The Impact of Social Events on Financial Performance among Microfinance Institutions

This Capstone study attempts to determine whether or not the social performance of microfinance institutions (MFIs)--their commitment to and fulfillment of their development mandate--has a positive effect on their ability to survive and thrive financially in the context of repayment crises caused by social events such as those that occurred in India, Nicaragua, and Bosnia-Herzegovina around 2009-2010. It attempts to build on recent efforts by Moody's Analytics and others to quantify social performance through the scoring and weighting of data from questionnaires with MFI managers. The study aims to measure the effectiveness of these scores as an indicator of business performance. Business performance is measured as the change in the probability of MFI default as measured by a model created by Moody's Analytics, based on quantitative financial performance indicators combined with qualitative factors such as market position, access to capital, and quality of management. An OLS regression was run and yields a statistically significant negative correlation, if not a predictive model, between probability of default and social performance. In other words, high levels of social performance at an MFI mitigate, to some extent, the financially deleterious effects of repayment crises based on social events. Socially-minded human resources practices were found to be the most significant factor affecting financial performance. Several limitations in the quality and quantity of available data are discussed with regards to their dampening effects on the strength and reliability of the results. Finally, suggestions for further research with a wider and more reliable dataset are presented.