Sustainability index of micro finance institutions (MFIs) and contributory factors

Abstract

Purpose – The purpose of this paper is to conceptualize the sustainability of micro finance institutions (MFIs) in a holistic manner. The idea is to create an index of sustainability for MFIs which includes financial and outreach aspects of sustainability. Further, it also discerns the factors which contribute to high (low) sustainability scores of MFIs. Design/methodology/approach – Data on Indian MFIs was collected from Microfinance Information Exchange database. Using the technique of order preference by similarity to ideal solution (TOPSIS), an Index of sustainability is built by aggregating multiple indicators (operational self-sufficiency ratio, the average loan balance per borrower and the number of active borrowers) to arrive at composite sustainability score of MFIs. Contributory factors of sustainability were identified using a multiple regression model. Findings – The sustainability score for MFIs ranges from a maximum score of 0.80 to a minimum of 0.26. Gross loan portfolio, No. of borrower per staff member, portfolio at risk>30 days and return on assets, are significant contributors to sustainability scores of Indian MFIs. Practical implications – The index of sustainability is a useful tool to rank the MFIs on a multi-dimensional construct of sustainability. The study also helps to unravel factors that significantly contribute to sustainability of Indian MFIs. Originality/value – This study is novel in its attempt to measure sustainability in a holistic fashion by focussing not just on the financial performance of the MFI but also on outreach dimensions. It is also unique in its approach to adopt a multi criteria decision-making technique of TOPSIS to measure sustainability of Indian MFIs.