The Sustainability and Outreach of Microfinance Institutions

Abstract

Microfinance emerged as an approach with great potential for alleviating poverty and improving access to financial services by offering small loans with no pledged collateral requirement. Due to the growing demand for microfinance, businesses have put more emphasis on the relationship between financial sustainability and outreach. Microfinance Institutions (MFIs) work to increase social sustainability by providing more services to particular clientele, while maintaining the financial and operational sustainability of the institutions. This study investigates the financial sustainability and outreach of 32 MFIs in India in terms of interest rate and default rate. This study employs a simple methodology for the evaluation of microcredit interest rates proposed by Muhammad Yunus (2007), along with a new methodology for the evaluation of microcredit default rates. As a preliminary stage of using the Black-Scholes (BS) model, this study tests the validation of MFIs' asset values and default rates of geometric Brownian motion (GBM) using data. The Ryan-Joiner test is used to check the independence of data, and the chi-square test on two-way tables is used to check the serial independence of data. The interest rate premium and the default rate from the BS model will facilitate making decisions on the sustainability and outreach of MFIs. © IFIP International Federation for Information Processing 2014.