CAN DIVERSIFICATION MITIGATE CREDIT RISK IN MICROFINANCE INDUSTRY? A CROSS COUNTRY ANALYSIS

Abstract

This paper investigates the credit risk with respect to diversification. After banking sector, this study has extended the discussion from banking to microfinance institutions (MFIs) having dual objective of both financial and social nature to eradicate poverty. Risk is measured with the help of credit risk, z-score and Par30 while diversification is determined with respect to revenue, product, geographical and asset. Cross countries data from Pakistan, India and Bangladesh from south Aisa that is the hub of microfinance, is selected for understanding the scenario.the reason. The sample of 135 MFIs from time period 2012-2019 has determined that more risk comes with more diversification. The approach of generalized method of moment (GMM) is employed for panel data analysis and hypothesis testing. The findings are helpful for practitioner and policy makers to adapt strategies of diversification for sustainability of MFIs. Further MFIs can mitigate their risk with the help of strategy of group lending.