Assessment of Government Intervention in Microfinance Banks of Pakistan

This paper presents a panel data study of microfinance banks in Pakistan. The data includes a random sample of financial statements from 8 microfinance banks over the period from 2011-2015, totaling 40 firm year observations. The study aims to evaluate the effect of government interventions on these microfinance banks and brings up a statistically critical assessment of various government policies applied to the sector. To quantify the effects of government intervention, panel data analysis is conducted. For a better selection of model, the Hausman’s specification test is employed. The random effect model was found suitable for analysis. Using statistical tools, this paper investigates the causal effect of government regulations, government grants, market size, and governmental audits on the profit ratios of microfinance institutes. This is one of the few studies that investigates the impacts of the small and medium sized government policies on microfinance bank from inception of these policies. By analyzing the period during which these policies were first implemented, the study provides a clear and direct picture of the relationship between governmental policy and SME entities. Taking a snapshot of the impacts in the beginning provides undiluted results that are not confounded by other environmental and regulatory effects. The results show that most of the variables used in the study, such as market size and number of audits are significantly related, while government grants have an insignificant relationship with the performance of microfinance banks. The study makes a significant contribution by demonstrating that government policies and grants have limited impact on SME performance and should be reevaluated, while they should rely more on audits.