Journal of Nusantara Studies 2023, Vol 8(3) 43-61

Universiti Sultan Zainal Abidin

ISSN 0127-9386 (Online)
http://dx.doi.org/10.24200/jonus.vol8iss3pp43-61

SUSTAINABILITY OF MICROFINANCE INSTITUTIONS IN THE PHILIPPINES

1
Abul Bashar Bhuiyan, 2Jamaliah Said, *3Aza Azlina Md Kassim,
4
Abu Naaim Munir & 5Md Jafor Ali

1,4
Faculty of Business and Accountancy, Universiti Selangor, 40000 Malaysia.
2
Accounting Research Institute, Universiti Teknologi MARA, 40450 Malaysia.
3
Graduate School of Management, Management & Science University, 40100 Malaysia.
5
Faculty of Business Administration, Islamic University, 7003 Bangladesh.
*Corresponding author: [email protected]

Received: 15.05.2023 Accepted: 17.08.2023

ABSTRACT
Background and Purpose: Microfinance is the most effective and widely acknowledged method of
poverty alleviation across the globe but these days every so and often the MFIs are digressing from their
primary mission in pretext of financial and operational sustainability of the organizations. The purpose
of this research is to confirm the adherence of double bottom line sustainability of Microfinance
institutions (MFIs) and further to identify the determinants of MFIs sustainability in the Philippines.

Methodology: The sample for the study was obtained from MIX- market for the period 1999-2018.
Principal component analysis and KU model are used to measure the sustainability scores of MFIs.
Later, a panel regression model is applied to identify the determinants of sustainability.

Findings: MFIs are not adhering to the double bottom line sustainability as majority of MFIs were
unsustainable at different benchmarks set for the study. The sustainability can be achieved if MFIs start
utilizing their assets, focus on improving their efficiency and portfolio quality. MFIs size also
significantly influences the sustainability of MFIs.

Contributions: This study highlights the need for policy makers and regulators to develop a regulatory
framework to reduce the operating cost and improve the portfolio quality of MFIs in the Philippines.

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They should also provide guidelines that would help MFIs in improving their asset utilization ratio as
it would help them adhere to double bottom line sustainability.

Keywords: Sustainability, microfinance, double bottom line, outreach, financial sustainability.

Cite as: Bhuiyan, A. B., Saad, J., Md Kassim, A. A., Munir, A. N., & Ali, M. J. (2023). Sustainability
of microfinance institutions in the Philippines. Journal of Nusantara Studies, 8(3), 43-61.
http://dx.doi.org/10.24200/jonus.vol8iss3pp43-61

1.0 INTRODUCTION
Microfinance is a type of financial service that is offered to low-income individuals or
communities that would otherwise be unable to get them (Beisland et al., 2019; Segun, 2017).
Microfinance Institutions are an essential instrument for job creation, financial development,
and economic progress, because they provide economic possibilities to the unbanked poor who
have been overlooked by traditional banking institutions (Bhuiyan et al., 2020; Félix & Belo,
2019). Microfinance operations include a wide range of financial activities for underprivileged
and low-income households (ADB, 2000). The growing importance of microfinance services
has aided their expansion, first to other developing countries and then to affluent countries
(Bruhn-Leon et al., 2012; Bruton et al., 2011).
MFIs' sustainability was built on the basis of two main pillars commonly known as
double bottom line: social and financial sustainability (Saad et al., 2018). To begin, social
sustainability (SS) is expressed in terms of outreach (depth and breadth), whereas financial
sustainability (FS) is examined in terms of financial and operational sustainability. In MFIs
literature, many speculations regarding the focus of MFIs on social and financial sustainability
exist. For instance, Cull et al. (2007) and (Hermes et al., 2011) observed that MFIs fail to show
intention to achieve their social goal to achieve financial sustainability. This leads these
institutions to those activities which generate more profits (Hulme & Mosley, 1996) and focus
on non-poor clients. On the contrary, Morduch (2000) argued that MFIs need to be financially
sustainable if they want to achieve increased outreach. Hence, there exists a disagreement on
whether a strong emphasis on financial sustainability results in facilitating poor people or
exploiting them. However, it is also noticed that the MFIs can only achieve social sustainability
if they are financially sustainable, and vice versa (Serrano-Cinca & Gutiérrez-Nieto, 2014).
Microfinance enterprises has to become sustainable in order to assist in poverty eradication and
continue long-term operations (Zerai & Rani, 2012). Many researchers advocate the choice of

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a win-win situation known as double bottom (Ahmad et al., 2020; Roy & Pati, 2019; Saad et
al., 2020).
In the Philippines, institutional microfinance has advanced to a considerable extent in
terms of economic growth and financial inclusion for underprivileged populations (Kondo et
al., 2008). Most of the microfinance operations in the Philippines are being run by the private
sector, mainly by rural banks, which are regulated by the central bank, the Bangko Sentral ng
Pilipinas (BSP); cooperatives are regulated by the Cooperative Development Authority (CDA);
and NGOs, which are far less regulated, are monitored by the Securities and Exchange
Commission (SEC) (Alinsunurin, 2014). In addition, some local commercial banks have also
shifted part of their operations to microfinance.
In 2005, an event was held in New York city by the United Nations, the microfinance
sector in the Philippines was declared as “the best in implementing microfinance programs to
reduce poverty” by the Consultative group to assist the poor (Habaradas & Umali, 2013). In
2012, The Economic Intelligence unit declared the MFIs world ranking and the microfinance
industry in Philippines was ranked second for their supervision system and was ranked fourth
in overall business environment (Habaradas & Umali, 2013; Okuda & Aiba, 2020). The
evidence of microfinance expansion is clearly seen in the country (Alinsunurin, 2014). This
growth and expansion call for deeper analysis of whether MFIs are indeed efficient in
delivering financial services to their intended clients (Alinsunurin, 2014).
The sustainability challenges of MFIs are central in the Philippines (Sison et al., 2018).
MFIs should provide services to thousands of borrowers in a sustainable way. MFIs in the
Philippines continue to face challenges that could affect their ability to reach more poor people
as they strive to achieve financial sustainability (Habaradas & Umali, 2013). It is important to
maintain the double bottom line of microfinance, which is to address both financial and social
goals. Instead, it is critical to determine the long-term sustainability of MFIs across the
Philippines. This research therefore addresses the following issues - How can we assess the
sustainability of MFIs in the Philippines based on a double bottom line? At the same time, what
are the factors that determine the sustainability of MFIs in the Philippines.

2.0 LITERATURE REVIEW

The discussion starts with the background knowledge of MFIs in the Philippines followed by
a conceptual understanding of sustainability and identification of empirical factors that
determine the sustainability of MFIs.

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2.1 Microfinance in Philippines

As early as the 1960s, rural banks and cooperatives pioneered the idea and practice of servicing
microloans to farmworkers, and fisher profited from this early access to small amount credit.
The government engaged rural banks, development banks, and other government financial
enterprises to offer heavily discounted loans to the rural poor from the 1970s until the mid-
1980s. As a community development initiative to relieve poverty, they offered much-needed
micro loans for small entrepreneurial activities under microfinance (Habaradas & Umali, 2013;
Seibel et al., 1998). At present, MFIs facilitate borrowers by three different channels:
microfinance through banking systems, microfinance through NGOs and microfinance through
cooperatives.
In the Philippines, NGOs are registered with and supervised by the Securities and
Exchange Commission (SEC), Microfinance cooperatives are registered with and supervised
by the Cooperative Development Authority (CDA), and Microfinance banks are enlisted and
supervised by the Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines
(Okuda & Aiba, 2020). With the passage of time, microfinance in the Philippines had a
substantial impact on socio-economic development, and the 2019 growth rate of microfinance
NGOs was 35.9% (BSP). In the Philippines, the microfinance NGOs and Cooperatives have
14.60 million of clients and 317.90 billion pesos outstanding loans in 2019, as per the statement
of the central bank of Philippines-Banko Sental NG Philippines (BSP).

2.2 MFIs Sustainability

Microfinance Institution’s sustainability is an emerging phenomenon and it evolves at many
levels—institutional, social, and individual—and can be correlated with organizational,
management, and financial issues (Dhan, 2003). Sustainability refers to an organization's
capacity to pay costs from its own income rather than relying on contributions or government
assistance (Mahapatra & Dutta, 2016). Academic scholars and professionals converge to
identify two levels of sustainability: 1) financial sustainability - operational self-sufficiency
(OSS) and financial self-sufficiency (FSS) (Brynjolfsson & McAfee, 2014); 2) social
sustainability (SS) - outreach (depth and breadth) (Brau & Woller, 2004; Iezza, 2010). In most
literature, the capacity of MFIs to pay expenditures from earned revenue is referred to as
financial sustainability. OSS and FSS (Brynjolfsson & McAfee, 2014) are two aspects of
financial sustainability (Islam et al., 2013). According to Micro-credit Summit Campaign, after
subsidies and inflation adjustments, MFIs attain OSS and FSS by covering their operating costs
with profit earned by providing operational and financial services (Barres, 2006)
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The theoretical underpinning for MFIs' long-term viability offers two perspectives on
how to achieve MFIs' social and financial sustainability. These are the Welfarists (Social)
approach and the Institutionalists (Financial) approach (Brau & Woller, 2004; Saad et al.,
2020). Institutionalist ideology encourages MFIs to focus on their institutional continuity in
order to provide ongoing and long-term services to economically disadvantaged people. On the
contrary, MFIs, according to the Welfarists, were established to assist individuals in escaping
poverty, and one of its primary aims is to empower economically disadvantaged people. The
objective of the MFI is to provide financial services to a wide range of people (width), including
the very poor (depth). Previously, sustainability was mostly determined by the financial
perspective, but MFIs sustainability is influenced by both financial and social aspects (Ahmad
et al., 2020; Roy & Pati, 2019).

2.3 Determinants of MFIs Sustainability

There is a scarcity of empirical research on the long-term sustainability of MFIs, particularly in
Philippines. Existing research on MFIs in the Philippines has mostly focused on the
characteristics, effectiveness, and impact of microfinance on poverty reduction. As current
study has emphasized in achieving dual goals by considering both the FS and SS, the following
section outlines the key factors of MFI sustainability in various areas of the globe, which aids
in the development of MFI sustainability framework in the Philippines.
Financial sustainability of MFIs is determined by loan portfolio quality, sound
management and high lending rates (Ayayi & Sene, 2010). Saad et al. (2020) studied MFIs
sustainability in Pakistan during 2006 to 2015 and used regression analysis to identify the key
determinants of sustainability. The empirical results suggest that age, subsidy, efficiency, staff
productivity, and profitability determine MFIs sustainability. Duwal (2012) explored the
sustainability of MFIs in Nepal and identified that policy makers should focus on size,
efficiency and portfolio quality to improve sustainability of MFIs in the country. Rahman and
Mazlan (2014) study also endorse the previously obtained results and suggest that size
positively influences MFIs sustainability whereas efficiency negatively influences MFIs
sustainability.
Bhanot et al. (2015) examine sustainability of 81 MFIs from India for the year 2010
using panel regression. The sustainability construct was developed based on a double bottom
line. The empirical findings recommend that staff productivity, portfolio quality, profitability,
and size are the key factors that influence MFIs sustainability. Yenesew (2014) found a
contradictory result while determining MFIs sustainability. Portfolio quality has a negative and
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age has a positive but statistically insignificant relationship with sustainability. Tehulu (2013)
also highlighted a negative impact of portfolio quality and inefficiency of management on
sustainability. At the same time, MFIs size was found to be statistically significant. Saad et al.
(2017) identified the determinants of social sustainability of MFIs operating in Pakistan. MFIs
size and profitability contributes positively towards both the domains (breadth and depth) of
SS and portfolio quality only contributes positively towards the breadth of outreach. The
findings also highlight that efficiency has a statistically insignificant impact on SS of MFIs.
According to Nyamsogoro (2010), the operational expense ratio has a significant
impact on the long-term sustainability of microfinance institutions. MFIs become more
productive by lowering operational expenses while maintaining a certain level of outstanding
portfolio, leading in long-term financial sustainability (Mahapatra & Dutta, 2016). According
to Bogan (2012) the capital structure of MFIs is linked to their long-term sustainability. The
debt-to-equity ratio (capital structure) and OSS have a high and substantial negative connection
(Dissanayake, 2012). Meanwhile, Marakkath (2013) found no correlation between capital
structure and OSS. The size of a microfinance institution is positively proportional to its
financial performance (Cull et al., 2007). Hartarska and Mersland (2012) looked at the
influence of an MFI's size on its financial and operational sustainability and discovered that the
size of an MFI has a positive substantial impact on OSS. The operational definitions for the
variable used in this study are given in Table 1.

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Table 1: Operational definitions

Sr. Variable Operational Definition Measurement
Dependent Variable

1 Sustainability “Financial self- FSS = “adjusted operating revenue / sum of adjusted

Index sufficiency” (operating expense, financing expense, provision for loan
losses)”
“Operational self- OSS = “operating revenue / sum of operating expense,
sufficiency” financing expense, provision for loan losses”
“Depth of outreach” ALPB=gross loan portfolio / number of active borrowers
“Breadth of outreach” NAB= total number of active borrowers

Independent Variable
1 Profitability “Return on assets” ROA = “net operating income after taxes / average assets”
2 Portfolio “Portfolio at risk PAR = “unpaid balance of past due loans with overdue greater
quality greater than 30 days” than 30 days / gross outstanding lona portfolio”
3 Staff “Borrower per staff BPSM = “Total number of active borrowers / numbers of loan
productivity member” officers”
4 Efficiency “Operating expense OER = “Total operating expense / average outstanding loan
ratio” portfolio”
5 Leverage “Debt to equity ratio” DER = “Total liabilities / total equity”
6 Size “Total assets” TA = “Total assets of MFIs”

3.0 DATA AND MODEL SPECIFICATION

3.1 Data Sample
The researcher has collected data of 66 MFIs operating in the Philippines which have reported
their data on the MIX market during the period 1999-2018. Those MFIs which have not
reported their data for at least a period of 3 consecutive years were dropped from the data
sample. Mix market, also known as Microfinance Information Exchange, is the database which
in collaboration with the World bank provides the most reliable data for MFIs. The data
available on MIX is in accordance with the standards issued by CGAP (CGAP, 2003).

3.2 Econometric Model

In order to answer the first question, Principal component analysis (PCA) is firstly employed
to extract the factors that measure sustainability. PCA is more like a data reduction technique
in which a large number of variables are reduced to a smaller manageable number of factors.
The common factors identified are further decomposed to obtain sustainability scores of MFIs.

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Initially, a sustainability model is developed which includes both financial sustainability and
social sustainability indicators. As mentioned in Table 1, FSS, OSS, depth and breadth of
outreach are the indicators used to measure sustainability. Therefore, we use the following
equation

𝑆. 𝐼!" = 𝑤# 𝐹𝑆𝑆!" + 𝑤$ 𝑂𝑆𝑆!" + 𝑤% 𝐷𝑂𝑂!" + 𝑤& 𝐵𝑂𝑂!" (1)

In Equation 1, S.I is the index which provides sustainability score of MFIs, w represents weight
assigned to each indicator, FSS indicates financial self-sufficiency and OSS indicates
operational self-sufficiency, DOO is depth and BOO is breadth of outreach. The depth and
breadth of outreach is measured by average loan balance per borrower (ALPB) and number of
active borrowers (NAB) respectively. So, we come up with the following equation.

𝑆. 𝐼!" = 𝑤# 𝐹𝑆𝑆!" + 𝑤$ 𝑂𝑆𝑆!" + 𝑤% 𝐴𝐿𝑃𝐵!" + 𝑤& 𝑁𝐴𝐵!" (2)

Later applying KU index, standardized scores for sustainability are obtained.

𝑆 = (𝑍!" – 𝑀𝑖𝑛 𝑍!" ) / (𝑀𝑎𝑥 𝑍!" – 𝑀𝑖𝑛 𝑍!" ) (3)

Where S is the same scaled and normalized variable. 𝑍!" is the raw value of each indicator
whatsoever its scale and measure. Min Zit represents the lowest value and Max Zit represents
the highest value in the data for each variable.
After obtaining the sustainability score of MFIs using the above equation, the second
question is answered using the econometric model. Using the Hausman test, fixed effect
regression analysis is used to determine the factors that influence the double bottom line
sustainability of MFIs. The following equatorial model serves the above purpose.

𝑆. 𝐼 = 𝛼' + 𝛽# 𝑅𝑂𝐴 + 𝛽$ 𝑃𝐴𝑅 + 𝛽% 𝐵𝑃𝑆 + 𝛽& 𝑂𝐸𝑅 + 𝛽( 𝐷𝐸𝑅 + 𝛽( 𝑇𝐴 + 𝜀!" (4)

In equation 4 S.I is the sustainability, ROA measures profitability, PAR measures portfolio
quality, BPS measures staff productivity, OER measures efficiency, DER measures leverage
and TA measures MFIs size.

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4.0 EMPIRICAL ANALYSIS

4.1 Factors Extraction using PCA
We firstly conducted PCA to extract the double bottom line sustainability factors for MFIs in
the Philippines. Before implementing PCA, the correlation between different indicators was
tested to check for possible correlation. According to Asteriou and Price (2001), factor loadings
using PCA are significant if the indicators are not highly correlated. The correlation
coefficients presented that indicators are not co-related. Later on, the component values for the
variations in the groups are determined which are reported in Table 2.

Table 2: Principal components/correlation

Component Eigenvalue Difference Proportion Cumulative
C1 2.142 1.043 0.535 0.535
C2 1.099 0.359 0.274 0.810
C3 0.740 0.722 0.185 0.995
C4 0.017 0.000 0.004 1.000

The components 1, 2 and 3 explain 99.5 percent of the variations in group with component 1
having a cumulative proportion of 53.5 percent, component 2 having 27.4 percent and
component 3 having 18.5 percent respectively. As presented in Table 3, each indicator in
component 1 has a high coefficient on all factor loadings. Thus, all the indicators of
sustainability greatly contribute to component 1, and thus indicates that factors FSS, OSS,
ALPB and NAB measure the double bottom line sustainability of MFIs. The factor loading for
FSS, OSS, and NAB shows positive values whereas ALPB has negative factor loadings. The
negative value implies that increase in loan size negatively contributes toward MFIs
sustainability. MFIs which provide small loan sizes per borrower are focusing on increased
outreach and are facilitating the poor people of the community. This further confirms that MFIs
sustainability is achieved when both financial sustainability and increased outreach is achieved.

Table 3: Principal components (Eigenvectors)

Variable C1 C2 C3 C4
FSS 0.665 0.021 0.238 0.707
OSS 0.665 0.025 0.237 -0.707
NAB 0.196 0.756 -0.623 0.002
ALPB -0.275 0.653 0.705 0.001

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4.2 Sustainability Measurement

After identifying the factors using PCA, equation 3 is used to standardize all the factors of
sustainability. After normalizing each indicator, equal weights are assigned to each indicator.
Several existing studies have used equal weights for the financial sustainability and outreach
indicators (Bhanot et al., 2015; Bilbao-Terol et al., 2014; Saad et al., 2019). Thus, each
indicator of sustainability is assigned equal weight of 0.25 and equation 2 may be rewritten as
follows:

𝑆. 𝐼!" = (0.25)𝐹𝑆𝑆!" + (0.25)𝑂𝑆𝑆!" + (0.25)𝐴𝐿𝑃𝐵!" + (0.25)𝑁𝐴𝐵!" (5)

For ALPB with negative loadings, normalized values are subtracted from 100 to receive the
highest positive values for MFIs targeting the required outreach (see also Gisselquist &
Rotberg, 2009; Ibrahim, 2013). We then multiply each indicator with the assigned weights we
have obtained values ranging from zero to 100 (by multiplying the ratio by 100). The
sustainability score for each MFIs is obtained and the best performers receive the highest and
positive values. On the other hand, the worst performance receives the lowest values (see also
Gisselquist & Rotberg, 2009; Ibrahim, 2013).

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Table 4: Sustainability position of MFIs in Philippines

T 50 T 75
Year Industry average No of MFIs S UnS S UnS
1999 41.88 4 1 3 0 4
2000 51.82 8 6 2 0 8
2001 51.68 10 7 3 0 10
2002 48.04 16 10 6 0 16
2003 53.48 39 26 13 2 37
2004 53.29 55 38 17 4 51
2005 53.85 57 38 19 3 54
2006 53.74 58 42 15 2 55
2007 53.01 58 41 17 1 57
2008 52.85 57 43 14 2 55
2009 54.09 56 42 14 1 55
2010 53.56 47 35 12 1 46
2011 53.58 26 30 11 1 40
2012 51.34 26 17 9 0 26
2013 52.98 26 19 7 0 26
2014 52.10 26 16 10 0 26
2015 52.16 23 17 6 0 23
2016 54.31 22 16 6 0 22
2017 55.69 21 13 7 0 21
2018 55.70 18 13 5 2 16

The sustainability score of MFIs in the sample are given in Table 4. The sustainability scores
for industry are spread across each year labelled in Column 1. In column 2, industry average
for sustainability score is presented and column 3 provides the number of MFIs which have
reported their data for the given year. The industry average value shows that the lowest value
of 41.88 percent in 1999 gradually increased in recent years. The highest industry average score
of 55.70 is reported in 2018.
The total number of MFIs which have reported their data for each year are further
classified as sustainable (SuS) or unsustainable (UnSuS) with a threshold of 50 percent (T-50)
and 75 percent (T-75) in column 4 and 5 respectively. The benchmarks of T-50 and T-75 are
set to better understand the sustainability of MFIs working in the Philippines. Here, T-50
indicates the benchmark value for MFIs performing well on a minimum of two out of four
indicators or having a simultaneous impact of greater than 50 percent for all the indicators of
sustainability. While using this threshold, MFI having a sustainability score of above 50 is

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considered sustainable and those having a score below 50 is considered unsustainable. For
instance, in 1999, 4 MFIs have reported the data and only 1 MFI is sustainable while 3 MFIs
are unsustainable at T-50. Similarly, in 2018, where the industry average has the highest score
but still at T-50, 5 MFIs were unsustainable. The highest number of MFIs were reported in
2006 and 2007 with a count of 58 each. During 2006, 42 MFIs were sustainable, but the number
reduced to 41 in 2007 when benchmark was set at T-50.
Furthermore, T-75 indicates the benchmark value for MFIs performing well on a
minimum of three out of four indicators or having a simultaneous impact of greater than 75
percent for all the indicators of sustainability. While using this threshold T-75, MFI having a
sustainability score of above 75 is considered sustainable and MFI having a score below 75 is
considered unsustainable. For instance, 4 MFI have reported data in 1999 and none is
sustainable at a threshold of T-75. Until 2002, all the MFI which have reported their data are
unsustainable at T-75. Similarly, from 2012 to 2017 no MFI was sustainable at the threshold
of T-75. The situation is very critical and policy makers and regulators need to focus on
improving their outreach while maintaining financial sustainability.

4.3 Regression Analysis

Using regression analysis, the determinants of double bottom line sustainability are identified.
The analysis uses unbalanced panel data for the study period. The descriptive statistics of the
variables are shown in Table 5. Sustainability has a mean value of 53.19 percent, but the
maximum value of 94.9 percent shows a remarkable sustainability position of MFIs in the
country. The high value of 11.76 for standard deviation indicates large variation in
sustainability of MFIs.

Table 5: Descriptive statistics

Mean Maximum Minimum Std. Dev. Observations
SI 53.190 94.928 0.004 11.176 666
ROA 1.720 22.93 -95.63 8.907 666
PAR 8.960 72.72 0 9.38 666
BPS 121.99 1040 18 66.434 666
OER 32.628 123.94 1.92 18.051 666
DER 4.135 101.4 -59.2 7.870 666
TA 19748287 3.58E+08 77287 37671390 666

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ROA measures profitability which indicates MFIs ability to utilize its assets and generate
returns. The mean value of 1.70 and minimum value of 95.63 percent with negative sign means
MFIs have very low profitability level. These MFIs are not efficiently utilizing their assets and
are providing high-cost loans.
This is also evident as OER shows a mean value of 32.62 and maximum value of 123.9
percent. The portfolio quality is also very low with a mean value of 8.96 which is relatively
high. In the microfinance sector loans are not supported by any collateral. Therefore, having a
high PAR indicates low portfolio quality. BPS has a mean value of around 122 and maximum
number of BPS is around 1040. There is a large variation in the data which may possibly be
due to the difference in size of MFIs. The variation in MFIs size is also evident as TA indicates
a high value of standard deviation. The correlation matrix for all the explanatory variables is
presented in Table 6.

Table 6: Correlation Matrix, VIF, and Hausman

SI ROA PAR BPS OEL DER LTA Centered VIF
SI 1 NA
ROA 0.722 1 1.494
PAR -0.312 -0.446 1 1.362
BPS 0.0612 0.158 -0.100 1 1.038
OER -0.440 -0.328 0.027 0.0423 1 1.253
DER 0.008 -0.004 -0.082 -0.057 -0.136 1 1.047
LTA 0.300 0.307 -0.305 0.020 -0.297 0.137 1 1.239
Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross-section random 48.659 6 0

Variance inflation factor shows a value below 10 which is acceptable (Gujarati, 2003). Before
regression analysis, we have also identified that heteroscedasticity and multicollinearity
problems exist in the data. When applying regression, white cross-section regression was
applied to overcome the problems in the data. The descriptive statistics provides a large
variation in the data, therefore the Hausman test (Table 6) was applied which suggests the fixed
effect regression model is the best fit for the study (Roy & Pati, 2019). The results of fixed
effect white cross section regression analysis are given in Table 7.

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Table 7: Fixed effect regression

Variable Coefficient Prob.
C 45.576 0
ROA 0.959 0***
PAR -0.131 0.006***
BPS 0.0004 0.914
OER -0.243 0.0001***
DER -0.013 0.780
LTA 0.958 0.002***

R-squared 0.786
Adjusted R-squared 0.761
F-statistic 30.824 0
Note: *** indicates significance level at 1 percent

The positive relationship between ROA and SI shows that MFIs which efficiently utilize their
assets and generate revenue are able to achieve sustainability. Thus, profitability of MFIs is the
key determinant of sustainability as the relationship is significant at 1 percent. MFIs in the
Philippines should focus on reducing their operational cost and improve their asset
management. The findings are consistent with Bhanot et al. (2015) and Saad et al. (2020).
The PAR has a statistically significant relationship with SI having a coefficient value
of -0.131. This indicates that when portfolio at risk increases it would decrease the
sustainability and if PAR decreases the sustainability of MFIs increases. The key source of
income for MFIs is the loans they disburse to poor people and if MFIs are unable to recover
these loans, they become unsustainable. The increase in bad loans and poor management of
portfolio strongly influence MFIs sustainability as the relationship is significant at 1 percent.
OER and SI also have a statistically significant relationship with coefficient value of -0.234.
The negative relationship indicates that high cost of operations has a negative impact on
sustainability. MFIs in the Philippines should improve their cost of providing loans to improve
their sustainability position. As discussed in Table 5, MFIs are providing loans with a very high
OER which is seriously damaging the sustainability of institutions.
TA has a positive significant impact on sustainability of MFIs with coefficient value of
0.958. This indicates that MFIs which have large asset size are sustainable. The reason could
be the economies of scale impact which help MFIs in expanding their outreach. The efficient
utilization of assets helps MFIs to improve their profits which lead towards sustainability.
Kyereboah-Coleman (2007) also reports the similar result and highlighted that large MFIs have

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better structures and formalized procedures which help them in improving their repayments.
This also enables MFIs to possess more skilled human resources and acquire credit from
markets (Yang & Chen, 2009). Findings further suggest that BPS and SI does not have a
statistically significant relationship. DER has a negative impact on sustainability but the
relationship is not statistically significant.

5.0 CONCLUSION
Microfinance institutions begin their journey by providing small loans to underprivileged
communities. Over the years these institutions have transformed into diverse platforms. The
focus of these institutions has changed from poverty alleviation to achieving financial
sustainability. NGO MFIs are converted to NBFC MFIs which bring them under the array of
regulated institutions. The unavailability of donor funds has pushed many MFIs to look for
commercial institutions. In order to address the changing business demands of the sector, MFIs
need to be financially sustainable and reach the marginalized poor community. This was the
progressive idea behind the double bottom line sustainability of MFIs.
In the Philippines, MFIs have shown a remarkable growth over the last decades, but the
sustainability of these institutions remains questionable. The result shows that sustainability of
MFIs has not increased substantially for the study period. MFIs in the Philippines are not
adhering to double bottom line sustainability. The best way to maintain a double bottom line
objective is through periodical reviews and constant checks by regulators. This would facilitate
policy makers to regularize the industry. Additionally, there is a dire need of interventions by
regulatory authorities to ensure smooth operations across the country.
The result shows that large asset size helps MFIs in the Philippines to achieve a double
bottom line. Large MFIs can secure commercial loans from the market and develop highly
skilled human resources. Efficient utilization of assets would help MFIs to reduce their
dependency on external funds. The economies of scale reduce the operating cost and help in
achieving sustainability. PAR also has a significant negative impact on sustainability. MFIs in
the Philippines need to develop strong policies for proper scrutiny of their borrowers and ensure
systematic risk assessment of their portfolios. Due to poor loan management MFIs in the
Philippines must face a higher portfolio at risk which influences their sustainability.

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ACKNOWLEDGEMENT
This article is funded by the Universiti Teknologi MARA, Shah Alam, Malaysia, Grant No.
600-RMC/DANA 5/3 BESTARI (TD) (010/2022) and Accounting Research Institute (HICoE)
and Ministry of Higher Education, Malaysia.

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