Impact of Financial Performance of Islamic and Conventional Microfinance Institutions on their Outreach

Abstract

The purpose of this research was to examine the impact of the financial performance of Islamic and conventional microfinance institutions (CMFIs) on their outreach. Further, the study also checked the moderating role of institution size in this relationship. This study used unbalanced panel data from 350 microfinance institutions (including 300 CMFIs and 50 IMFIs) for the period 2015–21 by applying the fixed effect method. Financial performance (FP) was measured through return on assets (ROA) and portfolio yield (PFY) as independent variables, while Average loan size per borrower to gross national income (ALSBNI) represented the dependent variable (outreach). Other variables, such as gross domestic product (GDP), consumer price index (CPI), and regulatory quality (RQ), were used as control variables, while institution size (IS) was used as a moderator. Both ROA and PFY showed a negative relationship with the ALSBNI of IMFIs and CMFIs. IS positively impacted the ALSBNI of IMFIs, whereas it negatively impacted the ALSBNI of CMFIs. The two control variables, namely GDP and CPI, had a negative relationship with the ALSBNI of both institutions. The third control variable, i.e., RQ, however, showed a positive relationship with the ALSBNI of IMFIs and a negative relationship with CMFIs. The moderator (IS) further strengthened the negative relationship of ROA and PFY with the ALSBNI of IMFIs. It had a similar effect on the negative relationship of ROA with ALSBNI of CMFIs while converting their PFY’s negative relationship with ALSBNI into a positive one. The results indicate negative impact of the financial performance of CMFIs and IMFIs on their outreach, therefore these institutions need to focus on social performance to enhance their outreach.