Microfinance institutions, financial intermediation and the role of deposits

Microfinance institutions (MFIs), widely regarded as bankers to the poor, have extended their financial functions beyond lending to managing deposits. We empirically examine the influence of MFI deposit-taking on MFI financial performance. Using data of 1,301 MFIs worldwide, we find that an MFI's deposit level is an important determinant of its financial viability. However, the relationship is influenced by MFIs' institutional type (for-profit or nonprofit) and the legal environment (common law or civil law). The results suggest that the positive financial impact of deposits has not been fully realised, reflecting the need to further improve cost management and revenue generation.