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Issues in the Sustainability of Microfinance

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Issues in the Sustainability of Microfinance ISSUES IN THE SUSTAINABILITY OF MICROFINANCE Three Empirical Essays at Micro and Macro Level Dissertation zur Erlangung des wirtschaftswissenschaflichen Doktorgrades der Wirtschaftswissenschaftlichen Fakultät der Universität Göttingen vorgelegt am 24.08.2009 von Ahmad Nawaz aus Lahore, Pakistan i Eidesstattliche Erklärung Hiermit versichere ich an Eides statt, dass ich die eingereichte Dissertation “ISSUES IN SUSTAINABILITY OF MICROFINANCE: Three Empirical Essays at Micro and Macro Level” selbständig verfasst habe. Anderer als der von mir angegebenen Hilfsmittel und Schriften habe ich mich nicht bedient. Alle wörtlich oder sinngemäß den Schriften anderer Autoren entnommenen Stellen habe ich kenntlich gemacht. Göttingen, den 24. August 2009, Ahmad Nawaz ii In loving memory of Riffat Nawaz iii Acknowledgements I consider it a privilege to extend my deepest gratitude to my supervisor, Stephan Klasen, for his invaluable guidance and support throughout my doctoral studies. Without which, this dissertation would not have seen the daylight. I am greatly indebted to Bernhard Brümmer for his guidance and time when it mattered the most. I am also grateful to Carola Grün for her insightful comments which contributed significantly to the qualitative improvement in the final draft of the Thesis. I am also thankful to Prof. Jacob Yaron; Marek Hudon and Marc Labie of CERMi, Brussels and Roy Mersland of Agder University, Norway for their comments and suggestion during conferences. I feel very privileged to have such wonderful and caring colleagues around during my stay that to single out any one or few of them would not do justice at all. I thank all of them for their advice, practical help and friendship. I am thankful for the Higher Education Commission of Pakistan (HEC) and German Academic Exchange Program (DAAD) for funding my Doctoral studies and to my employment institute (PIDE) in Pakistan for keeping me intact on their pay‐ roll for the time of my Doctoral studies. I am also thankful to our chair for Development Economics, Göttingen Graduate School of Social Sciences (GGG) and KMU‐network for providing me funds to attend different conferences, workshop and summer school during my doctoral studies. Back home, I am greatly indebted to my father, Nawaz Khan for his love, affection, prayers, and blessings. He has always been a source of inspiration to me for his hard work and perseverance which really kept me going throughout particularly in testing times. I am also thankful to my siblings Ali and Ammara for iv their love, prayers and affection. Finally my wife, Alina owes a lot to the successful completion of my doctoral studies and deserves special appreciation. She managed the home affairs to perfection and took excellent care of our two kids Ayaan and Rania, thus allowing me the maximum time to concentrate on my doctoral studies. Having such remarkable teachers, colleagues, friends and family, I surely had a time of my life in Germany. v Contents List of Tables ix List of Figures x 1 Introduction and Overview 1 2 Subsidization of Microfinance 9 2.1 Introduction . 9 2.2 Data and Theoretical Framework . 12 2.2.1 Description of the Data . 12 2.2.2 The SDI Formula. 17 2.2.3 What Constitutes Subsidies? . 18 2.2.3.1 Equity Grants. 19 2.2.3.2 Profit Grants. 19 2.2.3.3 True Profit. 21 2.2.4 Choice of Economic Opportunity cost of MFIs Concessional funds (m) . 21 2.3 Microfinance Horizon. 24 2.3.1 Subsidy Dependence Index. 24 2.3.2 Composition of SDI. 29 2.4 With and Without Subsidy Comparisons . 30 2.4.1 Return on Equity (ROE) Vs Subsidy‐Adjusted Return on Equity (SAROE) . 30 2.4.2 Return on Asset (ROA) Vs Subsidy‐Adjusted Return on Asset (SAROA) . 32 2.4.3 Actual Yield Vs Subsidy‐Free Yield. 33 2.5 Conclusion. 34 3 Efficiency and Productivity of Microfinance: Incorporating the Role of Subsidies 37 3.1 Introduction. 37 3.2 Microfinance Horizon. 40 3.2.1 Subsidy Dependence Index (SDI) . 40 3.2.2 Description of the Data. 42 3.3 Efficiency Analysis. 45 vi 3.3.1 Methodology. 45 3.3.1.1 Data Envelopment Analysis (DEA) . 45 3.3.1.2 The Malmquist Productivity Index. 48 3.3.2 DEA Model and Input Output Variables. 49 3.3.3 Incorporation of Subsidies into DEA Framework. 50 3.4 Efficiency Analysis . 51 3.5 With and Without Subsidy Analysis . 53 3.5.1 Efficiency Analysis 2005. .. 53 3.5.2 Efficiency Analysis 2006. 55 3.5.3 Malmquist Productivity Index Analysis. 57 3.6 Tobit Regression Approach. 60 3.6.1 Methodology. 60 3.6.2 Regression Results 2005. 61 3.6.3 Regression Results 2006. 64 3.6.4 Panel Data Results. 66 3.7 Conclusion. 69 4 Sustainability of Microfinance: An Empirical Investigation 73 4.1 Introduction. 73 4.2 Data and Empirical Framework. 77 4.2.1 Description and Sources of Data. 77 4.2.2 Measuring Sustainability. 81 4.2.3 Empirical Approach. 83 4.3 Interest Rate Policy . 83 4.3.1 Results. 84 4.4 Profitability Regression . 87 4.4.1 Results . 88 4.5 Efficiency and Productivity . 90 4.5.1 Results . 91 4.6 Mission Drift . 93 4.6.1 Instrumental Variables . 96 4.6.2 Results . 97 4.7 Conclusion . .99 Appendix A 102 Appendix B 105 Appendix C 106 Appendix D 123 Appendix E 126 vii Appendix F 128 Appendix G 129 Appendix H 132 Appendix I 134 Appendix J 135 Appendix K 138 Appendix L 141 Appendix M 143 Bibliography 144 viii List of Tables 2.1 Variable Description and Summary Statistics. 13 2.2 Categorical Variables. 14 2.3 Definition of Categorical Variables. .15 2.4 Type of Subsidized Funds. 18 2.5 Subsidy Dependence Index (SDI). 24 2.6 Subsidy Free MFIs in 2006. .26 2.7 Subsidy Dependent MFIs in 2006. 27 2.8 Opportunity cost of public debt comparison (No. of MFIs. 28 2.9 Correlations. 28 3.1 Subsidy Dependence Index (SDI). 41 3.2 Variable Description and Summary Statistics. 43 3.3 Categorical Variables . 44 3.4 Correlation . 44 3.5 Inputs and Outputs in Efficiency Specifications. 50 3.6 Efficiency Analysis 2005 (With and Without Subsidies) . 55 3.7 Efficiency Analysis 2005 (Subsidies as an Input) . 55 3.8 Efficiency Analysis 2005 (Subsidies as an Output) . 55 3.9 Efficiency Analysis 2006 (With and Without Subsidies) . 56 3.10 Efficiency Analysis 2006 (Subsidies as an Input) . 57 3.11 Efficiency Analysis 2006 (Subsidies as an Output) . 57 3.12 Malmquist DEA indices for 2006. 58 3.13 Malmquist DEA indices for 2006 (with and without subsidy) . 59 3.14 Malmquist DEA indices for 2006 (subsidy as an input) . 59 3.15 Malmquist DEA indices for 2006 (subsidy as an output) . 59 3.16 Tobit Regression Analysis 2005. 62 3.17 Tobit Regression Analysis 2006. 65 3.18 Tobit Regression Panel Analysis (Random Effect) . 68 4.1 Variable Description and Summary Statistics. 78 4.2 Categorical Variables . 79 4.3 Subsidy Dependence Index (SDI). ..
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