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National Culture and Microfinance: Do the Cultural Dimensions Impact

Microfinance Performance?

Conference Paper · January 2019

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 NATIONAL CULTURE AND MICROFINANCE: DO THE CULTURAL
DIMENSIONS IMPACT MICROFINANCE PERFORMANCE?
1
MOHAMMAD ZAINUDDIN, 2IDA MD. YASIN, 3ISHTIAQUE ARIF, 4ABU BAKAR ABDUL HAMID
1,2,3,4
Putra Business School, Universiti Putra Malaysia
E-mail: mohammad.msc_hp17@grad.putrabs.edu.my, 2ida@putrabs.edu.my, 3ishtiaquearif@gmail.com,
1
4
abu.bakar@putrabs.edu.my

Abstract - Microfinance sector is highly international and culturally diverse. While an increasing body of literature
examines the relationship of national culture with the country’s economic performance, innovation performance and firm
performance, research on the influence of national culture on the performance of microfinance institutions (MFIs) is rather
sparse. Microborrowers’ entrepreneurial ability, risk-taking attitudes, attitudes towards the role of women, trustworthiness
may all be shaped by a country’s cultural dimensions which, in turn, may influence the success of microfinance program.
However, despite microfinance’s deep embeddedness in cultural contexts, international difference in microfinance remains
largely an understudied area. This study underscores the importance of cultural effects on microfinance financial and social
performance. It gives a brief review of the scant research that deals with the impact of national culture on MFI performance.
The paper improves our understanding of the interplay between microfinance organizations and the national culture where
MFIs are located, and why the levels of success of MFIs vary across countries.

Keywords - Microfinance, National Culture, Hofstede Dimensions

JEL classifications - G21, N20, Z10

I. INTRODUCTION different cross-cultural theories vis-à-visHofstede’s

original four dimensions of national culture.
The importance of national culture has long been
argued in economics literature. Classical economists, II. NATIONAL CULTURE
such as Adam Smith and John Stuart Mill, used
cultural explanations for economic phenomena An important criticism leveled against cultural studies
(Guiso et al., 2006). Max Weber (1905/2001) regards is the usage of nations as units for analysis. There can
Protestant work-ethic as crucial to the development of be significant cultural diversity in the same country,
capitalism in Europe. Karl Marx, on the other hand, as there are many countries that have regional or
inverts the direction of causality from ‘culture to ethnic subcultures. Furthermore, there can also be
economics’ to ‘economics to culture’. He argues that significant cultural similarities across national
the material productive forces determine the boundaries. The study of Minkov and Hofstede
dominant culture: the hand-mill creates feudalism (2012), however, finds little empirical support for
while the steam-mill creates capitalist society (Marx, such critique. Using the dataset of World Values
1847/1963). Other researchers, however, continue to Survey (WVS), they examine the fundamental
emphasize the causal link from culture to economic cultural values of 299 in-country regions from 28
outcomes. Landes(1998), for instance, attributes the countries. Their findings show that regions from
success of national economies to cultural factors and within the country overwhelmingly cluster along
concludes that “if we learn anything from the history national lines on basic cultural values and
of economic development, it is that culture makes all intermixtures across borders are relatively rare.
the difference” (p. 516). Microfinance sector is Another criticism stems from the very notion of
culturally diverse and subject to national cultural culture: it is vague and difficult to measure. The
influences. Microborrowers’ entrepreneurial ability, concept is also complex and highly contentious.
risk-taking attitudes, attitudes towards the role of Hofstede, a pioneer in intercultural research, moved
women, trustworthiness may all be shaped by a the concept of culture to the cross-cultural arena
country’s cultural dimensions which, in turn, may based on variations in culture across countries. He
influence the success of microfinance program. defined culture as “the collective programming of the
However, despite microfinance’s deep embeddedness mind which distinguishes the members of one human
in cultural contexts, international difference in group from another” (Hofstede, 1980, p. 25). Such
microfinance remains largely an understudied area. In collective phenomenon is so broad that it is hard to
recent years, however, an emerging number of design testable hypotheses. The primary achievement
researchers study the role of culture in poverty and of Hofstede, however, was that he formulated an
even explain the behavior of poor people in reference empirical mapping of countries across certain cultural
to cultural factors (Wilson, 2009). This paper briefly dimensions. His dimensions have been extensively
overviews the existing literature examining the effect used by researchers in a variety of settings. In recent
of national culture on microfinance financial and years, more data have made it possible to
social performance as well as summarizes the systematically analyze the impact of national culture

Proceedings of 145th ISERD International Conference, Cairo, Egypt, 11th -12th January 2019
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 National Culture and Microfinance: Do the Cultural Dimensions Impact Microfinance Performance?

and to relate it to different aspects of national Kittilaksanawong and Zhao (2018), after analyzing
economies. 3,408 MFI-year observations, suggest that lending to
women reduces sustainability of microfinance firms
III. NATIONAL CULTURE AND and this effect is moderated by national culture.
MICROFINANCE The effect of diversity or ethnic-linguistic-religious
fractionalization on MFI performance has also been
A growing number of studies examine the effect of studied. Awaworyi Churchill (2017) argues that
national culture on different aspects of national fractionalization increases group-formation difficulty
economies. While some researchers show the amongst borrowers, and shows how ethnic diversity
relationship between national culture and the can compel microlenders to move away from poorer
country’s economicperformance (Grenness, 2015; to comparatively richer clients. He finds that
Guiso et al., 2006; Liñán & Fernandez-Serrano, fractionalization negatively affects MFI financial
2014), others demonstrate the effect of culture on the performance and leads to mission drift, because of
country’s innovation performance and capacity lower trust and social networks in more fractionalized
(Halkos & Tzeremes, 2013; Jang et al., 2016). A countries. Similarly, Postelnicu and Hermes (2016)
significant number of researchers study corporations find that MFIs have lower financial and social
and financial institutions across different cultural performance in high-fractionalized and low-trust
contexts and find the relationship between national societies. They use data from a sample of 100
culture andfirm performance (Boubakri et al., 2017; countries, and their results also indicate that social
Breuer et al., 2018; Gleason et al., 2000; Laskovaia et performance of MFIs is higher in individualist
al., 2017). Interestingly, Kanagaretnam, Lim and societies. Nevertheless, a number of scholars suggest
Lobo (2011) even examine the effect of national that the effect of cultural dimensions on microfinance
culture on earnings quality of banks, whereas performance is rather complex. Fogel, Lee and
Steenkamp and Geyskens(2012) find the contingent McCumber(2011) find that power distance leads to
effect of national culture on governance choices made high MFI outreach in terms of poor and female
by firms. But what is the effect of national culture on borrowers, whereas uncertainty avoidance leads to
the social and financial performance of microfinance lower outreach in terms of female borrowers but
organizations? The research in this regard, better outreach in terms of number of clients. Their
unfortunately, is rather scant. In recent years, study also indicates that individualism increases MFI
however, an increasing body of literature shows the social performance both in terms of number of
significant relationship between national culture and borrowers and poor clients, but negatively affects
microfinance performance. Burzynska and Berggren financial performance as it increases the cost and risk
(2015) investigate the effect of social beliefs on of lending. In contrast, Manos
microfinance financial performance, using a panel of andTsytrinbaum(2014), after analyzing data from 30
331 MFIs from 37 countries. They find that MFIs countries, show that institutional collectivism
have lower operating and default costs in countries increases MFI social performance. They also find the
with higher levels of trust and more collectivist negative relationship between uncertainty avoidance
culture. Aggarwal, Goodell and Selleck (2015) and financial performance, and the positive
examine the role of social trust on MFIs’ preference relationship between power distance and social
for women borrowers and demonstrate that MFIs performance. BanászandCsepregi(2018), on the other
favor female clients more in low trust countries. Their hand, conclude that MFIs are successful in countries
results, based on a global sample of 1,019 characterized by high power distance, high
microfinance firms, indicate that women targeting is uncertainty avoidance and collectivist culture.
done as a substitute for social trust. However,
Table 1. Literature summary on the relationship between culture and microfinance
Relationship
Literature Cultural dimensions
result *
Positive relationship between PD and SP, IND and SP; negative
Fogel et al. (2011) Hofstede dimensions
relationship between IND and FP
Manos and Positive relationship between PD and SP; negative relationship
GLOBE dimensions
Tsytrinbaum(2014) between UA and FP
Aggarwal et al. Negative relationship between social trust and MFIs’ preference
Social trust
(2015) for women borrowers
Burzynska and
Social beliefs Positive relationship between trust and FP, CLV and FP
Berggren (2015)
Postelnicu and Social capital Positive relationship between IND and SP, trust and SP/FP;

Proceedings of 145th ISERD International Conference, Cairo, Egypt, 11th -12th January 2019
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 National Culture and Microfinance: Do the Cultural Dimensions Impact Microfinance Performance?

Hermes (2016) negative relationship between fractionalization and SP/FP

Awaworyi Churchill
Ethnic diversity Negative relationship between fractionalization and SP/FP
(2017)
Negative relationship between women borrowers and FP is
Kittilaksanawong
Hofstede dimensions moderated by national culture: more in high PD & IND and less
and Zhao (2018)
in high MAS & UA countries
Banász and Positive relationship between PD/UA/CLV and MFI
Hofstede dimensions
Csepregi(2018) performance
Note: *PD=Power Distance, UA=Uncertainty Avoidance, IND=Individualism, CLV=Collectivism, MAS=Masculinity, SP=Social
Performance, and FP=Financial Performance.

CONCLUSION [9] Granato, J., Inglehart, R., &Leblang, D. (1996). The Effect of
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