Funding sources and their implications for the long-term financial sustainability of saving and credit cooperatives in Ethiopia

Abstract

The subject of funding sources and financial sustainability in saving and credit cooperatives (SACCOs) has become more critical as microfinance institutions, previously reliant on donations, are now compelled to transition towards commercialized financing avenues. Hence, this study aims to examine the relationship between funding sources and the financial sustainability of SACCOs in Ethiopia. To address this objective, we analyzed a balanced panel dataset of 238 SACCOs spanning the years 2019–2021. Applying the correlated panel-corrected standard error (PCSE) and random-effects probit regression estimator, the findings indicate a positive and consistently significant association between member capital and deposit financing sources and the financial sustainability of SACCOs. At the same time, a high level of external borrowing balance in the SACCO's assets (debt-to-asset ratio) is found to insignificant impact on financial sustainability. However, evaluating the external borrowing proportion relative to member capital (debt-to-equity) demonstrates a positive contribution to financial sustainability. In addition, to account for potential differences in their operational environments and access to funding sources, a separate study of SACCOs in urban and rural SACCOs shows that capital structure variables have similar effects on their financial performance, except for the debt-to-asset ratio, which has a different effect on each. So, the optimal financing sources for SACCOs derive from member participation through member capital and deposit funding avenues.