Financing pattern investigations using regression analysis

This section reports on results of test of regression of various sources of finance with total assets as the dependent variable. The analysis in this section is however restricted to a simple econometric procedure due to the short time series of the data. The intention is to investigate using a stronger statistical method than the percentage of proportions in section 4.6.2.1, if there are identifiable financial structure patterns as well as the effects of MFI financial behaviour on changes in total assets over the sample period 1998 to 2003. In the tests, use is made of the financing choices established in Table 4.23: namely, changes in types of debt and equity including quasi- equity (or donations), savings, and other liabilities over varying number of years after Shyam- sunders and Myers (1999) and Watson and Wilson (2001). For the dependent variable, total assets is used in the ordinary least squared (OLS) regression presented in Table 4.26 and Table 4.27.

Table 4.26: Ordinary Least Squares regression results Dependent variable: Total Asset Growth

Independent variables Coefficient T-Statistic P-Values

Intercept (4.7737) 0.0000*** Equity 3 0.1692 (1.8179) 0.0722 Equity 2 0.4522 (4.7271) 0.0000*** Equity 1 -0.0814 (-1.1600) 0.249 Debt 3 0.2299 (2.5093) 0.0138** Debt2 0.1986 (2.3348) 0.0216** Debt 1 0.2231 (2.9889) 0.0035*** Adjusted R2-squared 0.62474 R2 –Squared 0.64726 F- Statistic 28.748 *** Significant level at 1% ** Significant level at 5% *Significant level at 10%

Notes: Table 4.26 presents the summary statistics of the variables used in the OLS regression of total assets on Equity and Debt. Equity 1, 2 and 3 are estimated at MFI level, based on debt equity proportions of the balance sheet over three years using input from Table 4.23. The same approach applies for Debt 1, 2 and 3. Independent variables are defined as follows: Equity 1 represents change in relative proportions of aggregate total equity between year 2 and 1; Equity 2 represents relative change in year 3 and 2 while Equity 3 represents relative change between year 3 and 1. The same procedure was used to compute Debt 1, 2 and 3. Dependent variable is measured by total asset growth for 3 years. All values are derived from MFI audited balance sheets consecutive data series over the sample period 1998 to 2003.

Table 4.26 shows regression estimates detailing the relative influence of each of the financing components in relation to overall changes in asset financing. It indicates that the need for growth in total assets (additional resources) was largely met by internal resources first, for the whole sample. In Column IV, Equity 2 is significant at 1% level and positively correlated with growth in total assets. The model shows that, besides this variable, all other significant and influencing finance sources relate to debt. Column II shows the pattern of the coefficients represented by the beta values (see beta values (β) explanation in section 3.6) in terms of relative size: Equity 2 coefficient

is the largest, followed by changes in Debt 3, followed closely by Debt 1 and Debt 2 and thereafter by Equity 3. Finally, the least coefficient is given by period changes in Equity 1 which is negatively associated with changes in total assets and is not significant at all. It appears that this source made no contribution on growth in total assets over the sample period although Equity 3 contributed significantly. This coefficient’s pattern suggests the preference for distinctive sources of

finance, namely; equity sources are more preferred first and second debt. This is consistent with the prescriptions of the pecking order with regard to explanations on financing choices.

A closer look at the T-statistic in brackets for the model gives further inference on prioritisation over the different sources of finance broadly between debt and equity, with higher values indicating more preferred sources and more explanatory power to growth in assets, while the ranking provides insight into the pattern. The adjusted R2 _{result show that changes in both equity and debt}

components account for 62.5% of the total asset growth over the period. This represents one of the best choice models fitted after many trial models not presented here were found to be un- impressive.

Inspection of the results indicates that all proportions of debt are significant and associated with the change in total assets, but come second after the most influential component of equity. This point to the fact that the most preferred financing source is equity, perhaps donations (also referred to as quasi-equity) and MFI contributed capital before external sources of finance start being in demand. It is to be noted that Equity 3 is significant and after all debt sources, perhaps representing higher earnings being recouped to finance growth. A number of authors have suggested these patterns that, MFIs facing financial deficit in their early years resort to donations and savings from friends before attracting debt finance (Zapalska et al., 2007; Pollinger et al., 2007; Cull et al., 2008). The results are therefore indicative that MFIs finance growth in assets first with internal sources which include donations, own capital and social contributions since these components are not distinguished at this level. Thereafter, faster growth requires external debt finance as is the case in the present study supplemented by profits. It indicates that fast growing MFIs are profitable with a likelihood of attracting debt finance. This reflects the importance of interest-bearing debt sources of capital after exhausting quasi-equity and/or retained earnings. The implications of these findings are that, in general, fast-growing African MFIs are likely to seek finance from commercial sources.

Table 4.27: Ordinary Least Squares regression results: various finance sources Dependent variable: Total Asset Growth

Independent Variables Coefficient T-Statistic Prob.

Savings 0.11 (3.377048) 0.0000*** Equity 1 -0.01 (-0.200854) 0.8400 Equity 2 0.58 (5.724035) 0.0000*** Equity 3 0.08 (1.340338) 0.1800 Debt 1 0.15 (2.699892) 0.0100** Debt 2 0.06 (1.415058) 0.1600 Debt 3 0.08 (2.85025) 0.0100** Other Liabilities 0.00 (0.768275) 0.4400 C 0.27 (3.414229) 0.0000***

R-squared 0.6800 Adjusted R2-squared 0.65000 Prob (F-statistic) 0 *** Significant level at 1%,

F-statistic 24.3469 ** Significant level at 5%, Durbin-Watson stat 2.457045 * Significant level at 10%,

Notes: Table 4.27 presents OLS regression of total assets on various sources of Equity and Debt. The definitions of variables are as in Table 4.26 for Equity 1, 2, 3 and Debt 1, 2 and 3. In addition two more sources of finance are added to the model, savings and other liabilities. All values are derived from MFI audited balance sheets consecutive data series over the sample period 1998 to 2003.

The model estimated in Table 4.26 did not distinguish between different types of debt and equity. Table 4.27 distinguishes between three types of debt: i.e. savings, different forms of interest- bearing debt (Debt 1, 2, 3); and other liabilities representing short term obligations due to minority groups. Theses additional variables were included to capture the pattern of financing among different sources of debt financing.

As can be seen from Table 4.27, the adjusted R2 _{squared which gives the explanatory power of the}

model shows a marginal increase from 62.5% to 65.0% (compare Adjusted R2 _{in Table 4.26) with}

inclusion of more sources. The model produces slightly stronger results in terms of adjusted R2 _but

mixed results with regard to the relative size of statistical significance of independent variable coefficients vis-à-vis Table 4.26. The coefficient estimates, however, are able to explain significantly higher proportions of the variance in the dependent variable. For example, period changes in Equity 2 can explain 58% of the variance in asset growth as opposed to 45% in Table 4.26. On the other hand, explanatory power of Debt 3 is reduced to 8% from 22.9% probably due to split of savings which are able to explain 11% of changes in assets.

The pattern of coefficients nonetheless confirms the previous results, but also suggest a new pecking order within debt finance sources. Thus, equity (including donations), retained earnings are more preferred first, and then some form of debt, savings and then more debt. The distortion of the pattern as obtained in Table 4.26 could be because of errors in separation of the data or because the debt variables are highly correlated. Though, once again, this finding could equally reflect supply-side constraints (Watson & Wilson, 2001; Helwege & Liang, 1996; Shyam-Sunders & Myers, 1999).

In conclusion, the pattern followed by MFIs in financing asset growth over the last three years tested under the OLS regression estimates seems to have moved from equity sources to savings to debt as per the significant levels and T-statistic. Indeed this pattern is more understandable and best describes the financing pattern that obtains from MFI financing behaviour (cf results of Table 4.23). It is indicative that the shift is from own sources of finance, and/or donations first, before these funds are augmented by forced savings from clients and then debt (including all forms of liabilities). This has the implication that once internal sources are exhausted, the financing order seems to seek savings next, before debt finance is requested finally as part of external finance. Overall, these basic figures suggest a pattern consistent with pecking order theory predictions, that, internal sources are more preferred than external sources of finance and among debt sources, safer debt is more preferred.