Professional Documents
Culture Documents
1.1 Background Access to financial markets is seen as a precursor to growth and development. In Pakistan, much like the rest of the developing world, the cash impoverished, financially unsound, strata of the population is left rather wanting. Deemed too risky; a significant proportion of the Pakistani populace remains un-served by formal institutional players of the countrys burgeoning financial markets. The Pakistani financial landscape has evolved considerably over the past two decades (2002). The 1990s brought sweeping reforms: nationalized commercial banks (NCBs) were wrested away from state control and put into the hands of the market; also, the State Bank of Pakistan (SBP) was given precedence over the Pakistan Banking Council, having been made the sole the supervisory banking authority (Burki responsible & Niazi, for regulating sector 2003).
Resultantly, state owned banks that previously controlled 92% of total banking assets (as per 1990 estimates) lost significant ground and saw their share of the market shrink by approximately 1/4thto 70% by 2000s end (Burki & Niazi, 2003); this figure now rests at less than 20% as per recent SBP reports. Unconstrained access to formal, and semi-formal, sources of funds is seen as imperative to the developmental goals of countries. Vatta (2003) underlines the role credit plays in
1
extracting
households
from
the
maws
of
poverty
giving
individuals the opportunities to: invest in capital, both human and social, insure themselves against external shocks by building a diverse asset base, and profiting from lucrative economic propositions as and when they present themselves. Formal credit institutions however have largely failed the poor. Informal lenders are the primary source of funding for the large segments of low-income economic actors in the developing world. The concerned authorities however seem to be taking note of the unsustainable nature, and the discriminating effects of current practices. The SBP recently, in association with the Department for International Development (DFID), initiated the Financial Inclusion Program (FIP) to help extend the financial markets reach, and reign in the formally ostracized via innovation, education of the masses regarding financial matters, capacity building, and research and its consequent institutionalization (PMN, 2008). Inclusiveness is of essence since 24 million Pakistanis live below the and national expansion poverty of line (IFC, are 2008). seen as Microfinance microcredit
linchpins of any policy, local or international, aimed at rescuing the marginalized from their present predicament. Microfinance involves facilitating the poor with unbridled access to financial products and services by providing them with loan amounts deemed too small for conventional intermediaries to furnish. As Weber (2004) explains: microlevel schemes are an effective way to empower the poor and bring the women into the realm of decision-making and money management that they rights, accruing to traditions and customs, have been continually denied. Microfinance
2
essentially uses the informal lenders business model as a prototype incorporating into its strategy the concept of group lending, high rates, and frequent payments to ensure low default rates (Hammil, Matthew, and McCarter, 2008). The institutions responsible for the above also have a
social dimension to their work: mitigating food insecurity, women empowerment and employment, development of creditors and green issues are all seen as natural offshoots of the microfinance promise (Nieto, Cinca, and Molinero, 2007). Pakistan, much like its fellow regional partners, has taken an active interest in the development of its microfinance sector. This is evident in the series of reforms introduced by the SBP to the streamline promulgation (2001), introduction Development of workings of its of the microfinance Microfinance ancillary as the the such organizations Institutions statutes, and Microfinance order
Ordinance Sector
supporting programs
Program as a
underline viable
efforts the chief regulatory body seems to be making in establish microfinance business opportunity and not just a tool to effect social development of the masses (PMN, 2008). The history of microfinance in Pakistan although dates back to the 1960s with the Comilla Project and its so-called experimentation 2008). Presently Network there (PMN) are a number of Microfinance as: Providers with microcredit, the sector itself only began to take-off and gained prominence in the 1990s (PMN,
(MFPs) operating in the country the Pakistan Microfinance categorizes these Microfinance Institutions (MFIs), Microfinance Banks (MFBs), and Rural
3
Support
Programs
(RSPs).
The
national
rural
support
programs of which there are four were primarily inspired by the work of private players such as the Aga Khan Rural Support Program (AKRSP) that operated largely in the Northern Areas and busied itself with dispersing credit and mobilizing savings to/from the surrounding rural areas (Rauf & Mahmood, 2009; PMN, 2008).
1.2 Problem Identification Poverty is one of the main causes of low economic
development in developing countries and people are compled to lead a miserable life below the poverty line. There is a substantial portion of the population of the developing countries which are living below the line and thus trap in the vicious circle of poverty. The concerned authorities however seem to be taking note of that situation and formulating policies which address the issue of poverty. The microfinance is one of the suggested solutions which shows its benefit and fruitfulness in many developing countries like Bangladesh. In Pakistan microfinance institutions are also operational but the matter of concern for this literature is that are the microfinance institutions are efficient enough to address the issue or this situation is going adverse The due SBP to inefficiency in of microfinance with the institutions. recently, association
Department for International Development (DFID), initiated the Financial Inclusion Program (FIP) to help extend the financial markets reach, and reign in the formally ostracized via innovation, education of the masses regarding financial matters, capacity building, and research and its consequent institutionalization (PMN, 2008).
4
Inclusiveness is of essence since 24 million Pakistanis live below the and national expansion poverty of line (IFC, are 2008). seen as Microfinance microcredit
linchpins of any policy, local or international, aimed at rescuing the marginalized from their present predicament. Microfinance involves facilitating the poor with unbridled access to financial products and services by providing them with loan amounts deemed too small for conventional intermediaries to furnish. As Weber (2004) explains: microlevel schemes are an effective way to empower the poor and bring the women into the realm of decision-making and money management that they rights, accruing to traditions and customs, have been continually denied. Microfinance
essentially uses the informal lenders business model as a prototype incorporating into its strategy the concept of group lending, high rates, and frequent payments to ensure low default rates (Hammil, Matthew, and McCarter, 2008). The institutions responsible for the above also have a
social dimension to their work: mitigating food insecurity, women empowerment and employment, development of creditors, and green issues are all seen as natural offshoots of the microfinance promise (Nieto, Cinca, and Molinero, 2007). Pakistan, much like its fellow regional partners, has taken an active interest in the development of its microfinance sector. This is evident in the series of reforms introduced by the SBP to the streamline promulgation (2001), introduction Development of workings of its of the microfinance Microfinance ancillary as the the such organizations Institutions statutes, and Microfinance
Ordinance Sector
supporting programs
Program
underline
order
establish
microfinance
as
viable
business
opportunity and not just a tool to effect social development of the masses (PMN, 2008). The history of microfinance in Pakistan although dates back to the 1960s with the Comilla Project and its so-called experimentation 2008). Presently Network Support there (PMN) Programs are a number of Microfinance as: Providers with microcredit, the sector itself only began to take-off and gained prominence in the 1990s (PMN,
(MFPs) operating in the country the Pakistan Microfinance categorizes (RSPs). The these Microfinance rural support Institutions (MFIs), Microfinance Banks (MFBs), and Rural national programs of which there are four were primarily inspired by the work of private players such as the Aga Khan Rural Support Program (AKRSP) that operated largely in the Northern Areas and busied itself with dispersing credit and mobilizing savings to/from the surrounding rural areas (Rauf & Mahmood, 2009; PMN, 2008). Given the recent increase in the frequency and magnitude of disasters the world over there seems to be an apparent fatigue setting in amongst donors and donor organizations. Its all come to the oft-repeated economic principle of too little resources relative to continually amassing needs. Resultantly microfinance providers, much like the rest of their economic counterparts, have to largely depend upon their performance to attract much needed funding. Nieto et al. seem (2007) however are right the in stating how traditional of affairs; approaches of assessing performance of institutions does not compatible with current state especially that pertaining to microfinance service providers
6
Questions to
regarding these
how
then
to
appropriately abounds
measure in the
performance of MFPs, and contextualize the discussion in reference specialized units literature accumulated over the course of this study (Nieto et al., 2007; Lapenu & Zeller, 2004; Bassem 2008).
conceptually different than that of conventional banks that primarily information regarding financial independent and dependent variables to arrive at numbers reflecting the respective banks success in harnessing its intermediary abilities (Nieto et al., 2007). Murdoch (1999) explains and how have MFIs their cannot be treated as
conventional
banks
financial
performance
judged purely on the basis of their financials, in fact a microfinance institutions primary concern is with deepening outreach and widening should its made influence part of and their thus such considerations efficiency
Are the microfinance institutes in Pakistan efficient? The efficiency of microfinance institutes is vital to achieve the objectives of microfinance in country. Do the factors such as, utilization of assets, operational efficiency in terms of cost, profitability & capital structure have direct impact on the sustainability & efficiency of microfinance institutions? Stock price in the market is one of the tools for determining the confidence which is directly related to the profitability & efficiency of institutions.
1.5 Rationale of the Study The study will provide knowledge regarding the efficiency of the microfinance institutions in Pakistan. The efficiency of microfinance institutions is vital in order to achieve the objective of microfinance in Pakistan. The prime objective of microfinance is poverty reduction in the country which can only be ensured if the providing institutions are efficient. This study also provides information about the effectiveness of microfinance in Pakistan so it gives information about multiple dimensions of microfinance in Pakistan.
1.6
The objectives of this study are to determine the overall performance of micro finance institutes (MFIs) in Pakistan, identify the operational efficiency. The study also
8
establishes the link between the stock price, operation efficiency and capital structure. It will determine the most efficient institution among the sample. IT analyzes the (MFIs) individually among the variables.
1.7 Limitations Similar to other studies, this study is not without its restrictions. Our sample process consists of four micro finance institutes may bound the generalisability of the
outcome. The study can be strengthened by raising the sample size as a finding and result may differ considerably when the sample size is increased or decreased. As only few micro finance institutions may not represent whole MFIs in Pakistan, more MFIs would create a more diffused results and findings. Finally, more variables can also be included in the theoretical framework can be caused by many different aspects of the MFIs.
1.8 Scope of the Research The research analyzes the impact of total revenue, total debt, total assets and operating expenses on the share price of micro finance banks in Pakistan. The research is
9
descriptive in nature and collection of data from secondary and reliable sources. Thus this study process guide and help the micro finance institutes for future dealings.
Independent variables
Dependent variable
There are five variables involved in the proposed model. The proposed variables represent the five factors such as stock
10
price,
total
assets,
debt,
profitability
&
operating
expenses. These are the factors which directly linked with the efficiency of microfinance institutions.
Dependent Variable The study uses the econometric model based which establishes the relation between the stock price & other financial indicators so stock price is the dependent variable in the stock market. The investors feel confidence on investing in the MFI if its performance is adequate in the market.
1.10 Definition of terms Financial Revenue The amount of money a company earns through the sale of goods or services, rents, and other sources. Revenue is the amount the company makes; it should not be confused with profit, which is revenue less expenses. Likewise, it should not be confused with cash flow, as revenue can be money owed but not yet paid.
Operating Expense A category of expenditure that a business incurs as a result of performing its normal business operations. One of the typical responsibilities that determining how low management operating must contend expenses firm's with can ability is be to
11
affecting the
with
its
competitors.
Total assets are everything that a business or an individual owns. For a company, total assets are listed on a balance sheet. These assets are valued based on their purchase prices, not the current market value of the assets. Assets typically can be converted from a physical item into cash. The ease in which an asset can be turned into money is known as liquidity. Assets can take various forms, ranging from real estate and investment securities to equipment and inventory. Cash also contributes to the sum of assets.
Total debt Total debt includes long term debt and current liabilities. Investors can find it listed on the balance sheet in a companys annual report. A companys total debt is an important component in the total debt-equity ratio, an indicator of a companys equipment payments load. debt that level. will Debt can be a good Too If tool much a for a corporation. It can help the company invest in new plants and increase are profitability. up or down. debt, however, is risky. It locks the company into regular interest whether earnings company stumbles, it may have trouble recovering under a heavy debt
Share price A share price is the price of a single share of a number of saleable stocks of a company. Once the stock is purchased, the
12
owner share.
becomes
a shareholder of
the
company
that
issued
the
1.11 Hypothesis The Hypotheses which have drawn from the theoretical framework are as follows. H1: Financial revenues has a significant impact on share price. H2: Operating
price.
expenses
has
significant
impact
on
share
share price.
13
performance of the institutions seems to differ due to many of the reasons such as literacy, accessibility & demography etc. Two competing schools of thought are diverse from one another and can be categorized as the Welfarists and the Institutionists al., 2004) as (Brau the and Woller, 2004). Sustainability, to generate by Meyer the of formal defined by Chaves and Gonzales-Vega (as cited in Nieto et institutions which since is ability sufficient funds so as to meet the opportunity costs of utilizing (2002) an all of inputs, MFIs also when explained seen access important markets concept through from to lines
perspective financial
those continued
excluded
require
credit and not one-off loans if they are to successfully hold poverty at bay.
14
argue
that
microfinance to the
providers
can
achieve selfself-
this sustainability and remain liquid, solvent, operative without as seen having through become prism of completely financial sufficient
sufficiency (Brau & Woller, 2004; Ejigu, 2009). As documented by Meyer (2002) financial self-sufficiency is a difficult measure to achieve since it requires MFIs to generate additional revenues to build reserves to both sustain/drive growth, and help cushion against contingencies that may arise in the future. Also, becoming financially self-sufficient adeptness in entails the achieving and a certain level of of reporting recording company
financials which itself is an arduous and ambitious task and is seen to be the product of improved institutional wide transparency (Meyer, 2002). Institutionists them to believe that for MFPs to and achieve operate becomes number that their sans more of
social objective of alleviating poverty it is necessary for self-sustain (Ejigu, diminishing pool of their activities this the subsidies to a be 2009) viewpoint
relevant with time as donor fatigue sets in and funds seem given donor their motivated overwhelming Provided in tragedies, both man-made and naturally occurring, vying for limited resources. social investors and are unlike instead counterparts by mere traditional, drive,
commercial markets, do not require higher financial returns philanthropic however, it is the institutions/programs that exhibit their effectiveness and efficiency in achieving their mission and demonstrate costless, 1999).
15
little
drift of
that
attract i.e.
the
most
coveted, (Morduch,
source
funding
donor
funds
Sustainability and outreach, as previously alluded, however are seen to be two conflicting objectives with the rift between the two driven by informational asymmetries and high transaction costs they entail (Mosley and Hulme, 1996). Welfarists empathize with the programs social objectives concerning the economic upliftment, and development of its clients, and promote the use of subsidized debt and donors funds to achieve to a this purpose of by extending at financial low cost services large number applicants,
(Ejigu, 2009). Institutionists however, emphasize upon the unreliability of donor funds and thus promote extending services to clients at high cost i.e. at near market rates, prevailing in highly lucrative informal markets all over the developing world, so as to achieve the financial sustainability required to attract competitively priced commercial financing necessary for growth and perpetuity (Ejigu, 2009). Recently, more and more research is being conducted in an attempt to evaluate the ability of MFPs in utilizing their resources in a manner as to arrive at optimum levels of output in other words, the textbook definition of, efficiency. The efficiency of financial institutions has long been a matter of concern for researchers and policy makers alike. Farrell argued that information regarding the productivity and efficient operations of a firm is necessary to ascertain how performance can be improved by optimizing output while making no additions to present input reserves (as cited in Cook and Seiford, 2009).
16
Also,
Ramanathan
(2003)
stresses
how
conventional
productivity analysis is centered around measuring average factor productivity usually appropriate for single inputoutput firms, whereas what todays management decisions are concerned with is assessing total factor productivity consistent with multiple input-output firms. Consequently, a seemingly large number of studies have busied themselves with evaluating similar performance regions measures rather than for for intermediaries operating across
specific countries; studies by Bassem (2008), Fiordelisi, Marques, Ibanez, and Molyneux (2010), Haq et al. (2009), Nieto et al. (2004) can be cited as reference points. Berger studies evaluate across obtained 21 and Humphrey (1997) and present an analysis of 130 to
using
parametric
techniques
different across
financial are
countries. studies
Differences
efficiency
variation in measurement methods undertaken to calculate the said efficiency, a difference in the concepts used to model efficiency, and exogenous variables not accounted for by various studies i.e. the environmental effects at play (Berger and Mester, 1997). Among the various measures available for ascertaining
institutional efficiency there has been a noted shift from traditional ratio analysis to more comprehensive approaches such as the data envelopment analysis form to analysis (SFA) a part best (DEA) of the and The the two stochastic frontier approach.
approaches reference
frontier or best
analysis techniques used to model relative efficiencies of the practice performing unit(s) from among the sample being considered.
17
The
so-called
best
performing
firm
is
then
used
as
benchmark against which others are continually assessed and thus the scores obtained help policy makers and/or managers identify areas of concern, and also quantify the effects of various developments such as mergers, and (de)regulations, on the performance of respective MFIs (Berger & Humphrey, 1997). Efficient firms are seen to lie on the said frontier whereas their inefficient counterparts are enveloped by the frontier and thus lie below it; efficient firms are resultantly given a score of 1 while others waver between 0 and 1(Ramanathan, 2003). Schaffnit, evaluation Rosen, to be and at Paradi heart sift (1997) of hold performance activity. from a in
the to
managerial practice
Frontier analysis excels at allowing individuals with little institutional given sample, insight and best MFIs then further facilitates experts
quantifying the qualitative knowledge they already possess thus making it an essential, and informative policy tool allowing users to improve the workings of their respective institutions with regards to market leaders and yield higher productivity gains than they would otherwise achieve (Berger and Humphrey, 1997).
Microfinance should be about establishing long lasting local financial institute to better serve the society. Robinson (2001) has claimed in his literature that most institutes who provide subsidized loan mostly fail to survive for long time. Even though the successful institutions who are providing subsidized loan can meet only the small portion of
18
the aggregate demand for the microfinance and also it is not possible for the donors to provide fund for the long period, Woller (1999). The profitability approach focuses on the mobilization of savings and financial sustainability by commercial means. It is market oriented and financial deepening approach in which extreme poor are excluded from the microfinance program and social well being of the society is the by-product. Rhyne (1998) proclaims that access to microfinance institutes in a sustainable way is more important the poverty alleviation. Some of the successful and best institutions based on this approach are Bank of Rakyat Indonesia, BancoSol in Bolivia and Association for Social Advancement Bangladesh. are This approach is promoted worldwide and CGAP found that 5% of worldwide microfinance institutions financially sustainable, while IMF claims that it is only 1%. Microfinance smoothening, also helps is promoting and consumption growth,
financial
deepening
economic
(Ministry of Finance, 2003). Mosley and Hulme (1996 & 1998) come to the conclusion that most of the todays microfinance programs are not as effective as they could be. Arguments regarding levels, the success of of the microfinance inability to have been countered by heavy criticism regarding unchanging poverty exploitation women, effectively cater to target groups, loan re-payment and high interest rates, Dignard and Havet (1995), Christen (1997), Brau and Woller (2004).
Christen programs
(1997) have
suggests
that this
fashionable by
microcredit that
19
countered
view
elaborating
responsibility essentially lies upon or under the control of microfinance institutions i.e., institutional factors such as staff inefficiency and skill as well as clear communication of re-payment expectations. Amin at el (2003) focus their editorial on the capability of microfinance to reach poor and helpless. They focus their literature on the grounds that microfinance credit is available only to the poor who are slightly above and below the poverty line. Copestake et al (2001) analyze the impact of microfinance credit on the households focuses and on firms the wellbeing, respectively. Copestake
relationship of business performance and household income. Evans et al (1999) approaches the microfinance in different aspect and check the viability of microfinance as the important tool of poverty alleviation. Kabeer (2001) focus the role of microfinance on the women empowerment. Kandker (1998) concluded that microfinance is an important tool that of it poverty is alleviation in in the Bangladesh. settings Robinson than (2001) promotes the view of Kandker (1998) with addition applicable national other Bangladesh. Younus (1999) recalled how he had to struggle to convince the eligible women to accept credit. In Pakistan many microfinance programs charge very low rates in comparison to the many other countries of the world due the main aim is to alleviate poverty, DIFD (2006), this reveals that these institutions are not sustainable and are running on heavy subsidized donations. This makes it extremely important to develop such a microfinance program which is more sustainable as well as it charge as much as low rate as possible so that maximum strength of the poor
20
can get benefit. Poverty is definitely a grave concern for Pakistan and the government has selected microfinance as a vital tool for the poverty alleviation (Ministry of Finance, 2003) which is more effective when it is designed as per the cultural or regional requirements. Unluckily, microfinance for poverty alleviation and economic growth has been but This applied in many may Islamic have hinder countries completely many like been Pakistan, ignored. religious vital barriers
condition
potential
clients from assessing microfinance, Segrado, (2005) same is to be expected in Pakistan. Rahman their (2007) finds that Grameen by borrowers supplemented the other
microcredit
payments
borrowing
from
sources thus, endless trail of debts started. The government of Pakistan has selected microfinance as an important tool for the purpose of poverty alleviation and empowering the vulnerable. This strategy of microfinance has been applied in addition to the major program of poverty alleviation. microfinance alleviation Pakistan and in There are are numerous being this In policies for the including poverty has and currently used
Pakistan. as of
regard, legal as
government framework
granted many facilities for expansion of microfinance in such facilitation Khuskhali for lenient procedures for license of microfinance institution formation Bank first microfinance institutions by the government (Ministry of Finance, 2003).
In
Pakistan to
the state
microfinance sponsored
market rural
is
dotted
with
an
increasing number of local and international players who in addition support programs help
21
furnish low cost, convenient, and effective credit to the nations poor. Currently, as outlined in Rauf and Mahmood (2009), three different microfinance models are operative in the country, namely: Microfinance Banks (MFBs), NGO-MFIs, and FY10 Rural and Support managed to Programs grow by (RSPs). 13% and These 40% microfinance and providers (MFPs) reached a total of 2 million borrowers in in credit savings outreach, respectively (MicroWatch, 2010). The social and economic viability of microfinance operations have led conventional commercial financial intermediaries to scope out the scene and add small borrowers to their list of potential customers ORIX leasing, and the National Bank of Pakistans (NBPs) Rozgaar Scheme program both offer their services to meet the needs of these high-risk patrons, heretofore financial pariahs for some (PMN, 2010; Rauf & Mahmood, 2009). MFPs of MFPs in order to increase the quality ensuring funding the and quantity of and these funding
financial services offered need to achieve a certain level financial (2005) sustainability outlines and also the continued, of of effective operations. The World Banks report on South Asian patterns degree intermediaries tabulates
required from different sources for these institutions to evolve into commercially sustainable entities; as per their findings MFPs need to wean themselves off donor capital and generate higher (voluntary) deposits and attract additional financing from commercial investors to achieve the elusive status of commercially sustainable ventures. Afghanistan and Pakistan are seen to rely primarily on donor financing, with the Pakistani MFPs now moving to seek funds from apex organizations on a subsidized basis; whereas Indian MFPs tap
22
into the pool of compulsory savings they initiate, and are now increasingly attracting funds from commercial banks who have its begun to view that MFPs as a viable be investment a given continued incentives provided for by the Central Bank and insistence microfinance labeled priority sector (World Bank, 2005). Pakistan Microfinance Network (PMN) purports MFBs to have the most sustainable and balanced funding structure of all presently hefty 90% functioning of all organizational deposits emanate types from although, a institutional
depositors even though small depositors account for more than 90% of the total number of MFB depositors (PMN, 2010). The remaining NGO-MFIs and RSPs generate funds via donor reserves, and subsidized debt: which makes up 70% of the institutions total debt profile; given the high prevailing rates of interest, in excess of 12% (KIBOR), and a lack of incentives for increased institutional investment commercial debt is expected to be maintained at its current low levels (PMN, 2010). Given their considerable scope for growth it is essential that Pakistani MFPs raise additional and financing to effectively leverage their equity attract commercial
funding via providing for improved transparency to ensure access to greater, cheaper financing which in turn would facilitate these institutions to become self-sufficient and profitable ventures (World Bank, 2005). The financial & economic experts argue that the microfinance institutions are efficient if they are able to address the issue of poverty reduction in the country. The efficiency of microfinance institutions can also be determined through establishing the link between the share price & some vital
23
factors specific to the institutions which have direct link with the movement of the stock price (Kandker, 1998). This current study focuses on the efficiency of the microfinance institutions through establishing the relation between the stock price of the company & other companys specific financial indicators.
Data Typically for influence analysis, ground level studies and panel data were recommended so that researcher could incarcerate the secular impact and trend of the intervention and could compare the preceding and future scenarios. But unluckily, many of the Microfinance Institutes (MFIs) or
24
researchers do not have recommended data and manage with the cross-sectional data at one point in time. Microfinance institutions which were included in this study work in urban and as well as in rural areas but their main focus were in urban areas. The larger proportion of their work is in the main urban centers such Lahore and Karachi and their suburbs. The problem aroused in selecting the control groups and localities as there are approximately more than 95000 thousand borrows in Lahore with more than 70 offices of microfinance institutes as with Karachi and some other urban centers with continuous increase in the number of offices of MFIs. Hence, the knowledge and accessibility of microfinance in these centers was vast. This made it difficult to such areas which were unexposed to microfinance. In that scenario, an effort was made to find control areas where microfinance was not persistent so that can be calculated precisely as much as possible. Only those MFIs were selected for this study who met the criteria. The criteria was that MFIs had at least three years of work experience in the field of microfinance and had a sound business plan for at least next three years and had a portfolio of at least 2200 active borrowers and have conducted annual audit for last three years and last but not the least who were willing to participate in this social impact assessment study. The selected on sample the contains basis of four most (4) micro finance The
institutions
active
borrowers.
microfinance institutions on the basis of active borrowers are Bank, NRSP, Kashf Foundation, FMFB Pakistan and TMFB. The sample size comprises of 16 quarterly values. The data
25
is secondary in nature. The share prices are also comprises of 16 quarterly average values.
3.2 Instruments and measures The study uses of the ordinary least of square (OLS) for the
determination
efficiency
microfinance
institutions
(MFIs). The ordinary least square regression use multiple independent variables and with the dependent variable so that relation between the dependent and multiple independent variables can be established. For the current study this is the relation which determines the efficiency of the microfinance institutions.
This studys choice of independent and dependent variables are seen to be consistent with both the production and intermediation approaches. Microfinance institutions however differ from other financial and depository institutions in the fact that a majority of them are seen to focus on the micro-credit Pakistans aspect case, are of microfinance by and most, as in from barred regulatory bodies
accepting deposits (PMR, 2010). The study focuses on four independent variables i.e., total assets, operating expenses, total debt & financial revenues against the stock price. Further, since the intent of the given paper is to assess overall cost efficiencies of selected microfinance institutions, additional information regarding input prices is necessary to help achieve the said goal. Personnel as vital component of operating expenses is an important variable and used widely in efficiency studies for
26
financial (2006)
institutions. labor as
Fiorentino, an input in
Karmann, order
and to
Koetter estimate
use
efficiencies of German banks; they define labor as full-time or equivalent employees actively employed by the respective institutions. Haq et al. (2009) similarly account for MFI employees as an input in their efficiency analysis, so does Rizvi (2001) in his seminal study on the liberalization of the Pakistani banking industry and its consequent effects on bank efficiency. Here we sift labor to include only loan officers as variable in our study, following a stance assumed by Nieto et al. (2007) we exclude other personnel from our analysis as these might include individuals whose workings are unrelated to the core activities of the MFPs so they dont fall in the category of operating Jansson personnel et al. thus excluded from operating expenses. (2003)
define loan officers as personnel who are responsible for the management of the loan portfolio (as cited in Nieto et al., 2007). Operating Expenses in general are defined by Jansson et al. (2003) as expenditures including related to the operations of the and institution administrative, depreciation,
board expenses (as cited in Nieto et al., 2007). The inclusion of operating expense as a variable is
justified on the basis that these expenditures are necessary for the MFP to continue operations and facilitate extension of micro-credit and other services. The variable is also suggested for use by Berger & Mester (1997). As previously outlined in the paper, financial capital makes up a significant portion of a majority of Pakistani MFPs
27
financing structure (PMN, 2009). Resultantly, total debt is incorporated into the model as a variable. Fiorentino et al. (2006) (2010). use borrowed funds as a variable in their cost efficiency study; as do Manlagnit (2011), and Sun and Chang
3.3 Procedure
The model which is estimated is as follows S = f(Y, X, M, C) Where S = Stock Price Y = Financial revenues of selected MFI X = operating expenses of selected MFI M = Total Assets of MFI C = Total debt of MFI
28
250000 200000 150000 100000 50000 14500 14000 13500 13000 12500 12000 11500 08:1 08:3 09:1 09:3 TA TD 10:1 10:3 TR P 11:1 11:3 0
29
Dependent Variable: SHARE Method: Least Squares Date: 05/18/12 Time: 00:46 Sample: 1 16 Included observations: 16 Variable Coefficient -0.000574 -0.001979 -0.000144 9.33E-06 22.48922 0.120847 -0.198845 0.831402 7.603524 Std. Error 0.001062 0.008783 0.000846 9.14E-06 9.964116 t-Statistic -0.540953 -0.225358 -0.170525 1.021334 2.257021 Prob. 0.5993 0.8258 0.8677 0.3290 0.0453 12.06937 0.759328 2.718900 2.960334
The
above
Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion
diagram
shows
the
decline
in
total
assets
and
operating
revenues during the period spanning from 2008 to 2011. The total debt and operating expenses show stability during the given period.
30
-16.75120 0.586012
F-statistic Prob(F-statistic)
0.378011 0.819746
Table 4.1 depicts relation between the share price and total assets are insignificant as the p value is greater than the level of significance which is taken as 0.05. The negative sign shows there is negative relation between the share price and the increase in the assets. In simple words, it means that the increase in the assets has negative impact on the share price in the market. The negative impact may be due to the fact that the increase in the assets is due to the increase in the cash and cash equivalent in hand which gives negative signals to the shareholders that the institution is not utilizing its available assets. The relation between the share price and total debt is
insignificant as the p value is greater than the level of significance which is taken as 0.05. The negative sign shows there is negative relation between the share price and the increase in the total debt. In simple words, it means that the increase in the assets has negative impact on the share price in the market. The negative impact may be due to the fact that the increase in the total debt increases the gearing of the institution which results in the decline of
31
net
worth
of
the
institution
which
also
gives
negative
signals to the shareholders in the market so they are not much willing to invest in the MFI. The relation between the operating expenses is negative & insignificant as the p value is greater than the level of significance of 0.05. The negative sign with the coefficient of operating expense shows that the increase in the operating expense reduces the profitability of the financial institution so investors and shareholders are earning less on their investment has than before. impact The on decline the in the profitability negative shareholder
expectation from the institution so they are not that much willing to invest in the market. There is positive and insignificant relation between the
share prices and operating revenues because it is directly linked with the profitability of the MFI. This shows that the increase in the profitability has positive impact on the share prices The in the market. of The increase is also in shows the the profitability can only be possible through efficiency in its operations. value R-squared consistency in the share prices.
50000
32
40000 30000
The above diagram shows fluctuation in both total assets and operating revenues but there is no significant difference between the values at the start of the period and end of the period. There is stability in operating expenses and total debt.
33
Dependent Variable: SHARE Method: Least Squares Date: 05/18/12 Time: 00:51 Sample: 1 16 Included observations: 16 Variable TA TD OE RE C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient -2.91E-05 9.00E-05 0.000134 1.05E-05 8.006383 0.216782 -0.068025 0.250340 0.689369 2.453522 2.243683 Std. Error 0.000202 7.31E-05 0.000226 7.11E-06 1.526760 t-Statistic -0.143934 1.230936 0.594469 1.473926 5.244037 Prob. 0.8882 0.2440 0.5642 0.1685 0.0003 10.54375 0.242236 0.318310 0.559744 0.761155 0.571814
Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)
the relation between the share price and significance which is taken as 0.05. The
total assets is insignificant as the p value is greater than the level of negative sign shows there is negative relation between the share price and the increase in the assets. In simple words, it means that the increase in the assets has negative impact on the share price in the market. The negative impact may be due to the fact that the increase in the assets is due to the increase in the cash and cash equivalent in hand which gives negative signals to the shareholders that the institution is not utilizing its available assets. The relation between the share price and total debt is
insignificant as the p value is greater than the level of significance which is taken as 0.05. The positive sign shows there is positive relation between the share price and the increase in the total debt. In simple words, it means that
34
the increase in the assets has positive impact on the share price in the market. But in the opinion of most of the financial experts the positive relation is not good due to the fact that the increase in the total debt increases the gearing of the institution which results in the decline of net worth of the institution which also gives negative signals to the shareholders in the market so they are not much willing to invest in the MFI. The current results shows another school of thought which argues that the increase in the debt provides slight cushion to shareholders from risk associated to MFI so some of the shareholder interested in investing geared institution. The relation between the operating expenses is positive & insignificant as the p value is greater than the level of significance of 0.05. There is positive and insignificant relation between the share prices and operating revenues because it is directly linked with the profitability of the MFI. This shows that the increase in the profitability has positive impact on the share prices in the market. The increase in the profitability can only be possible through efficiency in its operations. The value of R-squared is also shows the consistency in the share prices.
35
80000 60000 40000 20000 15000 14000 13000 12000 11000 10000 08:1 08:3 09:1 09:3 TA TD OE 10:1 10:3 TR P 11:1 11:3 0
The diagram shows the decline in the total asset during the period and there is fluctuation in operating revenues but there is no substantial change in it. The operating expenses also show continuous decline during the period. There is also increase in the total debt in the last few years of the given period.
36
Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)
Table 4.3 highlights the relation between the share price and total assets is insignificant as the p value is greater than the level of significance which is taken as 0.05. The negative sign shows there is negative relation between the share price and the increase in the assets. In simple words, it means that the increase in the assets has negative impact on the share price in the market. The negative impact may be due to the fact that the increase in the assets is due to the increase in the cash and cash equivalent in hand which gives negative signals to the shareholders that the institution is not utilizing its available assets. The relation between as the p the share is price less and than total the debt level is of
significant
value
significance which is taken as 0.05. The positive sign shows there is positive relation between the share price and the increase in the total debt. In simple words, it means that
37
the increase in the assets has positive impact on the share price in the market. But in the opinion of most of the financial experts the positive relation is not good due to the fact that the increase in the total debt increases the gearing of the institution which results in the decline of net worth of the institution which also gives negative signals to the shareholders in the market so they are not much willing to invest in the MFI. The current results shows another school of thought which argues that the increase in the debt provides slight cushion to shareholders from risk associated to MFI so some of the shareholder interested in investing geared institution. The significant result shows that the variable should not be considered in the analysis of the current MFI. The relation between the operating expenses is negative & significant significance The variable as of of the p value There is is less than the level of 0.05. negative is and significant so it
relation between the share prices and operating revenues. operating revenue significant should be excluded from the analysis of current MFI. The value of R-squared is also shows the consistency in the share prices.
38
50000 40000 30000 20000 10000 16000 14000 12000 10000 8000 6000 08:1 08:3 09:1 09:3 TA TD OE 10:1 10:3 TR P 11:1 11:3 0
The above diagram shows substantial increase in the total assets and slight decline in the operating revenues during the period. Total debt has also declined during the period and also shows consistency after the sudden decline.
39
Dependent Variable: SHARE Method: Least Squares Date: 05/18/12 Time: 00:52 Sample: 1 16 Included observations: 16 Variable TA TD OE RE C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient -7.19E-05 5.02E-05 8.05E-05 -4.95E-05 11.19398 0.688893 0.575764 0.173176 0.329890 8.349669 2.508682 Std. Error 4.94E-05 1.91E-05 4.43E-05 1.70E-05 0.889984 t-Statistic -1.455664 2.632781 1.819670 -2.922347 12.57773 Prob. 0.1734 0.0233 0.0961 0.0139 0.0000 9.413750 0.265879 -0.418709 -0.177275 6.089413 0.007785
Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)
Table 4.4 States the relation between the share price and total assets is insignificant as the p value is greater than the level of significance which is taken as 0.05. The negative sign shows there is negative relation between the share price and the increase in the assets. In simple words, it means that the increase in the assets has negative impact on the share price in the market. The negative impact may be due to the fact that the increase in the assets is due to the increase in the cash and cash equivalent in hand which gives negative signals to the shareholders that the institution is not utilizing its available assets. The relation between as the p the share is price less and than total the debt level is of
significant
value
significance which is taken as 0.05. The positive sign shows there is positive relation between the share price and the increase in the total debt. In simple words, it means that
40
the increase in the assets has positive impact on the share price in the market. But in the opinion of most of the financial experts the positive relation is not good due to the fact that the increase in the total debt increases the gearing of the institution which results in the decline of net worth of the institution which also gives negative signals to the shareholders in the market so they are not much willing to invest in the MFI. The current results shows another school of thought which argues that the increase in the debt provides slight cushion to shareholders from risk associated to MFI so some of the shareholder interested in investing geared institution. The significant result shows that the variable should not be considered in the analysis of the current MFI. The relation between the operating expenses is negative & significant significance The variable as of of the p value There is is less than the level of 0.05. negative is and significant so it
relation between the share prices and operating revenues. operating revenue significant should be excluded from the analysis of current MFI. The value of R-squared is also shows the consistency in the share prices.
41
5.1 Conclusion The above analysis gives insight information regarding the efficiency of the micro finance institutions in utilization of its assets, total debt and total operating expenditure which generate operating revenues. The above results shows slight variance in the behavior of the share prices in the market with reference to the four variables of the model i.e., total assets, total debt, total operating revenues and operating expenses. The relation between the total assets and the share price in the market is consistent in all the statistical between the outcomes. share There and is also consistent revenues relation in the price operating
outcomes. There is variability in the relation between the share prices and total debt & operating expenses. The relation between analysis the the of total two debt and total operating is already be
revenues should be negative rationally which is evident in statistical mentioned MFIs. The reason why it in above chapter that should
negative. The positive relation between the two specific variables i.e., total debt & operating expenses with share prices may be due to the signaling theory as mentioned in previous chapter or may be due to some non-financial factors which are affecting the stock prices in the market. The above shows that the financial institutions in Pakistan are considerably efficient irrespective of some variation of
42
movement to
of
specified their
variables
in in
the
study.
There
is and
substantial room available for the microfinance institutions improve efficiency utilizing assets operations.
43
5.2 Recommendations Based on the analysis should do and the conclusion following the to microfinance improve the
institutions
operational efficiency: MFIs should utilize their cash and cash equivalents to the maximum but keeping the adequate liquidity so that they dont trap in liquidity risk. MFIs should utilize their non-currents in such a way that they get better and improved returns The operating expenses should reduce so minimum possible so that targeted profitability is ensured. The revenues should be maximized which can be possible
through increasing the customer base The total debt should be utilized appropriately and
effective because debt also affects the profitability by percentage of financial charge on the debt.
44
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50
Total Assets 14022 13764 12920 12100 11613 12129 12246 11891 12330 12625 12544 12269 12136 12218 12455 12768
Total debt 1359 1283 1189 1077 1099 1140 1124 1106 1076 1204 1212 1164 1157 1132 1108 1176
Operating exp 13876 13762 12878 11875 11348 11533 11869 11762 11071 12190 12496 12123 12058 11810 11289 12359
Revenues 248000 192700 125900 60900 37200 38500 81500 64200 42800 46000 54600 50800 59000 77300 73100 146500
Prices 12.30 12.68 11.36 11.98 12.54 12.48 13.25 13.54 12.91 11.65 11.25 11.36 11.48 11.78 11.19 11.36
KASHF FOUNDATION
The figures are in 000 (Total revenues, operating expenses, total assets, total debt) Share price in PKR
51
Data set Quarterly values from year (2008-2011) National Rural Support Program (NRSP)
Total Assets 10481 10539 9859 10602 10731 10285 9979 10012 9562 9381 9978 9842 8710 7941 7328 7435 8038 7077
Total debt 9488 9545 9131 9304 1023 9371 9558 9371 8816 8684 8971 8566 7679 7174 6806 6841 6899 5284
Operating exp NRSP 9813 10519 9722 9326 10428 10178 9658 9614 9387 9206 9159 9350 8676 7721 7162 7277 7202 6860
Revenues 66647 55100 80100 79600 142600 71100 72145 73245 69458 69235 65485 65258 65936 110241 98756 104587 100245 124978
Prices 10.36 10.45 10.89 10.54 10.68 10.69 10.78 10.58 10.25 10.34 10.86 10.25 10.65 10.87 10.15 10.36 10.34 10.98
The figures are in 000 (Total revenues, operating expenses, total assets, total debt) Share price in PKR
52
Data set Quarterly values from year (2008-2011) First Microfinance Bank Ltd (FMFB)
Total Assets 6118 6244 9187 9187 9187 9461 11061 12276 13283 15201 15739 15334 15156 14371 14876 14331
Total debt 5258 4782 5865 9183 9179 9178 8999 1004 1134 1170 1505 1451 1382 1334 1385 1288
Operating exp FMFB 5727 5377 5865 9187 9183 9180 9208 10584 12289 12131 15122 15126 14934 14017 14077 13999
Revenues 45698 42365 43168 43698 41258 40245 41654 42587 40125 39785 36547 35874 40125 45879 35124 34852
Prices 9.25 9.36 9.15 9.75 9.65 9.45 9.63 9.12 9.18 9.17 9.35 9.93 9.48 8.98 9.69 9.48
The figures are in 000 (Total revenues, operating expenses, total assets, total debt) Share price in PKR
Data set
53
Total Assets 14909 13365 13854 14290 13806 12994 12376 11496 12047 11272 10744 11298 11635 10563 10908 10498
Total debt 1355 1200 1181 1295 1287 1205 1125 1084 1116 1002 9697 1094 1053 9799 9365 9438
Operating exp TMFB 14321 13354 12214 13740 13772 12961 12370 11272 11180 11272 10041 10619 11328 10513 10064 10498
Revenues 64587 61234 69789 63458 67895 69847 60458 62357 64125 68167 68004 60124 63078 63897 58796 59321
Prices 13.95 12.95 12.56 13.25 13.78 13.64 12.98 12.45 11.36 11.28 11.98 11.63 12.43 12.35 12.69 12.87
The figures are in 000 (Total revenues, operating expenses, total assets, total debt) Share price in PKR * share prices are collected from Karim Securities Karachi through Mr. Shafiq Khan.
54
Plagiarism Report
55