THE INTERACTION BETWEEN SOCIAL PERFORMANCE AND

PROFITABILITY IN VIETNAM’S FORMAL MICROFINANCE

INSTITUTIONS

Van Duong Ha23

Hong Bang International University

Abstract:

Social performance is one of the factors affecting the profitability of Vietnam’s formal
microfinance institutions (MFIs) over the years. This study analyzed the determinants of
social performance and profitability. At the same time, the study examined the interactive
relationships between social performance and profitability of formal MFIs. After regression
analysis on a set of panel data from 2010 to 2018 of all formal MFIs in Vietnam, it appears
that profitability, financial sustainability, and deposit have positive relationships with
outreach breadth; outreach depth and the number of the branch have negative relationships
with outreach breadth. The debt-to-equity ratio and financial sustainability have positive
relationships with outreach depth; profitability, asset growth rate and loan-to-deposit ratio
have negative relationships with outreach depth. The equity growth rate, outreach breadth
and repayment ratio have positive relationships with profitability; outreach depth, MFIs age
and loan-to-deposit ratio have negative relationships with profitability. The study finds
bidirectional interactions and the causal relationship between social performance and
profitability of formal MFIs. This study recommends that managers and helps researchers
and managers to understand the key determinants for effective management of formal MFIs.
Keywords: Financial sustainability, microfinance institution, outreach breadth, outreach
depth, social performance, sustainability.

1. Introduction
The renewed interest in the social goals of microfinance is part of the operations in
MFIs. Because, in microfinance, social performance and profitability are linked and
mutually reinforcing. MFIs attention to their mission to improve the lives of poor people
are likely to improve their operations bottom line as well. This shift is marked by a surge
of interest in various types of outreach and operations development, all directed to helping
MFIs gain a better understanding of customers and how MFIs can best serve them. At the
same time, thanks to the intervention of microfinance in recent years with potential for

23
Corresponding email: dhv05@yahoo.com

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greater outreach and sustainable success, microfinance is widely regarded as the solution
to poverty and widely recommended and perceived by many as a turn-key for unlocking
opportunities for the impoverished people. With the suport of microfinance, poor, farmers
are aided with the tools, skills, capital to successfully adopt a sustainable approach in their
quest to escape from the poverty trap in which they are deeply anchored.
In Vietnam, the formal MFIs have establish by the State Bank of Vietnam. The
operations of formal MFIs have reached 28 provinces and cities with 113 branches and
transaction offices. The operations of formal MFIs in Vietnam have made an important
contribution to expanding the scale of the financial service provision, especially providing
financial services to the poor, low-income people and contributing to ensuring social
security. Social performance is one of the goals of formal MFIs in Vietnam. Beside,
increasing the ability to provide financial services is one of the important orientations that
are targeted by formal MFIs in Vietnam. With this orientation, formal MFIs have
expanded the scale of the service provision. However, many factors have affected the
operations, made social performance and profitability of many formal MFIs in Vietnam
fluctuated over the years, affecting the ability to expand the scale of the financial service
provision. There have been some researches on formal MFIs operations in Vietnam; but,
there has been no research on the relationship between social performance and
profitability. In particular, the study of the interactive and causal relationship between
social performance and profitability of formal MFIs is one of the urgent issues to
understand the relationship and trend impact to increase social performance and promote
profitability of formal MFIs in Vietnam. Therefore, this study is helpful to decision-
makers and other stakeholders of formal MFIs in Vietnam.
2. Literature review
Microfinance institution means a type of credit institution which mainly conducts
some banking operations to meet the needs of low-income individuals and households and
super small-sized enterprises. MFIs may be established as limited liability companies with
the operations: (i) Taking deposits in Vietnamese dong in forms of compulsory savings
under their regulations, and deposits of organizations and individuals including voluntary
deposits of microfinance clients except those for payment purposes. (ii) Borrowing loans
from domestic and overseas individuals, credit institutions, MFIs, and other organizations.
(iii) MFIs may only extend credit in Vietnamese dong by lending. The credit extension of
MFIs may be guaranteed with compulsory deposits or guarantee of a group of savings
depositors or loan borrowers. (iv) Other operations of MFIs: Entrusted lending and
receiving entrustment of lending, providing financial consultancy services in the

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microfinance sector, providing collection and payment and money transfer services for
microfinance clients, acting as insurance service agents (National Assembly, 2010).
Therefore, the formal MFIs may be established as limited liability companies that
mainly conducts some banking operations to meet the needs of low-income individuals
and households and super small-sized enterprises. The formal MFIs play an important role
in the economy and social development, contributes to the strengthening and expanding
the formal financial systems. In particular, the formal MFIs offer financial services to the
poor who have no access to the traditional financial sector. At the same time, formal MFIs
attract capital from savings mobilization to serve the needs of investment, production, and
exchange of goods, thereby contributing to poverty reduction and income improvement
for customers. To play this important role, requirements for formal MFIs is to ensure
social performance and profitability in their operations.
2.1. Factors affecting social performance
Social performance that represents the outreach of MFIs includes both breadth and
depth dimensions. The breadth of outreach is shown by the number of borrower, the depth
of outreach is shown by the average loan size (Abrar, 2019). Social performance is one of
the goals of MFIs to increase accessibility of low-income individuals and households and
super small-sized enterprises, which is a goal associated with the development, and
operation process of MFIs. There fore, the breadth and depth of outreach are influenced
by many different factors.
2.1.1. Factors affecting outreach breadth
There are generally assumed that the larger the number of borrowers the better the
outreach. The number of active borrowers is an indicator of the outreach breadth (Rashid
and Twaha, 2013) and the outreach breadth is related to the actual number of poor people
reached with financial services (Abdulai and Tewari, 2017). The breadth of outreach is a
component associated with the development of the formal MFIs and is influenced by
many factors, including:
Firstly, outreach depth: The study of Cull et al. (2006), the finding is consistent with
an important trade-off between outreach breadth and outreach depth. Beside, The study of
microfinance outreach, Abdulai and Tewari (2017) showed the trade-off relations between
the depth and the breadth of outreach of MFIs.
H1.1: There is a negative relationship between outreach depth and outreach breadth
of formal MFIs.

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 Secondly, number of branches: According to World Bank (2004), increasing the scale
of the microfinance services by leveraging the branch networks to provide microcredit to a
large number of customers. Beside, expansion of credit to more borrowers is also associated
with increase in number of branches for many MFIs and this may reconcile with the fact
that increase in the breadth of outreach of MFIs (Quayes, 2012).
H1.2: There is a positive relationship between number of branches and outreach
breadth of formal MFIs.
Thirdly, deposit: The deposit relate to outreach breadth of MFIs. Because,
objectives of mobilizing deposits aim to provide relatively secure deposit services that
meet the demand of large numbers of poor people on an ongoing basis and provide
credit services to the poor by developing a relatively stable means to finance MFIs
portfolios (CGAP, 2005).
H1.3: There is a positive relationship between deposit growth rate and outreach
breadth of formal MFIs.
Fourth, financial sustainability: According to Nyamsogoro (2010), the trade-off
between financial sustainability and breadth of outreach with regards to the minimum loan
size. The study of microfinance outreach showed the trade-off relations between
sustainability and the breadth of outreach. This means that institutions that focus on
attaining the financial sustainability goal are unlikely to provide microfinance products
and services to a large number of poor clients (Abdulai and Tewari, 2017). Further,
factors such as simultaneous causality relationship between financial sustainability and
breadth of outreach, trade-off between financial sustainability and breadth of outreach
(Mujeri et al., 2017).
H1.4: There is a negative relationship between financial sustainability and outreach
breadth of formal MFIs.
Fifthly, return on assets: The relationship between return on assets and outreach
breadth shows that profitable MFIs reinvest their profit by increasing their loan portfolio
and reach maximum number of poor people. Results indicate that profitability positively
influence the outreach breadth (Saad, Taib & Bhuiyan, 2018).
H1.5: There is a positive relationship between return on assets and outreach breadth
of formal MFIs.

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 2.1.2. Factors affecting outreach depth
The depth of outreach is measured by average loan size (Ledgerwood, 1999) and all
financial service providers expand the depth of outreach to develop new products and
channels or to move to new regions and market segments. The majority of direct funding
to microfinance is used to support portfolio growth (Ledgerwood et al., 2013). There fore,
the average loan balance per borrower is a measure of depth of outreach (Abdulai and
Tewari, 2017). The depth of outreach is associated with all MFIs activities and is
influenced by many factors, including:
Firstly, credit size: According to Abdulai and Tewari (2017), loan size reflects
outreach to poor clients by MFIs and the study of Saad et al. (2018) pointed out large
MFIs tend to focus on large loan size and large size also strongly positively influence the
outreach performance of MFIs. Thus, credit size has a positive impact on outreach depth
of MFIs.
H2.1: There is a positive relationship between credit size and outreach depth of
formal MFIs.
Secondly the size growth of MFIs: MFI size in terms of total assets and MFI size to
be associated with larger loan size per borrower (Kai, 2009). MFIs with greater asset
proportion or with large size also strongly positively influence the outreach of MFIs (Saad
et al., 2018).
H2.2: There is a positive relationship between the size growth of MFIs and outreach
depth of formal MFIs.
Thirdly, debt-to-equity ratio: The study of Osotimehin et al. (2011) find that
microfinance outreach is positively and significantly determined by debt-equity ratio.
Next, the study result of Quayes (2012) show that debt to equity ratio has a significant
positive impact on the depth of outreach and according to Johnson (2015) finds that MFIs
that are highly leveraged compromise outreach objectives in their operations.
H2.3: There is a positive relationship between debt-to-equity ratio and outreach
depth of formal MFIs.
Fourth, loan-to-deposit ratio: According to Barkley et al. (1984), loan-to-deposit
ratio is used as a proxy for relative loan activity. Beside, the study of DiSalvo and
Johnston (2017) showed that loan-to-deposit ratio is a key indicator to be monitored to
take the gauge of credit institutions' structural liquidity positions. It is a ratio showing how
much credit of these institutions is funded by key stable funding resources, namely

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deposits. This can also be said about loan-to-deposit ratios as another measure of the
liquidity of credit institutions. Loan-to-deposit ratio of large credit institutions reached
high ratio, their lending expanded rapidly. The lending increased to meet the needs of
their customers. There by, loan-to-deposit ratio affects on outreach depth of MFIs.
H2.4: There is a positive relationship between loan-to-deposit ratio and outreach
depth of formal MFIs.
Fifthly, financial sustainability: According to Churchill (2019), the study results for
the full sample provide evidence of a trade-off between financial sustainability and
outreach depth. The results also indicate that an increase in financial sustain-ability leads
to a much stronger negative effect on outreach depth.
H2.5: There is a negative relationship between financial sustainability ratio and
outreach depth of formal MFIs.
Sixthly, return on assets: Return on asset effect both the depth and breadth of
outreach of MFI and results of regression analysis suggest that outreach of MFIs
approximated by outreach depth is negatively influenced by return on assets of MFI (Saad
et al., 2018).
H2.6: There is a negative relationship between return on assets and outreach depth
of formal MFIs.
2.2. Factors affecting profitability
The definition of profitability usually depends on the objective of the analysis. The
profitability theory focuses on how well the miccrofinance institutions uses its assets to
generate returns. Return on assets indicates how well an miccrofinance institution is
managing its assets to optimize its profitability. The ratio includes not only the return on
the portfolio, but also all other revenue generated from investments and other operating
activities and this ratio can be used to forecast earnings in future periods. Return on assets
measures profitability regardless of the institution’s underlying funding structure; it does
not discriminate against miccrofinance institutions that are funded primarily through
equity and return on assets is a good measurement for profitability of miccrofinance
institutions (Bruett et al., 2005). There fore, return on assets is a good measurement for
profitability of PCFs, profitability is associated with all PCFs operations and is influenced
by many factors, including:
Firstly, MFIs age: The MFIs age of operation reflects the operational experience of
MFIs and affects profitability of MFIs (Kipesha, 2013). At the same time, among other

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factors, the age of the MFIs was found to have a positive and significant impact on the
financial performance. The age of the MFIs was also found to have a positive and
significant impact on the financial performance (Vanroose and D’Espallier, 2013).
However, Narwal and Yadav (2014) find a negative impact of age on profitability of MFIs.
H3.1: There is a positive or negative relationship between MFIs age and profitability
of formal MFIs.
Secondly, outreach depth: The results of Amin, Qin, Rauf and Ahmad (2017) show
that outreach depth measured with average loan balance per borrower has positive impact
on profitability of MFIs.
H3.2: There is a positive relationship between outreach depth and profitability of
formal MFIs.
Thirdly, equity growth rate: Ability of a institution to act in long term depends on
how financial managers can manage optimally capital of the institution and the study of
Pai and Kishore (2014) find out working capital management is the most important
decision because it affects profitability and liquidity of institutions. The study Waweru
and Wanyoike (2016) found that capital structure generally had a significant effect on
profitability of MFIs. The study concluded that equity capital ratio in MFIs was on the
rise. There fore, there is a positive relationship between equity growth rate and
profitability of financial institutions.
H3.3: There is a positive relationship between equity growth rate and profitability of
formal MFIs.
Fourth, loan-to-deposit ratio: This ratio is used to assess the liquidity of MFIs, and
there is a correlation between loan-to-deposit ratio and net income (Monyi, 2017).
However, liquid assets usually have lower rates of return; therefore, higher liquidity (lower
loan-to-deposit ratio) would signal lower profitability and vice versa (Adusei, 2015).
H3.4: There is a negative relationship between loan-to-deposit ratio and profitability
of formal MFIs.
Fifthly, outreach breadth: The results of Amin et al. (2017) indicate that outreach
breadth measured with number of active borrowers and shows negative impact on
profitability of MFIs.
H3.5: There is a negative relationship between outreach breadth and profitability of
formal MFIs.

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 Sixth, repayment ratio: According to MicroRate (2014), repayment ratio of
customers reflects the loan quality of MFIs and shows that a part of the loan portfolio is at
risk of non-repayment. As a result, this ratio affects MFI's income and repayment ratio is a
factor related to profitability of MFIs.
H3.6: There is a positive relationship between repayment ratio and profitability of
formal MFIs.
3. Research methodology
The study uses both primary and secondary data. Secondary sources of data are
gathered by international journals, books, etc. Primary data were collected from the
website of MIX Market, annual reports, financial reports of all formal MFIs, that were
licensed by the State Bank of Vietnam in the period of 2010 - 2018. This research has
analyzed and synthesized the theoretical basis relating to social performance and
profitability of MFIs. Based on the synthesized and analyzed theories, the paper defines
the factors affecting social performance and profitability, the analysis model of the
interactive relationship between social performance and profitability of formal MFIs in
Vietnam is established as follows:
𝑛

Y1 = 𝛼10 + 𝛼11 Y3 + ∑ 𝛽1k X1k + 𝜇1 (1)

𝑘=1
𝑚

Y2 = 𝛼20 + 𝛼21 3 + ∑ 𝛽2γ X 2γ + 𝜇2 (2)

γ =1
𝑞

Y3 = 𝛼30 + 𝛼31 Y1 + 𝛼31 Y2 + ∑ 𝛽3δ X 3δ + 𝜇3 (3)

δ =1

Where:
Y1 is the variable that measures outreach breadth, determined the number of active
borrowers. Y2 is the variable that measures outreach depth, determined by the average
loan per borrower. Y3 is the variable that measures profitability, determined by return on
assets. X1k, X2γ and X3δ are the independent variables that can affect outreach breadth and
outreach depth in equations (1), (2) and (3), respectively.
The coefficient α and coefficient β are the correlation coefficients of the independent
variables with the dependent variables, which are the error terms of the model. For
simplicity, indicator i represents the number of observations and indicator t represents the
number observed year. This study uses Stata 15.0 software with the variables described
briefly, the definitions of variables and expected signs are presented in Table 1.

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 Table 1: Summary of the research model variables
Variables and symbols
Factors affecting outreach breadth
Dependent variable
Outreach breadth (NAB)
Independent variables
Depth of outreach (ALB)
Number of branches
(BRA)
Deposit (DEP)
Financial self -
sustainability (FSS)
Return on assets (ROA)
Factors affecting outreach depth
Dependent variable
Outreach depth (ALB)
Independent variables
Credit size (CS)
The size growth of MFI:
Asset growth rate (AGR)
Debt-to-equity ratio
(DER)
Loan-to-deposit ratio
(LDR)
Financial self -
sustainability (FSS)
Return on assets (ROA)
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Definition Expected sign and
hypotheses
The number of active borrowers
The average loan per borrower H1.1: - (high ALB,
low NAB)
Number of branches H1.2: + (high BRA,
high NAB)
Total deposit H1.3: + (high DEP,
high NAB)
Operating income / (Operating expenses + H1.4: - (high FSS,
financing costs + provision for loan losses + low NAB)
Cost of capital)
(Net operating income -Taxes) / Average H1.5: + (high ROA,
assets high NAB)
The average loan per borrower
Gross loan H2.1: + (high CS,
high ALB)
Growth in asset H2.2: + (high AGR,
high ALB)
Total liabilities / Total equity H2.3: + (high DER,
high ALB)
Gross loan / Total deposit H2.4: + (high LDR,
high ALB)
Operating income / (Operating expenses + H2.5: - (high FSS,
financing costs + provision for loan losses + low ALB)
Cost of capital)
(Net operating income -Taxes) / Average H2.6: - (high ROA,
assets low ALB)
Factors affecting profitability
Dependent variable
Return on assets (ROA) (Net operating income -Taxes) / Average assets
Independent variables
The age of MFI (AGE) Number of operational years of MFI H3.1: +/- (high AGE,
high / low ROA)
Depth of outreach (ALB) The average loan per borrower H3.2: + (high ALB,
high ROA)
Equity growth rate (EGR) Increase in equity H3.3: + (high EGR,
high ROA)
Loan-to-deposit ratio Gross loan / Total deposit H3.4: - (high LDR,
(LDR) low ROA)
Outreach breadth (NAB) The number of active borrowers H3.5: - (high NAB,
low ROA)
Repayment rate (RR) The value of the refunded credits / The value H3.3: + (high RR,
of the due credits high ROA)

The study uses the descriptive statistical method to evaluate the fluctuations of
variables in the research model, perform the correlation analysis to assess the degree of
multicollinearity and perform the regression according to the fixed effects model, random
effects model and comparison with pooled ordinary least square model to determine the
influencing factors for each model. Through the results of the regression steps, this study
finds out the factors affecting social performance and the relationships between social
performance and profitability of formal MFIs.
4. Research results
4.1. Descriptive statistics and correlation analysis
Descriptive statistics of both dependent and independent variables are presented in
Table 2. The results testify that ALB, AGE, AGR, BRA, EGR, FSS, LDR , ROA and RR
variables have smaller standard deviations than the average. CS, DER, DEP and NAB
variables have fluctuations, due to the large difference credit size, in debt-to-equit, deposit
and outreach breadth between formal MFIs in Vietnam in the period from 2010 - 2018.

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 Table 2: Descriptive statistics
Variable Mean Std. Dev. Min Max
ALB .0081806 .0034304 .0022 .0153
AGE 17.75 6.56125 6 28
AGR 23.36139 17.4796 -6.3 69.58
BRA 25.69444 21.52582 4 71
CS 754.4994 937.2296 21 3699
DER 5.133889 5.823978 1.16 24.26
DEP 386.81 471.1465 4 2007
EGR 16.70667 15.56716 -7.14 68.67
FSS 103.4697 14.88413 71.74 129
LDR 2.108611 .9157172 .89 5.25
NAB 93407.61 105733 414 330300
ROA 4.137222 1.950659 .42 7.8
RR 88.67083 12.97568 60.36 99.99
Source: Own calculations.
The analysis results of correlation between variables in the model indicate a very
low degree of correlation among the variables, the presence of any multicollinearity is
neglected (Table3).
Table 3: Correlation matrix
Correlation matrix for factors affecting outreach breadth
NAB ALB BRA DEP FSS ROA
NAB 1.0000
ALB -0.0238 1.0000
BRA 0.4341 0.0461 1.0000
DEP 0.6267 0.3350 0.5180 1.0000
FSS 0.7509 0.3080 0.6021 0.7789 1.0000
ROA 0.6022 -0.2840 0.3759 0.3464 0.4037 1.0000
Correlation matrix for factors affecting outreach depth
ALB CS AGR DER LDR FSS ROA
ALB 1.0000
CS 0.1847 1.0000
AGR -0.5430 -0.1209 1.0000
DER 0.5260 -0.2697 -0.1159 1.0000
LDR -0.7293 0.0049 0.4173 -0.3449 1.0000
FSS 0.3080 0.7902 -0.1915 -0.0476 -0.0868 1.0000
ROA -0.2840 0.4354 0.0681 -0.5047 0.1216 0.4037 1.0000
Correlation matrix for factors affecting profitability
ROA AGE ALB EGR FSS LDR NAB RR
ROA 1.0000
AGE 0.4270 1.000
ALB -0.2840 0.2375 1.0000
EGR 0.4112 0.0623 -0.3849 1.0000
FSS 0.4037 0.8597 0.3080 -0.0351 1.0000
LDR 0.1216 -0.0425 -0.7293 0.3433 -0.0868 1.0000
NAB 0.6022 0.7864 -0.0238 0.1210 0.7509 0.1110 1.0000
RR 0.5985 0.7411 0.1782 -0.0107 0.6351 -0.0710 0.6571 1.0000
Source: Own calculations.
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4.2. Regression results
4.2.1. Regression results for factors affecting outreach breadth
Regression is carried out using Fixed effects model (FEM), Random effects model
(REM) and comparison with Pooled ordinary least square (OLS) model between NAB
dependent variable and ALB, BRA, DEP, FSS, ROA independent variables.

According to the results of FEM and REM, both P-values are less than the
significance level of 5% (P-value = 0.000), so the regression models are statistically
significant at the significance level of 5 %. In FEM, variables DEP, FSS and ROA have
positive impacts on the variable NAB at the significance level of 1%, 10% and 10%,
variable BRA has a negative impacts on the variable NAB at the significance level of
10%, variable ALB has a negative impacts on the variable NAB, but this variable is not
statistically significant. In REM, variables DEP, FSS and ROA have positive impacts on
the variable NAB at the significance level of 1%, 5% and 5%, variables ALB and BRA
have negative impacts on the variable NAB at the significance level of 1% and 10%.

This study performed Hausman test to select the appropriate model and Hausman
test result obtains a P-value of 0.0591, greater than the significance level of 5 %, so REM
is more suitable than FEM. In comparison with OLS Pooled model, REM is more suitable
than OLS Pooled model. Therefore, the study uses REM regression results in order to
analyze and test the next steps. The multicollinearity test of the model with Mean VIF =
4.06, VIF of variables smaller than 10. This result shows no serious multicollinearity in
this model.

Test for variance change of the model, P-value = 1.0000 is greater than 0.05,
therefore, this model does not have variance change phenomenon. Checking the
autocorrelation of the model, P-value = 0.0159 is smaller than 0.05 so this model have
serial correlation.

After overcoming the model serial correlation (REM-xtgls), the results show that
variables DEP, FSS and ROA have positive impacts on the variable NAB at the
significance level of 1%, 5% and 5%, variables ALB and BRA have negative impacts on
the variable NAB at the significance level of 1% and 10% (Table 4).

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 Table 4: Regression results for factors affecting outreach breadth
Independent Dependent variable (NAB)
variables REM FEM REM-xtgls
ALB -8711354.1*** -1692443.1 -8464470.4***
(-3.53) (-0.27) (-3.54)
BRA -931.0* -1257.0* -802.5*
(-2.25) (-2.75) (-2.16)
DEP 154.5*** 177.6*** 153.7***
(6.42) (5.74) (7.23)
FSS 2314.4** 2437.5* 2053.8**
(2.79) (2.39) (2.87)
ROA 12095.4** 13654.3* 13142.0**
(2.72) (2.22) (3.09)
_cons -160683.7* -237845.4* -141902.7*
(-2.19) (-2.14) (-2.18)
P-value 0.0000 0.0000 0.0000

Note: t statistics in parentheses * p<0.05, ** p<0.01, *** p<0.001

Source: Own calculation

4.2.2. Regression results for factors affecting outreach depth

Regression is carried out using FEM, REM and comparison with OLS model
between ALB dependent variable and CS, AGR, DER, LDR, FSS, ROA independent
variables.
According to the results of REM and FEM, both P-values are less than the
significance level of 5% (P-value = 0.000), so the regression models are statistically
significant at the significance level of 5 %. In REM, variables AGR, LDR and ROA have
negative impacts on the variable ALB at the significance level of 10%, 1% and 10%,
variable DER has a postive impact on variable ALB at the significance level of 10%,
variable CS and FSS have postive impact on variable ALB, but this variable is not
statistically significant. In FEM, variables CS, AGR, LDR and FSS have negative impacts
on the variable ALB, variables DER and ROA have positive impacts on the variable
ALB, but these variable are not statistically significant.
This study performed Hausman test to select the appropriate model and Hausman
test result obtains a P-value of 0.0118, smaller than the significance level of 5 %, so FEM
is more suitable than REM. In comparison with OLS Pooled model, FEM is more suitable
than OLS Pooled model. Therefore, the study uses FEM regression results in order to

354
analyze and test the next steps. The multicollinearity test of the model with Mean VIF =
2.76, VIF of variables smaller than 10. This result shows no serious multicollinearity in
this model.
Checking the autocorrelation of the model, P-value = 0.4709 is greater than 0.05 so
this model does not have serial correlation.Test for variance change of the model, P-value
= 0.0000 is smaller than 0.05, therefore, this model have variance change phenomenon.
After overcoming the model serial correlation (FEM-xtgls), the results show that
variables AGR, LDR and ROA have negative impacts on the variable NAB at the
significance level of 10%, 1% and 5%, variables DER and FSS have positive impacts on
the variable NAB at the significance level of 10% and 5%, variable has a positive impact
on the variable NAB, but this variable is not statistically significant (Table 5).
Table 5: Regression results for factors affecting outreach depth
Independent Dependent variable (ALB)
variables REM FEM FEM-xtgls
CS 0.000000733 -0.000000497 0.000000246
(1.32) (-0.93) (0.57)
AGR -0.0000457* -0.0000220 -0.0000330*
(-2.40) (-1.14) (-2.40)
DER 0.000164* 0.0000737 0.000106*
(2.46) (1.32) (2.28)
LDR -0.00186*** -0.000737 -0.00187***
(-4.93) (-1.35) (-6.19)
FSS 0.0000379 -0.00000397 0.0000721**
(1.07) (-0.13) (2.61)
ROA -0.000389* 0.000183 -0.000466**
(-1.97) (0.80) (-3.08)
_cons 0.00945** 0.00990** 0.00653*
(2.85) (3.64) (2.47)
P-value 0.0000 0.0000 0.0000

Note: t statistics in parentheses * p<0.05, ** p<0.01, *** p<0.001

Source: Own calculations

4.2.3. Regression results for factors affecting profitability

Regression is carried out using FEM, REM and comparison with OLS model
between ROA dependent variable and AGE, ALB, EGR, LDR, NAB, RR independent
variables.

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 According to the results of REM and FEM, both P-values are less than the
significance level of 5% (P-value = 0.000), so the regression models are statistically
significant at the significance level of 5 %. In REM, variables EGR, NAB and RR have
positive impacts on the variable ROA at the significance level of 5%, 1% and 10%,
variable ALB and LDR variable have negative impacts on the variable ROA at the
significance level of 10% and 10%, variable AGE has a negative impact on the variable
ROA, but this variable is not statistically significant. In FEM, variable EGR and NAB
have positive impact on the variable ROA at the significance level of 10% and 5%,
variables LDR has a negative impacts on the variable ROA at the significance level of
10%, variables AGE, ALB and RR have positive impacts on the variable ROA, but these
variables are not statistically significant (Table 6).
Table 6: Regression results for factors affecting pofitability
Independent variables Dependent variable (ROA)
REM FEM
AGE -0.0768 0.0504
(-1.26) (0.71)
ALB -235.2* 237.4
(-2.46) (1.12)
EGR 0.0414** 0.0327*
(2.93) (2.28)
LDR -0.659* -1.090*
(-2.02) (-2.43)
NAB 0.00000761* 0.0000128**
(2.29) (3.66)
RR 0.0863*** 0.00494
(3.68) (0.14)
_cons -0.240 1.421
(-0.11) (0.60)
P-value 0.0000 0.0000

Note: t statistics in parentheses * p<0.05, ** p<0.01, *** p<0.001.

Source: Own calculations

This study performed Hausman test to select the appropriate model and Hausman
test result obtains a P-value of 0.0939, greater than the significance level of 5 %, so REM
is more suitable than FEM. In comparison with OLS Pooled model, REM is more suitable
than OLS Pooled model. Therefore, the study uses REM regression results in order to
analyze and test the next steps. The multicollinearity test of the model with Mean VIF =

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3.16, VIF of variables smaller than 10. This result shows no serious multicollinearity in
this model.
Test for variance change of the model, P-value = 1.0000 is greater than 0.05,
therefore, this model does not have variance change phenomenon. Checking the
autocorrelation of the model, P-value = 0.4996is greater than 0.05 so this model does not
have serial correlation.
5. Discussions
5.1. Discussions of factors affecting social performance
The results of REM-xtgls (Table 4) reflect that variable ALB has a negative impact
on NAB with coefficient -8464470.4 and variable ALB has negative effects on NAB with
the significance level of 1%, indicating that ALB has a very strong impact on outreach
breadth. This result agrees with the expected sign and hypotheses; at the same time, this
result agrees with the analysis results of Cull, Kunt and Morduch (2006), Abdulai and
Tewari (2017).There is a trade-off relations between outreach depth and outreach breadth
of formal MFIs in the past years.
Variable BRA has a negative impact on NAB with coefficient -802.5, variable BRA
negatively affects NAB at the significance level of 10%, indicating that BRA has an
impact on outreach breadth. This result contrasts with the expected sign and hypotheses;
at the same time, this result disagrees with the analysis results of World Bank (2004) and
Quayes (2012). The reason, some formal MFIs maintain and no increase in the number of
branches, while this formal MFIs still increase in the number of active borrowers in the
period 2010-2018.
Variable DEP has a positive impact on NAB with coefficient 153.7 and variable
DEP has positive effects on NAB with the significance level of 1%, indicating that DEP
has a very strong impact on outreach breadth. This result agrees with the expected sign
and hypotheses; at the same time, this result agrees with the analysis results of CGAP
(2005). Many MFIs provide relatively secure deposit services that meet the demand of
large numbers of poor people which contribute to expand outreach breadth of MFIs of
formal MFIs in the past years.
Variable FSS has a positive impact on NAB with coefficient 2053.8, variable FSS
has positive effects on NAB with the significance level of 5%, indicating that FSS has a
strong impact on outreach breadth. This result contrasts with the expected sign and
hypotheses; at the same time, this result disagrees with the analysis results of Nyamsogoro
(2010), Abdulai and Tewari (2017), Mujeri et al. (2017). Because, some formal MFIs
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increased their financial self - sustainability by more than 110% through increasing their
income from lending activities, contributing to increasing the number of active borrowers
in the past years.
Variable ROA has a positive impact on NAB with coefficient 13142.0, variable
ROA has positive effects on NAB with the significance level of 5%, indicating that ROA
has a strong impact on outreach breadth. This result agrees with the expected sign and
hypotheses; at the same time, this result agrees with the analysis results of Saad et al.
(2018). Because, in the past years, profitable MFIs reinvest their profit by increasing their
loan portfolio and reach large number of poor people.
The results of FEM-xtgls (Table 5) reflect that variable AGR has a negative impact
on ALB with coefficient -0.0000330 and variable AGR has negative effects on ALB with
the significance level of 10%, indicating that AGR has an impact on outreach depth. This
result contrasts with the expected sign and hypotheses; at the same time, this result
disagrees with the analysis results of Kai (2009), Saad et al. (2018). Because, the size
growth of many formal MFIs has slowed down in recent years, while the average loan per
borrower still increase in many formal MFIs in recent years.
Variable DER has a positive impact on ALB with coefficient 0.000106, variable
DER has positive effects on ALB with the significance level of 10%, indicating that DER
has an impact on outreach depth. This result agrees with the expected sign and
hypotheses; at the same time, this result agrees with the analysis results of Osotimehin et
al. (2011), Quayes (2012), Johnson (2015). Many formal MFIs use funding sourses for
lending and this formal MFIs increased the average loan per borrower from liabilities over
the years.
Variable LDR has a negative impact on ALB with coefficient -0.00187 and variable
LDR has negative effects on ALB with the significance level of 1%, indicating that LDR
has a very strong impact on outreach depth. This result contrasts with the expected sign
and hypotheses; at the same time, this result disagrees with the analysis results of Barkley
et al. (1984), DiSalvo and Johnston (2017). Because, loan-to-deposit ratio of many formal
MFIs has slowed down in recent years, while the average loan per borrower still increase
in many formal MFIs in recent years.
Variable FSS has a positive impact on ALB with coefficient 0.0000721, variable
FSS has positive effects on ALB with the significance level of 5%, indicating that OSS
has a strong impact on outreach depth. This result contrasts with the expected sign and
hypotheses; at the same time, this result disagrees with the analysis results of Churchill

358
(2019). There is not the trade-off relations between financial sustainability and outreach
depth of formal MFIs and many formal MFIs increase in financial sustainability and lead
to increase the average loan per borrower in the past years.
Variable ROA has a negative impact on ALB with coefficient -0.000466 and
variable ROA has negative effects on ALB with the significance level of 5%, indicating
that ROA has a strong impact on outreach depth. This result agrees with the expected sign
and hypotheses; at the same time, this result agrees with the analysis results of Saad et al.
(2018). There is a trade-off relations between profitability and outreach depth of formal
MFIs in the past years.
5.2. Discussions of factors affecting profitability
The results of REM (Table 6) reflect that variable ALB has a negative impact on
ROA with coefficient -235.2 and variable ALB has negative effects on ROA with the
significance level of 10%, indicating that ALB has an impact on profitability. This result
contrasts with the expected sign and hypotheses; at the same time, this result disagrees
with the analysis results of Amin et al. (2017). There is a trade-off relations between
outreach depth and profitability of formal MFIs in the past years.
Variable EGR has a positive impact on ROA with coefficient 0.0414 and variable
DER has positive effects on ROA with the significance level of 5%, indicating that DER
has a strong impact on profitability. This result agrees with the expected sign and
hypotheses; at the same time, this result agrees with the analysis results of Waweru and
Wanyoike (2016), Pai and Kishore (2014). Average equity growth rate of MFIs is greater
than 16% in the period 2010-2018, which contribute to increase profitability of MFIs in
this period.
Variable LDR has a negative impact on ROA with coefficient -0.659 and variable
LDR has negative effects on ROA with the significance level of 10%, indicating that LDR
has an impact on profitability. This result agrees with the expected sign and hypotheses; at
the same time, this result agrees with the analysis results of Monyi (2017) and Adusei
(2015). Because, the loan-to-deposit ratio of many official MFIs has been decrease in
recent years, while return on assets have still increased in many foramal MFIs.
Variable NAB has a posttive impact on ROA with coefficient 0.00000761, variable
NAB has posttive effects on ALB with the significance level of 10%, indicating that NAB
has an impact on profitability. This result contrasts with the expected sign and hypotheses;
at the same time, this result disagrees with the analysis results of Amin et al. (2017). There
is not a trade-off relations between outreach breadth and profitability of formal MFIs in

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the past years. Many formal MFIs have advance outreach breadth and contributed to
increasing profitability of formal MFIs over the years.
Variable RR has a posttive impact on ROA with coefficient 0.0863, variable RR has
posttive effects on ROA with the significance level of 1%, indicating that RR has a very
strong impact on profitability. This result agrees with the expected sign and hypotheses; at
the same time, this result agrees with the analysis results of MicroRate (2014). The reason,
many formal MFIs maintain and increase repayment ratio more than 99%, quickly
regenerate the capital resourse for lending and contributing to increase profitability in the
period of 2010-2018.
6. Conclusions
The objective of this paper is studying the interactive relationships between social
performance and profitability of formal MFIs in Vietnam. Multiple regression analysis is
used in this study to find out the potential factors that affect social performance and
profitability of formal MFIs. Based on prior researches, three prominent models are
identified and these research results are accurate according to the characteristics of formal
MFIs and the development history of formal MFIs in Vietnam from 2010-2018.
The results study show three factors that have positive relationships with outreach
breadth of formal MFIs are deposit, financial sustainability and return on assets. Two
factors that have negative relationships with outreach breadth of formal MFIs are outreach
depth and number of branch. Two factors that have positive relationships with outreach
depth of formal MFIs are debt-to-equity ratio and financial sustainability. Three factors
that have negative relationships with outreach depth of formal MFIs are the asset growth
rate and loan-to-deposit ratio and return on equity. Credit size has insignificant
relationships with outreach depth of formal MFIs.
This study also shows that three factors that have positive relationships with
profitability of formal MFIs are the equity growth rate, outreach breadth and repayment
ratio. Two factors that have negative relationships with profitability of formal MFIs
outreach depth and loan-to-deposit ratio. The formal MFIs age has insignificant
relationships with profitability of formal MFIs.
At the same time, this study finds relationships between social performance and
profitability of formal MFIs. Particular, this study finds bidirectional interactions and the
causal relationships between social performance and profitability of formal MFIs in
Vietnam. Outreach breadth and profitability have a relationship to interact with each other
in a positive trend. However, outreach depth and profitability have a relationship to

360
interact with each other in a contrary trend; thus, there is a trade-off relationship between
outreach depth and profitability of formal MFIs.
Nowadays, MFIs are becoming a significant investment prospect in many regions of
the country. This study will help the researchers, managers to develop their expertise
about the key factors of social performance and profitability and the relationship between
social performance and profitability of MFIs in Vietnam. At the same time, based on the
research results, the article recommends key content to increase social performance and
advance profitability of formal MFIs in Vietnam as follows.
Firstly, this study finds bidirectional causal interactions between profitability and
outreach breadth with each other in a positive trend, but there is a trade-off relationship
between outreach depth and profitability of formal MFIs. Thus, the immediate policy
recommendation from this study would supportthe encouragement of formal MFIs to
emphasize on outreach breadth and profitability of formal MFIs.
Secondly, formal MFIs should focus more on improving repayment ratio and
increase the deposit mobilization that contribute to expand outreach breach and promote
profitability.
Thirdly, formal MFIs should focus more on the equity growth that contribute to
increase profitability of formal MFIs. At the same time, the formal MIFs restrict the trade-
off between outreach depth and profitability, thereby contributing to increased
profitability and outreach breadth .
This study assesses the between social performance and profitability of the formal
MFIs in Vietnam. Subsequent research can be extended to the institutions that provide the
microfinance service in Vietnam, further investigate other factors including macro and
micro factors to achieve more comprehensive results on the causal and interactive
relationship between social performance and profitability.
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