Muriu, Peter W (2011)
Ph.D. thesis, University of Birmingham.
Microfinance institutions (MFIs) may be flourishing in commercial terms but few are profitable. While MFIs in other regions have consistently reported positive profits, those operating in Africa continue to post negative profits. What explains this disparity? This thesis contributes to the current state of knowledge and research on microfinance profitability by investigating the potential determinants of MFIs profitability with a focus on Africa. Further empirical work is carried out to examine: (i) profit persistence and the speed of convergence; (ii) impact of financing choice on microfinance profitability and (iii) the impact of institutional environment of the host economy where MFI is located on profitability. This thesis is pioneering in using System-GMM estimators in studies of determinants of microfinance profitability which enables us to control for possible endogeneity. The analytical framework uses an unbalanced panel dataset comprising of 210 MFIs across 32 countries operating from 1997 to 2008. Our main estimations show that MFI profitability is non-negligibly driven by MFI specific factors and the institutional environment of the host country. Specifically, average profitability is higher in MFIs that are efficient, well-capitalized and with scale advantages. A key result is that macroeconomic environment is not significant in explaining microfinance profitability.
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