The Impact of the Macroeconomic Environment on Microfinance Sustainability

This paper uses a Random Effects regression model to examine the impact of the macro-economic climate on the sustainability of microfinance institutions (MFIs). The paper uses inflation, unemployment rates, interest rates and per-capita gross domestic product (GDP) as causal variables, and repayment rates and return on equity (ROE) as measurements of MFI sustainability. The paper attempts to answer the following questions:

• What is the impact of the macro-economic environment on MFI repayment rates and profitability?;
• Does this impact depend on the type of MFI, the region where it is located, and whether the MFI is regulated?;
• What are the implications of these findings for organizations hoping to establish sustainable MFIs?

It finds that:

• Per-capita GDP is a highly significant determinant of MFI profitability;
• The macro-economic climate has no impact on repayment rates;
• Except for the income effect, the macro-economic climate has little impact on MFI sustainability;
• MFIs achieve similar repayment rates irrespective of the macro-economic environment in which they are located;
• Inflation is not statistically significant for MFI performance.