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Life cycle theory and financial sustainability of selected SADC microfinance institutions (MFIs)

Innocent Bayai and Sylvanus Ikhide ()

Journal of Developing Areas, 2016, vol. 50, issue 6, 121-132

Abstract: The Life Cycle Theory (LCT) has been applied in business in an effort to explain the ‘birth, growth, maturation and death’ processes of firms. However, its application and relevancy in the microfinance field has not been popular. The LCT connotes that, the management of MFIs gains experience through time hence sharpen the business model and MFI financing. This allows MFIs to navigate from being small, inefficient and un-sustainable institutions into large, sustainable and financially sustainable institutions. Financial sustainability is celebrated by institutionalists for enhancing outreach to the poor in a consistent way. This makes financial sustainability a supreme MFI development lag necessary for every MFI. Evidence on whether MFIs develop towards financial sustainability has remained on the low side as research has continued to shy away from addressing this worthy cause. In an effort to explain whether MFIs mature towards financial sustainability, this study employs data from selected Southern Africa Development Community (SADC) MFIs, a deviation from a prior study which considered MFIs from across the world with high disclosure tendencies and asset values. We selected SADC MFIs (small and large) on the pretext that, SADC MFIs are typically financially unsustainable as portrayed by an earlier survey – raising concerns on their ability in serving the persistently poverty stricken region. Getting to know whether the LCT can explain financial sustainability becomes obligatory in designing intervention mechanisms. Panel regression methods adjusted for various robustness checks show that, the LCT cannot fully explain MFI financial sustainability. We note the role of MFI financing structure and efficiency measures in defining financial sustainability. Low cost financing sources (equity) support financial sustainability. Donations limit financial sustainability as they nurture dependency and inefficiency. Regulatory costs linked with deposit collection also constrain financial sustainability. We suggest the usage of low cost internal financing sources if MFIs are to attain FS. In the same realm, MFIs ought to restrain costs, whether they come from the financing side or operational side for financial sustainability to be attained. We note the need to maintain a quality loan portfolio to endorse FS.

Keywords: Life Cycle Theory; Financial Sustainability; MFIs; MFI age; SADC (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:jda:journl:vol.50:year:2016:issue6:pp:121-132