Abstract
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.
Highlights
Microfinance institutions (MFIs) have emerged as essential catalysts of financial inclusion and socioeconomic development
The minimum value of À1.304 suggests that some MFIs are financially unsustainable
The mean return on asset is 2.1%, which is slightly lower than the international (MIX) benchmark of 3% (ACCION, 2004)
Summary
Microfinance institutions (MFIs) have emerged as essential catalysts of financial inclusion and socioeconomic development. MFIs provide credit to small enterprises and rural households that the formal banking institutions consider high-risk borrowers (Abor, 2017). MFIs lend small-uncollateralized loans through innovative lending strategies such as group lending and progressive loans (Sangwan and Nayak, 2020). While MFIs’ primary objective is to serve as many poor borrowers as possible (social performance), this goal is only attainable if they are profitable and financially sustainable. One strategy for attaining financial sustainability is increasing interest income by charging higher interest on loans; due to the demand side’s unique nature, this is not feasible for MFIs (Quayes, 2012). Any attempt to reach more clients exposes microfinance to additional credit risks that may negatively affect financial performance
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