Investigating The Role of Microfinance in Developed and Developing Economies

DISSERTATION
Investigating the role of microfinance

in developed and developing
economies
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ABSTRACT
Abstract
The viability of microfinance and role of microfinance institutions is an ongoing debate over
the years. To date, microfinance institutions served million of poor people by providing them
easy access to loans with better repayment rates, and also improving their health and welfare.
But on the other hand, the growing interest in microfinance schemes in developing and
developed economies raised many issues. The purpose of this study is twofold. First, this
study is significant in addressing the incompetence of microfinance institutions in reaching
the core poor by uncovering the factors that obstruct the implementation and growth of
microfinance. Secondly, a cross-country comparison among 3 Asian developing countries
(Bangladesh, Pakistan, and India) and 2 developed countries (UK and USA) is conducted to
evaluate the effectiveness and productivity of their microfinance institutions in reaching and
serving low income people. In order to achieve the objectives of this study, the attempt is
made to collect microfinance data for six years from 2006 to 2011. The findings of the study
reveal that Bangladesh and India are comparatively ahead of other countries in serving poor
people by providing them microfinance services. Similarly, on the basis of ten most important
microfinance indicators, it is concluded that MFIs in both developed countries i.e. UK and
USA lack in performance, outreach, financial stability, and costs compared to the developing
countries particularly Bangladesh and India. It is believed that this study will be a significant
addition to the literature because of cross-country analysis as well as the due to the
recommendations made at the end to promote microfinance practices to reduce poverty levels
in the world.
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ACKNOWLEDGMENT
Acknowledgement
I would like to thank my supervisor who assisted me throughout the dissertation period. His
timely support and feedback gave me the opportunity finish this dissertation on time. A
special thanks to Durham University and staff for providing me access to library books and
journals related to microfinance. Last but not least, I am so grateful to my parents who
encourage me throughout my studies in Durham University and finally today I am able to
submit my dissertation in the partial fulfilment of my degree.
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Table of Contents
Abstract................................................................................................................. 1
Acknowledgement................................................................................................. 2
CHAPTER 1: INTRODUCTION
1.1 Introduction..................................................................................................... 8
1.2 Background of the Study................................................................................. 8
1.3 Problem Statement........................................................................................ 10
1.4 Research Aim and Objectives........................................................................11
1.5 Research Questions....................................................................................... 11
1.6 Significance of the Study............................................................................... 11
1.7 Research Organisation...................................................................................12
CHAPTER 2: LITERATURE REVIEW

2.1 Introduction................................................................................................... 13
2.2 Global Perception of Microfinance..................................................................13
2.3 Microfinance Activities...................................................................................14
2.3.1 Microfinance Lending...............................................................................14
2.3.2 Microfinance Products and Services........................................................14
2.3.3 Interest Rates.......................................................................................... 15
2.4 Role of Microfinance Institutions....................................................................16
2.4.1 Commercial Banks as Formal MFIs..........................................................16
2.4.1 Microfinance in Developing Countries.....................................................17
2.4.2 Microfinance in Developed Countries......................................................19
2.5 Factors Affecting the Growth of Microfinance................................................20
2.5.1 Financial Stability..................................................................................... 20
2.5.2 Uncontrolled Growth................................................................................ 20
2.5.3 Cultural factors........................................................................................ 21
2.5.4 Systematic Fraud..................................................................................... 21
2.5.5 Bureaucracy Barriers............................................................................... 21
2.5.6 Lack of Credit Rating Agencies................................................................21
2.5.7 Challenges for Commercial Banks...........................................................22
2.5.8 Methodological Flaws..............................................................................22
2.5.9 State Intervention.................................................................................... 22
2.5.10 other factors.......................................................................................... 22
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2.6 Summary....................................................................................................... 23
CHAPTER 3: METHODOLOGY
3.1 Introduction................................................................................................... 24
3.2 Research Methodology...................................................................................24
3.3 Philosophical Paradigms................................................................................ 25
3.4 Research Design............................................................................................ 25
3.5 Research Approach........................................................................................ 26
3.5.1 Qualitative vs. Quantitative.....................................................................26
3.5.2 Deductive vs. Inductive...........................................................................26
3.6 Research Methods......................................................................................... 27
3.6.1 Case Study Method..................................................................................27
3.6.2 Sources of Data collection.......................................................................28
3.6.2.1 Secondary Data Collection................................................................28
3.6.2 Limitations of Secondary Data.................................................................29
3.6.3 Reliability and Validity of Secondary Data...............................................29
3.7 Data Analysis................................................................................................. 30
3.8 Study Population............................................................................................ 31
3.9 Research Ethics............................................................................................. 31
3.10 Resources Used........................................................................................... 32
3.11 Research Limitations.................................................................................... 32
3.12 Summary..................................................................................................... 32
CHAPTER 4: CROSS-COUNTRY ANALYSIS

4.1 Introduction................................................................................................... 34
4.2 Data Reliability Analysis................................................................................34
4.3 Analysing Gross Loan Portfolio.......................................................................35
4.4 Analysing Outreach....................................................................................... 37
4.4.1 Borrowings............................................................................................... 37
4.4.2 Number of Active Borrowers....................................................................38
4.4.3 Average Loan Balance per Borrower........................................................39
4.4.4 Percentage of Female Borrowers.............................................................40
4.5 Analysing Financial Stability..........................................................................42
4.5.1 Return on Asset (ROA) Ratio....................................................................42
4.5.2 Return on Equity (ROE) Ratio...................................................................43
4.5.3 Deposits to Loan (DTL) Ratio...................................................................44
4.6 Analysing Costs............................................................................................. 46
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4.6.1 Cost per Borrower....................................................................................46

4.6.2 Cost per Loan.......................................................................................... 47
4.7 Summary....................................................................................................... 48
CHAPTER 5: CONCLUSION
5.1 Conclusion..................................................................................................... 49
5.2 Recommendations......................................................................................... 52
5.3 Research Limitations...................................................................................... 53
5.4 Future Research............................................................................................. 54
References........................................................................................................... 55
Appendices.......................................................................................................... 62
Appendix A....................................................................................................... 62
List of Figures
Figure 1.1 Chronological development
......................... 09
Figure 2.1 Flow of microfinance
......... 15
of
microfinance.
financial
resources.
Figure 3.1 Research Onion....

............ 24
Figure 3.2 Research approach..........
.... 31
Figure 3.3 Entire research process......
......... 33
Figure 4.1 Gross loan portfolio of
.............. 35
all
countries.
Figure
4.2
Loan
Portfolio
Bangladesh
UK. 35
Figure
4.3
Borrowings
of
all
.................................................... 37
Figure
4.4
Borrowings:
Bangladesh
........ 37
Figure
4.5
Active
borrowers
of
.......................................... 38
all
vs.
countries.
vs.
countries
UK.
.
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Figure
4.6
Active
Borrowers
Bangla
............................................. 38
vs.
Figure
4.7
Avg.
loan
balance
of
.......................................... 40
countries.
all
UK.
Figure
4.8
Avg.
loan
balance:
Bangla
............................................ 40
vs.
Figure
4.9
Female
borrowers
in
.......................................... 41
countries.
Figure
4.10
Female
borrowers:
......................................... 41
all
Bangla
vs.
UK.
UK.
Figure
4.11
ROA
ratio
of
all
..................................................... 42
countries.
Figure
4.12
ROA
ratio:
Bangladesh
........ 42
vs.
UK.
Figure
4.13
ROE
ratio
of
all
countries
..................................................... 43
Figure
4.14
ROE
ratio:
Bangladesh
............................................... 43
vs.
.
UK.
Figure 4.15 DTL ratio of all countries...

........ 45
Figure 4.16 DTL ratio: Bangladesh vs. UK...
.......... 45
Figure 4.17 Cost per borrower of all countries........
.. 46
Figure 4.18 Cost per borrower: Bangla vs. UK.
.......... 46
Figure 4.19 Cost per loan of all countries..
... 47
Figure 4.20 Cost per loan: Bangla vs. UK...
... 47
Figure 4.21 Average borrowings (2006-2011).
........................................ 50
Figure 4.22 Average Gross Loan Portfolio (2006-2011) ...
. 50
Figure 4.23 Average No. of active borrowers (2006-2011)
........................ 51
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Figure 4.24 Average loan balance per borrower (2006-2011)

.......................... 51
Figure 4.25 Average financial stability (2006-2011).
................................ 51
Figure 4.26 Average costs (2006-2011).
................................................... 52
List of Tables
Table 2.1: Informal vs. Formal MFIs.
........................................................... 16
Table 3.1: Features of positivism and interpretivism paradigms.
............... 25
Table 4.1 Reliability analysis through Cronbachs Alpha.
......................... 35
Table 4.2 - Correlation Matrix Gross Loan Portfolio.
............................... 36
Table 4.3 - Correlation Matrix Borrowings.
.............................................. 38
Table 4.4 - Correlation Matrix Number of Active Borrowers.
.. 39
Table 4.5 - Correlation Matrix Avg. loan balance per borrower.
........ 40
Table 4.6 - Correlation Matrix Female borrowers.
................................... 41
Table 4.7 - Correlation Matrix Return on assets ratio.
....... 43
Table 4.8 - Correlation Matrix Return on equity ratio.
............................ 44
Table 4.9 - Correlation Matrix Deposits to loan ratio.
............................. 45
Table 4.10 - Correlation Matrix Cost per borrower.
................................ 47
Table 4.11 - Correlation Matrix Cost per loan.
......................................... 48
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Chapter 1: Introduction
1.1 Introduction
This chapter mainly contains an introduction and the basic idea of the dissertation. The
background and problem statement are included to set the scene for originating aim,
objectives, and research questions of the study. After that, the significance of the study
illustrates how this study will contribute to the literature of microfinance. Finally, the
theoretical framework of the study gives an idea about the basic structure of the dissertation.
1.2 Background of the Study

According to Consultative Group to Assist Poor (CGAP), microfinance offers poor people to
access basic financial services (Fardoust et al. 2010 p. 478). The idea of microfinance is
developed originally in Bangladesh when Muhammad Yunus formed the Grameen Bank in
1976. The bank was established in effect of several small projects of NGOs that were
providing credits to poor people. In the early days of establishment, Grameen bank
emphasised on small loans and savings and put interest rates adequately high to cover
expenditures. After all, the bank asked borrowers to organise a group of five people and
arrange weekly meeting with each other to repay their finances and also share valuable
thoughts and opinions. In early 1990s, the idea of microfinance started to become popular
among commercial banks, and many powerful banks and financial institutions adopted
microfinance (Otero, 1999). In 2005, microfinance concept inspired many big financial
institutions worldwide and Muhammad Yunus received a Nobel Prize in 2006 for his
innovative idea (King, 2012). By looking at the successful experiment and great achievement,
Yunus decided to expand the network of Grameen bank all over the world. In 2011, Grameen
bank had nearly 2,565 branches in 81,379 villages worldwide and serving over 3500,000 poor
people with the help of 22,124 staff members (Grameen Bank, 2011).
Microfinance as a new strategy, and with a complete faith in the financial system market and
theory, worked like a magic bullet against poverty. In the opinion of several experts and
theorists microfinance helped many developing economies to generate profits as well as
reduce poverty at one fell swoop (Tulchin, 2003). Microfinance has deep roots in developing
countries especially in Asia. Regardless of its popularity in developing countries, this practice
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was also informally adopted in many European countries during the 1980s and 1990s. The
informal practice and self-help created the need for microfinance institutions in Europe. For
example, Irelands early history of microfinance can be traced back in 1980s when self-help
led to financial advancement, conductive regulations, legal backing, and mass microfinance
movement (Khan and Rahaman, 2007). The Irish loan funds introduced by charity
organisations in the beginning of eighteenth century initially. However, some objectionable
laws and regulations imposed by the commercial banks brought it down (ibid).
In Germany, rural finance was introduced in the early 1960s when Friendrich Wilhelm
Raiffeisen developed a scheme for microfinance (Steinwand, 2001). This scheme was named
credit cooperative that was originally used to provide financing to poor farmers in rural
areas. By 1910, nearly 1.4 million farmers gained benefits from this scheme. Later on the
scheme was introduced in Northern Italy and Ireland to serve poor farmers (Morduch, 1999).
Similarly, during 1970s, British and Dutch set up a microfinance based model namely
Raiffeisen Model when they were ruling in Indonesia and India. Today an Indonesian bank,
the Bank of Rakyat (BRI) is a thriving microfinance institution based on the idea of
Raiffeisen Model (Seibel, 2005). In fact, the microfinance concept is popular everywhere in
the world but it has different names in different countries. For instance, in China it is called
Hui; in India it is known as Chit funds; and in Philippines its name is Paluwagan (Seibel,
2005). Figure 1.1 shows the chronological development of microfinance since 1970 to
present divided into four periods: expansion, growth, commercialisation, and transformation.
Figure 1.1: Chronological development of microfinance
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Source: Srnec et al (2009, p. 188)
1.3 Problem Statement

Microfinance became very popular when Muhammad Yunus, the founder of Grameen Bank,
received a Nobel Prize for increasing awareness for supporting poor families by giving them
small finances. Since then several microfinance institutions established both in developed and
developing nations. To date microfinance institutions served million of poor people by
providing them easy access to loans with better repayment rates, and also improving their
health and welfare (Becker, 2010). Therefore, there is no doubt that a majority of poor
families gained countless benefits from microfinance schemes all around the world, but
problems occurred when too many microfinance institutions rapidly expanded worldwide
until 2009 without appropriate institutional abilities to controls (Ltzenkirchen, 2012). The
growing interest in microfinance schemes in developing and developed economies raised
many issues. For example, potential borrowers did not retain any written evidence; wish to
borrow minor uneconomic loans; and often have no assets as collateral. In this regard, many
researchers believe that microfinance is one of the major factors that significantly contributed
to the financial crisis of 2008 (Srnec et al. 2009).
Since to date, the role of microfinance institutions is still unclear. In the past, the role of very
few microfinance institutions has been explored so far, and existing studies do not clearly
reveal any conclusive results showing the performance of microfinance institutions in
developing and capitalist economies (Momoh, 2005; Ltzenkirchen, 2012). This literature
gap exists due to lack of comparative studies that compare and analyse the role of
microfinance institutions in reducing the poverty in both developing and developed countries.
Momoh (2005) highlights the fact that some particular banks and institutions in developing
economies, such as Bangladesh in Asia and Ghana in Africa, have achieved considerable
success in using microfinance as a tool to reduce poverty level. This debate is rather unclear
because many studies have claimed that a majority of microfinance institutions in developing
economies are responsible of putting beneficiaries in debt (Srnec et al. 2009). Similarly, some
studies concern about the ineffectiveness of microfinance institutions in reaching the core
poor (Manohar, 2000). Zeller and Meyer (2002) and Bamwesigye (2008) also doubt about
the actual role of microfinance institutions due to a number of issues hampering the proper
implementation and growth of microfinance in developing and developed countries.
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The above discussion reveals that many questions remain unexplored due to insufficient
knowledge in this domain. Therefore, the research rationale of this study is to explore the
actual and perceived role of microfinance institutions in development and developed
countries along with investigating the factors that hinder the true growth of microfinance
systems in developed and developing countries.
1.4 Research Aim and Objectives

This research endeavours to investigate the actual and perceived role of microfinance in
reducing the worldwide poverty level. Furthermore, the study also aims to reveal the hidden
truth about the success or failure of microfinance institutions in capitalist and developing
economies. In order to obtain an accurate picture of microfinance operation, the following
objectives are drafted:
To investigate general perception of microfinance concept

To identify factors that hinder the growth of microfinance systems and institutions
To conduct cross-country analysis to explore the true role of microfinance institutions
in developed and developing countries

To provide recommendations to promote microfinance practices to reduce poverty
levels in the world economies
1.5 Research Questions

The research questions that help the researcher to address key aim and objectives of the study
are as follows:
1. What are the key issues that obstruct the implementation and growth of microfinance?
2. Where UK and Bangladesh stand in terms of microfinance implementation?
3. What is the role of microfinance institutions (MFIs) in providing microfinance facility
in developing and developed economies?
1.6 Significance of the Study

To date, hardly any study is conducted that compares and analyses the role of microfinance
institutions in reducing the poverty in both developing and developed countries (Momoh,
2005; Ltzenkirchen, 2012). Therefore, the attempt is made to fill the literature gap by
investigating the actual and perceived role of microfinance institutions. As a result, this study
is expected to reveal the hidden truth of their success or failure in capitalist and developing
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economies. To achieve the desired results, the cross-country analysis is conducted by

considering the cases of different microfinance institutions operating in different countries
such as Bangladesh, India, Pakistan, UK, and USA.
This research is also significant in addressing the incompetence of microfinance institutions
in reaching the core poor (Manohar, 2000) by uncovering the factors that obstruct the
implementation and growth of microfinance. It is believed that this study will be a significant
addition to the literature because of cross-country analysis as well as the due to the
recommendations made at the end to promote microfinance practices to reduce poverty levels
in the world.
1.7 Research Organisation

This research is organised into five chapters. The first chapter is introduction that illustrates
the basic idea of the research by including research background, problem statement, and aim,
objectives of the study. The second chapter is literature review which reviews literature on
various aspects of the microfinance concept to clarify and address the objectives of the
research. The methodology chapter outlines the methodology of this research by discussing
research philosophy, design, approach, data collection techniques and procedures. The fourth
chapter is the most important chapter of this research is cross-country analyses which
analyses the role of MFIs in developing and developed economies on the basis of various
indicators showing the performance of MFIs in terms of portfolio, outreach, financial
stability, and cost. Finally, the last chapter is the conclusion that concludes the study and
also provides recommendations to promote microfinance practices to reduce poverty levels in
the world economies.
Chapter 2: Literature Review

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2.1 Introduction
The literature review chapter outlines different aspects of microfinance phenomenon. The
chapter includes a debate on different microfinance activities, global perception of
microfinance, role of microfinance institutions, and the factors that hinder the adoption and
implementation of microfinance methodology.
2.2 Global Perception of Microfinance

Microfinance has a worldwide impression as a successful tool for reducing poverty. Several
policy makers around the world therefore attempt to investigate the availability and
sustainability of microfinance for poor people in the future. The investors, donors, and other
key stakeholders of the microfinance claim that microfinance can pay for itself, and must do
so if it is to reach very large numbers of poor households (Brandsma and Burjorjee, 2004, p.
9). The argument gives the message that unless microfinance institutions charge enough to
bear their costs, they will always be restricted by the unsure and scarce provision of financial
support from donors and government. It is also assumed in the statement that microfinance
has already achieved satisfactory results for the poor people but there is a need to make it
available for needy people as soon as possible. Morduch (1999) outlines that the interest of
investors and donors in microfinance domain indicates a win-win proposition that the
institutions of microfinance that practise ethical banking can also better serve poor people in
alleviating the poverty. This means that the institutions that pursue good banking principles
with the likelihood of some return in the form of profit will be able to cover their costs
effectively and thus they can serve poor people in a sustainable manner in reducing the
poverty. Morduch (2000) further explains that the ability of poor people to repay loans
indicates that they are getting benefit/profit from the investments they made from microcredit
money.
Microfinance is perceived as an awesome public policy agenda that has received considerable
attention and success for providing financial support and services to poor people for the
improvement of their livelihoods. Microfinance proposals are accepted widely and a number
of reputable organisations and banks around the globe sponsored such initiatives (Banerjee
and Duflo, 2009). These institutions include: the United Nations, World Bank, NGOs, and
several government and non-government charitable organisations. The core aim to support
this initiative is to promote small scale investments as well as to assist low income people and
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communities by providing them opportunities to generate incomes (Hartarska and Nadolnyak

2008b; Imai et al. 2010). The success or failure of microfinance institutions depends on
several factors; some institutions failed and ceased already while others are serving million of
people in both developing and developed countries.
2.3 Microfinance Activities

2.3.1 Microfinance Lending
Microfinance lending programs are not identical in every country. Generally, there are two
types of microfinance lending: group lending and individual lending (Lehner, 2009). The
fundamental means of group lending scheme is the mutual responsibility for reimbursement
of microcredit. The biggest advantage of the group lending program is to motivate the
members of the group to screen and monitor each other. This will consequently reduce the
overall cost of MFIs and they do not need to conduct extensive screening processes at
individual level. In contrast, the major disadvantage of group lending is that some individuals
may take advantage of mutual responsibility and act as a free-rider. This problem can be
avoided by developed a direct link between the bank and the borrower. This will intensify the
flexibility of the microfinance system (Gin et al. 2006). In individual lending, there is a
strong need to screen and monitor individuals and as a result the firm will face higher
transaction costs. This is the reason that most of the microfinance lenders today lend in group
based schemes (Hermes and Lensink, 2007).
2.3.2 Microfinance Products and Services

The products and services of MFIs are not only limited to microfinance credit; instead they
also offer other conventional financial services with the name of micro savings and micro
insurance. Micro saving refers to an availability of small deposit accounts for poor people as
an encouragement to save money for future use. Therefore, these deposits many times
become more than the outstanding loan amount and consequently act as another source for
funding loans (Dhar, 2005). On the other hand, micro insurance is offered by MFIs to protect
poor people from particular risks and threats by paying consistent insurance premium in
proportion to the probability and costs of associated risks (ibid). Some other services offered
by MFI include health advice, business development, and education. It is evident that the
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combination of non-financial and financial services of MFI has deep impact on reducing
poverty (Zaman, 1999).
2.3.3 Interest Rates

The appropriate level of interest rate for microfinance is an ongoing debate since the
establishment of Grameen Bank. Generally, MFIs charge high interest rates compared to the
conventional banks. This is because the firms have high operational costs and as a result
higher costs per pound lent, than conventional banks (Cull et al. 2009). However, there are
considerable variations in the levels of interest rates between microfinance institutions.
Kneiding & Rosenberg (2008) found that the worldwide average interest rate is nearly 35%
with an exceptional case of 80% in Uzbekistan. The interest rate is expected to reduce to
some extent in upcoming years due to an increasing level of competition between MFIs.
Figure 2.1 illustrates the microfinance process including microfinance stakeholders and
activities.
Figure 2.1: Flow of microfinance financial resources
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2.4 Role of Microfinance Institutions

The role of Microfinance Institutions (MFIs) on alleviating the poverty has gained
momentum. Different opinions are found in this context, some believe that MFIs play a
positive role in reducing poverty while others perceive that they significantly contributed to
the financial crisis of 2008 (Srnec et al. 2009). But before discussing the role of microfinance
institutions in detail, it is essential to understand the difference between different types of
microfinance institutions to evaluate the nature of financial services offered by each of them.
Table 2.1 presents the underlying differences between two types of MFIs i.e. formal and
informal.
Table 2.1: Informal vs. Formal MFIs
Informal MFIs
Formal MFIs
Just registered
Registered and operate under the countrys laws
Lack of transparency
Transparent institutions
Impressionable to Central Bank
Adaptable and acceptable to Central Bank
Elected members, can be non-professionals
Works under professional management
Low financial stability, high risk
High financial stability, low risk
Limited microfinance availability
Medium microfinance availability
Normally without insurance and hedging
Covered with insurance
Low interest rates for clients
Similar interest rates offer by commercial

banks
Loan maturity level (95 to 99%)
Normally less than informal MFIs
No or less profit
Gain profit but less than commercial banks
Usually operates at village level
Operates on local or regional levels
Humanitarian organisations, nongovernmental aid
Also own foreign sources

2.4.1 Commercial Banks as Formal MFIs

Normally, four types of government or non-government institutions are formally involved in
microfinance activities. These intermediaries could be commercial banks, specialised
financial institutions, state owned banks, and finance organisation. Recently, many
commercial banks in both developing and developed economies have started to infiltrate into
the microfinance sector. There are several ways that commercial banks can engage in
microfinance activities. For instance, they can either directly interact with borrowers or
indirectly involve by generating funds. In general, commercial banks participate in
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microfinance activities in four ways: direct lending, partnership with MFIs, microfinance
subsidiary, or securitisation (Ledgerwood, 1999; Rhyne, 2009).
The direct lending ability of commercial banks allows them to serve the microfinance sector
without any issue or delay. The Grameen Bank started group lending in 1976 where the loan
was attributed to each individual in a group. However, if in case any individual defaults
his/her current credit then new loan will not approved to him/her. The group lending
procedure involves a responsibility of borrowers to reimburse their credits on time and in a
disciplined way (Ledgerwood, 1999). Commercial banks also do partnership with MFIs and
lend them in a variety of ways such as retail and wholesale banking. On the other hand, MFIs
collect, monitor, and originate loans. Indeed, MFIs obtain many benefits working with
commercial banks. As the greater capital can enlarge loan size, so the banks may introduce
their products and services to other geographical areas (Rhyne, 2009). One such example is
the ICICI Bank in India that has established alliances with more than 72 MFIs throughout the
country and looking to raise the number of partnerships to 250 by 2013 (Ugur, 2006).
Another significant practice of commercial banks for starting microfinance operations is to
establish new subsidiaries. These subsidiaries help commercial banks to alleviate the level of
risk while lending to low income people. From the point of view of borrowers, dedicated
microfinance services offered by the commercial banks may develop high trust and indicate
banks commitment to poverty reduction. Finally, commercial banks also play a significant
role in the context of microfinance by generating capital in local and international markets to
support and strengthen the operations of MFIs (Ledgerwood, 1999).
2.4.1 Microfinance in Developing Countries

The microfinance institutions in developing countries proved that low income people are
bankable and small credits have deep impacts on their lives. In particular, the MFIs that
started their services in South Asia expanded rapidly around the world. A survey study
reveals that till 2008, MFIs served nearly 11.8 million poor people in South Asian countries
(i.e. India, Pakistan, Bangladesh, Sri Lanka, Nepal), and 3.8 million low income people in
East Asian countries (i.e. Indonesia, Thailand, Vietnam, China, Philippines) (Haq et al. 2008).
However, people in South Asia are more reluctant in mobilising saving. The gross portfolio of
South Asia is nearly 605 million compared to East Asia with 1156 million (ibid).
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Another proof of the MFIs role in Asian countries highlighted by the State of Microcredit
Summit Campaign Report (2012), where it is stated that MFIs in Asian countries reached
nearly 90 million poor people compared to the low income people in the rest of the world
particularly in America, Latin, Africa, Middle East and Caribbean. Moreover, among over
2000 MFIs in the world, MFIs in Asia achieved highest savings volume and expand the loans
to low income households (Ltzenkirche, 2012). In fact, the MFIs only in Indonesia and
Bangladesh supported over 50% poor families to improve their livelihoods. Some MFIs
operating in developing countries such as Bangladesh, Vietnam, Thailand, and Indonesia
jointly have achieved greatest savings mobilisation and loan distribution in terms of the
worldwide Gross National Product (GNP) (ibid).
In South Asia, three MFIs such as Grameen Bank, BRAC, and ASA serve around 75% poor
community (Haq et al. 2008). Most of their clients are poor women, and the intensity of
outreach is also measured in terms of women clients. A recent study reveals that women poor
clients in South Asian countries are account for almost 85% compared to other counties
(Ltzenkirche, 2012). On the other hand, East Asian MFIs have dominated figures in terms of
portfolio loan figures. For example, MFIs in China has the leading portfolio loan figure of
91.5 billion followed by thrift banks and MFIs in Thailand and Philippines. As compared to
the Asian South Eastern countries, the countries in South Asia excel in credit delivery (Haq et
al. 2008). However, microfinance institutions in South Asian countries retain compulsory
reserves in the form of savings to access loans. Their existing borrowers are three times
excess in number and thus retain savings ten times more compared to the East Asian
countries. For instance, Indonesian MFIs particularly BRI organises more small deposit
accounts in contrast to all MFIs in South Asia.
The MFI sustainability also has an important role to intensify the outreach of MFIs; and to
achieve the optimum level of sustainability MFIs require enough revenue to bear operational
costs. In contrast to MFIs in South East Asian countries, the performance of South Asian
MFIs in terms of lowering down operational costs in not inspiring. In the past decade,
Thailands MFI BAAC has achieved 98% loan-to-deposit ratio whereas Bangladeshi MFI, the
ASA is on top of the list in terms of profitability and performance in South Asian countries
(Haq et al. 2008).
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2.4.2 Microfinance in Developed Countries

The financial crisis unexpectedly opened a way for microfinance institutions to offer their
services in developed countries that have been adversely affected by the economic downturn.
For instance, several MFIs started to seek a licence to open credit unions in the United States
after the financial crisis of 2008 (Srnec et al. 2009). It is evident from the commencement of
the Grameen America Bank in New York at the end of 2008. The founder of the bank,
Muhammad Yunus, asserts that the core aim of obtaining a US credit union licence is to
introduce microfinance services at any of the USA states through Grameen America Bank.
Grameen America points out that initially the chief revenue source for the institute will be the
interest paid by the borrowers on microcredit and ultimately to form a credit union or bank
that can also accept bank or saving deposits (Clary, 2009). The basic idea behind this
philosophy was to encourage MFIs to support low income people by establishing a
cooperative type of village banks or credit unions. In this way, the mutual responsibility of
MFI owners will be strengthened and consequently the cost of financial services will be
reduced.
Another paramount development in the microfinance context in the USA is the provision of
guaranteed microcredit to small farmers through Farm Service Agency (FSA) (Srnec et al.
2009). This facility is available to farmers who cannot borrow loan from commercial banks.
These farmers can use FSA loans for several purposes such as purchase of livestock, land,
seed, feed, equipment, and supplies. The nature of this type of microfinance is different from
those available in the developing countries in terms of economic environment. The FSA
service is fully insured and also covered with local legislations which significantly reduced
the level of risk (USDA, 2009).
The microfinance sector in the United Kingdom is slightly different than USA and other
countries. Almost all British MFIs have common goals to fill gaps in access to credit for
economically or socially expelled individuals or enterprises. Some MFIs implement a variety
of dissimilar products, structures, and target groups compared to other institutions (Carboni
et al. 2010). Such institutes are usually known as UK Community Development Finance
Institutions (CDFIs). People in the UK are usually not familiar with microfinance compared
to general finance. The MFIs normally emphasise on dissimilar market niches; for instance,
social enterprises, artistic or cultural firms, starting business in the villages or deprived area
regions, or small credits to formerly jobless females. As some MFIs focus on microfinance
Page | 20
credits, the industry altogether offers a variety of products and services to low income people
(Brau and Woller, 2004). Mary Ellen, the CEO of Womens World Bank in the UK, rejects the
perception that microfinance was one of the sources of finance crises. She asserts that there is
much equity still available for microfinance proposals (Johnsson, 2009).
2.5 Factors Affecting the Growth of Microfinance

Like financial institutions, MFIs also face difficult times due to internal or external factors.
This study also underpins the challenges for the implementation of microfinance in
developing and developed countries. A number of researchers identified various causation
factors that affect the implementation and growth of microfinance. These factors are
discussed in detail in the following subsections.
2.5.1 Financial Stability

The financial stability is essential for MFIs and requires commercial sources for generating
funds (Rai and Rai, 2012). Meehan (2004) argues that MFIs may survive longer if they
develop relationships with conventional financial markets at local and international levels for
the purpose to generate funds. In addition, to achieve financial stability MFIs should also
enhance their efficiency by lowering their operating costs (Adongo and Stork, 2005).
Furthermore, attracting investors is also difficult in the microfinance sector because investors
typically prefer transparent financial systems which often hard to find in microfinance sector,
therefore they are discouraged by the lack of official recognition and approval of available
data and actions of MFIs (Servon, 2006).
2.5.2 Uncontrolled Growth

Uncontrolled growth represents the failure of those institutions that experienced quick growth
and early success, and then faced crises due to loss of control over microfinance activities. In
fact, the primary focus of such MFIs is to expand their branch networks and hire a maximum
number of loan officers to achieve growth. But no attention is paid to intensify the efficiency
of loan officers to achieve operational productivity (Marulanda et al. 2010). Also in few
cases, the solid portfolio policy itself besieged the institutions.
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2.5.3 Cultural factors

The major benefit of microfinance is to offer small loans to poor people who are in fact
trapped in poverty for generations. Therefore, it is not easy to advertise and educate them
how small loans can help them to establish their own micro businesses in order to improve
their livelihoods. Moreover, international MFIs engage in microfinance activities also need to
communicate clearly about their agendas to local low income communities in order to
develop trust among them (Ugur, 2006).
2.5.4 Systematic Fraud

Systematic frauds are also evident in several cases of MFIs failure. Many senior officials at
the management level misused their positions and powers given to them. They used
institutional financial and other resources for their own benefit using different mechanisms.
In many cases it was found that microfinance loans were granted to their friends or relations
who were not entitled for those loans (Marulanda et al. 2010).
2.5.5 Bureaucracy Barriers

Bureaucracy is another barrier to microfinance activities particularly in the developing
countries. Such problems occur mainly due to political and economic instability where
investors are reluctant to invest money and consequently MFIs face difficulties in running
microfinance operations smoothly (Lucarelli, 2005). Another issue in this domain associated
with the minimum interest rates set by the governments. MFIs find themselves in trouble in
achieving sustainability of microfinance with high interest rates imposed by the government
(Campion, 2002). Similarly, judiciary problems in most of the developing countries enforce
MFIs to formulate credit structures under their regulations which also sometimes influence
microfinance activities (Servon, 2006).
2.5.6 Lack of Credit Rating Agencies

Credit rating attainment can be an expensive option for small MFIs and often considered as
deficient in the microfinance sector. Therefore in order to develop trust of people and other
stakeholders, it is inherent for MFIs to establish partnership with commercial banks and giant
auditing firm to secure better funding (Ugur, 2006).
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2.5.7 Challenges for Commercial Banks

Partnership with commercial banks may also create some problems for MFIs because
commercial banks have different approaches to target their customers for financing.
Introducing and implementing microfinance strategy can be difficult in terms of
understanding low income people and their culture, social values, and traditions etc. For this
purpose, commercial banks may need to conduct various training workshops to educate their
staffs to deal with specific client (Rhyne, 2009).
2.5.8 Methodological Flaws

Methodological flaws are also foremost factors that hinder the implementation and growth of
MFIs. These issues emerge due to commercial banks when they misjudged microcredit risks
and consider that these risks will be treated on later stages and mistakes will be rectified
through minor adjustments. Moreover, they leave several indebted borrowers behind when
they leave the market and consequently those borrowers have poor credit history with credit
bureaus (Marulanda et al. 2010).
2.5.9 State Intervention

In some countries, state intervention contributes to the failure of MFIs for informally
promoting microfinance activities. This can led the microfinance market to downfall because
of lack of effective monitoring and control for medium and long-term sustainability of
microfinance products/services (Marulanda et al. 2010).
2.5.10 other factors

Some other factors that hinder the growth of MFI are mentioned by different financial experts
and theorists. These factors include: high interest rate, increased competition, client retention,
lack of information about the client, clients education level, unregistered lenders, low
population density, legislation and regulatory framework, and difficulty in attracting poor
clients (Campion, 2002; Lucarelli, 2005; Servon, 2006; Ugur, 2006; Servon, 2006;
Marulanda et al. 2010).
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2.6 Summary
This chapter highlights the fact that microfinance has a worldwide perception as a successful
poverty reduction tool but microfinance activities are not same in every country. The
operations and activities of MFIs are primarily based on type of lending, product/service, and
interest rates. The investigation of informal and formal MFIs reveals that formal MFIs in
partnership with commercial banks can play a critical role in serving more poor people in
both developing and developed countries. Though microfinance in developing countries is
well-established and running smoothly but there is a need to start such activities at the
extensive level to support low income people in developed countries as well. It is also
concluded that MFIs face a number of internal and external threats that hinder the
implementation and growth of microfinance in the developing and developed countries.
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Chapter 3: Research Methodology

3.1 Introduction
The research methodology chapter mainly discusses the methodology adopted to complete
this research. The discussion in this chapter surrounds research philosophy, design, approach,
data collection techniques and procedures. In addition, research ethics, research limitations,
and resources used are also the part of the debate.
3.2 Research Methodology

The research methodology is a broad concept which provides a systematic framework to
solve research problems using a number of tools and techniques (Saunders et al. 2007). This
concept is often confounded with research methods which are only the part of the research
methodology for collecting primary or secondary data to achieve underlying objectives of the
research. Research onion is a comprehensive framework for research methodology which is
developed by Saunders et al (2007) to characterise and show various research activities at six
different stages of the research. This framework is employed in this study to highlight the
activities of the research as well as to provide reasoned discussion on the selection of
appropriate tools and techniques to conduct the research. Figure 3.1 shows the research onion
of this research where bold items represent the adopted methodology.
Figure 3.1: Research Onion
Source: Saunders et al. (2007 p.132)

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3.3 Philosophical Paradigms

The research philosophy refers to the creation and the nature of the knowledge to effectively
address research aims and objectives (Collins, 2010). Two foremost philosophical paradigms
that can be applied to social science studies are positivism and interpretivism. The key
differences between these two are included in table 3.1.
Table 3.1: Features of positivism and interpretivism paradigms
Features
Goal
Approach
Data type
Reality perception
Knowledge
Dispersion
Ontology
Research methods
Relationship b/w
research and subject
Data analysis
Positivism
Descriptive with valid arguments
Deductive
Quantitative (numeric data)
Focused, few but exact judgements
Based on scientific laws
Absolute
Combined, conventional, dependent
Surveys, physical experiments
Non-participative, stiff,
unsupportive
Quantitative analysis through
statistical or mathematical tools
Interpretivism
Exploratory with solid arguments
Inductive
Qualitative (textual data)
Diverse, multiple thoughts
Based on social science principles
Relative
Discrete, isolated, independent
Interviews, case studies
Participative, flexible, supportive
Qualitative analysis (document
reviews, or interview data analysis)
Sources: Collins (2010, p. 38)
In this research, interpretivist paradigm is chosen because this study is mainly based on
qualitative cross-country analysis and requires strong arguments to underline the positive or
negative role of MFIs in developed and developing countries. Furthermore, the adoption of
the interpretivist paradigm helps the researcher to provide recommendations to promote
microfinance practices to reduce poverty levels in the world economies. The positivism
paradigm is not adopted because the study does not undertake field or laboratory experiment
or survey investigations (Saunders et al. 2009).
3.4 Research Design

Descriptive and exploratory are the two types of research design (Creswell, 2008). In this
research, exploratory research is chosen because of non-experimental nature of the study. In
addition, this study does not hypothesise anything and therefore, most suitable for providing
qualitative data about microfinance institutions for cross-country analysis. Another reason of
choosing the exploratory research design is to address the strong need of exploring the role of
Page | 26
MFIs which is still unclear due to lack of studies in this research domain. The nature of this
study is flexible and discrete in exploring the issues that obstruct the implementation and
growth of MFIs in developed and developing countries. However, the researcher needs to
address research questions more openly which often cannot be done by employing descriptive
research (Murthy and Bhojanna, 2009). Another reason of giving preference to exploratory
research over descriptive research is because it makes more logical use of qualitative
approach and also does not require large samples.
3.5 Research Approach

The approach of the research is described under two subsections as follows.
3.5.1 Qualitative vs. Quantitative

According to Ledgerwood and White (2006), qualitative approach is more appropriate than
quantitative approach to better understand and explain the underlying behaviour of MFIs.
This is because qualitative research using interviews, case studies, and focus group is
normally the initial point for investigating the topic especially when the topic is confusing
such as effectiveness or ineffectiveness of MFIs in reaching the core poor. On the basis of
research nature and requirements of the research questions, qualitative approach is selected in
this research to effectively measure the efficiency and efficacy of MFIs through qualitative
data available in the form of facts and evidences in the case studies and documents regarding
microfinance institutions. In addition, empirical data surrounding various MFIs from selected
countries allows the researcher to conduct cross-country analysis which consequently helps
the researcher to address key research questions of the study.
3.5.2 Deductive vs. Inductive

Both deductive and inductive approaches are applicable in this research but preference is
given to the inductive approach due to lack of availability of desired data on some particular
MFIs from developed and developing countries. The idea of adopting the deductive approach
is dropped because it is suitable for testing theories when a large amount of data is available
(Saunders et al. 2009). Another reason of following inductive approach throughout this study
is to adopt a bottom-up strategy to highlight problematic factors that hinder the
implementation and growth of microfinance systems and institutions. This means that the
study requires investigating few issues in the beginning and summarise with a list of more
Page | 27
diverse causation factors that can affect the development and growth of MFIs in developed
and developing countries (Bryman, 2008). In this study, not enough data for clarifying the
role of MFIs is available. Therefore, inductive approach helps the researcher to draw strong
conclusions on the basis of limited information.
3.6 Research Methods

The research methods allow the researcher to acquire best possible knowledge to build up
understanding about a specific topic in order to achieve the objectives of the research
(Bryman, 2008). The selection of appropriate research method for the study is always a
critical decision for the researcher because choosing inappropriate method can affect the
overall results of the study and also can obstruct the achievement of the underlying aim of the
research (Saunders et al. 2009). Among two widespread used research methods i.e. scientific
and historical, the researcher has chosen historical method as it is suitable for this research for
collecting reliable data about MFIs from authentic secondary sources. The scientific method
is not employed because it needs experimental investigation which is not required in this
study. In addition, scientific method is not preferred because it is considered as a traditional
and more costly approach compared to the historical method (McNabb, 2010). The following
steps are taken to complete this study by taking into account historical research method.
1. Developing the need to conduct this study by identifying the research problems;
2. Gathering sufficient knowledge and information regarding the research problem to
devise a set of appropriate research objectives and research questions;
3. Carefully verifying and authenticating the acquired knowledge and information
4. Analysing and interpreting the results to draw conclusions; and
5. Finally, documenting the results and conclusions in a significant manner
3.6.1 Case Study Method

The case study method is employed to compare different MFIs operating in the following
countries: Asia (Bangladesh, India, and Pakistan,), United Kingdom (UK), and the United
States of America (USA). Asian countries represent developing countries whereas the UK
and USA are considered as examples of developed countries in this study. The case studies of
these countries are undertaken to having an idea about the negative and positive role of MFIs
in these countries. In order to analyse these MFIs, the data was acquired from various sources
which is explained in the next section.
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3.6.2 Sources of Data collection

The fundamental sources from where data can be collected are primary sources and
secondary sources (Saunders et al. 2009). Throughout the research, the researcher ensures to
acquire reliable data from trustworthy sources to avoid ambiguity while concluding the study.
In this research, the researcher only acquired secondary data, as it was not possible to collect
microfinance primary data from various MFIs from different developed and developing
countries. Some more reasons why primary research is not considered are as follows:
Obtaining sufficient amount of primary data about various MFIs from different parts
of the world usually requires a teamwork where each team member is assigned a task
for collecting adequate data (Bryman and Bell, 2007)

The time and financial resources were limited to conduct primary research in this
domain
The data required for analysis purpose was readily available on the websites and
financial statements of MFIs
3.6.2.1 Secondary Data Collection
Secondary data collection method refers to gathering readily available information from
various reliable and pertinent sources. Kothari (2008) highlights the importance of
satisfactoriness, appropriateness, and trustworthiness of secondary data to draw meaningful
conclusions in order to address research questions and objectives effectively. The work in this
study is primarily based on meaningful secondary data. Therefore, it is collected from many
reliable sources which include websites, document reviews, microfinance case studies,
commercial banks, microfinance institutions, charitable organisations, finance journals &
books, and various internet sources.
The key sources of acquiring processed information about microfinance were the MFIs
operating in Asia, UK, and USA regions. Asian countries represent developing countries
whereas the UK and USA are considered as example of developed countries in this study. In
order to support qualitative reasoning during cross-country analysis, the empirical data from
2006 to 2011 about all MFIs operating in these countries are collected from the following
website http://www.mixmarket.org. The data of 2012 is not collected because the required
data was not fully updated in microfinance databases. The empirical data collected about
MFIs is based on ten microfinance indicators suggested by Becker (2010). These indicators
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are: microfinance borrowings, gross loan portfolio, number of active borrowers, return on
asset (ROA) ratio, return on equity (ROE) ratio, deposit-to-loan (DTL) ratio, average loan
balance per borrower, cost per borrower, cost per loan, and finally the percentage of female
borrowers. The average of each indicator for all MFIs associated with each country is taken
on a yearly basis.
A gross loan portfolio represents all outstanding principal amounts that are due for entire
outstanding client loans. Apart from interest receivable, this undertakes all renegotiated loans,
delinquent, and current loans. The number of active borrowers means individuals or groups
who presently have an outstanding loan balance. However, a person having more than one
loan is considered as single a borrower. The description of other indicators is as follows:
Return on asset ratio = (Net Operating Income, less Taxes) / Assets, Return on equity = (Net
Operating Income, less Taxes)/ Equity, Deposits to loan = Deposits / Gross Loan Portfolio,
Average loan balance per borrower = Gross Loan Portfolio Gross / Number of Active
Borrowers, Cost per borrower = Operating Expense/ Number of Active Borrowers, Cost per
loan = Operating Expense/ Number of Outstanding Loans, and percentage of female
borrowers.
3.6.2 Limitations of Secondary Data

The major limitation associated with secondary data is a poor fit (Kumar, 2011) means that
secondary data is usually collected by individuals or organisations for specific purposes and
normally it may not sufficiently fits to any other situation. Similarly, other two issues
associated with secondary data are inaccuracy and inferiority of information which may result
in data inaccuracy and disreputableness. In the point of view Vartanian (2010), the issue of
outdated data is another area of concern that researchers must keep in mind.
3.6.3 Reliability and Validity of Secondary Data

As mentioned earlier that several limitations are associated with the acquisition of secondary
data in this study. In order to reduce the impact of those limitations, an extensive care is taken
to collect data from trustworthy sources so that the incredibility, disreputableness, and
inaccuracy of the data cannot be questioned. In addition, the latest data about ten
microfinance indicators are acquired from http://www.mixmarket.org, financial statements,
and websites of MFIs to overcome the issue of obsoleteness of data. Furthermore, the
Page | 30
empirical data collected from the website is tested through Cronbachs Alpha in SPSS. It is
believed that adopting these careful considerations made the secondary data reliable and
validated.
3.7 Data Analysis

Data analysis is the backbone of this research and during this step, the researcher attempts to
investigate, organise, transform, and interpret useful information which consequently allows
him to conclude the study in an effective manner (Bryman, 2008). This study is mainly based
on cross-country analysis between developing and developed countries and in this regard,
each countrys MFIs are analysed and evaluated on the basis of qualitative and empirical
information that indicates the effectiveness and productivity of those institutes in reaching
and serving poor people. For this purpose, the attempt is made to collect microfinance data
for six years from 2006 to 2011. The average of each microfinance indicator for all MFIs
associated with each country is taken on a yearly basis. The reliability and validity of the data
are analysed through Cronbachs Alpha (C) test using SPSS program. Furthermore, Karl
Pearsons correlation coefficient is used to find correlations between the microfinance
indicators of each country. The correlation matrixes are developed using the following
formula through SPSS.
r
( x x)( y y)
( x x) ( y y )
2
Source: King et al. (2011, p. 106)
The correlation coefficient (r) value should remain between -1 and +1 where answers near to
-1 represents negative relationship between variables and values near to +1 indicates positive
relationship. In this study, the charts, graphs, and tables are constructed in MS Excel to
represent empirical data/information.
The diagram in figure 3.2 illustrates adopted research approach, methods, and data collection
techniques in this study.
Figure 3.2: Research approach
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3.8 Study Population

The population of this research mainly consists of formal MFIs operating in developing and
developed countries. These countries are: Asian countries (Bangladesh, India, and Pakistan),
United Kingdom (UK), and the United States of America (USA). All MFIs operating in these
countries are chosen to assess their true role in reducing poverty. It was not required to collect
everything about the MFIs that is why only relevant data is collected for analysis purposes.
This relevant data are the indicators of success or failure of MFIs which include:
microfinance borrowings, gross loan portfolio, number of active borrowers, return on asset
ratio, return on equity ratio, deposit to loan ratio, average loan balance per borrower, cost per
borrower, cost per loan, and finally the percentage of female borrowers. The empirical data
about these indicators are collected from http://www.mixmarket.org website for the period
from 2006 to 2011.
3.9 Research Ethics

Taking into account ethical considerations are always important for the researcher in
conducting research in the academic domain (Bryman, 2008). The researcher followed a
particular research ethics checklist provided by Durham University to undertake all essential
preventative measures. These ethical considerations allow the researcher to:
Preserve the rights of human participants while communicating with them;

Protect data according Data Protection Act;
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Fair use of technological and other resources;

Employ officially permitted way to collect data about microfinance institutions etc.
3.10 Resources Used

Larson (2007) specifies three essential resources that are required to complete any research.
They are: human resources, technological resources, and financial resources. All these
resources are also undertaken in this research as well. Human resources indicate the
researcher himself as well as supervisor and other individuals who guided the researcher in
completing this dissertation. Technological resources include all computing resources that the
researcher used for reading, writing, and searching purposes and finally, financial resources
indicate monetary resources that were required for printing and binding stuff.
3.11 Research Limitations

The researcher endeavours to collect true and reliable data from the financial databases and
financial statements of MFIs. Therefore, any error in the data may affect the conclusion of the
study. Furthermore, it was difficult to conduct thorough research due to the restriction of the
number of words and fixed deadline. A more deep research can be conducted in this domain
if more time and resources are provided.
3.12 Summary
The exploratory research design allows the researcher to address the strong need of
investigating the role of MFIs by acquiring qualitative data about microfinance. The
qualitative approach is taking on to investigate, understand, and explain the underlying
behaviour of MFIs in reaching the core poor. On the other hand, inductive approach is
adopted due to lack of availability of desired data on some particular MFIs from developed
and developing countries. The work reported in this study is based on secondary data which
is gathered from many trustworthy and genuine sources such as financial statements and
websites of MFIs. In order to support qualitative findings, the empirical data was collected
about ten microfinance success indicators which include: : borrowings, gross loan portfolio,
number of active borrowers, return on asset ratio, return on equity ratio, deposit-to-loan ratio,
average loan balance per borrower, cost per borrower, cost per loan, and the percentage of
female borrowers. The data analysis in this research is mainly based on cross-country
Page | 33
analysis of different MFIs chosen from developed and developing countries. The entire
research process of the study is depicted in figure 3.3.
Figure 3.3: Entire research process
Page | 34
Chapter 4: Cross-Country
Analysis
4.1 Introduction
In this chapter, the cross-country analysis is performed to analyse the role of MFIs in
developing and developed economies. The analysis is conducted on the basis of various
indicators showing the performance of MFIs in terms of portfolio, outreach, financial
stability, and cost.
The secondary data about Microfinance Institutions (MFIs) of developed and developing
countries are collected from the website of official microfinance database i.e.
www.mixmarket.org/mfi. The empirical data is based on ten microfinance indicators such as:
microfinance borrowings, gross loan portfolio, number of active borrowers, return on asset
ratio, return on equity ratio, deposit to loan ratio, average loan balance per borrower, cost per
borrower, cost per loan, and finally percentage of female borrowers. The data from 2006 to
2011 was collected about three Asian developing countries i.e. Bangladesh, India, and
Pakistan; and two developed countries such as the UK and USA. The average of each
microfinance indicator for all MFIs associated with each country is taken on a yearly basis.
The data are sorted and analysed through MS Excel. The collected data is presented in
Appendix A.
4.2 Data Reliability Analysis

Cronbachs alpha (C) test is performed to check whether data collected from
www.mixmarket.org/mfi is reliable and standardised. Doloi (2009) describes following
criteria to assess and evaluate the results of Cronbachs alpha (C) test.
C>0.9
0.9>C>0.8
0.8>C>0.7
0.7>C>0.6
0.6>C>0.5
C<0.5
Excellent
Good
Acceptable
Questionabl
e
Poor
Unacceptabl
e
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The results of Cronbachs alpha (C) test are illustrated in table 4.1 where all ten indicators
are categorised into four significant groups. Each groups C indicates satisfactory results.
The table also shows that the overall reliability of the data is 0.825 which is considered as
good
Table 4.1 Reliability analysis through Cronbachs Alpha
Indicator Group
Gross loan portfolio
Borrowing related
Financial stability related

Cost related
Indicator
Items
Gross loan portfolio

Borrowings
No. of active borrowers
Avg. loan balance
% of female borrowers
Return on asset ratio
Return on equity ratio
Deposits to loan ratio
Cost per borrower
Cost per loan
0.722
Acceptable
0.901
Excellent
0.841
Good
0.754
Acceptable
10
0.825
Good
Overall reliability
Result
Data from 2006 to 2011
4.3 Analysing Gross Loan Portfolio

A gross loan portfolio represents all outstanding principal amounts that are due for entire
outstanding client loans (Churchill and Frankiewicz, 2006). Apart from interest receivable,
this undertakes all renegotiated loans, delinquent, and current loans. Figure 4.1 demonstrates
the outstanding amounts of MFIs operating in selected developed and developing countries
from 2006 to 2011 where higher figures indicate more outstanding principals. An exceptional
case is evident in the figure which demonstrates that the USA has provided a greater number
of microloans to low income people between 2008 and 2009 to stimulate the economy in
order to avoid the adverse effects of the recession.
Gross Loan Portfolio (in 000 US$)
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Figure 4.1 Gross loan portfolio of all countries
Figure 4.2 Loan Portfolio Bangladesh vs. UK
On the other hand, Bangladesh is comparatively ahead of other countries in providing

microloans to poorer people. A continuous increasing trend from 2006 to 2008 in
Bangladeshs gross loan portfolio represents the emergence of various new MFIs in the
microfinance sector (Delimatsis and Herger, 2011).
Apart from the developed countries i.e. UK and USA, the trend line of gross loan portfolio of
developing countries looks stable throughout the period. This could be the reason that
microfinance facility was not or partly available in these countries before the 2008 recession.
Furthermore, figure 4.2 clearly indicates the gross loan portfolio situations of Bangladesh and
UK. As compared to the Bangladesh and other developing countries, most of the low income
people in the UK do not bother to undertake microloans as they often get considerable
support from government in the form of tax credits and other benefits to fulfil their primary
needs (Gov.uk, 2013).
Table 4.2 represents the correlation matrix of gross loan portfolio of selected countries. It is
found from the correlation analysis that the loan portfolios of USA, UK, and India are
strongly correlated with each other and also significant at 0.01 level. This is due to their
matching ratios of providing microloans to poor people during recession period. In contrast,
the correlation between Bangladesh and UK is strong but it is insignificant at 0.01 and 0.05
levels due to instability of outstanding loans.
Table 4.2 - Correlation Matrix Gross Loan Portfolio
Bangla
Bangla
1
India
Pak
USA
UK
Page | 37
India
Pak
USA
UK
.627
(.182)
-.064
.038
(.904)
(.943)
.944**
.562
(.245)
(.005)
.928**
.509
(.302)
(.008)
1
.256
(.624)
.196
(.709)
1
.991**
(.000)
N=6
**Correlation is significant at the 0.01 level (2-tailed test)
*Correlation is significant at the 0.05 level (2-tailed test)
Source: SPSS
4.4 Analysing Outreach

4.4.1 Borrowings
Borrowings represent the loans made by MFIs in a particular time period (Sinclair, 2012).
Figure 4.3 illustrates mixed trends of borrowings in the selected countries from 2006 to 2011.
The point to be noted is that both UK and USA had very low borrowings before 2008 and
they started to increase the level of borrowings after the 2008 recession to prevent low
income families from recession impact. The borrowings of India and Bangladesh also rose
after the 2008 but borrowings in Pakistan faced decline due to instability of the political
situation in the country (Ali et al. 2009). Therefore, it can be said that apart from Pakistan, all
other selected countries significantly increased their borrowings after the 2008 and then
normalised them in upcoming years.
Borrowings (in 000 US$)
Figure 4.3 Borrowings of all countries
Figure 4.4 Borrowings: Bangladesh vs. UK
Page | 38
It is shown in figure 4.4 that the borrowings of Bangladesh are far high compared to the UK
due to the familiarity and popularity of microcredit in Bangladesh.
The correlation matrix in table 4.3 provides somehow similar results as table 4.2. The
borrowings level in India is positively correlated with those of in the USA and UK. Table 4.3
also demonstrates a strong correlation between UK and USA at 0.05 significance level. On
the other hand, the correlation between Bangladesh and UK is positive but it is insignificant
at 0.01 and 0.05 levels due to differences in the demand of microfinance in both countries.
Table 4.3 - Correlation Matrix Borrowings
Bangla
India
Pak
USA
UK
Bangla
1
.151
(.776)
-.156
India
-.364
UK
(.478)
.872*
(.788)
-.176
(.023)
.821*
.034
USA
(.768)
.142
Pak
(.948)
(.739)
-.247
(.045)
(.637)
1
.967**
(.002)
N=6
Source: SPSS
4.4.2 Number of Active Borrowers

The number of active borrowers indicates individuals and groups who presently have an
outstanding loan balance (Churchill and Frankiewicz, 2006). This also refers outstanding
balances with MFIs that people are responsible to repay on time in the proportion of the gross
loan portfolio. However, a person having more than one loan is considered as single a
borrower. As shown in figure 4.5 that Bangladesh leads to other countries in having
maximum number of borrowers each year from 2006 to 2011. India due to its extensive
poverty level is at second position followed by Pakistan. USA compared to the UK has a
higher number of active borrowers because of the public awareness and improvement in the
knowledge of microfinance (Olsen, 2010).
Number of Active Borrowers (in 000 US$)
Page | 39
Figure 4.5 Active borrowers of all countries
Figure 4.6 Active Borrowers Bangla vs. UK
On the other hand, figure 4.6 illustrates an apparent difference between the active borrowers
in the UK and Bangladesh. A significant rise in the figures from 2008 to 2010 shows the
public awareness and popularity of microloans in the UK.
The correlation matrix in table 4.4 demonstrates significant positive relationships of the UK
with USA and India, and negative relationship with Bangladesh in terms of number of active
borrowers throughout the chosen period. This shows the parallel increase and decrease trends
in these countries within the same period.
Table 4.4 - Correlation Matrix Number of Active Borrowers
Bangla
India
Pak
USA
UK
Bangla
1
-.052
(.922)
-.206
(.695)
-.421
(.406)
-.504**
(.001)
India
Pak
USA
UK
1
-.034
(.949)
.783
(.066)
.841*
(.036)
1
.300
(.563)
.259
1
.881*
(.620)
(.020)
N=6
Source: SPSS
4.4.3 Average Loan Balance per Borrower

The average loan balance per borrower is computed as dividing the gross loan portfolio by
number of active borrowers (Armendriz and Labie, 2011). It is quite amusing that both UK
Page | 40
and USA have the highest average per borrower. This may be because of the difference of
exchange rates between developed and developing countries. For example, giving 300
microcredit can be a small amount for a UK national but it worth as medium loan for the
people living in Asian developing countries. This is also the reason the UK has a high average
loan balance per borrower compared to Bangladesh as shown in figure 4.8.
Average Loan Balance per Borrower (in US$)
Figure 4.7 Avg. loan balance of all countries
Figure 4.8 Avg. loan balance: Bangla vs. UK
The correlation matrix in table 4.5 shows that Bangladesh is positively correlated with India
and USA at 0.01 significance level. This means the ratio of average loan balance per
borrower is somehow similar among these three countries. On the other hand, the table
reveals a statistically significant but negative correlation between Bangladesh and the UK.
Table 4.5 - Correlation Matrix Avg. loan balance per borrower
Bangla
India
Pak
USA
Bangla
1
.846*
(.034)
-.057
(.915)
.911*
(.012)
India
Pak
USA
UK
1
.335
(.516)
.800
(.056)
1
-.184
(.728)
Page | 41
UK
-.259*
(.011)
.090
(.865)
-.063
.366
(.906)
(.476)
N=6
Source: SPSS
4.4.4 Percentage of Female Borrowers

Percentage of female borrowers refers to the loans undertaken by females in the selected
countries. Overall the ratio of female borrowers is high in all the countries except Pakistan
which is a male dominated country. Figure 4.9 shows the leading percentage position of the
UK where almost all borrowers from 2006 to 2011 were female. In India and Bangladesh
more than 90% borrowers are females while the percentage in the USA vary throughout the
period but it is certainly higher than the percentage in Pakistan where more than 40%
borrowers are males. Similarly, figure 4.10 presents a comparison between UK and
Bangladesh where it is clearly indicated that in both countries female borrowers are keen to
undertake microloans. Though Bangladesh is also a male dominated country, but this higher
percentage highlights the fact that women in Bangladesh are also encouraged to work or run
micro businesses.
Percentage of Female Borrowers
Figure 4.9 Female borrowers in all countries
Figure 4.10 Female borrowers: Bangla vs. UK
The correlation matrix in table 4.6 shows negative correlations between Pakistan and other
countries due to considerable differences in the borrowings of females. All other countries
have positively correlated values at either 0.01 or 0.05 significance level.
Page | 42
Table 4.6 - Correlation Matrix Female borrowers
Bangla
India
Pak
USA
UK
Bangla
1
.725**
(.001)
-.043
(.935)
.579*
(.020)
.843**
(.000)
India
Pak
USA
UK
1
.430
(.395)
.324*
-.310
(.031)
.816**
(.550)
.-542
(.000)
(.635)
1
.512*
(.035)
N=6
Source: SPSS
4.5 Analysing Financial Stability

According to Rai and Rai (2012), the financial stability is essential for MFIs and requires
commercial sources for generating funds because in this way they can attract more investors
which will enhance their efficiency. In this section, the ratio analysis is used to analyse the
financial stability of MFIs operating in developed and developing economies. For this
purpose, the following significant ratios are considered: return on asset ratio, return on equity
ratio, and deposits to loan ratio.
4.5.1 Return on Asset (ROA) Ratio

Return on Asset (ROA) ratio is expressed as deducting taxes from net operating income and
dividing it by total assets. The high ROA ratio is better because it indicates the efficient use
of assets in generating funds (Norton et al. 2006). Figure 4.11 illustrates interesting results
where the ROA ratio of UK MFIs was more assets intensive and consequently negative
throughout 2006 to 2011 except 2008 when it increased 200% due to changes in financial
policies to mitigate the impact of the recession (Imai et al. 2011). Bangladesh performed well
in keeping the balance between assets and earnings and therefore has a higher ROA compare
to other selected countries. India and USA also achieved positive ROA whereas Pakistan
faced negative ROA from 2006 to 2010. The positive figure in 2011 indicates better
performance in terms of utilising best use of its assets.
Return on Asset Ratio
Page | 43
Figure 4.11 ROA ratio of all countries
Figure 4.12 ROA ratio: Bangladesh vs. UK
Figure 4.12 shows a rapid increase in the UK trend line of ROA in 2008 while the
Bangladeshi ROA ratio was positive throughout the period.
The correlation matrix in table 4.7 indicates only one positive correlation between USA and
India which is significant at 0.01 level. All other values are not statistically significant with
each other but they do have positive or negative associations.
Table 4.7 - Correlation Matrix Return on assets ratio
Bangla
India
Pak
USA
UK
Bangla
1
.109
(.837)
.467
India
-.038
(.943)
-.381
(.457)
USA
UK
1
-.026
(.350)
Pak
(.962)
.329*
1
-.459
(.024)
.567
(.360)
-.227
(.240)
(.666)
1
.344
(.504)
N=6
Source: SPSS
4.5.2 Return on Equity (ROE) Ratio

The Return on Equity (ROE) ratio is calculated by deducting taxes from net operating income
and divided it by shareholders equity. In fact, ROE measures MFIs efficiency of generating
funds from each unit of shareholders equity (Churchill and Frankiewicz, 2006).
Return on Equity Ratio
Page | 44
Figure 4.13 ROE ratio of all countries
Figure 4.14 ROE ratio: Bangladesh vs. UK
In figure 4.13 negative figures of UK MFIs are not the good sign of performance which often
causes negative income consequences such as shareholders may withdraw remaining finances
from the business. Although Bangladesh, Pakistan, and India faced several ups and downs in
ROE due to economic, cultural, and social considerations, but they were able to remain
positive values throughout the period. This is also indicated in figure 4.14 where blue trend
line of Bangladesh represents sustainable growth of microfinance compared to the UK.
Table 4.8 - Correlation Matrix Return on equity ratio
Bangla
India
Pak
USA
UK
Bangla
1
-.418
(.409)
.567
India
.096
(.821)
-.534
(.856)
.011
(.275)
-.085
(.983)
USA
UK
1
-.120
(.240)
Pak
(.873)
1
-.047
(.929)
.177
(.737)
1
.832*
(.040)
N=6
Source: SPSS
The above table 4.8 of correlation matrix indicates only one strong correlation value i.e.
0.832 between USA and UK which is also statistically significant at 0.01 level. Other
countrys MFIs are insignificantly correlated with each other which demonstrate their
different ROEs in different timings.
Page | 45
4.5.3 Deposits to Loan (DTL) Ratio

The Deposits to Loan (DTL) ratio is calculated as dividing deposits by gross loan portfolio
(Harper and Arora, 2005). Here deposits represent all compulsory, voluntary, institutional, or
retail deposits whereas gross loan portfolio is the outstanding client loans. In figure 4.15, the
higher percentages indicate that deposits more than adequately funded the loan portfolio. In
this regard, again Bangladesh clean sweeps other countries with high DTL ratios.
Interestingly, the second highest but unstable ratios are achieved by Pakistan and USA which
is a good sign of microfinance success in these countries. On the other hand, India and UK
have achieved lower DTL ratios throughout the period. Bangladesh maintains high
percentages compared to the UK in figure 4.16. This is because the UK recently introduced
microfinance activities in the country and just few MFIs are operating in the UK market at
this time (Provost, 2012).
Deposits to Loan Ratio
Figure 4.15 DTL ratio of all countries
Figure 4.16 DTL ratio: Bangladesh vs. UK
In table 4.9, the correlation matrix reveals only two statistically significant correlations i.e.
0.259 and 0.146 which are between India and the UK, and USA and Pakistan. These
correlations exist because of the stability in the percentages of DTL ratio among these
countries. In contrast, Bangladesh is negatively correlated with the UK in terms of DTL ratio.
Table 4.9 - Correlation Matrix Deposits to loan ratio
Bangla
India
Bangla
1
India
-.314
Pak
USA
UK
Page | 46
(.544)
Pak
USA
UK
-.710
.239
(.114)
-.047
-.303
(.929)
-.864
(.648)
(.559)
.259
(.026)
(.015)
1
.146*
(.013)
.599
(.209)
1
-.337
(.514)
N=6
Source: SPSS
4.6 Analysing Costs

Analysing costs of providing microfinance to low income people is also essential to
determine the performance of the MFIs. As Adongo and Stork (2005) said that MFIs can
achieve financial stability by lowering their operating costs. Therefore, two types of costs are
analysed in the following subsections: cost per borrower and cost per loan.
4.6.1 Cost per Borrower

Cost per borrower is expressed as dividing operating expenses by the number of active
borrowers within a particular time period (Churchill and Frankiewicz, 2006). It primarily
gives an idea of the average cost of maintaining a single current borrower. Figure 4.17
indicates the cost per borrower for each country in providing microfinance services to poor
clients. It is evident in the figure that Bangladesh has the lowest cost per borrower followed
by India whereas the UK has the highest cost per borrower. This is because of the currency
and exchange rate differences as the UK has the highest currency value among all selected
countries; or in other words, the value Bangladeshi and Indian currencies (i.e. Taka and
Rupees) are very low compared to the UK. But it is amusing to see that Pakistan has the
second highest cost per borrower, even more than the USA. This could be the result of lack of
knowledge and awareness of microfinance in the country.
Cost per Borrower (in US$)
Page | 47
Figure 4.17 Cost per borrower of all countries
Figure 4.18 Cost per borrower: Bangla vs. UK
The correlation matrix of cost per borrower in table 4.10 demonstrates a negative correlation
between Bangladesh and UK due to the fact of huge differences between the costs per
borrower.
Table 4.10 - Correlation Matrix Cost per borrower
Bangla
India
Pak
USA
UK
Bangla
1
.522
(.288)
.381
India
.389
(.084)
-.079
(.446)
-.954**
(.003)
USA
UK
1
.754
(.457)
Pak
(.882)
-.381
(.456)
1
.050
(.925)
-.164
(.757)
1
-.287
(.581)
N=6
Source: SPSS
4.6.2 Cost per Loan

Similar to cost per borrower, cost per loan gives an idea of the average cost of maintaining a
single loan. It is expressed as operating expenses by the average number of outstanding loans
within a particular time period (Churchill and Frankiewicz, 2006). Figure 4.19 reveals quite
similar results as figure 4.17 where Bangladesh and India have the lowest cost per loan
compared to other countries.
Page | 48
Cost per Loan (in US$)
Figure 4.19 Cost per loan of all countries
Figure 4.20 Cost per loan: Bangla vs. UK
On the contrary, UK and Pakistan have a high cost per loan. Unfortunately, this is the
permanent drawback of high value currencies but the impact of this drawback could be
reduced by concentrating on increasing ROA and DTL ratios by stimulating gross loan
portfolio and customer deposits (Harper and Arora, 2005).
Table 4.11 also reveals a negative but statistically significant relationship between the UK
and Bangladesh MFIs. In addition, a positive correlation between India and Bangladesh MFIs
illustrates the stability and continuous low costs of both countries within the selected period.
Table 4.11 - Correlation Matrix Cost per loan
Bangla
India
Pak
USA
UK
Bangla
1
.589*
(.019)
.458
India
.607
(.350)
.276
(.201)
-.793
(.027)
USA
UK
1
.467
(.361)
Pak
(.597)
.556
(.252)
1
.597
(.211)
.277
(.595)
1
.614
(.195)
N=6
Source: SPSS
Page | 49
4.7 Summary
The Cronbachs Alpha (C) test through SPSS reveals the reliability and standardisation of
selected quantitative data. Apart from some exceptional cases, it can be said that Bangladesh
is comparatively ahead of other countries in serving poor people by providing them
microfinance services. Similarly, on the basis of microfinance indicators, it can be said that
MFIs in both developed countries i.e. UK and USA lack in performance, outreach, financial
stability, and costs compared to the developing countries particularly Bangladesh and India.
This is because that the microfinance concept is new in these developed countries and hence
there is a strong need to intensify microfinance activities to increase awareness and
knowledge.
Chapter 5: Conclusions
This chapter concludes the current study by addressing each objective separately.
5.1 Conclusion
The first objective was set to investigate the general perception of the microfinance concept
in the developing and developed countries. It is concluded that microfinance is normally
perceived as a thriving tool for reducing poverty level but it depends if microfinance
institutions can reach real poor people in order to provide them considerable financial
support. In addition, it is also perceived that the success of MFIs is also based on multiple
factors such as interest rate, cost of microfinance, outreach, borrowings, gross loan portfolio,
and financial stability. These factors can be managed effectively by adopting good ethical
banking principles and also by establishing relationships with well-recognised international
banks, NGOs, and charitable organisations. Although, the awareness of microfinance is more
manifest in developing countries due to the high poverty level, but there is a strong need to
expand microfinance activities at the extensive level in order to support core poor in these
countries. On the other hand, the level of microfinance understanding increased in low
income people in developed countries particularly after the 2008 financial crisis. Therefore, it
is necessary for the developed economies to make available microfinance facilities for people
who need it. This step will consequently help governments to prevent financial crisis in the
future.
Page | 50
The literature study reveals several causation factors that hinder the success, growth, and
implementation of microfinance systems in developing as well as in developed countries. The
foremost factors usually include: lack of financial stability, uncontrolled growth, cultural and
value impede, systematic frauds, bureaucratic obstacles, state intervention, methodological
defects, and shortage of credit rating agencies. In addition, some other factors have a weak
but considerable impact on MFIs in executing microfinance operations. These problematic
factors are: a high interest rate, increased competition among MFIs, government support,
client retention, lack of information about the client, clients education level, unregistered
lenders, low population density, legislation and regulatory framework, and difficulty in
attracting poor clients.
The cross-country comparison reveals some interesting insights about microfinance

implementation in Asian developing and the two worlds developed countries i.e. UK and
USA. Apart from some exceptional cases, the overall analysis reveals that Bangladesh and
India are comparatively ahead in the success rate of microfinance implementation among all
countries taken as case studies. The averages of all indicators from 2006 to 2011 are taken in
figures 4.21 to 4.26. The average of borrowings in figure 4.21 illustrates the strong positions
of India and Bangladesh in acquiring borrowings to facilitate microfinance activities.
Interestingly, the average gross loan portfolio of the USA followed by Bangladesh is evident
in figure 4.22 which is a good sign for microfinance implementation in both developed and
developing countries.
Average in US$ (2006 to 2011)
Page | 51
Figure 4.21 Average borrowings
Figure 4.22 Average Gross Loan Portfolio
The strong position of Bangladesh is clearly demonstrated in figures 4.23 and 4.24 where
Bangladesh dominates other countries in terms of number of active borrowers and average
loan balance per borrower. The positions of the UK and USA are inadequate at this moment
because the microfinance activities are relatively new in these countries. In fact, this concept
became popular after the financial crisis of 2008 when governments started to intensify such
activities to stimulate their economies.
Average in US$ (2006 to 2011)
Figure 4.23 Average No. of active borrowers
Figure 4.24 Average loan balance per borrower
Figures 4.25 and 4.26 also demonstrate dominating positions of Bangladesh and India in
terms of performance (measured through ratios) and cost of loans and individual borrowers.
The microfinance performance in the UK in terms of ratio analysis is not satisfactory
compared to other countries.
Page | 52
Figure 4.25 Average financial stability (2006-2011)
Figure 4.26 Average costs (2006-2011)
It is also concluded on the basis microfinance indicators that MFIs in the UK and USA lack
of performance, financial stability, outreach, and cost compared to the developing countries
particularly Bangladesh and India. This is because that the microfinance concept is new in
these developed countries and hence there is a strong need to intensify microfinance activities
to increase awareness and knowledge. The female borrowers have taken immense advantage
Page | 53
from microfinance availability in all chosen countries apart from Pakistan which is a male
dominated country.
A comparison between the UK and Bangladesh reveals that microfinance activities are more
mature in Bangladesh compared to the UK. As compared to Bangladesh, the costs of
microfinance activities are very high in the UK due to significant differences in the currency
values of both countries. The high rate of female borrowers is also evident in most of the
developing and developed nations but interestingly the percentage of UK female borrowers
are higher than others countries.
5.2 Recommendations
On the basis of facts and evidences collected from the literature and
microfinance data, the following set of recommendations can be made to
promote microfinance practices in order to reduce poverty levels in the
world economies.
Improving financial stability: It is important to improve financial stability of
microfinance institutions in developing and developed countries. This
essentially requires commercial sources for generating funds because in this way they can
attract more investors which will enhance their efficiency (Ledgerwood and White, 2006);
Controlled growth: Loss of control over microfinance activities triggered
many issues in the past; therefore, it is suggested to MFIs to increase the
efficiency of the loans and reaching the core poor to achieve productivity;
Prevent frauds and financial crimes: The new laws must be introduced and
existing regulations must be reformed and applied to MFIs to reduce
security fraud issues, pyramid schemes, abusive investments, and moneylaundering (World Bank, 2005);
Interest rate limits: High interest rates applied to microfinance credits
often obstruct low income people to obtain loans. Therefore, there is
strong need not to charge high interest rates. The MFIs can collaborate
with government, central bank, and commercial banks to limit the interest
rates (Churchill and Frankiewicz);
Page | 54
Tax and accounting treatment of microfinance: It is also recommended to

MFIs to devise a system for the proper treatment of microfinance in the
books of accounts. The NGO MFIs are required to be exempted from profits
tax like other NGOs. In addition, the controversies regarding tax policies
must be resolved by reforming the regulations on MFIs;
Commercial bank involvement: Commercial banks are required to conduct various
training workshops to educate their staffs to deal with specific clients (Rhyne, 2009). The
training and development workshops are inherent to fix various issues
with microfinance activities in commercial banks such as culture, values,
tradition, and dealing with poor people etc.;
Effective monitoring and control: In order to improve monitoring and
control over microfinance operations, it is recommended to MFIs in
developing and developed countries to adopt leading tools and techniques
and industry standards in the core areas such as corporate governance,
client protection, and transparency (Ledgerwood and White, 2006);
5.3 Research Limitations

The conclusion of this study and above stated recommendations are made on the basis of
literature review and cross-country analysis which is based on the microfinance data acquired
from http://www.mixmarket.org databank. It is believed that MFIs in developed and
developing countries can improve microfinance activities by following this set of guidelines
but any possible mistake in the quantitative data may be a limiting factor in this study that
can influence the study results.
In fact, no big problem is faced whilst carrying out this research. The only problem faced was
that the latest data for the year 2012 was not available on http://www.mixmarket.org databank
or anywhere else about microfinance. Furthermore, it was difficult to conduct thorough
research due to the restriction of the number of words and fixed deadline.
5.4 Future Research

During this research, it was found that a majority of microcredit borrowers are women in both
developing and developed countries. Therefore, the future research could be based on
Page | 55
investigating the factors that hinder males to borrow microfinance in both developed and
developing countries.
Page | 56
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Appendices
Appendix A
Page | 64
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Investigating The Role of Microfinance in Developed and Developing Economies

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Investigating The Role of Microfinance in Developed and Developing Economies

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DISSERTATION

Investigating the role of microfinance

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CHAPTER 2: LITERATURE REVIEW

CHAPTER 4: CROSS-COUNTRY ANALYSIS

4.6.1 Cost per Borrower....................................................................................46

Figure 3.1 Research Onion....

Figure 4.15 DTL ratio of all countries...

Figure 4.24 Average loan balance per borrower (2006-2011)

1.2 Background of the Study

Source: Srnec et al (2009, p. 188)

1.3 Problem Statement

1.4 Research Aim and Objectives

To investigate general perception of microfinance concept

in developed and developing countries

1.5 Research Questions

1.6 Significance of the Study

economies. To achieve the desired results, the cross-country analysis is conducted by

1.7 Research Organisation

Chapter 2: Literature Review

2.2 Global Perception of Microfinance

communities by providing them opportunities to generate incomes (Hartarska and Nadolnyak

2.3 Microfinance Activities

2.3.2 Microfinance Products and Services

2.3.3 Interest Rates

Source: Srnec et al (2009, p. 189)

2.4 Role of Microfinance Institutions

Registered and operate under the countrys laws

Impressionable to Central Bank

Adaptable and acceptable to Central Bank

Elected members, can be non-professionals

Works under professional management

Low financial stability, high risk

High financial stability, low risk

Limited microfinance availability

Medium microfinance availability

Normally without insurance and hedging

Covered with insurance

Low interest rates for clients

Similar interest rates offer by commercial

Loan maturity level (95 to 99%)

Normally less than informal MFIs

Gain profit but less than commercial banks

Usually operates at village level

Operates on local or regional levels

Humanitarian organisations, nongovernmental aid

Also own foreign sources

2.4.1 Commercial Banks as Formal MFIs

2.4.1 Microfinance in Developing Countries

2.4.2 Microfinance in Developed Countries

2.5 Factors Affecting the Growth of Microfinance

2.5.1 Financial Stability

2.5.2 Uncontrolled Growth

2.5.3 Cultural factors

2.5.4 Systematic Fraud

2.5.5 Bureaucracy Barriers

2.5.6 Lack of Credit Rating Agencies

2.5.7 Challenges for Commercial Banks

2.5.8 Methodological Flaws

2.5.9 State Intervention

2.5.10 other factors

Chapter 3: Research Methodology

3.2 Research Methodology