Sustainability and Efficiency of Microfinance Institutions in South Asia

In this paper we focus on microfinance institutions in South Asia. These microfinance institutions (MFIs) provide credit to the poor who have no access to commercial banks. This is done to reduce poverty and to help the poor with setting up their own income generating businesses. There appears to be in general a conflict between the outreach activities of such MFIs and their sustainability. It may also influence the efficient functioning of such organizations. Therefore, the focus in literature has shifted from subsidizing MFIs to their financial sustainability and efficiency. It is now presumed that such institutions should be able to cover the cost of lending money out of the income generated from the outstanding loan portfolio and to reduce these costs as much as possible. Besides it there is an element of increasing competition among MFIs which is coupled with factors like commercialization, technological change and financial liberalization and regulation policies of the government. In view of such developments we analyze the behavior of microfinance institutions in South Asia comprising MFIs in India, Nepal, Bangladesh and Sri Lanka. We look into major aspects of access to poor by MFIs, sustainability in activities and finances as well as the efficiency of such organizations from different parameters. Using data for 5 years for 142 MFIs across these nations, our results indicate that the goals of sustainability and efficiency are not always mutually supportive. In the long run thus these organizations should choose their focus to those outreach activities in which they exhibit efficiency from different angles such that sustainability along with reduced dependence on lenders as well survival in competitive environment is feasible.