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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Development of Microfinance Institutions in a Multi-Tier Framework |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 70 |
| Date | 2015 |
| Abstract Text | Microfinance industry has achieved an unprecedented growth over the last two decades. Consequently, the landscapes of both the microfinance institutions (MFIs) and the investors have evolved to include a diverse array of institutional types. As a result of this increasing complexity, classifications of MFIs based on performance and institutional set-up emerged to address the needs of donors and investors. Today, definitions that classify MFIs into tiers based on several dimensions that include size, maturity and sustainability are increasingly used by practitioners and researchers. However, there is no consensus on an industry-wide, global standardized framework. e-MFP (2013) proposes definitions based on three criteria that classify MFIs into three tiers. The first objective of this thesis is to analyze the institutional development of MFIs, by investigating the changes in ownership, governance and human resources management across tiers. The second objective is to explore the commonalities and distinctive patterns in MFIs that advanced tiers over time, by examining the speed of growth, capital structure and performance. The first part of the thesis gives a brief overview of the historical development of microfinance industry, and introduces the main types of MFIs and investors. It then reviews the different tiered classifications that emerged over time. A significant number of classifications consider the size of an MFI as the only criterion. Although, size is an important indicator for performance, it does not tell much about the level of institutional development of an MFI. Another group of classifications use vague, qualitative definitions on criteria such as profitability, governance and operational efficiency. The framework proposed by e-MFP (2013) is built around three criteria: size, sustainability and transparency. Each criteria is further defined by objective, measurable definitions. These three criteria combined serve as a proxy for institutional development of MFIs. The second part of the thesis reports findings on the changes in ownership, governance, capital structure, human resources, speed of growth and performance of MFIs that advanced from tier 3 to tier 2 to tier 1 over time. A multiple case study is conducted to explore the changes and to assess the common distinctive patterns in those MFIs that moved up tiers. Six MFIs from Colombia, Ecuador, India, Tajikistan, Tanzania and Tunisia are selected employing the MIX Market Database, which includes 14,837 observations of 2,581 MFIs from 115 countries over the period between 1995 and 2012. Construct validity is addressed by using three main sources of evidence: MIX Market Database for the historical cross- section MFI data; annual reports, audited financial statements, rating reports and previous case studies on individual MFIs for the analysis. External validity is adressed through replication logic, focusing on cross-case analysis and comparison of the results. To ensure internal validity and reliability, a computer assisted qualitative data analysis software was utilized to capture, code and examine the patterns across the cases. Findings indicate that legal status, and in turn the ownership of MFIs are more decisive than tiers in explaining the differences among the MFIs. Deposit taking MFIs have stable capital structures throughout the assessment and differ from the rest of the cases. Donated equity loses its presence while share capital and retained earnings have increasing portions with the transition to tier 2, depending on the legal status. For tier 2 and tier 1 MFIs, commercial and non-commercial borrowings are the main funding sources fueling their growth. The rate of commercial to non-commercial borrowings also increase by the tier advancement. The findings further suggest that MFIs show the highest average growth rates during tier 3. Growth in assets and loan portfolio slightly slows down in tier 2, before cooling down in tier 1. In all three tiers, growth strategies of MFIs resemble an extensive one, marked by capacity increases and expansion. In contrast, growth of tier 2 MFIs are driven more by the increases in productivity and average loan balances. Accelerated growth of the MFIs and the focus on productivity are followed by increases in the riskiness of portfolios, decreased pro tability and mission drift. These findings challenge the common belief that MFIs become more sustainable and less risky by tier advancement. Finally, findings reveal that tier 3 MFIs have unclear ownership structures and informal governance mechanisms which are lead by unqualified Board of Directors (BoD) and committed managers. Typical tier 3 MFIs do not have a separate human resources department, thus hiring, training and remuneration policies are not established. Technical assistance and external guidance improve the human resources policies in transition to tier 2. Tier 2 MFIs, have BoD with members that have experience in banking and microfinance. Affiliated members from microfinance investment funds and private equity firms also have a seat on BoD. Written rules and systematic mechanisms enhance the formalization and agency problems pose less uncertainty during the transition to tier 1. |
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