An Evaluation of Sustainability and Subsidy Dependence of Microfinance Instituti
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[a] Faculty of Accounting and Finance， University of Professional Studies， Accra， Ghana.
*Corresponding author.
Received 6 November 2012； accepted 10 January 2013
Abstract
The research aims to explore the understanding of the relationship between sustainability of microfinance institutions （MFIs）， subsidy dependence index （SDI） and operational self-sufficiency （OSS）.The research study is based on initial exploratory study by analyzing data on 14 executive directors in qualitative interviews and 116 relationship executives in research questionnaires. The microfinance institutions identified were the Financial Non-Governmental Organizations （FNGOs）， the Savings and Loans Companies （S&L）， the Credit Unions （CUs）， the Rural Banks （RBs） and the SUSU Companies. Multiple Regressions which allows for the testing of theories or models established a significant relationship between the Operational Self Sufficiency （OSS） and the predictors， especially the drop-out rate of clients and average loans. The Subsidy Dependence Index （SDI） was calculated for the various types of MFIs and the result was a high dependency ratio especially among the FNGOs. Though the dependency is on the decline， it is very slow indicating that most MFIs will depend on subsidies for a very long time to come.
Key words： Subsidy dependence； Sustainability； Operational self-sufficiency； Viability； Microfinance
INTRODUCTION Microfinance developed as a source of finance and a development tool especially in developing countries after the pioneering works of McKinnon （1973） and Shaw（1973）. According to Ledgerwood （1999）， microfinance has evolved as an economic development approach intended to benefit low-income men and women. Provision of Microfinance services has spread across Africa in the last few decades as a way to harness and provide small financial services necessary for growth. Some of these institutions which provided these credits were supported through subsidized credits by international donor agencies and governments to enable them increase the depth of their outreach. Ghana was no exception to this phenomenon as noted by Steel and Andah （2003） and Aryeetey and Gockel （1991）. However a central issue which has assumed important heights in the academic and policy circles is the sustainability and subsidy dependence of these microfinance institutions. The sustainability of microfinance institutions is central to the development of financial intermediation at the micro level.
Previous empirical studies have made important contributions， but they have been insufficient in establishing the extent of subsidy dependence of MFIs and the factors influencing it. Such a study is important both from operational as well as academic point of view. Again， in Ghana studies on microfinance have not empirically tested sustainability and operational self-sufficiency （OSS） of such institutions. Specifically， this study investigates the following research question：
1. WHAT IS THE EXTENT OF SUBSIDY DEPENDENCE ON SUSTAINABILITY OF MICROFINANCE INSTITUTIONS IN SUB-SAHARAN AFRICA WITH SPECIFIC REFERENCE TO GHANA？ Hypotheses posed are：
H1： Subsidy dependence of MFIs in Ghana is high.
H2： There are significant differences in the OSS of MFIs in Ghana.
H3： There are significant differences between OSS and its predictors.
An answer to this question requires investigation into the extent to which subsidies are perceived to impact on sustainability of microfinance institutions in Ghana and the development of sub-research questions. This research problem is investigated by gathering data from 116 relationship managers of microfinance institutions in Ghana regarding their activities and then matched with interview data collected from 14 Executive Directors and Managers on similar issues.
The paper is structured into six sections. It begins with the introduction by tracing the evolution of subsidies and this is followed by literature review which explores the theoretical underpinnings to the research. This is followed by the methods or approaches used in arriving at the results and the conclusions and policy implications to the research.
2. LITERATURE REVIEW
According to Zeller and Meyer （2002）， it is commonly believed that further institutional innovation and microfinance expansion will continue to rely on public intervention and financial support. In fact most of MFIs that reach large numbers of female and male clients below the poverty line require state or donor transfers to subsidize their costs. They further stressed that the most successful MFIs that have achieved financial sustainability have required investments by the state or donors in the past. Such public investments are justified from a public policy perspective only if the discounted social benefits of public investment in microfinance are expected to outweigh the social costs （Zeller and Meyer， 2002）. These costs include the opportunity costs of forgoing the benefits of other public investments， such as primary education， when scarce government or donor funds are used for microfinance （Zeller et al.， 1997）. The subsidy dependence index has become a widely accepted operational measure to quantify the amount of social costs involved in supporting the operations of a financial institution.
2.1 Subsidy Dependence Index （SDI）
Following Yaron （1994） and Khandker et al （1995） the subsidy dependence index is computed as follows：
3. METHODOLOGY The research was based on both the qualitative and quantitative approaches. A two stage approach was used. First， an exploratory qualitative interview was conducted by interviewing 14 executives of sampled microfinance institutions with focus on how dependent they are on subsidies （SDI） or operationally self-sufficient （OSS）. This was followed by a self-administered survey involving 130 microfinance institutions. The sample selected covered all the types of microfinance institutions namely； Financial Non-Governmental Organizations （FNGOs）， Savings and Loans Companies （S&L）， Credit Unions （CUs）， Rural Banks （RB） and SUSU companies.
The decision to conduct the exploratory interviews was based on the following reasons：
Subsidy dependence or operational self-sufficiency of microfinance institutions though widely studied in the developed countries， Asia and Latin American countries； the same cannot be said of sub-Saharan Africa in general and Ghana in particular. Therefore there are less comprehensive theories on microfinance institutions in Ghana.
Data for this study is collected from two sources； the financial reports （secondary） and structured questionnaires and interviews （primary） to elicit institutional characteristics and modes of handling the performance variables. Operating manuals where they were available and useful were used to examine the mode of day to day operations of the selected microfinance institutions. The survey data was complemented with information gathered through the qualitative phase. As such， the basis for the primary data used for the entire study was obtained from an exploratory stage and a qualitative survey stage. The sampling frame included managing directors/ financial managers from microfinance institutions in seven out of the ten regions of Ghana； Greater Accra， Eastern， Central， Western， Ashanti， Northern and Volta regions.
As one of the objectives of this research was to determine the extent of dependence on subsidies of MFIs， it was determined that the most appropriate sampling method to utilize was a ‘two phased’ stratified random sampling technique （Churchill， 2000）. The stratum development began by assessing the regional distribution. From there the microfinance institutions located in the regions were determined. The next stage involved the aggregation of coverage by examining the regions with the high number of MFIs. The selection of Greater Accra， Central， Western， Eastern， Ashanti， Northern and Volta regions gave 130 MFIs， representing 74.4%. The importance of achieving a high coverage is to ensure that the intensity of activities is captured to allow for the creation of a proportionate representation of the population within the research （Henry 1990； FrankfortNachimias & Nachimias， 1996）. Limiting the coverage to all except Upper East， Upper West and Brong Ahafo was equally influenced by time and limited financial resources available for this research.
Subsidy Dependence Indices （SDI） and Operational Self-Sufficiency （OSS） were computed and analyzed for each type of MFI over the period under study to ascertain their subsidy dependence and trends in operational selfsufficiency. In analyzing the data for the study operational self-sufficiency was measured at the nominal level （yes=1， and no=0） which led to the use of the logistic regression and the chi-square test.
The main statistical tools used were the chi-square test of independence and correlations for the hypotheses since the levels of measurement of the variables were mainly nominal and or ordinal. For the secondary data， trend analysis was carried out and the regression model was used to establish a relationship between operational selfsufficiency （OSS） of the predictors namely administrative expenses （AE）， dropout rate （DOR）， cost per borrower（CPB）， real portfolio yield （RPY）， loan officer productivity（LOP）， average loan （AL）， portfolio at risk （PAR） and active borrowers （AB）. In addition， One-Way ANOVA was used to ascertain if there were differences in the operational self sufficiency and subsidy dependence index of the MFI’s. The hypotheses tested were carried out at 95% significance levels （0.05）. When one chief executive（CUA） was interviewed on whether they depended on subsidies for their operations， this was his response “when we started we needed support and therefore we had the government and overseas partners supporting us. Now we are self-sufficient， almost 100% okay”.
Another FNGO Chief Executive had this to say “We are supported by international donors. You see we are directly under the church and we are enjoined to empower our members through microfinance so they can rise to their God given potentials. So yes， we will continue to receive support”.
4. EMPIRICAL RESULTS
The 14 MFIs used in the exploratory study were examined according to sectors to find their specific approaches to issues of subsidy dependence and operational selfsufficiency （see Table 1）.
4.1 Institutional Management of Borrowers， Staff， Cost and Subsidy Dependence.
The 14 MFIs used in the exploratory study were examined according to sectors （see Table 1） to find their specific approaches to dealing with the variables that affect OSS and SDI as shown in Table 1.
4.2 Subsidy Dependence Index and Operational Self Sufficiency of the MFI’s
The data for the study revealed that generally the average SDI of the MFI’s increased sharply from 0.1745 in the year 2003 to about 0.3751 in 2004. It decreased steadily thereafter to 0.2687 in 2005 and then to 0.1683 in the year 2007 （see Figure 1）.
The average annual rate of decrease was just about 0.019. This indicates that the net subsidy of the MFI’s has been decreasing at a rate of about 1.9%. This situation is worrying and does not augur well for the long term sustainability of the micro finance industry in Ghana as the MFIs would depend on subsidies for a long time to come. Only about 12.7% of the changes in the SDI could be attributed （explained） to the change in the economy. Indications are that much of the changes in the SDI could not be attributed or explained by the changes in the economic years （see Figure 2）.
The results in Fig.2 revealed that the SDI of the FNGO’s increased drastically from 0.1794 in 2003 to an all time high of 0.4651 for the period under review. The SDI of the FNGO’s， however， decreased sharply thereafter to 0.2678 in 2005， decreasing further but steadily to 0.1794 by the year 2007. The average annual increase in the SDI of the FNGO’s was only 0.026 （2.6%）. This was followed by the RB， which recorded marginal increase in SDI from 0.1978 in 2003， to 0.2159 in 2007， giving an average annual increase of 0.004 （0.40%） . The SDI for the S&L decreased from 0.1432 in 2003 to 0.1028 in 2007. The average annual rate of decrease was 0.004（0.04%）. Further analysis of the mean SDI by type of MFI revealed significant differences in the SDI of the FNGO’s， S&L and RB. The mean SDI’s of 0.2577， 0.1366， and 0.1885 were recorded by the FNGO’s， S&L and the RB respectively （Table 1）.
The One-Way ANOVA results （Table 7） for the test of mean differences revealed that there were significant differences in the mean OSS of the MFI’s （F=35.29， df=2， 352 and p
CONCLUSION AND IMPLICATIONS The Subsidy Dependence Index showed a decreasing trend， though at a slow rate. This is an indication that most of the MFIs will continue to rely on subsidies for a long time to come. The Multiple factor analysis established that the regression model was significant in establishing a relationship between the dependent variable， Operational Self Sufficiency （OSS） and the predictors. Using single factor analysis， the regression model was used to establish a formal relationship between each independent variable and the dependent variable. The following were the major findings of the study.
i. Subsidy dependence among the MFI’s in Ghana was high especially the FNGOs who do have any immediate plans of exiting and the significant operational selfsufficiency （OSS） variable were drop-out rate and average loans， confirming hypothesis （1）， confirming Zeller and Meyer （2002） that many MFIs that were perceived successful required state or donor transfers to subsidize their costs （pp5）.
ii. Results from the model of determinants of operational self-sufficiency show that a reduction in dropout rates helps MFIs to increase the worth of outreach and obtain additional revenue from lending， confirming hypothesis （3） that there are significant differences between OSS and its predictors （Table 7）. This further helps MFIs to cover their operational costs and thereby increase operational sustainability but this is not the same for all the MFIs examined， confirming hypothesis （2） that there are significant differences in the OSS of MFIs in Ghana and also significant differences between OSS and its predictors.
The study was based on cross sectional data； therefore causal links among variables could not be established clearly. The model developed therefore suffers from this limitation. The study confirms the view that operational self-sufficiency and subsidy dependence of MFIs is a complex phenomenon， hence more research that combines multiple factors to arrive at a better understanding of what leads to operational self-sufficiency is advocated. The replications of this research by covering all the ten regions of Ghana showing their peculiarities in the delivery of microfinance is advocated.
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