Efficiency Wage and the Credit Risk: Evidence from the Global Microfinance Industry Md Imran Hossain- Md Aslam Mia- Hooy Chee Wooi
School of Management
Universiti Sains Malaysia
Penang, 11800,
Malaysia
Abstract
From a relational lending or banking perspective, offering higher-than-industry-average wages, known as Efficiency Wages (EW), can boost employee productivity, particularly in terms of loan recovery within microfinance institutions (MFIs). This underscores the significance of efficiency wage in shaping credit risk, which is a persistent challenge within the microfinance industry. Given this context, determining the nexus between efficiency wage and credit risk has gained significant interest, particularly among policymakers and academics. Hence, the study primarily aims to investigate the relationship between efficiency wage and credit risk of MFIs. To this end, data were collected from the World Bank^s Mix-market database, covering 1258 unique MFIs across 101 countries from 2010 to 2018. Contrary to conventional wisdom, our findings showed that the implementation of efficiency wage tends to increase credit risk within MFIs. Our result suggests that paying employees above the industry averages may incentivize them to prioritize loan quantity over the borrowers^ ability to repay. This outcome remains robust even when employing alternative proxies and endogeneity-corrected techniques.
