Determinants of Microfinance Institutions' Financial Sustainability; Does Depth of Outreach Matters? Evidence from MFIs in Kenya
Abstract
The financial sustainability of microfinance institutions is vital in ensuring financial inclusion of the poor population. Moreover, it has been argued that it is better not to have MFIs than having unsustainable ones indicating how important the sustainability of MFIs is. Therefore, the present study investigated the moderating role of the depth of outreach on the relationship between determinants and financial sustainability. The study adopted an explanatory research design where a panel approach was used and a positivist paradigm. The target population was all 52 registered microfinance institutions in Kenya for the period 2010-2018. The study adopted the census approach method. The data was collected from 30 MFIs for 9 years from mix market database using a data collection schedule. The study used both descriptive and inferential statistics to analyze data. Hypotheses were tested using hierarchical multiple regression and the choice between fixed or random effect models was determined by the Hausman test. The findings showed that depth of outreach had an antagonistic moderating effect on the relationship between financial leverage and financial sustainability (β = -0.12, ρ<0.05) and the relationship between portfolio quality and financial sustainability (β= -0.118, ρ<0.05). Therefore, the study encourages MFIs to engage in the prudent use of financial leverage so that they enhance their overall profitability and financial sustainability in the long-run. Besides, managers should develop loan appraisal and monitoring mechanisms to minimize the danger of default rates as well as improve the quality of their portfolio. Finally, managers of MFIs are advised to understand the intersection between financial leverage, portfolio quality and depth of outreach, if they are to realize financial sustainability.
Keywords: Financial Leverage, Portfolio Quality, Financial Sustainability, Microfinance Institutions, Depth of Outreach
References
Adongo, J., & Stork, C. (2006). Factors influencing the financial sustainability of selected microfinance institutions in Namibia: Namibian Economic Policy Research Unit.
Aguilera, R. V., & Jackson, G. (2010). Comparative and international corporate governance. The Academy of Management Annals, 4(1), 485-556.
Ahlin, C., & Jiang, N. (2008). Can micro-credit bring development? Journal of Development Economics, 86(1), 1-21. Aiken, L. S., West, S. G., & Reno, R. R. (1991). Multiple regression: Testing and interpreting interactions. Sage.
Al-Malkawi, H.-A. N., & Pillai, R. (2018). Analyzing financial performance by integrating conventional governance mechanisms into the GCC Islamic banking framework. Managerial Finance, 44(5), 604-623.
Aronsson, T., & Löfgren, K.-G. (2007). Welfare theory: History and modern results. Umeå Economic Studies, 726.
Awaworyi Churchill, S. (2018). Sustainability and depth of outreach: Evidence from microfinance institutions in sub‐Saharan Africa. Development Policy Review, 36, O676-O695.
Ayayi, A. G., & Sene, M. (2010). What drives microfinance institution's financial sustainability. The Journal of Developing Areas, 303-324.
Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of personality and social psychology, 51(6), 1173.
Barry, T. A., & Tacneng, R. (2014). The impact of governance and institutional quality on MFI outreach and financial performance in Sub-Saharan Africa. World Development, 58, 1-20.
Bayai, I., & Ikhide, S. (2018). Financing Structure and Financial Sustainability of Selected SADC Microfinance Institutions (MFIs). Annals of Public and Cooperative Economics, 89(4), 665-696.
Berger, A. N., & Di Patti, E. B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065-1102.
Bogan, V. L. (2012). Capital structure and sustainability: An empirical study of microfinance institutions. Review of Economics and Statistics, 94(4), 1045-1058.
Bos, J. W., & Millone, M. (2015). Practice what you preach: Microfinance business models and operational efficiency. World Development, 70, 28-42.
Boslaugh, S. (2007). An introduction to secondary data analysis. Secondary data sources for public health: A practical guide, 2-10.
Brau, J. C., & Woller, G. M. (2004). Microfinance: A comprehensive review of the existing literature. The Journal of Entrepreneurial Finance, 9(1), 1-28.
Chen, Y., & Hammes, K. (2004). Capital structure theories and empirical results-A panel data analysis. Available at SSRN 535782.
Cheng, S.-R., & Shiu, C.-Y. (2007). Investor protection and capital structure: International evidence. Journal of multinational financial management, 17(1), 30-44.
Chikalipah, S. (2017). What determines financial inclusion in Sub-Saharan Africa? African Journal of Economic and Management Studies, 8(1), 8-18.
Christen, R. P., Rhyne, E., Vogel, R. C., & McKean, C. (1995). Maximizing the outreach of microenterprise finance: The emerging lessons of successful programs: Harvard Institute for International Development Cambridge.
Churchill, S. A., & Marr, A. (2017). Sustainability and outreach: a comparative study of MFIs in South Asia and Latin America and the Caribbean. Bulletin of Economic Research, 69(4), E19-E41.
Committee, B. (2010). Basel III: A global regulatory framework for more resilient banks and banking systems. Basel Committee on Banking Supervision, Basel.
Conning, J. (1999). Outreach, sustainability and leverage in monitored and peer-monitored lending. Journal of Development Economics, 60(1), 51-77.
Conning, J., & Morduch, J. (2011). Microfinance and social investment. Annu. Rev. Financ. Econ., 3(1), 407-434.
Crawford, N., & McKenzie, L. (2011). E-learning in context: An assessment of student inequalities in a university outreach program. Australasian Journal of Educational Technology, 27(3).
Cull, R., Demirgu ̈ ç‐Kunt, A., & Morduch, J. (2007). Financial performance and outreach: A global analysis of leading microbanks. The Economic Journal, 117(517), F107-F133.
D’espallier, B., Guérin, I., & Mersland, R. (2011). Women and repayment in microfinance: A global analysis. World Development, 39(5), 758-772.
De Aghion, B. A., Armendáriz, B., & Morduch, J. (2007). The economics of microfinance: MIT press.
Dehejia, R., Montgomery, H., & Morduch, J. (2012). Do interest rates matter? Credit demand in the Dhaka slums. Journal of Development Economics, 97(2), 437-449.
Duguma, G., & Han, J. (2018). Effect of Deposit Mobilization on the Financial Sustainability of Rural Saving and Credit Cooperatives: Evidence from Ethiopia. Sustainability, 10(10), 3387.
Drukker, D. M. (2003). Testing for serial correlation in linear panel-data models. The stata journal, 3(2), 168-177.
Galema, R., & Lensink, R. (2009). Microfinance commercialization: Financially and socially optimal investments. University of Groningen, Working Paper.
García-Herrero, A., Gavilá, S., & Santabárbara, D. (2009). What explains the low profitability of Chinese banks? Journal of Banking & Finance, 33(11), 2080-2092.
Ghatak, M. (1999). Group lending, local information and peer selection. Journal of Development Economics, 60(1), 27-50.
Gibbons, D. S., & Meehan, J. W. (1999). The microcredit summit's challenge: Working toward institutional financial self-sufficiency while maintaining a commitment to serving the poorest families. Journal of Microfinance/ESR Review, 1(1), 8.
Godquin, M. (2004). Microfinance repayment performance in Bangladesh: How to improve the allocation of loans by MFIs. World Development, 32(11), 1909-1926.
Gonzalez, A. (2010). Is microfinance growing too fast?. MIX data brief, (5).
Gujarati, J. (2012). A comprehensive induction system: A key to the retention of highly qualified teachers. The Educational Forum (Vol. 76, No. 2, pp. 218- 223). Taylor & Francis Group.
Hardy, M. A. (1993). Regression with dummy variables (No. 93). Sage.
Hartarska, V., & Nadolnyak, D. (2007). Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence. Applied Economics, 39(10), 1207-1222.
Hartarska, V., Shen, X., & Mersland, R. (2013). Scale economies and input price elasticities in microfinance institutions. Journal of Banking & Finance, 37(1), 118-131.
Hayes, A. F. (2013). Introduction to mediation, moderation, and conditional process analysis: Methodology in the Social Sciences. Kindle Edition, 193.
Helms, B. (2006). Access for all: building inclusive financial systems: The World Bank.
Hermes, N., & Hudon, M. (2018). Determinants of the performance of microfinance institutions: A systematic review. Journal of economic surveys, 32(5), 1483-1513.
Hermes, N., & Lensink, R. (2007). The empirics of microfinance: what do we know? The Economic Journal, 117(517), F1-F10.
Hermes, N., & Lensink, R. (2011). Microfinance: its impact, outreach, and sustainability. World Development, 39(6), 875-881.
Hulme, D., & Mosley, P. (1996). Finance against poverty (Vol. 2): Psychology Press.
Johnson, C. (2015). The impacts of capital structure on outreach depth in Sub-Sahara Africa. Critique: A worldwide journal of student politics.
Johnston, M. P. (2017). Secondary data analysis: A method of which the time has come. Qualitative and quantitative methods in libraries, 3(3), 619-626.
Jose, P. E. (2008). ModGraph-I: A program to compute cell means for the graphical display of moderation analyses: The internet version, Version 2.0. Victoria University of Wellington, Wellington, New Zealand. Retrieved June 4, 2009.
Kabeer, N. (2005). Direct social impacts for the Millennium Development Goals Money with a Mission Volume 1-Microfinance and Poverty Reduction (Vol. 66, pp. 66-93): Practical Action Publishing in association with GSE Research.
Kar, A. K. (2012). Does capital and financing structure have any relevance to the performance of microfinance institutions? International Review of Applied Economics, 26(3), 329-348.
Karlan, D. S., & Zinman, J. (2008). Credit elasticities in less-developed economies: Implications for microfinance. American Economic Review, 98(3), 1040-1068.
Khandker, S. R. (2005). Microfinance and poverty: Evidence using panel data from Bangladesh. The world bank economic review, 19(2), 263-286.
Kipesha, E. F., & Zhang, X. (2013). Sustainability, profitability and outreach tradeoffs: evidences from microfinance institutions in East Africa. European Journal of Business and Management, 5(8).
Kyereboah-Coleman, A. (2007). The impact of capital structure on the performance of microfinance institutions. The Journal of Risk Finance, 8(1), 56-71.
Lanha, M. (2004). Efficacité relative du prêt de groupe avec caution solidaire. Cahier de.
Little, T. D., Bovaird, J. A., & Card, N. A. (2012). Modeling contextual effects in longitudinal studies. Routledge.
Lopatta, K., Jaeschke, R., & Chen, C. (2017). Stakeholder engagement and corporate social responsibility (CSR) performance: International evidence. Corporate Social Responsibility and Environmental Management, 24(3), 199-209.
Maes, J. P., & Reed, L. R. (2012). State of the microcredit summit campaign report 2012. Microcredit Summit Campaign.
Mahjabeen, R. (2008). Microfinancing in Bangladesh: Impact on households, consumption and welfare. Journal of Policy modeling, 30(6), 1083-1092.
Makombe, I., Temba, E., & Kihombo, A. (2005). Micro-Credit and Women‟ s Empowerment: Evidence from the Credit Scheme for Productive Activities of Women
in Tanzania.‟. Alleviating Poverty: Case Studies of local level Linkages and Processes in Developing World. India, Rainbow Publishers.
Manos, R., & Yaron, J. (2009). Key issues in assessing the performance of microfinance institutions. Canadian Journal of Development Studies/Revue canadienne d'études du développement, 29(1-2), 101-122.
McConnell, J. J., & Servaes, H. (1995). Equity ownership and the two faces of debt. Journal of financial economics, 39(1), 131-157.
Mersland, R., & Strøm, R. Ø. (2010). Microfinance mission drift? World Development, 38(1), 28-36.
Morduch, J. (1999). The microfinance promise. Journal of economic literature, 37(4), 1569- 1614.
Muriu, P. W. (2011). Microfinance profitability. University of Birmingham.
Nyamsogoro, G. D. (2010). Financial sustainability of rural microfinance institutions (MFIs) in Tanzania. University of Greenwich.
Olivares-Polanco, F. (2005). Commercializing microfinance and deepening outreach? Empirical evidence from Latin America. Journal of Microfinance/ESR Review, 7(2), 5.
Paxton, J. (2003). A poverty outreach index and its application to microfinance. Economics Bulletin, 9(2), 1-10.
Reichert, P. (2018). A meta-analysis examining the nature of trade-offs in microfinance. Oxford Development Studies, 46(3), 430-452.
Rhyne, E. (1998). The yin and yang of microfinance: Reaching the poor and sustainability. MicroBanking Bulletin, 2(1), 6-8.
Schreiner, M. (2000). Credit scoring for microfinance: Can it work? Journal of Microfinance/ESR Review, 2(2), 6.
Schreiner, M. (2002). Aspects of outreach: A framework for discussion of the social benefits of microfinance. Journal of international development, 14(5), 591-603.
Silva, L., & Backhouse, J. (1997). Becoming part of the furniture: the institutionalization of information systems Information systems and qualitative research (pp. 389-414): Springer.
Smith, A. (1776). The Wealth of Nations (New York: Modern Library, 1937). Originally published, 3.
Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of financial economics, 26(1), 3-27.
Toumi, K., Viviani, J. L., & Belkacem, L. (2011). A comparison of leverage and profitability of Islamic and conventional banks. Paper presented at the 6th International Finance Conference on Financial Crisis and Governance. Cambridge Scholars Publishing (Ed.).
Vanroose, A., & D’Espallier, B. (2013). Do microfinance institutions accomplish their mission? Evidence from the relationship between traditional financial sector development and microfinance institutions’ outreach and performance. Applied Economics, 45(15), 1965-1982.
Wambugu, F. W., & Ngugi, J. K. (2012). Factors influencing sustainability of microfinance institutions in Kenya: A case of Kenya Women Finance Trust. International Journal of Innovative Research and Development (ISSN 2278–0211), 1(11), 519-537.
Woller, G., & Schreiner, M. (2002). Poverty lending, financial self-sufficiency, and the six aspects of outreach. Disc. Paper, Ohio.
Woller, G. M., Dunford, C., & Woodworth, W. (1999). Where to microfinance. International Journal of Economic Development, 1(1), 29-64.
Wooldridge, J. M. (2009). Introductory econometrics: a modern approach. [Mason, Ohio], South-Western engage learning.
Yaron, J., & Manos, R. (2007). Determining the self-sufficiency of microfinance institutions. Savings and Development, 131-160.
