Financing structure and financial sustainability: evidence from selected Southern Africa development community microfinance institutions

Date
2017-03
Journal Title
Journal ISSN
Volume Title
Publisher
Stellenbosch : Stellenbosch University
Abstract
ENGLISH SUMMARY : Despite the burgeoning interest in microfinance, research has shied away from addressing the relationship between financing structure and the financial sustainability of microfinance institutions (MFIs) as evidence on the same remains sparse. Considering the commercialisation trend, this thesis closes this gap by examining the relationship between the financing structure and financial sustainability for selected Southern Africa Development Community (SADC) MFIs. The effort was informed by the need to have financially sustainable MFIs that can consistently provide financial services to the marginalised, and hence advance outreach in the poverty–stricken region. The thesis comprises a blend of four research papers that address: (1) a conceptual review of ‘financial sustainability’ as applied in microfinance, (2) the essence of the life cycle theory (LCT) in explaining financial sustainability, (3) financing structure and financial sustainability, as well as (4) the relationship between the financing structure and outreach (depth and breadth). Assuming panel data on 60 selected MFIs drawn from the MIX over a period of six years, the study applies robust panel framework (fixed and random effects models) as well as binary–outcome models (probit and logit models). The results show that MFI age alone cannot explain the level of financial sustainability. Rather, the ability to manage default risk by reducing the portfolio at risk as well as embracing cost–efficiency by minimising both operational and financing costs improves chances of financial sustainability. Generally, MFIs are not financially sustainable — supporting evidence from earlier studies. ‘Young’ MFIs emerge more financially sustainable signifying a new trend variant from the propositions of the LCT. Further evidence reveals that financial sustainability is sensitive to the financing sources employed by MFIs as well as the number of active borrowers. Regulatory costs also limit the role of deposits in spurring financial sustainability. Moreover, results demonstrate that outreach depth is significantly constrained by debt financing; whilst equity, deposits and ‘new’ MFIs have a significant positive effect on outeach depth. Outreach breadth is promoted by deposits only; whilst equity, debt and ‘new’ MFIs limit it. The study suggests the adoption of proper credit risk analysis done through credit bureaus and client screening technology to reduce adverse selection and moral hazard. In addition, a strong loan recovery strategy can also limit outstanding loans. Embracing cost–efficiency through the use technology such as mobile banking and cost–cutting innovation in lending may reduce the operating costs for MFIs. Also, financing costs incurred through the use of costly borrowings can be controlled by reducing borrowings, thereby improve chances of attaining financial sustainability. The removal of controls on lending rates and the promotion of efficient financial markets through appropriate regulatory framework go a long way in reducing the cost of borrowing, allow for the raising of equity capital as well as stimulating financial sustainability. Regulation that promotes competition; reduce regulatory costs and allow for the establishment of ancillary financial infrastructure (credit bureaus) helps in improving transparency in the microfinance sector.
AFRIKAANSE OPSOMMING : Ten spyte van die groeiende belangstelling in mikrofinansies, het navorsing weg van die aanspreek van die verhouding tussen finansiering struktuur en die finansiele volhoubaarheid van microfinanciering instellings (MFI) as getuienis op dieselfde weggeskram bly yl. Met inagneming van die kommersialisering tendens, hierdie tesis sluit hierdie gaping deur die ondersoek van die verhouding tussen die finansiering struktuur en finansiele volhoubaarheid vir geselekteerde Suider-Afrikaanse Ontwikkelingsgemeenskap (SAOG) MFI. Die poging is deur die behoefte om finansieel volhoubaar MFI wat konsekwent kan verskaf finansiele dienste aan die gemarginaliseerde, en dus bevorder uitreik in die armoede-geteisterde gebied het. Die tesis bestaan uit 'n mengsel van vier referate wat spreek: (1) 'n konseptuele oorsig van 'n finansiele volhoubaarheid 'soos toegepas in mikrofinansies, (2) die essensie van die lewensiklus teorie (LCT) in die verduideliking van finansiele volhoubaarheid, (3) finansiering struktuur en finansiele volhoubaarheid, asook (4) die verhouding tussen die finansiering struktuur en uitreik (diepte en breedte). Die aanvaarding van data paneel op 60 gekies MFI uit die mengsel oor 'n tydperk van ses jaar, die studie van toepassing is sterk paneel raamwerk (vaste en ewekansige effekte modelle) asook binere-uitkoms modelle (probit en logit-modelle). Die resultate dui daarop dat MFI ouderdom alleen die vlak van finansiele volhoubaarheid nie kan verduidelik. Inteendeel, die vermoe en die standaard risiko te bestuur deur die vermindering van die portefeulje in gevaar asook die aanvaarding van koste-doeltreffendheid deur die vermindering van beide operasionele en finansieringskoste verhoog kanse op finansiele volhoubaarheid. Oor die algemeen, MFI is nie finansieel volhoubaar - ondersteunende bewyse van vorige studies. 'Jong' MFI na vore meer finansieel volhoubaar aan te dui 'n nuwe tendens variant van die stellings van die LCT. Verdere bewyse toon dat finansiele volhoubaarheid is sensitief vir die finansiering bronne in diens van MFI asook die aantal aktiewe leners. Regulatoriese koste ook die rol van deposito te beperk in stijgende finansiele volhoubaarheid. Verder het die resultate toon dat uitreik diepte aansienlik beperk word deur skuldfinansiering; terwyl aandele, deposito's en 'nuwe' MFI het 'n beduidende positiewe uitwerking op outeach diepte. Outreach breedte word bevorder deur net deposito's; terwyl aandele, skuld en 'nuwe' MFI beperk dit. Die studie dui daarop dat die aanvaarding van behoorlike krediet risiko-analise gedoen deur kredietburo's en klient screening tegnologie om ongunstige seleksie en morele gevaar te verminder. Daarbenewens kan 'n sterk lening herstel strategie ook uitstaande lenings te beperk. Omhels koste-doeltreffendheid deur die gebruik van tegnologie soos mobiele bankdienste en koste te sny innovasie in uitleen kan die bedryfskoste vir MFI verminder. Ook, finansieringskoste gely deur die gebruik van duur lenings kan beheer word deur die vermindering van lenings en sodoende kanse bereiking finansiele volhoubaarheid te verbeter. Die verwydering van kontroles op uitleenkoerse en die bevordering van doeltreffende finansiele markte deur middel van toepaslike regulerende raamwerk gaan 'n lang pad in die vermindering van die koste van lenings, voorsiening te maak vir die verkryging van aandele kapitaal sowel as stimulerend finansiele volhoubaarheid. Regulasie dat mededinging bevorder; verminder regulatoriese koste en voorsiening te maak vir die vestiging van bykomende finansiele infrastruktuur (krediet buro) help in die verbetering van deursigtigheid in die mikrofinansies sektor.
Description
Thesis (PhD)--Stellenbosch University, 2017.
Keywords
Financial structure, Sustainable development, Microfinance -- Developing countries, Southern African Development Community, UCTD
Citation