Determinants of financial sustainability of microfinance institutions in Pakistan

Abstract

Since Pakistan achieved independence, poverty has become one of the most important issues in the country, which can be reduced with the help of microfinance sector. Pakistani microfinance institutions (MFIs) are facing a decline in profitability which makes it difficult for them to survive. The current study aims to investigate the determinants affecting the financial performance, i.e. profitability and sustainability of microfinance institutions in Pakistan, as well as to establish if attaining profitability and sustainability becomes a conflicting goal in serving the poorer strata. The paper utilizes an unbalanced panel data set of 29 MFIs for the period 2008-2014 obtained from MIX Market. The study uses fixed effect and random effect with later accounting for endogeneity through instrumental variables technique i-e 2SLS and 3SLS. The results reveal that MFIs' size, cost efficiency, portfolio at risk, average loan size and yield on loan portfolio are the main factors influencing the financial performance of MFIs in Pakistan. No sign of mission drift has been found rather serving to the poor is seen to be an increment for financial performance. The study provides guidance to MFIs' managers in determining the factors that could affect their financial performance and reaching foremost objectives of any MFI. Managers can get an idea how to achieve both goals simultaneously. To the authors knowledge, this is the first study concentrated specifically on Pakistan in determining performance and outreach factors to date considering the simultaneous causation adopting two-stage least square (2SLS) and three-stage least square (3SLS) estimation strategy.

Financial Sustainability and Corporate Social Responsibility Under Mediating Effect of Operational Self-Sustainability

“…Prospective investors always want to know about returns on their investment. Investor return was employed in the studies of Moskowitz (1972) to measure the enterprise's financial performance and was then later used in many other studies (Cochran and Wood, 1984;Naz et al, 2019). Price per share was used as an investor return in Moskowitz (1972) studies, which was later found to be faulty.…”

“…The operational cost of MFIs is higher than other banks as these provide services to the unbanked at their doorstep (Naz et al, 2019). The MFIs have to perform this function to raise lowincome customers' income levels (Akram and Hussain, 2011).…”

“…Targeting low income customers is the primary concern for large and sustainable MFIs (Thomas and Jyothi, 2016). Therefore, MFIs have to invest resources in social performance that distract MFIs from core objectives of profitability and operational and financial sustainability (Woller, 2007;Nurmakhanova et al, 2015;Naz et al, 2019). The target for financial sustainability puts pressure on the MFIs to distract CRS and to target easier-to-reach rich customers to reduce the default risk.…”

“…This action will result in dislodging from a mission to provide services to the unbanked. On the other hand, CSR will increase social roots, customers' loyalty, poverty alleviation, employee attraction, and access to capital (Cochran and Wood, 1984;Woller, 2007;Sweeney, 2009;Naz et al, 2019). Thus, MFIs have to trade-off between CSR and financial self-sufficiency (Nurmakhanova et al, 2015).…”

“…The paper contributes to prior research in three areas. The mediating effect of operational self-sustainability is ignored, which is more significant in the microfinance industry as it has a higher operating cost than conventional banking (Naz et al, 2019). CSR in microfinance institutions (MFIs) is more important than any other industry as MFIs receive donations from donors to enhance outreach and social projects (Sweeney, 2009).…”