Role of Diversification on Financial Sustainability and Credit Risk of Asian Microfinance Institutions

Abstract

This paper investigates the role of diversification with respect to  financial sustainability and credit risk. This study has extended the discussion from banking to microfinance institutions (MFIs) having dual objective of both financial and social nature to eradicate poverty. Asia being the hub of microfinance, is selected for understanding the scenario. Role of diversification is determined with respect to revenue, product, geographical and asset perspective. Risk is measured with the help of credit risk; z-score and Portfolio at risk (30 days) while operational self- sustainability is employed to understand microfinance sustainability. The approach of generalized method of moment (GMM) is employed for panel data analysis for a sample of 313 Asian microfinance from time period 2012-2019. The findings present significant impacts of various dimensions of diversification for sustainability of microfinance institutions and found more risk comes with more diversification. Further MFIs can mitigate their risk with the help of strategy of group lending. This study suggests that, all MFIs generate income through both financial and non-financial services that led to expansion of their social outreach and decrease their operational cost and hence, sustainability. The findings are helpful for practitioner and policy makers to adapt strategies of diversification for sustainability of MFIs.