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Impact of Rule of Law and Government Size to the Microfinance Efficiency

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  • Hafezali Iqbal Hussain
  • Sebastian Kot
  • Fakarudin Kamarudin
  • Lim Huang Yee

Abstract

This study examines the impact of rule of law and government size under the dimensions of economic freedom to the social and financial efficiency of microfinance institutions (MFIs) from Thailand, Philippines, Malaysia, Indonesia, and Cambodia 2011 to 2018. The Data Envelopment Analysis (DEA) approach has been applied to identify the efficiency level of MFIs. At the same time, the Pooled Ordinary Least Square (PoOLS) and Generalized Least Square (GeLS) methods comprising the Fixed Effect (FEMod) and Random Effect (REMod) models are used to examine the impact of dimensions of economic freedom and potential determinants on the efficiency level of MFIs. Overall, the results revealed that the technical efficiencies for both social and financial efficiency are contaminated by managerial inefficiency, which is measured by pure technical efficiency. This indicates, although the MFIs had been operating on a relatively optimal scale, they were facing the inefficiency from the managerial side. Besides, the results from the panel regression analysis have implied that both property rights and government integrity under the measurement of rule of law positively influence the MFIs’ financial efficiency. Meanwhile, the impact of government size shows both tax burden and government spending are significantly positive to the social efficiency of MFIs. As the policy implication, the information provides suggestion to the government on how its role can help in improving the efficiency level of MFIs and implements some useful initiatives to help MFIs to sustain in the long term. In addition to that policymakers can identify the relevant inputs of MFIs and thus revise the policy accordingly and design new policies and regulations based on different economic freedom dimensions. The results of the present study provide a reference to guide them in decision making on their investments. For academicians or researchers, they can obtain more information regarding the efficiency of MFIs that is valuable for further research or study.

Suggested Citation

  • Hafezali Iqbal Hussain & Sebastian Kot & Fakarudin Kamarudin & Lim Huang Yee, 2021. "Impact of Rule of Law and Government Size to the Microfinance Efficiency," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 34(1), pages 1870-1895, January.
    • Handle: RePEc:taf:reroxx:v:34:y:2021:i:1:p:1870-1895
    DOI: 10.1080/1331677X.2020.1858921
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    Cited by:

    1. Safaa Alsmadi & Ahmad Alkhataybeh & Mohammad Ziad Shakhatreh, 2022. "Corporate cash holdings and disclosure violations: an empirical investigation of Jordanian listed companies," Journal of Islamic Accounting and Business Research, Emerald Group Publishing Limited, vol. 13(3), pages 568-580, January.
    2. Jamal Ali Al-Khasawneh & Naceur Essaddam & Salah A. Nusair & Benito A. Sanchez, 2023. "Productivity-conditioned market reaction of US Bank acquisitions during regulation-deregulation eras," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(2), pages 368-385, June.
    3. Nguyen Hong Thu & Dao Le Kieu Oanh & Do Thi Thanh Nhan, 2022. "Impact of Credit Facilities and Contemporary Economic Environment on the Accessibility to Credit of Customers – Case Study In Binh Duong, Vietnam," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 16(3), September.
    4. Tilahun Aemiro Tehulu, 2022. "Institutional quality and credit growth: “Sand” or “grease” effect? Evidence from microfinance institutions," Cogent Business & Management, Taylor & Francis Journals, vol. 9(1), pages 2098637-209, December.
    5. Wensheng Xiao & Yu Tang & Bright Obuobi & Shaojian Qu & Minglan Yuan & Decai Tang, 2023. "The Influence of Rule of Law on Government’s Sustainable Economic Management: Evidence from China," Sustainability, MDPI, vol. 15(15), pages 1-23, July.
    6. Nidhi Agarwala & Sudarshan Maity & Tarak Nath Sahu, 2024. "Efficiency of Indian banks in fostering financial inclusion: an emerging economy perspective," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 29(2), pages 341-353, June.
    7. Faris Alshubiri & Syed Ahsan Jamil & Samia Fekir, 2024. "Corruption Control, Government Effectiveness and Banking Stability: Does Corruption Grease or Sand the Wheels?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(1), pages 2656-2681, March.
    8. Li, Zhuolun, 2023. "Do geopolitical risk, green finance, and the rule of law affect the sustainable environment in China? Findings from the BARDL approach," Resources Policy, Elsevier, vol. 81(C).

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