Small sums, big impact: Corruption and microfinance institutions

Abstract

Microfinance institutions (MFIs) have been promoted worldwide as developmental platforms that can help eliminate some of the major global challenges such as poverty and economic development. The effectiveness of using MFIs to fulfil such expectations depends on their performance, which can be affected by a range of institutional factors such as corruption, rule of law and financial sector development. However, there is a lack of clarity on whether these factors are performance inhibitors or promoters. Using gender as a mediating factor, this study develops and tests these relationships on MFI performance, with the aim of contributing to research on institutions and corruption in the Global South. Drawing on the MFI performance model, the study uses data on MFIs operating in 33 African countries. The results reveal that the control of corruption reduces MFIs’ operating expenditure, while it increases MFIs’ operating income. Drawing from the essentialist perspective of the theory of social construction of gender, it is argued that female borrowers from MFIs are shown to have a mediating impact on the relationship between the variables tested (such as control of corruption) and MFI performance. The study also has public policy relevance for nations seeking to use MFIs as means of fostering entrepreneurship and economic development.