BIBLIOGRAFIA

The manner in which MFIs are financed varies across regions, as shown in Figure 2.13. According to Figure 2.13 African MFIs are mainly financed through deposits whilst MENA MFIs make use of equity. South Asian MFIs heavily depend on debt financing. The gist of the matter is that the trade-off between MFI financing options and financial sustainability would naturally vary according to the region being considered. Variation in the effect of each financing option on financial sustainability is dependent on the study setup, in other words the sample, the area considered, the period and the level of financial development. This explains why Cull et al. (2009:19) note that, “the exact nature of trade-offs in microfinance differ across regions, but meaningful trade-offs need to be recognized and weighed everywhere.” Localised trends thus are instrumental in defining the nexus between financing and financial sustainability as they vary across regions.

3.6 Chapter summary

This chapter sought to label the relationship between MFI financing and financial sustainability. Of note is that financing options for MFIs vary across regions. This can be explained by varying degrees of financial development and policies that govern the functioning of financial markets. Though subsidies are condemned for spurring distortions and inefficiency and for harbouring a dependency syndrome, subsidies are additive to financial sustainability, though with a threshold limit. Smart subsidies are preferred to ensure that maximum social impact is attained without prejudicing financial sustainability in the long run. Common ways of making subsidies smart include subsidising the programme not the client, strategic short-term subsidisation of very poor lients, strategic subsidisation in the long-term as well as crowding-in other commercial financing options. However, effort has to be channelled towards proper measurement of efficiency and impact under subsidy financing for timeous withdrawal of subsidies once operations attain financial sustainability.

The agency theory notes the role of debt in promoting financial sustainability since it effects cost-efficiency. The pressure to attain enough revenue to service debt, cover operational costs and make profits propel MFIs towards financial sustainability. However, checks and balances have to be put in place to avoid excessive use of debt as it may trigger bankruptcy and spark

mission drift as cutting administrative costs on small loans to maintain financial sustainability becomes unavoidable. Whilst savings are a stabiliser and endorse financial sustainability since they come at low cost, regulatory costs might oppose financial sustainability in the short run. Becoming licensed to attract savings requires the hiring of experts, conforming to set capital requirements and the upgrading of systems. This might curtail financial sustainability in the short run if MFIs are not prepared to meet such costs and hence trigger mission drift as MFIs resort to bigger loans whose associated administration fees are low. Thus the reduction of regulatory costs makes the attraction of deposits cheaper for MFIs. Equity, though, cheap remains a scarce resource in microfinance as few MFIs are listed on stock exchanges. All the same, equity is compatible with financial sustainability and feeds into a significant outreach depth. The next chapter investigates the essence of the life cycle theory in explaining financial sustainability. The gist of the matter is to draw financing lesions if any which can be replicated in pursuit of financial sustainability. Also, observing how MFIs develop given the theoretical life cycle theory propositions is important in appreciating the practicality of the life cycle theory, hence allow for practical and informed decisions regarding financial sustainability to be made.

CHAPTER 4

LIFE CYCLE THEORY AND FINANCIAL SUSTAINABILITY OF SELECTED SOUTHERN AFRICA DEVELOPMENT COMMUNITY MICROFINANCE

INSTITUTIONS44 4.1 Introduction

The financial sustainability of MFIs continues to be in the limelight of research owing to its importance in ensuring the longevity of MFIs – transforming into a consistent fight against poverty (Quayes 2012; Sekabira 2013; Kipesha & Xianzhi 2013). Theory has shown that MFIs’ life cycle stages can explain the financial sustainability of MFIs (Fehr & Hishigsuren 2006; Hoque & Chishty 2011). Over time, managers of MFIs perfect business models, learn through experience, broaden financing options and steer MFIs into financial sustainability. MFIs thus age towards financial sustainability as they develop into large and stable institutions with extended outreach (Schneider & Greathouse 2004). The development of MFIs into financially sustainable institutions according to Schneider and Greathouse (2004) requires that MFIs integrate into local financial systems. Integration allows MFIs to increase leverage, capitalise on deposit collection and access capital markets in raising funding for growth in a bid to increase outreach.

The life cycle theory (LCT) has been applied in various academic fields with its application in commerce being popularised by Porter (1980) (marketing – product development; management –

strategy formulation, financing strategies; firm development, etc). Despite the popularity of the LCT, its application in microfinance has remained negligible. There is little, if any, evidence for the transition suggested by the LCT in explaining MFI development proxied by financial sustainability. Past LCT–based studies (Schneider & Greathouse 2004; Maisch 2011; Campion & White 1999) focused more on the problems of and how MFIs evolved into commercialised

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A research paper based on this chapter titled: ‘Life Cycle Theory and Financial Sustainability of Selected SADC MFIs’ was presented in Port Elizabeth at the 5th

International Financial Services Conference, 29 September – 1 October, 2015. The paper was presented again in Dubai at the Australia-Middle East Conference on Business and Social Sciences (AMCBS), April 17-18, 2016. The paper has been published as a conference proceeding for the AMCBS as well as in the Journal of Developing Areas Special Issue on the AMCBS.

institutions and the benefits thereof. Little effort has been channelled into gathering evidence of the feasibility of the LCT in explaining financial sustainability.

The latest attempt by Bogan (2012) to make use of the LCT in explaining financial sustainability of MFIs did not favour the LCT. Her study investigated MFIs whose asset values were at least $1.3 million and had disclosure45 levels of at least 3 diamonds. The study used a global sample in its quest for high–quality data and hence did not focus on any particular region. In agreement with the LCT, MFIs with high asset values and high disclosure tendencies did not attain such status over-night but went through growth phases – thus, revisiting the LCT is justified.

A key realisation is that not all regions have high asset value and high disclosure MFIs. Cull et al. (2009:19) noted that “the exact nature of trade-offs in microfinance differ across regions, but meaningful trade-offs need to be recognized and weighed everywhere.” In that context, this chapter extended the exploration of how MFI age related to financial sustainability by focusing on selected SADC46 MFIs. Given that microfinance in the SADC region is growing, delineating whether MFIs ‘get better with age’ is a worthy cause given the need to fight poverty. This chapter considered low and high asset value MFIs that characterised the microfinance sector in the SADC. The study was not ‘diamonds-based’ as MFI reporting is inconsistent in SADC. Questions were: Is the LCT confirmed in the SADC? If so, what then explains financial sustainability in the SADC region and what are the practical lesions thereof?

From a practical perspective, the curatorship of the African Bank – once the largest microfinance bank in the SADC (Jones 2014) and the wide-spread failure of seemingly ‘mature’ MFIs in the SADC (Karim et al. 2011) questions the LCT. The expectation is that MFIs’ business models, asset quality and financing methods improve over time as MFIs learn from mistakes and hence position themselves for financial sustainability. Based on the theoretical dictum of the LCT whereby MFIs are expected to mature towards financial sustainability through commercialisation, this chapter querries the following hypotheses:

H1: ‘New’ MFIs are financially un-sustainable.

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Disclosure is indicated by diamonds in microfinance. The best reporting MFIs are accorded five diamonds whilst the poorest reporting MFIs might not have any diamond.

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H2: ‘Mature’ MFIs are financially sustainable.

The chapter is structured as follows: Section 4.2 reviews the literature on microfinance, financial sustainability and the LCT. Section 4.3 details the data gathered and econometric methods used whilst the results and the chapter summary appear in sections 4.4 and 4.5 respectively.