Managerial Finance

The impact of outside control in microfinance : Table of Contents

Valentina Hartarska — Sat Oct 10 08:00:17 BST 2009

Abstract:
Purpose – Microfinance practitioners have emphasized that appropriate control mechanisms are critical for the success of a microfinance institution (MFI). The purpose of this paper is to study the effects of external governance mechanisms on MFIs' performance, whereby external governance is defined as the control exercised by stakeholders and markets, and accountability mechanisms that operate to enforce internal governance. Design/methodology/approach – This paper uses a database of 108 MFIs operating in over 30 countries and analyzes their performance by adopting an empirical approach usually employed in cross-country banking research on the impact of market forces and regulation on performance. MFI performance is measured by sustainability and outreach indicators and is modeled as a function of external audit, microfinance rating, and regulatory status and controls for MFI and country-specific characteristics. Findings – Results indicate that regulatory involvement and financial statement transparency do not impact performance, while some but not all rating agencies may play a disciplining role. Research limitations/implications – At the time of the study, available data are limited to 108 organizations and since then more MFIs have made their financial statements available, therefore, the hypotheses of this paper can be retested. Practical implications – Stakeholders should be aware that external control mechanisms in microfinance are weak, thus adequate internal governance mechanisms are important. Originality/value – This paper offers empirical evidence that external governance mechanisms have limited impact on MFI performance.

Leveraging donor funds: the switch to commercial funding : Table of Contents

Nicholas Biekpe, Josephat M. Kiweu — Sat Oct 10 08:00:17 BST 2009

Abstract:
Purpose – The purpose of this paper is to highlight important factors that influence funding decisions from the perspective of commercial lenders, and suggest commercialization of microfinance as a source of alternative development finance. Design/methodology/approach – A survey of industry experts on funding decisions representative of proponents of commercial microfinance is conducted to help provide views on the most important considerations in their lending practice. Findings – The study finds that specific critical success factors define minimum pre-conditions for microfinance institutions considering commercial funding as an alternative source of finance. The study reveals that the three most important considerations for lending evaluation are transparency in financial reporting, sound financial management, and previous history of borrowing. Research limitations/implications – The study carried out is based on a relatively small sample and puts significant reliance on respondents' opinions. Originality/value – This is probably one of few attempts to explore the possibility of a linkage between microfinance and capital markets. The paper will be of interest to microfinance institutions, commercial banks, international donors and wholesale funds with an interest in investing in the microfinance industry.

Evaluating impacts of microfinance institutions using Guatemalan data : Table of Contents

James C. Brau, Shon Hiatt, Warner Woodworth — Sat Oct 10 08:00:17 BST 2009

Abstract:
Purpose – The purpose of this paper is to investigate microlending outcomes among Latin American non-governmental organizations (NGOs), specifically microfinance institutions (MFIs). While there is a growing movement of non-profit ventures channeling small loans to the poor worldwide, assessments of their impacts are lacking. Thus, field interviews with clients who had various degrees of involvement in the process of receiving microloans from MFIs were conducted over a summer in Guatemala. Design/methodology/approach – Using a dataset of 393 clients from Guatemalan MFIs, microfinance impacts from two dimensions are examined and impacts measured along financial and social dimensions by surveying new clients, current clients, and graduated clients of five MFIs in Guatemala. Findings – Applying univariate and multivariate analyses shows that for Guatemala, MFIs do produce a measure of improvement in the lives of microfinance clients. This improvement is concentrated along the social dimensions of housing, health, and client empowerment. Research limitations/implications – A limitation of this paper is that it focuses on only five of several dozen MFIs in Guatemala. What is needed is further use of the survey instruments to carry out subsequent studies throughout more of Latin America, and beyond. Practical implications – This research suggests that microfinance demonstrates promising results associated with social benefits to various client populations. As such, it holds a variety of implications for government and other policymakers as they consider innovative ways to reduce poverty and human suffering around the globe. Originality/value – It is anticipated that this field study will contribute to the furtherance of literature on the effects of lending among the poor.

Statistical audit sampling for portfolio-at-risk in microfinance : Table of Contents

Mark Schreiner — Sat Oct 10 08:00:17 BST 2009

Abstract:
Purpose – The purpose of this paper is to provide a rigorous, statistically correct, and low-cost way to audit sample a lender's loan portfolio, be they a microlender or other type of lender. No other paper applies this method to loan portfolios, even though it is a high demand application. Design/methodology/approach – Standard techniques of audit sampling and dollar unit sampling with stratification are applied to the particular case of a microlender's portfolio. Unlike the audit sampling that almost all auditors use, no arbitrary rules of thumb are applied. Findings – The paper finds that statistical audit sampling for a lender's loan portfolio is simple, rigorous, and inexpensive. Practical implications – In audit sampling, most auditors use arbitrary rules of thumb and have no idea whether they are sampling enough items to actually be sure, with some desired level of confidence, that they have found no defects. This simple, inexpensive, and statistically rigorous technique will allow auditors who actually want to do a good job to quantify the precision of their statements in a very common application. Originality/value – This paper combines several disparate threads from the statistical literature on audit sampling in a way that auditors (who are usually not statisticians) can apply them for auditing the quality of a lender's portfolio – microfinance or otherwise – which is a very common need.

Microfinance institutions in Bangladesh: achievements and challenges : Table of Contents

Salehuddin Ahmed — Sat Oct 10 08:00:17 BST 2009

Abstract:
Purpose – The purpose of this paper is to review the Bangladesh experience with microfinance popularly known as microcredit. The success of microfinance in Bangladesh has generated immense interest in other countries of the world. The paper emphasizes the role of autonomous national microfinance fund and analyzes the efficiency of microfinance delivery mechanisms in Bangladesh. The paper examines the new realities/challenges faced by the microfinance movement in Bangladesh. Design/methodology/approach – The paper provides an overview of the evolution of microfinance institutions (MFIs), their coverage of borrowers and activities funded in Bangladesh. Results of some independent impact assessment studies have been presented. Data from various institutions of Bangladesh and from some surveys conducted in Bangladesh are used. Findings – The paper shows how the concept of microfinance, the MFI and various modalities of delivery of financial services to the poor have contributed to the development efforts of Bangladesh where a large number of people live below the poverty line. Research limitations/implications – The paper is based on data and information of a limited time period and covering some selected issues. Further studies may be carried out on second generation issues and problems based on more available data. Practical implications – The paper brings out the implications of microfinance as an effective tool for development and poverty alleviation. Originality/value – The paper points out the practical aspects to build up a robust and sustainable system for increasing the access of the poor to financial services.