Microfinance Institutions in Ethiopia, Kenya and Uganda: Loan Outreach to the Poor and the Quest for Financial Viability

Gashaw Ayele

African Development Review, 2015, vol. 27, issue 2, 117-129

Abstract: Microfinance institutions' (MFIs') loan service outreach to the poor (depth) and the ensuing institutional viability concern is an unsettled issue in the literature. Can MFIs increase the depth of their outreach whilst achieving financial viability (viability)? Answering this question is exceedingly relevant to countries that opt for right policies towards financial inclusion. In their microfinance operations, Kenya and Uganda ranked first and second in Africa; fifth and eighth in the world, respectively; and Ethiopia is an emerging MFI destination. Yet, the loan outreach in these countries falls short of the uncontested huge demand. The study introduces an approach that disintegrates the overall effect of depth on viability into direct and indirect effects. Hausman‐Taylor and Generalized Structural Equation Models are employed on unbalanced panel dataset of 31 MFIs (2003–12) drawn from the three countries. The result implied a direct‐positive effect and an indirect‐negative effect running from depth to viability. Under contained operational‐expenses‐per‐loan‐portfolio, depth could be pro‐viability. Debt‐to‐Equity‐Ratio relate inversely with viability whereas ‘Real‐Yield’ relates directly. The paper concludes that support to MFIs should be aligned to ensure efficiency through reduced operational costs and thereby complementary depth–viability nexus can prevail.

Date: 2015
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