The Profitability of Microfinance and Income Diversification Strategy in Ghana: Insights for a Post-COVID-19 Industry

Abstract

This study explores the effect of income diversification on the profitability of microfinance institutions (MFIs) in Ghana. The results indicate that the institutions record low profits and they are generally not so much diversified. Income diversification has a negative effect on return on asset and return on equity, suggesting the preference for a focused strategy. Larger firms are found to be more profitable although there is an inverted U-shaped nexus. Investments in fixed assets are beneficial for enhancing performance among the firms while the findings cast doubt on the extent of financial intermediation. This is because cash and investments in government securities are more than 50 percent of assets while loan levels are scant as compared to deposits. The study calls for MFIs to resort to providing more loans as this will enhance their bottom-line and also improve the economy. The insights from the study lend credence to the relevance of data-driven decision making among MFIs.

Keywords: microfinance institutions, pro-poor population, income diversification, post-COVID-19, profitability

JEL Classification: E22, G23, H12, L1, L25