The Impact of Political and Cultural Factors on the Success of Microfinance Institutions

Abstract

This research focuses on the survival context of microfinance institutions from a political and cultural perspective. Compared to other methods of poverty alleviation, microfinance, as a new financial channel, seems more resilient, independent, and full of vitality for innovating the inner power of grassroots movements. This dissertation addresses the dynamic relationship between the performance of microfinance institutions (MFIs) and states’ actions from a bird’s eye view and explores the best political conditions for MFIs. Panel data from around 8957 microfinance institutions (MFIs) based in 113 countries has been utilized in the quantitative analysis of this dissertation. More specifically, a fixed effects model is used to test the impacts of the time-variance variables while a random effect model is used to explore the time-invariance variables. Moreover, a qualitative analysis of three countries--China, Indonesia and India—is undertaken to provide examples of how the dynamic relationship between external environment and performance of microfinance institutions works in practice. For both quantitative and qualitative analyses, regime type and democracy, governance quality, decentralization and culture are the main indicators to study as impacts of the macro-political environment. Geert Hofstede’s six culture dimensions have been applied to study cultural factors and provides a complementary view and support for the findings about political indicators. Overall, both cross-national regression models and detailed case studies indicate that a higher level of decentralization and a lower level of government control of markets could help the performance of MFIs. Regulations and good governance do not help the performance of MFIs significantly. Regimes with higher levels of democracy tend to help MFIs reach more borrowers but there is no significant impact on sustainability and depth of outreach. Some cultural factors have proven to have significant influences on the performance of MFIs.