Determinants of Financial Sustainability in Microfinance Institutions: A Panel Data Study

Abstract

Microfinance institutions have been used as a catalyst tool for increasing the welfare of poor people and fostering economic growth in many regions globally, including Nepal, since the decade of the 70s. However, the issue of financial sustainability in their operations is still emerging. The study aimed to analyze the factors influencing the financial sustainability of microfinance institutions in Nepal. The research employed the two-step system General Method of Moments estimator to analyze the financial sustainability of twenty-five sampled microfinance institutions, out of fifty-seven D-class financial institutions categorized as microfinance institutions and regulated by Nepal Rastra Bank, using cross-sectional data obtained from their comprehensive financial statements spanning from 2016 to 2023. The study used three key indicators - operational self-sufficiency, return on equity, and return on assets - to assess the financial sustainability of the selected microfinance institutions in Nepal. The findings of this study suggested that savings and the number of borrowers significantly and positively affect the financial stability of microfinance. In contrast, member-per-staff and non-performing loans negatively and significantly affect financial sustainability. However, loan portfolios do not significantly affect the financial sustainability of microfinance in Nepal. Further researchers can broaden the scope of the study by including variables such as geographic location, developmental stages, ownership structures, age, product delivery strategies of microfinance institutions, microfinance institution size, and government policy and regulations.

Keywords

• financial sustainability
• micro-finance
• operational self-sufficiency
• return on equity
• return on assets
• non-performing loan