Traditionally, provision of microfinance was mainly credit and most of the attention within the microfinance industry has focused on the provision of credit and showed little interest in mobilizing savings. Fiebig et al (1999) notes that if savings facilities are offered by a micro finance institution (MFI), it may achieve a level of outreach and impact that credit oriented MFIs cannot achieve. Christen and Drake (2000) argues that, few MFIs have reached financial self-sufficiency in terms of being fully financed by client savings and funds from formal financial institutions. Further, they point out that, MFIs mobilizing savings are likely to have better governance than MFIs with credit products only because they are not required to answer to government authorities. They often lack strong regulation and supervision because their priority is granting loans to specific group of borrowers. Campion and White (2000) argue that, the impact of savings mobilization on an MFI cannot be overstated. The MFI’s funding problem stands as a stumbling block in the way of its growth and restricts its capacity of increasing outreach.
Provision of financial services to the poor involves high transaction cost due to financial infrastructures and risks associated with information asymmetries and moral hazards (Stiglitz and Weiss 1981). The MFIs are faced with twofold challenges of providing financial services to the poor (outreach) and at the same time ensuring that they cover their operating costs from the revenues and remain sustainable. Therefore, these two dimensions must be taken into account in order to assess their overall performance. Hence, the question that arises is whether provision of savings fosters financial performance of an institution and at the same time increase outreach.
Research objective
The study will seek to determine the relationship of MFI savings and reaching both sustainability and outreach goals. Seek
Literature Review
An institution with both objectives of financial and outreach sustainability, would try to move to high profitability and high client service coverage (Rock et al., 1998). However, for MFIs to expand the services to many people as possible, they have to implement carefully since many problems may arise after a period of expansion. The review of the literature shows that financial sustainability is one of the measures of performance in MFIs. Meyer (2002) stated that, for an MFI to be unsustainable, it arises from low repayment rates of loans, high operating costs and lack of funds from different sources. Operational self-sustainability (OSS) is when the MFIs operating income is enough to cover operational costs. While financial self-sustainability (FSS) is when the costs of funds and other forms of subsidies received are also covered by the operating income.
Outreach is measured by the number of poor clients served by a financial institution. Meyer (2002) noted that, outreach is multidimensional and in order to measure outreach, we need to look in to different dimensions such as the number of clients served, that was previously not accessible to formal financial services like secure savings, insurance, remittance transfer and other services including the loans that are the predominant product in the microfinance industry.
According to Otero and Rhyne (1994) and Christen et al. (1995), cited in Meyer (2002), financial sustainability and outreach are complimentary. This is because as the number of clients served increase, MFIs will enjoy economies of scale hence, reduction in costs which will help them to be financially sustainable. Hulme and Mosely (1996) on the other hand argued that there is an inverse relationship between financial sustainability and outreach. The advanced argument here implies that higher outreach come with higher transaction costs therefore leading to MFIs becoming financially unsustainable.
A global analysis of 124 leading MFIs conducted by Robert cull et al. (2007), on the performance in 49 countries found interesting mixed results. It found some evidence for trade-off between efficiency and outreach, but also gave some evidence that outreach to the poor and profitability can also be achieved. Hermes Neils et al. (2008) examined whether there exists a trade-off between outreach to the poor and efficiency of MFIs using a sample of more than 1,300 observations for 435 MFIs. The study suggested that, efficiency and outreach of MFIs are negatively correlated implying there exists a trade-off. However, Fluckiger and Vassiliev (2008) argues that, an analysis on a pooled data set of MFIs in various countries may lead to comparison of an inefficient MFI to an efficient MFI as these institutions operate in very different environments. Fluckiger and Vassiliev (2008) conducted a survey of 45 MFIs in Peru to empirically analyse their efficiency. The findings were mixed; some MFIs performed well financially, while others reached large numbers of very poor people and very few managed to achieve both outreach and financially.
Giovanni and Weber (2006) analysed data from 45 MFIs for five years period (1999-2003). The variables used to measure outreach were loan size, collateral, group lending and target of poor borrowers. In their study, operating self-sufficiency was the only variable to measure financial performance. The results of the study did not confirm nor contradict the existence of trade-off between outreach and financial performance.
Research methodology
The Micro-banking Bulletin (2000) reports a number of studies using accounting ratios to measure both social and financial performance of MFIs. These studies use several indicators of outreach to measure the MFIs success in serving the poorest borrowers (social goal). Also, it employs several indicators to assess the overall financial performance of MFIs or sustainability (financial goal). The number of clients may affect the financial performance of micro-finance institutions and realizing full potential of performance may require micro-finance providers to achieve a certain level of client base.
Woller (2002) argues that the number of borrowers is an indicator of both breadth of outreach and scale thus positively related to financial self-sufficiency. Adongo and Stork (2005) in their study used Ordinary Least Squares to identify the factors that influence financial sustainability of microfinance institutions. A study conducted by Lancater James (2006) used the same model to determine how the non-performing loan ratio can be explained by the debt suspension program implementation and outreach.
This study will attempt also to use OLS regression model to determine the role of savings in financial performance and outreach. Most studies on performance and outreach use profitability to measure performance and number of loan clients to measure outreach. However, there are few attempts if any to measure outreach in terms of other financial services like savings. This study aims to go further by including savings as one of the variable in examining performance and outreach.
Data collection methods
The population under study will consist of all the Kenya Women Finance Trust Ltd branches in Kenya. The data types to be used in the study will be mostly secondary and partially primary data. The data to be collected will be for a period of 5 years (2005-2010). Lancater (2006) used a four period data hence justifies this study period of five years. Since 100% of the clients are women, it will be interesting to evaluate the institutions outreach as most of the outreach indicators used by most studies is the percentage of women clients. However, the scenario on this study will be different since all the client population is only women. The rationale behind taking this one MFI as a sample of the population of MFIs in Kenya is due to the limited time frame during the internship and it would only be possible to conduct the study in the one institution.
The following will be some of the variables to be selected for analysis as presented in the Micro-banking Bulletin issue No.18 (July 2009).
Financial Indicators
Return on Equity
Return on Assets
Operational self-sufficiency
Financial self-sufficiency
Non-performing loans
Deposits to total assets
Outreach Indicators
Active borrowers
Average loan balance per borrower
Active savers
Average savings balance per saver
Number of Voluntary savers
The number of clients being served by an MFI has been noted in the literature as a core social performance indicator. The primary data to be collected will be sampled from clients in all the branches of the MFI. The data will attempt to investigate the new clients they get services from the institution and they were previously excluded from the formal financial services. This will provide a clear insight of how the financially excluded are reached by the institution. This is important in a country like Kenya where there are several MFIs competing for the same clients. It will try to find the real increment over the period of the study with actual new members not from other players of the financial sector.
Preliminary time frame
Complete literature review by 15 April 2010
Start the field work research by 03 May 2010
Complete fieldwork by 15 July 2010
Complete analysis by 09 August 2010
Give presentation on 27 September 2010
Complete final report by 18 October 2010
Tentative Budget
Description
Amount in Kshs
Amount in EUR
Air ticket to Kenya round trip
Travelling expenses in the field
Internet access
Accommodation
Food
Stationery
Printing
Total
