Microfinance Institutions: A Profitable Investment Alternative?
Microfinance Institutions: A Profitable Investment Alternative?

Summary/Abstract: The promise of microfinance institutions (MFIs) to transform lives, and their limited success—so far—has maintained MFIs prominence in the literature for years. We examine the question of MFI financial sustainability using the familiar variable, return on equity (ROE), and data from the Microfinance Information Exchange. This is reasonable as increasing numbers of MFIs re-organize as equity-based firms. We find that MFIs must make “good” loans, leading to high portfolio yields while containing operating costs. MFIs must make loans to relatively credit-worthy borrowers, perhaps preferentially lending to women. MFIs will be more likely to become self-sufficient in the poorest of countries, where they face less competition from banks and similar institutions. They will be more successful in places with relatively high price levels for consumption goods.

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