Financial and social sustainability in the European microfinance sector

This paper investigates the balance between social and fnancial sustainability goals in the European microfnance sector using an original dataset obtained from a survey conducted in 2016–2017 on 159 microfnance institutions (MFIs) operating in 38 European countries. Overall, our results show that MFIs that are more likely to comply with their social sustainability objectives are also doing well fnancially. The only aspect on which social sustainability does not seem to have a positive efect on fnancial sustainability is the fnancing of the poorest through the provision of small-scale loans. A phenomenon that seems peculiar to the European context is that larger MFIs operating in countries with stringent fnancial regulation tend to show a comparative advantage and better withstand competition from the traditional banking sector. However, a separate issue that deserves attention is the specifc regulation on interest rates, which seems to penalize the MFIs operating in countries imposing interest rate caps due to the impossibility to pass on the high unit costs of microlending to borrowers. Our results are robust to alternative measures of fnancial sustainability and to the use of the Generalized Method of Moments (GMM) and Instrumental Variable (IV) estimation techniques to overcome the problem of endogeneity.