Sources of funding and performance of microfinance institutions over the life cycle

Microfinance institutions (MFIs) typically rely on both commercial sources of funding like equity, debt, and deposits, and non-commercial sources, such as donations and grants. Profit incentive theory predicts that commercial sources of funding positively impact performance regardless of the life-cycle stage of an MFI. Life cycle theory proposes that the sources of funding and the performance outcomes associated with those sources vary by life cycle stage. We test both of these theories using an 18-year global MFI data set. We find evidence of an interplay between profit incentive and life cycle theories as equity funding is positively associated with financial and social performance metrics, but only in mature MFIs. Grant funding is negatively associated with financial performance and positively associated with operating expenses over the entire MFI life cycle. The findings suggest that analyses of funding should consider the lifecycle and that policymakers should expect variation in MFI performance across both the lifecycle and by funding source.