The scale effects of agricultural credits, institutional governance and microfinance sustainability in Sub-Saharan African countries

Abstract

Purpose

The study examines the synthesized influences of institutional governance and the scale effects of agricultural credits on the sustainability of microfinance institutions (MFIs) in Sub-Saharan Africa.

Design/methodology/approach

Using a sample of 840 MFIs (300 independent and 540 networked), the study applied Generalized Method of Moments (GMM) and Lewbel’s estimator.

Findings

Results indicate positive effects of financial structure, efficiency and agricultural credit scale on sustainability, with a non-linear U-shaped relationship between agricultural credit size and microfinance sustainability. Depending on institutional governance quality, a threshold is identified where agricultural credit scale significantly enhances the quality of Portfolio at Risk (lnPAR) in independent MFIs and Returns on Assets (lnROA) in networked MFIs.

Research limitations/implications

Study suggests strengthening governance for transparency and operating within optimal size for enduring sustainable performance. While focused on Sub-Saharan Africa, future research could expand to various economies or introduce additional variables for a comprehensive analysis.

Practical implications

MFIs can achieve sustainability by implementing management guided by better institutional norms, innovative financial transformations better suited to financing agricultural activities and techniques and an organizational structure more aligned with their performance targets.

Social implications

Broader and more reliable access to financial services, particularly in the agricultural sector, can stimulate production and alleviate poverty.

Originality/value

The study’s originality lies in its contribution to the literature by examining the role of institutional governance in microfinance institution performance and evaluating microfinance in a broader Sub-Saharan African context, proposing threshold limits where agricultural microcredit compromises performance.

Citation

Mba Fokwa, A. (2024), "The scale effects of agricultural credits, institutional governance and microfinance sustainability in Sub-Saharan African countries", Agricultural Finance Review, Vol. 84 No. 2/3, pp. 208-225. https://doi.org/10.1108/AFR-12-2023-0165