Religiosity and threshold effect in social and financial
performance of microfinance institutions
Mohammad Ashraful Mobin
What is the Issue ?
•
Effect of religion on Microfinance Institutions’ Performance.
•
Testing the paradox of the microfinance hypothesis.
WHY It is an Issue ?
World Poverty Map
Prevailing Religion
WHY it is an Issue ?
•
Several theories and studies argue that religious beliefs represent an important yet
neglected factor in development.
•
16.1% of worldwide population lives with less than one US dollar a day and 57.6%
with less than 2.5 USD.
•
44% of this extreme poor people is concentrated in the Muslim countries.
•
About 65 million people around the world received small loans without collateral
through microfinance.
WHY it is an Issue ?
•
72% of the people in Muslim countries do not use formal financial services.
•
20%-40% people do not use conventional microfinance to avoid interest.
•
Currently more than 300 Islamic Microfinance Institutions are working to alleviate
the poverty.
•
Little academic inquiry on the relationship between Islamic based institutions and
development. Moreover, there is even less in the area of Islamic microfinance and
development.
What are the theories supporting this issue ?
•
Neo-classical
The Neo-classical growth model emphasizes the importance of savings in order for a
country's economy to grow. According to Todaro et al. (2003), one of the main
constraints for poor households in developing countries is the lack of access to
financial services. ( Financial Inclusion )
•
Welfarist theory
The Welfarist theory focuses on reducing poverty through credit, often provided in
conjunction with services such as skills training and teaching of literacy and
numeracy, health, nutrition and family planning.
What are the theories supporting this issue ?
•
Micro-Finance Unity Theory
This theory advocates for joint liability in the repayment of microfinance loans. The
argument fronted by this theory is that joint liability could improve repayment rates
and the welfare of credit-constrained borrowers.
•
Empowerment Theory of Micro-finance
The empowerment theory shows how microfinance loans can empower people to
improve their standard of livings by enabling them to start businesses. The theory
points out that women account for nearly74 percent of the 19.3 million of the
world’s poorest people now being served by microfinance institutions.
What is the meaning of Religion , Development and Microfinance ?
Religion and development:
•
The notions of development and religion have so much in common
•
Hindu idea emphasizes harmony with the living environment.
•
Muslims believe that the ultimate aim of life is to return humanity to its creator in
its original state of purity.
•
Christians believe that personal transformation – inner change – is the key to the
transformation of society.
What is the meaning of Religion , Development and Microfinance ?
Microfinance:
• To provide credit to working poor who otherwise would
not have access to credit services.
• MFI created for poverty alleviation and empowerment
of the poor.
• Relying on traditional skills, poor people use financial
services to start or expand self-supporting businesses.
What are the variables ?
Dependent Variable
• OSS ( source: microfinance consensus guidelines; CGAP, World Bank)
Operational self-sufficiency (oss) = Operating revenue /(Financial expense + Loanloss provision expense + Operating expenses
Independent Variables
•
•
•
•
•
•
Total Equity
Average loan Size
Female clients
Portfolio yield
Loan loss reserve Ratio
Cost Per Borrower
Why This Model ?
•
Preferred Model by CGAP, World Bank
•
Used by most of the microfinance rigorous study
•
Research Agenda from Previous Study
Reference :
Mersland, Roy, Bert D’espallier, and Magne Supphellen. "The effects of religion on
development efforts: Evidence from the microfinance industry and a research
agenda." World Development 41 (2013): 145-156.
Title
13
Why System GMM ? Why not Difference GMM
One potential problem with the ‘differenced’ equation is that the lagged ‘levels’ of
regressors may be weak instruments for the ‘differenced’ variables.
•
The problems can be tackled by the ‘System GMM’ proposed by Blundell and
Bond (1998). This estimator combines within a system the regression in first
differences with the regression in levels.
•
The ‘first differenced’ moment conditions in Standard GMM are augmented by
‘level’ moment conditions in System GMM for more efficiency in
estimation(Blundell and Bond, 1998).
Title
14
What is the finding : Difference GMM
Difference
GMM
Model
L.OSS
1
0.170
(0.76)
L2.OSS
Model
2
0.0595
(0.23)
Model
3
Mo~4
diff22robust
0.170
(0.89)
0.0595
(0.51)
-0.623
(-1.92)
CPB
-0.623***
(-3.41)
-299.3**
(-2.69)
-259.3
(-1.81)
-299.3*
(-2.55)
Portflio
0.406**
(2.66)
0.208
(0.21)
0.406*
(2.51)
0.208
(0.35)
ROE
16.82
(1.11)
36.48
(1.55)
16.82
(1.42)
36.48*
(2.33)
-0.00000176
(-0.37)
-0.00000153
(-0.30)
-0.00000176
(-1.29)
-0.00000153
(-1.59)
0.140
(0.01)
21.50
(1.26)
0.140
(0.02)
21.50
(1.43)
Femaleclients
lloansize
lloanloss
lloans
lequity
Dummy
Islamic
Constant
Observations
t
*
statistics
p<0.05, **
-11.88**
(-2.72)
-12.64*
(-2.45)
-11.88**
(-2.87)
-259.3**
(-2.84)
-12.64**
(-2.73)
6.082
(0.70)
11.69
(1.10)
6.082
(0.99)
-8.468
(-0.99)
-25.83
(-1.93)
-8.468
(-1.05)
-25.83
(-1.86)
0
(.)
0
(.)
0
(.)
0
(.)
0
(.)
0
(.)
0
(.)
0
(.)
49
34
49
34
11.69*
(1.99)
in parentheses
p<0.01, *** p<0.001
Title
15
What is the finding : Difference GMM
System GMM
L.OSS
Model 1
Model 2
Model 3 Mo~4
system22ro~t
-0.0621
(-0.44)
-0.132
(-1.06)
-0.0621
(-0.27)
-0.132
(-0.60)
L2.OSS
CPB
0.133
(1.48)
-309.1**
(-2.99)
-287.8*
(-2.46)
0.133
(0.96)
-309.1**
(-2.62)
-287.8*
(-2.07)
Portflio
0.414**
(2.90)
3.018***
(3.34)
0.414*
(2.55)
3.018
(1.10)
ROE
11.66
(0.83)
1.960
(0.12)
11.66
(1.01)
1.960
(0.05)
-0.00000275
(-0.62)
0.00000278
(0.42)
-0.00000275
(-1.45)
0.00000278
(0.49)
-4.778
(-0.54)
86.91
(0.95)
Femaleclients
lloansize
-4.778
(-0.44)
lloanloss
-12.90**
(-3.24)
lloans
lequity
9.058
(1.21)
86.91***
(5.36)
-9.996*
(-2.05)
-14.75
(-1.52)
-16.33*
(-2.00)
-12.90***
(-3.40)
9.058*
(2.33)
-9.996*
(-2.00)
-14.75
(-0.63)
-16.33**
(-2.65)
Dummy Islamic
25.52
(0.92)
138.3**
(2.66)
25.52
(0.95)
138.3
(1.08)
Constant
114.3
(0.96)
-583.2**
(-2.62)
114.3
(0.94)
-583.2
(-1.03)
82
86
Observations
82
t statistics in parentheses
* p<0.05, ** p<0.01, *** p<0.001
86
Robustness Check
•
Sargan Test
Sargan test of overidentifying restrictions
H0: overidentifying restrictions are valid
chi2(17) = 21.22822
Prob > chi2 = 0.2162
Title
17
Implications
1. Islamic rules and principles should have significant on
Microfinance performance.
2. Donors can consider Islamic Microfinance Institutions too
as it may provide a different results.
3. It is recommend for managers and donors to ensure that
Islamic inspiration translates into benefits for clients.
Title
18
Can MFIs maintain both Social and
Financial performance ?
• Financial Inclusion Vs Financial Performance of MFIs
• Poverty eradication Vs Strengthening Microfinance
Institutions
• Indicators : OSS Vs Average Loan Size
• Reference : Li, Yan. "Threshold Effects of Poverty Targeting
on Financial Sustainability and Social Outreach of
Microfinance Institutions."
Title
19
What is the Paradox of Microfinance ?
Higher loan size , Small no. of borrowers , better performance
Smaller loan size , large no. of borrowers, worse performance.
Microfinance would enable a group of people with widely
different characteristics and / or unbanked out of the
stranglehold of moneylenders, therefore including them
financially and socially.
The underlying assumption considers that the seniority in
access to microfinance services can improve living conditions
and reduce poverty among beneficiaries.
Title
20
What is the Paradox of Microfinance ?
It could lead beneficiaries into situations of debt, and therefore
aggravate their already difficult fate.
Given this duality of approaches, we assume that there may be
a "threshold" at which if nothing is done, the positive effects of
microcredit become exhausted and result in the deterioration
of welfare recipient
How to test ?
• Threshold regression models or sample splitting models have
wide application in economics and applied econometric
practice (Hansen 1999; Hansen 2000).
• It allows to endogenously determine the threshold level(s) at
which the sample is split. It treats the threshold value(s) as
unknown instead of arbitrarily deciding the splitting point.
• Hansen (1996) and Caner and Hansen (2004) suggest a
bootstrapping procedure to obtain the asymptotic P-value.
Title
22
Why Bangladesh ?
Known as Birth Place of Microfinance.
• Bangladesh is well-known for its "minimalist" Grameen program focusing
mainly on livelihood enterprises.
• MFIs in Bangladesh serve a total number of over 20 million members, with
Grameen Bank leading the flock with 7.2 million, ASA with 6.4 million
and BRAC with 5.3 million members.
•
The average size of the loan stands at BDT8,000, making the Bangladesh
microfinance segment a vibrant US$2.3 billion industry.
• All the MFIs claim to have reported excellent repayment rates at 98 percent
and above.
Title
23
What is the Finding ?
Title
24
Why this result?
• By applying the sample splitting technique of Caner and
Hansen (2004), we get a threshold value of 1 at which the full
sample is not divided into difference regime.
• when the percentage of the poorest is relatively low and MFIs
are actually serving a large number of marginally poor or nonpoor clients.
• It does not support paradox hypothesis
Title
25
Implications
• Good News for Policy makers , MFIs and microentrepreneurs.
• MFIs ( Specifically in Bangladesh) should not be more
concerned about financial performance rather than social
performance.
• If financial Inclusion is achieved, financial sustainability will
be achieved too.
Title
26
Thank You!
For any future queries please email me
1400028@student.inceif.org
AlHuda CIBE FZ LLE - U.A.E
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