Microfinance Institutions in Ethiopia, Kenya, and Uganda. Loan Outreach to the Poor and the Quest for Financial Viability


MicrofinanceLoan outreach—financial viability nexus is among the unsettled issues in microfinance literature: unyielding stance favoring viability for increased outreach to the poor (depth) versus a trade-off view justifying subsidized Microfinance Institutions (MFIs). The concern is exceedingly relevant to developing countries that opt for right policies towards financial inclusion. Even leading microfinance industries are challenged to reach the wider poor. In their microfinance operations, Kenya and Uganda ranked first and second in Africa; fifth and eighth in the world, respectively; and Ethiopia, although not in the ranking, is an emerging fellow. Yet, the loan service outreaches to the poor in these countries fall short of the escalating demand. This study contextualizes microfinance depth-of-outreach and financial viability issues in Ethiopia, Kenya, and Uganda; analyses depth of loan outreach and financial viability nexus; and quantifies the path from depth to viability. Hausman-Taylor Instrumental Variable Technique (H-T) and Generalized Structural Equation Model (GSEM) are employed on unbalanced panel dataset of 31 MFIs (2003-to-2012) sampled from the three countries. The H-T estimates supported lending to the poor for enhanced viability if operational expenses are contained. Operating-Expense-Per-Loan-Portfolio and Debt-to-Equity-Ratio relate inversely with viability while ‘Real-Yield’ relates directly. The GSEM revealed positive association between lending to the poor and size of operating expenses, which indirectly hampers viability. Support to MFIs targeted to ensuring efficiency through reduced operational costs can reinforce a complementary outreach—viability nexus otherwise, tradeoff would be inevitable.

by: Gashaw T. Ayele (MSc)

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