To profit or not to profit? Assessing financial sustainability outcomes of microfinance institutions

• Date: 01 July 2019
• Author: Rodrigo de Oliveira Leite,Luiz Claudio Sacramento,Layla dos Santos Mendes
• Published date: 01 July 2019
• DOI: http://doi.org/10.1002/ijfe.1718

Received: 18 August 2017 Revised: 22 December 2018 Accepted: 30 December 2018

DOI: 10.1002/ijfe.1718

RESEARCH ARTICLE

To profit or not to profit? Assessing financial sustainability

outcomes of microfinance institutions

Rodrigo de Oliveira Leite1Layla dos Santos Mendes2Luiz Claudio Sacramento3

1School of Administration and Finance,

Universidade do Estado do Rio de Janeiro,

Rio de Janeiro, Brazil

2Escola Brasileira de Administracao

Publica e de Empresas, Fundacao Getulio

Vargas, Rio de Janeiro,Brazil

3Economics Department, Pontifical

Catholic University of Rio de Janeiro, Rio

de Janeiro, Brazil

Correspondence

Rodrigo de Oliveira Leite, School of

Administration and Finance,

Universidade do Estado do Rio de Janeiro,

Rua Sao Francisco Xavier 524 Sala 8024-B

20550-013, Rio de Janeiro, Brazil.

Email:

rodrigo.de.oliveira.leite@gmail.com

JEL Classification: G21; D21; C33

Abstract

Weused a multilevel approach on comparing for-profit and not-for-profit micro-

finance institutions (MFIs). The database was composed of 202 MFIs (in 52

countries) from the most widely used microfinance dataset (the Microfnance

Information eXchange, Inc. Market), with 669 observations from 2010 to 2014.

Four financial sustainability outcomes were considered: yield on gross portfo-

lio; return on assets; portfolio at risk, 30 days; and operational self-sufficiency

(OSS). Although for-profit MFIs had a higher Yield, there was no significant

effect of profit orientation on ROA,PAR30, and OSS. Further analysis shows that

although profit orientation has a significant effect on the yield of small MFIs,

it does not have any effect on larger MFIs, which is consistent with the theory

that larger MFIs can distribute its fixed costs better,requiring lower interest rates

and allowing smaller yield on the gross portfolio. In addition, we show that the

intrinsic characteristics of the MFIs account for the majority of the variance from

the four outcomes.

KEYWORDS

financial efficiency, microfinance, mission drift, multilevel model, profitability

1INTRODUCTION

In the last decades, microfinance has been achieving

increasing prominence in policymaking for the poor

entrepreneur (Morduch, 1999). Muhammad Yunus, the

microfinance pioneer, founded the GrameenBank in 1976

and, for that, received the Nobel Peace Prize thirty years

later. However, there is not much agreement on how

microfinance institutions (henceforth MFIs) should be

structured in order to achieve the best results in alleviating

poverty. Nevertheless, little attention is given to sustain-

ability and mission drift of MFIs nor to which approach is

the best to achieve sustainability without drifting from the

main mission: help the poor.

This study investigates the following question: Are

not-for-profit MFIs as sustainable as for-profit ones? If

not, what causes this difference? Literature advocates

both approaches. The former is considered a traditional

approach while the latter is deemed to be modern (Hudon

& Traca, 2011). Morduch (2000) expressed those differ-

ent points of view. Those that advocate the profit-oriented

approach of microfinance claim that with profits an MFI

can achieve self-sustainability and expand its loan portfo-

lio to help more people. They also claim that not-for-profit

MFIs are less efficient and cannot survive without subsi-

dies. Nevertheless, Hudon and Traca(2011) provide empir-

ical evidence that up to a certain threshold, subsidized

MFIs reach higher levels of efficiency.

This paper investigates whether MFI profit orientation

determines some difference regarding sustainability and

revenues. The authors aforementioned focus on the effi-

ciency of these institutions, whereas we focus on sustain-

ability, which still is not fully explored in the literature.

This study has several political implications. Although

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