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Does the Pursuit of Outreach Consistently Stifle the Financial Performance of Microfinance Institutions in sub-Saharan Africa?

We study the relationship between outreach and the financial performance of 479 microfinance institutions (MFIs) in 37 countries of sub-Saharan African (SSA), covering the period 1998 to 2012. This study builds on earlier literature on the relationship between outreach and the financial performance of MFIs across countries. Unlike many prior microfinance studies, we investigate the outreach-financial performance nexus by adopting novel approaches: (i) of linear and non-linear specification, (ii) of solely focusing on SSA, and (iii) of segregating the two-outreach variables into different segments, with the aim of determining the optimal outreach thresholds (or tipping point). By employing the OLS and GMM method, we find evidence indicating a positive and statistically significant relationship between outreach and the financial performance among MFIs in SSA. In addition, providing small microcredits below the USD 600 threshold is associated with lower profitability than larger loans. Equally, we observed that MFIs serving more than 30,000 clients reported a strong financial performance, rather than the MFIs that were serving less than that threshold. The study findings have implications for the managers and stakeholders with a vested interest in the microfinance industry of SSA.

Working Paper 813
1 March 2020
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