Examining the Determinants of Financial and Operational Sustainability of Microfinance Institutions in Ghana

This thesis results from an extensive investigation into the intricate relationship between two pivotal determinants: operational and financial factors and their impact on the sustainability of microfinance institutions (MFIs) in Ghana, with particular emphasis on microcredit pricing as a moderating factor in the hypothesized relationships, drawing on a sample of 270 MFIs. The first determinant involves financial factors, encompassing some key elements of capital structure, specifically capitalization, deposits and availability of loanable funds, while the second determinant is made up of Operational Factors, composed of portfolio at risk, financial technology (FinTech) and staff quality. These variables have been assessed using a 5-point Likert scale and subjected to statistical analysis using Partial Least Squares Structural Equations Model (PLS-SEM) with the aid of SMART-PLS version 4 and SPSS version 26. The thesis adopts a dual theoretical perspective, integrating both the Life Cycle Theory (LCT) and the Institutional Theory. The findings validate eight of the twelve primary hypotheses framed for the study. Firstly, all the financial factors exhibit a positive and significant association with MFI financial sustainability in Ghana. Secondly, one of the operational factors, FinTech, exerts a positive and significant influence on financial sustainability of MFIs, while both FinTech and staff quality demonstrate a positive and significant relationship with MFI operational sustainability in Ghana. Thirdly, portfolio at risk bears a negative and significant relationship with financial sustainability. Lastly, the study highlights the moderating influence of microcredit pricing on the relationships between Capitalization and financial sustainability, as well as between portfolio at risk and operational sustainability. The implications of the study are manifold: Firstly, it emphasizes the necessity for a comprehensive approach, addressing both financial and operational factors, to promote sustainability in the microfinance sector. Secondly, it highlights the inadequacy of the existing minimum capital requirement imposed by the Central Bank of Ghana for ensuring MFI sustainability. Thirdly, it underscores the importance of appropriate microcredit costing and pricing practices, emphasizing the delicate balance required to ensure both the profitability of MFIs and the affordability of credit for borrowers. Specifically, an optimal microcredit price enhances MFI financial sustainability, whereas excessively high microcredit pricing has detrimental effects. This is attributed to the fact that excessively high microcredit pricing amplifies the portfolio at risk metric, raising the default risk and subsequently pushing microcredit prices even higher. This creates difficulties for microloan beneficiaries in repaying, leading to a pernicious cycle of high microcredit interest rates and high default rates, ultimately resulting in the collapse of the MFI. Consequently, policy interventions such as raising the minimum capital requirement, providing a framework to guide MFI microcredit costing and pricing practices and/or imposing microcredit pricing caps among other measures are required to pivot the microfinance industry in Ghana from the perennially high attrition rate to an era of improved financial and operational sustainability.