The impact of outreach on the sustainability of government and donor supported microfinance institutions (MFIs) in Uganda

Abstract

Interest in microfinance has soared in the recent decade and the instrument is now seen as one of the most promising tools to tackle poverty in the developing world. The fascination with microfinance derives from the fact that the provision of financial services can contribute to poverty reduction and pass the test of sustainability at the same time. This would imply that MFIs can continue to lend, without recourse to subsidized funds (i.e. be sustainable), to more poor people (i.e. increase outreach). For donors / government, microfinance is especially attractive as it can be delivered in an institutional and financially sustainable manner that permits them to withdraw after making relatively modest investments. Expanding access to financial services for the poor is a goal that has frustrated development practitioners both support and retail financial organizations for decades. The distressing legacy of subsidized and direct credit has created many skeptics. In Uganda, most government directed credit programs targeting small farmers and other priority groups have previously failed or produced mixed results as those programs could not be sustained. It is from this background that the study was conceived to establish whether or not increasing outreach in terms of numbers of loan clients had an impact on the sustainability of donor and government supported MFIs. The study examined 38 MFIs that deliver financial services in different parts of Uganda. The sample was drawn to ensure a range in geographical setting. institutional type, and level of clientele. The study assessed the performance of these MFIs by considering the impact of outreach, ability to reach large numbers of people) and sustainability, (the ability to operate at a level of profitability that allows sustained service delivery with minimum or no dependence on donor inputs). This impact was assessed using econometric methodology. The study established that outreach had an insignificant positive impact on the operational sustainability. Similarly, the study found out that the amount of subsidized funding outstanding had a positive but also insignificant effect on sustainability. Average loan size was found to have a negative but insignificant impact on operational self sufficiency. In fact, average loan size and outreach were the most insignificant in the model. Total expenses (Texp) and Total operating income were found to be the most significant factors influencing the sustainability of the MFIs under study. This effect was found to be significant basing on the t-statistic and probability values. Therefore, good practice MFIs should expand their outreach based on market projections and indicators of viable economic activity among potential clients in new areas. This is because; the study confirmed that sustainability is all about full cost recovery. That is, if MFIs are to be sustainable, they must earn adequate operating income to cover their operational expenses.