Question

Explain the role of subsidies in the sustainability of microfinance institutions (MFIs) in Ghana.

b) Discuss the benefits of deposit mobilisation as a source of funding for microfinance institutions (MFIs).      

Answer 1

a) The social nature of the micro finance institutions is financed through subsidies. They stand for the empowerment of poor.

• The subsidies or concessionary funds are used by the MFIs to capitalize the institution, promote growth, and improve efficiency, operations and performance of newly formed MFI.
• Subsidies will help them to meet their operational and social obligations of making finance available to all. And it grants them some time to develop without pressures of competitors and society. Without adequate subsidies and funds, many MFIs have failed to achieve their sustainability objectives. Though it is helpful for the companies, excessive subsidisation can be counterproductive that is reducing efficiency and staff productivity and ethical behaviour. It can be said that there is negative correlation between financial sustainability and the levels of subsidies received by a MFIs.

b) The Deposit mobilization by MFIs helps to keep the cost of capital low, and thereby leads to financial sustainability. There are some deposits mobilization variables like, the deposit to loan ratio, deposit to total asset ratio, the volume of deposits, and demand deposit ratio etc. These have a significant direct impact on financial sustainability. Deposit mobilization helps to have financial self-sufficiency, which is a necessary condition for institutional sustainability. When there is institutional sustainability it will lead to successful provision of financial services to the poor sections of the society. As a financial institution, the deposit mobilization is vital for financial sustainability and it will foster the local economic development. This is possible by self-sustainability which will provide the MFI with lower cost funds