Abstract:
Microfinance institutions (MFIs) are seen as one of key ingredients in poverty
reduction in Africa. Nevertheless, for them to achieve their goal of poverty
reduction, their profitability is crucial. Several factors such as outreach,
institutional environment, age, size and type of MFI affect the profitability of MFIs,
but labour efficiency role and credit risk effect on profitability of MFIs have seen
little attention. This study therefore, sets out to investigate the potential
determinants of MFIs profitability within African countries. The objectives of the
study were to examine the trends in profitability of African MFIs and to estimate
the determinants of profitability of MFIs in Africa.
The study used a MIX Market data for the period 2007 to 2011 for 45 MFIs in nine
African countries to obtain a balanced panel. The study estimated both fixed effect
and random effect. However, based on the Hausman test, the fixed effect best suited
the estimation. Profitability of MFIs was measured using Return on Asset (ROA)
and Return on Equity (ROE). Labour efficiency was measured as the number of
borrowers per staff of MFIs whereas credit risk was measured by loan default for
thirty days. To ensure robustness of the model and that the estimated equation does
not suffer from omitted variable bias, other control variables were included in the
model such as inflation, real gross domestic product, age, size and type of MFI.
The study finds that labour inefficiency relates to profitability of MFIs in African
countries negatively. Also, credit risk exerts negative effect on profitability of MFIs
in Africa. Other variables which were found to influence the profitability of MFIs
include economic growth, inflation, size of MFIs and age of MFIs.
