Abstract: This paper intends to assess the relationship between the commercialization of microfinance institutions and their portfolio quality using the non-linear smooth transition autoregressive (STAR) model. The main intention of this study is to give an insight into the link between some factors of commercialization and the portfolio quality of MFIs and to justify whether this new trend is responsible for increasing loan defaults. In doing so, we use panel data on 59 MFIs operating in four different regions over a 14-year period. Results show that focusing on profitability as well as increasing competition are positively related to portfolio at risk >30; the indicator of MFIs’ repayment risk. Moreover, we find out that the deviation from not-for-profit to for-profit MFIs and from group-based lending to individual lending are also positively associated with PAR30. These results indicate that commercialization seems to be a contributor to the decline of MFIs’ portfolio quality and a plausible cause to the decrease of loan default rates.

Keywords: microfinance, commercialization, loan default, STAR model

Pages: 53-65

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