Income Diversification and Financial Sustainability of Indian Microfinance Institutions (MFIs): An Empirical Study

Abstract

Microfinance institutions (MFIs) emerged intending to provide financial services to underserved populations, fostering economic inclusion and poverty alleviation. However, achieving this aim is wholly based on the MFIs’ financial sustainability and profitability. MFIs’ fundamental structural restrictions might make raising income through increased interest rates difficult. As a result, it is now widely acknowledged that MFIs with various revenue streams outperform those primarily focused on lending in terms of financial sustainability. This study investigates this link by assessing the impact of income diversification on the financial performance and financial self-sufficiency of the top ten listed Indian MFIs. The study uses eight years of panel data from 2016 to 2023, and analysis was made by applying descriptive statistics, Herfindahl-Hirschman Index (HHI), and panel data regression models. Our findings provide empirical support for the banking studies’ preference for focused strategies over diversification strategies, showing that expanding income sources has no impact on the financial performance (return on equity/return on asset) and financial self-sufficiency (FSS) of Indian MFIs.

Keywords: Indian MFIs, Financial Sustainability, Income Diversification, Focused Strategy, Panel Data, HHI Index

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