Trade-off between outreach and sustainability of microfinance institutions: evidence from sub-Saharan Africa
The changing landscape of the microfinance industry, which is characterized by a decline in donor funding, has reignited debates regarding the ability of microfinance institutions to serve the poor while remaining sustainable. In this study, we examined the relationship between outreach and sustainability in the context of sub-Saharan Africa (SSA) and analysed the determinants of sustainability using data from 71 microfinance institutions (MFIs) across 10 countries. By applying correlation analysis and fixed effects regression, we found mixed evidence of a trade-off between the depth of outreach and operational self-sustainability. Furthermore, the results show that interest rate is a major determinant for MFI sustainability, which is consistent with the institutionalist view. Factors that significantly influence the sustainability of MFIs in SSA are the average loan size as a percentage of gross national income, gross loan portfolio, portfolio at risk, operating expenses to assets ratio, governance effectiveness, and the interest rate on loans granted to clients. The study recommends that managers of MFIs and decision makers in the region closely monitor their cost-side variables and improve productivity by adopting measures such as information communication techniques that enhance outreach at low cost. In addition, stepping up monitoring and incentivizing hard working staff could help improve both deposit mobilization and loan recovery.