Microfinance is one of the objects of socially responsible investments. Socially responsible investments, which are defined as investments, which, along with the improvement of economic prosperity, take into account environmental, ethical and moral aspects, have become one of the most controversial terms in the financial world, since they are based on principles that have traditionally not been decisive for investors who often did not care about the details of investments that went beyond their profitability. Although the scientific interest in socially responsible investments has increased significantly in recent times, they have not yet become a central element of today’s investment landscape. It is interesting to note that the term “ethical stocks” (ethical stocks), the acquisition of which was often based on religious principles, was used earlier. It is believed that socially responsible investment helps to direct capital to companies that provide economic growth while protecting the environment and improving social well-being, with the aim of ensuring sustainable development and protecting human rights.

As a rule, socially-oriented investors buy shares, based on, in addition to traditional criteria for assessing the effectiveness of their influence on a variety of social, environmental, ethical and other indicators. Thus, investors meet their own ethical requirements (without investing in products or practices that are unacceptable to them) and try to influence the behavior of companies by rewarding those who support their values. And although the number of supporters for implementing social responsibility has grown considerably in investment practice, socially responsible investments are also often criticized. In particular, J. Entin believes that the definition of “socially responsible” is somewhat subjective, since there is no universal standard and criteria for determining a socially responsible investment. It is also argued that socially responsible investments are less profitable than traditional investments, thus worsening the overall performance of investment portfolios. However, other scientists believe that the effectiveness of socially responsible investments can be compared with the effectiveness of traditional investment, and according to M. Thomson, corporations with smart environmental and social practices achieve better results than companies that do not focus on these goals.

One of the objects of socially responsible investments is microfinance, which has become attractive to institutional and individual investors, while the microfinance sector was previously in existence with the support of donors and non-governmental organizations. Among the reasons for targeting the microfinance sector to the capital markets is a variety of financial innovations (which allow microfinance institutions to attract the required capital in the market), as well as the growth of market and social value of microfinance investments. Indeed, such investments, in addition to promoting poverty reduction and social development in transition countries, are simultaneously characterized by a rather attractive ratio of risk and return, which makes them an attractive part of diverse investment portfolios.

Microfinance involves providing financial services to people with low incomes who are not able to receive financial services from traditional suppliers. Today in the world, about 1.1 billion people live on less than $ 1 a day, and the daily income of about 2.7 billion people (or 40% of the world’s population) is less than $ 2. The main microfinance service is the provision of microcredits (which can amount to less than $ 100) for low-income workers. In Asian countries, the average amount of microcredits is about $ 150, while in Eastern Europe and Central Asia – $ 1,600. USA. In addition, many microfinance institutions are beginning to offer deposit and insurance services.

The forms of organization of MFIs in developing countries vary widely to this day, and include: depending on the local tradition, the motivation of the founders and the legal framework of the country. Only a minority of them have the status of a bank (226 out of 2,658) with the associated auditing and reporting obligations. The typing of microfinance institutions has become more difficult in recent years. Previous classifications such as e.g. from the Mix Market database, institutions that grant individual loans from those who grant group loans and from village banks differ. In view of a trend among most microfinance institutions to supplement the offer of group loans with individual loans and to offer savings as well as credit, such a classification no longer makes sense. This study therefore adopts Mix Market’s current approach of classifying banks according to their legal system.

Data source and definitions

The Mix Market Database manages 2,658 microfinance organizations that voluntarily upload, without checking for correctness, economic and, to a lesser extent, social metrics related to their business on their platform.

Mix Market offers the world’s most comprehensive collection of data on microfinance organizations. However, the figures are far from complete and only partly the quality of independently verified data. However, since Mix Market provides the best source of data to answer the questions raised in this study, the information is used here. Where necessary, attention is drawn to the limited validity of certain data.

The Mix Market microfinance platform distinguishes six categories of microfinance providers: banks, co-operative banks, non-banking financial institutions (NBFIs), NGOs, small rural banks, and others.

The platform defines the respective categories as follows:

  • Bank: A bank is a state-licensed financial intermediary regulated by official oversight. It offers a variety of financial services, including savings, loans and money transfer.
  • Cooperative Bank: A cooperative bank is a member-operated financial intermediary. It can offer a range of financial services, including savings and loans, for the benefit of its members. Although it is not regulated by the state, it can be under the supervision of a regional or national cooperative council.
  • Financial institution without a banking license (NBFI): An NBFI offers similar services as a bank, but has a different status. This can be accompanied by lower capital requirements, often resulting in a limited supply of financial services. An NBFI is usually subject to a different state supervision than banks.
  • In some states, the NBFI category corresponds to a state-specific category of banks specifically developed for microfinance banks.
  • Non-Governmental Organization (NGO): An NGO is registered as a non-profit organization for tax purposes, but may also be written differently. Their range of financial services is usually limited and usually does not include the management of savings. The institutions are typically not subject to state supervision.
  • Small agricultural bank (Rural Bank): A “Rural Bank” is aimed at customers who live in non-urban environments and engage in some sort of agricultural activity.