Do microsavings stimulate financial performance of microfinance institutions in Sub-Saharan Africa?

Abstract

PurposeThe purpose of this paper is to investigate the empirical relationship between microsavings and the financial performance of microfinance institutions (MFIs) in Sub-Saharan Africa (SSA).Design/methodology/approachThe approach in this paper is decidedly empirical, and employs data obtained from Microfinance Information eXchange (MIX). The data set consists of 350 microfinance MFIs domiciled in 36 Sub-Saharan African countries for the period covering 1998–2012.FindingsThe panel estimation results consistently show that there exists a negative and statistically significant relationship between microsavings and the financial performance of MFIs in SSA. This is perhaps surprising, albeit rational considering the exceedingly elevated operating expenses that ascend from mobilizing and managing microsavings, ceteris paribus, that could erode firm profitability. The paper draws policy implications from these important findings.Research limitations/implicationsEven though generalized method of moment estimation technique was employed and robustness checks, the issue of endogeneity cannot be eliminated entirely.Practical implicationsMicrofinance industry is one of the fastest growing segments of the financial sector in SSA. The industry is increasingly becoming the core of financial inclusion in the region where two-thirds of the adult population lack access to formal financial services. Therefore, gaining an in-depth understanding of the role microsavings play in the financial performance of MFIs can contribute to the growth of the industry.Originality/valueThis study is timely considering the significant growth in the number of microsavings – there are currently twice as many microsavings accounts in SSA as there are microcredits. More importantly, based on 400 MFIs, that reported data to MIX in 2016, the total microsavings stood at about US$11bn against an aggregate loan portfolio of about US$10.5bn. The remarkable growth of microsavings in SSA, from less than US$100m in 2000 to US$11bn in 2016, is the main motivation of undertaking this study.