Essays in microfinance: their capital structure and financial inclusion.

Authors: Bowden, M. and Nzeribe, N.

Conference: Bournemouth University Business School

Abstract:

This analysis examines key capital structure variables unique to MFIs namely; Leverage and Deposits. The leverage measure for MFIs captures total borrowing (as well as short and long tenure financing), in addition to donated equity, capturing the donations made to MFIs by donors by way of equity, finally, deposits are MFI clients timed deposits. In order to achieve the aims, we utilize a fixed-effect panel data estimation technique for analysis of the obtained data (which includes 778 MFIs with 3,338 data points), in addition to employing dummy variables to further enhance the analysis. The institutional and firm specific variables include; creditor rights, corruption indicators, governance quality, and MFI characteristics variables such as; size, risk and age. The second analysis utilizes MFI social and financial performance dependent variables, against capital structure variables. Finally, the third empirical analysis employs financial inclusion index, in addition to a broad set of independent variables which capture MFI penetration, technology utilization (mobile subscription), geography (population density), institutional quality (public credit registry, and corruption control), macroeconomic (inflation, gross income), and financial development variables (deposit interest rate, and domestic credit to private sector).

The results for the impacts of the institutional determinants of the capital structure of MFIs reveal that (for both leverage the deposit models) institutional measures are important in determining the capital structure of MFIs. In particular, the measure for investor protection is significant in determining the leverage of MFIs. This is a new finding within the Microfinance literature within the context of sub-Saharan Africa. This confirms the importance of a strong institutional environment in attracting funding for the sector. Further confirming this position are the measures of economic freedom, which appear to be significant in determining the donated equity for MFIs. Specifically, financial freedom is positive and significant, whilst the measure of income GNI per capita is relevant in determining the donated equity of MFIs.

The second analysis examines the influence of capital structure on a comprehensive set of MFI performance. These include financial performance measure such as; sustainability, return on asset, risk and MFI efficiency. On the other hand, social performance captures the outreach of MFIs (measured by percent of female borrowers). In addition the outreach measure is split into two measures capturing both the breadth (number of active borrowers) and depth (average loan balance per borrower) of MFI outreach. Two Major findings are observed here. Firstly, the measure for financial performance MFI sustainability reveal that short-term leverage is significant in explaining MFI sustainability. On the other hand, the measure for social performance (percent of female borrowers), is negatively influenced by short-term leverage, suggesting MFIs operating principally with short-term leverage are less likely to achieve their social performance (often because of the pressure attached to the utilisation of short-term leverage). However, the measure for long-term leverage significantly influences the measure of social performance.

The final analysis utilises a financial inclusion index, with the key regressor variable identified as a measure of MFI activity (MFI penetration rate). Key findings reveal that: MFIs (as measured by their penetration rates) appear to be insignificant in influencing financial inclusion in SSA. More specifically, the relationship appear to be in an inversely related with the measure for financial inclusion. This finding is telling, and a significant new finding within the literature. Perhaps expected, given the operational preferences of MFIs in Africa to focus on urban clients as opposed to rural penetration. Secondly, institutional measures such as; corruption control, appear to be positive in influencing financial inclusion, reiterating the need for good governance and strong institutions. Worthy of note however is the measure for the information environment as measured by public credit registry. For instance, the results of the analysis showed that the existence of a public credit registry plays a significant role in influencing the financial inclusion in SSA.

Fortunately, the policy implications are somewhat evident. Creating an enabling environment for funders to come into the sector and feel protected should be apriority. Policies that strengthen financial reporting practices, transparency in government, and embracing the absolute power of the rule of law are important for the continent in the short and longer term. From a macro-environment standpoint improving national income via increased productivity of local institutions, is a positive signal to international funders. Governments in SSA and policy makers, are required to create suitable local capital markets and healthy ways of providing long-term favourable financing to MFIs within the SSA region. It is clear from the various models of analysis that long-term leverage on favourable terms on average is crucial for the long-term sustainability and performance of MFIs within the SSA region. Therefore, Implementing a long-term funding strategy via affordable local currency denominated markets will tremendously improve the sector in SSA, and hence, should be the priority for policy makers.. The rationale being that with long-term funding MFIs are able to operate with more scope to expand operations without the pressure of meeting foreign denominated funding repayment obligations.

A key finding for this research is the revelation that MFIs are less impactful in aiding the financial inclusion drive in SSA, as anecdotal evidence would suggest. Conversely, we find that the measure for mobile penetration is highly significant in influencing financial inclusion in SSA. Despite the findings for MFIs, the use of MFIs to achieve this goal could indeed still be attainable, however in their current capacity this is not possible. Therefore, re-tooling MFIs to meet such demands is crucial, and should be of high priority for policy makers and funders of the MFI sector. One of such ways to achieve deeper rural coverage could be an implementation of mobile banking technology in executing financial services. Some of the more important findings indicate that –with some hope- the implementation of financial technology such as mobile money could be of benefit to countries in SSA. Policy makers are therefore better off putting in place sound institutional framework such as strengthening and localising public credit registries. This research analysis indicates that this is significant in aiding/impacting financial inclusion in SSA. Establishment of functional and efficient public credit registries, will greatly improve the processing of financial information and aid information asymmetry. In addition to this MFIs can then be trimmed down in their operative capacities, so as to aid agility in their operations, to better enable them reach the bottom of the pyramid competently.

https://eprints.bournemouth.ac.uk/35088/

Source: Manual

Essays in microfinance: their capital structure and financial inclusion.

Authors: Nzeribe, N.

Conference: Bournemouth University Business School

Abstract:

This study examines three central themes within the MF literature, within the context of the current drive and efforts by governments in sub-Saharan Africa (SSA) to improve institutional and governance quality, whilst implementing Microfinance as a blanket development policy tool. First, within an institutional context, we test for the institutional and firm specific determinants of the funding structure of MFIs. Secondly, we examine the impact of funding/capital structure on MFI financial and social performance. Finally, within the context of unfavourable financial exclusion level in SSA, we question just how much important MFIs are in improving the drive towards financial inclusion on the continent (by examining the impact of MFIs on financial inclusion in SSA). In order to achieve the above aims, this research project utilizes a comprehensive panel dataset for 38 countries in SSA, for the period 2004-2016. A database (MIX Market) specially purposed for MFI reporting and data bank was implemented in collecting the data employed for this research. In addition, World Bank data was employed in collecting country specific, and macro-economic data, whilst data from the heritage index, ease of doing business index, and corruption index were employed as explanatory variables. This analysis examines key capital structure variables unique to MFIs namely; Leverage and Deposits. The leverage measure for MFIs captures total borrowing (as well as short and long tenure financing), in addition to donated equity, capturing the donations made to MFIs by donors by way of equity, finally, deposits are MFI clients timed deposits. In order to achieve the aims, we utilize a fixed-effect panel data estimation technique for analysis of the obtained data (which includes 778 MFIs with 3,338 data points), in addition to employing dummy variables to further enhance the analysis. The institutional and firm specific variables include; creditor rights, corruption indicators, governance quality, and MFI characteristics variables such as; size, risk and age. The second analysis utilizes MFI social and financial performance dependent variables, against capital structure variables. Finally, the third empirical analysis employs financial inclusion index, in addition to a broad set of independent variables which capture MFI penetration, technology utilization (mobile subscription), geography (population density), institutional quality (public credit registry, and corruption control), macroeconomic (inflation, gross income), and financial development variables (deposit interest rate, and domestic credit to private sector). The results for the impacts of the institutional determinants of the capital structure of MFIs reveal that (for both leverage the deposit models) institutional measures are important in determining the capital structure of MFIs. In particular, the measure for investor protection is significant in determining the leverage of MFIs. This is a new finding within the Microfinance literature within the context of sub-Saharan Africa. This confirms the importance of a strong institutional environment in attracting funding for the sector. Further confirming this position are the measures of economic freedom, which appear to be significant in determining the donated equity for MFIs. Specifically, financial freedom is positive and significant, whilst the measure of income GNI per capita is relevant in determining the donated equity of MFIs. The second analysis examines the influence of capital structure on a comprehensive set of MFI performance. These include financial performance measure such as; sustainability, return on asset, risk and MFI efficiency. On the other hand, social performance captures the outreach of MFIs (measured by percent of female borrowers). In addition the outreach measure is split into two measures capturing both the breadth (number of active borrowers) and depth (average loan balance per borrower) of MFI outreach. Two Major findings are observed here. Firstly, the measure for financial performance MFI sustainability reveal that short-term leverage is significant in explaining MFI sustainability. On the other hand, the measure for social performance (percent of female borrowers), is negatively influenced by short-term leverage, suggesting MFIs operating principally with short-term leverage are less likely to achieve their social performance (often because of the pressure attached to the utilisation of short-term leverage). However, the measure for long-term leverage significantly influences the measure of social performance. The final analysis utilises a financial inclusion index, with the key regressor variable identified as a measure of MFI activity (MFI penetration rate). Key findings reveal that: MFIs (as measured by their penetration rates) appear to be insignificant in influencing financial inclusion in SSA. More specifically, the relationship appear to be in an inversely related with the measure for financial inclusion. This finding is telling, and a significant new finding within the literature. Perhaps expected, given the operational preferences of MFIs in Africa to focus on urban clients as opposed to rural penetration. Secondly, institutional measures such as; corruption control, appear to be positive in influencing financial inclusion, reiterating the need for good governance and strong institutions. Worthy of note however is the measure for the information environment as measured by public credit registry. For instance, the results of the analysis showed that the existence of a public credit registry plays a significant role in influencing the financial inclusion in SSA. Fortunately, the policy implications are somewhat evident. Creating an enabling environment for funders to come into the sector and feel protected should be apriority. Policies that strengthen financial reporting practices, transparency in government, and embracing the absolute power of the rule of law are important for the continent in the short and longer term. From a macro-environment standpoint improving national income via increased productivity of local institutions, is a positive signal to international funders. Governments in SSA and policy makers, are required to create suitable local capital markets and healthy ways of providing long-term favourable financing to MFIs within the SSA region. It is clear from the various models of analysis that long-term leverage on favourable terms on average is crucial for the long-term sustainability and performance of MFIs within the SSA region. Therefore, Implementing a long-term funding strategy via affordable local currency denominated markets will tremendously improve the sector in SSA, and hence, should be the priority for policy makers.. The rationale being that with long-term funding MFIs are able to operate with more scope to expand operations without the pressure of meeting foreign denominated funding repayment obligations. A key finding for this research is the revelation that MFIs are less impactful in aiding the financial inclusion drive in SSA, as anecdotal evidence would suggest. Conversely, we find that the measure for mobile penetration is highly significant in influencing financial inclusion in SSA. Despite the findings for MFIs, the use of MFIs to achieve this goal could indeed still be attainable, however in their current capacity this is not possible. Therefore, re-tooling MFIs to meet such demands is crucial, and should be of high priority for policy makers and funders of the MFI sector. One of such ways to achieve deeper rural coverage could be an implementation of mobile banking technology in executing financial services. Some of the more important findings indicate that –with some hope- the implementation of financial technology such as mobile money could be of benefit to countries in SSA. Policy makers are therefore better off putting in place sound institutional framework such as strengthening and localising public credit registries. This research analysis indicates that this is significant in aiding/impacting financial inclusion in SSA. Establishment of functional and efficient public credit registries, will greatly improve the processing of financial information and aid information asymmetry. In addition to this MFIs can then be trimmed down in their operative capacities, so as to aid agility in their operations, to better enable them reach the bottom of the pyramid competently.

https://eprints.bournemouth.ac.uk/35088/

Source: BURO EPrints