Abstract
The importance of microfinance to developmental objectives relating to access to financial services, poverty alleviation, inequality reduction, and providing a solution to financial market failure among others cannot be over-emphasized. Academic literature confirming this is abundant. However the sustainability of these institutions has been a major concern in the recent past. This study seeks to determine what drives financial sustainability of microfinance institutions within the Ghanaian context. The study follows a quantitative approach using secondary data sourced from MIX Market. An unbalanced panel dataset from 25 Ghanaian microfinance institutions over six years (2006-2011) was used. Econometric results found that sustainability of microfinance institutions is positively related to the yield on gross portfolio and administrative efficiency ratio and negatively related to staff productivity. The direction of the staff productivity is puzzling and calls for more in-depth research to understand the source of the negative relationship between high level of staff productivity and financial sustainability.
Highlights
The seminal paper by Stiglitz and Weiss (1989) explored the impact of imperfect information in the credit markets its linkage to market failure
The average debt structure (DE)is 3.40, which indicates that the capital structure of Microfinance Institutions (MFIs) in Ghana is leveraged to the extent of 3.40 times debt to equity
The minimum ratio is negative at -354.28, implying that the capital structure of some MFIs is equity-funded as opposed to debt
Summary
The seminal paper by Stiglitz and Weiss (1989) explored the impact of imperfect information in the credit markets its linkage to market failure. As a result of imperfect information banks tend to ration out credit which denies the majority of the poor from accessing financial services from traditional banks (Stiglitz & Weiss, 1989:393). According to Barr (2005:279), the poor in developing countries face serious limitations in terms of access to financial services; these limitations include cost, risk and convenience factors Other factors, such as fragmented markets, dispersed populations and underdeveloped infrastructure, result in the cost of providing financial services to the poor being relatively higher (Woller & Schreiner, 2001:2). The consequence of those factors is significant exclusion of the majority of people by the traditional system. Financial exclusion in sub-Saharan Africa is approximately 76% of adults, which is well in excess of the global average of 50%, and that of high income economies at 11% (Demirguc-Kunt & Klapper, 2012:11)
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