Determinants of margin in microfinance institutions

ABSTRACT

Microfinance institutions (MFIs) lend to the poor. However, microfinance clients suffer from high interest rates, a type of poverty penalty. This article analyses the margin determinants in MFIs. A banking model has been adapted to microfinance. This model has been tested using 9-year panel data. Some factors explaining bank margin also explain MFI margin, with operating costs being the most important factor. Specific microfinance factors are donations and legal status, as regulated MFIs can collect deposits. It has also been found that MFIs operating in countries with a high level of financial inclusion have low margins.

KEYWORDS:

• Microfinance institutions
• mission drift
• banking
• net interest income
• outreach
• financial inclusion

JEL CLASSIFICATION:

• A13
• G21

Additional information

Funding

The work reported in this article was supported by the Spanish Ministry of Education and Science [grant ECO2010-20228] and the European Regional Development Fund and by the Government of Aragon [grant Ref. S-14 (3) and S-86].