Download The Impacts of Capital Structure on Depth of Outreach in Sub

 Spring 2015 The Impacts of Capital Structure on Depth of
Outreach in Sub-Saharan Africa
Courtney Johnson
Illinois State University
Abstract
The mission of microfinance institutions (MFIs) is two-fold, serving
poor clients and financial sustainability. Yet, there is a concern that
MFIs have prioritized financial objectives over outreach objectives by
adopting characteristics of commercialized capital structure. A
growing number of MFIs have transformed their capital structure
from donations and concessional loans to a structure that undertakes
commercial financing options, such as loans at market rates and
investment capital. What is the impact of this change in financing on
outreach objectives? This paper uses data from 74 MFIs from Planet
Rating, a third-party MFI rating website, conducting a cross-sectional
analysis. This study finds that MFIs that are highly leveraged
compromise outreach objectives. Yet, other variables that indicate a
commercialized financing structure are found to be insignificant. This
study suggests that Sub-Saharan MFIs can undertake a commercial
capital structure without compromising outreach objectives. Yet, it
cautions against the overextension of leverage as this has been found
to compromise depth of outreach.
Roughly half of the worldwide adult population has a bank account
(Weise 2012). Banking services not only provide a safe place to store
money, but also provide the opportunity to obtain credit, a financial
option that has become integral to global business practices and to
consumer spending. To some, the ability to take out credit has
118 Critique: A worldwide journal of student politics become a human right (Yunus 1999). Yet, there are many places
across the world that remain excluded from banking services.
According to Bill & Melinda Gates Foundation, there remain 2.5
billion adults who have no access to banking services (Weise 2012).
Microfinance Institutions (MFIs) are micro-lending
organizations that provide credit to people previously excluded from
banking services. When microfinance first arose in 1976, it was a
research project initiated by Muhammad Yunus in a small village in
Bangladesh (Yunus 1999). With the success of the Grameen Bank,
this grassroots movement became a global vision. The United
Nations declared 2005 “the year of microfinance” and Yunus won
the Nobel Peace Prize in 2006 (United Nations 2014; Roy 2010).
Part of the reason why microfinance has been so widely
received is that it has been viewed as a tool to help accomplish the
Millennium Development Goals including poverty eradication, access
to education, and improvements to nutrition (Roy 2010). Poverty can
be understood as a trap, one that brings persistent obstacles causing
further economic degradation (Azariadis and Stachurski 2005). In
“The End of Poverty,” Sachs (2006) argues that access to capital is a
way to help poor people reach the first rung of the economic ladder
to climb out of the poverty trap. Indeed, studies show that
microfinance has had a positive impact on household income (CGAP
2002). Hossain (1988) found that income of Grameen Bank
borrowers increases by 43% compared to the target group that did
not have microcredit programs in their area. Similarity, Khandker and
Pitt found that household income increased 29% in program villages
versus non-program villages (1996). Furthermore, studies show that
MFI clients are likely to invest in better housing, nutrition, and
education (CGAP 2002; Khandker and Pitt 1996). Additionally, early
successes shattered the stereotype that poor people make poor
clients, as loan repayment rates remained in the 90th percentile
119 Spring 2015 (Yunus 1999). Microfinance has been widely celebrated for its ability
to reach poor people, aiding in the escape of the poverty trap.
Yet, since the beginning, MFIs have had to balance objectives
of outreach and financial sustainability. Sometimes called attempting
to meet the “double-bottom line,” microfinance strives to not only
do-good but to pay for itself. Since MFI borrowers are charged an
interest rate on credit and sometimes fees associated with
membership, in theory, MFIs should be able to cover costs. The idea
that microfinance is a social service that could fund itself was an
exciting promise. However, achieving financial sustainability has been
harder in practice than in theory. Early MFIs often depended on
donations or concessional loans from governments to meet high
operation costs. For example, in 1996, the Grameen Bank received
over $26 million in subsidies through concessional loans and
donations, coming largely from the Government of Bangladesh
(Morduch 1999). In part, Grameen Bank was not financially
sustainable due to the high operation costs associated with lending to
poor clients. The Grameen Bank emphasizes high quality staff
training and strives to recruit clients among the most marginalized
residents of the Bangladesh (Hossain 1988). Additionally, despite that
in 1986 the Grameen Bank absorbed a margin of loss of 6.7%, Yunus
refused to raise interest rates (Hossain 1988). He was quoted,
“microfinance was created to fight the money lending, not to become
the money lender” (Bloomberg 2007). Although it took over ten
years since the inception of the bank for it to reach financial
sustainability, Yunus would not compromise social outreach goals for
profitability (Yunus 2007).
The Welfarist Camp
Welfarists, or the poverty approach, are descendants of the Grameen
Bank philosophy that social goals should not be compromised for
financial gains. The ideology rests on the premise that self120 Critique: A worldwide journal of student politics employment can empower marginalized people. Often times, loans
are given to groups of women to enhance feelings of agency and
social capital, creating an environment of empowerment (Riaz 2009).
In this camp, MFI success is measured by depth of outreach, or how
well the MFI reaches poor clients and mitigates poverty.
Although welfarists do not discredit the objective of financial
sustainability, they assert that MFIs can become successful
institutions while depending on outside sources of funding. They
argue that donations and concessional loans are forms of equity
investment that have a “social, or intrinsic return” (Woller and Brau
2004, 8). These MFIs usually offer services to the most marginalized
clientele, which are disproportionally located in rural, poorer areas.
Due to limited infrastructure, increased transportation costs, low
population density, and the need for high quality staff, the pursuit of
these clients can be costly (Armendáriz & Morduch, 2005; Hudon
2011; Makame and Murinde 2006). Clientele education services,
which are common among welfarist MFIs, also increase costs
(Hossain 1988; Lafourcade et al). Analyzing 74 MFIs, Conning (1999)
found that sustainable MFIs that targeted poorer clients had higher
staff costs. Additionally, poor clients have little collateral to cover
default increasing the risk absorbed by the MFI (Khandker 1998).
Therefore, donations, grants, and concessional loans coming from
both independent donors and governments often cover the gap
between MFI revenue and MFI costs (Schreiner 1999, 2002; Kar
2011).
The Institutionalist Camp & Commercialization
However, the welfarist approach to microfinance is matched by
another set of beliefs, institutionalists. This camp is committed to
MFI financial sustainability and believes emphasis on this objective is
crucial to MFI success. Based on concepts originating from Ohio
State University’s Rural Finance Program, institutionalists argue that
121 Spring 2015 institutional sustainability is key to successful microfinance functions
and furthermore, financial sustainability is integral to institutional
sustainability (Woller and Brau 2004). Rather than measure MFI
success with depth of outreach, institutionalists tend to focus on the
ability of the MFI to expand financial services to more people, a
measurement known as breadth of outreach (Olivares-Polanco 2005).
Institutionalists operate under the notion that by creating financially
sustainable MFIs, the social services to the poor are inherent
(Morduch 2000).
Institutionalism’s reasoning is based on the profit-incentive
theory (Bogan 2012). By taking on more debt through unsubsidized
loans and investments, the MFI is under pressure to perform
efficiently, cover operation costs, and to turn a profit. These
pressures encourage financial discipline promoting economic growth
and institutional sustainability (Armendáriz de Aghion and Morduch
2005; Kar 2011; Basu 2004). Along these same lines, donations and
concessional loans weaken financial discipline suppressing financial
success and economic growth (Charitonenko et al. 2004; Robinson
2001; Basu 2004). Another concern of institutionalists is that
donation capital is limited and subject to the “whims of donors”
thereby limiting the sustainable outreach of microfinance services
(Charitonenko et al., 36). 2004. Lastly, institutionalists worry that
donor funds “crowd out” market sources that could aid in the growth
of MFI industry (Basu 2004, 14). Where welfarists view microfinance
as a social service, institutionalists view microfinance as a business
that does social good.
For institutionalist MFIs and policy-makers, the most highly
endorsed avenue to achieve financially sustainability has been
through commercialization. Commercialization is a process that
transforms several attributes of an MFI including management
structure, operational efficiency, and sources of financing to resemble
those more like a for-profit institution. Charitonenko et al. (2004)
122 Critique: A worldwide journal of student politics explains commercialization as “the expansion of profit-driven
microfinance operations” (17). One of the key ways an MFI is
affected by commercialization is the way the MFI finances itself, or
the capital structure. Commercial financing opportunities include
non-subsidized loans through commercial banks and the practice of
leveraging MFI assets for investment opportunities (Charitonenko et
al. 2004). The commercialization of MFIs paves to way to financial
sustainability.
This idea to “eradicate poverty through profits” has become
quite popular and has resulted in a shift towards MFIs running as
banks (Prahalad 2006,1; Roy 2010, 29). In 2006, Prahalad published
The Fortune at the Bottom of the Pyramid advocating for the merging of
bank and microfinance interests. Prahalad argued that banks had the
opportunity to extend their business to the clients at the unreached
bottom on the economic pyramid while MFIs would benefit from
increased access to capital (2006). Today, Citigroup, Barclays, and JP
Morgan are among the large bank conglomerates that have
incorporated microfinance services (Hartford 2008). By many
accounts, microfinance has become a commercial industry.
The future of microfinance as a commercial industry has
become the dominant strand of thought behind several international
development organizations (Roy 2010). In 2004 CGAP published
“The Key Principles of Microfinance,” an article that upholds the
importance of financial objectives.1 The article discourages subsidies
and donations and calls for a laissez-faire approach to government
intervention (CGAP 2004). Published by the Asian Development
Bank, Charitonenko et al. (2004) echo many of these
recommendations adding that government regulation should be
The Consultative Group to Assist the Poor (CGAP) is a powerful global partnership
that is, essentially, a branch of the World Bank.
1
123 Spring 2015 tailored to support commercial MFIs and discourage subsidy
dependence.
Mission Drift & Outreach
The concern of welfarists is that commercialization of MFIs causes
mission drift, or the prioritization of financial objectives over
outreach objectives (Christen 2001; Zhao et al. n/d; Helms 2006).
Previous research suggests that these concerns are warranted; as
financial objectives are pursued, depth of outreach is often
compromised. Using data from 435 MFIs, Hermes et al. (2011) find a
trade-off between profitability and depth of outreach. In “The
Promise and Perils of Microfinance,” Woller (2002) found that many
MFIs are not reaching optimal depth of outreach suggesting that the
poor and the very poor are not the preferable market for profitseeking MFIs. Additionally, Cull et al. (2007) used data from 124
MFIs finding that there was a trade-off between profitability and
outreach to the poorest clients. Finally, after comparing previous
literature, Montgomery and Weiss find that the barriers to reach the
“core poor” include high interest rates, social stigma, and exclusion
due to perceived risk (2005, 26). With such a trade-off discovered by
many previous researchers, increasing pressure on MFIs to perform
financially would likely prove detrimental to depth of outreach.
Moreover, some institutionalists have suggested that MFI
outreach should be reserved for the less poor. In an interview with a
staff member of the United Nations Development Fund, the speaker
asserted that some people are just “unbankable” (Roy 2010, 54). In
2004, Charitonenko et al. wrote that MFIs should exclude the
“hardcore poor” (27). Charitonenko and Rahman (2002) argue that
the welfarist microfinance market is saturated and that there is “little
room for further growth in market depth through Grameen-style
microcredit” (26). Instead, the authors advocate for expanding
services, products, and clients. In this light it is possible to see that
124 Critique: A worldwide journal of student politics commercialized MFIs likely pursue clients that are less poor and have
more assets (Basu 2004; Charitonenko et al. 2004).
Instead of focusing on reaching the poorest people,
institutionalists often stress financial inclusion, or a measurement for
breadth of outreach. Scholars argue that commercial financing
opportunities provide MFIs with the capacity to reach more people.
In 2007, Michael Chu wrote “Profit and Poverty: Why it Matters”
arguing that only financially sustainable MFIs are capable of
accomplishing social objectives. Chu asserts, “no longer fundsconstrained, the number of poor people reached and the volume of
capital disbursed has exploded” (1). By capturing economies of scale,
MFIs are able to expand the reach of financial services thereby
increasing breadth of outreach, or expanding the reach of financial
services (Brau and Woller 2004; Charitonenko 2004; Christen 2001).
The heated discussion between the welfarists and
institutionalists has been called the “microfinance schism” (Morduch
2000, 1). At the heart of the tension between welfarists and
institutionalists is the disagreement on the use of subsidies in
financing MFIs. As MFIs change their financing structures to
resemble for-profit structures, MFIs take on further debt and cast
aside donations and concessional loans in favor of loans at market
interest-rates and investment strategies (Charitonenko and Rahman
2002; Dixon 2012). Studies show that these changes in capital
structure improve financial performance, but how does a
commercialized capital structure impact depth of outreach? Although
the commercialization of MFIs can change several aspects of MFIs,
this research aims to capture the effects of commercialization within
capital structure.
A Focus on Sub-Saharan Africa
Although Sub-Saharan Africa has at least 4.6 million active
borrowers, approximately 88% of households remain unbanked
125 Spring 2015 (MIX 2012; CGAP 2012). With 50% of the population living on less
than $1.25 per day, it would seem that MFI market penetration is
surprisingly low. Previous studies have demonstrated that
microfinance can have a positive effect on household income,
education, and nutrition (CGAP 2002; Khandker and Pitt 1996;
Hossain 1988). Sachs (2006) even asserts that microfinance is the key
to overcoming the poverty trap. Therefore, limiting the spread of
microfinance services within Sub-Saharan Africa, one of the poorest
regions across the world, is a disservice at best.
Scholars have examined why market penetration is lower in
Sub-Saharan Africa than other developing nations finding
explanations of culture, infrastructure, and levels of institutional trust
(Lerpold 2012; Epstein and Yuthas 2011; Lafourcade et al. 2005).
Yet, a frequent claim is that the growth of the MFI industry in Africa
has been limited by MFI access to financing. Basu et al. (2004) assert
that increasing integration between banking and microfinance
industries in Africa would provide greater liquidity to MFIs and
expand the growth of microfinance services. Commercialization
opens up options to private financing and investment, increasing the
number and capacity of MFIs (Helms et al. 2006; Chu 2007). Since
the spread of microfinance has been limited, at least in part, by MFI
access to capital, then commercialization would expand the growth of
the MFI industry in Sub-Saharan Africa, increasing breadth of
outreach (CGAP 2004; Prahalad 2006).
However, in order to avoid mission drift, it is essential to
understand the way characteristics of a commercialized capital
structure impacts depth of outreach. This study expands upon the
work of Makame and Murinde (2006). These scholars examined the
impacts of commercialization measured through regulation and
competition on outreach in East Africa. Since the variables used to
measure commercialization, competition and regulation, were found
to be insignificant, it is the task of this study to examine
126 Critique: A worldwide journal of student politics commercialization from a different angle. Rather than use
measurements of regulation and competition as characteristics of
commercialization, it may be more significant to use capital structure,
or the way an MFI finances itself.
Although commercialization may assist in the spread of
microfinance within Sub-Saharan Africa, it is important to
understand the effect of commercialization on depth of outreach.
Therefore it is relevant to ask, have MFIs in Sub-Saharan Africa with
characteristics of commercialization maintained depth of outreach?
This study will help policy-makers understand the implications of
pursuing commercialized capital structures.
Data
The data for this study comes from Planet Rating, a database of the
financial statements of MFIs in Sub-Saharan Africa. These financial
statements provide more reliable and detailed information than most
previous studies on this topic that used data from the self-reported
website Microfinance Information Exchange (MixMarket). Thirdparty rating systems like Planet Rating have the benefit of being less
biased. In addition, Planet Rating collects more detailed information
about each MFI providing the ability to use new variables.
The units of analysis are the 74 publically available financial
reports of MFIs in Sub-Saharan Africa available on Planet Rating in
English and French. Of the 47 countries in Sub-Saharan Africa, the
dataset used in this study has observations from 25 countries, or just
over half the Sub-Saharan Africa countries (see Appendix A). Still,
there are limitations to this dataset. First, the observation number is
relatively low. Second, the MFIs in this database are self-selected to
be rated by Planet Rating.
127 Spring 2015 Variables and Hypotheses
As explained by Schreiner (2002), Morduch (1999) and Navajas et al.
(2000), there are many aspects of outreach that can be measured that
shed light on the lending practices of MFIs. This study focuses on
depth of outreach, or the quality of meeting the goal to reach poor
people. Ideally, scholars have pointed out that depth of outreach
should be measured by client changes in income or poverty status
after borrowing (Navajas et al. 2000; Schreiner 2002). This speaks to
the capacity of the MFI to address poverty. Another method of
measuring depth of outreach considers characteristics of the client.
For example, depth of outreach increases when MFIs lend to female
clients in rural areas as opposed to male clients in urban areas
(Paxton 2002). This demonstrates that the MFI emphasizes the
mission to serve subjugated, if not poorer, clients. Yet, data of this
nature is sparse. The studies that are able to employ these
measurements are limited to few observations and are often
conducted in data-rich nations. Since this study explores regional
patterns in Sub-Saharan Africa where data is limited, this study will
use a proxy to measure depth of outreach.
Thus, depth of outreach is the MFI’s average loan size
measured by the ratio of gross loan portfolio to the number of active
borrowers. Based on the rationality that poorer clients take out
smaller loans, the lower the average loan size, the deeper the
outreach. As Mosley and Hulme (1998) found, households with
higher incomes take out larger loans than households with lower
incomes. Although this study acknowledges that large loan sizes do
not necessarily indicate low depth of outreach (Christen 2011), this
proxy has been widely used (Chishty et al. 2011; Hartarska 2005;
Mersland and Storm 2009). Yet, the same loan in one country might
be substantially different in value than another country. In order to
account for economic variability on a country level, this study divides
MFI average loan size by gross national income (GNI) per capita.
128 Critique: A worldwide journal of student politics Although previous scholars have measured economic variability in
different ways, such a division is a common practice (Kar 2011; Cull
et al. 2007; Christen 2001; Makame and Murinde 2006). This study
uses GNI per capita rather than GDP per capita because GNI more
fully accounts for the economic picture of Sub-Saharan countries. As
an MFI demonstrates commercial characteristics within its capital
structure, depth of outreach is expected to shrink. This expectation is
supported by the empirical findings of Paxton (2011), Chishty et al.
(2011), and Kar (2011). In order to account for lagged effects, depth
of outreach data is collected from the financial statements of MFIs a
year after the values of the independent variables.
Profit can potentially shed light on the character of an MFI’s
capital structure. Profit is measured as the return on assets (ROA), or
MFI income over assets. A commonly used indicator of profit, the
higher the ROA the more profitable the MFI (Makame and Murinde
2006; Cull et al. 2007). Past research suggests a trade-off between
profitability and depth of outreach. Using data from 435 MFIs
Hermes et al. (2011) found that financial efficiency comes at the
expense of depth of outreach. Therefore, MFIs that are more
profitable will have lower depth of outreach, or higher average loan
size.
Leverage is the process of using assets or borrowed capital to
invest in a venture that is expected to turn a profit (Kar 2011). As an
MFI invests its resources in order to turn a profit, it is leveraging
their assets thereby taking on more debt. The ratio of debt to assets is
a measurement of leverage and this leverage ratio is a key attribute of
an MFI’s capital structure. When debt is greater than assets, the
higher the ratio the more the MFI is considered highly leveraged.
When debt is less than assets, the lower the degree of leverage. As an
MFI takes on more debt, its financial risks are higher and the
pressure to perform financially increases. Scholars have found that
increasing leverage negatively affects outreach. Studying 72 MFIs,
129 Spring 2015 Conning (1999) found that financially sustainable MFIs that focus on
depth of outreach were less leveraged. Kar (2011) used panel
regression on a dataset of 782 MFIs finding that an increase in
leverage decreases depth of outreach. Further evidence comes from
Chishty et al. (2011). Using a dataset of 24 MFIs and panel regression
techniques, they find that increased leverage decreases depth of
outreach to the very poor. If, in fact, the trade-off between financial
performance and outreach holds true, then MFIs with higher leverage
will pursue less-risky clients, decreasing the depth of outreach
(Armendáriz de Aghion; Morduch 2005).
Donation intensity may also shed light on the characteristics
of a commercialized capital structure. This term derives from the
work of Hudon et al. (2011) where in a study of 100 MFIs they found
that the “effect of subsidies depends on their intensity” (971).
Donation intensity is measured by the value of donations over
assets. 2 Arguing that guaranteed money creates idleness and
inefficiency, commercialization advocates reason against the use of
donations. Therefore, MFIs that are commercialized are expected to
have low donation intensity represented by small ratios. Due to the
financial pressures associated with commercialization, MFIs that have
low donation intensity are expected to have low depth of outreach.
Evidence for this claim comes from Paxton (2012). Conducting a
study of 18 MFIs in African and Latin American countries, Paxton
found that MFI dependence on subsidies decreases as depth of
outreach decreases. However, Bogan (2012) claimed to find
conflicting evidence. Using panel data from 6 countries, Bogan
(2012) found that MFIs with a higher proportion of grants to assets
did not reach significantly more poor clients. Yet, despite Bogan’s
Data was collected from the equity donation value in the balance sheet unless this
value was missing; in which case, the data was collected from the donation value in
the income statement.
2
130 Critique: A worldwide journal of student politics claims, this finding was insignificant at the .10 level. Therefore, the
previous hypothesis remains. MFIs with low donation intensity will
have a lower depth of outreach indicated by a large average loan size.
Paid-in capital, or the value of investments, also sheds light
on the capital structure of MFIs. Unlike donations, paid-in capital is
invested into an MFI with expectation of profitable returns.
Sometimes in the form of stocks or shares but also in the form of
cash, paid-in capital is a way for an MFI to raise money in a similar
fashion as a traditional business. While this method of financing can
support goals of financial sustainability, it is possible that increased
pressures on financial objectives hinder the outreach objectives of
MFIs. To control for varying sizes of MFIs, paid-in capital is
measured with regards to assets creating the variable investment ratio.
The higher the investment ratio, the lower the depth of outreach.
Since donation intensity indicates the welfarist approach to
microfinance while investment ratio indicates the institutionalist
approach, it is expected that the coefficients of these variables have
an inverse relationship, or when the donation intensity ratio is
negative, the investment ratio is positive.
The interest and fees paid on borrowings indicates the type of
loans that an MFI uses to finance itself. Concessional loans, by
definition, have lower interest rates than the industry standard. The
welfarist viewpoint claims that since MFIs are providing a service by
improving the wellbeing of citizens, loans should be given to MFIs at
discounted rates (Helms 2006). Counter arguments assert that
concessional loans do not build financially sustainable MFIs (CGAP
2004; Helms 2006; Charitonenko and Rahman 2002; Dixon 2012).
The institutionalist camp insists that in order for microfinance to be a
viable solution to poverty alleviation, MFIs must not be dependent
on external sources of financing, including concessional loans
(CGAP 2004). Therefore, MFIs that adopt the institutionalist
viewpoint will accept loan terms with higher interest rates than MFIs
131 Spring 2015 who are not interested in commercial sources of financing. Taking on
more debt and risk, these financial pressures may have an adverse
effect on depth of outreach. Yet, in order to compare across MFIs, it
is important to control for MFI size. By dividing interest and fees
paid on borrowings by assets, this study uses a variable called cost of
borrowings. MFIs that have a higher ratio of cost of borrowings are
expected to have a lower depth of outreach.
Past research has found that the MFI institution type has an
effect on outreach. In an analysis of 18 MFIs Paxton (2012) found
that non-governmental organizations (NGOs) had deeper measures
of outreach than credit unions or banks attributing this to NGO
emphasis on social mission. Cull et al. (2011) assert that lending type
reflects “differences in social mission, target customers and location
as much as management strategies” (F113). For example, in a study
of 124 MFIs, Cull et al. (2011) found that MFIs registered as village
banks had greater depth of outreach than individual-based lenders. In
order to control for “the type-of-institution effect,” this study will
use two dummy variables contingent on the data available (OlivaresPolanco 2005, 55). MFIs that are registered as companies will be
coded as 0. Companies have stakeholders who often pressure the
MFI to perform financially potentially overshadowing outreach
objectives (Roy 2010). With companies as the reference category,
MFIs that are registered as NGOs are coded as 1. NGOs are
expected to have a greater depth of outreach. In contrast to
companies, NGOs tend to emphasize social missions rather than
financial objectives (Basu 2004; Helms 2006). Lastly, cooperatives are
MFIs that are partially, if not fully, owned by their employees or
customers. Employing the theory of interpersonal and institutional
trust, it is possible that cooperatives may have stronger ties with
communities than other institution types (Epstein and Yuthas 2011).
If true, cooperatives will have lower average loan sizes and higher
depth outreach. Cull et al. (2007) found that village banks have lower
132 Critique: A worldwide journal of student politics loan sizes than all other institutions. However, this finding can only
be partially applied to this study because not all village banks are
cooperatives and not all cooperatives are village banks. Furthermore,
institutional laws complicate this matter. Some countries in SubSaharan Africa, including Ghana, Benin, Guinea, have enacted laws
prohibiting NGOs from collect deposits (Basu 2004). This
significantly hinders the ability of an MFI to function and would
encourage NGOs to formally register as a cooperative or company.
Considering that there would be “NGO-style” MFIs operating as
cooperatives and companies, this factor would be reflected in lower
loan sizes, or higher depth of outreach. Yet, previous research
suggests that cooperatives may actually decrease depth of outreach.
In an analysis of 163 MFIs, Lafourcade et al. (2005) found that
cooperatives had twice as high loan sizes than other MFIs. An
explanation for this may lie in theories of in-group and out-group
social capital. In a theory set forth by Fukuyama (1999), when social
capital within groups increases, social capital towards outsiders
decreases. Since cooperatives are by definition a group of members
working towards a common objective, cooperatives may be more
inward looking than outward looking in terms of interests. If true,
this would be reflected in lower depth of outreach. Just because
cooperatives are partially owned by employees or customers does not
mean that outreach goals are prioritized. In fact, the opposite trend
may be occurring.
I will control for MFI size by the logarithm of total assets.
The amount of an MFI’s assets is a good indicator of MFI size and
the logarithm function normalizes the distribution. This
measurement has been used frequently by previous scholars (Kar
2011; Chishty 2011; Bogan 2012; Kyereboah-Coleman and Osei
2008). Previous research has found that MFI size is negatively
associated with the depth of outreach (Farrington & Abrams 2003;
Bogan 2012; Kar 2011). Based on the life cycle theory, scholars have
133 Spring 2015 noted the tendency of MFIs to utilize commercial financing
opportunities as they get grow in assets (Bogan 2012; Helms 2006;
Basu 2004). The greater the size, the greater the opportunity for
commercial lending. As an MFI takes on more commercial debt, the
pressures to perform financially overwhelm outreach objectives.
Therefore as MFI size increases, the depth of the outreach is
expected to decrease.
I will also control for MFI age by the logarithm of the
number of years an MFI has been in operation. The number of years
indicates MFI age, and the logarithm function normalizes the
distribution. This measurement has been used by a number of
scholars (Kar 2011; Chishty 2011; Makame and Murinde 2006; Cull et
al. 2007). Competing theories suggest that this variable may have a
positive or negative effect on depth of outreach. The older the MFI,
the more interpersonal and institutional trust within a community,
the deeper the outreach to poor clients (Epstein and Yuthus 2011). If
theory holds true, the older the MFI, the greater the depth of
outreach. On the other hand, the life cycle theory asserts that most
young MFIs will be financed on donations and subsidies but as an
MFI ages, it will “transform” its capital structure to commercial
opportunities (Farrington & Abrams 2003; Bogan 2012; Helms
2006). If the life cycle theory holds true, then as MFI age increases,
the depth of the outreach is expected to decrease.
134 Critique: A worldwide journal of student politics Table 1: Definition of Measurements
Variable
Measurement
Depth of Outreach
(Loan portfolio/# of
borrowers)/GNI per capita
Profit (ROA)
Income/Assets
Leverage
Debt/Assets
Cost of Borrowings
Interest + Fees Paid on
Borrowings/Assets
Donation Intensity
Donations/Assets
Investment Ratio
Paid-In Capital/Assets
Size
Log (Assets)
Age
Log (Age)
Company (D)
0
NGO (D)
1
Cooperative (D)
1
Descriptive Statistics
Of the 74 MFIs in this study, the average loan size varied greatly
from $23.28 to $2,487.32 before taking into account GNI per capita.
After taking into account GNI per capita, average loan size varied
from .03 to 6.23 with a mean of 1.08. The measurement that this
study uses to define depth of outreach has a large range from
excellent depth of outreach (low number) to poor depth of outreach
(high number). ROA varied greatly from -119% to 62% with an
average ROA of -5% demonstrating that some of the MFIs in this
study were experiencing negative growth while others were
experiencing substantial growth. Leverage had a minimum value of 0
and a maximum value of 15 showing that some MFIs did not take on
any debt while some took on a good amount. Demonstrating the
range of MFI age, years of operation was as low as 5 years old up to
50 years old. After taking the log into account, the average MFI size
135 Spring 2015 was 6.1. Of the MFIs in this study, 17 or 23% of the MFIs were
categorized as NGOs while 31 or 42% of the sample were
categorized cooperatives. Complete accounts of the variables are
listed below in Table 1.
Loan Size
ROA
Leverage
Cost
Borrowings
Donation
Intensity
Investment
Ratio
Size
Age
NGO
Cooperative
Table 2: Descriptive Statistics of Variables
Min. Value
Max. Value
Mean
.0268
6.2332
1.0772
-119.8
-61.9
-5.2347
0
14.5891
.7997
of -.000009
1.99339
.04071
-.000793
7.74635
.41932
0
1.48755
.11153
3.672744
.69897
0
0
7.93905
1.69897
1
1
6.10674
1.17878
.23287
.42465
Findings
This model 3 suggests that characteristics of a commercialized
financing structure do not necessarily decrease depth of outreach.
None of the variables demonstrated a VIF value greater than 5 confirming that
this model does not have problems of multicolinearity.
3
136 Critique: A worldwide journal of student politics The adjusted R2 is .11 suggesting that this model4 explains 11% of the
variation of loan size.
Although ROA, cost of borrowings, donation intensity, and
investment ratio are all insignificant at the .05 level, the direction of
all the signs are as expected. ROA is positive suggesting that as
profitability increases, depth of outreach decreases. MFIs with greater
donation intensity have a positive effect on depth of outreach. MFIs
with higher investment ratios had a negative effect on depth of
outreach. This model finds that cost of borrowing decreases depth of
outreach. Yet, since these variables are insignificant, these findings
support the institutionalist argument that MFIs that are under greater
pressure to perform financially do not necessarily compromise
outreach objectives. Furthermore, this model supports the findings of
Bogan (2012) that MFIs that depend on subsidies do not have greater
depth of outreach.
Along these same lines, MFI size and age are found to be
insignificant. As MFI size increases, depth of outreach decreases. Yet,
since this variable is insignificant, this model suggests that as an MFI
grows in size and likely undertakes commercial financing, this does
not significantly overshadow outreach objectives. Similarly, although
older MFIs demonstrated a negative effect on depth of outreach, this
variable is insignificant. Therefore, older MFIs may be taking on
more commercialized financing without decreasing depth of
outreach.
After conducting Cook’s test, Service d’Appui aux Initiatives Locales de
Développement, an MFI in Cameroon, was found to be an influential case and was
removing making the sample size 74. This is likely due to the fact that SALID is an
organization that lends to MFIs, not directly to clientele. Therefore, inclusion in the
analysis was theoretically flawed.
4
137 Spring 2015 However, this model also reveals that aspects of
commercialization can have negative impacts on depth of outreach.
As leverage increases, there is a decrease in depth of outreach.
Significant at the .05 level, as an MFI takes on more debt in order to
pursue financial objectives, depth of outreach decreases. Supporting
the findings of Conning (1999) and Kar (2011), this cautions the
overuse of debt.
Furthermore, MFIs that were registered as cooperatives had a
negative and significant effect on depth of outreach. MFIs that are
registered as cooperatives reach less poor people than companies.
This finding suggests that member ownership leads to increased selfinterest within the group rather than appealing to the interests
outside the group. Contrary to previous research, MFIs registered as
NGOs had an insignificant impact on depth of outreach. However,
since institutional laws have likely affected registration decisions,
further research should explore banking laws in Sub-Saharan Africa
and how these might change how an MFI registers its institution
type.
138 Critique: A worldwide journal of student politics Table 3: Regression of Depth of Outreach on Explanatory Variables
Independent
Coef.
Variables
(S.E.)
ROA
.004
(.007)
Leverage
.300*
(.158)
Donation Intensity -.233
(.250)
Investment Ratio
.085
(.779)
Cost of Borrowing .055
(.667)
NGO
-.377
(.433)
Cooperative
.673*
(.377)
Size
.191
(.191)
Age
.739
(.977)
N= 74
Adj
R2=.11
Note: *p<.05, one-tailed test
139 Spring 2015 Policy Implications
For policy-makers on a local, national, and international scale, these
findings suggest that it is possible to pursue a commercial capital
structure without compromising the social objective of depth of
outreach. Although increased loan interest rates and investments may
encourage strict financial accountability, this emphasis on financial
sustainability does not necessarily overshadow outreach objectives.
This is good news to Sub-Saharan African MFIs that may want to
transform their capital structure in order to attract more capital. This
is also good news to local or international organizations that are
considering Sub-Saharan Africa as a location for a new MFI. The
ability to access commercial financing sources rather than the limited
pool of grants and subsidies can potentially spread the opportunities
of microfinance across unreached spaces. This study suggests that
such a commercial capital structure, indicated through ROA,
investment ratio, and cost of borrowing does not compromise
outreach objectives. In other words, MFIs can remain socially
conscious and still pursue financial sustainability.
Yet, this study also suggests a word of caution. Overleveraging, or overextending debt to assets, can have negative
repercussions on depth of outreach. This study suggests that MFIs
with high leverage were unable to balance financial objectives with
social objectives. The pressures to perform financially overshadowed
the outreach mission resulting in a change of clientele from poor to
better off, a finding reflected in growing loan sizes. MFIs that pursue
a commercialization of capital structure must be careful not to take
on too much debt.
Additionally, this study suggests that MFI decision makers
that intend to emphasize social goals should consider registering as
an NGO or as a company. Supporting the theory set forth by
140 Critique: A worldwide journal of student politics Fukuyama (1999), cooperatives tend to be more inward looking and
less concerned with the welfare of the out-group, or nonmembers.
Yet, it is also possible that this study has not examined the
full picture of commercialization. The commercialization of MFIs
affects many aspects of microfinance practices, not just the capital
structure. Literature suggests that the conditions attached to loans,
the time period of repayment, interest rates charged to borrowers,
environments of regulation and competition, and MFI management
structure are also impacted by the trend of MFI commercialization
(Basu 2004; Makame and Murinde 2006; Charitonenko and Rahman
2002; Kyereboah-Coleman and Osei 2008; Mersland et al. 2009;
Christen 2001). Yet, the goal of this study was to focus on one aspect
of commercialization, the capital structure, in an attempt to clearly
define the pattern of commercialization. Although not in the scope
of this study, including these additional variables may better account
for the trend of commercialization. In other words, perhaps
understanding an MFI’s capital structure does not sufficiently capture
the characteristics of commercialization. Future research should
strive to identify more of the characteristics of commercialization in
order to test for their impact on depth of outreach.
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148 Critique: A worldwide journal of student politics Appendix A: Country data on the 74 observations
Country
Burkina Faso
Benin
Burundi
Cameroon
Chad
Ethiopia
Gambia
Ghana
Guinea
Kenya
Niger
Nigeria
Madagascar
Malawi
Mali
Mozambique
Rwanda
South Sudan
South Africa
Sierra Leone
Senegal
Togo
Tanzania
Uganda
Zambia
25 out of 47 countries
# of Observations
2
1
1
4
1
5
1
4
1
5
6
3
1
1
1
1
9
1
2
1
4
1
2
14
2
74
149