Drivers of solvencs risk - Are microfinance institutions different?

File pdf 355KB

Based on a dataset covering 3169 banks and 1284 microfinance institutions (MFIs) operating in 106 countries this paper provides evidence on the drivers of MFI solvency risk. Overall, we find that MFIs face greater solvency risks than banks due to a higher volatility of asset returns. However, over time risk developments in banking and microfinance are largely driven by the same factors. A major exception is size as MFIs, mainly due to non-governmental institutions and non-bank financial intermediaries, become less risky when increasing in size, while the opposite holds for banks. Overall, results suggest that the special business model MFIs pursue does not make them special from a financial stability perspective. Thus, given the rising importance of microfinance within financial sectors, in terms of volumes and in terms of number of customers served, MFIs and banks should be subject to the same efforts that aim at raising financial stability.

Author(s):

Adalbert Winkler    
Frankfurt School of Finance & Management
Germany

Markus Schulte    
Frankfurt School of Finance & Management
Germany