Financial Sustainability Of Microfinance Institutions Research Articles

The effect of capital structure on the financial sustainability of microfinance institutions: A meta‐analysis

AbstractConsidering the trend toward microfinance institutions (MFIs) commercialization that fundamentally reshapes their capital structure, this meta‐analysis, by synthesizing data from a wide range of studies, aims to investigate the impact of different sources of finance on the financial sustainability of MFIs and determine the optimal order in which these sources should be utilized. In this study, 166 effect sizes were obtained from 64 studies. Overall, the findings indicate that equity and deposit financing enhance financial sustainability positively, whereas debt and donation financing exhibit an inverse relationship. However, variations exist based on the MFI charters. While equity financing adversely affects the financial sustainability of MFI banks, it also exerts positive effects on other types of MFIs. Similarly, deposit financing negatively affected MFI NGOs. Regarding financial sustainability proxies, debt and equity financing affect financial self‐sufficiency (FSS) and operating self‐sufficiency (OSS), unlike donation and deposit financing. Equity financing has a positive effect on OSS but a negative effect on FSS. In contrast, debt financing shows the opposite trend. The meta‐regression further reveals that, as capital structure variables, the sources of finance do not significantly explain the variance in MFIs' FSS but do so for OSS. These findings have implications for managers and for future research.

Financial leverage, percentage of female borrowers and financial sustainability of microfinance institutions

PurposeThis paper examines the influence of financial leverage on the financial sustainability of microfinance institutions (MFIs) and the moderating role of the percentage of female borrowers (PFB).Design/methodology/approachThe study uses a global sample of 646 MFIs drawn from the World Bank Mix Market and panel data for 2010–2018. The study employs ordinary least squares (OLS) and the one-step system generalized method of moments (SGMM) as regression estimation methods.FindingsThe findings of this study reveal that financial leverage and the PFB have a negative and significant effect on financial sustainability. The findings further show that the interaction between financial leverage and the PFB positively affects the financial sustainability of MFIs.Practical implicationsThe findings inform MFIs' managers on the adverse effect of financial leverage and the PFB in their quest for financial sustainability. The findings also demonstrate that MFIs can leverage female borrowers to reverse the adverse effect of financial leverage on financial sustainability of MFIs.Originality/valuePrevious studies examined the direct effect of financial leverage and reported incongruent results. Because female borrowers are at the epicenter of MFI lending, this study fills the gap in the literature by examining whether the proportion of female borrowers moderates the relationship between financial leverage and MFIs' financial sustainability using a global dataset.

Central Bank Regulations and the Financial Sustainability of National Microfinance Banks in Nigeria

This study examines the impact of Central Bank Regulations on the Financial Sustainability of National Microfinance Banks in Nigeria. The study employed the expost-facto research design. Data was collected from the central bank bulletins and the financial reports of the sample seven national Microfinance banks. The data collected was analysed using Multivariate Analysis of Variance (MANOVA). The findings derived from the empirical analysis revealed significant relationships between the Minimum Capital Requirement, and the financial sustainability indicators, including returns on assets (ROA) and returns on equity (ROE) and confirmed that the Minimum Capital Requirement imposed by the central bank has a significant impact on the financial sustainability of microfinance institutions. Based on the findings of the study, the following policy recommendations can be made; Policymakers and regulators should continue to enforce and monitor the Minimum Capital Requirement for microfinance banks. Adequate capitalization is essential for the financial sustainability and profitability of microfinance institutions. However, the capital requirement should be flexible enough to accommodate the specific needs and characteristics of microfinance banks, considering their focus on serving the underserved segments of the population. And Microfinance banks should prioritize maintaining an adequate level of capital to ensure their ability to generate returns on assets. This can be achieved through effective capital management strategies, including attracting additional capital from investors, optimizing internal capital generation, and ensuring efficient use of capital in productive activities.

Capital structure and financial sustainability: stakes of microfinance institutions in Bamenda, Cameroon

This research assesses the effect of capital structure on the sustainability of Microfinance Institutions (MFIs) in Bamenda, Cameroon. We use panel data obtained from audited annual financial statements of fifteen (15) MFIs, comprising both member- and shareholder-owned MFIs in Bamenda, Cameroon from 2014 to 2020, and an ex-post facto causal research design. Debt, equity, grants, and retained earnings are used to capture capital structure, while Operational Self-Sufficiency is used as a proxy for sustainability. The Generalised Least Squares and the quantile-on-quantile techniques are used for data analysis. Our findings indicate a statistically significant negative relationship between debt, grants and financial sustainability of MFIs, while a statistically significant positive relationship is found between retained earnings and financial sustainability of MFIs. A positive, though statistically insignificant relationship is found between equity or share capital and MFI financial sustainability. The results are robust upon consideration of different quantiles. Based on the findings, MFIs in Cameroon should rely more on retained earnings and equity to be more financially sustainable. The findings additionally provide evidence relating to the shortcoming of grants in the financing of development initiatives.

Determinants of the Financial Performance and Sustainability of Microfinance Institutions in Chandrapur Municipality Nepal

The financial performance and Level of financial sustainability of microfinance institutions (MFIs) in Chandrapur Municipality is examined in this article. Access to financial services for the most vulnerable social groups has long been a problem that numerous projects and programs are trying to solve. Performance of Microfinance Institutions Various works suggest that the performance of an institution can be understood from two perspectives. This investigation used an exploratory research approach. The data has been collected for adaptation of the services and products to the target clients from Chandrapur Municipality by age and number of year involved in microfinance institutions.

Financial Sustainability of Microfinance Institutions : Evidence from India

Financial Sustainability of Microfinance Institutions : Evidence from India

Togo'da mikro finans kurumlarının finansal performansı ve sürdürülebilirliğinin belirleyicileri

Purpose - This article investigates the factors influencing the financial performance and the level of financial sustainability of microfinance institutions (MFIs) in Togo. Methodology - Ordinary least squares models and binary probit models were employed in the research to identify the determinants of return on assets as a proxy for the financial performance and operational and financial sustainability of microfinance institutions. Unbalanced panel data collected from the MIX Market database of 29 MFIs in Togo over the period 1999–2018 was used in the study Findings – The results show that MFI's financial performance is positively and statistically influenced by size. However, the number of depositors per borrower and the loan loss ratio is negatively linked to financial performance. The operational sustainability was positively related to the depositors per borrower ratio, the PAR > 30 (Portfolio at Risk 30 days), and the productivity ratio. On the other hand, it is negatively related to PAR > 90 and the ratio of personal expenses to outstanding credit. Finally, financial sustainability was significantly and positively influenced by the size, and it was significantly and negatively influenced by PAR > 90. Conclusions – Taking these results into account can allow microfinance actors in Togo as well as politicians and donors to better orient their actions in the sector.

Credit expansion and financial sustainability of microfinance institutions: A generalized method of moments panel data analysis

This study examines the nexus between credit expansion and the financial sustainability of microfinance institutions (MFIs) in Sub-Saharan Africa (SSA). The study also examines the interaction effects of credit expansion and interest rate/portfolio quality on MFI sustainability. The study relies on panel dataset of 136 MFIs across 31 SSA countries covering the year 2004 to 2018 and applies the Arellano-Bover/Blundell-Bond two-step Generalized Method of Moments (GMM) Windmeijer bias-corrected standard errors to analyze the data. The results establish that credit expansion matters in MFI financial sustainability. Specifically, the study uncovers that while the size of the loan portfolio and loan intensity are positively associated with MFI sustainability, the economic significance of loan intensity is higher. On the other hand, the other credit expansion proxy “credit growth” does not predict the sustainability of MFIs. The results also reveal that the loan intensity and potfolio at risk have interaction effects on MFI sustainability. However, the study fails to support an asymmetric effect of credit expansion on financial sustainability depending on the interest rate charged on loans. The study uses three proxies for credit expansion and gives useful insights for policymakers and/or MFI managers that loan intensity should be the main target of MFIs if the goal is to attain financial self-sufficiency. The study also examines the interaction effects of credit expansion and interest rate/portfolio quality on MFI sustainability and sheds light on what is expected from MFI managers to expand credit access to the poor without compromising sustainability.

Financing Practices on Sustainability of Microfinance Institutions in Nakuru County, Kenya

The study aimed at financing practices on the sustainability of microfinance institutions in Nakuru County. A Census of microfinance institutions in Nakuru County was carried out. The objectives of this research were: To establish the effect of group financing on the sustainability of microfinance institutions in Nakuru County; to evaluate the effect of debt financing on the sustainability of Microfinance in Nakuru County, To evaluate the effect of financial securities on the sustainability of microfinance institutions in Nakuru County, and To determine the effect of loan performance on the financial sustainability of Microfinance institutions in Nakuru County It analyzed how financing practices lead to the sustainability of microfinance institutions in the county. A sampling design was used because it is the most efficient for this kind of study. The target population was the microfinance institutions that practice financing services and lead to the sustainability of Microfinance institutions in Kenya. The research study used judgmental sampling because the population under study was large, and the sample size was Finance respondents in 5 registered Microfinance institutions in Nakuru County in Kenya. The data collection instruments were questionnaires for the respondents to fill in primary data and micro-financial reports, including published financial statements in collecting secondary data. The coded data were entered into the Statistical Package for Social Sciences (SPSS) Version 24 analytical tool for analysis. Descriptive statistics were done using mean, percentages, and standard deviation. Inferential statistics involved correlation and regression. Correlation results showed a weak to moderate relationship between the independent and dependent variables. The study thus recommends that the MFIs consider and improve group financing, debt financing, financial securities, and loan performance to increase their sustainability. The findings of the study are essential for policymakers and institutions, especially those in the microfinance industry, to develop a policy framework that will take care of issues like improving service delivery to end users by microfinance institutions in Kenya.

Does intellectual capital matter to MFIs’ financial sustainability?

PurposeThis paper examines the effect of intellectual capital (IC) on the financial sustainability of microfinance institutions (MFIs). The study is motivated by the increased calls for MFIs to be self-sustainable and the growing importance of knowledge-based assets as contributors of competitive advantage and sustained performance.Design/methodology/approachWith a global sample of 444 MFIs and data for 2013–2018, which yielded 2,664 MFIs-year observations, this study examines the effect of IC on MFIs’ financial sustainability. The data are extracted from the MIX Market database. Value added intellectual capital coefficients are used as proxy measures of IC. Operational self-sufficiency is used to measure financial sustainability. Data are analyzed using three-panel data estimation models: the fixed effect, the random effect and the dynamic panel system generalized method of moments.FindingsThe results show that human capital efficiency and capital employed efficiency have a positive and significant effect on the financial sustainability of MFIs. However, structural capital efficiency has a significantly negative effect on financial sustainability. These results confirm the relative importance of both tangible and intangible assets as important positive contributors of financial sustainability of MFIs.Research limitations/implicationsThe paper focused on the association between IC and financial sustainability of MFIs. Therefore, examining nonfinancial institution may validate the contributions of this study.Practical implicationsBased on the findings, MFIs’ managers are encouraged to leverage IC, physical and financial capital to attain financial sustainability. In particular, MFIs should invest in employees training and development. Additionally, owing to the positive relationship between physical capital and financial sustainability, there is need for policy interventions to ensure MFIs access adequate funding. The study further recommends mandatory disclosure of IC among MFIs.Originality/valueThis is the first paper to investigate the relationship between IC and the financial sustainability of MFIs using panel data and a global sample of MFIs; therefore, it lays an empirical ground for future studies.

Financial Accountability and Sustainability of Microfinance Institutions in West Pokot County, Kenya

In the recent past, there has been a constant demand for timely accountability reports due to increased awareness, devolution of funds and establishment of various new institutions. Financial sustainability of microfinance institutions in West Pokot County in Kenya has been highlighted as a major concern. The main purpose of the study determined the effects of financial accountability on the sustainability of the microfinance institutions in the West Pokot County. The specific objectives were to: determine the effect of audit efficiency on the sustainability of Micro Finance Institutions (MFIs) in West Pokot County; establish the effect of fraud detection on the sustainability of microfinance institutions in West Pokot County; determine the effect of financial reporting on the sustainability of microfinance institutions in West Pokot County; and determine the effect of financial regulation on the sustainability of microfinance institutions in West Pokot County. The study was based on Agency theory, stakeholder theory, and stewardship theory. The study applied explanatory research design. The target population was the 6 MFIs in West Pokot County. A census was taken since the population is small. The researcher used a semi-structured questionnaire administered to each member of the respondents to collect the data. The collected data was analyzed using descriptive statistics and regression and correlation analysis by the help of SPSS. The results were presented in tables, pie charts and bar charts. From the findings, when financial accountability factors are held at zero, sustainability of microfinance institution will be negative (-0.257). At the same time, an increase in audit efficiency, fraud detection, financial reporting, and financial regulations each by one unit leads to an increase in sustainability of microfinance institutions by 0.276, 0.313, 0.453, and 0.036 units respectively the p-values were also less than 0.05 (that is 0.025 for audit efficiency, fraud detection (0.002), financial reporting (0.005) and financial regulations (0.038). This implies that all financial accountability factors considered in this study have a positive relationship with sustainability. The study concludes that financial accountability is to a great extent observed in MFIs particularly through audit efficiency, fraud detection, financial reporting, and financial regulations. The study recommends that the government through the relevant agents should ensure existing financial accountability regulatory framework is adhered to ensure sustainability of microfinance institutions. Microfinance institutions also should ensure they pay focus on audit efficiency, fraud detection, financial reporting, and financial regulations.

Efficiency Wage and Productivity in the Indian Microfinance Industry: A Panel Evidence

Enhanced productivity remains a crucial agenda for firms to attain cost and competitive advantages in the market. Hence, the main purpose of this study is to investigate the effects of efficiency wage (EW) on the productivity of microfinance institutions (MFIs) with respect to their dual objectives, namely, outreach (depth and breadth) and financial sustainability. Unbalanced panel data of 179 Indian MFIs were collected over the period 2010–2018 from the Microfinance Information Exchange (MIX) market platform (now obtainable from the World Bank catalogue). Under a static model setting (fixed effects model), the observed relationship between EW and MFI’s productivity is mixed. On the one hand, EW exhibits a strong and statistically significant positive relationship with the breadth of outreach, even after considering various control variables and alternative proxies of EW. On the other hand, EW shows no positive influence on the MFIs’ depth of outreach; rather, it results in a mission drift of MFIs, with the poorest of the poor being neglected (weak and insignificant for proxy of EW). Concerning the financial sustainability of MFIs, EW exhibits a positive and statistically significant effect, except for the profitability dimension when an alternative proxy of EW is used. A two-step system generalized method of moments (GMM) performed to limit endogeneity problems also validates most of our findings. The outcomes of this study could help MFIs’ managers in designing appropriate financial packages to enhance MFIs’ productivity and subsequently attain the dual objective of outreach and sustainability.

Determinants of Financial Sustainability for Microfinance Institutions: Lessons for Islamic Microfinance Banks in Nigeria

Islamic microfinance institutions play a major role in the provision of financial services to the poor and underprivileged through non-interest, equity-based products and services. To achieve these critical objectives, however, they need to be financially sustainable, which is threatened by the current economic and financial crisis caused by the Covid-19 pandemic. The objective of this paper is to review the determinants of financial sustainability of microfinance institutions with a view to drawing lessons for Islamic microfinance banks in Nigeria. The paper utilized the literature review methodology to synthesize research findings in the area. The review revealed that the major determinants of financial sustainability of microfinance institutions are the capital structure, asset size, and financial innovation. Others are good risk management and corporate governance frameworks. The paper thus recommended that Islamic microfinance institutions in Nigeria should maintain a robust capital structure that relies more on equity, a lean but diversified Board, and utilize more technology-based services. Most importantly, they should emphasize profit and loss sharing principles in their operations.

Financial Sustainability of Microfinance Institutions at Growth Stage: Do Lending Terms Matter?

Abstract The financial sustainability of microfinance institutions (mfi s) is crucial if their benefits are to be enjoyed in the long run. This study investigated the determinants of mfi s’ financial sustainability at growth stage. The study aimed to address the following questions: are factors influencing financial sustainability at maturity equally important at growth stage? What influence do lending terms have on financial sustainability at growth stage? The study used panel regression models and four-year survey data from 106 rural mfi s in Tanzania. Decomposition of lending types was adopted to unveil the contribution of lending terms to financial sustainability. We found that most factors influencing financial sustainability at maturity stage are equally important in influencing sustainability at growth stage. In addition, two factors appear to affect financial sustainability at growth stage only. Moreover, lending terms matter in determining financial sustainability at growth stage. The study provides insights on how lending terms can be used to influence financial sustainability at growth stage.

Revenue diversification and financial sustainability of microfinance institutions

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.

Financial Sustainability of Microfinance Institutions and Macroeconomic Factors: A Case of South Asia

This study explores the financial sustainability of microfinance institutions (MFIs) in the economic context to identify how macro-level economic decisions affect the micro-level decisions in the microfinance sector in South Asia. For that purpose, the data of 409 South Asian MFIs combined with the macroeconomic variables of respective countries are used over the period 1999–2017. The empirical analysis uses a fixed-effect model (FEM) to analyse the unbalance panel data of microfinance institutions and macroeconomic variables. We employ two-stage least squares (2SLS) model for robustness and System Generalized Method of Moment (GMM) to address the potential endogeneity and over-identification bias. The results reveal that economic indicators such as foreign investment, human development, inflation, interest rate, private credit, and labour force participation have negatively influenced financial sustainability except for the GDP growth. The overall economic results seem imperative from the good-governance perspective of MFIs. Besides, the government and microfinance policymakers need to give due consideration to the macro-level economic decisions to achieve the financial sustainability of MFIs. JEL Classification: A12, G21, G28, O1, Q01

Client Satisfaction: Key Factors to Sustainability of Microfinance Institutions (MFIs)

This paper describes the analytical picture of client protection strategy. This is descriptive research design. Client's is an important part for instutional governace which interact different parties i.e. policy makers, political leaders, social leader/activist and gurdians of microfinance members. Responsible financing helps to Neplease microfinance institutions (MFIs) to retain clients in microfinance institutions. MFIs needs clear vision and policy regarding client's retention. MFIs need to create the healthy and favaurable environment of microfinance sector. Responsible financial inclusion focus on transprant in the pricing, terms and condition of all financial products. It works with clients so they do not borrow more money than they can repay or use products that they do not need. The conclusions of the study shows that an appropriate product design and delivery, preventation of over-indebtedness, transparency, responsible pricing, fair and respectful treatment of clients, privacy of client data and mechanisms for complaint resolution is best way for the operational and financial sustainability of microfinance institutions. The findings of the study will benefited policy makers and leader of microfinance institutions. Accodingly, this paper explores the state of responsible financial knowledge and practices, with a focus on client protection and client's satisfaction strategies on the basis of review of best practices.

Capital structure and financial sustainability of Microfinance Institutions (MFIs) in Rwanda

The aim of this study was to assess the effect of capital structure on financial sustainability of microfinance institutions (MFIs), and find out the extent to which capital structure affects financial sustainability of MFIs in Rwanda. Data was collected from annual financial reports of MFIs and SACCOs for the period 2014-2018. Due to data availability, only a panel of 20 MFIs and SACCOs was considered using fixed effects OLS regression models. Findings from this study reveal that the use of debt as financing sources adversely affects firms‘ financial self-sufficiency and performance. In contrast, the use of share capital strongly improves firms‘ operational and financial sustainability as well as their return on assets. Using retained earnings moderately and positively increases firm‘s financial sustainability. Results from sample splits show that compared to MFIs, SACCOs are more likely to be adversely affected by debt financing than their MFI counterparts. With respect to share capital, there is significant difference between the two groups. Using share capital to finance MFIs‘ investments significantly increases their return on assets, their operational and financial self-sufficiency. With respect to SACCOs, results show that using share capital as means of financing firms‘ assets negatively and significantly affects their return on total assets as well as their operating and financial self-sufficiency.

Are NGOs and cooperatives similar or different? A global survey using microfinance data

Corporate governance remains fundamental to ensuring the social mission alongside the financial sustainability of microfinance institutions. One primary governance issue relates to the legal form used to perform microfinance activities. The sector deploys various forms including Banks, Non-Bank Financial Institutions, Cooperatives and NGOs, but each of them has unique features that lead to different orders of priorities and to distinct structures and mechanisms to pursue such a dual objective. This study compares the board governance model and the performance of cooperative organizations (COOPs) with nongovernmental organizations (NGOs) involved in microfinance. Using data on 352 rated microfinance institutions, the test results show that, compared to NGOs, COOPs have larger boards and a higher number of board meetings. However, NGOs have a greater percentage of international board members. The test on performance reveals that, whereas COOPs are more cost-efficient and charge lower interest rates, NGOs generally perform better in terms of social performance. However, the two organizational types do not perform differently in terms of profitability.

Efficiency and financial sustainability of microfinance institutions: A study of Jaffna district

Microfinance is the provision of thrift, saving, credit and financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their standard of living. (Sen., 2008).In numerous studies done across the world, it is generally believed that various microfinance initiatives have been able to make a difference in the target populations lives. However, increasing doubts have been raised over the financial sustainability of microfinance institutions. MFIs need to be economically viable and sustainable in the long run but economic implications of long term sustainability are not being considered (Srinivasan et al., 2006). Microfinance collectively refers to the supply of loans, savings accounts, and other basic financial services like insurance, to the poor. About one billion people globally live in households with per capita incomes of one dollar per day (Morduch J. 1999).Microfinance Institutions (MFIs) are special financial institutions. They have both a social nature and a for-profit nature. Their performance has been traditionally measured by means offinancial ratios. The context of the study is to analyze the prospects of micro finance industry in Jaffna District special reference to MPCS Co-operative Rural Bank. This study examines the relationship between efficiency of co-operative rural banks with its financial sustainability. The objective of the study is to evaluate efficiency and financial sustainability of microfinance institution in relates with its rate of interest, operating revenue, administration & operating expenditure, administrative, operating, and financial and staff efficiency.10 rural banks were selected in Jaffna district using stratified random sampling method. Research hypothesis were formulated that there is an impact of efficiencies on financial sustainability and operational and financial efficiencies are significant impact in determining the financial sustainability. Ratio analysis was used to evaluate the efficiencies of the rural banks. Findings say that there is a relationship exists between efficiency and financial sustainability.