Determinants of Microfinance Institutions’ Financial Performance: The Case of Tajikistan and Kyrgyzstan

Abstract

Since Tajikistan and Kyrgyzstan gained independence in 1991, poverty has become one of the crucial problems in these two countries, which can be reduced with a contribution of the microfinance sector. Poor financial performance of microfinance institutions (MFIs) in Tajikistan and Kyrgyzstan makes it difficult for them to operate in the long run and ultimately, they liquidate. Finding out more about the profitability and financial sustainability of MFIs is vital for their long-term existence and long-lasting service to the poor. Hence, this research paper attempts to identify the main determinants of Tajik and Kyrgyz MFIs’ financial performance using firm-specific and macroeconomic variables. The study explores the variables over the period of 2009-2020 on annual basis and incorporates panel corrected standard errors regression technique. The results of the regression analyses showed that cost efficiency, capital adequacy, age, percentage of female borrowers, and inflation play an important role in determining the profitability whereas only two variables such as cost efficiency and capital adequacy mainly determine the operational sustainability of MFIs in Tajikistan and Kyrgyzstan. However, internal, and external determinants of MFIs’ financial performance in Kyrgyzstan and Tajikistan differ. Consequently, this thesis proposes Tajik MFIs to focus on portfolio selection and Kyrgyz MFIs to increase their outreach by attracting more borrowers.