Explaining Failures of Microfinance Institutions

Abstract

We empirically study the determinants of failures of microfinance institutions based on the CAMELS rating components and microfinance-specific measures by applying probit regression techniques. Our findings confirm the capital adequacy (C), the asset quality (A), the management capability (M), the earnings (E), and the sensitivity to market risk (S) as explaining factors of failures of microfinance institutions.Regarding microfinance-specific effects, there is a positive influence of the percentage of female borrowers on the likelihood of failure. Moreover, we find evidence that regulation, the presence of donations, and the rapid growth of an MFI affect the probability of failure.