| Abstract: |
Microfinance Institutions (MFIs) in sub-Saharan Africa (SSA) and the
developing world have over the years attracted and received billions of US
dollars (valued at over US$4 billion annually worldwide) in subsidies and
concessionary funds. These subsidies are used to capitalize, promote growth,
and help improve efficiency, operations and performance of newly established
MFIs. At face value these interventions seem positive, yet studies have shown
that they can be counterproductive in terms of their effect on the
performance, efficiency and self-sustainability of the MFIs. This research
addresses this issue by identifying four determinants of MFI’s performance and
analysing the effect that subsidies have on them. A quantitative approach was
used in the analysis in which the financial data of 92 MFIs were estimated
using panel data estimation. The method of variable selection was based on the
procedure used by Nawaz (2010). This method of determining the relationship
between selected performance and sustainability indicators and subsidy was
modelled on the Subsidy Dependant Index (SDI) method of analysis developed by
Yaron (1992a) and the Return on Asset (ROA), Operational Self-Sufficiency
(OSS) and Financial Self-Sufficiency (FSS) methods of analysis developed by
the SEEP Network (2005). The summary results of the analysis showed that the
majority of MFIs (90.22%) were not sustainable nor were they found to be
profitable. However, the results show that all the institutions were
operationally self-sufficient and that, on average, MFIs in SSA charged higher
interest rates than MFIs in other parts of the world. The average OSS was
136.01% showing that MFIs are operationally self-sufficient. However, the
average FSS value was ix 74.32% reflecting that the MFIs are not able to raise
enough revenue to cover their capital and indirect costs which would
ultimately result in them running out of equity funds. The inclusion of
subsidies in the sustainability regressions resulted in a decline in the
ability of the MFIs to attain operational and financial self-sufficiency, thus
showing the negative effect subsidies have on the sustainability of MFIs.
Inflation and interest rates charged on loans also had a negative effect on
sustainability as they resulted in an increase in costs and a decline in the
number of low income clients. MFIs located in wealthier countries were found
to be more efficient because of the lower costs associated with having
wealthier clients who have larger loan sizes. MFIs in lower income countries
have to overcome limitations of weak infrastructures, low population densities
and rural markets which increase operating costs. Older institutions were
found to more likely be sustainable than new and young MFIs as expected
because of their improved efficiency and productivity and also because they
have more experience and are therefore better equipped to overcome challenges.
However, by adding subsidy in the analysis the results show that the level of
efficiency of MFIs is reduced. The results also show that with increased
maturity MFIs are found to be more productive, however, when subsidies are
included in the finances the levels of productivity will decline as costs
increase. NBFIs are the most suitable business model to practice in MFIs in
Africa according to the findings which reflect that NBFIs are more profitable
and efficient than any of the other business models in the sample. However,
cooperatives were found to be the most productive business model as they have
a stronger borrower to staff ratio than the other institutional types.
Furthermore, cooperatives and NBFIs tend to have clients who are better off
and therefore can afford to take larger sized loans, unlike clients of NGOs
who are poor who struggle to have a stable income. |