Assessing the Critical Determinants of Performance of Microfinance Institutions in Ghana

Abstract

This study empirically examines the determinants of microfinance performance as well as the influence of microfinance financial performance on its social performance (outreach) in Ghana. The research used data for 165 Ghanaian microfinance institutions (MFIs) over the period 2014-2018. The research employed the fixed effect estimation technique in estimating the model as suggested by the Hausman test. Taking unobserved firm and year heterogeneity and correcting for heteroskedasticity and serial correlation, the study found factors such as capital adequacy ratio, firm’s cost, firm’s interest rate and inflation, to be significant determinants of microfinance performance, with CAR and firm’s cost having a negative effect on performance; interest rate and inflation having a positive effect on performance of MFIs in Ghana. The study also found a negative and significant relationship between return on assets (ROA) and firm size (total assets), with firm size being used as a proxy for measuring MFIs outreach. The study concludes that capital adequacy ratio, firm cost incurred, firm interest rate and inflation are significant determinants of microfinance performance in Ghana, and that MFI that are performing better financially tend to have less outreach to the poor.