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What drives microfinance institution's financial sustainability

Ayi Gavriel Ayayi and Maty Sene ()
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Maty Sene: Université du Québec at Trois Rivières, Canada

Journal of Developing Areas, 2010, vol. 44, issue 1, 303-324

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 (search for similar items in EconPapers)
JEL-codes: G21 I30 R00 (search for similar items in EconPapers)
Date: 2010
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Handle: RePEc:jda:journl:vol.44:year:2011:issue1:pp:303-324