Factors Affecting Financial Sustainability of Microfinance Institutions

Abstract

Millions of people in developing countries have been given access to formal financial services through microfinance programs. Nevertheless, millions of potential clients still remain un-served and the demand for financial services far exceeds the currently available supply. Given significant capital constraints, expansion of microfinance programs remains a formidable challenge facing the microfinance industry. Moreover, it is observed that microfinance organizations have had various degrees of sustainability. One such sustainability is the financial sustainability. Financial sustainability has been defined by various researchers differently. As such there is no clear cut definition of the word financial sustainability. The MIX Market and various other agencies like ACCION, Women’s World Banking etc. have attempted to define the term financial sustainability in their own limited way. Therefore this paper attempts to find out the factors which affect the financial sustainability and thereafter propose a more comprehensive and representative model for financial sustainability and create an index to observe the financial performance of microfinance sector. The financial data of microfinance institutions from India and Bangladesh suggests that the capital/ asset ratio, operating expenses/loan portfolio and portfolio at risk> 30 days are the main factors which affect the sustainability of microfinance institutions.

Keywords: Microfinance, Financial Sustainability, Portfolio at Risk>30 days, Capital to Asset ratio, Operating expenses to Loan portfolio