What Explains the Low Profitability of Microfinance Institutions in Africa?

African Journal of Social Sciences, Volume 2 Number 3 (2012) 85-115

Posted: 7 Mar 2012 Last revised: 11 Jun 2012

See all articles by Peter Muriu

Peter Muriu

University of Birmingham - Birmingham Business School

Date Written: December 8, 2011

Abstract

While microfinance institutions (MFIs) in other regions have continuously reported positive profits, those operating in Africa economies continue to post negative profits. Why has this remained so? This study uses unbalanced panel dataset comprising of 210 MFIs across 32 Africa economies, operating during the 1997-2008 period to study the determinants of MFI profitability. We find that apart from credit risk and managerial inefficiency, average profitability is higher for MFIs that are larger and more highly capitalized. MFI returns are affected by corruption which may reduce the probability that MFI will invest in a country. We find no evidence suggesting a statistically significant relationship between changes in macroeconomic variables and profitability of MFIs, which may be an indication of the high resilience of MFI on local macroeconomic conditions. The evidence gathered in this thesis is important for forming credit market policy that may help deepen the quality and quantity of access to finance particularly by the poor.

Keywords: Microfinance Institutions, Profitability, Sub-Sahara Africa

JEL Classification: G21, E44

Suggested Citation

Muriu, Peter, What Explains the Low Profitability of Microfinance Institutions in Africa? (December 8, 2011). African Journal of Social Sciences, Volume 2 Number 3 (2012) 85-115, Available at SSRN: https://ssrn.com/abstract=2017980

Peter Muriu (Contact Author)

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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