Determinants of Financial Sustainability of Microfinance Institutions in East Africa

Abstract

Poverty eradication is at the forefront of the development strategy of Africa. Interventions through the delivery of microfinance services are considered as one of the policy instruments to eradicate poverty. However, for sustainable poverty alleviation, the MFIs themselves should be financially sustainable. Given the relation between the well being of the microfinance sector and the goal of poverty eradication, the purpose of this paper is to empirically investigate the determinants of financial sustainability of microfinance institutions in East Africa where poverty is a serious problem. Binary probit and ordered probit regression models are used in this study in identifying the factors that determine East African microfinance institutions’ financial sustainability. Using unbalanced panel data collected from 23 microfinance institutions (MFIs) in East Africa from the period 2004 to 2009, the regression results reveal that MFIs’ financial sustainability is positively and significantly driven by loans intensity and size. However, management inefficiency and portfolio at risk have a negative and significant impact on financial sustainability. Breadth of outreach and deposit mobilization are not important determinants of financial sustainability. Thus, management inefficiency, portfolio at risk, loans intensity, and size are important determinants of microfinance institutions’ financial sustainability in East Africa.

Keywords: Financial sustainability, Microfinance institutions, East Africa.