Microfinance Performance: Profitability Of Microfinance Institutions

Microfinance has achieved tremendous success in improving the livelihoods of the poor. Translating high repayment rates into profits however remains a challenge to most MFIs. The motivation for this monograph emanates from the negative average profit levels amongst Sub-Sahara Africa MFIs which are in sharp contrast with other regions. What explains this disparity? Are there constraints unique to Africa that hinders MFIs profitability? Despite strong theoretical underpinnings, these questions highlight an important research gap, which deserves an empirical scrutiny. We show that MFI profitability is non-negligibly driven by MFI specific factors and the institutional environment of the host country. Specifically, average profitability is higher in MFIs that are efficient, well-capitalized and with scale advantages. Consistent with the agency costs hypothesis, our results show that highly leveraged MFIs are more profitable. Young MFIs suffer more from political instability and weak enhancement of the rule of law, which is consistent with accumulation of information capital and relationship lending. We find evidence of a moderate persistence in microfinance profitability.