Financial sustainability of microfinance institutions in sub-Saharan Africa: evidence from GMM estimates

Abstract

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.