Effect of financial regulations, risk management, on performance of microfinance institutions in Sub-Saharan African Countries
Keywords:
Risk, Financial Regulation, Microfinance, Inflation, Financial-Depth, UnemploymentAbstract
The study investigates the complex interplay between the performance of microfinance institutions (MFIs) in sub-Saharan Africa, financial regulation, and risk management. Microfinance institutions are essential for the promotion of financial inclusion and economic development in the region; however, they encounter substantial obstacles in the form of regulatory mandates and risk management. This research employs a two-step system Generalized Method of Moments (GMM) approach to examine the effect of financial regulation on the risk management practices and financial outcomes of microfinance institutions, utilizing panel data from multiple sub-Saharan African countries, and spanning 2002 to 2023. The results suggest that effective regulation can improve the stability and resilience of microfinance institutions by establishing a positive and significant relationship between strong financial regulatory frameworks and enhanced risk management. Furthermore, the investigation reveals that microfinance institutions derive advantages from robust regulatory environments by virtue of their operational sustainability and financial understanding. In contrast, the flexibility of microfinance institutions may be impeded by excessive regulatory burdens, underscoring the necessity of balanced regulatory policies. The significance of customized regulations that address specific regional challenges while promoting microfinance institutions growth and financial stability is emphasized by the results. Microfinance institutions ability to reach marginalized populations is not compromised by the development of regulations that promote innovation and risk mitigation, as emphasized in policy recommendations. This study enhances comprehension of the impact of regulation and risk management on microfinance institutions operations in emergent markets, with a particular emphasis on sub-Saharan Africa. It also provides policymakers and microfinance institutions stakeholders with valuable insights to enhance financial inclusion initiatives. Future research should delve deeper into the influence of macroeconomic factors on the sustainability of microfinance institutions in the region and technology-driven regulatory solutions.
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