Sustainability which refers to the ability of a microfinance institution (MFI) to cover all of its costs through interest and other income paid by its clients is a cornerstone of sound microfinance. Financially sustainable MFIs can become a permanent part of the financial system and can continue to operate even after grants or soft loans are no longer available.
The growth of MFIs can be attributed to factors such as their contributions to social welfare, job creation and general economic and improvement of lives of the poor.
However, despite the interest in the sector and the subsidies that have flowed into some of the mission-oriented MFIs, it appears challenging to make an MFI viable over the long term. One survey found that 30 percent of domestic microfinance programs operating in 2001 were either no longer in operation or were no longer lending capital two years later. Furthermore, most microfinance programs report difficulty in sustaining its operations without continued reliance on grants, external fundraising, or other subsidies.
Sustainability is a cornerstone of sound microfinance. This term refers to the ability of a microfinance institution (MFI) to cover all of its costs through interest and other income paid by its clients. Financially sustainable MFIs can become a permanent part of the financial system: they can continue to operate even after grants or soft loans are no longer available. Donors have nowhere near enough funds to meet the global demand for microfinance. But when an MFI becomes sustainable, it is no longer limited to donor funding. It can draw on commercial funding sources to finance massive expansion of its outreach to poor people. Experience proves that microfinance can be done sustainable, even with very poor clients.
From bankers’ perspective, a microfinance institution is said to have reached sustainability when the operating income from the loan is sufficient to cover all the operating costs. This definition adopts the bankers’ perspective and sticks to ‘accounting approach’ of sustainability. However, Shah
(1999) adopts an ‘integrated approach’ in defining the term sustainability as the ‘accounting approach’ to sustainability that takes into account the financial aspect of the institution is too narrow. He states that the concept of sustainability includes, amongst other criteria, – obtaining funds at market rate and mobilization of local resources.
Therefore, the performance assessment criteria for the financial viability of any microfinance related financial institution are: repayment rate, operating cost ratio, market interest rates, portfolio quality, and ‘demand driven’ rural credit system in which farmers themselves demand the loans for their project. From banker’s perspective, sustainability of microfinance institution includes both financial viability and institutional sustainability (self sufficiency) of the lending institution. The frames of reference in banker’s definitions are therefore, more financial, administrative and institution focused.