Trade-off between financial sustainability and outreach of microfinance institutions

Abstract

Microfinance institutions (MFIs) offer banking services to poor customers who have no access to the traditional financial sector. However, recent developments in the microfinance industry have increased focus on financial sustainability of MFIs therefore shifting focus from their social mission (outreach). Previous studies examine the factors affecting both financial sustainability and outreach of MFIs in separate models without taking into account the possible link between them. On this basis we propose a comprehensive model which includes both ‘outreach’ and ‘financial sustainability’ as endogenous variables and allows for possible link between them. Our results show that focusing on financial sustainability does not necessarily hurt the depth and breadth of outreach.