Effects of Geographical Location on MFI Lending Behaviour in Developing Countries

Ever since the United Nations declared 2005 the year of micro-credit and linked it to the Millennium Development Goals, and especially on poverty reduction, there has been a series of studies looking at factors affecting the flow of credit down the poverty line. This is of particular importance because in spite of the success of Microfinance Institutions such as the Grameen Bank in Bangladesh and BancoSol in Mexico, evidence shows that many Microfinance Institutions do not reach down the poverty line but tend to cluster at the top.

Developing several hypotheses using the elements of the neo-institutional theory, this study looks at how geographic location affects how Microfinance Institutions target their clients and the moderating effect that their regional context has on other factors. This is analysed using an unbalanced panel of 6, 645 observations drawn from 443 MFI institutions in 81 countries divided into 5 regions for the time period 2000-2014. An ordered logit regression was run using the target markets as the ordinal dependable variables.

Based on the arguments of the neo-institutional theory, this study builds on previous ones by using a larger sample size (and number of years) to examine how the regional context affects the relationship between institutional quality and the selective lending behaviour of MFIs in 81 developing countries. An ordered logit regression was carried out using an unbalanced panel of 6645 observations from 443 MFI institutions across six regions from 2000-2014 against a broad range of company, country, regional and global specific variables. The results indicate that the geographic locations affects how MFIs lend down the poverty line with MFIs in and those in Eastern Europe and Central America less likely to lend to down the poverty line. The study found that the regional context also plays a big role in how institutional factors affect MFI lending practises with certain factors being more relevant in some regions than in others. This study also makes a case for using target markets as a better measure for depth of outreach as opposed to the more popular loan sizes and identifies the role that rural population growth and mobile phone penetration play in increasing depth of outreach of microfinance.