Average Loan Size Research Articles

Sand or grease effect? The impact of Islamic banking on the social mission of microfinance institutions

PurposeIslamic banking and microfinance institutions (MFIs) share the core objective of serving the underprivileged. This study aims to investigate whether Islamic banking development facilitates (greases) or hinders (sands) the social mission of MFIs.Design/methodology/approachData for 19 countries covering the period 2010–2018 were collected from the World Bank, Bank Focus and International Monetary Funds and analyzed using conventional econometric methods. Endogeneity-corrected techniques and alternative proxies were employed to ensure robust results.FindingsThe study revealed that Islamic banking development (proxied by the size of the Islamic banking assets) weakens the depth of outreach of MFIs (measured by average loan size). In countries with growing Islamic banking, MFIs appear to shift their focus toward wealthier clients, potentially due to market saturation among the poor. This is evidenced by MFIs offering larger loans, suggesting a mission drift toward profit maximization. Therefore, it can be inferred that competition from Islamic banks, to some extent, erodes the social mission of MFIs.Originality/valueThis study is among the few to examine the recent and comprehensive relationship between Islamic banking development and the social mission of MFIs.

Impact of climate change training intervention in savings groups

AbstractThis paper investigates the impact of integrating climate change interventions in informal community‐based institutions called savings groups. By integrating climate‐related activities into these groups, the aim is to simultaneously strengthen the group's financial activities as well as improve knowledge and investment capacity in climate adaptation. We find that the introduction of the training increases meeting attendance rate and average loan sizes, suggesting that members can access larger sums for investment to implement the knowledge acquired during the training. We provide evidence that there are opportunities for economies of scope and for a larger positive impact on the livelihoods of the populations at the bottom of the pyramid by combining financial services offered in the savings groups and climate‐related interventions.

Climate Risks in the Commercial Mortgage Portfolios of Life Insurers: A Focus on Sea Level Rise and Flood Risks

In this paper, we explore the climate risk exposure of U.S. life insurers' commercial mortgage loan portfolios, focusing on sea level rise (SLR) and flood risks. While vast literature and industry reports document the potential impact of climate change on the insurance industry, most focus on the property insurance market. Life insurers hold a significant number of commercial mortgages, representing approximately 15% of their assets by the end of 2021. These investments are susceptible to both physical and transitional risks of climate change and are much less researched or understood. From 2012 to 2019, we find that the size of newly issued commercial mortgages by life insurers in the U.S. grew from $37 billion to $56 billion (by 51%). We find heterogeneity across life insurers in terms of the average loan size, the loan origination frequency, as well as loan locations. In terms of locations, life insurers tend to originate loans in metropolitan areas, many of which are on the coast. Some life insurers focus on specific geographical areas that happen to be exposed to high levels of SLR or flood risks (e.g., Florida), while some diversify across metropolitan areas (coastal or noncoastal) in the U.S. Our findings have important policy implications for regulators and researchers.

Cooling the mortgage loan market: The effect of borrower-based limits on new mortgage lending

This paper studies the effects of regulatory measures concerning maximum loan-to-value (LTV), debt-to-income (DTI), and debt service-to-income ratios (DSTI) on new loans secured by residential property. It uses loan-level regulatory survey data on about 82,000 newly granted residential mortgage loans in Czechia from 2016 to 2019 to estimate the average effects of regulatory measures and their heterogeneous effects depending on borrower, loan, bank, and regional characteristics. We find that the LTV limits decreased the mortgage loan size only slightly, while the value of collateral securing the loans increased. Only the additional DTI and DSTI limits helped reduce the average loan size significantly and prompted more risk-sensitive pricing that heighten the average lending rate. The mortgage market response to the limits appears heterogeneous in loan size rather than pricing or collateralization. The loan size reduction varied with the borrower’s income, age, and location. High-income, high-repayment, and 25 to 35 years old borrowers reduced their contracted loan size more. Borrowers located in regions with higher GDP per capita and lower unemployment rates reduced the contracted loan size more. Longer-maturity loans showed a greater drop in the contracted loan size.

The Relationship Between Microfinance Mission Drift and Financial Returns to Stakeholders

Some microfinance institutions (MFIs) can drift from their social mission, generating well-studied effects for their borrowers. We focus on the lesser-known effect of mission drift on the financial return to other stakeholders (employees, government, micro-savers, and banking creditors). Using a sample of 534 MFIs, we calculated the economic value distributed by the MFI to these stakeholders by considering salaries, taxes, and interest paid. We found a negative relationship between average loan size and return to employees (RTE), government, and banking creditors, and a positive relationship between women borrowers and RTE and government. This is explained by the fact that mission-focused MFIs are usually small, labor-intensive institutions with a stable business model. We found a positive relationship between average loan size and return to micro-savers, and a negative relationship between women borrowers and return to micro-savers. The reason is that many mission-focused MFIs do not offer micro-savings, undermining financial inclusion.

Determinants of NPLs of Self-Help Group-Bank Linkage Program in India: Empirical Evidences and Policy Implications

This article examines the major factors influencing the non-performing loans (NPLs) of the Self-Help Group-Bank Linkage Program (SHG-BLP) in India at both macro- and micro-levels. A panel regression analysis of the state-level data shows that the total outstanding loan amount, average loan size per SHG and poverty rate exert positive impacts, whereas gross state domestic product has a negative effect on gross non-performing loans (GNPLs). Analysis of primary data indicated a higher incidence of loan default by SHG members. Logit regression analysis employed on primary data suggests that the loan default by SHG members is positively associated with age and experience because of higher family responsibility and lesser incentive to repay the loan. On the other hand, self-employment, levels of income and savings show negative relations with loan default. Self-employed SHG members and those who make some savings are less likely to default on loans. Similarly, higher-income groups show less chance to default on loans. An analysis of the perceptions of the SHG members reveals that poor economic conditions, non-cooperation among members, social and medical expenses, and expectations of loan waiver from the government are the main reasons for loan defaults.

Analyzing the Debt Behavior of Farm Households in the Maharashtra State of India

The number of farm suicides in India is alarming. While the official data on farm suicides released by National Crime Records Bureau (NCRB) shows a rising trend till 2015, the figure went slightly down from 12,590 in 2015 to 10,338 in 2018. Any increase in the farm suicide cases in India is worrisome because of majority of population's dependence on agriculture. The report also mentions about the various reasons for farmers committing suicide with bankruptcy being a major cause of suicide among farmers. Considering the dismal state of farm suicides in the Maharashtra state of India, the present study attempts to analyze the debt behavior of the farm households for two time periods viz. 2004-05 and 2011-12. The study uses information on debt behavior of farm households in Maharashtra collected through two rounds of India Human Development Survey (IHDS) survey, which is a nationally representative, multi-topic survey across India. The first round of interviews was completed in 2004-05 and the second round of IHDS re-interviewed most of these households in 2011-12. The sample consists of a total of 1543 households in 2004-05 and 1685 households in 2011-12 in the Maharashtra state. The state of Maharashtra has been divided into 5 divisions viz. Konkan, Vidarbha, Nashik, Pune, and Marathwada. The sample households in the state have been divided based on land ownership and size of land into Agri wage laborer, small and marginal, medium, and large farm households. The debt profile of the households is analyzed using information on the share of indebted households, number of loans taken in the past 5 years, average loan size, outstanding debt, interest rate on the largest loan, debt-servicing capacity, debt-to-income ratio, consumption-income ratio, etc. The study also attempts to identify the key factors that are likely to have contributed to the highest number of farm suicides in Maharashtra and also provides policy suggestions for the government. The comparison between the two time periods not only helps understand what went wrong with the finances of farmers during the study period but also helps us identify the factors which may result in farmers taking such extreme steps in the future.

The Main Street Lending Program

The Main Street Lending Program was created to support credit to small and medium-sized businesses and nonprofit organizations that were harmed by the pandemic, particularly those that were unsupported by other pandemic-response programs. It was the most direct involvement in the business loan market by the Federal Reserve since the 1930s and 1940s. Main Street operated by buying 95 percent participations in standardized loans from lenders (mostly banks) and sharing the credit risk with them. It would end up supporting loans to more than 2,400 borrowers and co-borrowers across the United States with an average loan size of $9.5 million and total volume of $17.5 billion. This article describes its goals, its design, the challenges and constraints that shaped its reach, and the characteristics of its borrowers and lenders. We conclude with some lessons learned for future policymakers and facility designers.

Determinants of Financial Sustainability of the Microfinance Institutions in Sri Lanka

Today microfinance organizations are facing a challenge with how to balance poverty alleviation mission and sustainability. Hence, the importance of the sustainability of microfinance organizations goes beyond the poverty reduction mission. This research study was meant to determine the influential factors of financial sustainability in microfinance institutions in Sri Lanka. Existing two theories: Welfare Theory and Institutionalist theory were tested in MFIs in Sri Lanka with cause and effect relationship between variables, and the researcher adopted a cross-sectional research design with quantitative approach conducted in a field setting. Financial self-sufficiency is the dependent variable and twenty independent variables were used to test the determinant factors of sustainability. It was found that, the loan officer productivity, MFIs age, organization type, the yield on the gross loan portfolio, and profit margin have a positive and statistically strongly significance at 1% significant level. These factors profoundly affect the determination of the financial sustainability of MFIs in Sri Lanka. Further, the interest rate was positive with 5% statistically significant level, and active borrowers were positive with 10% in determining the financial sustainability of MFIs. Operating expenses ratio and capital structure negatively affected with 1% statistically significant level, where portfolio risk at 30 days affected negatively at 5% in determining the financial sustainability. Moreover, other factors: average loan size, the percentage of female borrowers, MFIs size, cost per borrower, number of MFIs products, lending methodology, geographic locations, write off ratio, risk coverage ratio and MFI regulations did not have a significant impact on financial sustainability in Sri Lanka.

Money or Management? A Field Experiment on Constraints to Entrepreneurship in Rural Pakistan

This paper identifies the relative importance of human and physical capital for entrepreneurship. Microfinance clients were offered business training and a loan lottery of up to seven times the average loan size. Business training increased business knowledge, reduced business failure, improved business practices, and increased household expenditures by US$82 per year. It also improved financial and labor allocation decisions. These effects are concentrated among male clients, however. Access to larger loans, in contrast, had little effect, perhaps because current loan sizes already meet the demand of most clients. Despite these positive impacts, business training was not cost-effective for the lender.

Factors affecting borrowers’ turnover in microfinance institutions: A panel evidence

AbstractIn the era of competitiveness, clients or borrowers remain an important asset for financial institutions, as they are the ultimate source of revenue. Although the departure of clients from one microfinance institution (MFI) to another is a common phenomenon, the manner in which organizational characteristics affect turnover is largely unknown in the context of the microfinance industry. Hence, by utilizing recent (2010–18) data on 235 MFIs from the global microfinance industry, this study investigates the factors affecting the borrower turnover rates (BTR) of MFIs by employing conventional panel regression techniques. To overcome endogeneity and ensure robust and dynamic results, the generalized method of moments (GMM) has also been used in this study. The findings reveal that the efficiency‐wage and financial self‐sufficiency of MFIs reduce BTR, while staff turnover rate, write‐off ratio and average loan size increase BTR. Our results remain robust even after controlling for several market and macro‐economic factors. The findings could be utilized to generate several policy implications to reduce borrowers’ turnover.

COVID Response: The Main Street Lending Program

The Main Street Lending Program was created to support credit to small and medium-sized businesses and nonprofit organizations that were harmed by the pandemic, particularly those that were unsupported by other pandemic-response programs. It was the most direct involvement in the business loan market by the Federal Reserve since the 1930s and 1940s. Main Street operated by buying 95 percent participations in standardized loans from lenders (mostly banks) and sharing the credit risk with them. It would end up supporting loans to more than 2,400 borrowers and co-borrowers across the United States, with an average loan size of $9.5 million and total volume of $17.5 billion. This article describes the facility's goals, its design, the challenges and constraints that shaped its reach, and the characteristics of its borrowers and lenders. We conclude with some lessons learned for future policymakers and facility designers.

FINANCIAL OUTREACH AND FINANCIAL SUSTAINABILITY OF LICENSED DEPOSIT TAKING MICROFINANCE INSTITUTIONS IN NAIROBI CITY COUNTY, KENYA

Purpose: The purpose of this study was to investigate the relationship between financial outreach and financial sustainability of deposit taking microfinance institutions in Nairobi County, Kenya.
 Methodology: The study employed a positivism research philosophy to determine the relationship between financial outreach and financial sustainability. A population of 13 licensed Deposit Taking Microfinance Institution was considered for this study. Census method was preferred due to small number of target population. A static Panel linear regression model with fixed effect was developed for both operating self-sufficiency and financial self-sufficiency. Secondary data was obtained from Central Bank of Kenya from audited financial statements. Inferential analysis method was employed using Stata statistics software then descriptive statistics tool such as mean and standard deviations were used. several diagnostic tests were conducted namely: normality, multicollinearity, heteroscedasticity, serial correlation, stationarity and Hausman.
 Results: The study found that number of active clients (breath of outreach) had statistically significant relationship; Average loan size (depth of outreach) had insignificant; age of firm (experience of institution) had insignificant relationship on financial sustainability of DTMFIs in Nairobi County, Kenya. The moderating effect between credit risk management (portfolio at risk) and breadth of outreach (number of active clients) was positive while portfolio at risk and experience of institution (age) and depth of outreach (average loan size) was negative on the relationship between financial outreach and (OSS and FSS) financial sustainability. Further, loan loss provision coverage had positive interaction with number of active clients, age, and average loan size on the relationship between financial outreach and financial sustainability of DTMFIs in Nairobi County, Kenya.
 Unique contribution to theory, practice and policy: The study recommended that the government through Central Bank of Kenya should formulate policies that enhance savings with DTMFIs and therefore encourage financial inclusion. Further, DTMFIs should engage in vigorous financial education to boost financial facilities’ awareness to boost the breadth of outreach and get involved in information collection and sharing to mitigate credit risk.

Social and financial performance of MFIs: complementary or compromise?

Purpose With the ongoing transformation of the microfinance sector, questions have been raised on the ability of microfinance institutions (MFIs) to perform financially well without compromising with their social objectives. The current study attempts to analyse the social and financial performance of Indian MFIs with an objective to find the kind of relationship between these two objectives. Design/methodology/approach The dynamic framework of simultaneous equations model is used to find the nature of the relationship which exists between social and financial performance of Indian MFIs. Findings The study finds that depth of outreach enables MFIs to achieve financial sustainability. On the other hand, financially strong MFI lend more as reflected by an increase in their average loan size. Research limitations/implications Many MFIs still receive subsidies to support their operations. Ideally, adjustments should be made to remove the effect of such subsidies on their cost. However, due to non-availability of data, the study fails to make any adjustment for the subsidies. Practical implications The presence of a complementary relationship between social and financial performance in the Indian microfinance sector is quite encouraging for the policymakers during the current time when the sector is becoming less dependent on subsidies. However, the recent upsurge in the average loan size requires attention. Social implications The findings suggest that MFIs can achieve financial sustainability while targeting poor clients. This indicates that MFIs can perform socially good along with their financial performance. Originality/value Such study is vital when the Indian microfinance sector is moving away from subsidies to become self-reliant and commercialised. Few studies have focused on this aspect of Indian microfinance sector.

Understanding the Scope of the Institutional Transformation within the Microfinance Sector: Evidence from Sidian Bank in Kenya

Abstract This article investigates the impact of the change in the legal status of a microfinance institution on its social and financial performance. It uses a case study with a strong emphasis on both quantitative and qualitative approaches to understand the stakeholders’ perceived value of transformation. The results from the study reveal that transformation significantly improves the profitability and the efficiency of Sidian Bank, and in addition, improves the quality of its portfolio. However, we found that transformation has altered significantly the social objectives of Sidian Bank by decreasing its breadth and depth of social outreach. Insights from the qualitative approach reveal that the average loan size widely used to proxy mission drift is a biased indicator since clients grow over time and always favor bigger loans. The stakeholders’ perceived value of transformation differs in terms of risks, breadth, and financial results.

Determinants of Operational Self-Sustainability of Microfinance Institutions in Vietnam

The purpose of this paper is to investigate the determinants of the Operational Self-Sustainability (OSS) of Vietnamese microfinance institutions (MFIs). This research uses both qualitative and quantitative research methods: (i) qualitative research was via in-depth interviews with ten microfinance practitioners, policymakers and researchers; (ii) quantitative research was conducted by using panel data of 34 MFIs in the period 2011-2015 with binary logistics and OLS regressions. Results are as follows: (i) MFIs' OSS in Vietnam are mainly determined by five key factors: portfolio at risk (PAR>30), capital structure, gross loan portfolio, scope of activities and legal form; (ii) OSS are most affected by legal status (social organizations have better OSS than formal MFIs or programs/projects), location (MFIs focus in one province have higher OSS than working nationwide or just in one district), capital structure (MFIs with more equity proportion have higher OSS); (iii) surprisingly, average loan size per borrower and age of MFIs do not have statistically significant correlation with OSS. The key recommendations are: (i) MFIs should focus on its professionality and increase its equity; (ii) related stakeholders such as State Bank of Vietnam should promote the enabling ecosystem for microfinance development to enhance poverty reduction and economic development.

Effect of Outreach on Financial Sustainability and Profitability of Saving and Credit Cooperatives in Eastern Ethiopia

This study scrutinized the effect of outreach on financial sustainability and profitability of SACCOs in Eastern Ethiopia using balanced panel data from 33 SACCOs over the period of 2017-2019. Quantitative approach and explanatory design was employed to realize the stated objective. This study used secondary data sources mainly audited financial statements of the SACCOs in the study period. The analysis revealed that SACCOs in Eastern Ethiopia are profitable but not financially sustainable. The random effect model result shows that gross loan to asset ratio, the yield on the gross loan portfolio, managerial and operational efficiency has a statistically significant and positive effect on the financial sustainability of SACCOs while average loan size has a statistically significant but negative effect. Likewise, gross loan to asset ratio, managerial efficiency, and average loan size has a statistically significant and positive effect on the profitability of SACCOs in Eastern Ethiopia. However, a portion of women borrowers and the number of active borrowers has a statistically significant but negative effect on the profitability of the SACCOs in the study area. Finally, the study suggests that increasing the number of borrowing clients and sales volume (loan portfolio) could benefit SACCOs in Eastern Ethiopia from the economics of scale. Keywords: Eastern Ethiopia, Financial sustainability, Outreach, Profitability, SACCOs DOI: 10.7176/RJFA/11-15-02 Publication date: August 31 st 2020

Effect of Outreach on Financial Sustainability and Profitability of Saving and Credit Cooperatives in Eastern Ethiopia

This study scrutinized the effect of outreach on financial sustainability and profitability of SACCOs in Eastern Ethiopia using balanced panel data from 33 SACCOs over the period of 2017-2019. Quantitative approach and explanatory design were employed to realize the stated objective. This study used secondary data sources, mainly audited financial statement of the SACCOs, in the study period. The analysis revealed that SACCOs in Eastern Ethiopia are profitable but not financially sustainable. Random effect model results show that gross loan to asset ratio, yield on gross loan portfolio, managerial and operational efficiency has statistically significant and positive effect on the financial sustainability of SACCOs, while average loan size has statistically significant but negative effect. Likewise, gross loan to asset ratio, managerial efficiency, and average loan size has statistically significant and positive effect on the profitability of SACCOs in Eastern Ethiopia. However, the portion of women borrowers and number of active borrowers has statistically significant but negative effect on the profitability of the SACCOs in the study area. Finally, the study suggests that increasing the number of borrowing clients and sales volume (loan portfolio) could benefit SACCOs in Eastern Ethiopia from economics of scale.

Macroprudential Policy, Mortgage Cycles and Distributional Effects: Evidence from the UK

Macroprudential regulators worldwide have introduced regulations to limit household leverage in light of existing evidence which suggests that high leverage is associated with household distress during crisis. We analyse the distributional effects of such a macroprudential policy on mortgage and house price cycles. For identification, we exploit the universe of UK mortgages and a 15%-limit imposed in 2014 on lenders — not households — for high loan-to-income ratio (LTI) mortgages. Despite some regulatory arbitrage (eg increases in LTV and average loan size), more-constrained lenders issue fewer high-LTI mortgages. Partial substitution by less-constrained lenders leads to overall credit contraction to low-income borrowers in local-areas more exposed to constrained-lenders, lowering house price growth. Following the Brexit referendum (which led to house-price correction), the 2014-policy strongly implies — via lower pre-correction debt — better house prices and mortgage defaults during an episode of house price correction.

Determinants of Microfinance Interest Rates: Case of Sri Lanka

This research attempts to identify determinants of microfinance interest rates with a view to control and reduce such rates for the betterment of microfinance clients. Data from 30 microfinance institutions were gathered using a set format to capture required variables. The variables covered the cost of funds, efficiency, competition and company characteristics. Variables such as return on assets, non-performing accommodations, competition and average loan size were considered as endogenous. Therefore, a two stage least square panel regression using random effects was used to analyse the data. The identified determinants of microfinance interest rates were the prior period’s interest rate, cost of funds, efficiency, the size of firm and profitability. However, competition, the nature of microfinance institution and the experience of the firm did not give significant results. Accordingly, it is recommended that appropriate action should be taken to reduce the cost of funds, improve efficiency and transmit the profitability of institutions to the microfinance client. Further, policies should be developed to improve transparency in the pricing imposed by such institutions and to enhance financial literacy of the public to derive benefits of competition. Thereby, the size of firm, experience and regulatory position can be stimulated to minimize interest rates.