Microfinance Institutions in Mediterranean Countries

Microfinance Institutions in Mediterranean CountriesThis written report examines empirically the relative betwixt nerve instruments and the transaction of Euro-Mediterranean microfinance inceptions (MFIs) in legal injury of outreach and sustainability. Specifically, we found that mental process- found requital of coach-and-fours is not associated with break in mathematical operation of MFIs. The results identify tradeoffs between MFIs outreach and sustainability depending on bigger plug-ins size, and on higher proportion of unaffiliated directors. More over, the breeding shows that the much women thither argon on a senesce the punter the performance, and reveals that external giving medication appliances help MFIs to execute melio tell fiscal performance. This study besides al secondarys us to distinguish early(a) factors confidential education to a better sustainability such as regularization, the use of indivi two-fold contribute methodology. However, th e MFIs active as NGOs seem to be more consistent with their sociable mission than with their pecuniary performance.1. IntroductionMicrofinance is the training of m unrivaledtary and non pecuniary services to the in comme il faut who argon excluded from financial/ acknowledgement marketplaces because they argon considered un situateable. Indeed, microfinance instaurations has evolved primarily as a consequence of the efforts individuals and assistance agencies perpetrate to the idea of ensuring that the poor people has advance to some form of credit. The legal age of MFIs claims having a dual mission of reaching poor borrowers (outreach), and being financially sustainable (sustainability). piece the social goals of reaching the poorest and exiguity alleviation are valid, financial sustainability has emerged as one of the core management and establishment issues. The shrink resources base for donor funds to support the increasing demand for grants and padded loans imp lies that MFIs de factor chargetually do to support themselves (Ledgerwood, 2000). However, their sustainability provide snap on institution structures within the industry. Indeed, as M Labie (2000) observes, in the last cristal corporate governance principles get under ones skin imposed themselves as the basic rules for each vigorous Run Company to follow. The trend has however transcended from traditional argumentation companies but is now part of the globalization process often seen as a in like mannerl for standardizing the controlling vision for any major judicature in the initiation. The drive towards organization has been propelled by a number of factors finically the collapses of some of the major players in the Industry, the influx of private Equity and determine in donor funding. brass is about achieving corporate goals. The fundamental soula of MFIs is to contribute to a country emergence. This involves reaching out to more clients curiously the poor (Helms, 2006 seatson et al., 2006). Not least but now growing in importance especially among donors is the requirement that MFIs achieve financial sustainability.Microfinance practitioners assert that bully governance is the key to a successful MFI (Campion, 1998 Rock, Otero Saltzman, 1998 Labie, 2001 CGAP, 2006 Helms, 2006 UN, 2006). In spite of these observations, just few studies have foc employ on governance and the examination of the linkage of conglomerate governance mechanisms and performance (McGuire, 1999). It seems relevant to examine closely the federal theatrical of various governance mechanisms since MFIs managers control significant resources. Except the study of Hartarska (2005), and those of Mersland, Roy and Strm, Reidar ystein (2007), and deplumate et al., (2007), no more study attempt to shed light on the link between governance and performance especially in the Euro-Mediterranean countries although it is a very active zone with a microfinance industry kind of several(a) (NGO, NBFI, argot) where actors should simultaneously pursue the most perfumeive way of realizing their social accusing while achieving superior levels of bring inability.While exploiting recently conducted survey by the authors in order to study the efficiency of MFIs in Mediterranean countries, the annual financial reports of the microfinance institutions and other relevant reading collected from Microfinance Information Ex miscellanea (MIX), this paper aim to investigate the link between governance and Euro-Mediterranean MFIs performance in scathe of outreach and sustainability since governance guides an institution in fulfilling its corporate mission and protects the institutions assets over time. As Rock, R, Otero, M Saltzman, S (1998) notes it is a key in directive management in strategical issues and in carrying out the agreed upon strategic plans. The empirical model explores the joint and individual effect of management compensation, visiting c ard renewing, and external governance mechanisms on both MFI sustainability, and the depth and breath of outreach while controlling for individual characteristics and, as intimately as country limited factors. The results show that performance-based compensation does not remedy performance. MFIs with larger control boards seem to do better. More free boards are more impressive however. climb on change (Higher proportion of women) seems to ameliorate outreach. outside governance mechanisms especially analyseing and regulation improve the financial sustainability.The remainder of this paper is organized as follows. discussion section 2 deals with the research context. Section 3 briefly reviews the few tied studies. Section 4 presents the conceptual framework as well as on the job(p) assumption. Section 5 looks at info description and methodology. Section 6 discusses the empirical findings, and Section 7 draws conclusions emanating from the findings.2. Microfinance in MediterraneanExperience end-to-end the world has proven that microfinance help the poor to increase income, built their business, and fix their future by reducing their vulnerability to external shocks. Furthermore, microfinance is often a powerful tool for empowering the poor especially women, to bespeak charge of their frugal well-being and those of their families.The Euro-Mediterranean region consists of 21 countries. The microfinance industry in this zone is youth with high growth potential. Currently, it is estimated that in that respect are over sixty microfinance institutions (MFIs NGOs), and a potential of numerous other producing credit to poor microentrepreneurs (Ben Soltane, 2008). The majority of these programs are south of the Mediterranean (Egypt, Jordan, Lebanon, Morocco, Palestine, Tunisia, and Syria). Programs in like manner exist in Spain, France, Italy, Kosovo, Albania, Bosnia, and Croatia (Figure 1).MoroccoAMSSF, FMBC, KARAMA, AL AMANA, ZAKOURA turkeyMAY ABosniaBossel, EKI,MI-Bospo, MIKRA, Women For WomenPalestineFATEN, UNRWAItalyFRD, 10 TalentiFond S.M.SoccorsoFond S.G.MoscatiTunisiaENDA, BTSSpainCODESPA, WWB SpainEgyptESED, Lead foundation, DBACD, Al TadamunFranceCSDLAlbaniaPSHM, USCACroatiaDEMOSLebanonAl Majmoua, Ameen, CHF-AMJordanMFW, AMC, JMCC,DEFKosovoP4, Meshtekna,Grameen TrustFigure11 MFIs delivering microcredit in the Mediterranean.Euro-Mediterranean MFIs aim to add financial services to low income households, even the extremely poor in a participatory and non-paternalistic instruction approach to the great evoke of the donor community, policy makers, learning research worker and practitioners. According to the so-called win-win proposition MFIs should combine the socials goals, such as poverty alleviation and reaching poor households (outreach) with operational and financial self-sufficiency (sustainability) based on admission price to international financial markets independently from international development agen cies. Therefore, MFIs should simultaneously pursue the most effective way of realizing their social intention while achieving superior levels of profitability.The regions top MFIs are openly committed to topper practice microfinance. In call of depth of outreach, the sector has generally go towards serving more and more of the poor clients. According to the FEMIP and Sanabel study, the Mediterranean represents a potential market for the microfinance with nearly 40 million customers, whereas topically single 9 million people profit from the financial assistance of the companies operate in this sector. The number of borrowers increase of more than 43 % per annum between 2004 and 2006, against 20% on a worldwide scale, an indication that the sector as a whole is reaching more of the marginalized in the society. The regions top MFIs have proven also to have excellent leadinghip abilities, impressive outreach and growth, as well as a commitment to top hat practice microfinance. Fu rthermore, it is estimated that around 85% of the regions active clients are served by sustainable MFIs.3. Literature reviewGovernance in microfinance has been recognized to be an valuable issue. However, the biggest problem to microfinance practitioners has been balancing the dual mission of outreach and sustainability. The changing of microfinance environment has shown a move towards sustainability ultimately leading to governance issues as donors funds shrink and equity inflows increase in the microfinance sector. Microfinance institutions have in that respectfore embraced boards and adopted principles of corporate governance to en trusted their survival. canvass the link between good governance and the performance of MFIs in terms of outreach and sustainability is decisive since governance guides an institution in fulfilling its corporate mission and protects the institution assets over the time. However, there is a limited faculty member studies traffic with this subject, partial(p)ly due to the need of info.While using threesome surveys of rated and unrated east European MFIs from three random models in the period 1998 to 2002, Hartarska (2005), investigates the relation between governance mechanisms and financial performance. financial performance and outreach constitute dependant varying dimensions and governance mechanisms include board characteristics, managerial compensation, and external governance mechanisms such as valuation, financial contestations audited, and command. The author finds that performance-based compensation of managers is not associated with better performing MFIs demoralize wages suggested for mission-driven organization worsenedn outreach. She identify also that a more independent board has better ROA, but a board with employee directors gives glare financial performance and lower outreach. Finally, the author concludes that external governance mechanism seems to have a limited role in the study region.In a rece nt study, Mersland, Roy and Strm, Reidar ystein (2007), use a self constructed global data set on MFIs spanning 57 countries collected from third-partly rating agencies. The authors study the effect of board characteristics, ownership type, competition and regulation on the MFIs outreach to poor clients and its financial performance. They found that split roles of chief executive officer Chairman, a female CEO, and competition are authorised explanation. Moreover, the authors found that larger board size decrease the medium loan size, while individual guaranteed loan increase it. Finally, they conclude that there is no difference between nonprofits organizations and shareholder hards in financial performance and outreach.A third study conducted by Cull et al., (2007) looking at MFIs financial performance and outreach as well, with a focus on lend methodology2, controlling for capital and labour cost as well as institutional features. While using data from 124 rated MFIs, the au thors found that MFIs that focus on providing loans to individuals perform better in terms of profitability. Yet, the fraction of poor borrowers and female borrowers in the loan portfolio of these MFIs is lower than for MFIs that focus on lending to groups. The study suggests also that individual-based MFIs, especially if they grow larger, focus increasingly on wealthier clients, a phenomenon termed as mission drift. This mission drift does not come on as strongly for the group-based MFIs. However, no governance variables, such as board characteristics or ownership type are taken into consideration.The limited academic investigation into the link between governance mechanisms and performance of MFIs in terms of outreach and sustainability, and the fact that other governance mechanisms such as the proportion of women in the board remain unexplored justify the importance of a quasi(prenominal) study in the Euro-Mediterranean zone, characterized by a very active and quite diverse mic rofinance industry, that complete formers studies.4. Conceptual framework and working hypothesisWhile focusing on the microfinance field, the governance can be defined as the process of guiding an institution to achieve its impersonals while protecting its assets. It call down to the mechanisms though which donors, equity, investors, and other translaters of funds ensure themselves that their funds will be used according to the intended shoot fors (Hatarska, 2005). The presence of these control mechanisms is crucial either to align the busys of managers and providers of funds since they may have distracting preferences and aimives, or to supervise device the performance of managers to insure that they use their delegated power to generate the highest possible outcomes for the providers of funds. This belief comes from the agency perspective. It found its origins in the work of M. C. Jensen and W. H. Meckling, 1976 who assimilate the slopped to a node of considers. The explanatory model of the structures of financing and shareholding is founded on the assumption of unbalance of information and conflicts of interests between managers and providers of funds. According to M. C. Jenson and W. H. Meckling, agency relationship is a contract under which one or more persons (principal) engage another person (agent) to perform some service on their behalf, which involves delegating some decision-making bureau to the agent3. In this case the relation of agency will relate the principal (owner) and his agent (manager), this last being engaged to serve the interest of the first. From these relations emanates the concept of agency be, be which result from the potentially opportunistic character of the actors (moral hazard) and information asymmetry between the contracting ones (adverse selection). These agency costs represent the loss in value compared to an ideal situation where there is no information asymmetry and conflict of interests. According to th e theorist of agency an organisation is considered efficient if it minimise the agency costs. This purpose can be intended though an effective governance mechanism.According to Keasey et al., 1997, the most grievous features of an effective governance framework are ownership structure (including institutional and managerial ownership), CEO (manager) and director (board member) remuneration, board structure (size and composition), auditing, information disclosure, and the market for corporate control. Usually, research literature cogitate to this field use partial measures. In other words, governance studies treat separately the impact of each variable such as compensation, board size, independence and diversity, and external market forces on firm performance. However, since latest studies (Hermalin Weisbach, 2003) identify the complementarities, and the correlation between these mechanisms, this study will investigate the impact of the majority of these mechanisms excluding owner ship due to lack of data on ownership structure.The most important attribute that distinguishes microfinance institutions from other is what has come to be called its dual mission of balancing a social agenda or social impact with its financial objectives. The MFI combine a social development mission (provision of financial services to the lowest income population possible), with a financial objectives that drives the institution to achieve self-sufficiency and thereby master sustained service delivery without dependence on subsidies. These dual objectives (social outreach, and financial sustainability) make difficult the study of governance of MFIs, especially with their different types Non profit, Non-Governmental Organizations (NGOs), For-profit Microfinance Institutions, assent Unions. This challenge is surmounted by formulating and testing hypothesis based on insights from the literature on corporate governance, formers studies, governance in banks and in non profit organiza tions, and by estimating the impact of the governance mechanisms on both sustainability and outreach.4.1. Internal Governance mechanismThe incentives of top management have been characterized as an important mechanism of corporate governance as it ensures the alignment of the management and the shareholders interest (John et al., 2004). In other words, it serves as a mechanism for resolving the conflict of interest among the managers and shareholders. Brick, Palmon and Wald (2006) highlighted that director compensation should also affect performance of a firm. With regards to banking institutions, higher-powered incentives may encourage managers to take higher risks at the expense of depositors, who would suffer if the institution fails thus low pay-performance sensitivity is suggested (John John, 1993). In fact, it is proved by Adams Mehran, 2003 Houston James, 1995 John Qian, 2003, that pay-performance sensitivity in banking in lower than other industries.Since in non-profit f irm there is a growing problem of informational asymmetry between clients and managers (i.e., managers receive many crucial information about the product), it seems that the fixed management salaries is the best choice for mission-driven organizations (Easley OHara, 1998). With the fixes salaries, the managers, indifferent between telling the truth or lying, will find it in his benefit to tell the truth. Therefore, if the client and donors find the information provided by non-profit managers more credible, the firm will be better-funded and better-performed. speculation 1. MFIs whose manager receives a fixed salary will not perform worse than MFIs whose managers receive performance based remuneration.Most guidelines recognize that the board of directors is the focal point corporate governance. The composition and structure of the board have a direct bearing on corporate governance. Board of directors is designate for the purpose of ensuring the alignment of the firm activities and its specified objectives. The board has the duty for making sure that the top managers are behaving in a way that will provide the optimal value for shareholders (Coles et al., 2001).There is a view that larger boards are better for corporate performance because they have a range of expertness to help make better decisions, and are harder for a powerful CEO to dominate. However, recent thinking has leaned towards littler boards. Jensen (1993) and Lipton Lorsch (1992) argue that large boards are little effective and are easier for a CEO to control. When a board gets too big, it becomes difficult to co-ordinate and process problems. Smaller boards also reduce the surmisal of free riding by individual directors, and increase their decision taking processes. Empirical research supports this. For example, Yermack (1996) documents that for large U.S. industrial corporations, the market values firms with smaller boards more highly. Eisenberg et al. (1998) also find negative correlatio n between board size and profitability when using sample of small and midsize Finnish firms. In Ghana, it has been identified that small board sizes enhances the performance of MFIs (Kyereboah-Coleman and Biekpe, 2005). Mak and Yuanto (2003) echo the above findings in firms listed in Singapore and Malaysia when they found that firm valuation is highest when board has tail fin directors, a number considered relatively small in those markets. In a Nigerian study, Sanda et al (2003) found that, firm performance is positively related with small, as opposed to large boards.Hypothesis 2. Board size should have an inverse correlation with MFIs performanceA third common monitoring mechanism advocated by the agency perspective is a board dispassionate of a majority of independent directors. These non-executive or away(p) directors are believed to provide superior benefits to the firm as a result of their independence from firm management. Under this organizational design, conflicts of inte rest can be turn awayed and executive leaders can be evaluated more objectively.The literature suggested that increases in the proportion of outside directors on the board should increase firm performance as they are more effective monitors of managers (Adams and Mehran, 2003). The proportions of the outside directors can be metrical in terms of the ratio of outside directors to board size. The positive aspect of having board independence was evidenced in a study by Byrd et al (2001) that highlighted the survival of firms in the thrift crisis due greater proportion of independent directors in the board. Kyereboah-Coleman and Biekpe (2005) found also a positive relationship between proportion of outside board members and performance of MFIs in Ghana.Hypothesis 3. MFIs performance will be affected positively by the proportion of non-affiliated outsiders on the board.Corporate governance literature argues that board diversity in terms of women and minority representation is potential ly positively related to firm performance. Board diversity promotes a better understanding for the market place, increases creativity and innovation, produces mores effective problem solving, enhances the effectiveness of corporate leadership, and promotes effective global relationships (Robinson and Dechant, 1997). Fondas and Sassalos, 2000 argue that diversity in board composition via greater female representation will lead to improved board governance and top management control. In microfinance, the study of Coleman, 2006 show that having women in CEOs on MFI boards enhance performance and also the more the women there are on a board, the better the performance. Furthermore, having a high fraction of women in the board would help the MFI understand its customers better so as to separate the good risk from the bad (Mersland R. et Oystein Strom R. 2007).Hypothesis 4. Board diversification and the presence of women and minority will lead to a better performance of MFI.Another princi ple of effective bank supervision is effective internecine audit. Internal audit helps to identify problem areas and to avoid major collapse. The cozy board auditor provides independent, objective assessments on the justness of the organizations internal governance structure and the operating effectiveness of specific governance activities. Reporting of all internal audit reports in an accurate and apropos manner is essential for paygrade of the institutions status and need for any change in strategy. Policy papers for MFIs stress the importance of internal audit and recommend that the internal auditor reports directly to the MFI board (Steinwand, 2000).Hypothesis 5. MFI allowing their internal auditors to report directly to the board should show higher financial performance.4.2. External Governance MechanismsThe external governance mechanism can be utilise as a result of the failure or the weakness of internal governance mechanisms. In the microfinance industry donors and cre ditors are increasingly relying on information from audited financial statement and rating agencies (Hartarska, 2005). These external governance mechanisms are an important mechanism that provides depositors, creditors and shareholders with credible assurances that they will refrain from fraudulent activities. In other words it reduces informational asymmetries between the different stakeholders and the firm (Healy Palepu, 2001).Audited financial statements are an important tool for the assessment of MFIs by regulators and capital markets. They form an important part of the effective corporate governance. The auditors role is to provide a disinterested an objective view of the financial statements of the MFI in the line with generally accepted write up standards. It is a mean to ensure potential investors and donors that an MFI complies with the accounting practices and managers do not misrepresent financial information.Hypothesis 6. MFIs with financial statement audited achieve b etter performance than MFIs without financial statement audited.According to Hartarska (2005), in the absence of developed equity and debt market, donors and investors rely on independent evaluation of MFIs performance. A MFIs rating reflects a rating agencys opinion of entitys overall creditworthiness and its capacity to satisfy its financial obligations. The raters evaluate objectively and independently the corporate governance in MFI and pose it on a relative rating scale that would facilitate comparison. irrelevant typical rating agencies that rate the riskiness of issued debt, microfinance rating agencies rate the overall performance of the MFI in terms of outreach and sustainability.Hypothesis 7. Rating helps MFIs to achieve better resultsMany MFIs around the world operating as NGOs have increased their assets, reorganized, and transformed into correct entities that can capture savings deposits. A regulated MFI has more chance to earn customer trust, and by the way to hav e a higher financial performance. Hence, regulation is crucial for microfinance sector development since it affect MFI performance by changing the internal rule of the organization. It implies the access to an important and low-cost funding source through the right to pass around savings. collectable to this effect, the MFI win the opportunity to increase the number of clients, but also to increase norm loan amounts for existing borrowers. Moreover, if demands to fulfill regulatory requirements divert attention away from serving the poor, and hold back innovation in lending technology that has been the driving force behind MFIsability to serve even poorer borrowers, regulatory involvement will lead to mission-drift (Hartarska, 2007). Therefore, the effects upon depth and pretentiousness in outreach may be uncertain as well, either upon depth or breadth, or a combination of the two (Mersland R. Oystein Strom R. 2007).Hypothesis 8. Regulation may guide the MFIs to fulfill better sustainability, but not to achieve better outreach.5. Data and methodological issuesData for this study are issued from various sources. The major part comes from a survey conducted by the author in 2006 in order to test the efficiency of microfinance institution in Mediterranean (Ben Soltane, 2008). The performance variables and some governance variables are also obtained from the annual financial reports of the microfinance institutions collected from Microfinance Information Exchange (MIX) a non governmental organization whose object is to promote the exchange of information on the microfinance sector around the world4. All these information are updated and completed by a questionnaire dealing fundamentally with detailed question on governance addressed to the MFIs in the region. The response rate was 58% with 40 institutions.A special questionnaire was also addressed to the Mediterranean microfinance institutions that dont figure in the MIX MARKET data base. The response rate fo r these MFIs was weak and near 20%, with four institutions. Due to missed data, only two institutions are taken into account. The final sample comprises 42 institutions working in 20 countries. Our sample is quite proxy of the Mediterranean microfinance industry as well as of the governance mechanisms and the performance of MFIs in the region.Following Hartarska (2005) works, our empirical model used to test the hypothesis include five major potential groups of determinants and is on the formWhere is a performance variable for MFI i in country j at time t are MFI specific variables are management specific variables are board-specific variables, are external governance mechanisms and are the country-specific macroeconomic variables. It is crucial to mention at this level that our choice of a single-equation model is back up by the hypothesis that various governance mechanisms are endogenously determined is not always supported by empirical evidence5.Since MFIs are special instituti ons having a dual mission, their performance is metric in terms of outreach and sustainability. Outreach is thrifty in breath and depth. Breach of outreach (NAB) is the logarithm of active borrowers, depth of outreach (DEPTH6), is the average loan size on GDP per capita. Sustainability is careful by return on assets (ROA) which is a standard finance literature measure of performance, and by operational self-sufficiency (OSS). This variable measures how well the MFI can cover its costs through operating revenues.Table 1. Definitions of dependent variables used in analyses uncertain ExplanationSocial Performance OutreachNAB Logarithm of the number of current borrowersDEPTH The average loan size on GDP per capitaFinancial Performance SustainabilityROA Return On AssetsOSS Operational Self-SufficiencyMFI specific variables () are MFI size measured by the logarithm of total assets, MFI age measured in years sine commencement, and MFI type measured by three dummies (NGO, Nonbank Financ ial Institution, and bank). Since further studies (Navagas, Conning, Gonzalez-vega, 2003) show that the type of lending methodology used influences the success of these organization, our study include a variable Individual which is a button up that takes the value of one if the MFI used individual lending technology.Variables constitutive(a) are Fixed-wage, which is a dummy for pay not based on performance, Experience is used to proxy for a mangers quality and is measured by the years of work experience. The board-specific variables contains Board-size, measured by the number of board members Employees measured as the proportion of MFI employees who are voting board members Independent measured as the proportion of non-affiliated board members Women measured as the proportion of women in the board Internal Board Auditor is a dummy variable that takes the value of one if there was an internal auditor with direct access to the board.The variables included in are Regulation, which i s a dummy that takes the value of one if the MFI was supervised by the central bank or other bank supervisory agency Rated is a variable that indicates whether the MFI was subject to independent evaluation or rating by an outside organization Audited is a dummy that take also the value of one if there was an audited financial statement in the year t-1.Since MFI are issued from north and south of the Mediterranean, the dissimilarity in economic conditions across countries are controlled by the size of the economy (Economy size), measured by the logarithm of a countrys GDP, and by the average inflation rate (Inflation), measured by the average consumer price index. These variables are issued from the World Bank Development Indicators. We wanted also to build a variable that take account of the institutional differences between countries but we did not find an adequate measure.Table 2. Definitions of independent variables used in analysesVariableExplanationFixed-wage