Performance and Trade-offs in Microfinance Organizations - Does Ownership Matter?

This paper examines the effect of Microfinance Organization (MFO) ownership on its performance. Policy advocates argue that transformation of non-government organizations (NGOs) into shareholder owned firms (SHFs) will improve their performance. This paper investigates the validity of this claim. The paper examines a data set of 200 non-government or shareholder MFOs from 54 countries. The organizations represent the more commercially-oriented strata of MFOs. Study findings indicate that:

• Difference in performance between SHFs and NGOs is minimal;
• NGOs are not more socially oriented than SHFs, nor are SHFs more profit-oriented than NGOs;
• NGOs involved in microfinance are driven by the same economic rationality as any other bank;
• SHFs superiority in scale and scope do not seem to be related to ownership type, but to the legal constraints that impede most NGOs from mobilizing savings.

The study does not support policy advocates preferences for SHFs, and states that the recommendation of transforming NGOs into SHFs is premature. Adoption of legal frameworks allowing well-performing NGOs to mobilize savings is a better alternative, if the objective is to increase NGOs scale and scope.