Report on Impact of key factors on the efficiency

 Srilanka is a country where the population is distributed according to their income. The majority is divided by "highest-income" middle income, "low income" and lowest income. Microfinance banks provide capital to the rural people of Srilanka, the process of assisting capital to the people is mixed or individual. SEEDS, "SANASA" Janasakti bank are kind of small microfinance bank that is working in Sri Lanka and the main point is to provide loan to women of rural areas in an interest rate, rather than a bank is providing, which also leads to a huge effect in government banks. In this country, microfinance bank has provided sector and those are "informal" "semi-formal" "formal" sectors (Chavan, P & Ramakumar, R, 2002). The main challenge of the Janshakti bank is to provide loan on a safe rate and there must be borrowers at a high rate of interest. Company policy should be spread in a way that will help borrowers or the individuals to deposit their funds at janshakthi bank than running towards government banks. Bank Should get developed with the running time and innovation of new technology will help the business in running more smoother and will be resulting in the growth of the country's economy. The loan must be allocated to the borrowers at an affordable rate that will be resulting in borrowers will be taking a loan from the bank. The main challenges that Janassakti bank faces, that there are many microfinance banks and NGOs that may be providing loan to the borrower at a low rate of interest than Janshakti Bank, which may lead to slow down of the development of the bank. The critical issues that are challenging the bank are different government policies, different kinds of donors role, "commercial depositing" of "lending and mobilization" of operation regarding the "competitiveness and the efficiency" of the market economy.

           The main factors of microfinance are providing loan to the rural people in a certain rate of interest. Microfinance has come before 1950 but got highlighted in the middle of 1950 to 1980, the main factor of the market is to provide small loans to the people ( (herath, 2015). The main factor of microfinance is to provide with funds that the rural people are unable to reach formally. Microfinance banks aim to provide different kinds of loans to different parts of the country, regarding the issue of the borrowers. This kind of bank provides different kinds of loans like agricultural loan for a duration of 6 months and at a rate of near about 15% of interest and the amount that is been provided on agricultural loan from 10000-30000, house loans are also provided to rural people and there are two types of house loan that are being provided to the people and those loans are "Amma housing loan" and "General housing loan". Those house loan had a duration of 5 years at 15% reducing rate of interest and the balance that is provided is near about 100000.there are others loans that are being provided to the people and those are "saving loan" "consumption loan" "welfare loan" and all those are in 28% of reducing rate (www.cbsl.gov.lk).Literature investigating performance is a specific and growing branch that is mainly focused on factors that determine the efficiency of MFI operations. Studies of literature belonging to this branch analyze how organizations use their resources to convert them into a value creation like goods and/or services, which is the main crust captured behind the organizational efficiency. A generalized idea has been discussed in the literature regarding these non – profit organizations.

           Financial Efficiency of MFI has been measured in literature in various ways. The majority of researches used traditional ways by calculating financial ratios for example return on assets (ROA) and return on equity (ROE). In some literature they measured financial efficiency by measuring riskiness on a portfolio of loans or measured via calculation of income through interest and fee (loan portfolio). Some indicators are used which are more related to microfinance. Such indicates are operational self-sufficiency and financial self-sufficiency. Operational self-sufficiency tells the ability of MFIs to pay their expenses & cost with revenues, it actually illustrates that MFI has the potential to do break even with its existing operations. On the other hand, the financial self-sufficiency indicator measures the extent to which operations of MFI could perform without availing subsidies like grants and soft loans.

           In literature, the social mission of MFIs depicts social performance indicator, it could be missions like gain access to information of those poor individuals household and small companies who have limited resources and in seek of more financial resources. Social performance usually gaged by two factors which show the outreach of an MFI, its breadth and depth (Schreiner, 2003). Breath of outreach of an MFI defines its number of actual clientele which means how much clients served by an MFI. However, the depth of outreach tells us about the client’s portfolio (type or profile) served by the MFI. Majority of researches used the two most popular measures of depth of outreach are as following;

        One is ratio based which shows active female borrowers out of the total number of active borrowers. The second is calculated by the loan’s average size divided by the GDP per capita of the country. The perception behind the first ratio is female borrowers generally fall in the poorest category of poverty, usually, they are unable to receive a loan from a formal banks.

Other measurements for social performance are the number of clients for loans, the number of accounts for loan and saving, the average loan size, figures of established branches and share of female borrowers. These measurements are critically evaluated in the literature.

The majority of research’s focus is on cost efficiency for the measurement of MFIs. It is often hard to collect data to use in more sophisticated methods of measuring social performance, especially if a cross – country comparison needs to be made for performance measurement that's why many researchers used simple measurements for it.

           Dissanayake (2012) did research on eleven Sri Lankan MFIs from the period of 2005 till 2011 and studied their ROI to figure out the determinants of profitability. He tried to investigate the relationship between MFI’s Internal or specific factors and ROE. He did a regression analysis of the data collected from MIX market database.  His study shows that there is a negative statistical relationship between ROE and debt to equity ratio & operating expense ratios. However, a statistically positive and significant relationship has been calculated between ROE and write-off ratio and operating expense ratio. One of the determinants of ROE is not statistically significant which is the personnel productivity ratio. 

Majority MFI have a high debt to equity ratio (High gearing) from financial sources (Long Term) to conduct their operations. Additionally, to reduce the risk they lend to more clients. (Shankar, 2007) found that the main driving force of transactional cost was mainly linked to field workers compensations, the number of groups covered by each worker and recovery & collection activities.

(Suresh de Mel & David McKenzie, 2009) investigated that outreach of the poor reduced because of leverage which leads to an increase in cost of capital resultant into high cost of borrowing. It eventually influences default rates which affects MFIs’ growth.

           (Manyumbu, Mutanga, & Siwadi, 2014) research indicated that high gearing MFIs had a high proportion of costs which had an average 36 % of limited growth to service loans.Another negative effect was that the total cost had 15 % of high bad debt expense. There main source of funding was provided by banks and other credit institutions in the form of debt capital via loans. Injected capital was on average consisted of 68% of banks borrowings account while on average 32% of the pool of capital came from savings accounts combined with equity and shareholders contribution.  Theoretically, ROE (return on equity ) is affected by financial leverage and it could be positive or negative based on used debt finance for productivity and profitability.Following conditions could help to materialized it, for example, timely usage of debt, minimum interest rate, and low cost, effective usage of these plus positive leverage and unlimited debt financing.

           A perfect condition of financial leverage is when return of equity increases because leverage effects the stock volatility and increases the risk level which eventually leads towards higher returns. However, a decrease in the return of equity could be happened, if a company’s finance is overly leveraged. Financial over-leverage is a condition in which at a lower rate of interest a huge debt by borrowing incurred and used of high resources in high-risk investment. If expected returns overshadowed by the risk of the investment than the value of equity of the company decreases because it has given an impression to stockholders that debt to asset rate is too risky.

           (Mukama, Therese Fish & Jako Volschenk, 2005) research illustrated factors like clients’ educational level, insufficient funds to provide loans to clients, limited compensations for staff and limited resources for skills development could affect the efficiency of MFIs.

(mulunga, 2010) pointed out liquidity problems for some MFIs were due to their mismanagement of funds to meet their cash-related needs. (Harker, 2006) study showed that educational and health-related services greatly benefit individuals, poor household and small firms. His recommendation was that IMFs practicing such services increase the living standard of the borrower but also increase the rate of repayment over period. The population of borrowers with better education and health facilities is more capable to earn money and eventually greater chance of repaying loans which leads to the growth of these IMFs. Education level management gives a better view and understanding of marketing conditions and it should be the utmost importance of IMFs. Because it could lead to profitability, financial sustainable environment, loan book quality could be enhanced, more saving accounts and firms the trust level and growth of shareholder. Repayment of loans greatly affected by factors like household size, rate of interest, the purpose of issuing credit, age, gender, demographics and a number of times field works pay visit to societies. Such factors could define the efficiency of IMFs.

As per Financial literacy theory, people with more financial literacy usually have great chance of prevailing two thinking style, it is called Dual-process theories (intuition and cognition). According to it a major source of financial decisions could be lead by intuition and processes of cognition. Such a decision-making process could create a better chance of repayment, better debt management, economic welfare and reduction in poverty which all lead to more efficient MFIs.

           According to (OCDE, 2005) definition of financial literacy is a state of clear understanding of financial products for customers and investors in order to make sound decisions to minimize their risk level and maximize the results of opportunities for better financial well- being. 

(Suresh de Mel, David McKenzie & Christopher Woodruff , 2007) studied and evaluated the grant programs offered to males and females by the micro-finance institutions after three devastation tsunami’s impact in Sri Lanka. According to study results, the return on investment was over 9% in the case of enterprises owned by males but received zero percent for female-owned enterprises.

            ( Gunatilaka & Silva, 2010) studied how women’s empowerment could be affected by the ownership of microfinance loans. Results of the research were positive and showed the significant effect of women’s ownership of a loan and study its effect on the project control index and composite index is used to measure her empowerment.

Globally women have been seemed under keen focus to be given microfinance services by MFIs. On average women are around 74% of the world’s poor population which is 19.3 million.

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