What Explains the Low Profitability of Microfinance Institutions in Africa?

While microfinance institutions (MFIs) in other regions have continuously reported positive profits, those operating in Africa economies continue to post negative profits. Why has this remained so? This study uses unbalanced panel dataset comprising of 210 MFIs across 32 Africa economies, operating during the 1997-2008 period to study the determinants of MFI profitability. We find that apart from credit risk and managerial inefficiency, average profitability is higher for MFIs that are larger and more highly capitalized. MFI returns are affected by corruption which may reduce the probability that MFI will invest in a country. We find no evidence suggesting a statistically significant relationship between changes in macroeconomic variables and profitability of MFIs, which may be an indication of the high resilience of MFI on local macroeconomic conditions. The evidence gathered in this thesis is important for forming credit market policy that may help deepen the quality and quantity of access to finance particularly by the poor