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Determinants of financial sustainability of microfinance institutions in Pakistan

Author

Listed:
  • Farah NAZ

    (Kinnaird College for Women)

  • Sarah SALIM

    (Kinnaird College for Women)

  • Ramiz ur REHMAN

    (The University of Lahore)

  • Muhammad Ishfaq AHMAD

    (The University of Lahore)

  • Rizwan ALI

    (The University of Lahore)

Abstract

Since Pakistan achieved independence, poverty has become one of the most important issues in the country, which can be reduced with the help of microfinance sector. Pakistani microfinance institutions (MFIs) are facing a decline in profitability which makes it difficult for them to survive. The current study aims to investigate the determinants affecting the financial performance, i.e. profitability and sustainability of microfinance institutions in Pakistan, as well as to establish if attaining profitability and sustainability becomes a conflicting goal in serving the poorer strata. The paper utilizes an unbalanced panel data set of 29 MFIs for the period 2008–2014 obtained from MIX Market. The study uses fixed effect and random effect with later accounting for endogeneity through instrumental variables technique i-e 2SLS and 3SLS. The results reveal that MFIs’ size, cost efficiency, portfolio at risk, average loan size and yield on loan portfolio are the main factors influencing the financial performance of MFIs in Pakistan. No sign of mission drift has been found rather serving to the poor is seen to be an increment for financial performance. The study provides guidance to MFIs’ managers in determining the factors that could affect their financial performance and reaching foremost objectives of any MFI. Managers can get an idea how to achieve both goals simultaneously. To the authors knowledge, this is the first study concentrated specifically on Pakistan in determining performance and outreach factors to date considering the simultaneous causation adopting two-stage least square (2SLS) and three-stage least square (3SLS) estimation strategy.

Suggested Citation

  • 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.
    • Handle: RePEc:url:upravl:v:10:y:2019:i::p:51-64
    DOI: 10.29141/2218-5003-2019-10-4-5
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    References listed on IDEAS

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    2. Dobdinga Cletus Fonchamnyo & Tony Anyangwe & Ndichia Nana Chantal & Gildas Dohba Dinga, 2023. "Capital structure and financial sustainability: stakes of microfinance institutions in Bamenda, Cameroon," Future Business Journal, Springer, vol. 9(1), pages 1-10, December.

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    More about this item

    Keywords

    public administration; sustainability; profitability; outreach; microfinance; microfinance institution; Pakistan.;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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