Title: Cost structure and financial sustainability of microfinance institutions: the potential effects of interest rate cap in Bangladesh

Authors: Zahid Islam; Marcela Porporato; Nelson Waweru

Addresses: Scotiabank Commercial Banking, 390 Victoria Street, Prince George, BC V2L 4X4, Canada ' School of Administrative Studies, York University, 4700 Keele Street, Toronto, ON, M3J 1P3, Canada ' School of Administrative Studies, York University, 4700 Keele Street, Toronto, ON, M3J 1P3, Canada

Abstract: This paper examines the cost structures of 215 MFIs reported by the Microcredit Regulatory Authority of Bangladesh with a view to identify the main determinants of sustainability. MFIs in Bangladesh are an important case to study, as it is the first country to introduce an interest rate cap. Using management accounting ideas and frameworks, principally contingency theory to identify components of MFI's cost structure, this study measures Operational Self Sufficiency (OSS) as the result of administrative costs, financial costs, interest rate spread and size/complexity. The results suggest that there are two key factors that are significantly related to MFI sustainability: interest rate spread and general administrative costs. We conclude that MFIs that have lower administrative costs and a large interest rate spread are more likely to achieve sustainability prior to the introduction of the interest cap.

Keywords: microfinance institutions; MFIs; Bangladesh; cost structure; MFI sustainability; interest rate cap; interest rate spread; administrative costs; financial cost; OSS; operational self sufficiency.

DOI: 10.1504/IJFSM.2014.062292

International Journal of Financial Services Management, 2014 Vol.7 No.1, pp.54 - 72

Received: 14 Sep 2013
Accepted: 14 Jan 2014
Published online: 21 Oct 2014 *

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