Factors Affecting The Financial Sustainability Of The MFIs:Empirical Tudy On The Arab World

Financial sustainability is the ultimate goal for every business organization. This study attempts to answer the fundamental question of:What are the various factors that affect financial sustainability of microfinance institutions (MFIs) in the Arab states? A major motivation behind this study is that no previous literature on microfinance institutions (MFIs) in Arab countries does exist; hence factors affecting financial sustainability of these institutions are unknown. Consequently, this study bridges this knowledge gap. This study builds on Accounting Profitability Theory in the development of an econometric model that takes into account the determination of eligible variables traced in the literature. This study empirically investigates the impact of a set of explanatory variables on the financial sustainability of MFIs by utilizing a panel data. The cross sectional dimension of the study utilizes data for33microfinance institutions (MFIs) operating in9Arab states. The time series dimension is represented by historical time series data for5years for the period2007-2011. The outcome of this study is robust and comes in support to findings prevailing in the empirics.Panel least square method is applied to estimate the linear relationship that exists among a set of exogenous and endogenous variables and financial sustainability. Estimates of macroeconomic variables which are exogenous in the model reveal statistically significant negative impact on the dependent variables as is clear in the negative signs of the coefficients estimates of inflation rates and interest rates.Results support Modigliani and Miller proposition that debt financing is an optimal capital structure for microfinance institutions (MFIs) as debt involves tax shield. The extent to which microfinance institutions (MFIs) are able to stimulate public savings in the form of deposits determines the rate at which microfinance institutions (MFIs) approach sustainability. Public Deposits form a unique and, hence, a cheap source of financing operations at microfinance institutions (MFIs). Operational Efficiency in the model is represented by a set of endogenous explanatory variables, most of which estimates show in aggregate positive and statistically significant relationship with sustainability. However, one efficiency variable, that is payment default risk, is estimated to have a negative impact on financial sustainability of microfinance institutions (MFIs). Expected returns on loan portfolio have been estimated to have a positive, yet statistically significant impact on financial sustainability. The higher the revenues generated from loan portfolio, keeping costs at minimum, the more successful an microfinance institution (MFI) is in financial sustainability realization. In this study, estimated coefficients of both dimensions, exogenous macroeconomic variables and endogenous efficiency variables, collectively corroborate results and findings as outlined in the empirical literature.