Alex Leibowitz 06 Sponsor: Professor Amy Ickowitz

1
Microfinance Is Outreach an Impediment to
Financial Self-Sustainability
Alex Leibowitz 06 (Sponsor Professor Amy
Ickowitz)
Implications 1) Size- increasing the number of
borrowers of a microfinance institution increases
its OSS up to a point 2) This study has found
that providing savings accounts will increase
OSS. 3) The higher the average loan balance the
higher the OSS. 4) Microfinance Institutions that
have a higher proportion of borrowers below the
poverty line have a lower OSS than microfinance
institution with a lower proportion of borrowers
below the poverty line.

• Dependent variable
• Financial self-sustainability
• studied through operational self sustainability
  (OSS)
• Indicates whether enough revenue has been
  generated to cover direct costs excluding
  adjusted cost of capital but including any
  financing costs incurred (has issues of
  subsidization)

Abstract Financial services are essential
elements in any economy. Individuals who do not
have access to these services are usually
restricted in the way they smooth income and
finance investments. This study examines the
trade-offs between outreach and financial
self-sustainability of microfinance institutions.

• Independent Variables
• Breadth-How a microfinance institutions reach an
  ever-wider audience.
• Number of Borrowers
• Number of Borrowers2
• Dummy Savings
• Depth- How microfinance institutions reach an
  ever-poorer or previously excluded audience.
• Average Loan Balance
• Average Loan Balance2
• Poverty Dummies
• Control variables- Account for legal status and
  geographical location

• What is Microfinance?
• Microfinance
• A system that provides financial services to
  underserved groups
• Not a new idea
• 1950s-1980s, government-run programs sought to
  target rural populations
• Rural credit programs became a centerpiece in
  many countries development strategies throughout
  the world.
• Unfortunately, many of these programs served to
  reinforce the idea that providing financial
  services to poor and rural population is
  unnecessary and costly.
• Nearly all programs ended in disaster
• Low loan recovery rates of 50
• Loans going to the politically connected.
• New generation of microfinance institution
  avoids government intervention and concentrates
  on performance-based incentives.
• The most noted of these institutions is the
  Grameen Bank

Trade-Off Theoretically if a microfinance
institution was to only have a finite amount of
equity to loan then there would be a trade-off
between the average loan balance and the number
of borrowers. Using the coefficients of the
continuous regression we developed a graphical
model which analyzed the trade-offs between OSS,
Number of Borrowers, and Average Loan Balance Per
Borrower when the equity stock available to loan
is held constant. Since the amount of funds to
loan is held constant, as the number of borrowers
increase the average loan balance decreases. In
the figure below I present three cases where
there is constant equity stock.

• The Study
• Examine how microfinance institutions outreach
  affects their financial self- sustainability.

Determinants of OSS
If a microfinance institution is endowed with
100 million of equity stock and begins to lend
to 30,000 borrowers giving each borrower an
average loan of 3333.33. The model shows an
immediate drop off in OSS from the initial small
number of borrowers with high loan balance. The
model does not recover until the critical point
of 99,000 borrowers with average loan balance of
1010.10 where it slowly begins to recover and
then levels off. The model shows that having more
borrowers is less important than average loan
balance for small firms in terms of OSS but after
the critical point for 100 million in constant
equity stock, borrowers become more important
than average loan balance.

• Data
• Information from the mixmarket.org
• Includes 362 Microfinance organizations
• With data ranging from 1996-2005
• Areas Africa, Eastern Europe, Central Asia, and
  East Asia
• Issues about accounting standards (the
  information is not fully audited)

Main Model OSS F(controls, number, number2,
loan-balance, loan-balance2, poverty_level_missing
, poverty_level_medium poverty_level_high,)

• Conclusion
• This study has an increased ability to analyze
  policy suggestion over previous work. Former
  studies used indexes to account for outreach
  through my model both portfolio and poverty
  analysis can take place.
• Shows the difficulty that microfinance
  institutions located in poor regions have with
  obtaining and maintaining OSS

The second model replaces number, number2, loan
balance and loan balance2 with categorical
variables to confirm the results of the main
model.