Paper short abstract:

The study explores the effect that the income diversification strategy of microfinance institutions has on their profitability. The findings show that income diversification inhibits profitability. Other explanatory variables drive profits. Implications for a post-COVID-19 context is well discussed.

Paper long abstract:

This study explores the effect of income diversification on the profitability of microfinance institutions (MFIs) in Ghana. The study uses a pooled cross-sectional quarterly data covering 2016 to 2018 on MFIs in Ghana and regression analysis. The results indicate that the MFIs record low profits and they are generally not so much diversified. Income diversification has a negative effect on return on asset and return on equity, suggesting the preference for a focused strategy. Larger firms are found to be more profitable although there is an inverted U-shaped nexus. Investments in fixed assets are beneficial for enhancing performance among the firms while the findings cast doubt on the extent of financial intermediation. This is because cash and investments in government securities are more than 50 percent of assets while loan levels are scant as compared to deposits. The study calls for MFIs to resort to providing more loans as this will enhance their bottom-line, improve economic activities and drive economic growth. The insights from the study lend credence to the relevance of data-driven decision making among MFIs. This study extends the diversification-performance literature in the context of MFIs in emerging markets.