Yusnidah Ibrahim,

School of Economics, Finance and Banking, College of Business,

Universiti Utara Malaysia,

Kedah, Malaysia,

E-mail: yibrahim@uum.edu.my

The Influence of Institutional Characteristics on Financial Performance of Microfinance Institutions in the OIC Countries

Iftekhar Ahmed,

School of Economics, Finance and Banking, College of Business,

Universiti Utara Malaysia,

Kedah, Malaysia,

E-mail: iftekharhbs@gmail.com

http://orcid.org/0000-0002-9044-7185

Mohd Sobri Minai,

School of Business Management, 

College of Business, 

Universiti Utara Malaysia, 

Kedah, Malaysia,

E-mail: msminai@uum.edu.my

Abstract. Microfinance institutions (MFIs) proved to be a powerful tool for financial inclusion through developing entrepreneurial activities in rural areas. MFIs provide small-scale loans to the poor who have no access to traditional banking and financial system. However, in the pursuit to meet their social obligation, MFIs need to be financially sustainable and this sustainability largely depends on the institution’s characteristics. This study investigates the influence of MFIs’ characteristics on their financial performance, using the panel dataset of 57 microfinance institutions from the member countries of the Organisation of Islamic Cooperation (OIC). The empirical results show that, as expected, the interest rate charged and the period of existence in the market have a significant positive relationship with the financial performance of MFIs. The results also indicate that credit union and cooperatives, non-bank financial institutions and non-governmental organisations outperformed their counterparts financially. Therefore, the study concludes that charging a high rate of interest may improve institutions’ financial self-sufficiency; however, it is unable to secure MFIs' profit maximization strategy. Conversely, not-for-profit MFIs can ensure their financial viability while serving the poorest clients which is the prime goal of any microfinance program. Hence, MFIs can earn profits, but within limits, complying with their social promise at the same time.

Received: December, 2017

1st Revision: February, 2018

Accepted: March, 2018

DOI: 10.14254/2071-789X.2018/11-2/2

JEL Classification: G21, L25

Keywords: microfinance; financial performance; sustainability; OIC