Journal of Economics and Financial Analysis, 3 (2), pp. 23-39, [2019]

Does Portfolio Quality Influence Financial Sustainability? A Case of Microfinance Institutions in Kenya



This article studies the relationship between portfolio quality and the financial sustainability of microfinance institutions in Kenya. The analysis is based on a panel dataset of 30 microfinance institutions in the period 2010 to 2018. The study is guided by institutional theory which is built on conformance and continuity. The study adopts an explanatory research design where a panel approach is used under positivist paradigm. The study finds that portfolio quality has a positive significant effect on the financial sustainability at 1% statistical significance level. Based on this finding, the study concludes that portfolio quality is an essential element of MFIs financial sustainability. The study recommends that MFIs managers should devise good collection policies to improve portfolio quality while lessening loan default rate. The portfolio quality may improve the overall profitability and enhance investor confidence in their strategic decision-making on refinancing. It is important to note in order to ensure financial inclusion; the stakeholders must be involved.


Portfolio Quality; Financial Sustainability; Microfinance Institutions; Institutional Theory.

JEL Classification

D23, G21, G23.

Full Text:


Abara, G., Mengesha, B., & Reddy, P. (2017). Determinants of credit default risk of microfinance institutions in assosa zone. International Journal of Research in Management, Economics and Commerce, 7(10), pp. 45-52.

Abdulai, A., & Tewari, D.D. (2017). Trade-off between outreach and sustainability of microfinance institutions: Evidence from sub-Saharan Africa. Enterprise Development and Microfinance, 28(3), pp. 162-181.

Abraham, H., & Balogun, I. (2012). Contribution of microfinance to GDP in Nigeria: Is there any. International Journal of Business and Social Science, 3(17), pp. 167-176.

Adongo, J., & Stork, C. (2006). The microfinance gap: Selected issues for Namibia. Namibian Economic Policy Research Unit.

Ahlin, C., & Townsend, R.M. (2007). Using repayment data to test across models of joint liability lending. The Economic Journal, 117(517), pp. 11-51.

Awaworyi Churchill, S. (2018). Sustainability and depth of outreach: Evidence from microfinance institutions in sub‐Saharan Africa. Development Policy Review, 36, pp. 676-695.

Ayayi, A.G., & Sene, M. (2010). What drives microfinance institution's financial sustainability. The Journal of Developing Areas, 303-324.

Ball, A., & Craig, R. (2010). Using neo-institutionalism to advance social and environmental accounting. Critical Perspectives on Accounting, 21(4), pp. 283-293.

Bayai, I., & Ikhide, S. (2018). Financing Structure and Financial Sustainability of Selected SADC Microfinance Institutions (MFIs). Annals of Public and Cooperative Economics, 89(4), pp. 665-696.

Berger, A.N., & Di Patti, E.B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), pp. 1065-1102.

Brau, J.C., & Woller, G.M. (2004). Microfinance: A comprehensive review of the existing literature. The Journal of Entrepreneurial Finance, 9(1), pp. 1-28.

Cassar, A., Crowley, L., & Wydick, B. (2007). The effect of social capital on group loan repayment: evidence from field experiments. The Economic Journal, 117(517), pp. 85-106.

CGAP, (2003). Microfinance Means Financial Services for the Poor, Donor Brief No. 11, March

Chakravarty, S., & Pylypiv, M.I. (2015). The role of subsidization and organizational status on microfinance borrower repayment rates. World Development, 66, pp. 737-748.

Chowdhury, P.R. (2007). Group-lending with sequential financing, contingent renewal and social capital. Journal of Development Economics, 84(1), pp. 487-506.

Christen, R.P., Lauer, K., Lyman, T., & Rosenberg, R. (2012). A guide to regulation and supervision of microfinance. Consultative Group to Assist the Poor (CGAP), 128.

Collett, K.D. (2015). Proposing a freedom from predatory microfinance lending. Ariz. J. Int'l & Comp. L., 32, pp. 277.

De Aghion, B.A., Armendariz, B., & Morduch, J. (2007). The economics of microfinance. MIT press.

Delbridge, R., & Edwards, T. (2007). Reflections on developments in institutional theory: Toward a relational approach. Scandinavian Journal of Management, 23(2), pp. 191-205.

DiMaggio, P.J., & Powell, W.W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American sociological review, pp. 147-160.

Drukker, D.M. (2003). Testing for serial correlation in linear panel-data models. The stata journal, 3(2), pp. 168-177.

Fernando, N.A. (2006). Understanding and dealing with high interest rates on microcredit: A note to policy makers in the Asia and Pacific region. Asian Development Bank.

Gibbons, D.S., & Meehan, J.W. (1999). The microcredit summit's challenge: Working toward institutional financial self-sufficiency while maintaining a commitment to serving the poorest families. Journal of Microfinance / ESR Review, 1(1), pp. 131-192.

Godquin, M. (2004). Microfinance repayment performance in Bangladesh: How to improve the allocation of loans by MFIs. World Development, 32(11), pp. 1909-1926.

Gujarati, D. (2004). Basic Econometrics. United States Military Academy, West Point: Tata McGraw-Hill.

Hausman, J.A. (1978). Specification tests in econometrics. Econometrica, 46(6), pp. 1251-1271.

Helms, B. (2006). Access for All: Building Inclusive Financial Systems. Washington, DC: World Bank.

Hermes, N., & Lensink, R. (2007). The empirics of microfinance: What do we know? The Economic Journal, 117(517), pp. 1-10.

Ibtissem, B., & Bouri, A. (2013). Credit risk management in microfinance: The conceptual framework. ACRN Journal of Finance and Risk Perspectives, 2(1), pp. 9-24.

Jennings, P.D., & Zandbergen, P.A. (1995). Ecologically sustainable organizations: An institutional approach. Academy of management review, 20(4), pp. 1015-1052.

Kassim, S., & Rahman, M.M. (2008). Handling default risks in microfinance: The case of Bangladesh. Qualitative Research in Financial Markets, 10(4), pp. 363-380. DOI: 10.1108/QRFM-03-2017-0018

Knewtson, H., & Qi, H. (2019). Managing risk for sustainable microfinance. The Journal of Risk Finance, 20(1), pp. 2-13.

Kyereboah-Coleman, A. (2007). The impact of capital structure on the performance of microfinance institutions. The Journal of Risk Finance, 8(1), pp. 56-71.

Laffont, J.J., & N'Guessan, T. (2000). Group lending with adverse selection. European Economic Review, 44(4-6), pp. 773-784.

Lopatta, K., Jaeschke, R., & Chen, C. (2017). Stakeholder engagement and corporate social responsibility (CSR) performance: International evidence. Corporate Social Responsibility and Environmental Management, 24(3), pp. 199-209.

Lounsbury, M. (1997). Exploring the institutional tool kit: The rise of recycling in the US solid waste field. American Behavioral Scientist, 40(4), pp. 465-477.

Mersland, R. (2013). Market opportunities for microfinance institutions. Enterprise Development and Microfinance, 24(4), pp. 282-294.

Meyer, J.W., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American journal of sociology, 83(2), pp. 340-363.

Mills, K., & McCarthy, B. (2014). The state of small business lending: Credit access during the recovery and how technology may change the game. Harvard Business School General Management Unit Working Paper (15-004).

Nawaz, A. (2010). Performance of microfinance: The role of subsidies. Savings and Development, 34(1), pp. 97-138.

North, D. (1990). Institutions and their consequences for economic performance. In K-S. Cook and M. Levi (eds), "The limits of rationality", pp. 383-401. Chicago and London: University of Chicago Press

Nurmakhanova, M., Kretzschmar, G., & Fedhila, H. (2015). Trade-off between financial sustainability and outreach of microfinance institutions. Eurasian Economic Review, 5(2), pp. 231-250.

Nyamsogoro, G.D. (2010). Financial sustainability of rural microfinance institutions (MFIs) in Tanzania. University of Greenwich.

Rivera, J. (2004). Institutional pressures and voluntary environmental behavior in developing countries: Evidence from the Costa Rican hotel industry. Society and Natural Resources, 17(9), pp. 779-797.

Schreiner, M. (2003). Scoring: The Next Breakthrough in Microcredit? Occasional paper, No: 7.

Scott, W.R. (2008). Institutions and Organizations: Ideas and Interests. 3rd ed. Sage Publications, Los Angeles, CA.

Tchakoute-Tchuigoua, H., & Soumare, I. (2019). The effect of loan approval decentralization on microfinance institutions' outreach and loan portfolio quality. Journal of Business Research, 94, pp. 1-17.

Tehulu, T.A. (2013). Determinants of financial sustainability of microfinance institutions in East Africa. European Journal of Business and Management, 5(17), pp. 152-158.

Tellis, W., & Seymour, A. (2002). Transition from a Microfinance Institution to Regulated Bank: Technology Infrastructure Planning in a Developing Country. Informing Science.

Viswanathan, P., & Shanthi, S. (2017). Modelling Credit Default in Microfinance—An Indian Case Study. Journal of Emerging Market Finance, 16(3), pp. 246-258.

Westphal, J.D., Gulati, R., & Shortell, S.M. (1997). Customization or conformity? An institutional and network perspective on the content and consequences of TQM adoption. Administrative science quarterly, pp. 366-394.

Woller, G.M., Dunford, C., & Woodworth, W. (1999). Where to microfinance. International Journal of Economic Development, 1(1), pp. 29-64.

Wooldridge, J.M. (2010). Econometric analysis of cross section and panel data. MIT press.

Yegen, E. (2014). Predicting the default characteristics of microfinance borrowers in Turkey: A probit analysis. International Journal of Business and Social Science, 5(5), pp. 291-300.

Yunus, M., and Jolis, A. (2007). Banker to the poor: Micro-lending and the battle against world poverty. New York: Public Affairs.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.