What Drives Microfinance Provider's Financial Sustainability: The Moderating Role of National Governance Indicators (NGIs)

Microfinance providers have been known to provide programs to reduce poverty in rural areas. However, they are still facing the issue of sustaining the operations on a long-term basis. This study investigates the impact of organizational structure, outreach, leverage, liquidity, and operating cost on the financial sustainability of microfinance providers in South Asia, moderated by national governance. A financial sustainability index has been developed by using Principal Components Analysis (PCA), considering both conventional (ROA & ROE) and efficiency (OSS and FSS) measures. This study uses the two-step system GMM estimates to examine the impact of factors affecting the financial sustainability of microfinance providers in South Asia, covering 85 MFPs from India, 34 from Pakistan, and 30 from Bangladesh from 2006 to 2018. The finding reveals a strong and significant relationship between financial sustainability and its determinants. The average loan per borrower has a significant positive, and the cost per borrower has a significant negative impact on financial sustainability. Further analysis demonstrated that national governance indicators significantly moderated the association between financial sustainability and its determinants. The finding indicates that microfinance banks are more sustainable than non-bank microfinance providers. Further results reveal that GDP and inflation significantly impact the financial sustainability of microfinance providers in South Asia.