Identifying Winning Strategies for MFIs by Constructing Structured Mashup Indices

Abstract

The performance of microfinance institutions is a particularly important issue for public policy and for identifying best practices in the area. Even though microfinance institutions’ performance in many dimensions has gained a lot of attention, comprehensive studies incorporating all of the components are still rare. Ravallion (2012) introduced mashup indices of development, which involve seeking patterns in the data rather than aggregating multiple indicators into a composite index. However, theory and practice offer little support for the development of these indices, leaving their meaning, interpretation, and robustness often unclear. Cull et al. (2007) highlighted an intriguing issue despite limited accountability and information asymmetries, microfinance contracts have been shown to be able to ensure high rates of loan repayment. However, high repayment rates have not always translated into profitability for most micro banks. Our research aims to fill the gap by examining key determinants across various dimensions of South Asian microfinance institutions (MFIs). From a large dataset of 136 indicators across six dimensions of business performance, the article creates and evaluates mashup indexes for business performance. It next tests the validity of constructs for South Asia. It then develops a structural model to capture the major relationships among strategic and operational components, and finally links their impact on MFI performance to the double bottom line, which includes financial performance as well as mission-related impact. The findings reveal that although MFIs in South Asia are more focused on breadth rather than depth, however, the institutions with more outreach depth outperform in the mission performance dimension. Further, our analysis reveals that institutional business strategies and policies are successful at the operational level, but the institutions seem to lack innovations and their objectives are not aligned with mission goals and lack innovation.