Financial Linkages, Institutional Factors and Loan Repayment Performance: The Case of Microfinance Cooperatives in Tanzania

Abstract

Loan repayment performance (LRP) in microfinance institutions (MFIs) has been associated with borrowers’ and institutions’ factors. Since microfinance cooperatives (MCs) are owned by borrowers, their institutional factors might affect LRP differently. Based on linkages literature, transaction cost and principal agency theories, financial linkages (FLs) between MCs and formal financial institutions (FFIs) seem to shape institutional factors, and therefore, LRP. However, empirical studies on these relationships are missing. Based on t-test analysis utilising three-year unbalanced data of 148 to 273 MCs’ observations, this paper shows that FLs have strong relationship with institutional factors affecting LRP. Controlling for these factors, results on the linear regression analysis reveal that FLs do not affect LRP.