1 XXIXème Journées du développement ATM 2013 UNIVERSITE PARIS-EST CRETEIL 6, 7 et 8 juin 2013 Causality between social performance and financial performance of microfinance institutions in the MENA region ( ): A panel data study Philippe ADAIR & Imène BERGUIGA Université Paris-Est Créteil, ERUDITE

2 Issue The alleged objective of microfinance institutions (MFIs) is to achieve the best possible performance and it can be carried out when they manage to reconcile two requirements: Social performance (SP) by reducing poverty* and financial performance (FP) by ensuring sustainable profitability.The alleged objective of microfinance institutions (MFIs) is to achieve the best possible performance and it can be carried out when they manage to reconcile two requirements: Social performance (SP) by reducing poverty* and financial performance (FP) by ensuring sustainable profitability. Is there a trade-off between SP (the demand side) and FP (the supply side) ? Is there a trade-off between SP (the demand side) and FP (the supply side) ? We explore the causality between these two performances? Sample and methodology the Middle East and North Africa () A sample of 64 MFIs in 9 countries** of the Middle East and North Africa (MENA) region over the p eriod (14 years) Panel data models (simultaneous equations of SP and FP). Factors determining the performance of MFIs. * poverty : < $2 a day per capita * * * * Egypt (13) Jordan (7) Morroco (10) Tunisia (1) Yemen (4) Lebanon (3) Palestine (7) Iraq (2) Syria (2) – From the MIX database

3 1. Literature review WelfaristsInstitutionalists Common goal Poverty alleviation Performance Performance from the standpoint of the clients: - Depth of Outreach - Impact assessment Performance from the standpoint of the institution: - Large scale - Sustainability of the MFI. Targeted customers Poorest ($1/day) Micro-entrepreneurs close to the poverty line ($2/day) AreaRuralUrban Type of MFI NGOs, cooperatives (Social bonds) Banks, NBFIs (Commercial contracts) Finance Resort to subsidies Financial self-reliance Relationship SP and FP Negative link on the short run (trade-off) and May be positive on the long run (reconciliation) ?

1. welfarists vs. Institutionnalists’ main hypotheses 7 Unequivocal causality causal interaction Negative link on the short run Positive link on the long run SP influences FP H 1 : Institutionalists ’ approach H 2 : Welfarists’ approach FP influences SP H 3 : Welfarists’ approach H 4 : Institutionalists ’ approach SP and FP interactH 5 : Trade-offH 6 : Compatible approaches

5 Dependent variables PerformanceIndicatorsDefinitions SPDepth of outreach (Depth) Difference according to GNI per capita : Poverty line ($2 a day per capita) - average loan amount per borrower FPAdjusted Return On Assets (AROA) Adjusted net income/ Average assets Financial Self- Sufficiency (FSS) Financial revenue + other operating income Adjusted financing Costs + Loan Loss Provisions+ operating expenses

6 Dependent variables An unclear relationship between SP and FP has been founded in the long run: Run a regression to test whether these initial results are robust enough.

7 Explanatory Explanatory variables

8 panel datasets) Estimated models (panel datasets) PanelModelsMethodsCausality Incomplete panel ( ) 2 models of SP and FP Within, FGLS, HTUnequivocal causality Complete panel ( ) + mature MFIs Simultaneous equations 3SLS, FE3SLS, EC3SLS Causal interaction

9 3. Results: Unequivocal causality between SP and FP

10 3. Results: Unequivocal causality between SP and FP Impact of SP upon FP: Negative and significant (at 1%) Impact of FP on SP: Negative and not significant and verified: Trade-off between SP and FP H 1 and H 3 verified: Trade-off between SP and FP As already found in our previous cross-section analysis in 2008 As already found in our previous cross-section analysis in 2008 (see Adair & Berguiga, 2010) (see Adair & Berguiga, 2010) 1 determinant of SP: Women Borrowers (FE) 1 st determinant of SP: Women Borrowers (FE) 1 determinants of FP: Depth of outreach (Depth) 1 st determinants of FP: Depth of outreach (Depth) The relationship between age and performance is non-linear: - Age and PF: - Age and PF: “U shape” - Age and PS: inverted - Age and PS: inverted “U shape”

4. Factors and effects 11 Unregulated NGO which use group lending are the transparent and socially efficient MFIs. Unregulated NGO which use group lending are the transparent and socially efficient MFIs. To be financially successful, MFIs providing loans to groups must be located in rural areas ( +confidence, - default). To be financially successful, MFIs providing loans to groups must be located in rural areas ( +confidence, - default). Macroeconomic effects on the more transparent MFIs in achieving their SP Macroeconomic effects on the more transparent MFIs in achieving their SP Political environment: has a negative impact on SP and FP of MFIs, especially in Middle East. Political environment: has a negative impact on SP and FP of MFIs, especially in Middle East. Regulation: Even through specific legislation on microfinance has decreased SP of MFIs. FP on SP is not robust: Prior search for FP in the short run. FP on SP is not robust: Prior search for FP in the short run. Is there a causal positive interaction between SP and FP on the long run as regards a complete panel of mature MFIs? Is there a causal positive interaction between SP and FP on the long run as regards a complete panel of mature MFIs?

12 3. Results: Causal interaction between SP and FP Asymmetrical interaction between SP and FP: Better FP results in a deterioration of SP whereas the impact of SP on FP remains unclear H 6 rejected: SP and FP do not reconcile on the long run Mature MFIs are financially and not socially performing. 1 st determinant of FP on mature MFIs: Portfolio At Risk (PAR) On the long run, MFIs are focusing more on their payback rates than on their depth of outreach

13 (rather crude) Conclusion Unequivocal causality between SP and FP is negative and causal interaction remains unclear on the long run. Unequivocal causality between SP and FP is negative and causal interaction remains unclear on the long run. The more a MFI is socially efficient, the less it seems to be financially successul and conversely (Welfarists vs. Institutionalists). The more a MFI is socially efficient, the less it seems to be financially successul and conversely (Welfarists vs. Institutionalists). The trade-off between SP and FP on the short run might be persistent on the long run Work in progress : Definition of mature MFIs remains questionable Extension of the sample (a selection bias is due to the MIX dataset) Focus on regulation, credit methodology and operating areas Study causality on a dynamic model (which lagged variables?) A longitudinal approach of MFIs borrowers’ in the MENA region would be welcome in order to measuring poverty alleviation (impact assessment upon the clientele on the long run). It may allow reconciliation between SP and FP ?