Do Institutions Matter for Microfinance Profitability? Evidence from Africa

Examining the impact of the institutional environment on MFI profitability
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This paper examines the extent to which the institutional environment influences microfinance profitability in Africa. It is based on a study of 167 MFIs across 32 African economies during the period 1997-2008.

The paper reviews literature on the relationship between the institutional environment and microfinance profitability. It analyzes impact of country specific institutional environments on MFI profitability based on data obtained from MIX Market database, World Development indicators and World Bank World Governance Indicators. Major findings include:

  • MFIs are more profitable in countries with political stability;
  • Older MFIs suffer less from political instability;
  • Corruption makes it harder for MFIs to realize profits;
  • Corruption acts as a barrier to microenterprise activities and slows down growth of portfolio to assets ratio;
  • Well-developed institutions may make it less costly for MFIs to operate in a fully compliant manner.

The paper states that a policy prescription geared towards MFI specific factors and institutional environments may invigorate the microfinance sector in Africa. It suggests that future research should focus on arriving at country specific conclusions.