Financial Sustainability of Microfinance Institutions and Macroeconomic Factors: A Case of South Asia

Purpose - This article investigates the factors influencing the financial performance and the level of financial sustainability of microfinance institutions (MFIs) in Togo. Methodology - Ordinary least squares models and binary probit models were employed in the research to identify the determinants of return on assets as a proxy for the financial performance and operational and financial sustainability of microfinance institutions. Unbalanced panel data collected from the MIX Market database of 29 MFIs in Togo over the period 1999–2018 was used in the study Findings – The results show that MFI's financial performance is positively and statistically influenced by size. However, the number of depositors per borrower and the loan loss ratio is negatively linked to financial performance. The operational sustainability was positively related to the depositors per borrower ratio, the PAR > 30 (Portfolio at Risk 30 days), and the productivity ratio. On the other hand, it is negatively related to PAR > 90 and the ratio of personal expenses to outstanding credit. Finally, financial sustainability was significantly and positively influenced by the size, and it was significantly and negatively influenced by PAR > 90. Conclusions – Taking these results into account can allow microfinance actors in Togo as well as politicians and donors to better orient their actions in the sector.

PurposeIn recent years, researchers have shown an increased interest in studying the institutional environment–financial institutions’ performance nexus. However, little attention is paid to investigating the role of institutional quality in the financial sustainability of microfinance institutions (MFIs). Consequently, this study explores whether investments in strengthening institutional environment enhance MFIs’ financial sustainability.Design/methodology/approachThe study relies on an unbalanced panel dataset of 136/138 MFIs in Sub-Saharan Africa (SSA) spanning from 2004 to 2018, which was obtained from the Microfinance Information Exchange (MIX) Market database under the World Bank catalog. Data for institutional factors are accessed from the World Bank database for World Governance Indicators (WGI). The study applies the two-step system generalized method of moments (GMM) to analyze the data.FindingsThe research uncovers that institutional environment matters in the financial sustainability of MFIs. The study shows that institutional quality is, in the aggregate, positively associated with financial sustainability. Different institutional factors also have distinct impacts on financial sustainability. While contemporaneous relationships are discovered between government effectiveness (GOVE), rule of law (RUL) and sustainability, the relationship between control of corruption (CCOR) and sustainability is an intertemporal one. Unlike the others, CCOR impacts sustainability with a one-year lag and not instantaneously. Nevertheless, the effects of the aforementioned institutional factors on financial sustainability are all positive and consistent with the result for the aggregate measure.Practical implicationsThe practical implication of our findings to MFI managers is that strategies should be developed and instituted to manage MFI-specific factors appropriately and counterbalance the negative effect of a weak institutional environment (in SSA) on financial sustainability, as MFIs have no or less control over the institutional quality. For policymakers, our findings underscore the significance of policy documents that assist developing economies in improving their institutional environment, as strong institutions are vital for MFIs in the attainment of financial sustainability, which is crucial for sustainable poverty reduction.Originality/valueWhile the extant literature provides valuable insights that different MFI-specific factors drive the financial sustainability of MFIs, the previous studies fail to address the role of institutional quality in the financial sustainability of MFIs. This study examines the nexus between institutional quality and financial sustainability, which has been ignored in the previous literature.

In the recent past, there has been a constant demand for timely accountability reports due to increased awareness, devolution of funds and establishment of various new institutions. Financial sustainability of microfinance institutions in West Pokot County in Kenya has been highlighted as a major concern. The main purpose of the study determined the effects of financial accountability on the sustainability of the microfinance institutions in the West Pokot County. The specific objectives were to: determine the effect of audit efficiency on the sustainability of Micro Finance Institutions (MFIs) in West Pokot County; establish the effect of fraud detection on the sustainability of microfinance institutions in West Pokot County; determine the effect of financial reporting on the sustainability of microfinance institutions in West Pokot County; and determine the effect of financial regulation on the sustainability of microfinance institutions in West Pokot County. The study was based on Agency theory, stakeholder theory, and stewardship theory. The study applied explanatory research design. The target population was the 6 MFIs in West Pokot County. A census was taken since the population is small. The researcher used a semi-structured questionnaire administered to each member of the respondents to collect the data. The collected data was analyzed using descriptive statistics and regression and correlation analysis by the help of SPSS. The results were presented in tables, pie charts and bar charts. From the findings, when financial accountability factors are held at zero, sustainability of microfinance institution will be negative (-0.257). At the same time, an increase in audit efficiency, fraud detection, financial reporting, and financial regulations each by one unit leads to an increase in sustainability of microfinance institutions by 0.276, 0.313, 0.453, and 0.036 units respectively the p-values were also less than 0.05 (that is 0.025 for audit efficiency, fraud detection (0.002), financial reporting (0.005) and financial regulations (0.038). This implies that all financial accountability factors considered in this study have a positive relationship with sustainability. The study concludes that financial accountability is to a great extent observed in MFIs particularly through audit efficiency, fraud detection, financial reporting, and financial regulations. The study recommends that the government through the relevant agents should ensure existing financial accountability regulatory framework is adhered to ensure sustainability of microfinance institutions. Microfinance institutions also should ensure they pay focus on audit efficiency, fraud detection, financial reporting, and financial regulations.

This study examines the nexus between credit expansion and the financial sustainability of microfinance institutions (MFIs) in Sub-Saharan Africa (SSA). The study also examines the interaction effects of credit expansion and interest rate/portfolio quality on MFI sustainability. The study relies on panel dataset of 136 MFIs across 31 SSA countries covering the year 2004 to 2018 and applies the Arellano-Bover/Blundell-Bond two-step Generalized Method of Moments (GMM) Windmeijer bias-corrected standard errors to analyze the data. The results establish that credit expansion matters in MFI financial sustainability. Specifically, the study uncovers that while the size of the loan portfolio and loan intensity are positively associated with MFI sustainability, the economic significance of loan intensity is higher. On the other hand, the other credit expansion proxy “credit growth” does not predict the sustainability of MFIs. The results also reveal that the loan intensity and potfolio at risk have interaction effects on MFI sustainability. However, the study fails to support an asymmetric effect of credit expansion on financial sustainability depending on the interest rate charged on loans. The study uses three proxies for credit expansion and gives useful insights for policymakers and/or MFI managers that loan intensity should be the main target of MFIs if the goal is to attain financial self-sufficiency. The study also examines the interaction effects of credit expansion and interest rate/portfolio quality on MFI sustainability and sheds light on what is expected from MFI managers to expand credit access to the poor without compromising sustainability.

Since Pakistan achieved independence, poverty has become one of the most important issues in the country, which can be reduced with the help of microfinance sector. Pakistani microfinance institutions (MFIs) are facing a decline in profitability which makes it difficult for them to survive. The current study aims to investigate the determinants affecting the financial performance, i.e. profitability and sustainability of microfinance institutions in Pakistan, as well as to establish if attaining profitability and sustainability becomes a conflicting goal in serving the poorer strata. The paper utilizes an unbalanced panel data set of 29 MFIs for the period 2008–2014 obtained from MIX Market. The study uses fixed effect and random effect with later accounting for endogeneity through instrumental variables technique i-e 2SLS and 3SLS. The results reveal that MFIs’ size, cost efficiency, portfolio at risk, average loan size and yield on loan portfolio are the main factors influencing the financial performance of MFIs in Pakistan. No sign of mission drift has been found rather serving to the poor is seen to be an increment for financial performance. The study provides guidance to MFIs’ managers in determining the factors that could affect their financial performance and reaching foremost objectives of any MFI. Managers can get an idea how to achieve both goals simultaneously. To the authors knowledge, this is the first study concentrated specifically on Pakistan in determining performance and outreach factors to date considering the simultaneous causation adopting two-stage least square (2SLS) and three-stage least square (3SLS) estimation strategy.

Microfinance institutions (MFIs) offer banking services to poor customers who have no access to the traditional financial sector. However, recent developments in the microfinance industry have increased focus on financial sustainability of MFIs therefore shifting focus from their social mission (outreach). Previous studies examine the factors affecting both financial sustainability and outreach of MFIs in separate models without taking into account the possible link between them. On this basis we propose a comprehensive model which includes both ‘outreach’ and ‘financial sustainability’ as endogenous variables and allows for possible link between them. Our results show that focusing on financial sustainability does not necessarily hurt the depth and breadth of outreach.

The purpose of this paper is to estimate the determinants affecting Financial Sustainability (FS) of Micro Finance Institutions (MFIs) working in Pakistan. The determinants are based on financing charges, size of loans, the age of the firm, size of Microfinance Institute, and proportion of female borrowers. These variables discern the important contribution to the effective financial sustainability of Microfinance institutions working in Pakistan. Data were collected from 25 Microfinance Institutions of their annual reports from 2008-2015. The multiple regression technique was used to measure financial sustainability with the given determinants. The results of this study show that financing charges, outreach and the proportion of female borrowers significantly explain the financial sustainability of MFIs. These are crucial determinants for alleviating poverty in Pakistan and attaining sound financial sustainability and survivorship of MFIs. This is one of the contributing studies in justifying various determinants affecting the financial sustainability in MFIs of Pakistan. This article is helpful for policymaker and management of MFIs to revitalize their focus to address the weaker parts of their capabilities and resources.

This paper examines what determines financial sustainability among 324 microfinance institutions (MFI) in 33 sub-Saharan African countries for the period covering 2003 to 2014. Using a well-specified Generalized Method of Moments (GMM) estimation technique, the empirical results provide strong evidence that return on assets (ROA) is the major determinant of financial sustainability of microfinance institutions in sub-Saharan Africa. This significant finding suggests that MFIs’ ability to generate higher net income from their credit portfolio is the critical factor for achieving financial sustainability. The implication of these findings is that MFIs should implement robust pre-loan screening systems, which can assess the creditworthiness of borrowers. This would undoubtedly contribute to reducing the loan default rates among MFIs operating in the region.

PurposeThis paper examines the effect of intellectual capital (IC) on the financial sustainability of microfinance institutions (MFIs). The study is motivated by the increased calls for MFIs to be self-sustainable and the growing importance of knowledge-based assets as contributors of competitive advantage and sustained performance.Design/methodology/approachWith a global sample of 444 MFIs and data for 2013–2018, which yielded 2,664 MFIs-year observations, this study examines the effect of IC on MFIs’ financial sustainability. The data are extracted from the MIX Market database. Value added intellectual capital coefficients are used as proxy measures of IC. Operational self-sufficiency is used to measure financial sustainability. Data are analyzed using three-panel data estimation models: the fixed effect, the random effect and the dynamic panel system generalized method of moments.FindingsThe results show that human capital efficiency and capital employed efficiency have a positive and significant effect on the financial sustainability of MFIs. However, structural capital efficiency has a significantly negative effect on financial sustainability. These results confirm the relative importance of both tangible and intangible assets as important positive contributors of financial sustainability of MFIs.Research limitations/implicationsThe paper focused on the association between IC and financial sustainability of MFIs. Therefore, examining nonfinancial institution may validate the contributions of this study.Practical implicationsBased on the findings, MFIs’ managers are encouraged to leverage IC, physical and financial capital to attain financial sustainability. In particular, MFIs should invest in employees training and development. Additionally, owing to the positive relationship between physical capital and financial sustainability, there is need for policy interventions to ensure MFIs access adequate funding. The study further recommends mandatory disclosure of IC among MFIs.Originality/valueThis is the first paper to investigate the relationship between IC and the financial sustainability of MFIs using panel data and a global sample of MFIs; therefore, it lays an empirical ground for future studies.

Purpose This paper examines the influence of financial leverage on the financial sustainability of microfinance institutions (MFIs) and the moderating role of the percentage of female borrowers (PFB). Design/methodology/approach The study uses a global sample of 646 MFIs drawn from the World Bank Mix Market and panel data for 2010–2018. The study employs ordinary least squares (OLS) and the one-step system generalized method of moments (SGMM) as regression estimation methods. Findings The findings of this study reveal that financial leverage and the PFB have a negative and significant effect on financial sustainability. The findings further show that the interaction between financial leverage and the PFB positively affects the financial sustainability of MFIs. Practical implications The findings inform MFIs' managers on the adverse effect of financial leverage and the PFB in their quest for financial sustainability. The findings also demonstrate that MFIs can leverage female borrowers to reverse the adverse effect of financial leverage on financial sustainability of MFIs. Originality/value Previous studies examined the direct effect of financial leverage and reported incongruent results. Because female borrowers are at the epicenter of MFI lending, this study fills the gap in the literature by examining whether the proportion of female borrowers moderates the relationship between financial leverage and MFIs' financial sustainability using a global dataset.

Microfinance is the provision of thrift, saving, credit and financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their standard of living. (Sen., 2008).In numerous studies done across the world, it is generally believed that various microfinance initiatives have been able to make a difference in the target populations lives. However, increasing doubts have been raised over the financial sustainability of microfinance institutions. MFIs need to be economically viable and sustainable in the long run but economic implications of long term sustainability are not being considered (Srinivasan et al., 2006). Microfinance collectively refers to the supply of loans, savings accounts, and other basic financial services like insurance, to the poor. About one billion people globally live in households with per capita incomes of one dollar per day (Morduch J. 1999).Microfinance Institutions (MFIs) are special financial institutions. They have both a social nature and a for-profit nature. Their performance has been traditionally measured by means offinancial ratios. The context of the study is to analyze the prospects of micro finance industry in Jaffna District special reference to MPCS Co-operative Rural Bank. This study examines the relationship between efficiency of co-operative rural banks with its financial sustainability. The objective of the study is to evaluate efficiency and financial sustainability of microfinance institution in relates with its rate of interest, operating revenue, administration & operating expenditure, administrative, operating, and financial and staff efficiency.10 rural banks were selected in Jaffna district using stratified random sampling method. Research hypothesis were formulated that there is an impact of efficiencies on financial sustainability and operational and financial efficiencies are significant impact in determining the financial sustainability. Ratio analysis was used to evaluate the efficiencies of the rural banks. Findings say that there is a relationship exists between efficiency and financial sustainability.

PurposeThis paper aims to investigate whether revenue diversification affects the financial sustainability of microfinance institutions (MFIs).Design/methodology/approachThe study uses a worldwide panel data set of 443 MFIs in 108 countries for the period 2013–2018 and two-step system Generalized Method of Moments estimation model.FindingsThe study finds that revenue diversification has a significant and positive effect on the financial sustainability of MFIs.Practical implicationsThe findings of this study actually offer important managerial and policy lessons on MFIs’ financial sustainability. Microfinance managers and policymakers should consider revenue diversification as a strategy through which MFIs can attain financial sustainability instead of overreliance on donations and government subsidiesOriginality/valueUnlike previous studies that examined revenue diversification in the context of banking firms, this study contributes to literature by examining the impact of revenue diversification of the financial sustainability of MFIs.

The aim of this study was to assess the effect of capital structure on financial sustainability of microfinance institutions (MFIs), and find out the extent to which capital structure affects financial sustainability of MFIs in Rwanda. Data was collected from annual financial reports of MFIs and SACCOs for the period 2014-2018. Due to data availability, only a panel of 20 MFIs and SACCOs was considered using fixed effects OLS regression models. Findings from this study reveal that the use of debt as financing sources adversely affects firms‘ financial self-sufficiency and performance. In contrast, the use of share capital strongly improves firms‘ operational and financial sustainability as well as their return on assets. Using retained earnings moderately and positively increases firm‘s financial sustainability. Results from sample splits show that compared to MFIs, SACCOs are more likely to be adversely affected by debt financing than their MFI counterparts. With respect to share capital, there is significant difference between the two groups. Using share capital to finance MFIs‘ investments significantly increases their return on assets, their operational and financial self-sufficiency. With respect to SACCOs, results show that using share capital as means of financing firms‘ assets negatively and significantly affects their return on total assets as well as their operating and financial self-sufficiency.

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.

Enhanced productivity remains a crucial agenda for firms to attain cost and competitive advantages in the market. Hence, the main purpose of this study is to investigate the effects of efficiency wage (EW) on the productivity of microfinance institutions (MFIs) with respect to their dual objectives, namely, outreach (depth and breadth) and financial sustainability. Unbalanced panel data of 179 Indian MFIs were collected over the period 2010–2018 from the Microfinance Information Exchange (MIX) market platform (now obtainable from the World Bank catalogue). Under a static model setting (fixed effects model), the observed relationship between EW and MFI’s productivity is mixed. On the one hand, EW exhibits a strong and statistically significant positive relationship with the breadth of outreach, even after considering various control variables and alternative proxies of EW. On the other hand, EW shows no positive influence on the MFIs’ depth of outreach; rather, it results in a mission drift of MFIs, with the poorest of the poor being neglected (weak and insignificant for proxy of EW). Concerning the financial sustainability of MFIs, EW exhibits a positive and statistically significant effect, except for the profitability dimension when an alternative proxy of EW is used. A two-step system generalized method of moments (GMM) performed to limit endogeneity problems also validates most of our findings. The outcomes of this study could help MFIs’ managers in designing appropriate financial packages to enhance MFIs’ productivity and subsequently attain the dual objective of outreach and sustainability.