Impact of Macroeconomic Conditions on Financial Efficiency of Microfinance Institutions: Evidence from Pre and Post-Financial Crisis

Nurazilah Zainal ,Siti Sara Ibrahim ,Sarah Roslan ,Jamilah Mahyideen ,Mohammed Hariri Bakri
Keywords: Financial Crisis; Financial Efficiency; Macroeconomic Conditions; Data Envelopment Analysis; Panel Regression. ,


Since the financial crisis of 2007–2009, a very tough situation has been encountered across the financial sector. The crisis has shown that it has hampered economic development, including banking institutions. The effect of the crisis is not excluded from the operations of the Microfinance Institutions (MFIs), as it today constitutes an integral part of the financial system. This paper intends to analyse the pre-crisis and post-crisis financial efficiency levels of the MFIs as the first objective. Next, to examine the effect on the financial efficiency level in both crisis periods upon macroeconomic conditions. Data were collected from 166 MFIs of ASEAN 4 countries from 2000-2007 (pre-crisis) and 2010-2017 (post-crisis), comprising Philippines, Vietnam, Cambodia, and Indonesia. The first phase of the analysis uses Data Envelopment Analysis to determine financial efficiency levels. The second phase employs Multivariate Panel Regression Analysis to examine the effect of macroeconomic conditions towards the level of financial efficiency obtained in the first phase. The first-phase result reveals the post-financial crisis efficiency score is barely higher than the pre-crisis efficiency score. This indicates that MFIs are financially efficient during crisis occurrences and afford to support the operation over a long-term basis. In the second phase, the regression analysis provides mixed findings, both significant and insignificant macroeconomic conditions affecting the financial efficiency of MFIs. The insignificant results show the consequences of the crisis explain some variables were unable to clarify the variation of the first-phase financial efficiency score of MFIs. Generally, the findings of this study will assist the microfinance industry to prepare itself for any potential crisis. This is important with the role of the MFIs in assisting the poor to ensure they are pulled out of a circle of poverty.