Religiosity and Threshold Effect in Social and Financial Performance of Microfinance Institutions: System GMM and Non-linear Threshold Approaches

The commercialization process and emphasis on sustainability apparently improve microfinance institutions’ financial performance and scale in terms of total number of borrowers and average loan size. However, whether focusing on financial sustainability is necessarily at the sacrifice of serving the less-poor clients or social and financial performance of MFIs depends on the  strength of social values and religion. The inconsistent results of previous studies implicate that linear regressions may be insufficient to explain the sustainability-outreach linkage because of potential non-linear relationship between financial sustainability and average loan size.

To solve the puzzle, this study employs relatively advanced dynamic difference and system GMM as well as non-linear Hansen threshold techniques. To the best of our knowledge this is the first study to apply non-linear technique over a sample of conventional and Islamic MFIs at the same time. The results tend to indicate the existence of religiosity effect on the social and financial performance of microfinance institutions, while the study does not find any evidence of sustainability-outreach paradox. Our findings present important insights for Islamic and conventional microfinance managers and donors as well as policy makers of the country to formulate a better policy. Social performance will harmonize the financial performance of microfinance institutions, so the MFIs authorities should not be necessarily worried about the financial sustainability while focusing on outreaching the poor.