See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/321236916

Microfinance Banks: Feasibility and Performance Compared to Traditional

Banking

Article in SSRN Electronic Journal · January 2015

DOI: 10.2139/ssrn.3066701

CITATIONS READS

0 6,286

3 authors, including:

Jorge Gutiérrez-Goiria Vicente Ruiz Herrán

Universidad del País Vasco / Euskal Herriko Unibertsitatea Universidad del País Vasco / Euskal Herriko Unibertsitatea
53 PUBLICATIONS 662 CITATIONS 19 PUBLICATIONS 96 CITATIONS

SEE PROFILE SEE PROFILE

All content following this page was uploaded by Jorge Gutiérrez-Goiria on 11 December 2017.

The user has requested enhancement of the downloaded file.

 Microfinance banks: feasibility and performance compared to
traditional banking
(full paper presented during the sessions of the XXIV AEDEM International Conference, held
in London, September 1st-2nd, 2015)

Jorge Gutiérrez-Goiria (Corresponding author)

Department of Financial Economics II
University of the Basque Country (UPV/EHU)
Av. Lehendakari Aguirre, 83, 48015, Bilbao, Spain
jorge.gutierrez@ehu.eus

Vicente Ruiz
Department of Financial Economics II
University of the Basque Country (UPV/EHU)
vicente.ruiz@ehu.eus

Miguel Angel Pérez

Department of Financial Economics II
University of the Basque Country (UPV/EHU)
miguelangel.perezm@ehu.eus

ABSTRACT: Financial exclusion situations persist around the world, despite the financialization

processes of the economy in recent years, and are widespread in low- and middle-income countries,

affecting their development potential. Microfinance has thus been a response that combines proximity

to low-income clients with adapted, socially oriented and efficient practices. The growth of the sector

has been externally supported by development agencies, multilateral institutions and other

international organizations, which have deemed it to be a novel financial and development instrument,

but doubts still remain regarding its sustainability. The article studies the period 2006-2013 using a

broad sample of traditional and microfinance banks, showing the feasibility of the sector in terms of

profitability, solvency and risk, and comparing this model with the traditional banking one in those

contexts.

Electronic copy available at: https://ssrn.com/abstract=3066701

 1 Introduction

The globalization processes of recent decades have resulted in a dual situation in terms of

international finance, with certain excesses at both extremes. On the one hand, there are the regions of

the world where the financial system, its products and use, have been greatly developed in a process

that some authors call financialization (Epstein, 2005). This great development, and the progressive

opening up of global capital markets, has contributed to a series of financial crisis that have impacted

on the real economy and had systemic consequences, about which authors had warned well before the

current crisis (Stiglitz, 2000). At the other extreme, there continue to be a widespread shortfall in the

most basic access to finance among large sectors of the population in many low- and middle-income

countries, which hinders development possibilities and results in serious problems in the everyday life

of millions of people.

According to the most recent studies, half of the world’s adult population (2,500 million people)

do not have an account in a traditional financial institution (World Bank, 2014). Great disparities can

be seen between countries regarding this lack of access and use, meaning that while 89% of adults on

average have a bank account in high-income countries, barely 24% do in the case of low-income

countries.

The lack of access is firstly explained by the different barriers to access to the formal financial

system, which include the economic ones (minimum amounts for opening or running an account that

are not feasible for most of the population), the social or cultural ones, the physical ones (geographical

accessibility) and those ones regarding documentation (Beck et al., 2007; 2008).

Nevertheless, in a detailed study of the financial habits of poorest people, Collins et al. (2009)

show that lack of or irregular income does not mean that there is less need for financial services. To

the contrary, people regularly demand and use those services rudimentarily to be able, for example, to

carry forward any surplus income, however slight, from one week to another in which they will not

earn anything, or to ask for an advance in the case of a pressing need or business opportunity.

In all societies, regardless of their level of wealth, this type of situations and needs occur, but

the response options are very different. Thus, the informal financial system is the first response in

Electronic copy available at: https://ssrn.com/abstract=3066701

many cases (relatives, friends, lenders, loan sharks, etc.), but this approach has obvious limitations.

Families sometimes self-manage their small surpluses (savings) in the form of items such as livestock,

which they can access in case of need. Rather more advanced responses are also common, in the form

of Rotating Savings and Credit Associations, Self Help Groups and others, which are going to help

bridge the gap between the formal financial system and the poorest households.

Given these obvious difficulties, and such extensive lack of access, different proposals have

emerged down through the years and achieved different degrees of success and implementation.

Microfinance represents the largest response to the problem so far, and its possibilities for growth still

seem significant.

Microfinance is an adapted and practical response to the lack of access to finance, and it has

developed techniques that manage to combine the advantages of the informal system (proximity,

adequacy of amounts and procedures, fewer guarantees, etc.) with the conventional ones of the formal

system (professionalization, trust, availability of funds, etc.). The practically simultaneous and

independent initiatives that began in the 1970s by M. Yunus in Bangladesh (Grameen Bank), and

ACCION in Latin America, have given way to a sector that has been maturing, while also being

backed by different organizations (World Bank, United Nations, cooperation agencies, foundations,

NGOs, etc.).

The aim of this paper is to establish whether, at the end of the period of great international

impetus and support for the micro-credit, we are facing a sector capable of providing a self-sufficient

response to such a challenge (with billions of people excluded), and whether its proposal provides a

different financial approach to that of the traditional system.

Specifically, we will study the differences in the business model, the profitability and solvency

of microfinance by means of a wide sample of Microfinance Institutions (MFI) in different low- and

middle-income countries between 2006 and 2013, and compare it with the situation of its closest

sector (the traditional banks in those same countries).

Building on this approach, the paper continues with a short review of the recent evolution of the

microfinance sector worldwide and the issues that are emerging in it. The following section considers

the implications of the microfinance approach as a model. Subsequently, the selection of the sample,

3
the variables and the methodology applied are discussed. The main results of the study are then

analysed and finally the main conclusions are presented.

2 Microfinance and its Recent Evolution

After a period of extraordinary growth, the latest Microcredit Summit Campaign data show the

number of established clients to be around 200 million people (Reed, 2014), 116 million of whom are

among the poorest (income under 1.25 dollars a day in purchasing power parity). If we consider that a

typical family has 4 or 5 members, there might be between 800 million and 1 billion people involved

in microfinance worldwide, which provides an idea of how extended these practices are.

The spread of microfinance has undoubtedly been underpinned by a strong media image from

halfway through the 1990s, and by backing at different levels. This support includes the declaration of

the United Nations´ International Year of Microcredit (2005), the Nobel Peace Prize that M. Yunus

won in 2006, and in the explicit inclusion of microfinance in the strategies and international summits

on development finance at the highest level (UN, 2002; 2008).

In the early 2000s, microfinance (particularly microcredit) was considered to be a possible

solution to poverty problems, with expectations that have been qualified over time. Evidence of some

poor results, and the bad practices or overindebtedness in places such as Bolivia and India (Andra

Pradesh) showed that a deeper analysis of the phenomenon was required, and that it might also have

had negative effects (Dichter and Harper, 2007). As a result, an increasingly number of methodologies

emerges to measure the social impact. Consequently, a growing number of methodologies for

measuring social impact are arising.

In this context, the need to expand services beyond credit has been progressively considered.

Not everyone is capable of developing a successful business, but the vast majority of people can

benefit from micro-savings services, which also allows Microfinance Institutions to obtain their funds

in a natural way, and to play their role as financial intermediaries. Other small-scale services

(insurance, payment methods, etc.) are also gradually being introduced by institutions with different

legal status and approaches (Banks, NGOs, Savings and Credit Cooperatives, etc.).

4
 The evolution in recent years has not been exempt of problems such as the ones that emerged at

the start of the international financial crisis. In this context, the microfinance sector has been less

affected, in general, than the traditional one, despite the difficulties in the early years of the crisis. The

profitability problems in the microfinance sector in 2008/09 have been studied from different

perspectives. According to the survey by the Centre for the Study of Financial Innovation (Lascelles,

2009), conducted among over 400 key players, a change could be seen at the start of the global crisis

regarding the concerns of the sector. Credit risk, and the lack of liquidity and alternatives to finance

the portfolios were identified as the main problems at a time of the capital markets shrinking. Other

interpretations (Lützenkirchen and Weistroffer, 2012) focused more on the very evolution of the

sector, which was growing very rapidly, and began to note problems such as the overindebtedness of

some clients or the competition, which have subsequently been corrected. In this regard, the severe

problems of microfinance in Andra Pradesh State, India (CGAP, 2010) were a serious wake up call to

those practices and a turning point for many MFIs.

The shift in the financing of the Microfinance Institutions should be noted in this maturing

process. There has been a progressive change in the source of the funds for these institutions, which

often came from international donations. On the one hand, there is a rise in financing from deposits.

On the other hand, as regards international flows (Lahaye et al., 2012; Dashi et al., 2013), we find a

significant participation of the private sector (around 30%) and a prevalence of debt-based instruments

(to support the loan portfolios) and, to a lesser extent, of equity participations. Donations are in third

place and quite limited to areas such as boosting new organizations or supporting the neediest areas

such as Sub-Saharan Africa.

A key issue, in this context where funds are increasingly obtained under market conditions, is to

analyse whether the MFIs can be an attractive investment, both for investors interested in their social

potential and for those not driven by that aspect (Jandaa and Svárovskáb, 2010). Investment

opportunities through instruments such as the Microfinance Investment Intermediaries mean that

investors with different interests actively participate in those processes.

5
 3 Specific Features of the Microfinance Model

Microfinance has always advocated practices that are different to those of the traditional

financial sector in terms of proximity, guarantees, products, etc. These practices affect the proposed

business model and its feasibility.

First, it is a sector that is highly focused on financial intermediation, with the microcredit clearly

predominating as the main product. The possibility of providing small loans is the basis of the sector,

which in many spheres is still identified as the microcredit sector, rather than as the microfinance one.

Different studies (Barros et al., 2007; Ianotta et al., 2007; García Herrero et al., 2009) show that banks

become more profitable the greater the percentage of their loan portfolio is in relation to other more

secure assets, and despite the greater management costs involved in maintaining a broad portfolio of

this type of assets.

Furthermore, and despite the progressive inclusion of microsavings as a second product, the

sector has found it hard to attract deposits, something that is more evident in the case of smaller

entities, such as the NGOs. The problems in this case refer both to regulatory issues -such as the

greater difficulty of managing savings accounts- and to the very inertia of the sector, which is more

credit-focused. Despite the growing trend to find financing by attracting deposits, some differences

should be expected in this regard, even in the cases of larger entities with a higher level of

professionalization such as the ones we are studying. This is a weakness of the microfinance system,

which must resort to other sources of funding. In this regard, financing through equity has a greater

specific weight on the balance sheet of these institutions than in the case of traditional banking.

Establishing a relationship between the profitability of the banks and their capital ratios is a

priori complicated. It is justifiable from a theoretical perspective that the higher those ratios are, the

lower the risk of the business of the banks is and, consequently, their profitability can be expected to

be lower. On the other hand, cutting the insolvency risk also leads to cutting the financing costs,

resulting in a rise in profitability. The empirical evidence does not show any definitive results in this

regard. However, we should mention some studies (Bourke, 1989; Demirguc-Kunt and Huizinga,

6
1999; Pasiouras and Kosmidou, 2007; García-Herrero et al., 2009) that show that banks with the best

results are those that maintain higher levels of capital in relation to their assets.

Logically, a key question has to do with the size of these institutions and the small scale of their

work, which supposes relatively higher costs. This problem is aggravated when working with low-

income customers and very small loans (Conning, 1999; Lützenkirchen and Weistroffer, 2012).

Initially, these questions raised serious doubts about the feasibility of the MFIs, but these have already

been ruled out in practice, as a large number of MFIs have shown to be self-sufficient (Lützenkirchen

and Weistroffer, 2012). On occasions, despite recognizing the MFI's viability under certain conditions,

questions have been raised regarding the possibility of working with poorer populations and being

sustainable at the same time, and potential conflicts between financial and social purposes have been

stressed (Conning, 1999; Cull et al., 2007; Gutiérrez and Goitisolo, 2011; Hermes and Hudon, 2015).

Some authors (Smirlock, 1985; Climent, 2012) argue that the size of the banks is positively correlated

with profitability. The advantages of a large bank include the greater chance to risk diversification, the

greater ease of access to the wholesale financing markets, some economies of scale, and even the

possibility of becoming systemically too large to be allowed to fail. Nonetheless, other studies

(Gilbert, 1984; Gual and Hernández, 1991) conclude that there is not always a gain in efficiency and

profitability with the increase in size of the banking institutions, and that it is even lost in some cases.

Among other reasons, this may be due to the existence of agency costs, of more complex bureaucratic

processes, and of other costs related to the management of extremely large companies (Stiroh and

Rumble, 2006; Pasiouras and Kosmodou, 2007).

Frequently, the high interest rates that microfinance institutions apply to their borrowers are

pointed out. This could be justified by the greater costs of funds and administration, or by differences

in the quality of their borrowers. The long-term trend, in this regards, shows a certain downward

tendency in the interest rates, noted for being irregular, and in any case higher than those of the

traditional sector (Lützenkirchen and Weistroffer, 2012; Dorfleitner et al., 2013; Rosenberg et al.,

2013).

The quality of the credits is a last point that characterizes the microfinance sector. The

feasibility of this type of institutions could be questioned because they are targeted to low-income

7
populations, with a high risk of default. This question of credit quality has attracted a fair amount of

attention in the microfinance sector, and there is no unanimity about the quality of the loans granted.

However, it should be noted that this variable impacts on the profitability of the bank due both to the

increase of the provisions to cover the losses, and to the greater income that the operations should

generate, provided that there is concordance between the return on the assets and their risk level.

4 Sample, Variables and Methodology

4.1 Sample

The information used for this research comes from the Bankscope database, which includes

information on approximately 32,000 public and private banking institutions around the world. The

sample used in the study is divided into 2 parts:

 On the one hand, the 65 microfinance institutions that operate in any of the 35 low- and middle-

income countries analysed1.

 On the other hand, the 749 traditional banks that operate in the same group of countries.

The timeline of the study is from 2006 to 2013, both inclusive.

4.2 Defining the Variables

In Table 1 we summarize the variables and ratios that are used to analyze and compare

Microfinance Institutions and traditional banks

Table 1 - Variables and ratios used in the study

Differential aspects Variable/Ratio

Total Assets
Business Model Loans/Total Assets
Deposits/Total Assets
Lending rates
Interest rates Deposit rates
Intermediation spread
ROA
Profitability
ROE
Solvency Equity/Total Assets
Credit risk Impaired Loans/Gross Loans

1
Appendix 1 includes the list of countries and the number of institutions in each case.

8
 Two aspects were analysed regarding the business model: first, the size of the banks, according

to the amount of their assets, and second, the importance of the traditional financial intermediation in

terms of the global business of the banks. Two ratios were used which relate, respectively, the loans

granted to customers and the deposits collected from them to the total assets of the institutions.

The aspects related to the interest rates were analysed using three variables: the interest rates

applied to the loans and deposits and the financial intermediation spread.

The profitability differences were analysed using two conventional ratios: the Return On Assets

(ROA) calculated as the quotient between the net profit and the total assets, and the Return On Equity

(ROE), calculated as the quotient between the net profit and equity.

The differences regarding the solvency level were analysed using the ratio that relates equity to

assets and, finally, the percentage of impaired loans related to gross loans was used to study the risk

level.

4.3 Methodology

The average value of the different variables and ratios were calculated for each of the years and

for the two groups of financial institutions defined. The average was weighted based on the total value

of the assets of each institution in order to take the size of each bank into account.

Prior to the statistical analysis to check the heterogeneity of the variables between the traditional

and microfinance banks, we established whether the distribution of those variables was normal. The

Kolmogorov-Smirnov test was therefore used. Due to the lack of normality of the variables studied in

all the years analysed, a non-parametric test, such as the Mann-Whitney rank-sum test, was applied in

order to check whether the differences between the variables for the two banking groups were

significant. This statistic is used to compare whether two samples, extracted independently, come from

a single population.

5 Results

The results of the study are set out in Appendices 2 and 3 of this paper. Appendix 2 shows the

averages, weighted by the value of the assets, of the different ratios and variables used in the study, for

9
each group of banks and year. Appendix 3, in turn, contains the results of the Mann-Whitney test for

each variable and in each of the years.

5.1 Business Model

The size is a basic difference between traditional and microfinance banks. The relevance of

Microfinance Institutions is relatively small in the financial systems of the 35 countries analysed in

this research, both as regards their number and their size (see Appendices 1 and 2). As a reflection of

this point, our sample shows that the average size of the Microfinance Institutions in 2013 was

approximately 10% of the one of the traditional banks2.

However, it is noteworthy that, despite their reduced size, Microfinance Institutions have

experienced significant growth in recent years. The value of their assets increased on average at annual

rates that ranged between 25.7% in 2010 and 46.1% in 2008. Over the same time period, assets of the

traditional banks grew between 11.21% in 2009 and 29.15% in 20083.

Figures 1 and 2 reflect the evolution between 2006 and 2013 of the ratios that relate the amount

of the loans granted and the deposits collected to the total assets of the two groups of financial

institutions.

80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30% Commercial Banks
Microfinance Institutions
20% 20%
Microfinance Institutions
10% Commercial Banks 10%

0% 0%
2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013

Figure 1 - Loans out of Total Assets Figure 2 - Deposits out of Total Assets
according to the type of institution according to the type of institution

As expected, given the characteristics of the microfinance sector, the proportion of assets that

MFI devoted to loans -between 66.82% in 2013 and 75.21% in 2011-, was far ahead of the figure

2
This percentage is 0.0001% if we compare the size of the microfinance institutions with that of the 100 largest
banks worldwide, according to Bankscope database.
3
Growth in the case of the 100 largest Banks of the world is clearly lower in that period, where the crisis caused
the balances sheets to shrink in many cases.

10
granted by the traditional banks -between 56.08% in 2008 and 58.74% in 2007-. Traditional banking

allocates a greater part of its resources to finance other types of investments and steers away from the

small-scale funding offered by Microfinance Institutions.

As regards the means to attract resources, the opposite situation is found. On the one hand,

traditional banking is seen to have higher percentages of financing using bank deposits -between

66.47% in 2008 and 72.67% in 2006-. On the other hand, Microfinance Institutions showed ratios of

around 50% in the years studied. The difficulties faced by these institutions to attract this type of

resources have already been mentioned and partly explains their high solvency ratios.

The Mann-Whitney U test indicates that the null hypothesis of equal ranks is not accepted for

any of the years studied, which implies that there are significant differences in these variables between

both types of banks with a confidence level of 99%.

5.2 Interest Rates

The interest rates charged in customer loan operations by Microfinance Institutions are much

higher than those applied by the traditional banks. In the case of the former, they ranged between

19.48% in 2008 and 27.50% in 2009, while the latter ranged between 7.81% in 2006 and 11.38% in

2008. In some years, the interest rates of Microfinance Institutions were three times higher than those

of traditional banking.

The cost of the funds collected through banking deposits is also higher for Microfinance

Institutions than for traditional banks, even though the differences are lower than those observed in

loan operations. The deposit interest rates for the former fluctuated between 5.11% in 2006 and 7.38%

in 2013, and for the latter between 4.26% in 2010 and 6.74% in 2008.

Consequently, the financial intermediation spread of Microfinance Institutions -between 15.07%

and 21.08%-, is much higher and more volatile than that of commercial banks -between 3.78% and

5.47%- (See Figure 3).

11
25%

20%

15%

Microfinance Institutions
10% Commercial Banks

5%

0%
2006 2007 2008 2009 2010 2011 2012 2013

Figure 3 - Intermediation spread as per type of institution

The results of the Mann Whitney non-parametric test show that the differences between the

three variables analysed –loan interest rates, deposit interest rates and intermediation spread- are

statistically significant with a confidence level of 99% for the years studied, except for the deposit

interest rate in 2008.

5.3 Profitability

Microfinance Institutions reached higher levels of profitability than traditional banks in terms of

ROA for every year in the period between 2006 and 2013 (Figure 4). Compared to ROA that ranged

between 1.23% for 2009 and 2010 and 1.48% for 2006 for the traditional banks, the microfinance

banks ranged between 2% in 2009 and 4.62% in 2007. Except for 2009, the only year in which the

profitability differences were not statistically significant, the ROA of the Microfinance Institutions

was twice as high as the one reached by traditional banking. The sample, therefore, reflects the

problems experienced by the sector at the start of the crisis, as has already been discussed.

Furthermore, the greater volatility of the ROA of the microfinance sector during the study period

should be noted.

12
 5% 30%

25%
4%

20%
3%

15%
2%
10%

Microfinance Institutions
1%
Microfinance Institutions 5% Commercial Banks
Commercial Banks
0% 0%
2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013

Figure 4 - ROA as per the type of Figure 5 - ROE as per the type of institution
institution

The profitability for shareholders (ROE) was higher for the Microfinance Institutions in 6 out of

the 8 years studied (Figure 5). Only in 2006 and 2009 the traditional banks´ ROE, which ranged

between 15.23% in 2013 and 18.81% in 2007, exceeded the one of the microfinance sector, which

ranged between 15.27% in 2009 and 23.82% in 2007. The ROE of the Microfinance Institutions was

at its minimum in 2009, due to the problems already stated. This meant that over 20% of the

institutions analysed had a negative value for ROE, particularly in Latin America and, to a lesser

extent, in Sub-Saharan Africa (this reduced the average total ROE by over 2%). The variability in the

case of the Microfinance Institutions contrasts with a slight downward trend in the traditional banks. In

relative terms, the differences in ROE between the two groups of institutions are much lower than

those seen for the ROA. In the case of the ROE, the conclusions regarding the statistical significance

of the results are not clear, as the periods in which the differences are significant alternate with other

periods in which they are not (see Appendix 3).

5.4 Solvency

The solvency ratio of Microfinance Institutions practically doubled the one of the traditional

banks in the period, and they are undoubtedly institutions with smaller leverage levels. However, it

should be noted that the value of their ratio showed a downward trend during the years studied while it

remained relatively constant in the traditional institutions.

13
 25%

20%

15%

10%

5%
Microfinance Institutions
Commercial Banks
0%
2006 2007 2008 2009 2010 2011 2012 2013

Figure 6 - Solvency as per the type of

institution

The Mann-Whitney U test indicates that the null hypothesis of equal ranks for the solvency ratio

is not accepted for any of the years studied, which implies that there are significant differences in these

variables between both types of banks with a confidence level of 99%.

5.5 Credit Risk

Finally, the evolution of the ratio relating the impaired loans with the gross loans does not lead

to conclusive results on the quality of the assets of the two groups of financial institutions. The ratio

value was higher for the Microfinance Institutions from 2008 to 2012 and it was lower in 2006, 2007

and 2013 (see Figure 7).

According to the results, we can conclude that in the years when the crisis had a greater effect,

microfinance banks were more affected than traditional ones regarding the repayment of loans. This

might be due to the difficulties experienced by customers to pay high interest rates charged by MFIs,

which were accentuated in times of crisis. Moreover, the volatility of the ratio is greater in

Microfinance Institutions.

The conclusions regarding the statistical significance of the results are not obvious, given that

periods when the differences are significant alternate with others when they are not.

14
 5%

4%

3%

2%

Microfinance Institutions
1%
Commercial Banks

0%
2006 2007 2008 2009 2010 2011 2012 2013

Figure 7 - Credit risk according to type of

institution

6 Conclusions

Microfinance helps bridge the huge shortfall regarding access to the traditional financial system.

Given the scope of the problem, it is essential that becomes an interesting and viable sector for

possible investors, beyond those interested in socially responsible initiatives.

The study of 65 Microfinance Institutions in middle- and low-income countries reveals a very

credit-focused sector as regards their investments, reflecting the influence of the microcredit as the

flagship product. However, attracting deposits is less significant than in the traditional sector, and this

may raise problems if it is not capable of attracting funds locally to develop, and fulfil the role of

financial intermediation and link with the real economy that is the base of microfinance. The difficulty

in attracting liabilities through deposits also influences the high solvency rates of those institutions, far

exceeding those of traditional banking. This means a lower financial leverage and, consequently,

lower risk in the development of their activities.

The interest rates charged by MFIs in their operations, mainly in microcredit, are very high, and

the financial intermediation spread too. Even though this may be justified by the higher costs of small-

scale work, it threatens medium-term competitiveness of the sector and the maintenance of its clients.

The increase registered for the institutions of the microfinance sector in the crisis years may be related

to the high interest rates that they apply in their operations.

15
 Microfinance Institutions show profits that exceed those of traditional banks in the period and

the countries studied, and that are attractive enough to allow consolidation and predict future growth

of the sector. However, the values show a strong variability that contrasts with the greater stability of

the traditional financial sector.

In short, the study shows the possibilities and structural viability of a sector that, responding to a

clear social demand, has at the same time an important market niche worldwide, which have still not

been sufficiently explored by traditional investors.

REFERENCES

BARROS, C. P., FERREIRA, C. and WILLIAMS, J. , 2007, ‘Analysing the determinants of

performance of best and worst European banks: a mixed logit approach’, Journal of Banking and
Finance, 31, 2189-2203.
BECK, T., DEMIRGÜC-KUNT, A. and MARTÍNEZ PERIA, M. S. ,2007, ‘Reaching out: access and
use of banking services across countries’, Journal of Financial Economics, 85, 234-266.
BECK, T., DEMIRGÜC-KUNT, A. and MARTÍNEZ PERIA, M. S. ,2008, ‘Banking Services for
Everyone? Barriers to bank access and use around the world’, World Bank Economic Review, 22,
397-430.
BOURKE, P. ,1989, ‘Concentration and other determinants of bank profitability in Europe, North
American and Australia’, Journal of Banking and Finance, 13, 65-79.
CGAP ,2010, ‘Andhra Pradesh 2010: Global Implications of the Crisis in Indian Microfinance’, Focus
Notes, 67.
CLIMENT, S. ,2012, ‘La caída de las cajas de ahorro españolas. Cuestión de rentabilidad, tamaño y
estructura de propiedad’, Estudios de Economía Aplicada, 30, 1-26.
COLLINS, D., MORDUCH, J., RUTHERFORD, S. and RUTHVEN, O. ,2009,: Portfolios of the
Poor: How the World's Poor Live on $2 a Day, Princeton University Press.
CONNING, J. ,1999, ‘Outreach, sustainability and leverage in monitored and peer-monitored lending’,
Journal of Development Economics, 60, 51-77.
CULL, R., DEMIRGÜÇ-KUNT, A. and MORDUCH, J. ,2007, ‘Financial performance and outreach:
a global analysis of leading microbanks’, Economic Journal, 117, 107-133.
DASHI, E., LAHAYE, E. and RIZVANOLLI, R. ,2013, Trends in International Funding for
Financial Inclusion, CGAP Brief, December.
DEMIRGUC-KUNT, A. and HUZINGA, H. ,1999, ‘Determinants of commercial banks interest
margins and profitability: some international evidence’, The World Bank Economic Review, 13, 379-
408.
DICHTER, T. and HARPER, M., eds, ,2007,: What´s wrong with microfinance?, Practical Action
Publishing, London.
DORFLEITNER, G., LEIDL, M., PRIBERNY, C. and VON MOSCH, J. ,2013, ‘What determines
microcredit interest rates? ’, Applied Financial Economics, 20, 1579-1597.
EPSTEIN, G. A. ,2005, Financialization and the world economy, Edward Elgar Publishing.
GARCÍA-HERRERO, A., S. GAVILÁ, S. and SANTABÁRBARA, D. ,2009, ‘What explains the low
profitability of Chinesse Banks? ’, Journal of Banking and Finance, 33, 2080-2092.

16
GILBERT, R. A. ,1984, ‘Bank market structure and competition’, Journal of Money, Credit and
Banking, 16, 617-645.
GUAL, J. and HERNÁNDEZ, A. ,1991, ‘Costes operativos, tamaño y especialización en las cajas de
ahorro españolas’, Investigaciones Económicas, 15, 701-726.
GUTIÉRREZ, J. and GOITISOLO, B. ,2011, ‘Profitability and social performance of Microfinance
Institutions: empirical evidence of relations between different types of variables ’, Revista de
Economía Mundial, 27, 189-214.
HERMES, N. and HUDON, M., 2015, ‘Are financial and social efficiency mutually exclusive? A case
study of Vietnamese Microfinance Institutions’, Annals of Public and Cooperative Economics, 87
(1), 55-77.
IANNOTA, G., NOCERA, G. and SIRONI, A. ,2007, ‘Ownership structure, risk and performance in
the European banking industry’, Journal of Banking and Finance, 31, 2127-2149.
JANDAA, K. and SVÁROVSKÁB, B. ,2010, ‘Investing in microfinance’, Journal of Business
Economics and Management, 11, 483-510.
LAHAYE, E. , RIZVANOLLI, R. and DASHI, E. ,2012, Current Trends in Cross-Border Funding for
Microfinance, CGAP Brief, November.
LASCELLES, D. ,2009, Microfinance Banana Skins 2009: Confronting Crisis and Change, Centre for
the Study of Financial Innovation (CSFI), New York.
LÜTZENKIRCHEN, C. and WEISTROFFER, C. ,2012, ‘Microfinance in evolution: An Industry
between crisis and advancement’, Deutsche Bank Research, September.
PASIOURAS, F. and KOSMIDOU, K. ,2007, ‘Factors influencing the profitability of domestic and
foreign banks in the European Union’, Research in International Business and Finance, 21, 222-237.
REED, L., MARSDEN, J, ROGERS, S. RIVERA, C. and ORTEGA, A. ,2014,: Resilience: The State
of the Microcredit Summit Campaign Report 2014, Microcredit Summit Campaign.
ROSENBERG, R., GAUL, S., FORD, W. and TOMILOVA, O. ,2013, ‘Microcredit interest rates and
their determinants: 2004–2011’, in The Microfinance 3.0, Springer Berlin Heidelberg, pp. 69-104.
SMIRLOCK, M. ,1985, ‘Evidence of the relationship between concentration and profitability in
banking’, Journal of Money, Credit and Banking, 17, 69-83.
STIGLITZ, J. E. ,2000, ‘Capital market liberalization, economic growth, and instability’, World
Development, 28, 1075-1086.
STIROH, K. and RUMBLE, A. ,2006, ‘The dark side of diversification: the case of US financial
holding companies’, Journal of Banking and Finance, 30, 2131-2161.
UNITED NATIONS ,2002, Report of the International Conference on Financing for Development,
Monterrey (Mexico), United Nations.
UNITED NATIONS ,2008, Doha Declaration on Financing for Development: outcome document of
the Follow-Up International Conference on Financing for Development to Review the
implementation of the Monterrey Consensus, United Nations.
WORLD BANK ,2014, Global Financial Development Report 2014: Financial Inclusion, World
Bank.

17
Appendices

Appendix 1. Distribution by countries of the microfinance and traditional banks

Microfinan Tradition Microfinan Tradition

ce al ce al
Afghanistan 1 8 Malawi 1 6
Armenia 3 16 Mexico 2 56
Azerbaijan 2 23 Mozambique 2 12
Bangladesh 1 42 Nigeria 2 20
Bolivia 2 10 Nicaragua 1 6
D.R. Congo 1 13 Nepal 1 28
Colombia 1 26 Peru 5 15
Dominican
Republic 2 48 Philippines 1 49
Ecuador 2 18 Pakistan 4 31
Georgia 2 15 El Salvador 1 13
Ghana 1 18 Tajikistan 1 6
Honduras 1 17 Tanzania 3 30
India 1 65 Uganda 2 17
Kenya 4 33 Uzbekistan 1 15
Kyrgyzstan 2 6 Venezuela 2 24
Cambodia 3 18 South Africa 1 16
Morocco 1 11 Zambia 3 14
Mongolia 2 4 Total 65 749

18
Appendix 2. Average values of the selected variables in traditional and microfinance banks

2006 2007 2008 2009 2010 2011 2012 2013

Micro Traditio Micro Traditi Micro Traditi Micro Traditi Micro Traditi Micro Traditi Micro Traditi Micro Traditi
financ nal financ onal financ onal financ onal financ onal financ onal financ onal financ onal
Total Assets e
114.7 4,125.4 e
162.9 5,143.0 e
229.7 4,739.7 e
277.4 5,360.6 e
340.1 5,836.6 e
364.6 5,329.7 e
462.1 5,609.0 e
676.1 6,231.3
(millions US$) 6 7 9 1 7 4 6 2 9 1 3 4 5 6 9 7
Loans/Total 68.21 72.37 70.58 68.66 72.14 75.21 74.61 66.82
57.28% 58.74% 56.08% 56.91% 57.71% 58.08% 58.00% 58.24%
assets % % % % % % % %
Deposits/Total 44.73 49.63 47.85 51.22 53.19 52.39 51.96 49.03
72.67% 70.25% 66.47% 67.86% 68.49% 67.82% 68.04% 68.89%
assets % % % % % % % %
20.95 26.27 25.52 27.50 26.18 24.78 25.41 19.48
Lending rates 7.81% 8.63% 11.38% 10.38% 9.34% 10.01% 10.14% 10.00%
% % % % % % % %
5.11
Deposit rates 5.24% 6.35% 5.78% 5.93% 6.74% 6.59% 5.05% 5.75% 4.26% 5.49% 4.70% 5.73% 4.75% 7.38% 4.67%
%
Intermediation 17.05 20.98 19.99 21.08 20.94 19.50 19.86 15.07
3.78% 3.86% 5.38% 5.39% 5.16% 5.39% 5.47% 5.44%
spread % % % % % % % %
3.34
ROA 1.48% 4.62% 1.45% 3.56% 1.34% 2.00% 1.23% 3.09% 1.23% 3,26% 1.29% 3.48% 1.43% 2.89% 1.36%
%
17.29 23.82 20.66 15.27 19.24 21.89 23.26 20.83
ROE 18.72% 18.81% 17.82% 16.04% 15.46% 15.51% 16.31% 15.23%
% % % % % % % %
Equity/Total 20.04 18.94 16.60 15.55 16.20 15.54 15.68 13.99
8.18% 8.31% 7.77% 8.27% 8.20% 8.43% 8.71% 8.59%
assets % % % % % % % %
Impaired 1.56
Loans/Gross 2.20% 2.32% 2.40% 3.08% 2.86% 4.33% 3.53% 4.68% 3.27% 4.27% 3.22% 3.76% 3.31% 3.03% 3.36%
%
Loans
Institutions 39 370 44 423 46 481 50 515 52 567 62 666 62 730 49 684

19
 Appendix 3. Mann-Whitney comparison of mean differences between the studied cohorts

2006 2007 2008 2009 2010 2011 2012 2

Sig. Sig. Sig. Sig. Sig. Sig. Sig.
Z Asint. Z asint. Z asint. Z asint. Z asint. Z asint. Z asint. Z
(bilateral) (bilateral) (bilateral) (bilateral) (bilateral) (bilateral) (bilateral)
- .000 - .000 - .000 - .000 - .000 - .000 - .000 -
Loans/Total assets
4.720 5.683 5.236 5.154 5.476 6.779 5.986 4.822
- .000 - .000 - .000 - .000 - .000 - .000 - .000 -
Deposits/Total assets
5.187 4.968 5.312 5.389 4.724 5.416 5.530 5.745
- .000 - .000 - .000 - .000 - .000 - .000 - .000 -
Lending rates
6.908 7.750 7.654 8.048 8.599 9.085 9.104 8.286
- .001 - .008 - .060 - .001 - .000 - .000 - .000 -
Deposit rates
3.210 2.660 1.881 3.462 4.375 3.673 4.012 4.179
- .000 - .000 - .000 - .000 - .000 - .000 - .000 -
Intermediation spread
6.315 7.723 7.409 7.612 8.442 8.796 8.603 8.012
- .044 - .000 - .000 -.545 .586 - .002 - .000 - .000 -
ROA
2.015 5.467 4.290 3.138 3.826 3.600 3.341
-.657 .511 - .068 - .072 -.768 .598 - .117 - .012 - .034 -
ROE
1.825 1.798 1.570 2.500 2.125 2.859
- .000 - .000 - .000 - .001 - .000 - .000 - .000 -
Equity/Total assets
4.545 4.224 3.548 3.211 4.041 3.940 3.715 2.707
- .078 - .017 - .042 - .043 -.912 .362 - .095 - .016 -
Impaired Loans/Gross Loans
1.764 2.382 2.038 2.024 1.670 2.410 2.841
(1) The cases in which the null hypothesis of equal rank is not rejected are marked with gray background.

20

View publication stats