Sector Study No.3 - Main determinants of profitability in Central American and Caribbean microfinance institutions

Between 2018 and 2021, REDCAMIF published a series of studies on microfinance in Central America and the Caribbean to highlight the advances and challenges of the inclusive finance sector in the region. This document reflects the joint effort that REDCAMIF and ADA have made over the past 10 years to promote the financial and social inclusion of micro and small entrepreneurs. This study is the first in the series.

The objective of this study is to analyse the determinants influencing the profitability of microfinance institutions in profitability of microfinance institutions in Central America and the Dominican Republic in the 2014 - 2018. The data processing was carried out using Stata software, an econometric multiple regression an econometric multiple regression model was run for a panel of 81 institutions in the region. institutions in the region.

Although the literature indicates that the profitability of the institutions can be expressed as a function of internal and external determinants, in this study we focus on the internal ones. we focus on the internal ones, i.e. those that result from the institutions' management decisions and policies. management decisions and policies. The most relevant results show that the main determinants of profitability for the institutions are the main determinants of profitability for the institutions in the region in the period under study are the period studied are capital adequacy, portfolio quality and operational management, due to the correct relationship between their parameters the correct relationship between their parameters and the return on assets. It is worth noting that capital adequacy is the variable that explains the greatest proportion of the variations in return on assets. return on assets. Knowledge of these determinants will be useful for the microfinance institutions themselves and others. microfinance institutions themselves and other stakeholders such as regulators, microfinance networks and funders to formulate policies and projects aimed at improving the profitability of the microfinance sector. improve the profitability of the microfinance sector in the region.