What Drives Microfinance Institution's Financial Sustainability

The Journal of Developing Areas, Vol. 44, No. 1, pp. 303-324, Fall 2010

Posted: 4 Nov 2011

See all articles by Ayi Gavriel Ayayi

Ayi Gavriel Ayayi

Université du Québec

Maty Sene

affiliation not provided to SSRN

Date Written: 2008

Abstract

Microfinance promises to trim down poverty. To achieve this noble objective microfinance institutions (MFIs) have to become steady profitable because donor constancy is not a given. Thus important question is: what factors drive the financial sustainability of MFIs? Using data on 217 MFIs in 101 countries distributed by region and type of MFIs over the period of 1998-2006, we report three important findings. First, we show that a high quality credit portfolio, coupled with the application of sufficiently high interest rates that allow a reasonable profit and sound management are instrumental to the financial sustainability of MFIs. Second, we show that the percentage of women among the clientele has a weak statistically non-significant negative effect on financial sustainability of MFIs. Third, we find that the client outreach of microfinance programs and the age of MFIs have a positive but lesser impact on attainment of financial sustainability. The policy implication is that MFIs have to emulate profit-making banking practices by implementing a sound financial management and good managerial governance to assure their financial sustainability.

Keywords: Microfinance, financial sustainability, portfolio-at-risk, interest rates, client outreach, Legal status, Credit methodology

JEL Classification: G21, I30, R00

Suggested Citation

Ayayi, Ayi Gavriel and Sene, Maty, What Drives Microfinance Institution's Financial Sustainability (2008). The Journal of Developing Areas, Vol. 44, No. 1, pp. 303-324, Fall 2010 , Available at SSRN: https://ssrn.com/abstract=1954114

Ayi Gavriel Ayayi (Contact Author)

Université du Québec ( email )

3351 Boulevard des Forges C.P 500
Trois Rivières, Québec G9A 5H7
Canada
819 376-5011 ext 3137 (Phone)

Maty Sene

affiliation not provided to SSRN ( email )

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