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While there is considerable expansion of microfinance institutions (MFIs) in the developing countries, there is a paucity of literature that examines the determinants of their Financial Performance (FP) among the Least Developed Countries (LDCs). This article seeks to investigate the determinants of FP of MFIs in Bangladesh over the period 2007–2013. Using two different measures of financial performance (portfolio yield and profit margin), the results indicate that the depth and breadth of social outreach can improve FP of MFIs. In particular, targeting women borrowers, increasing the average loan per borrower and increasing the number of active borrowers can contribute significantly to enhance the FP of MFIs. The results also show that, increasing savings and reducing operating expense can also contribute to increase MFIs’s financial performance.
This study investigates the determinants of FP of MFIs in Bangladesh. In particular, it examines the effects of breadth and depth of social outreach on the FP of MFIs. In addition, it also attempts to see whether other factors such as average savings, operating expense, GDP and Inflation have any effect on the FP. We use two dependent variables to measure the FP: portfolio yield and profit margin. As an analytical method, we deploy fixed effect and random effect model in line with Hoechle (2007) which gives estimates by taking into account the heteroscedasticity and serial autocorrelation problems of panel data model. The analysis finds empirical evidence that outreach (depth) to women borrowers has a positive effect on the two measures of FP. While the effect on profit margin is straightforward, the effect on yield either reflects that female borrowers have a higher repayment rate or the interest charged by the MFIs to women is higher or both. It can be explained by the fact that as a consequence of a rigid repayment schedule set by the MFIs which starts after the disbursement of the credit, women have to start repayment even before making any investment decisions (Abdullah and Quayes 2016). We also demonstrate that average loan per borrower (depth of outreach) is an important determining factor to improve the FP. The study also reveals that breadth of outreach (number of active borrowers) positively and significantly affects the portfolio yield and profit margin, while it did not show a statistically significant association with yield when we use number of clients as a proxy to measure breadth of outreach. In addition, average savings and operating expense are two important determining factors of FP. Furthermore, our analysis is based on an LDC with a large dataset consisting of 690 registered MFIs under the MRA, and hence the results can be generalized and replicated by other LDCs and developing countries.