Final Thesis Sarah Abd El-Maksoud

247 Pages·2016·1.8 MB·English

Cardiff Metropolitan University
Cardiff School of Management

Performance of Microfinance Institutions

A thesis submitted in fulfilment of the requirements for the degree of
Doctor of Philosophy

by
Sarah Abd El-Maksoud
November 2016

Supervised by
Dr. Sandy Kyaw
Dr. Amr Abd El-Aziz
Prof. Aiman Ragab
DECLARATION
This work has not previously been accepted in substance for any degree and is not being
concurrently submitted in candidature for any degree.
Signed Sarah Abd El-Maksoud (Candidate)
Date 14/11 /2016
STATEMENT 1
This thesis is the result of my own investigations, except where otherwise stated. Where correction
services have been used, the extent and nature of the correction is clearly marked in a
footnote(s).
Other sources are acknowledged by footnotes giving explicit references. A bibliography is
appended.
Signed Sarah Abd El-Maksoud (Candidate)
Date 14/11/2016
STATEMENT 2
I hereby give consent for my thesis, if accepted, to be available for photocopying and for inter-
library loan, and for the title and summary to be made available to outside-organisations.
Signed Sarah Abd El-Maksoud (Candidate)
Date 14/11/2016

i
To my dear mother, Karim, and Selim
ii
ACKNOWLEDGEMENTS
It was a dream, and it finally came true. I would like to thank each and every person whose
support made this thesis possible. I would like to express my deep gratitude to my supervisor Dr.
Amr Abd El-Aziz, for his guidance, help and support right from the very beginning, thank you so
much for everything. I would also like to express my appreciation to my director of studies Dr.
Sandy Kyaw who has always pushed me forward, and whose encouragement and support were
of great help to me. Additionally, I would like to thank Prof. Mohamed Abd El-Salam for his
valuable advice, and Prof. Aiman Ragab.
I would also like to thank my friends, Rabab and Sherine, for their greatly appreciated help and
support.
Finally, but most importantly, I would like to thank my family, without whom this thesis would
not have been possible. My dear mother, Salwa, who has always believed in me and encouraged
me to keep going, thank you for your unconditional love and endless support, I love you. My
father Moustafa, my brothers Hossam and Tarek, and Ghada and Mona, thank you so much for
your ongoing support.
And above all, I would like to thank my beloved husband, Karim, who has always been there for
me, who held me up when I was down, and who helped me through all the hardships. No words
could ever describe how grateful I am for everything you have done, I couldn’t have done it
without you, I am forever thankful, I love you.
iii
ABSTRACT
Microfinance is regarded as a financial development tool used in fighting poverty by providing
the poor with financial services such as microloans, savings, insurance and money transfers
thereby gradually lifting them out of poverty. Improving the performance of Microfinance
Institutions (MFIs) makes them more capable of better serving more poor people, contributing to
the development and enhancement of their economies and improving the welfare of the poor. It
is therefore of great importance to study the performance of MFIs from different aspects in order
to understand how they operate, what causes their success/failure, and try to find ways to
enhance MFI performance to get the most possible benefit out of them.
This thesis consists of three interconnected studies, each of which addresses the performance of
MFIs from a different aspect. The first study examines the effect of the external environment on
MFI performance worldwide in order to identify the context that is best suitable for MFI success,
with a special emphasis on the MENA region. The second study investigates the causal
relationship between microfinance and formal banking sector development in order to help
improve the performance of MFIs with the possible help of the banking sector. The third study
tests whether a trade-off exists between the two most pursued goals by MFIs: profitability and
outreach in order to help MFIs find a way to achieve both goals simultaneously. A balanced
panel dataset of 124 MFIs from 45 countries worldwide for the period 2004-2011 is used in
conducting the three studies by applying multiple linear regression models and PVAR model
using GMM.
Results reveal that the external environment surrounding an MFI significantly influences MFI
performance which helps in explaining the uneven performance of MFIs worldwide. It is also
concluded that MFIs in the MENA region are the most profitable on average compared to MFIs
in other regions which is mainly driven by GDP per capita, whereas South Asian MFIs tend to
outperform MFIs in the MENA region when it comes to outreach. Additionally, it is concluded
that MFI sustainability and banking sector development do not Granger cause each other, but
MFI outreach tends to Granger cause formal banking sector development. Finally, no evidence
of trade-off between MFI profitability and outreach is found except when the effect of
profitability on outreach is disaggregated by MFI type.

iv
Table of Contents
DECLARATION ............................................................................................................................. i
DEDICATION ................................................................................................................................ ii
ACKNOWLEDGEMENTS ........................................................................................................... iii
ABSTRACT ................................................................................................................................... iv
List of Abbreviations ..................................................................................................................... ix
List of Tables .................................................................................................................................. x
List of Figures ................................................................................................................................ xi
Chapter 1: Introduction ................................................................................................................... 1
1.1 Background and Theoretical Motivation .................................................................................. 2
1.2 Contribution of the Thesis ........................................................................................................ 7
1.3 Data and Methodology .............................................................................................................. 8
1.4 Structure of the Thesis ............................................................................................................ 10
Chapter 2: Overview of Global Microfinance .............................................................................. 11
2.1 Performance of Microfinance Institutions .............................................................................. 12
2.2 MFI Performance Worldwide and by Region ......................................................................... 21
2.3 Summary ................................................................................................................................. 25
Chapter 3: Microfinance in the MENA Region ............................................................................ 27
3.1 MENA Region ........................................................................................................................ 28
3.2 Political Environment in the MENA Region .......................................................................... 29
3.3 Economic Conditions in the MENA Region .......................................................................... 32
3.4 Microfinance Sector in the MENA Region ............................................................................ 36
3.4.1 Overview of Microfinance Sector in MENA Region ................................................... 36
3.4.2 Development of the Microfinance Sector in the MENA Region ................................. 38
3.4.3 Lending Methodologies in the MENA Region ............................................................. 39
3.4.4 Products Offered by MFIs in the MENA Region ......................................................... 39
3.4.5 Microfinance Regulatory Framework in the MENA Region ....................................... 40
3.5 Profitability and Outreach of MENA Region MFIs ............................................................... 41
3.5.1 Outreach in 2011 .......................................................................................................... 43
v
3.5.2 Profitability in 2011 ...................................................................................................... 44
3.6 Why the MENA Region? ........................................................................................................ 45
3.7 Summary ................................................................................................................................. 46
Chapter 4: Investigating the Factors Affecting the Performance of Microfinance Institutions in
the MENA Region ........................................................................................................................ 48
4.1 Introduction ............................................................................................................................. 49
4.1.1 Research Problem ......................................................................................................... 51
4.1.2 Research Question ........................................................................................................ 51
4.1.3 Importance of Research and Contribution to Knowledge ............................................ 52
4.1.4 Research Aim ............................................................................................................... 53
4.1.5 Research Outline ........................................................................................................... 55
4.2 Literature Review and Empirical Evidence ............................................................................ 56
4.2.1 Performance and Development of the Microfinance Sector ........................................ 56
4.2.2 Macroeconomic Variables and the Uneven Distribution of MFIs ............................... 61
4.2.3 The Effect of Macro-institutional Variables ................................................................. 67
4.2.4 Development of the Formal Banking System ............................................................... 74
4.2.5 Institution-Specific Characteristics ............................................................................... 77
4.3 Econometric Approach and Data Description ........................................................................ 82
4.3.1 Regression Model Specification ................................................................................... 82
4.3.2 Sampling and Data Description .................................................................................... 83
4.4 Analysis and Results ............................................................................................................... 91
4.4.1 Descriptive Statistics .................................................................................................... 91
4.4.2 Correlations .................................................................................................................. 96
4.4.3 Estimation and Testing Procedures .............................................................................. 99
4.4.4 Empirical Results and Discussion .............................................................................. 101
4.4.5 Robustness Checks ..................................................................................................... 110
4.5 Microfinance in the MENA Region ...................................................................................... 113
4.5.1 Evaluating MFI Outreach in the MENA Region and South Asia .............................. 114
4.5.2 Evaluating MFI profitability in the MENA Region ................................................... 117
4.6 Conclusion ............................................................................................................................ 119
vi
Chapter 5: Investigating the Causality between the Performance of Microfinance Institutions and
the Development of the Formal Banking System ....................................................................... 121
5.1 Introduction ........................................................................................................................... 122
5.1.1 Research Problem ....................................................................................................... 123
5.1.2 Research Question ...................................................................................................... 124
5.1.3 Importance of Research and Contribution to Knowledge .......................................... 124
5.1.4 Research Aim ............................................................................................................. 125
5.1.5 Research Outline ......................................................................................................... 125
5.2 Literature Review and Empirical Evidence .......................................................................... 126
5.2.1 Microfinance Sector Development ............................................................................. 126
5.2.2 Formal Banking Sector Development ........................................................................ 128
5.2.3 Relationship between Microfinance Development and Formal Banking Development
............................................................................................................................................. 130
5.2.4 Causality between Microfinance Development and Formal Banking Development . 133
5.3 Econometric Approach and Data Description ...................................................................... 134
5.3.1 Econometric Approach ............................................................................................... 134
5.3.2 Sampling and Data Description .................................................................................. 138
5.3.3 Hypotheses.................................................................................................................. 140
5.4 Analysis and Results ............................................................................................................. 141
5.4.1 Descriptive Statistics .................................................................................................. 141
5.4.2 Empirical Results and Discussion .............................................................................. 142
5.4.2 Robustness Check ....................................................................................................... 146
5.5 Conclusion ............................................................................................................................ 150
Chapter 6: Investigating the Trade-Off between Profitability and Outreach of Microfinance
Institutions................................................................................................................................... 152
6.1 Introduction ........................................................................................................................... 153
6.1.1 Research Problem ....................................................................................................... 155
6.1.2 Research Question ...................................................................................................... 156
6.1.3 Importance of Research and Contribution to knowledge ........................................... 156
6.1.4 Research Aim ............................................................................................................. 157
6.1.5 Research Outline ......................................................................................................... 157
6.2 Literature Review and Empirical Evidence .......................................................................... 158
vii
6.2.1 MFI Outreach ............................................................................................................. 158
6.2.2 MFI Profitability ......................................................................................................... 161
6.2.3 The Trade-off between Outreach and Profitability ..................................................... 162
6.2.4 Institution-Specific Characteristics ............................................................................. 166
6.2.5 Macroeconomic Controls ........................................................................................... 170
6.2.6 Corporate Governance in MFIs .................................................................................. 171
6.3 Econometric Approach and Data Description ...................................................................... 174
6.3.1 Econometric Approach ............................................................................................... 174
6.3.2 Sampling and Data Description .................................................................................. 176
6.3.3 Research Hypotheses .................................................................................................. 179
6.4 Analysis and Results ............................................................................................................. 180
6.4.1 Descriptive Statistics .................................................................................................. 180
6.4.2 Correlations ................................................................................................................ 181
6.4.3 Empirical Results and Discussion .............................................................................. 181
6.4.4 Robustness Check ....................................................................................................... 185
6.4.5 The Effect of Corporate Governance on Profitability and Outreach Trade-Off ......... 189
6.5 Conclusion ............................................................................................................................ 195
Chapter 7: Conclusion................................................................................................................. 197
7.1 Importance and Aim of the Thesis ........................................................................................ 198
7.2 Summary of key Findings ..................................................................................................... 200
7.3 Implications of Findings ....................................................................................................... 203
7.4 The Effect of Organisational Diversity on MFI Performance .............................................. 208
7.5 Recommendations ................................................................................................................. 211
7.6 Limitations and Future Work ................................................................................................ 215
References ................................................................................................................................... 217
Appendices .................................................................................................................................. 225
Appendix A.......................................................................................................................... 225
Appendix B .......................................................................................................................... 232
Appendix C .......................................................................................................................... 233

viii
List of Abbreviations
Augmented Dickey-Fuller ADF
Automated Teller Machine ATM
Classical Linear Regression Model CLRM
Corruption Perception Index CPI
East Asia and the Pacific EAP
Eastern Europe and Central Asia EECA
Egyptian Financial Supervisory Authority EFSA
Fixed Effects FE
Generalized Method of Moments GMM
Gross Domestic Product GDP
Gross Loan Portfolio GLP
Gross National Income GNI
Gulf Cooperation Council GCC
Im, Pesaran, and Shin IPS
Interquartile Range IQR
Kaufmann, Kraay and Zoido-Lobaton KKZ
Latin America and the Caribbean LAC
Levin, Lin, and Chu LLC
Microfinance Company MFC
Microfinance Information eXchange MIX
Microfinance Institution MFI
Middle East and North Africa MENA
Non-Bank Financial Institution NBFI
Non-Governmental Organisation NGO
Ordinary Least Squares OLS
Organisation of Petroleum Exporting Countries OPEC
Panel Vector Autoregresion PVAR
Purchasing Power Parity PPP
Random Effects RE
Return on Assets ROA
Return on Equity ROE
South Asia SA
United Arab Emirates UAE
United Nations UN
United States Dollar USD
World Development Indicators WDI
World Governance Indicators WGI
ix