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
Date Written: 2008
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: Suggested Citation