The Relationship between Outreach and Financial Sustainability: An Empirical Study on Ethiopian Microfinance Institutions
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Date
2015-06
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Addis Ababa University
Abstract
The overall objective of the study was to scrutinize the relationship between microfinance
outreach and financial sustainability in Ethiopia. The study specifically aimed at establishing the
relationship between loan outreach and microfinance institutions’ financial sustainability in
Ethiopia. MFIs in Ethiopia enable to increase industrial outreach to 3.9 million clients. Yet, the
loan service outreaches to the poor in Ethiopia fall short of the escalating demand. Quantitative
design was employed and it was found suitable for the study since it aimed at establishing the
relationship between microfinance outreach variables and financial sustainability. The
population for the study was composed of 35 microfinance institutions in Ethiopia. Secondary
data was collected from 14 purposively selected microfinance institutions reporting their
financial and operational data to either of AEMFI or NBE over the period 2003-2014. Multiple
regression analysis was then carried out on a panel data collected in order to examine
relationships between variables. Significant positive relationship between breadth of outreach
measured as number of active borrowers and gross loan to asset ratio and financial
sustainability was evident among microfinance institutions in Ethiopia. However, there is a trade
of between microfinance institutions depth of outreach measured by average loan size and
financial sustainability as this variable shown statistically significant association with financial
sustainability. Operating expense per loan portfolio relate inversely with financial sustainability
while yield relates directly. Thus, it was concluded that the relationship between outreach and
financial sustainability of MFIs in Ethiopia is depends on the variables used. Therefore, this
study recommends that microfinance institutions in Ethiopia should increase the numbers of
borrowing clients they are serving to be benefited from economics of scale.
Key words: Microfinance, loan outreach, financial sustainability, economies of scale
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Keywords
Microfinance; loan outreach; financial sustainability; economies of scale.