*PhD
Scholar, Business School, University of Shanghai for Science & Technology,
China. Email: wajiduom@yahoo.com
**Professor, Business School, University of Shanghai for
Science & Technology, China
Key words: Microfinance institution, poverty, South Asia
Introduction
Microfinance institution from last couple of decades served the poor
communities both in developed and developing world. Microfinance consist of
various financial services which includes, deposits, payments, money transfer
and provide insurance to low income household and entrepreneurs[1]
(Asian Development Bank 2001). Micro-credit and microfinance has been used
interchangeably, but there is a difference between micro-credit and
microfinance. The former means only the provision of small amount of money to
the poor people, while the latter also includes, saving, insurance and
transactional services. Microfinance institutions (MFIs) exist because poor
people are bankable which means that poor people can repay their borrowed money
along with interest on time. Besides financial services, MFIs also provides
non-financial service which includes counseling, training and education etc.
The prime objective of both these services is to enable the poor to increase
their access to a desirable life. But individual lending and dependent on grant
and subsidies questions their sustainable position in the long run. MFIs
primarily target those poor who were excluded by formal financial institutions
in the past (Batman, 2010). MFIs operated with two focus objectives, one, to
reach out and served the poor people, also called depth of outreach. Second, to
remain sustainable during the process, it means that to target the poor clients
profitably. Targeting the poor is risky because MFIs incur various costs, like
administrative, to reach the depth (the poor) these cost lower down the profits
digits of the MFIs. The amounts of loan of MFIs are small compare to commercial
banks and the numbers of borrowers are large which also create cautious
decision to select the reliable clients. For long sustainability MFIs need to
receive the principle amount along with interest rate on time. In the long run
MFIs heavily dependent on Government subsidies and donor funding, also like
commercial banks MFIs do debt financing to have sufficient financial means to
attain the desire outreach level.
Poor people receive little in the past from microfinance institutions,
and majority of these MFIs are now working with less poor (Hulme & Mosley,
1996). Thereafter in 90s the financial system advocates accelerate this
exclusion process (Batman, 2010). Commercial banks also extend microloans but
their focus is on profitability. On the other hand, microfinance institutions
focused on poor peoples and do individual lending. Though credit risks are very
high in individual lending, this can be reduced through group lending. But
lending large number of small loans to greater number of individuals in
disperse locations increases administrative costs which cause lesser returns on
individual lending’s compared to group lending. Poor borrower demands for
smaller loan and pay their installments frequently which increases a borrower’s
ability to repay its outstanding amounts (Conning, 1999). That is why
individual loans represent large proportion of microfinance institutions
(Christen, 2001) because the aim of MFIs is to reach the poorer while also to
increase its breadth. Broadening the base of individual lending may affect the
sustainability and financial performance of the MFIs because broadening the
base may be costly. Thus, in long run, if these MFIs are not subsidized through
government or donor funding, their sustainability will be at risk. Therefore,
in order to remain sustainable, these MFIs need subsidized credit. In short run
subsidize credit programs benefits entrepreneur, but these programs cannot
survive over a long term and fail to reach a significant number (Morduch,
2000). Further, other government involvement is considered bad but here are some
evidences in developing countries where governments provided fruitful inputs.
This paper empirically examined two main issues of the business of
microfinance, one, the mission of serving the poor, and second, leverage
financing. Previous studies provide empirical evidence of mission drift
(Mersland & Strom, 2010; Armendariz & Szafarz, 2011) on the other hand
leverage financing is very important to study in microfinance because on one
hand MFIs incur high cost on small loans and on the other hand cost of debt may
make situation more turbulent for MFIs if they are not profitable. For the
purpose, to measure mission drift two widely used measures were used, Average
loan size (Merland & Strom, 2010) and women borrower, and for leverage
financing debt to equity ratio were used. Average loan size is the very common
proxy to measure the depth of outreach (Mersland & Storm, 2010). Also to
allocate the depth of outreach women empowerment level is need to analyze,
because women are considered have low access to financial services and are
excluded in household decisions (Morduch, 2000). We used various other related
explanatory variables, Total Assets, Cost per borrower, return on assets ratio
and age of institutions to examine the various aspect of outreach. According to
Schreiner (2002) define various dimensions of outreach, first, value of the
microfinance loan to the client, second, cost of a loan to the client, third,
breath of outreach, fourth, scope of outreach and fifth length of outreach.
Using average loan size means that MFIs are targeting service and trading business
of his greater outreach potential than MFIs targeting manufacturing sector
assuming that their average loan balances are big, We put restrictions on data
and used larger dataset, average loan size, women borrower measure we come up with. Also these measures
were used by various academia in their high impact studies.
Literature Review
The literature largely focuses on organizational issues associated
with, microfinance and poverty. Microfinance represent small loan provided to
low income individuals. Microfinance programs are in operation to help
financially poor people to enable them to live a sustainable life. These
programs were initially run by various governments and NGOs to assist the poor
in both urban and rural areas. The aim of this study is to determine the
contribution microfinance institutions in poverty alleviation of the world
emerging south Asian economies. Microfinance
is the financial service provide to the poor to alleviate poverty and bring
financial development in a country (Sinha, 2008). Micro credit enables poor
people to start their own business and start self employed projects to generate
revenues and live a sustainable life (Onuamah, 2002). Micro finance
institutions face a challenge of collateral, often mission drift occur, as they
target the wealthy people and try to generate maximum returns and on their
investments. Poverty is a key challenge faced by developing and
developed economies to attain economic growth and development. Poverty prevails
in various forms, low income, lack of basic resources, education and so on.
Rhyne (1998) states that there is no way to determine the accurate loan size,
financial report represent average loan lend to the borrower.
Like other Asian counties, Pakistan is rated a low income country by
IMF facing serious problems in industrial sectors. These problems prevail in
form of, lack of energy, lack of latest technology availability and uncertain
law in order situation. The foreign direct investment has been decrease 9.7 %
2011. Like conventional banks in poverty reduction and economic growth, the
role of microfinance intuitions is critical to examine in south Asia. Omotola
and Murad (2011) examined and suggest that microloan and saving has direct
positive impact on Gross domestic product. Akanji (2001) investigates that
micro credit is the development process which provides an opportunity to local
entrepreneur and poor people of society to avail start a business and
contribute to the economy. But, with time when the institution matures, they
change their focus from poor to rich people of the society. Christen (2001)
empirically examined that changes in loan size explain mission drift. Mission
drift can be affected by institution age and nature of loan size i.e.
individual lending or group lending not by profitability and regulation.
Further, he added individual loan comprise of large proportion compare to group
loans, because the goal of MFIs are to reach to the poorer while also at the
same time increase the breath.
Cull, et al. (2007) examined that institutions who lend smaller loans
are more profitable then firms who do group lending. But, in average loan
portfolio poor and women are less in numbers. Added to this, micro lending was
provided to the poor to eradicate poverty. And bring development in society at
large. But, these institutions have also one prime objective ‘profit’. It is
known that nonprofit non government organizations usually lend smaller loan
compared to institution operating with profit status institutions. And mainly
work for the poor of the society (since it is assumed that poor people are
interested in smaller loans). Love and Bruhn (2009) investigate microfinance
institution ownership structure and conclude that improvement in ownership
bring a positive change in income and employment. Mustafa (1996) identifies
that, micro lending receipt earns economic values such as, increase in income,
increase in spending, house proprieties, increase expenditure in foods and
increase overall expenditure house
expenditures. Hossain (1988) reported a significant impact of micro credit and
poverty reduction in Bangladesh, indicating that micro credit receiver had high
income and get recipient of capital and employments. Trivedi and Cameron (2005)
examined that poverty as the result of low income.
To eradicate poverty investments are required in human and physical
capital to boost the productivity and provide employment opportunity to poor. For instance, Cull et al. (2007) find out by analyzing data
of 124 MFIs from 49 countries and concluded that individual lending
institutions are more profitable then group lending institutions. More than a
hundred of nongovernmental organizations are presently operating in both Rural
and Urban areas of south Asia to eradicate poverty by means by financial
assistance. Poor borrower demand for smaller loans and pay their instalment
frequently which increase poor borrower ability to repay its outstanding
amounts (Conning, 1999). Age of the
institutions plays a vital role while reaching to the depth. Christen and Drake (2002) examined that mission drift is
like a natural evolution for NGOs, when institutions matures their outstanding
loan balances increase and they transferred to regulated institutions. Christen
and Drake (2002) reported that
nongovernmental institution follow natural evolution, when institution matures
then transpired to regulated institutions and loan size tend to increase
causing mission drift. Further, they argue that to know, whether institution
achieve the outreach or not. At this point we can divide the literature
discussed into three parts, the first one, the poor are excluded from financial
services because they lack collateral requirements and cannot service the debt
(Hulme & Mosley, 1996; Fernando, 2004). The wisdom behind this belief was that
demand for credit in poor’s is very limited because they were unable to bear
the price of the financial services. Second, the poor should be reach out on a
sustainable manner and the poor need credit not the cheaper one, the idea was
that there is exist demand for credit in poor masses and also informal finance
has been approached by many poor (Morduch, 2000). Third, the depth of outreach
should be expanded by employing the continuous innovative approach because very
few MFIs do both individual and group landings.
Date and Methodology
Data
In order to test empirically the theoretical framework we have
developed for this study. Data were collected from Mix Market. It is a reliable
data source of microfinance institutions. Max Market is a non for profit
organization established to exchange information of microfinance institutions.
We have collected data of 62 rated MFIs from south Asia region of the world,
(Mersland & Strom, 2008) also used rated MFI in their study. The qualified
MFIs were those having data available for seven years from 2007-2014 and were
rated from 4 to 5 diamonds. The variables are available in the table 1.
Table 1 Variables of the Study
Variable |
Measure |
Source |
DTER |
Debt
to Equity Ratio |
Market Mix |
PFB |
Percent
of Female Borrower |
Market Mix |
ALS |
Average
Loan Size |
Market Mix |
AS |
Total
Assets |
Market Mix |
CPB |
Cost
Per Borrower |
Market Mix |
ROAR |
Return
on Assets Ratio |
Market Mix |
AGE |
Number
of Years |
Market Mix |
Methodology
In this method, we combine all the cross section and year (62*07) and estimate
the regression analysis. The OLS doesn’t capture the random effect and fixed
effect in penal data.
Equation 01 represents the estimated form of regression used in this
study.
Ln DTER =
β0+β1AS+β2CPB+β3ROA+β4AGE …...…..(01)
Ln PFB=
β0+β1AS+β2CPB+β3ROA+β4AGE .………(02)
Ln ALS=
β0+β1AS+β2CPB+β3ROA+β4AGE ….……(03)
Results and Analysis
The
results in table 02 shows all the variables used in the study and the dependent variables are
debt to equity ratio, percent of female
borrowers and average loan size.
Table 2 Regression
Analysis
Variables |
Dependent
variables |
||
|
DTER |
PFB |
ALS |
Constant |
-1.03* |
4.35* |
-2571.75* |
AS |
0.21* |
-0.04* |
296.23* |
CPB |
0.32* |
-0.09* |
272.79* |
ROA |
0.23* |
-0.01 |
111.41* |
AGE |
-0.29* |
0.01 |
29.19 |
Hausman Test |
47.93* |
26.99* |
47.67* |
Redundant Fixed Effects LR Test |
21.72* |
9.43* |
6.61* |
*Significant
at the 0.05 level (2-tailed)
The results show that total assets have a positive relationship with
debt to equity ratio and average loan size, and negative with female borrowers.
The debt to equity result shows that, when MFIs becomes larger their attitude
toward leverage financing was increases. Also the positive sign of average loan
size show that larger firm increase its loan balances and their depth of
outreach increases with size of the MFIs. The negative significant
relation-ship with female borrower suggest that MFIs targeting towards women
empowerment decease as the size of MFI increases. The cost aspect of targeting
the poor clients show a positive relationship with debt to equity ratio and
average loan size and negative with female borrowers, the findings shows that
external financing and increase in loan size increases the overall cost of the
loan, while targeting women decrease the MFI cost. The profitability which was
measured through return on assets ratio show a positive relationship with
average loan size and debt to equity ratio and negative with female borrowers,
the results indicate that debt financing which is consider costly for MFIs but
in our findings the results suggests otherwise. Also the profitability
increases the average loan size of the MFIs. The age results show that with
increasing the MFIs age their dependence on external financing decrease and
their tendency to women empowerment decreased. Moreover, with age the MFIs
increase their average loan balances as their age increases.
Conclusion
Microfinance birth took place with two distinguish feature, the first,
not for profit (focused on social well being of the poor masses) the second
one, financing through donor funding. This study discusses the depth of
outreach (a measure of mission drift) and other factors which has notable
impact on depth of outreach. The present study was examined to check the impact
of external financing and two outreach measures, female borrowers and average
loan size. Other explanatory variables were taken to explain the potential impact
of these variables on cost and profitability of MFIs. The findings conclude
that, MFIs did external financing and their access to poor despite incurs high
costs was increased. The women empowerment was taken a measure of mission drift
and we found that MFIs attitude towards women are negative, the result show
that empowering women were decreased because of its negative impact on
profitability of MFIs. The second depth of outreach measure which was taken
average loan size shows a positive relationship with cost and profitability of
MFIs. It means that MFIs reach out the poor clients and serve them and they
remain profitable in the process.
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