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Cost structure and financial sustainability of microfinance institutions: the potential effects of interest rate cap in Bangladesh

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  • Zahid Islam
  • Marcela Porporato
  • Nelson Waweru

Abstract

This paper examines the cost structures of 215 MFIs reported by the Microcredit Regulatory Authority of Bangladesh with a view to identify the main determinants of sustainability. MFIs in Bangladesh are an important case to study, as it is the first country to introduce an interest rate cap. Using management accounting ideas and frameworks, principally contingency theory to identify components of MFI's cost structure, this study measures Operational Self Sufficiency (OSS) as the result of administrative costs, financial costs, interest rate spread and size/complexity. The results suggest that there are two key factors that are significantly related to MFI sustainability: interest rate spread and general administrative costs. We conclude that MFIs that have lower administrative costs and a large interest rate spread are more likely to achieve sustainability prior to the introduction of the interest cap.

Suggested Citation

  • Zahid Islam & Marcela Porporato & Nelson Waweru, 2014. "Cost structure and financial sustainability of microfinance institutions: the potential effects of interest rate cap in Bangladesh," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 7(1), pages 54-72.
    • Handle: RePEc:ids:ijfsmg:v:7:y:2014:i:1:p:54-72
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    Cited by:

    1. Md Aslam Mia & Sunil Sangwan & A. H. M. Belayeth Hussain & Nurhafiza Abdul Kader Malim, 2022. "Rural–urban financial inclusion: Implications on the cost sustainability of microfinance lenders," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1899-1911, September.

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