Sources of funding and performance of microfinance institutions over the life cycle

• Published in: International review of financial analysis Vol. 95; p. 103415
• Main Authors: Annan, Anthony, Ciccotello, Conrad S., Rioja, Felix
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.10.2024
• Subjects: Capital; Life-cycle theory; Microfinance institutions; Profit theory; Life-cycle theory; Microfinance institutions; O16; Profit theory; G21; G32; Capital
• ISSN: 1057-5219
• DOI: 10.1016/j.irfa.2024.103415

Microfinance institutions (MFIs) typically rely on both commercial sources of funding like equity, debt, and deposits, and non-commercial sources, such as donations and grants. Profit incentive theory predicts that commercial sources of funding positively impact performance regardless of the life-cycle stage of an MFI. Life cycle theory proposes that the sources of funding and the performance outcomes associated with those sources vary by life cycle stage. We test both of these theories using an 18-year global MFI data set. We find evidence of an interplay between profit incentive and life cycle theories as equity funding is positively associated with financial and social performance metrics, but only in mature MFIs. Grant funding is negatively associated with financial performance and positively associated with operating expenses over the entire MFI life cycle. The findings suggest that analyses of funding should consider the lifecycle and that policymakers should expect variation in MFI performance across both the lifecycle and by funding source. •We analyze how sources of funding impact financial and social performance of microfinance institutions in their lifecycle.•Grant funding is negatively associated with financial performance and sustainability during the entire lifecycle.•Equity funding is positively associated with financial and social performance after MFIs have reached a Mature Phase.•We do not find that Equity is negatively associated with social performance in any lifecycle stage.