This article examines the financial sustainability of microfinance institutions (MFIs) in Bangladesh. Using data from the MIX Market database, the authors develop a financial sustainability index (FSI) to assess the impact of the following factors on an MFIs’ performance: whether the MFI is a bank or non-bank institution; increased number of active borrowers and loan size; percentage of women borrowers; liquidity; leverage via wholesale debt; and operating cost per borrower.
Among the findings are that MFIs in Bangladesh that were serving a greater percentage of women and those that had larger loan sizes have higher FSI scores. In contrast, microfinance banks have lower FSI scores, as do the financial services providers that had higher numbers of borrowers, liquidity, leverage and costs per borrower.
Dr Maeenuddin et al argue that burdensome banking regulation is a significant reason for decreased FSI scores among MFIs that transformed into microfinance banks. As for increased liquidity and leverage negatively affecting FSI scores, the authors cite mismanagement of financial resources as the main reason.
Regarding factors associated with higher FSI scores, the authors cite other research indicating women tend to be more financially responsible and longer-term customers as possible reasons why their participation as MFI clients is positively associated with financial sustainability. In addition, the authors conclude that their results support the theory that MFI success is dependent on higher loan sizes.
This is a summary of a paper by Maeenuddin, Shaari Abd Hamid, Mochammad Fahlevi, Annuar M D Nassir and Padzil Mohd Hashim; published by Cogent Economics & Finance; May 2023; 17 pages; available at https://doi.org/10.1080/23322039.2023.2202964.
By Vaughn Rajah, Research Associate
Additional Resources
Cogent Economics & Finance webpage
https://www.tandfonline.com/loi/oaef20
MIX Market database
https://databank.worldbank.org/source/mix-market
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