Determinants of Microfinance Profitability: Evidence from Latin America

This study attempts to find out the determinants of profitability of Microfinance Institution (MFI) operating in the Latin American region using the data for the period of 2005-2018. We used numerous variables as determinants of the profitability of microfinance institutions. We used Ordinary Least Square (OLS) and the most sophisticated methodology of dynamic panel data, the generalized method of moment (GMM), in this study.The factors that were considered very significant in the determination of profitability of microfinance institutions are Average loan balance (ALB), Number of the active borrower (NOAB), Borrower per staff member (BPSM), AGE, Equity to Assets (ETA), and COUNT hence increase the profitability of microfinance institutions. While, Portfolio Quality(P30), Number of offices (OFF), SIZE, and regulation status(RG) harm profitability(ROA) hence decrease the profitability of microfinance institutions. However, cost per borrower (CPB), Number of diamonds (DM), and Gross domestic product(GDP) have an insignificant effect on profitability(ROA).The result suggests that if microfinance institutions want to increase their profitability, they have to increase their borrowers while decreasing the number of offices simultaneously.The findings of this study will help reach a deep understanding to verbalize the future policy concerning to development of microfinance institutions.