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Microfinance Institutions in Ethiopia, Kenya and Uganda: Loan Outreach to the Poor and the Quest for Financial Viability

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  • Gashaw Tsegaye Ayele

Abstract

Microfinance institutions' (MFIs') loan service outreach to the poor (depth) and the ensuing institutional viability concern is an unsettled issue in the literature. Can MFIs increase the depth of their outreach whilst achieving financial viability (viability)? Answering this question is exceedingly relevant to countries that opt for right policies towards financial inclusion. In their microfinance operations, Kenya and Uganda ranked first and second in Africa; fifth and eighth in the world, respectively; and Ethiopia is an emerging MFI destination. Yet, the loan outreach in these countries falls short of the uncontested huge demand. The study introduces an approach that disintegrates the overall effect of depth on viability into direct and indirect effects. Hausman‐Taylor and Generalized Structural Equation Models are employed on unbalanced panel dataset of 31 MFIs (2003–12) drawn from the three countries. The result implied a direct‐positive effect and an indirect‐negative effect running from depth to viability. Under contained operational‐expenses‐per‐loan‐portfolio, depth could be pro‐viability. Debt‐to‐Equity‐Ratio relate inversely with viability whereas ‘Real‐Yield’ relates directly. The paper concludes that support to MFIs should be aligned to ensure efficiency through reduced operational costs and thereby complementary depth–viability nexus can prevail.

Suggested Citation

  • Gashaw Tsegaye Ayele, 2015. "Microfinance Institutions in Ethiopia, Kenya and Uganda: Loan Outreach to the Poor and the Quest for Financial Viability," African Development Review, African Development Bank, vol. 27(2), pages 117-129, June.
    • Handle: RePEc:bla:afrdev:v:27:y:2015:i:2:p:117-129
    DOI: 10.1111/1467-8268.12128
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    Cited by:

    1. Niels Hermes & Marek Hudon, 2018. "Determinants Of The Performance Of Microfinance Institutions: A Systematic Review," Journal of Economic Surveys, Wiley Blackwell, vol. 32(5), pages 1483-1513, December.
    2. Farah NAZ & Sarah SALIM & Ramiz ur REHMAN & Muhammad Ishfaq AHMAD & Rizwan ALI, 2019. "Determinants of financial sustainability of microfinance institutions in Pakistan," Upravlenets, Ural State University of Economics, vol. 10(4), pages 51-64, September.
    3. Amin Karimu & Samuel Salia & Javed G. Hussain & Ishmael Tingbani, 2021. "Are competitive microfinance services worth regulating? Evidence from microfinance institutions in Sub‐Saharan Africa," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 476-492, January.
    4. Sydney Chikalipah, 2017. "Institutional Environment and Microfinance Performance in Sub-Saharan Africa," African Development Review, African Development Bank, vol. 29(1), pages 16-27, March.
    5. Toyin Segun Ogunleye, 2017. "Financial Inclusion and the Role of Women in Nigeria," African Development Review, African Development Bank, vol. 29(2), pages 249-258, June.
    6. Merrey, D. J. & Lefore, Nicole, 2018. "Improving the availability and effectiveness of rural and “Micro” finance for small-scale irrigation in Sub-Saharan Africa: a review of lessons learned," IWMI Working Papers H049027, International Water Management Institute.
    7. Zeleke Worku, 2019. "Regulatory Obstacles and Small, Micro and Medium-sized Enterprises," International Review of Management and Marketing, Econjournals, vol. 9(6), pages 44-50.
    8. Odunayo Magret Olarewaju, 2020. "Investigating the factors affecting nonperforming loans in commercial banks: The case of African lower middle‐income countries," African Development Review, African Development Bank, vol. 32(4), pages 744-757, December.
    9. Aminat Olayinka Olohunlana & Ngozi Bosede Adeleye & Somod Dapo Olohunlana & Hauwah K. K. AbdulKareem, 2022. "Gender heterogeneity and microfinance sustainability in Sub‐Saharan Africa," African Development Review, African Development Bank, vol. 34(2), pages 232-243, June.
    10. Saifullahi Sani Ibrahim & Haruna Mohammad Aliero, 2020. "Testing the impact of financial inclusion on income convergence: Empirical evidence from Nigeria," African Development Review, African Development Bank, vol. 32(1), pages 42-54, March.
    11. Hermes, Cornelis & Hudon, M., 2018. "Determinants of the Performance of Microfinance Institutions: A Systematic Review," Research Report 2018008, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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