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. • We examine the impact of having debt versus no debt and international debt versus local debt on MFOs’ cost efficiency. • We use agency theory and the capital market liability of foreignness concept to study 655 MFOs in 88 countries (1998–2015). • MFOs with debt are more cost-efficient than those without debt. • MFOs with only international debt are more cost-efficient than those with only local debt. • International debt’s cost efficiency edge decreases as the institutional distance between debtholders and MFOs increases.