The Interactive and Causal Relationship between Productivity and Profitability of Vietnam’s Formal Microfinance Institutions

Abstract

Productivity and profitability are the most complex areas of financial decision making due to their interrelationship with other financial decision variables. At the same time, productivity and profitability are factors affecting the operations and goals of formal microfinance institutions (MFIs) in Vietnam. This study’s purpose was to discover the interaction and causal relationship between productivity and profitability and to examine factors that affect the productivity 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 appeared that profitability and debt-to-equity ratio have positive relationships with productivity and that the number of branches and deposits have negative relationships with productivity. Productivity has a positive relationship with profitability and both the debt-to-equity ratio and equity have negative impacts on profitability. The study found bidirectional interactions and a causal relationship between productivity and profitability. Based on the findings the study proposes policy measures that could be implemented by the managers of formal MFIs to increase productivity and ensure a more efficient distribution of economic resources. This study also helps managers of formal MFIs understand the key determinants for better management of formal MFIs.