Profitability Determinants in Microfinance Industry: Case of Zimbabwe (2010-2014)
DOI:
https://doi.org/10.1956/jge.v12i4.442Keywords:
Profitability, Government of National Unity, Multiple regression, X-efficiency, ZimbabweAbstract
This paper looked at determinants of profitability of microfinance institutions operating in Zimbabwe. The study employed case study approach on one credit-only MFI in Zimbabwe. Using Multiple Regression Techniques, the study identified profitability determinants in the Zimbabwean microfinance industry using 2011-2015 monthly data. Major findings were that ROA and ROE are influenced differently by cost efficiency ratio, cost per borrower ratio and GNU. The study showed that both ROA and ROE are negatively influenced by cost efficiency and cost per borrower ratios. The identified relationship supports the X-efficiency hypothesis which assumes negative relationship between cost/income ratio and profitability. ROA model detected GNU as significant variable and according to results, the variable has negative influence on ROA. To improve profitability in the Zimbabwean microfinance industry, the researcher recommends MFI managers to closely monitor cost efficiency and cost per borrower ratios. The study also roped in government as key stakeholder in driving profitability within the microfinance industry. The study recommends Zimbabwean government to pursue consistency in its political policies as well as systems.
References
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27. Hollis, A and Sweetman, A. (2007). The role of local depositors in controlling expenses in small-scale financial intermediation: an empirical analysis. Economica, 74 (296) pp.713-735. DOI: 10.1111/j.1468-0335.2007.00592.x
28. Jeon, D and Menicucci, D (2010). When is the optimal lending contract in microfinance state non-contingent?.Toulouse School of Economics. Working Paper Series 10-146,pp.1-19
29. Jorgensen A.N (2012).The profitability of microfinance institution and the connection to yield on gross portfolio: An empirical analysis. Masters Paper. Copenhagen business school, Copenhagen. pp. 1-130
30. Karlan, D. (2005). Using experimental economics to measure social capital and predict financial decisions, American Economic Review, 95(5), pp.1688-1699.
31. Katuka, B. (2015). What determines banks’ profitability in Zimbabwean dollarized economy? Panel Evidence (2009-2013).International Journal of Novel Research in Marketing Management and Economics 2(2), pp 75-89.
32. Lafourcade, A.C., J, Isern., P, Mwangi and M, Brown (2006). Overview of the outreach and financial performance of microfinance institutions in Africa, Microbanking Bulletin, April 2006.
33. Liu, H. and Wilson,J.O.S. (2009). The profitability of banks in Japan: The road to recovery? Centre for Banking Research. Working Paper (WP 06/09), pp. 8-20.
34. Madajewicz, M (2011). Joint liability versus individual liability in credit contracts. Journal of economic behaviour and organization, 77, pp.107–123.
35. Majone, G. (1996). Regulating Europe, London: Routledge.
36. Marquez, R. (2002). Competition, adverse selection, and information dispersion in the banking industry, The Review of Financial Studies, 15(3), pp. 901-926.
37. Mersland, R. and Strom , O. (2009). Performance and governance in microfinance institutions.Journal of Banking and Finance, 33(4), pp 662-669
38. Modigliani, F., and Miller, M. H. (1958). The cost of capital, corporate finance and the theory of investment. The American Economic Review, 48(3), pp.261-297.
39. Muriu, P. W., (2011). Microfinance Profitability. PhD paper, Birmingham Business School, University of Birmingham, pp. 1-214
40. Nzongang, T and Atemnkeng, J.T. (2006). Market structure and profitability performance in the banking industry of CFA countries: the case of commercial banks in Cameroon. Working Paper, viewed 20 October 2015, pp.1-14. Retrieved from: http://www.jsdafrica. com/Jsda/Summer_2006/PDF>.
41. Obamuyi, M.T. (2013). Determinants of Banks’ profitability in a developing economy: Evidence from Nigeria. Organizations and Markets in emerging economies, 4 (2), pp. 102-109.
42. Ommeren, S.V. (2011). An examination of the determinants of banks’ profitability in European banking sector, Master’s Paper, Erasmus University Rotterdam, pp. 1-54.
43. Rachdi, H. (2013). What determines the profitability of banks during and before the International financial crisis? Evidence from Tunisia. International Journal of Economics, Finance and Management. 2(4), pp. 332- 335.
44. Siti,N.I, Nurul, I.K. and Shahreena .D. (2014). Assessing the Determinants of Profitability Performance on Islamic Microfinance in Malaysia., pp. 1-5
45. Vigenina, D. and Kritikos, A. (2004). The individual micro-lending contract: is it a better design than joint-liability? Evidence from Georgia, Economic Systems 28(2), pp.155-176. doi:10.1016/j.ecosys.2004.03.006.
46. Woller. G.M., Dunford. C. and Woodworth, W. (1999). Where to microfinance?. International Journal of Economic Development, 1(1), 29-64. Retrieved from www.microfinance.com/English/Papers/ Where_to_Microfinance.pdf
2. Armendáriz de Aghion, B. and Morduch, J (2010). The Economics of Microfinance, second edition MIT Press, Cambridge, Massachusetts, pp. 1-257
3. Athanasoglou, P. P., Brissimis, S. N. and Delis, M. D (2007). Bank specific, industry specific and macroeconomic determinants of bank profitability. Bank of Greece. Working Paper No. 25 June 2005. Retrieved from www.bankofgreece.gr/bogekdoseis/paper200525.pdf, pp. 1-35.
4. Ayele, N.H. (2012). Determinants of Bank profitability: An Empirical study of Ethiopian private commercial bank. Master’s Paper, Addis Ababa Universty, pp. 1-86.
5. Barrès, I. (2001). Bosnian MFIs: Performance, and Productivity. The MicroBanking Bulletin, Focus on Productivity, Issue No 06, April 2001, pp. 1-90
6. Becchetti, L. and Conzo, P (2011). Enhancing capabilities through credit access: creditworthiness as a signal of trustworthiness under asymmetric information. Journal of Public Economics, pp. 1-14. doi:10.1016/j.jpubeco.2010.11.022
7. Berger, A. N. (1995). The relationship between capital and earnings in banking. The Wharton Financial Institutions Centre. Working Paper 94-17, pp. 1-23.
8. Berger, A., Bonaccorsi di Patti, E., (2006).Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry, Journal of Banking and Finance.
9. Bond, P. and Rai, A (2008), Cosigned vs. group loans. Journal of Development Economics, 85(1-2), pp.58-80.
10. Brand, M. and Gerschick, J., (2001). Maximizing Efficiency: The Path to Enhanced Outreach and Sustainability. ACCION Monograph No. 12, The MicroBanking Bulletin, Focus on Productivity, Issue No 06, April 2001.
11. Charitonenko, S. and Silva D.D., (2002), Commercialization of Microfinance: Sri Lanka. Asian Development Bank, Manila, Publication Stock Number 010703, pp.1-78
12. Churchill, C. andFrankiewicz, C. (2006). Making microfinance work: managing for improved performance. International Labor Organization-Geneva, pp.1-12
13. Copestake, J. (2007). Mainstreaming microfinance: social performance management or mission drift? World Development, 35(10), pp.1721-1738. http://dx.doi.org/10.1016%2fj.worlddev.2007.06.004.
14. Cull R, Demirgùç-Kunt A and Morduch J. (2007). Financial Performance and Outreach: A Global Analysis of Leading MicroBank. World Bank Policy Research Working Paper 3827, February 2006, pp.1-51
15. Cull, R., Demirgüc-Kunt, A., and Morduch, J. (2011). Does regulatory supervision curtail microfinance profitability and outreach? World Development, 39(6), pp. 949-965. doi:10.1016/j.worlddev.2009.10.016
16. D’Espallier, B., Hudon M. and Szafarz A. (2013). Unsubsidized Microfinance Institutions. Research Institute in management Science.CEB Working Paper N° 13/012, pp. (1-12).
17. Dissanayake D.M.N.S.W. (2012). The determinants of Return on equity: Evidences from Sri Lankan microfinance institutions. Journal of Arts, Science & Commerce, 2(2), pp. 26-35
18. Dissanayake D.M.N.S.W. and Anuranga B.K.D.H. (2012). The determinants of Return on assets: Evidences from microfinance institutions in Sri Lanka. University of Kelaniya. Retreived from: http://ssrn.com/abstract=1990281 , pp. 1-12
19. Dzingirai, C. and Katuka, B. (2014). Determinants of Bank failures in Multiple-Currency Regime in Zimbabwe (2009-2012). International Journal of Economics and Finance, 6(8), pp. 229-246. doi:10.5539/ijef.v6n8p229
20. Forster, S., Lahaye, E. and McKee, K. (2009). Implementing the client protection principles: A technical guide for investors. CGAP September 2009. PP.1-34
21. Gangopadhyay, S, and Lensink, R. (2009). Symmetric and asymmetric joint liability lending contracts in an adverse selection model. University of Groningen, working paper.
22. Ghosh, S and Tassel, V (2008). A model of mission drift in microfinance institutions. Florida University, pp.1-23
23. Gitonga, L. W. (2013). Determinants of profitability of commercial banks in Kenya. Maters Paper, University of Nairobi, pp. 1-47.
24. Gudeta S (2013). Determinants of Profitability: An Empirical Study on Ethiopian Microfinance Institutions. Masters of Science in Accounting and Finance Paper, Addis Ababa University, pp. 1-70
25. Heid. F., Porath. D. and Stolz. S. (2004). Does capital regulation matter for bank behavior? Evidence for German savings banks. Deutsche Bundedbank Research Centre. Discussion Paper Series 2: Banking and Financial Supervision N. 03/2004. Pp. 1-40
26. Hoffmann, S.P. (2011). Determinants of the profitability of the US banking industry. International Journal of Business and Social Sciences. 2(22), pp. 258-262.
27. Hollis, A and Sweetman, A. (2007). The role of local depositors in controlling expenses in small-scale financial intermediation: an empirical analysis. Economica, 74 (296) pp.713-735. DOI: 10.1111/j.1468-0335.2007.00592.x
28. Jeon, D and Menicucci, D (2010). When is the optimal lending contract in microfinance state non-contingent?.Toulouse School of Economics. Working Paper Series 10-146,pp.1-19
29. Jorgensen A.N (2012).The profitability of microfinance institution and the connection to yield on gross portfolio: An empirical analysis. Masters Paper. Copenhagen business school, Copenhagen. pp. 1-130
30. Karlan, D. (2005). Using experimental economics to measure social capital and predict financial decisions, American Economic Review, 95(5), pp.1688-1699.
31. Katuka, B. (2015). What determines banks’ profitability in Zimbabwean dollarized economy? Panel Evidence (2009-2013).International Journal of Novel Research in Marketing Management and Economics 2(2), pp 75-89.
32. Lafourcade, A.C., J, Isern., P, Mwangi and M, Brown (2006). Overview of the outreach and financial performance of microfinance institutions in Africa, Microbanking Bulletin, April 2006.
33. Liu, H. and Wilson,J.O.S. (2009). The profitability of banks in Japan: The road to recovery? Centre for Banking Research. Working Paper (WP 06/09), pp. 8-20.
34. Madajewicz, M (2011). Joint liability versus individual liability in credit contracts. Journal of economic behaviour and organization, 77, pp.107–123.
35. Majone, G. (1996). Regulating Europe, London: Routledge.
36. Marquez, R. (2002). Competition, adverse selection, and information dispersion in the banking industry, The Review of Financial Studies, 15(3), pp. 901-926.
37. Mersland, R. and Strom , O. (2009). Performance and governance in microfinance institutions.Journal of Banking and Finance, 33(4), pp 662-669
38. Modigliani, F., and Miller, M. H. (1958). The cost of capital, corporate finance and the theory of investment. The American Economic Review, 48(3), pp.261-297.
39. Muriu, P. W., (2011). Microfinance Profitability. PhD paper, Birmingham Business School, University of Birmingham, pp. 1-214
40. Nzongang, T and Atemnkeng, J.T. (2006). Market structure and profitability performance in the banking industry of CFA countries: the case of commercial banks in Cameroon. Working Paper, viewed 20 October 2015, pp.1-14. Retrieved from: http://www.jsdafrica. com/Jsda/Summer_2006/PDF>.
41. Obamuyi, M.T. (2013). Determinants of Banks’ profitability in a developing economy: Evidence from Nigeria. Organizations and Markets in emerging economies, 4 (2), pp. 102-109.
42. Ommeren, S.V. (2011). An examination of the determinants of banks’ profitability in European banking sector, Master’s Paper, Erasmus University Rotterdam, pp. 1-54.
43. Rachdi, H. (2013). What determines the profitability of banks during and before the International financial crisis? Evidence from Tunisia. International Journal of Economics, Finance and Management. 2(4), pp. 332- 335.
44. Siti,N.I, Nurul, I.K. and Shahreena .D. (2014). Assessing the Determinants of Profitability Performance on Islamic Microfinance in Malaysia., pp. 1-5
45. Vigenina, D. and Kritikos, A. (2004). The individual micro-lending contract: is it a better design than joint-liability? Evidence from Georgia, Economic Systems 28(2), pp.155-176. doi:10.1016/j.ecosys.2004.03.006.
46. Woller. G.M., Dunford. C. and Woodworth, W. (1999). Where to microfinance?. International Journal of Economic Development, 1(1), 29-64. Retrieved from www.microfinance.com/English/Papers/ Where_to_Microfinance.pdf
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Published
25.12.2016
How to Cite
Katuka, B. and Mavhunga, R. M. (2016) “Profitability Determinants in Microfinance Industry: Case of Zimbabwe (2010-2014)”, Journal of Global Economy, 12(4), pp. 219–242. doi: 10.1956/jge.v12i4.442.
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