The volume of savings mobilized by sample MFIs and the sector, in general, was very low. Despite the increasing trend it showed recently, it still represented 37 percent of the sector’s GLP (AEMFI, 2013). The major reason for the low level of savings may be attributed to the very little incentive attached to the mobilization of savings. Many MFIs consider mobilization of savings as costly and re-lending the deposits even would lead to greater losses. Moreover, many MFIs in Ethiopia have access to donated equity from development partners and highly concessional borrowings that they obtained from development finance institutions. Thus, this led them to give little attention to mobilization of client savings. In addition, since the interest rates on deposits is very low (which in Ethiopian case is 5 per cent) against the sky-high inflation in the country which results in real rates on deposits fell to zero or even below, savers had little incentive to build up accounts and ultimately, little savings was generated, and money stayed under mattresses or was moved into nonfinancial assets. Except OMO the three sample MFIs didn’t achieved level of OSS, and all of them were not attaining FSS yet. With negative AROA and AROE ratios, MFIs in Ethiopia are still not profitable.
The development of microfinance institutions in Ethiopia since 1996 has been a remarkable progress in poverty reduction. Numerous descriptive studies have ensured that microfinance is an effective tool to eradicate poverty in Ethiopia but evidence from quantitative studies is mixed. Derbew Kenubeh (2015), examined with the objective to identify and highlighting the key challenges facing officials of microfinance institutions by taking a case study of Amhara Credit and Saving Institution, Ethiopia and found that the officials of the institutions facing several challenges emanated from system of the organization and from the side of clients and suggested that the policy makers and institution itself should give emphasis to avoid the challenges facing officials. Mohammad (2010), stated in his study that microfinance institutions faced many problems and suggested that the government needs to play an important role to accelerate the sector and provide essential facilities to minimize challenges and strategic policy towards the microfinance
The progression form microcredit to microfinance signifies more than a swing in naming. The focus of micro credit at one point of time was on the development of highly standardised1 products that are simple to administer and in which fraud is easy to control as a means to break the cycle of poverty. Though the provision of credit to the poor used methodologies that were radical, subsequent innovations, especially in terms of broadening the range of financial service for the poor and designing more suitable financial products with a better fit with the livelihood opportunities and constraints of the poor, remained large stunted, leading many to describe the industry as a case of 'monopoly with monoproducts'. One reason for the evolution to micro finance is that the previous approach often fails to take into account the complex nature of low-income households' life style and income sources. While designing microfinance programs all these objectives are of great importance but a careful experimentation with new innovative approaches to provide more client responsive financial services can attain better balance between clients' preferences and institutional imperatives.
This result is in line with the finding of Ghatak and Guinnane (1999) who declared that peer monitoring is the act in which members are incited to exercise the appropriate effort and to allocate funds in the more productive ways in order to solve problem of loan default and joint liability among group members are important principles that can lower losses of MFIs as a loan default. Besides, it is in line with the theories of peer monitoring which say groups are motivated by the fact that group members have an incentive to take remedial action against a partner who miss-uses his/her loan because of joint liability. With group lending, individual borrowers are made to bear liability for themselves and for others in their group, but the savings in the form of better project choice allows the bank to pass on some benefits to the borrowers in the form of reduced interest rates (Ghatak & Guinnane, 1999). Thus, group lending increases welfare and repayment rates.
To turn to external governance, external corporate governance issues such as the competition for the MFIs show mixed result. In an early research provided by Olivares-Polanco (2005), the authors claim that competition in the market tend to lead to larger loan sizes and shallower outreach. The author argues that in these cases, the poorest borrowers are simply dropped from the microfinance lending portfolio. These findings are contradicted, first by a finding from Hartarska et al., (2012) who observed that competition had no effect on MFIs’ performance and then by other researches who found completion to decrease (improve) outreach. D´Espallier and Vanroose (2013) found MFIs to reach more clients and were also more profitable in countries where the access to traditional financial system is limited. In contrast, in countries where there is already an established banking system, the existing banks are in competition with the microfinance institutions which pushes them down-market towards the poorest customers, hence deepening the outreach. In other words, greater competition pushes MFIs down towards the poorest and provides them with loans.
In povertyalleviation strategies, adalah (justice) and khilafah (the individual’s role as God’s vicegerent on earth) remain the most important sources to develop solutions. Mannan (1986: 323) suggests that the foundational solution to povertyalleviation lies in establishing justice, as the Qur’an declares that: “Allah comment justice, the doing of good, and liberality to kith and kin, and He forbids all shameful deeds, and injustice and rebellion: He instruct you, that ye may receive admonition” (Qur’an, 16:90). In support of this, Chapra (1992: 213-224) points out that efficiency and equitable resource utilisation and distribution in Islam can be achieved by using dual moral filters: (i) to strike a blow against the greedy and their unlimited wants by forcing them to stay in line with khilafah and adalah; (ii) to utilise resources only for good purposes which can be performed through: (a) moral filter of the inner self; (b) motivation to find balance between self- interest and the interest of other people/public interest; (c) ‘restructure the whole economy’ with the goal of maqasid and limiting of scarce resources that must be utilised effectively; (d) a government highly-committed to actively practising Islamic values in economic policies to realise public wellbeing. Therefore, Islam, theoretically, recognises a thorough approach, blending the material and spiritual and not just relying on a single strategy on the material side.
A few studies have also been conducted to quantify the impact of microfinance on povertyalleviation. Hulme and Mosley (1996), for instance, based on the counter factual combined approach, analyzed the impact of microfinance on povertyalleviation using sample data for Indonesia, India, Bangladesh and Sri Lanka and found that growth of income of borrowers always exceeds that of control group and that increase in borrowers income was larger for better-off borrowers. Similarly MkNelly et al. (1996) found positive benefits for the borrowers. Khandker (1998), based on double difference comparison between eligible and ineligible households and between program and control villages, focusing on Grameen, Bangaladesh and Bangaldesh Rural Advancement Committee (BRAC), found that microcredit alleviated poverty up to 5 percent annually. Furthermore, it was found that a loan of 100 taka to a female borrower, after it is repaid, allows a net consumption increase of 18 taka. For Thailand village banks, Coleman (1999), using the same approach as that of Khandker (1998), found no evidence of any impact of micro finance. Another study by Coleman (2004), found that programs are not reaching the poor as much as they reach relatively wealthy people. Khandker (2003), found that microfinance helps to reduce extreme poverty much more than moderate poverty, i.e. 18 percentage points as compared with 8.5 percentage points over seven years. Welfare impact is also positive for all households, including non-participants, as there were spillover effects.
Wangwe (2004) argued that the rural financial services in Tanzania enable poor people not only to increase their incomes, build assets, and reduce vulnerability but also lead to improved nutrition and health status. Wangwe (2004) further argued that the factors that prevent proper operation of the rural financial markets include unfavorable macroeconomic policies, weak financial sector regulations, institutional and unfavorable legal framework. Similarly, Ahlén (2012) argued that MFIs have positive socio-economic impacts to the beneficiaries. His study indicated that MFIs helped beneficiaries to fulfill consumption needs, to pay for school fees and to get the capital for small businesses for clients. Furthermore, Kato and Kratzer (2013) revealed the high level of women empowerment caused by participation in Microfinance. Mukama et al. (2005) asserted that low educational level of clients, lack of capital to lend clients, staff- related incentives and lack of skills development strategies inhibiting the growth of the microfinance sector in Tanzania.
income) customers. This product revisits the issuing of systemic venture of MFIs, and finds that opposition to the information before the crisis, MFI show is correlated not only to retainer scheme conditions but also to changes in multinational city markets. It also presents an existential analysis of loaning rates with the usefulness of disclosure contract decisions, and finds that word sizes, fecundity, and MFI age boost to vindicate differences in lending value levels. This suggests that rule (and policies) promoting MFI competition and creativity in lending rates.
We first assume that eﬀort is unobservable (hidden action model) assuming that the donor cannot observe neither the eﬀort level chosen by the MFI, nor the fraction of richer borrowers. He only discovers the total repayment rate of loans to the MFI. We show that, in this case, asymmetric information can reduce the share of very poor borrowers reached by loans, thus increasing mission drift. This happens when the pro-poor orientation of the MFI is weak as compared to the one of the donor, so that this source of mission drift is more likely to arise in country in which MFIs are profit oriented. Afterwards, we allow for unobserved heterogeneity among MFIs: some of them are more eﬃcient than others and the contract proposed by the donor has to screen among diﬀerent types of MFI (hidden type model). In this case, the existence of asymmetric information between the donor and the heterogeneous MFIs tends to increase the poor outreach of the more eﬃcient MFIs while decreasing it for less eﬃcient ones so that in some case asymmetric information has the eﬀect of lowering the average level of mission drift (i.e. the share of richer borrowers who are granted a loan).
Microfinance Institutions are used as tools of poverty eradication, women empowerment & financial inclusion, their performance is mostly evaluated on the basis of non-financial factors. The MFIsperformance of MFI is thus evaluated on the basis of their social performance rather than its financial performance. However for the survival of any entity financial performance & financial sustainability plays a very important role. A MFI is measured for financial sustainability based on its efficient financial performance. Previously the MFIs were non-for-profit organizations later several non-banking financial companies & non-governmental organizations) have come into the microfinance sector. The primary aim of this research is to study the financial performance of Selected NGOs-MFIs & NBFC-MFIS & to compare their financial performance. The data is collected from secondary sources of data for the research study. The different sources used are journals research articles, papers, and different websites. The data collected is analyzed utilizing MS-excel & SPSS software.
Microfinance serves as a parallel financial sector by reaching the poor and under-privileged clients which commercial financial institutions fails to reach hence, can be used as an effective povertyalleviation tool in regions like Asia where majority of the world’s poor live (Hulme and Mosley, 1996; Brau and Woller, 2004). In the recent years corporate governance has attracted lot of attention from different stakeholders of microfinance because many of the failures of MFIs in past have been linked with the presence of weak governance system in those institutions. CSFI (2014) consider quality of management and governance as one of the most pressing risks facing this industry. Labie and Mersland (2011) highlighted the importance of good governance in overall performance of MFIs. Mersland and Strom (2008); (2009); Coleman and Osei (2008); Manderlier et al. (2009); Bassem (2009); Tchuigoua (2010); Aboagye and Otieku (2010); Hartarska and mersland (2012) and Galema et al. (2012) found empirical evidence of how corporate governance leads to improved financial performance in microfinance. While some corporate governance studies support the existence of unidirectional relationship (Wruck, 1989; Randoy and Goel, 2001; Mitton, 2002; Fernandez and Gomez, 2002; and Chen et al. 2007), literature also highlights the importance of studying direction of causality between corporate governance and firm performance (Kole, 1996; Bohren and Odegaard, 2001; Farooque et al. 2007a; 2007b; Adams and Ferreira, 2009). This study responds to the need of more literature on causal relationship between corporate governance and performance of MFIs by first studying whether good governance in MFIs of Asia lead to improved financial performance and later answering the question whether more financially sustainable MFIs of Asia are also better in their governance structures. However, we take a separate approach from prior literature, which provide separate investigation of different characteristic of corporate governance and ignore their combined effect which is considered more effective approach (Bebchuk et al. 2008). We employee various characteristics of corporate governance from the perspective of leadership and ownership structure to construct a corporate governance index (CGI) for MFIs of Asia which is used as a proxy for overall corporate governance mechanism of MFIs.
Abstract: The purpose of this study was to assess the effect of debtors management on the financial performance of selected microfinance institutions (MFIs) at Nairobi County in Kenya. The independent variables for debtors management were: debt collection policy, internal control systems, client appraisal and legal framework. On the other hand, the dependent variable was financial performance of selectedMFIs at Nairobi County in Kenya. Primary data was collected by the aid of self administered questionnaires and analyzed using multiple regression analysis. Both descriptive statistics and inferential statistics were determined. The nine licensed MFIs in Nairobi City, Kenya by the CBK as at 31 st December 2014 were the target population of the Study. In each of the 9 MFIs, four individuals were purposively selected to participate in the study as respondents; these were the Branch Manager, Credit Officer, Debt Recovery Officer, and Finance Officer and hence the sample size was 36 Officers in the 9 MFIs. With the aid of SPSS version 21.0 and Excel software, quantitative results were tabulated and presented in the form of charts, bar graphs, and narratives. The study found out that debt collection policy, legal framework and internal control systems are statistically significant in influencing financial performance of selectedMFIs at Nairobi City in Kenya. The study further established client appraisal had no statistically significant effect on financial performance of MFIs at Nairobi city in Kenya. The study found out that internal control systems had a significant effect on financial performance of MFIs in Nairobi city Kenya. The research recommends that all MFIs should have established debt collection Policy, adopt internal control system, closely monitor implementation of internal control systems and that the MFI Managers and the regulators should put more emphasis on compliance procedures.
Littunen et al. (1998) believe that start-up performance is the existence/survival over the first 3 years since starting the business of start-up firms. The continuation of business is a sign of the success of start-up performance. The maintenance of operations in the first years is very important for start-up firms to conduct long-term stable business. Based on VARIM theory, GEM's perspective (2016), the study of Littunen et al (1998), the study of Nguyen Dinh Tho & Nguyen Thi Mai Trang (2009), the startup performance is considered as the existence of start-up firms in the starting stage (less than 3.5 years), stable operation, goals achievement (revenue, profit and market share as desired) and potential future development.
Consequently, foreign capital investments (both debt and equity) in this industry has grown more than tripled to USD 4 billion (Reille & Forster, 2008) between 2004 and 2006. At the end of 2010, these investments have quadrupled and were calculated to be valued at USD 13 billion (Reille, Forster, & Rozas, 2011). According to Consultative Group of Assist the Poor (CGAP, 2004) approximately 90 per cent of one billion USD of MFI funds are mainly from the taxpayers of the developed countries. However, investors, creditor, donors and others stakeholders like employees, clients and governments are now demanding for transparency and accountability of funds utilised in the microfinance activities. Besides, Global financial crisis that started in 2007 has reduced the funding availability to MFIs and donations become more difficult to obtain where this increases the pressure to show performance and due diligence (Brown & Gladwell, 2009; Brunnermeier, 2009; Erkens, Hung, & Matos, 2012; Van Gool, Verbeke, Sercu, & Baesens, 2012). Any MFI that neglects adequate control and monitoring may suffer loss of reputation and face increased challenges in terms of achieving a sustainable position in the industry (Caudill, Gropper, & Hartarska, 2009; Hartarska & Nadolnyak, 2007; Lapenu & Pierret, 2006; Sinclair, 2012).
This study makes an advanced contribution to the understanding of corporate governance practices in MFIs, identifying and developing an appropriate governance structure. This governance structure mechanism will enable MFIs to conduct their operations with special reference to the social performance approaching poor people who require economic development for their lives. In prior studies, the nature of corporate governance practised by MFIs are less understood and no substantive work using multiple MFI outcomes over a number of years has been undertaken. The concerns raised in reviews of individual MFIs and normative discussions of what should constitute best practice do point to the need for better understanding of the nature of corporate governance practised by the MFIs and also, to understand the nature of the relationship that exists between institutional success and corporate governance. This study points to the need for further empirical research for MFIs using micro-econometric techniques, such as regression analyses of panel data to support the conceptual literature currently available.
clients in rural area); (2) low rate of return on loan (or high loan default rate); and (3) higher dependency on donor’s subsidies, which is closely related to financial self-sufficiency in operating MFIs. According to the Microfinance Information Exchange (MIX) Market database, financial self-sufficiency (in the microfinance context) refers to when “an institution has enough revenue to pay for all administrative costs, loan losses, potential losses and funds”. Indeed, Mersland and Strøm (2010) indicated that “around 41% of MFIs are not financially self-sustainable according to a survey by the Micro Banking Bulletin on the basis of the MIX 2006 benchmark data set of 704 MFIs”. MFIs have been under pressure to change their operating strategies and draw more attention to transformation into for-profits (from non-profits) to be financially self-sustainable and viable (Wagenaar, 2012). According to the MIX Market in 2009, the number of the for-profit MFIs was 490 out of the 1,161 MFIs (roughly 42%), and make up two-thirds of total assets (more than $65 billion worth) (Roberts, 2013). In this respect, some scholars have argued that profit-oriented MFIs would perform better than non-profits in achieving their social and financial missions—poverty reduction and financial self-sustainability—since the institutional transformation of MFIs can bring more deposits, independence from donors, better management, and finally better financial services to the clients (Mersland and Strøm, 2010)
Microfinance is not a new concept. It is dates back in the 19th century when money lenders were informally performing the role of now formal financial institutions. The informal financial institutions constitute; village banks, cooperative credit unions, state owned banks, and social venture capital funds to help the poor. These institutions are those that provide savings and credit services for small and medium size enterprises. They mobilize rural savings and have simple and straight forward procedures that originate from local cultures and are easily understood by the population (Germidis et al., 1991). These funds are to finance the informal sector SMEs in developing countries and it known that these SMEs are more likely to fail (Maloney, 2003). The creation of SMEs generates employment but these enterprises are short live and consequently are bound to die after a short while causing those who gained job positions to lose them and even go poorer than how they were. It is not until recent that microfinance had gained recognition thanks to the noble prize winner Yunus Muhammad of the Grameen Bank. It should be noted that microfinance is not a panacea but it is a main tool that foster development in developing countries. It is known worldwide that the poor cannot borrow from the banks. Banks do not lend to them because they do not have what is required to be granted a loan or to be provided with the bank services. The lack of financial power is a contributing factor to most of the societal problems. These problems emanate from poverty and it is known that with poverty one is bound to suffer so many consequences ranging from lack of good health care system, education, nutrition, Microfinance has proved this bank concept to be wrong. They target the poor who are considered risky but the repayment rate turns to be positive as compared with the regular commercial banks (Zeller and Sharma, 1998).
Pramanik et al. (2013), study explains that Microfinance has gone beyond the means of delivering the financial services as a channel and turned out to be a focal point for supply various services to the poor. The study delineates the trends and progress under MF sector under two models - SHG-Bank Linkage Model (objectives, principles, credit velocity and benefits) & MFI-Bank Linkage Model(funding related issues).The study suggests that SHGs should not only look at extending credit, but induce goal oriented savings products using technology for door step banking needs to members of SHGs. Ningshen et al. (2014), in the paper presents the existing scenario of microfinance, Institutional frame work of MFIs such as NBFCs, Section 25 Companies, Cooperatives, MACS and societies/ Trusts. Further, paper discusses lending models like -Grameen, SHG and SHG bank Linkage Model and their growth, performance and regional distribution; Besides updating the MFIs development and regulation Bill post 2011, the study concludes that Indian MFIs are showing recovery trends after crisis. Further, they emphasize that charging amicable interest rates (for clients as well as MFIs) for sustainability and client outreach and penetration for orderly development of MFIs.