Navigating the risk-return nexus: Unraveling the dynamics in the gross loan portfolio of microfinance institutions and its implications to sustainability and environmental impact

Paper Details

Research Paper 10/06/2023
Views (425) Download (72)
current_issue_feature_image
publication_file

Navigating the risk-return nexus: Unraveling the dynamics in the gross loan portfolio of microfinance institutions and its implications to sustainability and environmental impact

Abstract

Microfinance institutions (MFIs) have garnered significant attention in the Philippines for their role in promoting financial inclusion and reducing poverty. However, the lack of a comprehensive understanding of the risk-return dynamics in MFIs’ gross loan portfolios can have detrimental effects. To address this issue, this study navigated the risk-return nexus in MFIs and explored the quality management strategies employed by them. The study utilized a mixed-method research design, specifically the explanatory sequential design, and was conducted in Occidental Mindoro, Philippines. Thirty-two loan officers participated in the quantitative analysis, while nine loan officers were involved in the qualitative analysis. The data were analyzed using the Pearson correlation coefficient and thematic analysis. The findings revealed a significant negative correlation between the risk level associated with MFIs’ loan portfolios and the financial returns generated by these institutions through said portfolios. Additionally, three themes emerged for the quality management strategies’ contributing to higher returns while effectively managing risk in MFIs’ gross loan portfolios: (1) Proactive Risk Assessment and Mitigation, (2) Robust Monitoring and Reporting Mechanisms, and (3) Client Education and Support. To enhance the financial performance of MFIs, it is recommended to continue implementing these three key quality management strategies. By adopting these strategies, microfinance institutions can improve their risk management practices and achieve higher financial returns. The study’s findings highlight the importance of aligning financial objectives with social and environmental goals, emphasizing the need for responsible and sustainable lending practices in the microfinance sector.

VIEWS 124

Armendariz B., Labie M. 2018. The handbook of microfinance (2nd ed.). World Scientific.

Baek J., Kim M., Sohn, K. 2023. Liquidity risk and financial performance of microfinance institutions. Journal of Financial Services Research, 1-24.

Bateman, M., Liu, Y. 2019. Microfinance in Asia. In Handbook of Microfinance (pp. 261-283). Springer.

Bautista MAC., Mendoza CJG., Santos DS. 2021. Socioeconomic and environmental determinants of microfinance loan delinquency: Evidence from the Philippines. Environment, Development and Sustainability, 1-21.

Berger MA., Brown A., Johnson KH. 2018. Microfinance institutions and the risk-return trade-off. Journal of International Development, 30(1), 47-67.

Carag H., Mercado R., Natividad G. 2020. Risk management practices and financial performance of microfinance institutions: Evidence from the Philippines. Asian Journal of Economics, Business and Accounting, 17(4), 1-14.

Chen G., Mahmood A., Zhang M. 2019. The impact of credit risk on the financial performance of microfinance institutions: Evidence from China. Pacific-Basin Finance Journal, 56, 36-52.

Chen S., Garcia-Appendini E., Montoriol-Garriga J. 2018. Microcredit and willingness to pay for environmental quality: Evidence from a randomized-controlled trial of finance for sanitation in rural Cambodia. Journal of Financial Economics, 128(3), 431-453.

Cruz K. 2018. The role of microfinance institutions in promoting financial inclusion in the Philippines. Journal of Asian Finance, Economics and Business, 5(1), 55-62.

Cuevas CR., Fischer KP., Villatoro P. 2017. Performance and portfolio risk of microfinance institutions: A global comparison. Journal of Banking & Finance, 77, 80-96.

Cull R., Demirgüç-Kunt A., Morduch J. 2020. The microfinance business model: Enduring subsidy and modest profit. World Development, 125, 104686.

Duran J., Starnes S., Skees J. 2016. Factors affecting microfinance institutions’ outreach: Evidence from Sub-Saharan Africa. Journal of International Development, 28(3), 413-432.

Gonzalez-Vega C., Schreiner M., Meyer RL. 2015. The impact of microfinance on banks’ outreach and financial performance in Latin America. World Development, 67, 101-116.

Hartarska V., Nadolnyak D., Shen X. 2017. Efficiency in microfinance institutions: A data envelopment analysis. Journal of Developmental Entrepreneurship, 22(01), 1750002.

Hishigsuren O., Zhang T., Namsrai B. 2020. Assessing the sustainability of microfinance institutions in Mongolia: A risk and financial performance analysis. International Journal of Financial Studies, 8(2), 24.

Jung H., Lee S., Rhee C. 2018. The impact of agency costs on the performance of microfinance institutions. Emerging Markets Finance and Trade, 54(7), 1647-1663.

Kasi PM., Rahman AU., Rehman SU. 2017. The portfolio risk management and financial performance of microfinance banks in Pakistan. Business: Theory and Practice, 18, 45-56.

Labayen EV., Llenado RC., Tamayo A. 2017. Assessing financial performance and social outreach of microfinance institutions: Does ownership matter? The Social Science Journal, 54(4), 420-428.

Laya AM., Colonia DS., Llanto GM. 2021. What drives the financial performance of microfinance institutions in the Philippines? A comparative analysis. Philippine Review of Economics, 58(1), 1-26.

Lyman TR. 2019. Proactive risk management for microfinance institutions: Assessing interest rate and foreign exchange risk. Microfinance Open Source Software.

Mendoza RU., Bayot RR., Butalid RC. 2019. Financial performance and social outreach of microfinance institutions in the Philippines. International Journal of Economics, Commerce and Management, 7(5), 123-138.

Mersland R., Misund B., Strøm RØ. 2019. Financial sustainability and outreach of microfinance institutions. Journal of International Development, 31(7), 588-613.

Nguyen HTM., Ahsan K., Dao NM. 2021. Risk-return relationship and financial performance of microfinance institutions in Asia. Journal of Asian Business and Economic Studies, 28(1), 61-76.

Pabilonia SW. 2018. Financing agriculture in Occidental Mindoro, Philippines. Journal of International Agricultural Trade and Development, 67(2), 245-260.

Park MY., Sohn K., Song Y. 2022. The impact of management quality on the financial performance of microfinance institutions: Evidence from East Asia. Journal of Asian Finance, Economics and Business, 9(2), 81-92.

Purisima CS. 2015. Microfinance in the Philippines: A strategy for poverty reduction. International Journal of Social Sciences and Education, 5(2), 376-392.

Santander JL., Reig M., Hernandez-Canovas G. 2022. The impact of environmental, social, and governance factors on the financial performance of microfinance institutions in the Philippines. Journal of Cleaner Production, 325, 129365.

Santiago AF., Casuga MFR., Alonto MJ. 2016. Credit risk and portfolio management of microfinance institutions in the Philippines. Asian Journal of Finance & Accounting, 8(1), 47-59.

Sharma V., Al Ghazali B., Omar N. 2021 Portfolio risk, diversification, and financial performance of microfinance institutions. International Journal of Finance & Economics, 26(1), 1359-1377.

Yaron, J., Benjamin, M., & Ganapathi, J. 2017. The future of microfinance institutions: Regulation, risk management, and impact. World Development, 92, 220-231.

Yunus M., Moersidik SS., Ibrahim IM. 2022. Risk, return, and financial performance of microfinance institutions: Evidence from Southeast Asia. Journal of Risk and Financial Management, 15(1), 11.

Zahid A., Zameer H., Khan H. 2020. Determinants of sustainability in microfinance institutions: Evidence from developing countries. Business and Economic Horizons, 16(3), 559-576.

CGAP. 2020. Microfinance Risk Management. Retrieved from https://www.cgap.org/topics/microfinance-risk-management