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Financial performance and outreach: a global analysis of leading microbanks*

Authors


  • *

     The views are those of the authors and not necessarily those of the World Bank or its affiliate institutions. The Microfinance Information eXchange, Inc. (MIX) provided the data through an agreement with the World Bank Research Department. Confidentiality of institution-level data has been maintained. We thank Isabelle Barres, Joao Fonseca, Didier Thys and Peter Wall of the Microfinance Information Exchange (MIX) for their substantial efforts in assembling both the adjusted data and the qualitative information on MFIs for us. We have benefited from comments from Thorsten Beck, Patrick Honohan, Stijn Claessens, Bert Sholtens and participants at the Groningen conference. Sarojini Hirshleifer and Varun Kshirsagar provided expert assistance with the research. Any errors are ours only.

Abstract

Microfinance promises to reduce poverty by employing profit-making banking practices in low-income communities. Many microfinance institutions have secured high loan repayment rates but, so far, relatively few earn profits. We examine why this promise remains unmet. We explore patterns of profitability, loan repayment, and cost reduction with unusually high-quality data on 124 institutions in 49 countries. The evidence shows the possibility of earning profits while serving the poor, but a trade-off emerges between profitability and serving the poorest. Raising fees to very high levels does not ensure greater profitability and the benefits of cost-cutting diminish when serving better-off customers.

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