Developing an Index for the Measurement of Financial Sustainability of Microfinance Providers: A Theoretical Review

Abstract

Measurement of financial sustainability is still an unresolved and debatable issue. Utilizing multi-dimensional structures, the Finanical sustainability Index is essential in determining the actual financial position. The capacity of a microfinance institution (MFI) to operate sustainably by offering services to certain populations that traditional financial institutions neglect can be used to define sustainability. This study aims to design an indicator that can gauge a microfinance institution's financial sustainability. Due to the deficiencies of the present sustainability assessment, this paper's main focus is on examining the literature on assessing MFI financial sustainability. Additionally, this study is the first of its type to suggest a thorough index that takes into account both conventional measures (ROA & ROE) and efficiency measures (OSS and FSS) as components of the index. Principal Components Analysis (PCA) has been used to assign weight to the indicators to develop the index. This financial sustainability index will reflect an accurate picture of the operational capability of the MFIs, which can help to reduce poverty and empower women. This index will reflect an accurate picture of the operational and financial health of the MFIs for long-term operation. This study is limited to the financial sustainability of microfinance providers. It can be enhanced to the sustainability index by including others factors such as outreach, institutional and environmental factors.