Branch Profitability in Microfinance Institutions

Abstract

Microfinance institutions has important roles for developing country economic. In Indonesia 98.67% of business units are on micro segment and it absorbs 89.04% working labors. Profitability has been main issue for microfinance institutions since it will impact to their market source of funding. PT Ibu Berdaya Fintek (Ibu Berdaya) as peer-to-peer lending company connects urban lenders with micro women entrepreneurs in rural area. Branch profitability is crucial for Ibu Berdaya because more than 80% of its revenue coming from the branch operation. The purpose of this research is to identify variables that influence the profitability of branch in microfinance institutions and provide some proposals to improve the branch’s profit margin. Total twenty-one variables analysed in this study, both branch’s internal performance variables and external variables. Multiple linear regression utilized to analyze correlation between all variables with branch profit margin used as dependent variable. Average monthly disbursement (both for new and subsequent loans), branch age, and number of account officers all have positive and substantial effects on branches in microfinance institutions. However, the overall amount of past-due loans outstanding, the average amount of new loans outstanding, and the local minimum wage have a negative impact on branch profit. This research concluded that it’s important for microfinance institutions to keep ratio of sequence and new loan, ratio borrowers per account officer and implement better credit risk mitigation strategy.