Targeting the Poor versus Financial Sustainability and External Funding: Evidence of Microfinance Institutions in Ghana

This paper uses data from Ghana to investigate the challenge posed to MFI institutional building by reliance on external funding. The paper aims to estimate the effect of financial sustainability of funds on client targeting. Microfinance, indicative of reducing poverty, has received mixed recognition, partially due to lack of strong evidence on its impact. Architects of microfinance assert its capability. But sceptics argue that disbursement of meagre loan amounts and covariate risks threaten the success of microfinance. The study upholds the sceptic's view of a trade-off, and demonstrates the effect of source of funds and other institutional characteristics in targeting poor clients. Findings indicate that:

• Institutions are unable to operate competitively and reach poorer clients;
• Hybrid programs that mix state and market-oriented development paradigms raise a number of questions on institutional capability, economic efficiency and sustainability;
• Microfinance's dual objectives make institutions unsure of their inclination;
• Use of local sources of funds exclusive of government direct sourcing, such as linking deposit-taking institutions with informal MFIs could solve the problem.