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Journal of Sustainable Finance & Investment

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A cross-country analysis to investigate the true role of microfinance institutions in developed and developing economies
Muhammad Sajid Saeed
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Department of Accountancy, Finance and Risk, Glasgow Caledonian University, Cowcaddens Rd, Glasgow, Lanarkshire G4 0BA, UK Published online: 06 Mar 2014.

To cite this article: Muhammad Sajid Saeed (2014): A cross-country analysis to investigate the true role of microfinance institutions in developed and developing economies, Journal of Sustainable Finance & Investment, DOI: 10.1080/20430795.2014.883301 To link to this article: http://dx.doi.org/10.1080/20430795.2014.883301

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Journal of Sustainable Finance & Investment, 2014 http://dx.doi.org/10.1080/20430795.2014.883301

RESEARCH ARTICLE A cross-country analysis to investigate the true role of micronance institutions in developed and developing economies
Muhammad Sajid Saeed*
Department of Accountancy, Finance and Risk, Glasgow Caledonian University, Cowcaddens Rd, Glasgow, Lanarkshire G4 0BA, UK (Received 12 August 2013; accepted 20 December 2013) It is perceived that the micronance institutions (MFIs) served millions of poor people by providing them easy access to loans with better repayment rates. The purpose of this study is to conduct a cross-country comparison among three Asian developing countries (Bangladesh, Pakistan, and India) and two developed economies (UK and USA) to evaluate the effectiveness of their MFIs in serving low-income people. The micronance data for six years from 2006 to 2011 are collected from authentic sources. The ndings of the study reveal that Bangladesh and India are comparatively ahead of other nations in serving poor people by providing them microcredits. Keywords: micronance; cross-country analysis; role of micronance

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1.

Introduction

Micronance became very popular when Muhammad Yunus, the founder of Grameen Bank, received a Nobel Prize for increasing awareness for supporting poor families by giving them microcredits. Since then several micronance institutions (MFIs) have been established both in developed and developing nations. To date, MFIs have served millions of poor people by providing them easy access to loans with better repayment rates, and also improving their health and welfare (Becker 2010). Therefore, there is no doubt that a majority of poor families gained countless benets from micronance schemes all around the world, but problems occurred when too many MFIs rapidly expanded worldwide until 2009 without appropriate institutional abilities to control (Ltzenkirchen 2012). The growing interest in micronance schemes in developing and developed economies raised many issues. For example, potential borrowers did not retain any written evidence, wish to borrow minor uneconomic loans, and often have no assets as collateral. In this regard, many researchers believe that micronance is one of the major factors that signicantly contributed to the nancial crisis of 2008 (Srnec, Vyborna, and Havrland 2009). Momoh (2005) highlights the fact that some particular banks and nancial institutions in developing economies, such as Bangladesh in Asia and Ghana in Africa, have achieved considerable success in using micronance as a tool to reduce poverty level. This debate is rather unclear because many studies have claimed that a majority of MFIs in developing economies are responsible of putting beneciaries in debt (Srnec, Vyborna, and Havrland 2009). Similarly, some studies concern about the ineffectiveness of MFIs in reaching the core poor (Manohar 2000).
*Email: msaeed14@caledonian.ac.uk
2014 Taylor & Francis

M.S. Saeed

Zeller and Meyer (2002) also doubt about the actual role of MFIs due to a number of issues hampering the proper implementation and growth of micronance in developing and developed countries. 2. Literature review The role of MFIs on alleviating the poverty has gained momentum. Different opinions are found in this context. Some believe that MFIs play a positive role in reducing poverty while others perceive that they signicantly contributed to the nancial crisis of 2008 (Srnec, Vyborna, and Havrland 2009). But before discussing the role of MFIs in detail, it is essential to understand the difference between different types of MFIs to evaluate the nature of nancial services offered by each of them. Normally, four types of government and non-government institutions are formally involved in micronance activities. These intermediaries could be commercial banks, specialised nancial institutions, state-owned banks and nance organisation. Recently, many commercial banks in both developing and developed economies have started to inltrate into the micronance sector. There are several ways that commercial banks can engage in micronance activities. For instance, they can either directly interact with borrowers or indirectly involve by generating funds. In general, commercial banks participate in micronance activities in four ways: direct lending, partnership with MFIs, micronance subsidiary, or securitisation (Ledgerwood 1999; Rhyne 2009). The direct lending ability of commercial banks allows them to serve the micronance sector without any issue or delay. The Grameen Bank started group lending in 1976 where the loan was attributed to each individual in a group. However, if in case any individual defaults his/her current credit than he/she may not get the approval of new loan. The group-lending procedure involves a responsibility of borrowers to reimburse their credits on time and in a disciplined way (Ledgerwood 1999). Commercial banks also establish a partnership with MFIs and lend them in a variety of ways such as retail and wholesale banking. On the other hand, MFIs collect, monitor, and originate loans. Indeed, MFIs obtain many benets working with commercial banks. As the greater capital can enlarge loan size, so the banks may introduce their products and services to other geographical areas (Rhyne 2009). One such example is the ICICI Bank in India that has established alliances with more than 72 MFIs throughout the country and looking to raise the number of partnerships to 250 by the end of 2013 (Ugur 2006). Another signicant practice of commercial banks for starting micronance operations is to establish new subsidiaries. These subsidiaries help commercial banks to alleviate the level of risk while lending to low-income people. From the point of view of borrowers, dedicated micronance services offered by the commercial banks may develop high trust and indicate banks commitment to poverty reduction. Finally, commercial banks also play a signicant role in the context of micronance by generating capital in local and international markets to support and strengthen the operations of MFIs (Ledgerwood 1999). 3. Research objective and contribution

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In the past, the role of very few MFIs has been explored so far, and existing studies do not clearly reveal any conclusive results showing the performance of MFIs in developing and capitalist economies (Momoh 2005; Ltzenkirchen 2012). Therefore, to date, the role of MFIs is rather unclear and the reason is the lack of comparative studies that compare and analyse the role of MFIs in reducing the poverty in both developing and developed countries. Therefore, this research signicantly contributes to the nance literature by investigating the actual and perceived role of MFIs

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in reducing the worldwide poverty level. For this purpose, a cross-country analysis is conducted by considering the cases of different MFIs operating in different countries such as Bangladesh, India, Pakistan, the UK, and USA. 4. Research design and methodology

This research is based on the exploratory research design due to its non-experimental nature and logical use of qualitative approach. Another reason of using the exploratory research design is to address the strong need of exploring the role of MFIs which is still unclear due to lack of studies in this domain. The study does not rely on any hypothesis and also does not employ large data samples. It is based on existing data available about MFIs for cross-country analysis. The qualitative approach is followed in this research on the grounds of its nature and core research aim which is to effectively measure the efciency and efcacy of MFIs through qualitative data available in the form of facts and gures regarding MFIs. In addition, empirical data about various MFIs of selected countries also allow the researcher to conduct cross-country analysis.
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4.1. Population The population of this research mainly consists of formal MFIs operating in developed and developing countries. These countries include: Asian countries including Bangladesh, India, and Pakistan), the UK, and the USA. All MFIs operating in these countries are chosen to assess their true role in reducing poverty. 4.2. Data collection and analysis The work in this study is primarily based on meaningful secondary data. Therefore, it is collected from many reliable sources which include websites, document reviews, micronance case studies, commercial banks, MFIs, journals and books, and various Internet sources. The key sources of acquiring processed information about micronance are the MFIs operating in Asia, the UK, and USA regions. In order to support qualitative reasoning during the cross-country analysis, the empirical data from 2006 to 2011 about MFIs are collected from http://www.mixmarket. org database. The empirical data for 2012 are not collected because it was not fully updated in micronance databases. The data collected about MFIs are based on 10 micronance indicators suggested by Becker (2010). These indicators are micronance borrowings, gross loan portfolio, number of active borrowers, return on asset (ROA) ratio, return on equity (ROE) ratio, deposit-toloan (DTL) ratio, average loan balance per borrower, cost per borrower, and cost per loan. The average of each indicator for all MFIs associated with each country is taken on a yearly basis. Data analysis is the backbone of this research. Each countrys MFIs are analysed and evaluated on the basis of empirical information that indicates the effectiveness and productivity of those institutes in reaching and serving low-income people. The average of each micronance indicator for all MFIs associated with each country is taken on annual basis. The reliability and validity of the data are analysed through Cronbachs alpha (C) test using Statistical Package Social Sciences (SPSS) application. The results of C test are illustrated in Table 1 where all 10 indicators are categorised into four groups. Each groups C indicates satisfactory results. The table also shows that the overall reliability of the data is 0.825 which is considered as good. Furthermore, Karl Pearsons correlation coefcient is used to nd correlations between the micronance indicators of each country. The value of correlation coefcient (r) should remain between 1 and +1 where answer near to 1 represents negative relationship between variables and near to +1 indicates a positive relationship (Black 2009). The graphs and tables are constructed in MS Excel to represent empirical data.

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Table 1. Reliability analysis. Category Gross loan portfolio Borrowing related Financial stability related Cost related Overall reliability

M.S. Saeed

Indicator Gross loan portfolio Borrowings Number of active borrowers Average loan balance ROA ratio ROE ratio DTL ratio Cost per borrower Cost per loan

Items 1 4 3 2 10

C 0.722 0.901 0.841 0.754 0.825

Result Acceptable Excellent Good Acceptable Good

5.
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Cross-country analysis

5.1. Analysing gross loan portfolio A gross loan portfolio represents all outstanding principal amounts that are due for entire outstanding client loans. Apart from interest receivable, this undertakes all renegotiated loans, delinquent, and current loans. Figure 1 represents the outstanding amounts of MFIs operating in selected developed and developing countries where higher gures indicate more outstanding principals. An exceptional case is evident in the gure which shows that the USA has provided a greater number of microloans to low-income people between 2008 and 2009 to stimulate the economy in order to avoid the adverse impacts of the recession. On the other hand, Bangladesh is comparatively ahead of other countries in providing microloans to poorer people. A continuous increasing trend from 2006 to 2008 in Bangladeshs gross loan portfolio represents the emergence of various new MFIs in the micronance sector (Delimatsis and Herger 2011). Apart from the developed countries such as the UK and USA, the trend line of gross loan portfolio of developing countries looks stable throughout the period. This could be the reason that micronance facility was not or partly available in these countries before the 2008 recession. As compared to the Bangladesh and other developing countries, most of the

Figure 1. Gross loan portfolio (000).

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Table 2. Correlation matrix. BNG BNG IND PK USA UK 1 0.627 (0.182) 0.064 (0.904) 0.562 (0.245) 0.509 (0.302) IND 1 0.038 (0.943) 0.944** (0.005) 0.928** (0.008) PK USA

UK

1 0.256 (0.624) 0.196 (0.709)

1 0.991** (0.000)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. ** Represent 0.01 signicance level.

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low-income people in the UK do not bother to undertake microloans as they often get considerable support from government in the form of tax credits and other benets to full their primary needs (Gov.uk 2013). Table 2 represents the correlation matrix of a gross loan portfolio of selected countries. It is found from the correlation analysis that the loan portfolios of the USA, UK, and India are strongly correlated with each other and also signicant at the 0.01 level. This is due to their matching ratios of providing microloans to poor people during the recession period. 5.2. Analysing outreach

5.2.1. Borrowings Borrowings represent the loans made by MFIs in a particular time period. Figure 2 illustrates mixed trends of borrowings in the selected countries. The point to be noted is that both the UK and USA had very low borrowings before 2008 and they started to increase the level of borrowings after the 2008 recession to prevent low-income families from recession impacts. The borrowings of India and Bangladesh also increased after 2008, but borrowings in Pakistan faced a decline due to instability of the political situation in the country (United Nations 2012). Therefore, it can be said that apart from Pakistan, all other selected countries signicantly increased their borrowings after the 2008 and then normalised them in next years. The borrowings of Bangladesh and India are far high compared to other countries due to the familiarity and popularity of microcredit in these countries.

Figure 2. Borrowings (000).

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Table 3. Correlation matrix. BNG BNG IND PK USA UK 1 0.151 (0.776) 0.156 (0.768) 0.142 (0.788) 0.034 (0.948) IND

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PK

USA

UK

1 0.364 (0.478) 0.872* (0.023) 0.821* (0.045)

1 0.176 (0.739) 0.247 (0.637)

1 0.967** (0.002)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. ** Represent 0.01 signicance level. * Represents 0.05 signicance level.

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The correlation matrix in Table 3 provides somehow similar results as Table 1. The borrowings level in India is positively correlated with those of in the USA and UK. Table 2 also illustrates a strong correlation between the UK and USA at the 0.05 signicance level. On the other hand, the correlation between Bangladesh and UK is positive, but it is insignicant at 0.01 and 0.05 levels due to differences in the demand of micronance in both countries. 5.2.2. Number of active borrowers The number of active borrowers means individuals or groups who presently have an outstanding loan balance. This also refers outstanding balances with MFIs that people are responsible to repay on time in the proportion of the gross loan portfolio. However, a person having more than one loan is considered as a single borrower. As shown in Figure 3 Bangladesh leads other countries in having the maximum number of borrowers each year from 2006 to 2011. India due to its extensive poverty level is at the second position followed by Pakistan. The USA compared to the UK has a higher number of active borrowers because of the public awareness and improvement in the knowledge of micronance (Olsen 2010). The correlation matrix in Table 4 demonstrates signicant positive relationships among the UK, USA, and India, and negative relationship between Bangladesh and other countries in terms of number of active borrowers throughout the chosen period. This shows the parallel increasing and decreasing trends in these countries within the same period.

Figure 3. Number of active borrowers (000).

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Table 4. Correlation matrix. BNG BNG IND PK USA UK 1 0.052 (0.922) 0.206 (0.695) 0.421 (0.406) 0.504** (0.001) IND 1 0.034 (0.949) 0.783 (0.066) 0.841* (0.036) PK USA

UK

1 0.300 (0.563) 0.259 (0.620)

1 0.881* (0.020)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. ** Represent 0.01 signicance level. * Represents 0.05 signicance level.

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Figure 4. Average loan balance per borrower.

5.2.3.

Average loan balance per borrower

The average loan balance per borrower is computed as dividing the gross loan portfolio by the number of active borrowers. It is quite amusing that both the UK and USA have the highest average per borrower. This may be because of the difference of exchange rates between developed and developing countries. For example, giving 300 microcredit can be a small amount for a UK national but it worth as medium loan for the people living in Asian developing countries. This is also the reason that the UK has a high average loan balance per borrower compared to Bangladesh as shown in Figure 4. The correlation matrix in Table 5 gives that positive correlation among Bangladesh, India, and the USA at the 0.01 signicance level. This means the ratio of average loan balance per borrower is somehow similar among these three countries. On the other hand, the table reveals statistically insignicant but positive correlations between Pakistan and India and the UK and USA. 5.3. 5.3.1. Analysing nancial stability ROA ratio

The ROA ratio is expressed as deducting taxes from net operating income and dividing it by total assets. The high ROA ratio is better because it indicates the efcient use of assets in generating

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Table 5. Correlation matrix. BNG BNG IND PK USA UK 1 0.846* (0.034) 0.057 (0.915) 0.911* (0.012) 0.259* (0.011) IND

M.S. Saeed

PK

USA

UK

1 0.335 (0.516) 0.800 (0.056) 0.090 (0.865)

1 0.184 (0.728) 0.063 (0.906)

1 0.366 (0.476)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. * Represents 0.05 signicance level.

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Figure 5. ROA ratio.

funds. Figure 5 illustrates interesting results where the ROA ratio of UK MFIs was more assets intensive and consequently negative throughout 20062011 except 2008 when it increased 200% due to changes in nancial policies to mitigate the impact of the recession (Imai et al. 2011). Bangladesh performed well in keeping the balance between assets and earnings and therefore has a higher ROA compared to other selected countries. India and the USA also achieved positive ROA, whereas Pakistan faced negative ROA from 2006 to 2010. The positive gure in 2011 indicates better performance in terms of utilising best use of its assets. The correlation matrix in Table 6 indicates only one positive correlation between the USA and India which is signicant at the 0.01 level. All other values are not statistically signicant with each other, but they do have positive or negative associations.
Table 6. Correlation matrix. BNG BNG IND PK USA UK 1 0.109 (0.837) 0.467 (0.350) 0.038 (0.943) 0.381 (0.457) IND 1 0.026 (0.962) 0.329* (0.024) 0.567 (0.240) PK USA UK

1 0.459 (0.360) 0.227 (0.666)

1 0.344 (0.504)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. * Represents 0.05 signicance level.

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Figure 6. ROE ratio.

5.3.2. ROE ratio The ROE ratio is calculated by deducting taxes from net operating income and divided it by shareholder s equity. In fact, ROE measures MFIs efciency of generating funds from each unit of shareholder s equity. In Figure 6 negative gures of UK MFIs are not the good sign of performance which often causes negative income consequences such as shareholders may withdraw remaining nances from the business. Although Bangladesh, Pakistan, and India faced several ups and downs in ROE due to economic and nancial considerations, but they were able to maintain positive values throughout the period. Table 7 of correlation matrix indicates only one strong correlation value that is 0.832 between the USA and UK which is also statistically signicant at the 0.01 level. Other countrys MFIs are insignicantly correlated with each other which demonstrate their different ROEs in different periods. 5.3.3. DTL ratio

The DTL ratio is calculated as dividing deposits by gross loan portfolio. Here, deposits represent all compulsory, voluntary, institutional, or retail deposits whereas a gross loan portfolio is the outstanding client loans. In Figure 7, the higher percentages indicate that deposits more than adequately funded the loan portfolio. In this regard, again Bangladesh clean sweeps other countries with high DTL ratios. Interestingly, the second highest but unstable ratios are achieved by Pakistan and the USA which is a good sign of micronance success in these countries. On the
Table 7. Correlation matrix. BNG BNG IND PK USA UK 1 0.418 (0.409) 0.567 (0.240) 0.096 (0.856) 0.011 (0.983) IND 1 0.120 (0.821) 0.534 (0.275) 0.085 (0.873) PK USA UK

1 0.047 (0.929) 0.177 (0.737)

1 0.832* (0.040)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. * Represents 0.05 signicance level.

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Figure 7. DTL ratio (000). Table 8. Correlation matrix. BNG BNG IND PK USA UK 1 0.314 (0.544) 0.710 (0.114) 0.047 (0.929) 0.864* (0.026) IND 1 0.239 (0.648) 0.303 (0.559) 0.259* (0.015) PK USA UK

1 0.146* (0.013) 0.599 (0.209)

1 0.337 (0.514)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. * Represents 0.05 signicance level.

other hand, India and the UK have achieved lower DTL ratios throughout the period. Bangladesh maintains high percentages compared to other countries because the country introduced micronance activities several years ago. In Table 8, the correlation matrix reveals only two statistically signicant correlations such as 0.259 and 0.146 that are between India and the UK, and USA and Pakistan. These correlations exist because of the stability in the percentages of DTL ratio among these countries. 5.4. 5.4.1. Analysing costs Cost per borrower

Cost per borrower is expressed as dividing operating expenses by the number of active borrowers within a particular time period. It primarily gives an idea of the average cost of maintaining a single current borrower. Figure 8 indicates the cost per borrower for each country in providing micronance services to poor clients. It is evident in Figure 8 that Bangladesh has the lowest cost per borrower followed by India whereas the UK has the highest cost per borrower. This is because of the currency and exchange rate differences as the UK has the highest currency value among all selected countries; or in other words, the value of Bangladesh, India, and Pakistan currencies (for example, Taka and Rupees) are very low as compared to the

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Figure 8. Cost per borrower (000). Table 9. Correlation matrix. BNG BNG IND PK USA UK 1 0.522 (0.288) 0.381 (0.457) 0.389 (0.446) 0.954** (0.003) IND 1 0.754 (0.084) 0.079 (0.882) 0.381 (0.456) PK USA UK

1 0.050 (0.925) 0.164 (0.757)

1 0.287 (0.581)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. ** Represent 0.01 signicance level.

UK. But it is amusing to see that Pakistan has the second highest cost per borrower, even more than the USA. This could be the result of lack of knowledge and awareness of micronance in the country. The correlation matrix of cost per borrower in Table 9 demonstrates a negative correlation between the UK and other countries due to the fact of huge differences between the costs per borrower. 5.4.2. Cost per loan

Similar to cost per borrower, cost per loan gives an idea of the average cost of maintaining a single loan. It is expressed as operating expenses by the average number of outstanding loans within a particular time period. Figure 9 reveals quite similar results as Figure 8 where Bangladesh and India have the lowest cost per loan compared to other countries. On the contrary, the UK and Pakistan have a high-cost per loan. Unfortunately, this is the permanent drawback of high-value currencies but the impact of this drawback could be reduced by concentrating on increasing ROA and DTL ratios by stimulating gross loan portfolio and customer deposits (Harper and Arora 2005). Table 10 also reveals a negative but statistically signicant relationship between the UK and Bangladesh MFIs. In addition, a positive correlation between India and Bangladesh MFIs illustrates the stability and continuous low costs of both countries within the selected period.

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Figure 9. Cost per loan (000). Table 10. Correlation matrix. BNG BNG IND PK USA UK 1 0.589* (0.019) 0.458 (0.361) 0.607 (0.201) 0.793* (0.027) IND 1 0.467 (0.350) 0.276 (0.597) 0.556 (0.252) PK USA UK

1 0.597 (0.211) 0.277 (0.595)

1 0.614 (0.195)

Note: BNG, Bangladesh; IND, India; PK, Pakistan. * Represents 0.05 signicance level.

Figure 10. Average borrowings.

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Figure 11.

Average gross loan portfolio.

Figure 12. Average number of active borrowers.

6.

Conclusions

The cross-country comparison reveals some interesting insights about micronance success/ failure in Asian developing and the two worlds developed countries such as the UK and USA. Apart from some exceptional cases, the overall analysis reveals that Bangladesh and India are comparatively ahead in the success rate of micronance implementation among all countries taken as case studies. The averages of all indicators from 2006 to 2011 are taken in Figures 1015. The average of borrowings in Figure 10 illustrates the strong positions of India

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Figure 13. Average loan balance per borrower.

Figure 14. Average nancial stability (20062011).

and Bangladesh in acquiring borrowings to facilitate micronance activities. Interestingly, the average gross loan portfolio of the USA followed by Bangladesh is evident in Figure 11 which is a good sign for micronance implementation in both developed and developing countries. The strong position of Bangladesh is clearly demonstrated in Figures 12 and 13 where Bangladesh dominates other countries in terms of number of active borrowers and average loan balance per borrower. The positions of the UK and USA are inadequate at this moment because the micronance activities are relatively new in these countries. In fact, this concept became popular after the nancial crisis of 2008 when governments started to intensify such activities to stimulate their economies.

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Figure 15. Average costs (20062011).

Figures 14 and 15 also demonstrate dominating positions of Bangladesh and India in terms of performance (measured through ratios) and cost of loans and individual borrowers. The micronance performance in the UK in terms of ratio analysis is not satisfactory compared to other countries. It is also concluded on the basis micronance indicators that MFIs in the UK and USA lack of performance, nancial stability, outreach, and cost compared to the developing countries particularly Bangladesh and India. This is because that the micronance concept is new in these developed countries and hence there is a strong need to intensify micronance activities to increase awareness and knowledge.

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Olsen, T. D. 2010. New Actors in Micronance Lending: The Role of Regulation and Competition in Latin America. Perspectives on Global Development and Technology 9 (3): 500519. Rhyne, E. 2009. Micronance for Bankers and Investments. New Delhi: Tata McGraw-Hill Education. Srnec, K., M. Vyborna, and B. Havrland. 2009. Micronance in Developing Countries and Financial Crisis. Agricultura tropica et subtropica 42 (4): 187191. Ugur, Z. 2006. Commercial Banks and Micronance. College Undergraduate Research Electronic Journal 1. Philadelphia, PA: University of Pennsylvania. United Nations. 2012. World Economic Situation and Prospects 2013: Global Outlook. Press Release 18 December 2012. New York, NY: United Nations. Zeller, M., and R. L. Meyer, eds. 2002. The Triangle of Micronance: Financial Sustainability, Outreach and Impact. Baltimore, MD: John Hopkins for the International Food Policy Research Institute.

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