Purpose This study explores whether credit expansion elevates the risk of insolvency of microfinance institutions (MFIs) in Sub-Saharan Africa (SSA). Given that financial sustainability is one of the twin goals of MFIs, the paper also examines whether poor operational self-sufficiency increases the risk of MFI bankruptcy. Design/methodology/approach The study utilizes a dataset of 123 MFIs from SSA during 2004–2018. The data for MFI specific and macroeconomic variables are obtained from the World Bank Microfinance Information Exchange Market dataset and the World Bank development indicators database, respectively. The system Generalized Method of Moments (two-step GMM) is used to analyze the data. Findings The study unveils that credit growth has differential effects on the risk of insolvency of MFIs. Credit expansion increases the risk of insolvency of small and medium scale MFIs while its effect on insolvency risk in large scale MFIs is found to be negative. Region-wise, credit expansion has no significant effect on insolvency risk of MFIs in East Africa while in the rest of Africa, credit expansion elevates insolvency risk. The study also provides robust evidence that financial unsustainability increases insolvency risk, underscoring the danger of too much compromise on operational self-sufficiency as it might lead to bankruptcy. Practical implications The study highlights the vital role of large-scale MFI operations in reducing the risk of insolvency as MFIs expand microcredit for the poor suggesting that small and medium scale MFIs shall expand their scale of operations to benefit from credit expansion and the resulting financial stability. Besides, the negative financial sustainability and insolvency risk nexus suggests the need for improving financial sustainability to increase MFI resilience. Originality/value This study is the first study that explores the differential effects of credit expansion and financial unsustainability on the risk of insolvency across different regions and scale of MFI operations in the context of MFIs in SSA.
Tilahun Aemiro Tehulu (Thu,) studied this question.