Financial Sustainability and Outreach of Microfinance Institutions in Ethiopia: Does Organizational Form Matter?

Abstract

Growing commercialization and competition in microfinance drives the focus of micro lenders from outreach per se to achieving financial sustainability in serving the poor. Such a goal can conflict with the traditional social mission of microfinance � outreach to the poor. In places where credit markets are inefficient, attaining financial sustainability while serving the poor depends largely on the ability of lenders to overcome the costs of market contracts and constraints. Such ability of cost containment often varies by lending terms and organizational forms. Using disaggregated data of microfinance providers in Ethiopia, we compared financial cooperatives and specialized or non-bank microfinance institutions on their outreach, financial performance and ability to achieve financial self-sufficiency together with outreach to the poor. The results show that nonbank microfinance providers perform relatively well in terms of breadth and depth of outreach, but face higher cost, which creates tension between outreach and financial sustainability. In contrast, there exists a positive complementarity between outreach and financial viability for financial cooperatives. On average, financially self-sufficient cooperatives lend small size loans and serve larger proportions of women borrowers, implying a greater depth of outreach together with achieving financial sustainability. While non-bank microfinance providers do better in expanding outreach, based on the findings, financial cooperatives better contain their costs, balance social and economic goals and enable the microfinance industry to fulfill its full promise �serving the poor on cost-covering basis.