Sustainability, Profitability and Outreach Tradeoffs: Evidences from Microfinance Institutions in East Africa

Abstract

The aim of the study was to examine the presence of tradeoffs between sustainability, profitability and outreach to the poor. The study was conducted in East African using a panel data of 47 Microfinance institutions for four years period.

Using Welfarists approach the study found out that profitability focus has a negative impact on outreach to the poor, implying the presence of tradeoffs. The results on financial sustainability did not show presence tradeoffs with the outreach measures. Under Institutionalist view, the study found out that outreach to the poor has a positive relationship with both sustainability and profitability measures. The study concludes that, the possibility of tradeoffs exists between outreach to the poor with profitability measures as compared to the outreach with financial sustainability. The presence of tradeoffs between financial performance and outreach to the poor also depends on the variables used and estimation model specification. Some variables which indicated the existence of tradeoffs under Welfarists views did do not show such impact under Institutionalist views.

The study recommends that Microfinance institutions in East Africa should focus on financial sustainability in order to reduce their subsidy dependence, ensure survival and growth in the future. To the policy makers the study recommends that sustainability does not compromise the outreach to the poor. The government should review their policies governing Microfinance institutions to ensure that the institutions are directed towards sustainability. The government should also allow institutions to mobilize savings and offer other financial services to broaden their activities and the outreach to the poor.

Keywords: Sustainability, Profitability, Outreach, Microfinance Institutions, East Africa