Buffer capital, loan portfolio quality and the performance of microfinance institutions: A global analysis

Using a sample of 625 microfinance institutions (MFI) across 40 countries from 2010 to 2015, we empirically examine the effect of buffer capital on the performance of MFIs and how this effect varies with loan portfolio quality. We find a negative relationship between buffer capital and MFIs' performance. We further document that loan portfolio quality positively moderates the buffer capital-MFI performance relationship. We demonstrate that the buffer capital-loan portfolio quality relationship does not vary for deposit-taking, profit-making, and regulated MFIs. Our findings shed new light on the value relevance of capital in microfinance institutions. We use a novel approach to evaluate our results in light of the effects of omitted variable bias. (C) 2019 Elsevier B.V. All rights reserved.