Financial sustainability, liquidity and outreach of deposit-taking microfinance institutions: evidence from low income Sub-Saharan Africa.

Abstract

The United Nations’ Sustainable Development Goals regard microfinance provision as a developmental tool in fighting poverty and financial exclusion which are particularly rife in Low-Income Sub-Saharan Africa (LISSA). Therefore, this study analysed the financial sustainability, liquidity and outreach of LISSA Deposit-taking Microfinance Institutions (DTMFIs) through three objectives. The first objective investigated why the LISSA DTMFIs fall short in achieving financial sustainability despite having commendable deposit volumes. Panel data spanning 2006 to 2017 obtained through desk research from the Microfinance Information Exchange of 64 DTMFIs sampled across 18 LISSA countries was utilized. Through probit regression, the study found that the likelihood of attaining financial sustainability is reduced by small scale deposits, loan loss provisions, deteriorating loan portfolio quality and costly branch coverage. The study recommends low cost, large scale deposit operations; efficiency in managing operating expenses; credit enhancements; and restrictive deposit-taking licencing. The second objective assessed the relationship between liquidity and deposit insurance as the LISSA DTMFIs default in meeting withdrawals on deposits. The fixed panel of 64 DTMFIs was utilized. The estimated random effects results showed that explicit deposit insurance is positive and significantly related to liquidity. The study concluded that designing and implementing explicit deposit insurance schemes mitigates liquidity risk in depository microfinance. Therefore, the LISSA regulators ought to include microfinance deposits in formulating deposit insurance policies. The third objective examined whether pursuing outreach and financial sustainability in depository microfinance exhibit a trade-off or mission drift, as this is not yet clear for deposits. The System Generalized Method of Moments was adopted, using the fixed panel of 64 DTMFIs. No significant relationship was found between financial sustainability and the average deposit balance (outreach depth); but financial sustainability was negative and significantly related to number of depositors (outreach breadth). The study concluded that in the LISSA’s depository microfinance sector, there is neither a mission drift nor trade-off in outreach depth, but a trade-off exists in outreach breadth. Therefore, it is recommended that the DTMFIs segment their markets and develop appropriate deposit products for each market segment and also leverage on cost-efficient deposit-taking methods such as the use of agents and mobile phones.