Microfinance Institutions: The Effect of Outreach to Rural Borrowers on the Sustainability of Microfinance Institutions?

Abstract

Financial inclusion is one of the most important objectives of socio-economic development policymaking. Microfinance institutions (MFIs) have become a major role in promoting a wide range of financial inclusion which benefits low-income societies. However, outreach in rural areas, where poverty is more widespread, is considered low. Many things are often associated with slower growth of financial inclusion in rural areas such as the character of the borrowers and also difficult accesses to the poor. These obstacles lead to assumptions that MFIs in rural areas face more difficult challenges to maintain their sustainability than in urban areas. In this study, data collected during 10 years period, between 2009 to 2019, from 942 MFIs that reported their data to the MIX Market, 7560 observational data were being used. Using Panel Data model, this study investigated whether rural outreach will hinder the sustainability of the MFIs. Our baseline regression test informed that outreach in rural borrowers positively affected sustainability. In General, this study indicated that MFIs can consider penetrating more rural borrowers to continue carrying out one of their social missions in providing financial access to poor people in rural areas. Keywords: Microfinance Institutions (MFIs); Sustainability; Rural Borrowers; Depth of Outreach; Operational self-sufficiency (OSS)