The impact of debt: International versus local debt in microfinance organizations

Microfinance organizations (MFOs) increasingly access global debt and local debt markets. This study investigates whether such access benefits MFOs' cost efficiency, using agency theory and capital market liability of foreignness theory. Analyzing data from 655 MFOs observed in 88 countries between 1998 and 2015, this study finds that, on average, MFOs with debt tend to be more cost-efficient than MFOs without debt. The study also finds that, on average, MFOs with only international debt are more cost-efficient than MFOs with only local debt. However, the cost efficiency diminishes for MFOs exposed to foreign debtholders from institutionally distant countries. These results offer salient policy implications for debtholders and debt-seeking MFOs by highlighting the cost efficiency benefit of debt, especially international debt, for MFOs while simultaneously underscoring the detrimental moderating effect of institutional distance.