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Abstract Master’s thesis 6th of November, 2012 Hanna Hovi

TRADE-OFF BETWEEN PROFITABILITY AND POVERTY OUTREACH IN THE MICROFINANCE INDUSTRY DEPENDING ON THE INSTITUTION TYPE

PURPOSE OF THE STUDY: The thesis studies the trade-off between profitability and poverty outreach in the microfinance industry depending on the institution type. There are only few studies about the tradeoff even though there is a lot of discussion around it in the literature. The effect of the institution type (banks, non-bank financial institutions, cooperatives and non-governmental organizations) on that equation has not been studied before even though it has a large impact on both profitability and outreach. The main purpose is to find out whether institutions can achieve highly profitable operations at the same time with large poverty outreach. The study also investigates whether the effect varies between the different institution types. DATA: The thesis uses a large data set and multiple years’ panel data analyses of leading microfinance institutions. The study is conducted by using data of 795 institutions around the world and spanning over the years 1995-2011. I use random effects estimator with White’s robust standard errors and linear combination tests. In addition, I proceed with oneway ANOVA tests and Bonferroni, Scheffe, and Sidak multiple comparison tests to study the differences between institution types more closely. RESULTS: Profitability of the institution can be improved firstly by cutting the costs and secondly by increasing the interest rates. Banks and cooperatives are more profitable institution types. More commercialized and profit oriented institutions, especially banks, are more sensitive to changes in interest rates and cost structures. Based on my results, there is no clear tradeoff between profitability and poverty outreach. It is possible to achieve both profitability and the large poverty outreach but the results vary depending on the institution type. Banks and cooperatives suffer less on the trade-off between profitability and outreach. The main reason why the banks and cooperatives are able to achieve both of the targets is their cost effective operations. KEY WORDS: Microfinance, Trade-off, Mission drift, Operational self-sufficiency, Institution type, Outreach