The purpose of this paper is to investigate the impact of loan officers’ overconfidence on risk-taking decision and solvency performance measured by z-scores in the context of Islamic and conventional microfinance institutions (MFIs).
A random effect generalized least square regression was applied to examine the effect of overconfidence on credit risk-taking. The data set covers 326 conventional MFIs and 57 Islamic MFIs in six different regions over the period of 2005–2015.
Overconfidence proxies have shown through high loan growth, low-interest margin and loan loss provision reveal negative consequences on risk-exposures for both MFIs averagely. The loan officer’s overconfidence is significantly and positively related to the risk-taking decision, and thus, a lower loan portfolio quality. Besides, loan officers’ risk-taking behaviour harms these institutions’ solvency performance.
This paper makes an initial attempt to evaluate the effect of overconfidence behavioural bias on risk-taking decisions and its implication on the MFIs solvency and sustainability.
