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Abstract
Microfinance Institutions (MFIs) in sub-Saharan Africa (SSA) and the developing world have
over the years attracted and received billions of US dollars (valued at over US$4 billion
annually worldwide) in subsidies and concessionary funds. These subsidies are used to
capitalize, promote growth, and help improve efficiency, operations and performance of
newly established MFIs. At face value these interventions seem positive, yet studies have
shown that they can be counterproductive in terms of their effect on the performance,
efficiency and self-sustainability of the MFIs. This research addresses this issue by
identifying four determinants of MFI’s performance and analysing the effect that subsidies
have on them.
A quantitative approach was used in the analysis in which the financial data of 92 MFIs were
estimated using panel data estimation. The method of variable selection was based on the
procedure used by Nawaz (2010). This method of determining the relationship between
selected performance and sustainability indicators and subsidy was modelled on the Subsidy
Dependant Index (SDI) method of analysis developed by Yaron (1992a) and the Return on
Asset (ROA), Operational Self-Sufficiency (OSS) and Financial Self-Sufficiency (FSS)
methods of analysis developed by the SEEP Network (2005).
The summary results of the analysis showed that the majority of MFIs (90.22%) were not
sustainable nor were they found to be profitable. However, the results show that all the
institutions were operationally self-sufficient and that, on average, MFIs in SSA charged
higher interest rates than MFIs in other parts of the world. The average OSS was 136.01%
showing that MFIs are operationally self-sufficient. However, the average FSS value was
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74.32% reflecting that the MFIs are not able to raise enough revenue to cover their capital
and indirect costs which would ultimately result in them running out of equity funds.
The inclusion of subsidies in the sustainability regressions resulted in a decline in the ability
of the MFIs to attain operational and financial self-sufficiency, thus showing the negative
effect subsidies have on the sustainability of MFIs. Inflation and interest rates charged on
loans also had a negative effect on sustainability as they resulted in an increase in costs and a
decline in the number of low income clients.
MFIs located in wealthier countries were found to be more efficient because of the lower
costs associated with having wealthier clients who have larger loan sizes. MFIs in lower
income countries have to overcome limitations of weak infrastructures, low population
densities and rural markets which increase operating costs.
Older institutions were found to more likely be sustainable than new and young MFIs as
expected because of their improved efficiency and productivity and also because they have
more experience and are therefore better equipped to overcome challenges. However, by
adding subsidy in the analysis the results show that the level of efficiency of MFIs is reduced.
The results also show that with increased maturity MFIs are found to be more productive,
however, when subsidies are included in the finances the levels of productivity will decline as
costs increase.
NBFIs are the most suitable business model to practice in MFIs in Africa according to the
findings which reflect that NBFIs are more profitable and efficient than any of the other
business models in the sample. However, cooperatives were found to be the most productive
business model as they have a stronger borrower to staff ratio than the other institutional
types. Furthermore, cooperatives and NBFIs tend to have clients who are better off and
therefore can afford to take larger sized loans, unlike clients of NGOs who are poor who
struggle to have a stable income.