Microfinance in developing countries: the challenge of sustainable financial institutions

This study examines the impact particular subsidies have on the sustainability of Microfinance Institutions. Using case studies as the primary methodology, the study reveals subsidised Microfinance Institutions have a weak financial performance, particularly in terms of profitability and self-sufficiency. The relationship is further explored using a secondary survey that examines the leading risks faced by Microfinance Institutions. The survey validates the case study findings citing financial problems as a major risk to the sustainability of Microfinance Institutions. Following the results, the study proposes policy options to reduce the dependency of subsidies while increasing the financial performance of Microfinance Institutions. The policy recommendation is to remove operational subsidies and shift to “smart subsidies” which entails providing training to the financial institution’s staff.