Factors affecting the financing cost of microfinance institutions: panel evidence

Abstract

Microfinance institutions (MFIs) aim to minimize their operating costs as a way to provide affordable services to the poor and attain financial sustainability for long-term economic viability. To contribute to existing literature, this paper examines the factors affecting the financing cost of MFIs. The study features a balanced panel data of 169 MFIs from Bangladesh’s microfinance industry, covering the period from 2009 to 2014. Based on the empirical results, internal sources of funds, such as clients’ savings and cumulative surplus, have a significant negative effect on the financing cost of MFIs. On the other hand, certain external sources of funds, notably donations and funds from government apex bodies, serve to reduce financing cost, which reinforces the efficiency and effectiveness of external support to the microfinance industry. This study suggests that MFIs should rely on internally generated funds and reduce dependency on commercial debt.