IMPACT OF MACROECONOMIC INDICATORS ON SUSTAINABLE PERFORMANCE OF MICROFINANCE INSTITUTIONS IN PAKISTAN

Abstract

This study explores the complex relationship between macroeconomic variables and the financial health of microfinance organizations in Pakistan. Even though Pakistan's microfinance industry has grown, important financial indicators most notably Return on Equity (ROE) have declined noticeably. By closely examining the effects of macroeconomic variables like the GDP, FDI, inflation, unemployment rates, and foreign direct investment (FDI) on the financial performance of microfinance institutions, this study seeks to address this decline. The study explores historical ROE patterns, evaluates how macroeconomic factors affect financial stability, and looks at wider industry ramifications. The research examines data gathered from 46 microfinance institutions operating in Pakistan between 2005 and 2022 using a multifactor model and econometric equations. The robustness of the model is confirmed by diagnostic analyses, and regression analysis shows significant negative correlations between ROE and FDIO, UEG, and INF. Considering these findings, this study recommends that microfinance institutions in Pakistan focus on strategic diversification to reach new customer segments, embrace technological advancements for operational efficiency, and develop climate resilient financial products. Moreover, continuous monitoring ofmacroeconomic trends, collaboration for knowledge sharing, capacity building, and customer education are essential for navigating economic uncertainties. Policymakers are encouraged to provide supportive regulatory environments that foster innovation and responsible lending practices.