Risks and profitability of microfinance institutions during crisis: empirical insights from an emerging market

Abstract

The study explores the effects of different financial risks on the profitability of microfinance institutions (MFIs), amid a financial sector crisis. The study uses a pooled cross-sectional quarterly data covering 2016 to 2018 on MFIs in Ghana and a robust ordinary least squares regression. The study found a metamorphosis of the risk management strategies of MFIs. Overall, credit risk, capital risk and liquidity risk management are key drivers of performance. Initially, in 2016 and 2017, only credit risk was driving profits but by the end of the financial sector clean-up in 2018, all the four risk factors were driving performance. Size and asset turnover are other factors driving profitability. The study shows how important risk management is within the period of the financial crisis and how it affects microfinance performance. The findings also show how some prudential measures of the Bank of Ghana may have affected risk management and enhanced performance of MFIs after the financial sector clean-up exercise.