The nexus between microcredit nominal interest rates and inflation in sub-Saharan Africa: evidence from panel vector autoregression analysis
This paper investigates the dynamic effect of microcredit nominal interest rates and inflation, using a panel data of 315 microfinance institutions from 34 sub-Saharan African (SSA) countries over the period 2003 to 2011. To do so, we employ a panel vector autoregression (PVAR) model using efficient generalized method of moments (GMM) estimation as proposed by Blundell and Bond (1998). Apart from the full sample estimation, we further group our countries into three different income groups. Overall, the full sample estimation suggests that there is a negative relationship between inflation and microcredit nominal interest rates. The causality runs from inflation to microcredit nominal interest rates, whereas the reverse does not hold. Furthermore, the forecast error variances after 10 years have very low explanatory power for both microcredit nominal interest rates and inflation. Far more importantly, the significance of our study findings supports the Fisher effect (Fisher, 1930) and that microfinance lenders incorporate inflation into the microcredit interest rates. Additionally, moderation of persistently high inflation in the SSA region, ceteris paribus, could undoubtedly contribute to lowering the microcredit interest rates in SSA.
Financial sustainability of microfinance institutions in sub-Saharan Africa: evidence from GMM estimates
This paper examines what determines financial sustainability among 324 microfinance institutions (MFI) in 33 sub-Saharan African countries for the period covering 2003 to 2014. Using a well-specified Generalized Method of Moments (GMM) estimation technique, the empirical results provide strong evidence that return on assets (ROA) is the major determinant of financial sustainability of microfinance institutions in sub-Saharan Africa. This significant finding suggests that MFIs’ ability to generate higher net income from their credit portfolio is the critical factor for achieving financial sustainability. The implication of these findings is that MFIs should implement robust pre-loan screening systems, which can assess the creditworthiness of borrowers. This would undoubtedly contribute to reducing the loan default rates among MFIs operating in the region.
Prior empirical studies have sought to establish whether financial leverage boosts or stifles a firm’s profitability. By stark contrast, we are unaware of an empirical study that has attempted to investigate the leverage–profitability nexus in the microfinance context. Thus, we study the effect of financial leverage on the profitability of microfinance institutions, domiciled in sub-Saharan Africa, by exploiting a Microfinance Information eXchange (MIX) data set consisting of 465 microfinance institutions, drawn from 37 countries, over the period 1996 to 2012. By employing the generalized method of moments (GMM) estimation technique, we found that financial leverage is negatively associated with the profitability of microfinance institutions in sub-Saharan Africa. The plausible explanation for our findings is the persistently high costs of debt finance among many African countries. More importantly, policy implications are drawn from these findings.