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.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Micro finance; micro credit
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors

References

1. Ahmad, B., & Ali, S. B. (2012). Do Individual Investors in Pakistan Prefer Dividends?

2. Ahmad, M., & Ali, S. B. (2008). Technical Analysis in the Stock Markets of Pakistan: A Case of Commercial Banks.

3. Ali, M., & Ali, S. B. (2014). The impact of working capital management on firm profitability and fixed investment in Pakistan.

4. Ali, S. B., & Ali, S. M. (2011). Factors Affecting the Adoption of Islamic Banking in Pakistan.

5. Ali, S. B., Khan, Z. S., Shah, Z. A., Ahmed, H., & Aziz, A. (2021). Quality of Internal Risk Rating Framework at Commercial Banks in Pakistan, Elementary Education Online, 20 (5), 7150-7163.

6. Ali, S. B. (2012). Corporate Governance and Accounting Practices in Pakistan.

7. Ali, S. B., Farooq, K., Shah, Z. A., & Burney, S. (2021). Testing the Evidence on Weak Form EMH at Pakistan Stock Market. Turkish Online Journal of Qualitative Inquiry, 12(8).

8. Ali, S. B., Hussain, B. M., Baig, U., Khan, Z. S., Raza, A., & Murad, H. (2021). The Enigma of Capital Structure Theories: An Empirical Investigation Between Peer Corporations in Pakistan. International Journal of Advanced Research in Engineering and Technology, 113-124.

9. Ali, S. B., & Iqbal, M. F. (2009). Exchange Rate Volatility in Emerging Economies-A Case of Pakistan.

10. Ali, S. B., & Umyani, M. M. (2013). Capital Structure and Financial Performance: Evidence from Pakistan

11. Ali, S. B., & Khalidi, M. A. (2020). Valuation of equity securities, private firms, and startups. IBT Journal of Business Studies (JBS), 16(1).

12. Ali, S. B., Khan, Z. S., Shah, Z. A., & Ahmad, M. (2021). Lean Accounting System: Importance and Successful Implementation. Journal of Contemporary Issues in Business and Government| Vol, 27(3), 2388.

13. Ali Zaidi, S. N., & Ali, S. B. (2006). Risk and Scope of Debit Check Card in Competitive Market of Pakistan.

14. Armendáriz, B. a. (2010). The economics of microfinance. The MIT Press Cambridge, Massachusetts.

15. Arshad, M. A., Ali, S. B., Masood, K., Syed, A., Jabeen, N., & Sabir, R. I. (2021). The Nexus between Culture and IT Capabilities and Innovation Capabilities: Focusing on Manufacturing Firms in Pakistan. Multicultural Education, 7(9).

16. Arshad, M. A., Ali, S. B., Jafri, S. K. A., Arshad, M. H., & Sabir, R. I. (2021). Effect of Organizational Culture and Information Technology Capabilities on Innovation Capabilities: A Case of Manufacturing Firms. Elementary Education Online, 20(5), 6388-6388.

17. Arshad, M. Z., Ali, S. B., Sabir, R. I., Shahidan, A. N., & Arshad, M. A. (2021). The interrelationship between Orientations and SME’s Performance. Turkish Online Journal of Qualitative Inquiry, 12(7).

18. Ayayi, A. G. (2010). What drives microfinance institution's financial sustainability. Journal of Developing Areas.

19. Camara, & Fatoumata. (1990). Historical perspectives in microfinance. The World Savings and Retail Banks Institute.

20. Cull, Bank), R. (., Demirgüc-Kunt, Morduch, A. (., & University), J. (. (2005). Contract design and microfinance performance. A global analysis.

21. Dacheva, & Petra. (2000). A Study of Profitability, Outreach and Success Factors within the Latin American Context. Commercialization in Microfinance.

22. Dieckmann, & Raimar. (2007). Microfinance: An emerging investment opportunity. Deutsche Bank Research, 4.

23. Friedman, M. (1970). The social responsibility of business is to increase its profits. The New York Times Magazine.

24. Gaul, S. (2011). Defining responsible financial performance: The role of profits. MiCRO BANKING BULLETIN (MIX).

25. Gibbons, S., David, W, M., & Jennifer. (2002). Financing microfinance for poverty reduction.

26. Grameen Bank. (2011). Retrieved from http://www.grameen.com/

27. Gutiérrez-Nieto, B. S.-C.-M. (2009). Social Efficiance in micro finance institutions . Journal of Operational Research Society, 60:104- 119.

28. Hussain, Z., & Ali, S. B. (2009). Implementation of Operational Risk Regime: A Case of Commercial Banks in Pakistan.

29. Joanna, L. (2007). MicroFinance Information Bulletin. Microfinance Exchange Information Bulletin, 15.

30. Jorgensen, & Norgaard, A. (2011). The profitability of microfinance institutions and the connection to the yield on the gross portfolio. Copenhagen Business School, Applied Economics and Finance.

31. Ledgerwood, & Joanna. (2001). An Institutional and Financial Perspective. Microfinance Handbook.

32. Mawa, B. (2008). Impact of Microfinance:Toward Achieving Poverty Alleviation. Pakistan journal of Social Sciences, 876-882.

33. Mendelson, & Sam. (1970, September). European Microfinance Platform. (S. Mendelson, Editor) Retrieved from European Microfinance Platform: http://www.e-mfp.eu/blog/historical-perspectives-microfinance

34. MIX. (2011). microfinance information eXchange. Retrieved from http://www.mixmarket.org/

35. Murad, H., Ali, S. B., Baig, U., Raza, A., Ali, S., & Abdullah, A. (2021). Comparative study: conventional and Islamic banking performance in Pakistan. International Journal of Management (IJM), 12(3), 448-459.

36. Muriu, P. W. (2011). MICROFINANCE PROFITABILITY. Birmingham.

37. Publications, M. (2011, 05 08). Retrieved from Sacrificing unrealistic goals: http://www.themix.org/publications/microbanking-bulletin/2011/01/sacrificing-microcredit-unrealistic-goals

38. R, D. (2005). An emerging investment opportunity. uniting social investment and financial returns.

39. Rizvi, A., & Ali, S. B. (2011). Risk Taking Behavior of Investors of Pakistan

40. Saunders, M., Lewis, P., & Thornhill, A. (2009). Research Methods for business students. Pearson.

41. Sengupta, Rajdeep, Aubuchon, & P, C. (2008). The microfinance revolution: An overview. Federal Reserve Bank of St. Louis Review.

42. Srinivasan, N. (1997). The World Savings and Retail banking Institute. India: European Microfinance Platform.

43. Thomess, & Paul. (1990). The world savings and Retail Banks Institute. Europen Microfinance Platform.