Cost Structure and Financial Sustainability of Microfinance Institutions: The Potential Effects of Interest Rate Cap in Bangladesh

22 Pages Posted: 15 Aug 2011 Last revised: 4 Jan 2014

See all articles by Zahid Islam

Zahid Islam

Scotiabank Commercial Banking

Marcela Porporato

York University - School of Administrative Studies

Nelson Waweru

York University - School of Administrative Studies

Date Written: August 2, 2013

Abstract

This paper examined the cost structures of 216 MFIs in Bangladesh with a view to determine whether the country’s MFI’s will be able to achieve financial sustainability given the newly introduced interest rate cap. We measured financial sustainability through Return on Assets (ROA) and Operational Self Sufficiency (OSS). The results suggest that there are two key factors that are significantly related to financial sustainability: interest rate spread and general administrative costs. We conclude that MFIs that have lower proportions of administrative costs and a large interest rate spread are more likely to achieve financial sustainability even with the newly introduced interest cap.

Keywords: microfinance, Bangladesh, cost structure, financial sustainability, interest rate cap, interest rate spread, administrative costs, cost of funds, source of funds, operational self sufficiency

JEL Classification: M40, M49

Suggested Citation

Islam, Zahid and Porporato, Marcela and Waweru, Nelson Maina, Cost Structure and Financial Sustainability of Microfinance Institutions: The Potential Effects of Interest Rate Cap in Bangladesh (August 2, 2013). Available at SSRN: https://ssrn.com/abstract=1909248 or http://dx.doi.org/10.2139/ssrn.1909248

Zahid Islam

Scotiabank Commercial Banking ( email )

390 Victoria Street
Prince George, Bristish Columbia V2L 4X4
Canada

Marcela Porporato (Contact Author)

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada

Nelson Maina Waweru

York University - School of Administrative Studies ( email )

4700 Keele St.
Toronto, Ontario M3J1P3
Canada
+14167362100 (Phone)
+14167365963 (Fax)

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