How Sustainable is Microfinance, Really?

Lately, I’ve noticed several versions of the statement, “Although much is made of MFIs becoming subsidy independent, few of them have reached this goal.” I find it pretty hard to square such statements with the evidence.

Among roughly 1300 MFIs reporting to the MIX for 2006, about 565 showed a positive return on assets. Let’s assume that some of these aren’t really sustainable, either because their results are incorrectly reported or because adequate adjustments weren’t made for subsidies they received. That still leaves hundreds of sustainable MFIs. Lots of MFIs are now drawing billions (really!) in investment from microfinance investment funds that are dominated, not by development agencies, but by investors who are not willing to accept anything below a fully commercial risk-return profile. (This is based on studies by Xavier Reille and his associates. Most of the investors who identify themselves as “socially responsible” in fact do no more than apply a negative screen, and will accept returns no lower, and risks no higher, than any other commercial investor). Anyone who wants to say that very few MFIs are sustainable will have a hard time explaining the behavior of these investors.

Furthermore… if the question is “how sustainable is the microfinance industry,” we shouldn’t treat a tiny MFI with 2,000 customers the same as we would a huge one with 2,000,000. On average, sustainable MFIs are much larger than the unsustainable ones. To get a meaningful picture, we have to weight by number of borrowers or portfolio size. For instance, if we want to look at the state of the shoe industry worldwide, it would make no sense to give each of the hundreds of tiny boutique companies the same weight as Nike or Adidas.

Government MFIs tend to be unsustainable, and will continue to be so, because with a few large exceptions (e.g. BRI) they are not trying to be sustainable. Thus, if we want to test whether sustainability is an empty promise or not, we need to look mainly at the private MFIs, and weight the results. Taking the adjusted results from the MIX databases, Adrian Gonzalez has found that the strong majority of borrowers from private MFI are served by sustainable instutions today. Even if we mentally discount that result for any plausible level of over-optimistic reporting, it’s still clear that a very large chunk of the industry is already sustainable.

Taking another cut on the MIX data, the median (weighted) return on equity for all reporting MFIs ins 2006 was 13 percent.

MFIs that have transformed into for-profit companies are not the only ones that are profitable. In fact, Gonzalez found that on average not-for-profit MFIs had higher profits in 2006 than for-profit MFIs. This result may be due to the fact that MOST not-for-profit MFIs don’t pay taxes, and tend to operate in less competitive markets.

In my view, the proposition that microfinance can be a perfectly viable business in most settings has been demonstrated very compellingly by now. All it takes is competent management with a commitment to financial sustainability. I just wish some of the other propositions that guide my life were so thoroughly and clearly demonstrated!


10 September 2012 Submitted by Patrick Hynes (not verified)

I just wanted to raise the point that Oikocredit is one of the largest financers of microfinance in the world, and its investors are happy to receive a modest financial return of just 2%. Oikocredit’s social investment model has proved a sustainable model for development, attracting 30,000 investors worldwide and established for 33 years. I hope this does not sound like an advert, but I could not let this article go by without comment! Thanks.

10 September 2012 Submitted by Rich Rosenberg (not verified)

As Patrick Hynes notes, Oikocredit, with investors who are willing to accept below-market returns, is a significant exception to the general pattern described by Xavier Reille. The point is that there are plenty of MFI investors out there who are *not* willing to put their money in anything that doesn’t meet fully commercial standards.

10 September 2012 Submitted by Ryan Calkins (not verified)

Excellent post and analysis. Sustainability is a key issue, and something that many of the microfinance investment vehicles are attempting to address with their partner MFIs. Unitus seems to be taking the “positive deviance” approach: find the MFIs that are doing the best job within a group and then leverage their success by providing them with more resources and training so they can scale up.

Another consideration is the work being done by groups to measure the social impact of MFIs. The premise is that the financial bottom line of these MFIs may not be the only measure of success.

10 September 2012 Submitted by Getaneh Gobezie (not verified)

Thank you, Richard Rosenberg, for such critical views on sustainability, also reflected in your ‘CGAP Reflections on Compartamo’s IPO … previously. The development community really need a much enhanced debate on this very issue, as there are many controversies. May be, more so in poor countries? I have tried to raise such issue at a recent conferences, and the debate has been intensive. I have summarised same in a small paper titled: ‘Sustainable Rural Finance: Prospects, Challenges and Implications’, which is posted (pdf) at FAO/WB/IFAD/GTZ sponsored web. One can view at:…


Getaneh Gobezie

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