Financial Performance and Outreach: A Global Analysis of Leading Microbanks

This paper examines the promise of microfinance that it can deliver poverty reduction without relying on ongoing subsidy. It argues that this requires translating high repayment rates into profits, a challenge that remains for most micro-banks.The study:

• Uses a data set with financial information on 214 institutions in 49 countries;
• Examines claims in a large comparative survey;
• Explores the patterns of profitability, loan repayment and cost reduction;
• Asks the following questions:
  • Does raising interest rates worsen agency problems as detected by lower loan repayment rates and less profitability?
  • Is there evidence of a trade-off between the depth of outreach to the poor and the pursuit of profitability?
  • Have micro-banks moved away from their mission of serving the poor?

The study finds that:

• Most of the institutions surveyed were profitable or approaching profitability;
• There was little evidence of agency problems, outreach-profit trade-offs, or mission drift;
• It is possible to raise interest rates without undermining repayment rates, achieving both profit and outreach;
• Institution design and orientation matter substantially;
• Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised.

The paper concludes that for individual-based lenders, one key to achieving profitability is investing more heavily in staff costs - a finding contrary to the conventional wisdom that profitability is largely a function of minimizing costs.