Profitability of microfinance institutions and borrowers: a systematic literature review

Using the SCOPUS database, this paper conducts a systematic literature review to identify the drivers of financial profitability for both microfinance institutions (MFIs) and borrowers. Among the 174 papers reviewed, 39 addressed the profitability drivers of MFIs and borrowers. For, MFIs several factors stand out: financing for women and group credit, portfolio quality; client monitoring; appropriate active and passive interest rates; and control of operating costs. For borrowers, training in small business management; the generation of innovative and well-structured business ideas, access to microcredit and adequate passive interest rate, monitoring by MFIs and investment-focused credit, are found to drive profitability without jeopardizing their scope and depth of their operations. In this way the MFIs can grow and expand their services in a financially sustainable way, and better serve excluded individuals. These results may provide a valuable framework to MFIs and borrowers to consider in their activities. Additionally, the findings are valuable also to policymakers when designing microfinance policies aimed at poverty reduction. A possible conjecture resulting from this study is that the financial sustainability of microfinance does not lie in subsidization, but in the application of market rules. By identifying two sets of factors that drive profitability, for MFIs and for borrowers, this paper provides an interface that incorporates measurement indicators.