The Determinants Of Net Interest Margin Of Microfinance Institutions (Mfi’s) In Sub-Saharan Africa

ABSTRACT The study sought to investigate the determinants of net interest margins of Microfinance Institutions (MFI’s) in Sub-Saharan Africa (SSA) amidst the surge in commercialization and the drive towards sustainability. The study involved 144 microfinance institutions from 27 countries in the Sub-Saharan Africa forming an unbalanced panel from 2005 to 2013 drawn from the Microfinance Information Exchange (MIX) database. The study used the robust fixed effect technique and corrected for possible endogeneity by using the Generalised Method of Moments (GMM). The study found that MFI’s charge high interest margins to attain and maintain selfsufficiency as it found a positive relationship between operational self-sufficiency and net interest margin. The relationship was persistent even after controlling for endogeneity. It also came to light that commercialization and the drive for sustainability have drifted MFI’s from their core mission as it was found that unsustainable MFI’s and profit oriented MFI’s target large loan sizes. On the whole, operational cost was found to be the main driver of net interest margins of MFI’s in SSA. The study recommends that while it is good for MFI’s to become sustainable and profitable, they must not relinquish their social obligation of helping the very poor. Moreover, irrespective of their profit motive, they should make use of best business practices such as strengthening their internal structures and governance functions to ensure they are cost efficient. It is therefore highly recommended that the industry take a look at their efficiency vis a vis their sustainability by lowering operational cost and keeping margins within affordable thresholds.