The impact of financial management practices and competitive advantage on the loan performance of MFIs
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Date
2017
Journal Title
Journal ISSN
Volume Title
Publisher
International Journal of Social Economics
Abstract
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.
Description
Keywords
Competitive advantage, Social impact, Uganda, Financial management practices, Loan performance, MFIs
Citation
Nkundabanyanga, S. K., Akankunda, B., Nalukenge, I., & Tusiime, I. (2017). The impact of financial management practices and competitive advantage on the loan performance of MFIs. International Journal of Social Economics. DOI 10.1108/IJSE-05-2014-0104