FINANCIAL PERFORMANCE AND OUTREACH: A GLOBAL
ANALYSIS OF LEADING MICROBANKS*
Robert Cull, Asli Demirgu¨c¸-Kunt and Jonathan Morduch
Microfinance promises to reduce poverty by employing profit-making banking practices in low-
income communities. Many microfinance institutions have secured high loan repayment rates but, so
far, relatively few earn profits. We examine why this promise remains unmet. We explore patterns of
profitability, loan repayment, and cost reduction with unusually high-quality data on 124 institutions
in 49 countries. The evidence shows the possibility of earning profits while serving the poor, but a
trade-off emerges between profitability and serving the poorest. Raising fees to very high levels does
not ensure greater profitability and the benefits of cost-cutting diminish when serving better-off
customers.
Running banks in low-income communities is not easy. One of the great accomplish-
ments of the economics of information, after all, has been to show how information
asymmetries undermine credit markets in places where potential customers have few
assets to offer as collateral (Besley, 1995). Microfinance providers, though, have spe-
cialised in making uncollateralised loans in low-income communities. Through inno-
vative contracts and new microfinance management practices, institutions are
generating high loan repayment rates in contexts as diverse as the slums of Dhaka, war-
torn Bosnia, and rural Senegal. In doing so, microfinance providers have forced eco-
nomic theorists to re-think pessimistic views of the scope for improving credit markets.1
But microfinance would be a grand failure if securing high repayment rates was all
there was to it.
Meeting the full promise of microfinance – to reduce poverty without ongoing
subsidies – requires translating high repayment rates into profits, a challenge that
remains for most microbanks.2 The overall equation linking capital and labour inputs
into profits and social change still proves difficult to master.
We take a close look at this equation with unusually high-quality financial informa-
tion on 124 institutions in 49 countries; the institutions are united by claiming strong
commitments to achieving financial self-sufficiency and a willingness to open their
* The views are those of the authors and not necessarily those of the World Bank or its affiliate institutions.
The Microfinance Information eXchange, Inc. (MIX) provided the data through an agreement with the
World Bank Research Department. Confidentiality of institution-level data has been maintained. We thank
Isabelle Barres, Joao Fonseca, Didier Thys and Peter Wall of the Microfinance Information Exchange (MIX)
for their substantial efforts in assembling both the adjusted data and the qualitative information on MFIs for
us. We have benefited from comments from Thorsten Beck, Patrick Honohan, Stijn Claessens, Bert Sholtens
and participants at the Groningen conference. Sarojini Hirshleifer and Varun Kshirsagar provided expert
assistance with the research. Any errors are ours only.
1 A great deal has been written on microfinance theory within the past fifteen years (Stiglitz, 1990; Banerjee
et al., 1994; Besley and Coate, 1995; Conning, 1999; Ghatak and Guinnane, 1999; Laffont and Rey, 2003; Rai
and Sjo¨stro¨m, 2004). Armenda´riz de Aghion and Morduch (2005) provide a critical guide to the economics
literature on microfinance, and Ahlin and Townsend (2007) test leading models with Thai data.
2 We take this goal on face value, although we recognise the case for subsidised microfinance when social
benefits sufficiently outweigh social costs and subsidies do not undercut non-subsidised firms. The goal of
profit-making microfinance is discussed by Robinson (2001). Armenda´riz de Aghion and Morduch (2005)
discuss subsidy and sustainability in their chapter 9.
The Economic Journal, 117 (February), F107–F133.  The Author(s). Journal compilation  Royal Economic Society 2007.
Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
[ F107 ]

accounts to careful scrutiny.3 The institutions thus represent some of the best hopes for
achieving poverty reduction with profit (or at least without ongoing subsidy). Still, the
average share of funding (total liabilities plus total equity) made up of subsidy exceeds
20% in this sample.
The data do not allow us to answer the big (and controversial) question: can such
ongoing subsidy be justified? Answering that would require reliable data on social
impacts, and the evidence is scant. The data, though, allow us to illuminate other
important questions for the first time in a large comparative survey. Does raising
interest rates exacerbate agency problems as detected by lower loan repayment rates
and less profitability? Is there evidence of a trade-off between the depth of outreach to
the poor and the pursuit of profitability? Has mission drift occurred – i.e., have
microbanks moved away from serving their poorer clients in pursuit of commercial
viability? The questions are at the heart of debates within academic economics, as well
as being of immediate relevance for policymakers and practitioners.
As with other cross-country analyses, the aim is to describe patterns in the data. There
is insufficient exogenous variation in key variables to reliably estimate causal impacts, so
we focus on associations that help to illuminate and frame key debates. Since the
institutions in the survey are more focused on financial performance than typical
microbanks, we expect that the trade-offs described below are even starker for insti-
tutions that did not participate in the survey.
Our results bring some good news for microfinance advocates. First, over half of
the institutions in the survey were profitable after accounting adjustments were made
(although the average return on assets is negative overall). Others are approaching
profitability and should be able to soon achieve financial self-sufficiency. Second,
simple correlations show little evidence of agency problems, outreach-profit trade-offs
or mission drift. The correlations thus attest to the possibility of raising interest rates
without undermining repayment rates, achieving both profit and substantial outreach
to poorer populations, and staying true to initial social missions even when aggressively
pursuing commercial goals.
Disaggregating by lending type, though, uncovers trade-offs and tensions, even
among these leading institutions. The patterns of profitability and the nature of cus-
tomers vary considerably with the design of the institutions and their contracts.
Microfinance lenders use a variety of approaches to lending, and we focus on three
main categories.
The best-known approach is group lending, made popular within microfinance by
the Grameen Bank of Bangladesh and BancoSol in Bolivia. The method uses self-
formed groups of customers that assume joint liability for the repayment of loans given
to group members. The joint liability contract can, in principle, mitigate moral hazard
and adverse selection by harnessing local information and enforcement possibilities
and putting them to use for the bank. (Ahlin and Townsend, (2007) and Cassar et al.
3 The Microfinance Information eXchange, Inc. (MIX) kindly provided the data (with confidentiality
safeguards) through an agreement with the World Bank Research Department. The MIX is a non-profit
company dedicated to improving the information infrastructure of the microfinance industry by promoting
standards of financial and operational reporting and providing data. The data we use were collected as part of
the MIX’s MicroBanking Bulletin project. Summary statistics on the institutions are available in the Bulletin
(http://www.mixmarket.org).
F108 [ F E B R U A R YT H E E C O N O M I C J O U R N A L
 The Author(s). Journal compilation  Royal Economic Society 2007