Explaining Failures of Microfinance Institutions

Identifying the factors that can lead to the failure of MFIs

This paper empirically studies the determinants of failures of MFIs based on the CAMELS rating components by applying probit regression techniques. CAMELS is an acronym for capital adequacy, asset quality, management capability, earnings, liquidity, and sensitivity to market risk. It is used to identify a financial institution's overall condition. Apart from investigating whether the CAMELS components can be confirmed while explaining failures of MFIs, the paper also analyzes the microfinance-specific determinants of MFI failures. For the analysis, the paper uses annual balance sheet and income statement data on 1,797 MFIs in 117 countries from 1995 until 2011. It identifies documented failures among MFIs by examining breaks in data history. The paper discusses, whether:

  • CAMELS components affect the probability of MFI failure;
  • There is a positive relationship between the percentage of female borrowers and the probability of failure;
  • Donations have an influence on the likelihood of failure;
  • Regulated MFIs are less likely to fail than unregulated MFIs;
  • Growth rate of an MFI in terms of number of borrowers is positive related to the probability of failure.

About this Publication

By Dorfleitner, G., Leidl, M. , Priberny, C.