The Determinants of Net Interest Margin among Microfinance Institutions in Ghana

Abstract

The original mandate of Microfinance Institutions (MFIs) is to address the financing needs of the poor at a lower cost. However, majority of these MFIs rather unfortunately charge very high interest rates on loans and reward suppliers of deposits with low interest rates resulting in high net interest margins (NIM). Consequently, this study investigates into the factors that cause such high NIM among MFIs in Ghana in order to offer policy recommendations on how to curb this menace. STATA and Microsoft Excel statistical tools were employed in analyzing a 10-year panel data from 20 MFIs. The independent variables were categorized into two: MFI-specific and macro-specific variables. Glaring in this study is a statistically significant negative effect of inflation, non-interest earning assets, operating expenses, number of female borrowers on NIM and a significant positive impact of size, years of operation and ownership structure on NIM among MFIs in Ghana. This study concludes that high interest margins observed within the Ghanaian microfinance industry are mainly due to a combination of macroeconomic and firm specific factors which need to be given much attention in dealing with high NIM among MFIs in Ghana. Apparently, policy recommendations have been given in this study to specifically deal with the sources of high NIM among MFIs in Ghana.

Keywords: Microfinance schism, macro-economic, policy rate, inflation