Measuring the Financial Sustainability and its Influential Factors in Microfinance Sector of Pakistan

Financial sustainability is one of the major issues in the development process, particularly in developing countries. Microfinance started with two basic objectives of poverty reduction and women empowerment. However, unsustainable microfinance providers cannot assist the poor for a longer period of time, due to uncertainty about their existence. This study investigates that how financial sustainability of Pakistan’s microfinance sector is affected by various factors. A new financial sustainability index has been developed to measure the financial sustainability. Generalized Method of Moments (GMM) approach is employed to analyze the panel data from 34 Pakistani MFPs, yielding 344 MFI-years of observations from 2006 to 2018. The findings reveal that increase in loan size, female borrowers, liquidity, and leverage significantly enhances the financial viability of Microfinance Providers in Pakistan. However, the total borrowers and the operating cost per borrower negatively affect the financial sustainability of MFPs in Pakistan. MFIs needs to be financially independent, with less or no support from government or donor agencies. Financially sustainable MFPs contributes in the achievement of the 8 out of 17 Sustainable Development of Goals (2030 SDGs) of the United Nation. The data for 2018 onwards is seriously affected by COVID-19, which cannot be included in the current data set. Hence, researchers in future analyze the data from the pre-COVID-19 and post-COVID-19 periods to compare the analysis and examine the pandemic’s impact.