Buffer Capital, Loan Portfolio Quality and the Performance of Microfinance Institutions: A Global Analysis

Buffer Capital, Loan Portfolio Quality and the Performance of Microfinance Institutions: A Global Analysis

Using a sample of 625 microfinance institutions (MFI) across 40 countries from 2010-2015, we empirically examine the effect of buffer capital on the performance of MFIs and how this effect varies with loan portfolio quality. We find a negative relationship between buffer capital and MFIs’ performance. We further document that loan portfolio quality positively moderates the buffer capital-MFI performance relationship. We demonstrate that the buffer capital-loan portfolio quality relationship does not vary for deposit-taking, profit-making, and regulated MFIs. Our findings shed new light on the value relevance of capital in microfinance institutions. We use a novel approach to evaluate our results in light of the effects of omitted variable bias.

Godfred Afrifa, Ernest Gyapong, and Alaa Mansour Zalata

Journal of Finanical Stability

October 2019

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By |2019-09-17T12:19:05-07:00January 1st, 2018|Capital Requirements, Financial Regulation, Reference|