The impact of financial management practices and competitive advantage on the loan performance of MFIs

Purpose - The purpose of this paper is to study the impact of financial management practices and competitive advantage on loan performance of microfinance institutions (MFIs). Design/methodology/approach - In this cross-sectional study, the authors surveyed 70 MFIs in Kampala, Uganda. The authors applied principal component analysis to reduce the number of factors and identify the important elements that capture financial management practices, competitive advantage and loan performance of MFIs. The authors put forward and tested three hypotheses relating to the significance of the relationship between these three variables of MFIs using the statistical software package, SPSS and also apply the normal theory approach developed by Sobel (1982) and Baron and Kenny (1986) in testing the mediation by competitive advantage. Findings - Robust financial management practices are associated with better loan performance of MFIs. Results also reveal a significant positive relationship between the competitive advantage of the MFIs and their loan performance. Furthermore, a significant positive relationship between competitive advantage and loan performance is found. Moreover results also show a full mediation effect of competitive advantage on the association of financial management practices and loan performance, implying that the association of financial management practices of the MFIs on their loan performance is entirely through their competitive advantage. Research limitations/implications - Although there is plenty of literature on loan performance, financial management practices and competitive advantage, there is scarce literature on their effective conceptualization. This together with the imprecise definition of competitive advantage may have affected conceptualization of the authors study. Thus, in this study, the authors do not claim highly refined measurement concepts. Moreover, many of the extant studies for instance have measured loan performance quantitatively, yet process factors which are inherently qualitative in nature can better explain variances in loan performance concept. More research is therefore needed to better refine qualitative concepts used in this study. Practical implications - Efforts by the MFIs management to improve loan performance must be matched with adoption of financial management practices that provide MFIs with sustained competitive advantage over their rivals. Originality/value - In order to explain loan performance of MFIs, and drawing from social economics, management and accounting strands, this study shows that assessing the role of competitive advantage in the relationship between financial management practices and loan performance is imperative. Also, many of the extant studies have measured loan performance quantitatively, yet process factors or antecedents which are inherently qualitative in nature can better explain variances in loan performance concept. Thus this study calls for the refinement of loan performance concept and accounting for endogeneity.