Performance of Microfinance Institutions in Ethiopia: Integrating Financial and Social Metrics

Solomon Bizuayehu Wassie,Hitoshi Kusakari,Masahiro Sumimoto

doi:10.3390/socsci8040117

Abstract

Since their inception in the 1970s, microfinance institutions (MFIs) have received increasing attention both from policymakers and academic circles. Using unbalanced panel data (2000–2017) from Ethiopia, in this paper, we investigated the performance of MFIs and its determinants on the one hand and whether or not mission drift exists on the other hand. To this end, we employed seemingly unrelated regression (SUR) and fixed/random effect panel models. The results indicate that, based on different outreach and financial performance metrics, the MFIs in Ethiopia have good performance compared with those of the 10 biggest economies in Sub-Saharan Africa (SSA). The econometric estimation results show that asset holding and the yield on gross portfolio have a positive and significant effect on the social and financial performances of MFIs in Ethiopia. Furthermore, the number of loan officers, loan officer productivity, and personnel productivity have a positive and significant impact on the financial performance of MFIs. Our results also suggest that the null hypothesis—that MFIs are not shifting away from poorer clients—cannot be rejected, implying that there is no mission drift by MFIs in Ethiopia.

Highlights

Limited access to financial services is among the major problems impeding rural livelihood development (Hermes and Lensink 2007; Wijesiri et al 2017)
Our results reveal that asset holding has a positive and significant impact on the firm’s financial performance, possibly because larger firms can benefit from economies of scale (Kipesha 2013)
Measuring the performance of microfinance institutions (MFIs) is important in order to make reforms, when necessary, to meet organizational goals

Summary

Introduction

Limited access to financial services is among the major problems impeding rural livelihood development (Hermes and Lensink 2007; Wijesiri et al 2017). Whenever available, the formal banking sector systematically excludes the rural poor due to the higher screening, monitoring, and enforcement costs of providing a small loan. Most poor have few or no assets that can be secured by a bank as collateral A considerable number (more than 80%) of the poor in Ethiopia obtain financial services from informal lenders, who are able to enforce loan contracts but at a high interest rate (Demirguc-Kunt et al 2018; Wolday 2004). The government is making efforts to curb the role of informal lenders through the support of microfinance institutions (MFIs). The number of clients, volume of the loan portfolio, and savings of MFIs have been increasing (Wolday 2004)

Objectives

Results

Conclusion