Depth of Outreach and Financial Sustainability of Microfinance Institutions

2020 ◽  
pp. 204-218 ◽  
Author(s):  
Mohammad Zainuddin ◽  
Ida Md. Yasin ◽  
Masnun Mahi ◽  
Shabiha Akter
Keyword(s):  
Research Question ◽  
Financial Sustainability ◽  
Microfinance Institutions ◽  
Donor Funding ◽  
Trade Off ◽  
The Poor ◽  
Social Objective

Microfinance institutions tend to rely on donations and subsidies to achieve their social objective of outreach to the poor. Over the years, the industry has experienced tremendous growth, with donor funding pouring in. The question, however, arises whether microfinance firms can operate and continue to serve the poor clients on cost-covering basis without ongoing subsidies. There has been a growing tendency in the industry, which was traditionally a domain of not-for-profits, to embrace commercialization and pursue profitability to ensure self-sustainability. This chapter makes an empirical revisit to an inconclusive research question: Is there a trade-off between microfinance outreach and sustainability? Based on data for 1,232 microfinance firms from 43 countries, the study confirms the existence of trade-off between the two bottom lines of microfinance.

Impact of Competition on Efficiency of Microfinance Institutions: Cross Country Comparison of India and Bangladesh

2021 ◽  
pp. 097300522110052
Author(s):  
Joyeeta Deb ◽  
Ram Pratap Sinha
Keyword(s):  
Information Exchange ◽  
Data Envelopment ◽  
Bottom Of The Pyramid ◽  
Microfinance Institutions ◽  
Tobit Regression ◽  
Social Efficiency ◽  
Trade Off ◽  
Social Objective ◽  
Efficient Level ◽  
Potential Impact

Increased competition coupled with commercialisation in the Indian microfinance sector has brought about many major transformations. From an impact-driven development programme, microfinance institutions (MFIs) today emerged as commercially oriented profit-making entities. In addition to bringing their commercial and social objectives into balance, MFIs today are striving for efficient level of operation. Efficiency in the level of operation of MFIs allows them to remain competitive and attain financial sustainability. However, it is also imperative for MFIs to remain socially committed towards the ultimate mission of reaching the poorest at the bottom of the pyramid. Hence, it is of research interest to see the trade-off between MFIs’ social objective of spreading outreach and at the same time remaining financially sustainable. Against this backdrop, this article is devoted to study the potential impact of competition and commercialisation on efficiency of MFIs in India and Bangladesh. The study is carried over 75 MFIs altogether over the period of 8 years from 2009 to 2016. The data have been collected from microfinance information exchange database. Efficiency is measured through technical efficiency (TE) scores as estimated under data envelopment analysis. In order to establish the association between competitions, which is estimated by the Herfindahl–Hirschman index (HHI), tobit regression is used. The study evidenced increasing level of competition in the sector over the years, but it is more pronounced in India as against Bangladesh. In order to analyse the trade-off, TE scores are separately estimated under both financial and social measures. TE score is found to be higher in case of social measures of efficiency as against financial efficiency. Further, under both the measures, competition is found to be having a significant impact on both financial and social efficiency.

Trade-off between financial sustainability and outreach of microfinance institutions

2015 ◽  
Vol 5 (2) ◽  
pp. 231-250 ◽  
Author(s):  
Mira Nurmakhanova ◽  
Gavin Kretzschmar ◽  
Hassouna Fedhila
Keyword(s):  
Financial Sustainability ◽  
Microfinance Institutions ◽  
Trade Off

scholarly journals Social Versus Financial Performance of Microfinance: Bangladesh Perspective

2018 ◽  
Vol 10 (3) ◽  
pp. 263
Author(s):  
Mohammad Aslam ◽  
Senthil Kumar ◽  
Shahryar Sorooshian
Keyword(s):  
Financial Performance ◽  
Financial Services ◽  
Poverty Alleviation ◽  
Financial Institution ◽  
Panel Data Analysis ◽  
Poor People ◽  
Financial Sustainability ◽  
The Poor ◽  
Social Objective ◽  
The Relationship

Microfinance is a tool designed for poverty alleviation by providing financial services more specifically small credit to the poor household for income generating activities. One of the better ways to help poor people for poverty alleviation is through giving them financial services that cannot be done in traditional banking system. However, there is a big question whether it is possible to provide those services for a financial institution without being sustainable financially. How far it can go with free lunch that is depending on donors’ fund. These two patterns place microfinance at the intersection. One may wonder whether the microfinance compromises a trade-off between serving the poor as social objective and attaining financial sustainability as financial objective. If microfinance institute wishes to get financial sustainability through profit maximization rather ignoring intended social objective of alleviating poverty, than it loses its momentum and becomes like other traditional financial institute. Fulfilling social objective with financial sustainability will be the optimum outcome of microfinance. Microfinance has been pioneered primarily in Bangladesh and later replicated in rest of the world. By this time, over 33 million of clients are being served with various financial and non-financial services by over 700 registered microfinance institute in Bangladesh. This study intent to measure the social outreach versus financial sustainability of microfinance institute in Bangladesh through panel data analysis. To do this, we have analyzed the relationship between financial performance and depth of outreach of top 20 microfinance institutes of Bangladesh from 2015 to 2017. Our results show that the relationship is positive or neutral in some cases. Therefore, microfinance in Bangladesh has been attaining both social and financial objectives and there appears no mission drift.

scholarly journals Microfinance Complementarity and Trade-Off between Financial Performance and Social Impact

2015 ◽  
Vol 7 (11) ◽  
pp. 128 ◽  
Author(s):  
Trong V. Ngo
Keyword(s):  
Financial Performance ◽  
Financial Services ◽  
Poverty Reduction ◽  
Social Impact ◽  
Economies Of Scale ◽  
Generalized Method Of Moments ◽  
Microfinance Institutions ◽  
Trade Off ◽  
The Poor ◽  
Trade Offs

There is a widespread belief that providing access to financial services (microfinance) or reaching the poor with microcredit are perfect solutions to establish a sustainable economy or to help kick-start a bottom-up recovery and social development animated by the poor themselves through self-employment and microenterprises. Microfinance has therefore become an important instrument for poverty alleviation and for improving the welfare of the poor in both developing and transition economies. Due to the difficulty of targeting the poor, who have a lack of collateral, microfinance institutions (MFIs) are called on to achieve a balance between social impact (poverty reduction) and positive financial performance. This paper assumes that the financial objectives of MFIs operate in opposition to each other and that a trade-off is inevitable. Unbalanced panel data of MFIs for the period 1995-2013 has been extracted from the MIX Market website. In order to solve the endogeneity problem, this paper employed the dynamic system GMM (generalized method of moments) of Blundell and Bond (1998) that is considered as the new methodology currently in use in the empirical investigation of the financial performance in banking and finance. This paper outlines some of the parameters that affect the nature of trade-offs and complementarities between social and financial objectives in microfinance performance, and provides empirical evidence from cross-country analysis. Sustainability has a positive link with outreach. MFIs tend to expand their outreach in order to achieve sustainability, based on the advantages of the economies of scale. However, a threshold which makes the trade-offs or complementarities between financial and social objectives reverse if it goes beyond a certain point is also observed.

scholarly journals Determinants of Financial Sustainability for Microfinance Institutions: Lessons for Islamic Microfinance Banks in Nigeria

2021 ◽  
Vol 8 (Special Issue) ◽  
pp. 301-320
Author(s):  
Abdurrahman Abdullahi ◽  
Anwar Hasan Abdullah Othman
Keyword(s):  
Capital Structure ◽  
Financial Services ◽  
Financial Sustainability ◽  
Microfinance Institutions ◽  
The Poor ◽  
Research Findings ◽  
Islamic Microfinance ◽  
Asset Size ◽  
Good Risk ◽  
Economic And Financial Crisis

Islamic microfinance institutions play a major role in the provision of financial services to the poor and underprivileged through non-interest, equity-based products and services. To achieve these critical objectives, however, they need to be financially sustainable, which is threatened by the current economic and financial crisis caused by the Covid-19 pandemic. The objective of this paper is to review the determinants of financial sustainability of microfinance institutions with a view to drawing lessons for Islamic microfinance banks in Nigeria. The paper utilized the literature review methodology to synthesize research findings in the area. The review revealed that the major determinants of financial sustainability of microfinance institutions are the capital structure, asset size, and financial innovation. Others are good risk management and corporate governance frameworks. The paper thus recommended that Islamic microfinance institutions in Nigeria should maintain a robust capital structure that relies more on equity, a lean but diversified Board, and utilize more technology-based services. Most importantly, they should emphasize profit and loss sharing principles in their operations.

scholarly journals TARGETING THE POOR VERSUS FINANCIAL SUSTAINABILITY AND EXTERNAL FUNDING: EVIDENCE OF MICROFINANCE INSTITUTIONS IN GHANA

2012 ◽  
Vol 17 (03) ◽  
pp. 1250016 ◽  
Author(s):  
SAMUEL KOBINA ANNIM
Keyword(s):  
Regression Analysis ◽  
Development Strategies ◽  
Financial Resources ◽  
Financial Sustainability ◽  
Microfinance Institutions ◽  
External Funding ◽  
The Poor ◽  
Self Sufficiency ◽  
Using Data ◽  
Type Of Institution

This study tests the hypotheses that: (i) formal microfinance institutions (MFIs) using their own mobilized financial resources (based on owners' equity, commercial lending or deposits) for on-lending reach non-poor clients and (ii) concentrating on the achievement of financial sustainability causes an institution to target non-poor clients. Using data on 2,691 MFI clients and non-clients from Ghana, we revisit the microfinance argument of serving poorer clients and sustainability, and in addition examine the effect of the source of funds and type of institution on the financial and social objectives of MFIs. Following the correction of endogeneity, our regression analysis shows that unlike financial self-sufficiency, MFIs that are only operationally self-sufficient reach poorer clients, and also, formal institutions dispensing their own funds target non-poor clients. The latter finding suggests the importance of complementary development strategies and a deliberate harmonization of microfinance interventions, irrespective of the source of funds.

Does Offering Microsavings Make Sense for Microfinance Institutions?

2011 ◽  
Vol 56 (2) ◽  
pp. 15-27 ◽  
Author(s):  
Kelley Bergsma
Keyword(s):  
Business Model ◽  
Financial Statements ◽  
Financial Sustainability ◽  
Microfinance Institutions ◽  
Grameen Bank ◽  
Significant Evidence ◽  
The Past ◽  
The Poor ◽  
Core Mission

Within the past decade, two trends have emerged in the global microfinance industry. First, there has been a recent emphasis on financial sustainability. At the same time, microfinance institutions (MFIs) have begun to offer microsavings deposit services to their clients. Could there be a link between these two trends? As MFIs offer savings deposits, do they achieve greater financial sustainability? David Hulme (2008) asserts that Grameen Bank became more financially sustainable after it changed its business model to include microsavings. However, Hulme observes that Grameen Bank also moved away from its poorest clients when it made the shift to savings. This paper explores, as MFIs have switched to offering savings, whether or not MFIs have achieved greater financial sustainability and whether or not they have moved away from their poorest clients. The data examined were collected from the financial statements of Opportunity International MFIs. The results indicate that Opportunity International MFIs that offer microsavings are more financially sustainable than those that do not. Moreover, there is no significant evidence that, by offering microsavings, Opportunity International MFIs have abandoned their poorest clients. Opportunity International MFIs could provide a model of how microfinance institutions can improve their financial sustainability without compromising their core mission to serve the poor.

scholarly journals Determinants of microfinance outreach in Sub-Saharan Africa: A panel approach

2017 ◽  
Vol 17 (1) ◽  
Author(s):  
Abdulai Adams ◽  
Devi D. Tewarib
Keyword(s):  
Financial Services ◽  
Value Added ◽  
Sub Saharan Africa ◽  
Microfinance Institutions ◽  
Trade Off ◽  
Access To Credit ◽  
The Poor ◽  
Institutional Determinants ◽  
Managerial Implications ◽  
Sub Saharan

Orientation: The study focused on analysing the outreach performance of microfinance institutions (MFIs) in providing critical services for the poor using innovative lending techniques within constrained environments. Research purpose: The study examined the trade-off relations between the depth and the breadth of outreach and identified institutional level factors that influence MFIs outreach in sub-Saharan Africa (SSA). Motivation for the study: MFIs continue to play critical roles in extending financial services to the poor and yet previous studies have not analysed comprehensively the dimensions of outreach necessary for financial inclusion. Research design, approach and methods: The study employed correlation analysis and random effects methodology to panel data regression analysis (619 observations, 71 MFIs across 10 countries) to establish the trade-off relations and the determinants of outreach in SSA. Main findings: It was established that a trade-off exists between the depth of outreach (access to credit disbursement by poor clients) and breadth of outreach (number of clients served). The results further revealed that gross loan portfolio, portfolio at risk, borrower per staff member, interest rate, and operating expenses to assets ratio are the main institutional determinants of MFIs outreach in SSA. Practical/managerial implications: The policy implication is that MFIs that concentrate efforts in reaching the relatively poor do so at the expense of reaching a large number of poor clients. We suggest that effective monitoring of depth and breadth and the adoption and implementation of cost-saving outreach technologies by MFIs could enable them to operate sustainably and efficiently. Contribution/value added: A major contribution of the study is the trade-off relations revealed between the depth of outreach and the breadth of outreach of MFIs which advances the outreach literature.

scholarly journals Profiting from Poverty? A Case Study of UK based Microfinance Institutions

2015 ◽  
Vol 2 (2) ◽  
Author(s):  
Nitin Navin
Keyword(s):  
Developing Countries ◽  
Financial Performance ◽  
Financial Services ◽  
Social Performance ◽  
Financial Sustainability ◽  
Microfinance Institutions ◽  
Trade Off ◽  
External Capital

The success of the microfinance movement is beyond doubt. However, as the scope of the sector increased and commercialised, some problems of it became evident. Issue of profitability and sustainability of Microfinance institutions (MFIs) and, use of external capital by them are the two most debatable issues of the microfinance sector. The current study investigates these issues by targeting MFIs and consultants of microfinance sector located in UK. These MFIs and consultants have operations in different poor and developing countries. The study found that believing that MFIs can alone eliminate poverty is a fallacy. Any such belief by the policymakers will make further delay in eradicating poverty. The study also found that financial sustainability of microfinance seems to remain unachievable for most of the MFIs and, that there are fair chances of having trade-off between financial performance and social performance for those MFIs. On this line of thought, the study concludes by arguing that microfinance cannot be treated only as a substitute of the traditional financial services.

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