Is There a Trade-off between Financial Performance and Outreach in South Asian Microfinance Institutions?

Abstract

Falling government and donor funding, which has traditionally supported microfinance, is followed by an expansion of financially self-sustainable Microfinance Institutions (MFIs). This development has raised the concern as to whether the social goals of traditional microfinance would be equally well served in the new environment in as much as financial performance and outreach compete with each other. In this paper, we empirically examine this relation between financial performance and outreach of MFIs in a panel of South Asian countries from 2003 to 2009 using random effects modeling and general method of moments (GMM) estimation. We find that: (a) breadth and depth of outreach are positively associated to profitability and efficiency, and (b) depth in contrast to breadth mitigates risks. Overall, our findings do not confirm a statistically significant negative relation between financial performance and outreach goals, suggesting that a financially sustainable microfinance expansion can achieve its social goals at an acceptable credit risk level.