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The Impact of Profitability of Micro Finance (Micro Credit) on the Banking Sector of Pakistan

Kumar, Kunal (2015): The Impact of Profitability of Micro Finance (Micro Credit) on the Banking Sector of Pakistan.

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Current studies have shown that the microfinance industry is developing while enduring a change from the donor-driven NGO background towards a greater degree of capital market involvement. This change is due to many details, e.g. that offerings are getting harder to find, and businesses have started to see possibilities for profit in this industry. The main intention of this research is to find the aspects that regulate profitability, and to find out whether the high interest rates go hand in hand with high returns for the microfinance institutions as demanded by some detractors. To accomplish the goals, previous literature, studies, and theory from the commercial banking industry have been framed into a background study. Classifying certain indicator groups with economic implication: outreach financing structure, expenses, revenue, efficiency, quality of portfolio, and the peer group comparisons of deposit taking, age, legal status, and profit status to be factors of profitability and thereby to be examined further in an empirical analysis. The data used in the empirical analysis is originated though MIX market, and a sample of 8 MFI’s was managed and examined to test profitability model with return on assets as the dependable variable. I found that large adjustments in the microfinance industry became a problem when trying to evaluate models to explain patterns, since the Linear, regression is much influenced by outliers. Still, certain statistical trends were found which also bring into line with theory or previous studies. Factors that statistically influenced profitability are the operating expense over loan portfolio, and number of active borrowers which had a positive influence. On the other side there is capital asset ratio, with a negative influence over Return on Asset. The unpredicted signs of the variables could be explained by other influencing variables or other relationships than linear. It is, therefore, clear that there is still much diversity in this industry, and no clear set of best practices for becoming profitable has been defined. However, as the industry is young and still changing, this is not a surprising result.

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