Factors that Affect Financial Sustainability of

Microfinance Institutions in Pakistan

CHAPTER 1

1. INTRODUCTION

In Pakistan and at world-wide level, the importance of micro finance is a tool to take out poverty
all around the world. It is observed in reality that microfinance is the most suitable method which
allow poor to build their wage creating limit. (Sulaiman D. Muhammad 2010).

Neediness is one of the real issues of the world at this point. Obviously, Pakistan is not an
exemption to it. It is demonstrated that neediness can be diminished with the help of micro-
finance (Adams 2000). It is moreover conceded that part of microfinance is not simply confined
to destitution easing but rather it additionally broadens pay conveying sources, constructs
resources and enhances the status of ladies (Chen 1992). It has a positive effect on pay and
resources levels (Greetha 2006).

Microfinance is the course of action of fiscal administration to low acquiring class customer,
including purchasers and the self-governing used, who usually require access to dealing with a
record and related organizations. More exhaustively, it is an advancement whose dissent is "a
world in which whatever number poor and close poor families as could sensibly be relied upon
have never-ending access to a fitting extent of pure commercial organizations (banking system),
including recognize and in addition save assets, assurance ('insurance"), and store trades.'

Those who advance microfinance for the most part trust that such get to will bail needy
individuals out of destitution. The vision of micro finance is entirely easy to make systemic
change in monetary networks around the world. Rather than the selective money related
frameworks that have for a considerable length of time profited and secured the well off,
microfinance plans that they serve the devastated larger parts, lift them out of neediness, and
make them full members in their nation' social and monetary improvement.
Microfinance Institutions (MFIs) give money related organizations to low-pay families in
making nations around the globe. In the brains of different, microfinance and little scale credit
are synonymous. In any case, little - scale back implies a variety of money related association
that merge credit, theory resources, and security while downsized scale credit is the game-plan of
credit which is routinely utilized ns capital for exclusive business change. MFIs can go about as
Non-Governmental Organizations (NGOs), credit associations, nonbank money related focus
people or business banks

In accordance with Microfinance Institutions Ordinance 2001 "it is convenient to advance the
foundation of microfinance establishments for giving hierarchical, money related and
infrastructural support to poor people, especially poor ladies, for moderating neediness and
advancing social welfare and monetary equity through group building and social assembly and to
accommodate matters associated therewith or auxiliary thereto.”

As demonstrated by Muhammad (2010), focus on the challenges and openings stand up to

microfinance part in Pakistan, his investigation came to fruition that different troubles are before
microfinance portion like detestable controls, extending contention, imaginative and upgraded
things advantage, soundness, confined organization limit of scaled down scale back associations
(MFls, etc. On the other hand, the speedy augmentation in poverty in Pakistan, close by various
open entryways, is clearing course for the improvement of this zone and offering a massive
market potential for microfinance. On this preface the division shows a huge amount of
possibilities, for instance, enlivening advancement of economy, women fortifying, extending
volume, accessibility and exertion, budgetary issues of degree.

Schreiner and Colom bet (2001) portray micro-finance is "to try or endeavor to advance in value
or excellence in accessing to little stores (savings) & little advances (micro-lending) for poor
families overlooked by the traditional commercial banks.

"As demonstrated by Otero (1999), Microfinance is the course of action of cash related
organizations (financial subsidiaries) to low pay poor and amazingly poor autonomously utilized
people, these money related organizations jo in subsidizes and credit yet can similarly
consolidate other budgetary organizations, for instance, security, trade of portion organizations
and settlements. Microfinance incorporates the course of action of budgetary organizations, for
instance, speculation assets, credits and insurance to poor people living in both urban and nation
domains and who were rejected to secure such organizations from the formal cash related
establishments (Ojo, 2009)

Destitution (poverty) is a multidimensional marvel enveloping a man's financial, social,

wellbeing, instruction, security, and limit. Mitigating destitution is a confounded business. For
both the World Bank and the United Nations Development Program (UNDP), destitution
lessening requires an organized exertion "giving monetary open doors" while 'expanding the
limit of poor people" to engage people to build their human capital for profitable, social and
political picks up inside a setting of financial development (Perry and World Bank 2006)

Products of Microfinance

Microfinance joins the game-plan of monetary (budgetary) associations, for example, spare
resources "smaller scale sparing", propels "miniaturized scale loaning and affirmation
"miniaturized scale protection" to needy individuals living in both urban and country settings
who can't get such associations from the formal money related division. Ledger wood (1999)
everything considered unite hypothesis funds and credit anyway can in like way intertwine other
money related associations, for example, protection and segment associations.

1. Micro Insurance

Micro-insurance in Pakistan is still in its early stages. More than half of the present micro-
insurance strategies essentially in Pakistan are offered through the Benazir Income Support
Program (BISP), with the rest of in conjunction with microcredit administrations offered by
different microfinance foundations (MFIs), microfinance banks, nongovernment associations,
and rustic bolster programs or "rural support program" (RSPs). Comprehensively, micro-
insurance is protection for poor people. With regards to characterizing the term all the more
particularly or ordering particular items, for example, "micro-insurance", there is some absence
of agreement.

As per Churchill and McCord (2012), micro-insurance can ordinarily be portrayed by: (D) the
objective gathering served (poor people, or all the more for the most part, those underserved by
conventional protection items); (ii) tops on the measure of scope and premiums (low contrasted
with customary protection items); (i) the kind of supplier, (for example, "self- improvement
gatherings" and other group based associations); and (iv) the appropriation channel (counting
nongovernment associations or organization INGOs), microfinance foundations [MF1s), und
others). What's more, micro-insurance frequently takes into account the particular sorts of hazard
confronted by poor people. It is frequently and additionally portrayed as being less complex to
manage than customary (client) protection.

2. Micro Saving

Present day micro finance has been developing far from its unique concentrate on microcredit,
when Microfinance Institutions (MFIs) for the most part amplified little advances, ordinarily
without insurance. Today, MFls endeavor to offer an assortment of advance items, and
additionally micro-savings records, micro-insurance, and installment offices. Experimental proof
proposes the poor request more than just microloans (Collins et al. 2009). From the supply side,
may be a joint creation of microloans and micro-deposits must deliver scope economies to
legitimize the expenses of getting a permit to gather micro-deposits from poor people. Also, cost
points of interest must be generous to legitimize changing national laws to allow MFIs to gather
micro-savings

3. Microcredit

Microfinance is the game plan of money related administrations, for instance, credit (propels),
save reserves, littler scale leasing, small scale insurance and portion trades to fiscally dynamic
poor and low wage families to enable them participate in compensation creating practices or
expand/build up their privately owned businesses (Irobi, 2008)

The microfinance upheaval started when Bangladeshi financial expert "Prof Muhammad Yunus"
initially gave over a couple of dollars to a ruined wicker bin weaver in 1974. From that point
forward, the development toward microfinance. The allowing of little credits to the poorest
individuals on the planet to empower them to run independent ventures that will lift them out of
destitution. His concept of micro-credit won enthusiastic supporters over the globe.

Few year back, "Yunus" and the microfinance affiliation the developed, "Grameen Bank shared
the Nobel Peace Prize, "In South Asia, the smaller scale back has made out of trials, however the
best known begin was in Bangladesh in 1976, when "Muhammad Yunus" set up the "Grameen
Bank'on suburbia of"Chittagong University" grounds in the town of "Jabra”.

It is recognized that entrance to fund assumes a critical part in monetary development and
advancement by proficiently guiding resources from the surplus unit to deficit units. Even more
altogether, it accept a key part in the course of action of the capital critical for starting and
expanding associations, and creating and diminishing futile trade costs (Arestis and Demetriades,
1997, Odedokun, 1998)

Microfinance (MF) is a budgetary organization of little sum gave by money related foundations
(monetary establishments) (FI) to needy individuals. These fiscal organizations may fuse hold
reserves, credit, insurance, leasing, money trade, esteem trade, etc, that is, any sort of budgetary
organization, provided for customers to meet their common Money related necessities: life cycle,
monetary open entryway and emergency (Dasgupta and Rao 2003) with the main capability and
concept that

(i) Exchange esteem is little

(i) Clients are "poor"

Microcredit has been characterized by the 1997 Microcredit Summit as "projects that give credit
to independent work and other monetary and business administrations (counting reserve funds
and specialized help) to extremely poor people". (Smaller scale Credit Summit 1)

Additionally, size and customers bunch, what makes microcredit not the same as would be
expected credit is that the last is stroll in' and the previous is 'exit business for the Fl. Not at like
typical acknowledge, microcredit is restricted for guarantee substitute and credit in addition to
administrations. Microcredit in this way gets to be unmistakable from other normal.

Credit where not just credit sum is little and customers is poor, additionally acknowledge I
accommodated 'guarantee substitute' rather than conventional security and non-money related
administrations for expanding the profitability of credit.

Model of Micro-Financing
Smaller scale back is the dynamic field and there is lamentably no absolute best approach to
manage pass on associations to desperate people and consequently different administrations trade
systems have been made over a period range. Every development demonstrates has a lot of issue
and achievement.

A great many individuals in creating nations have been offered access to formal budgetary
administrations through microfinance programs. In any case, a great many potential customers
still main un served and the interest for money related administrations far surpasses the at present
accessible supply. Given huge capital requirements, extension of microfinance programs remains
considerable test confronting the microfinance business.

In addition, it is watched that micro finance affiliations have had distinctive degrees of viability
supportability). One such supportability is the cash related reasonability. Monetary supportability
has been characterized by different scientists in an unexpected way. All things considered there
is no obvious meaning of the word money related manageability. In Pakistan, diverse movement
models have been grasped by microfinance foundations and they can be their systems
orchestrated into taking after general classes, discussed one by one.

Grameen Bank Model

Grameen Bank" idea was conceived in the town of Jobra, Bangladesh, in 1976. "Educator (prof.
Dr. Yunus", "Nobel prize" victor for peace in 2006, had a field visit with his understudies
(Students). So they built up credit providing institution on the choose that credits are superior to
philanthropy to interfere with dejection: they offer individuals the chance to take practices in
business or developing, which give advantage and draw in them to satisfy the dedication.

The bank is set up on the conviction that individuals have unending potential, and releasing their
inventiveness and development enable them to end poverty. Grameen has offered credit to
classes of individuals once in the past underserved: dejected people, ladies, uneducated, and
jobless individuals. Access to credit depends on upon sensible terms, for example, the get-
together crediting structure after a long time allocate, with sensibly long terms of advances,
empowering the poor to build up their present aptitudes to gain better wage in each cycle of
advances Grameen's objective has been to propel cash related independence among needy
individuals. Yunus encourages all borrowers to wind up savers, with the goal that their close-by
capital can be changed over into new advances to other people. Since 1995, Grameen has
financed 90 percent of its credits with interest wage and stores accumulated; altering the interests
of its new borrowers and benefactor investors, Grameen changes over stores made in towns into
credits for the more poor in the t possesses (Yunus and Jolis1998)

Co-Operative Model

A co-operative society model is an affliation controlled by the people (members) who use its
organizations. This model tackles that decide that every gathering has enough in human and
budgetary advantages (financial resources) to manage their own specific cash (monetary) related
establishments. The people who assert it are the people who use (owners) its organizations and
can start from different ranges of same gathering like cultivating, retail et cetera.

Self Help Group "Model

The Self Help Group (from this time forward) SHG) demonstrate has developed in the NGO
division and takes a shot at the conviction that the poor can help themselves and the NGOs can
give systems administration and training to them. A SHG is a little gathering of around 20 people
from a homogeneous class who meet up willfully to accomplish certain collective goals, social or
financial. The gathering is justly shaped and chooses its own particular pioneers. The vital
components of SHGs incorporate individuals having a place with a similar socialism and sharing
typical belief system. Their points ought to incorporate financial welfare of all individuals"

"The idea of SHGs is dominatingly utilized as a part of the instance of financially destitute
individuals, for the most part ladies, who meet up to pool their little reserve funds and after that
utilization it among themselves. The gathering individuals meet consistently (once in a week)
and do their monetary exchanges" (Bhatia Navin, 2007)

The gathering activates investment funds among its individuals just and gives require based
credits to the individuals just (in light of the assets made by reserve funds). The principles and
standards relating to fund or different matters are made by the gathering. The inward exchanges
are fortified first and after that, the NGO supporting the gathering joins them to banks for more
budgetary help.
Federated Self Help Group Model

Personal development Gatherings have been extraordinarily viable in drawing in women by

giving immediate and circuitous focal points to them. In any case, SHGs are little in size
(generally speaking 10 - 15 individual) and are confined in the sorts of cash related organizations
they can give. Since Self Help Groups are an extensively compelling transport demonstrate a
need rises to scale them up without haggling with the accomplishment. The Federated Self Help
Group demonstrates is one such way to deal with scale up the past model. Partnership of SHGs
join a couple SHGs. Appeared differently in relation to a single alliance of SHGs has in excess of
1000 people.

In Federated SHG appear, there is a three dimension structure the principal unit is the SHG, the
inside dimension is a pack and the most astounding unit is a summit body, which addresses the
entire SHG. At the cluster level, each SHG is addressed by two of its people. The agents of each
SHG meet every now and again. Information about the social occasions to the summit body and
the other route around is given by the group unit. The zenith body generally made up of 10 15
people and they outline the connection between the SHGs and the NGO supporting them. With
the help of classes, a NGO with limited resources can influence incalculable. Small scale fund
financing theories.

While the Modigliani and Miller (M&M) capital structure theory is notable in corporate back, its
hugeness, given the excellent method for microfinance is unfound. The standard firm
acknowledged by the M&M speculation is at variance with crediting associations which are
capable pulling in stores, as such the theory requires modifications for it to suit advance
associations guided by the twofold essential concerns 44 (Cohen, 2003). We show three
legitimate theories here under i.e., the association theory, the existence cycle speculation and the
advantage force theory.

Agency theory. One pertinent hypothesis is the office hypothesis. It indicates on the part
obligation in adjusting administration's execution to that of the proprietors. Kar, (2012) offirmed
that obligation use by MFls expands productivity measures and progresses taken a toll
productivity. The hypothesis states that higher influence is a helpful administration which
diminishes inefficient income by a danger of liquidation (Williams, 1987). This may likewise
prompt to expanded weight on administration's part to produce enough money streams to
administration obligation commitments. In any case, organization expenses of observing
administration exercises diminish the incrcases. Organization expenses might be substantial in
the microfinance business as MFIs are, by their temperament, instructively murky (Hudon and
Traca, 2011)

Life cycle theory (LCT). Fehr and Hishigsuren, (2006) placed that capital structure of MFIs
changes with the LCT periods of a MFI. Conditions set by capital suppliers don't permit MFls to
have much decision, in this way, certain MFI development stages are reminiscent of a particular
financing structure. The related cost of capital may breaking point MF1s' financing decisions.
Hoque and Chishty, (2011) agreed by composing that the LCT clarifies the financing of MFIs as
they advance into fiscally reasonable foundations. In spite of the fact that Hoque and Chishty,
(2011) distinguished three MFI, development arranges the prominent stages, as sketched out by
Kapper, (2007) are: the start-up, development, union and the mix arrange. In the start-up stage,
MFIs are financed through gifts and concessionary reserves. This is on the grounds that it is
excessively hazardous for private speculators (value). Since givers need to control the loaning,
having value in the MFI would permit them to accomplish that. Setting up frameworks and limit
plans of action toward the start-up stage compel.

NGOs are best in this stage in light of the sponsorships and stipends they get. The extension
stage underscores on the expansion of operations once operational difficulties in the earlier stage
are tackled. A decent business demonstrates grows MFI operations and effort. The extension
organizes presents value by NGOs and open financial specialists to accomplish MFl security.
Universal Fund Institutions (IFIs) come into give seed capital. IFIs' capital comes in the middle
of giver assets what's more, business financing. Be that as it may, appropriations are still
accessible for MFls that is delicate credits and concedes (Brau and Woller, 2004).

The preferred standpoint moving force hypothesis (PIT). The PIT communicates that utilization
of business financing sources at any time of MFI headway connects with MFls to meet the micro
finance guarantee (Bogan, 2012). The utilization of business financing raises cost awareness,
capacity and effort. In simultaneous with the institutionalize viewpoint, the PIT seconds that
benefactor financing is constrained in total, thusly, can't fund micro finance at an upper scale
given the broadening requesting of micro finance.
The theory keeps up that MFls looking for after advantages thrive to intensify pay, while limiting
operational expenses, so as to take care of expenses and manufacture surpluses. MFls bolstered
by honors and enrichments don't respond to profit lift and cost minimization loads, along these
lines, pick outreach significance over capability by serving the poorest and nation clients which
have extra advancing expenses (Bogan, 2012; de Aghion and Morduch, 2005). Affirmation of
the PIT, as put transversely over by Bogan, (2012), saw the extending worldwide and inward
load on MFIs to shed-off enrichments and yield financing. Foundations, for instance, ACCION
global have made wild eyed undertakings to interface MFIs with esteem operators, commitment
financing, and furthermore different business sponsoring sources. This has benefitted a street for
MFLs to search for opportunity from blessings and gifts.

Objective of the Research

In Pakistan such a variety of small scale financing enterprises are working. Some are in a very
good condition as far as landing, training and developing their client for saving, small and
medium scale business organization. Some are in very terrible situation and struggling for their
survival.

The current dissertation is aim to identify the issues related micro-financing institutions in
Pakistan and centrally focused on the main determinant of affecting "financial sustainability" of
MFls in Pakistan and contributing through an appropriate clarification for Pakistani firms how
they should maintain their financial sustainability

There are two approaches toward the existence of MFIs: one is an institutional school of thought
which mainly focuses on the sustainability of an institution. Second is the welfare school of
thought they mainly argue in favor of outreach of MFls (Ben Soltane 2012, Hermes et al. 2011).
Therefore finding of this dissertation will also provide information about the financial
sustainability of MFIs microfinance banks and rural support program in the Pakistan

Research Question

There are multiple of issues related with micro financing institutes in Pakistan have: high lending
cost, loan default, reputation risk (According to Khalil Tetley 2015 Pakistan is ranking at no. 10
on the list) law in order situation, liquidity problems, political interferences etc. many studies
were conducted by researchers such as ("Cull et al, 2007 and Christen et al, 1995 referred to in
Kinde”2012). To identify the welfare and poverty alleviation provision of MFIs (MFN Risk
assessment study 2015). Very little attention were made toward institutional approach of MFIs
especial Pakistan. Financial sustainability of MFls is the essence for institution existing in long
run to alleviate poverty.

“Whether financial self-sufficiency is the indicator of financial sustainability of financial

sustainable firm or not?”

Problem Statement

The writing referred to has discovered enhanced outcomes while contemplating relationship
among various factors affecting the financial sustainability of MFls such as: FSS, OSS, capital
structure, interest rate, agency cost, management efficiency, breadth of outreach, and depth of
outreach. A few reviews have been led on the determinants of supportability of microfinance
establishments utilizing extensive and large number of established MFLs in different nations.
Notwithstanding, the levels of criticalness of the variables that impact monetary supportability of
MFIs change with studies ("Cull et al, 2007 and Christen et al, 1995 referred to in Kinde, 2012").
The experimental proof in regards to the association amongst size and MFIs' sustainability,
establishes a positive relationship. Ponders by Nyamsogoro (2010), Bogan (2008), Mersland and
Storm (2007) and Cull et al (2008) establish that size is decidedly and altogether identified with
budgetary execution mirroring the cost points of interest linked with size (economies of scale).
Due to inconsistency in results current study want to validate the puzzle relationship between
financial sustainability and the results of various independents and dependents variables which
were uses interchangeably in the different regions

The trial evidence with respect to the relationship among size and MFls' sensibility shows a
positive alliance. Contemplates by Nyamsogoro (2010), Bogan (2008), Mersland and Storm
(2007) and Cull et al (2008) show that size is positively and out and out related to budgetary
execution reflecting the cost purposes of intrigue associated with size (economies of scale).
Because of irregularity in results current review need to approve the confound relationship
between monetary manageability and the consequences of different independents and wards
factors which were uses reciprocally in the diverse districts. Therefore the huge gap of research
in the measuring of financial sustainability of micro financing institutes in Pakistan listed and
reported to Pakistan microfinance network and mix market of the world

Significance of Research

This study will be helpful in the prospective of Pakistan in determining the key factors of
financial sustainability, because more than 250 researches has been cited and very little attention
have been found to the measuring financial sustainability of microfinancing institutes in Pakistan
(Khandker, Shahidur R. (1996), Ledgerwood, J. (1998) Adongo, J. & Stork, c. (2005). Therefore
this study will help to the Pakistani firms such as (National rural support program, Akhowat, and
ASSASH etc.) which is financially constraints, and to take appropriate decision in the presence
of this evidence for boosting their growth, and to get rid of financial unsustainability of
microfinance institutes in Pakistan.
 CHAPTER 2

2. Literature Review

The Concept of Micro-finance

This study was conducted in India, in which micro finance is dependent on financial
sustainability. Thus financial sustainability is measured by two parameters (operating self –
sufficiency and financial self-sufficiency). Altogether 30 MFI’s have been used as sample data
and the source was Microfinance Information Exchange (MIX) for the time period 2005-2013.
Many Statistical tools have been used like F-test, Hausman test and finally, Panel data regression
model and multiple regression analysis. Later find out that capital/asset ratio, portfolio at risk
>30 days, and operating expenses/loan portfolio were the main factors that affect financial
sustainability of MFI’s. The research recommendations that most of firms do have a long-term
positive trend in Operational Self-Sufficiency (OSS) moreover it was found that selected
determinants of the selected MFI’s have a significant impact on ROA hence, financial
sustainability. (Sandya and Arjeet 2017)

The study was conducted in South Africa with the collaboration of Dubai and USA .This
research measured selected MFIs from 11 countries which are Madagascar, Mozambique,
Namibia, Congo, Malawi, Zimbabwe, Zambia, South Africa, Swaziland and United Republic of
Tanzania, The Population size 122 MFIs from the 11 mention countries with the time spam of
1997-2013. Linear panel model is used to determined financial sustainability which is selected as
a dependent variable. Independent variables for the research are Deposit collection, Retained
earnings, Finance, active borrowers, loan portfolio Equity, and age of MFIs. After running the
test it’s been recorded that the retained earnings, Equity and Deposit have a significant positive
connection with financial sustainability. While active number of borrowers has an insignificant
effect on financial sustainability. (Bayai and Ikhide 2016)

This article presents thoroughly survey of 15 articles on components that influence microfinance
sustainability. After viewing relevant literatures the researcher suggest the framework which
shows possible potential factors that affect financial sustainability of micro finance institutions as
open discussion for all academic students and researcher. (Gashayie and Singh 2015)

For relating outreach and sustainability study conducted in India after the crisis of Andra Pardesh
to compare with Asian countries like Sri Lanka, Pakistan, Nepal, Bangladesh and Afghanistan
Pool data was collected from MFI exchange data base for the period 2008 to 2012. Random
MFIs have been taken from above mentioned. Taken financial sustainability as a dependent
variable along with independent variables Equity, Portfolio at risk30, Average loan, Gross loan
Portfolio, Percentage of women borrowers and Cost of borrower. Which show that average loan
and Portfolio at risk30 have insignificant affect and remaining all variable have significant affect
with financial sustainability. ( Prabhjot Kaur 2014)

This study was conducted in Ghana on the basis of financial sustainability which shows the
difference in sustainability of MFI’s those who offer combined services (micro-credit and micro-
saving) those who just only offer micro-credit. Sample Data for this purpose is ascertained by 20
out of 32 MFI’s in country who are reported to the Microfinance Information Exchange Market
from 2006 to 2013. Dependent variables were OSS (operational self-sufficiency) and Portfolio at
risk where as two independent variables were used, namely “Accept deposit” and “Do not accept
deposit”. The study adopted quantitative approach and Mann- Whitney U test for analyzing the
data and found that those who offer micro-credit and services are less sustainable than those who
offer just micro-credit .The study conclude that Deposit taking institution adopt effective
management policies to reduce their risk. Lastly deposit taking institute should explore how to
integrate technology in their operations so as to reduce cost associated with mobilizing micro
savings. (Avortri. C & and Wereko. T.B.2016)

Genuine attempts to fight destitution saw the ascent of microfinance (Kimando et al, 2012)
Robinson (2001) portrayed micro finance as meager scale fiscal organizations basically credit
and saving provided for individuals who ranch or fish or gathering; who work little endeavors or
downsized scale tries where stock are made, reused, fixed, or sold, who give associations, who
work for wages or commissions; who get pay from leasing little proportions of land, vehicles,
draft creatures, or hardware and gadgets; and to different people and parties at the contiguous
dimensions of making nations, both typical and urban.
The implications of micro finance establishments proposed by a couple of scientists and
affiliations are evidently exceptional in connection to each other. Regardless, the pith of the
definitions is commonly the same. Microfinance is the plan of little scale money related
organizations to low compensation or unbanked people (Hartarska, 2005). The microfinance
region, besides being a fundamental section of the budgetary system, is similarly seen as a
dejection diminish strategy for making countries (kyereboah-coleman, 2007) It is about
arrangement of "a wide scope of budgetary administrations, for example, stores, credits,
installment administrations, cash exchanges and protection to poor people and low pay family
units and their homestead or non-cultivate smaller scale undertakings" (Mwenda and Muuka,
2004, p.145).

The Asian Development Bank (ADB) characterizes microfinance as the arrangement of an

expansive scope of monetary administrations, for example, stores, credits, installment
administrations, cash exchanges, and protection to poor and low-wage family units and their
small scale undertakings (ADB, 2000).

Microfinance establishments intend to oblige the poor by giving financial administrations in light
of the fact that the poor arc to a great extent avoided from the standard financial segment
(Morduch 2000). Notwithstanding to give n solid flow of credit and supportable improvement of
the division, MFIs likewise should be financially reasonable (Zerai and Rani 2012: Serrano-
Cinca and Gutie’rrez-Nieto 2014).

Access to monetary administration can expand family unit welfare through an expanded capacity
to gather resources, opening efficiency possibilities and expanding ability to manage dangers
Akpandjar et al., 2013: Wangwe, 2004). However most of the monetarily dynamic populace is
barred from standard money related administrations in most creating nations. In Tanzania
around90 for each penny of the populace barred from the standard keeping money segment
(Finscope, 2009). Practically speaking, notwithstanding monetary intermediation. some micro
establishments give social intermediation organizations, for instance, hoard course of action,
change of confidence, and get ready in cash related instruction and organization capacities
among people from a get-together anticipated that would benefit low-pay women and men
(Ledgerwood 1999).
This implies the abilities and certainty of low-wage individuals must be created notwithstanding
giving them access to credit arrangement. In this manner, the microfinance approach is not a
moderate approach offering just money related intermediation but rather an incorporated
approach offering both budgetary intermediation and alternate administrations said above
(Ledgerwood, 1999).

Microfinance foundations are considered as an apparatus for destitution mitigation through

enhancing access to back and money related administrations. As indicated by Basu et al. (2004)
MFls supplement successfully the formal managing an account division in giving money related
administrations to poor people.

The reason of enhancing fund originates from the commence that strengthening of the poor
through making pay producing limit empowers the poor to get to all improvement necessities to
escape mutifaceted measurements of destitution and diminish their helplessness to startling
occasions (Davis et al., 2004).

Microfinance is a successful device to battle neediness by giving monetary administrations to the

individuals who don't have admittance to or are ignored by the business banks and other
budgetary organizations (Dokulilova et al, 2009). Be that as it may, ponders (e.g. Ahlin and
Jiang, 2008) recommend that these advantages of microfinance must be acknowledged the length
of the poor keep on being customers of microfinance establishments.

Microfinance brought casual segment, while including unwavering quality and the guarantee of
mental and social strengthening than monetary congruity and in a few nations it is now doing this
strengthening. Effect of smaller scale fund is apparent in on a critical scale. Bringing certainty,
boldness, expertise improvement and strengthening (S.Sarumathi, Dr. k. Mohan, 2011).

Financial Sustainability of Micro finance Institutions

Capacity to deal with its accounts so it can meet its spending duties, both now and later on. It
guarantees that future eras of citizen’s don’t confront an unmanageable bill for taxpayer driven
organizations gave to the present generation".(LGA, 2015, p. 3). Khandker (1996) takes note of
that Financial Sustainability characterizes the capacity of a MFI to proceed with operations
inferable from practicality of operations, consequently capacity to cover operational, money
related and administrative expenses.

Grameen Bank, Khandker observes that the bank accomplishes FS, if the expense per unit of
capital advance is facilitated with the interest charged per unit to clients. Financial sustainability
in this manner can simply be accomplished where interest charged per unit of chief on advances
outperforms the related costs of raising the first. Practicality is described as the limit of a
substance to continue with a portrayed lead uncertainly (Filene, 2011)

At the end of the day, it is the capacity of an association to meet its objectives or focus over the
long haul. With regards to budgetary foundations and for firms, this requires private gainfulness:
an arrival on value, net of sponsorship that surpasses the private open door cost of assets
(Schreiner and Yaron, 1999). Money related manageability is one of the significant
measurements of supportability. It is an unmistakable parameter and diverse markers are
formulated to gauge the money related supportability of any establishments. The budgetary
manageability of a MFI is characterized as its ability to produce wage from its operations to
cover every one of its costs and an edge to bolster its development (Ayayi and Sene, 2010). As to
attributes of MFIs, Cull et al (2011) demonstrated that benefit looking for microfinance
organizations keep up their benefit rate by diminishing or shortening social effort.

It is likewise imperative to specify that those organizations who once in a while concentrate on
business pick up furthermore, for the most part concentrate on social effort, and relinquish
benefits. This investigation is tantamount with the revelations of Salim (2013) that, two of the
greatest MFIs in Bangladesh, specifically Grameen Bank and BRAC, have yielded potential
advantage of 35.2 and 31.4 % independently in 2003 to accomplish more conspicuous social
exertion.

Besides, Serrano-Cinca and Gutirrez-Nieto (2014) have found that non-NGO and significant
MFls(with respect to full scale assets) were quantifiably basic for coasting. Mersland and Strom
(2010) in like manner recorded that create MFls are mission-skimmed when assuming typical
praise gauge as a mediator of estimation.

Self-maintainability can be measured as far as both budgetary and monetary supportability.

Money related maintainability implies the smooth operation of budgetary establishments with the
important benefit, having sufficient liquidity to defeat any difficulties. As such, money related
maintainability implies that the Institute can deal with all its present costs and the costs achieved
being developed, if it develops. Monetary maintainability can be gaged from an effectively
quantifiable intermediary of the effect on low-salary assemble money related intermediation in
lieu of a full-money saving advantage examination (Yaron et al., 1998)

The term supportability has more extensive measurements, including budgetary manageability,
institutional supportability, mission manageability, program manageability, human asset
supportability, advertise manageability, lawful arrangement environment manageability and
impact sustainability. A concise and detailed explanation of these concepts is presented in Sa-
Dhan (2013). Despite the importance of each component of sustainability, this study will
concentrate on monetary and operational manageability of SACCOs because of information
accessibility and the general understanding that money related manageability can be a decent
circuitous intermediary of other supportability measures, in any event in the short run.

There is an exceptional civil argument among "welfarists' and "institutionalists" with respect to
two targets of MFIs, from one perspective, "welfarists contended that the target of Micro finance
establishment's creation ought to be to a great extent concentrated on taking into account the
poorest of poor people. Then again, "institutionalisis" contended that financial stability for future
development of the area will prompt to a more noteworthy effect for the poor group (Ben Sokane
2012; Hermes et al. 2011),

Yeron im 1992) examined that the two most essential goals for a provincial budgetary
establishments to be effective are monetary self-maintainability and more effort to the objective
rustic populace. Cash related possibility relates to the way that a crediting foundation should at
any rate think about the cost per each unit of coin lent to the esteem it charges its borrowers (ie.
the credit cost).

Money related reasonableness relates to meeting the fiscal cost of advantages (opportunity cost)
used for Money related self. Reasonability is said to be expert when the entry on esteem, net of
any appointment got, approaches or outperforms the open entryway cost of benefits. As
demonstrated by Khandker ct al. (1995), the possibility of supportability of microfinance can be
separated into four interrelated contemplations; specifically, cash related sensibility, money
related appropriateness, institutional attainability and borrower reasonableness recognize and
distinctive operations for the pay it produces from its crediting works out.

Be that as it may, for economical neediness lightening, the MFIs themselves ought to be
maintainable since unsustainable MFIs won’t help the poor later on the grounds that the MFIs
will be gone (Schreiner, 2000)

Money related maintainability of microfinance foundations is presumably the key measurement

of micro finance supportability. It alludes to the capacity of MFls to take care of every one of its
expenses from its own particular produced salary from their services ("Thapa et al., 1992")
without relying upon outer favor or sponsorship.

Dunford (2003) additionally characterizes budgetary manageability as the capacity to continue

going towards microfinance objective without proceeded with giver bolster. These definitions
fixate on one point, that is, the capacity to rely on upon self-operation. The definitions
additionally suggest the likelihood of making benefit out of the microfinance operations.

Budgetary supportability can be measured in two phases to be specific operational manageability

money related independence. As per Meyer (2002) operational maintainability alludes to the
capacity of the MFI to take care of its operational expenses from its working salary paying little
respect to whether it is sponsored or not. Then again, MFIs are fiscally independent when they
can cover from their own particular produced wage, both working and financing costs and other
type of endowment esteemed at market costs.

The above meanings of money related manageability suggest that a misfortune making (MFI
with poor monetary execution) won't be named monetarily feasible. Again a benefit making
MFI, whose productivity is resolved subsequent to covering a portion of the working expenses
by sponsored assets or assets, will likewise not be considered as fiscally supportable.

The arrangement of monetary administrations to the poor is depended on the suspicion that MFIs
exist forever to tackle social ills, for example, neediness, unemployment and low expectations
for everyday comforts (lezza and La Cour, 2010; Khawari,2004; Bogan, 2012).

To connect a financing gap, microfinance has created as an extreme instrument for desperation
facilitating through expanded money related get to poor people. While the flood of microfinance
organizations (MFI) has been remarkable in the previous three decades, their execution and
maintainability is as yet a dispute some open consideration.

May be the most complete clarification in the midst within recent memory is that by Jonathan
Morduch (2000) in his paper on micro finance: he fights that under 1 for every penny of MFls
are viable and near 5 for each penny will ever be. While the announcement was issued with
regards to NGOs and benefactor supported MFls, its led some light on the difficulties
confronting the business as a rule In any case, the experimental research done by Gonzalez
(2005) utilizing Mix Market information demonstrates that no less than 50 for every penny of
MFIs get to be supportable following five to ten years of operation. In view of this debate in the
writing, plainly more exact work is expected to examine the execution and maintainability of
various microfinance plans.

The meaning of supportability has been given different elucidations. Nonetheless, of late,
researchers and specialists meet to recognize two levels of maintainability from the underlying
three or four operational independence (OSS) and money related independence (FSS) (lezza,
2010)

Financial self-sufficiency (FSS)

The goal of FSS is to quantify whether a foundation gains enough incomes from advances to
covering costs, arrangement for advance misfortunes and cost of capital which for is barred from
the Oss. The cost of capital measures the capacity to keep up the estimation of in place from
expansion (Ibid). According to Meyer (2002) Then again, MFls are fiscally independent when
they financing costs and other type of sponsorship esteemed at market costs.

Operational self-sufficiency (OSS)

OSS measures how satisfactory MFI incomes are to take care of the aggregate costs (working
costs credit misfortune arrangements and monetary costs) slighting all stipends, endowments and
gifts Taking after the MIX Market meaning of maintainability Bogan et al (2007) portrayed a
MFI being operationally feasible when OSS achieves 100% and monetarily reasonable when
OSS achieves 110% Operational supportability (OSS) is measured as aggregate money related
income (Financial cost+Opcrating cost+ Loan misfortune arrangement cost)

According to Meyer (2002) operational supportability alludes to the capacity of the MFI to take
care of its operational expenses from its working wage paying little mind to whether it is
financed or not. The aftereffects of a few reviews have demonstrated that the operational
proficiency of self- financing MFIs to be around 33% contrasted with that of the MFIs which
rely on upon outer financing (Getubig et al., 2000). For instance, Ayayi and Sene (2010) has
found that sound administration hones which prompt to enhancing operational proficiency add to
money related supportability. There is likewise proof of enhancing operational productivity
prompting to development in client base and loaning in the event that reviews done in Latin
America (Battilana and Dorado, 2010). There is no review in the writing that has taken a gander
at the relationship between the operational proficiency and the execution (as characterized prior)
of MFIs. Taking everything into account, an expansion in operational effectiveness is probably
going to bring about additional assets (from givers and also inner investment funds) for MFis to
offer budgetary help to more poor borrowers and accomplish manageable operations. This will
then add to improving can cover from their own particular created wage, both working and the
execution in easing destitution in a successful way

Factors affecting sustainability:

Give us now a chance to distinguish a few variables that are relied upon to influence financial
sustainability of MFls From different studies, we watched that there are a wide number of
components which influenced the financing sustainability of the MFIs. A portion of the vital
determinants of financial sustainability identified are: age of the organization, legal status,
lending model cost per borrowers , product type, size of the MFI, number of borrowers, yield on
portfolio, profitability. financing costs, managerial efficiency, advance officer profitability, staff
compensations, fantastic portfolio, working efficiency, size of the capital resources of a MFI and
the macro economic factors, for example, inflation and loaning rate (Woller and Schreiner,
2001;Bopan. 2012; Ayayi and Sene, 2010; Nyamsogoro, 2010; Hartarska and Nadolnyak, 2010;
lezza, 2010; Kinde, 2012).
Subsequently, MFIs confront a tradeoff between the monetary and the social benefit. Changing
components can be contemplated to represent social-benefit, these include: normal credit
measure, number of country customers, and net female borrowers (Balkenhol, 2007)

Theoretical Framework

The theoretical framework of the study describes the selected variable.

Independent Dependent
Variable Variable

Management Efficiency

Size of Microfinance

Deposit mobilization Financial

Sustainability

Loan intensity

Age of Microfinance

Leverage
 SUMMERY OF LITERATURE REVIEW

Dependent Independent Direction of

Author Country
variable variable Effect

financial Breadth of
Tehulu(2013) No effect East Africa
sustainability outreach
Deposit
No effect
mobilization
Management
-
inefficiency
Portfolio at risk -
Loans intensity +
Size +
financial breadth of
Kinde (2012) affect Ethiopia
sustainability outreach
depth of outreach affect
dependency ratio affect
cost per borrower affect
capital structure No effect
staff productivity No effect
financial Capital/Assets India and
Rai(2012) affect
sustainability ratio Bangladesh
Number of active No effect
 borrowers
Yield firm No effect
Operating
expense/loan affect
portfolio
Portfolio at risk affect
Women
No effect
borrowers
Debt Equity ratio No effect
Inception for
No effect
firm
Adongo and
Financial Donor
Stork + Namibia
sustainability involvement
(2005)
Group lending -
Per capita
No effect
income
Ayayi and financial
portfolio at risk Not clear World
Sene(2010) sustainability
interest rate +
good
+
management
productivity ratio Not clear
client outreach +
Women clientele _ but not sig
Age of
+
microfinance
performance of capital
negatively
Sekabira(2013) MFI structure(Debt Uganda
correlated
(financial and grants
 sustainability)
Latin America
financial
Paxton (2002) depth of outreach + and
sustainability
Africa
financial self- developing
Hisako (2009) competition No effect
sufficiency (FSS) countries
Africa, East Asia
financial
Bogan (2009) capital structure - Europe,
sustainability
South Asia
performance of
capital
MFI negatively
Sekabira(2013) structure(Debt Uganda
(financial correlated
and grants
sustainability)

Welfarists
Profitability -
financial
East Africa
Kipesha and sustainability
Outreach
Zhang(2013)
Institutionalist
Profitability
financial +
sustainabili
Zerai and Financial
Outreach + India
Rani(2012) sustainability
Financial Depth of
Quayes (2012) + 83 countries
sustainability outreach and
financial
Sarma and sustainability of
Not sustainable India
Borbora(n.d) microfinance
institutions
 Africa, East
Asia,
Eastern Europe,
Bogan and Financial
Capital Structure + Latin America,
etail(2007) Sustainability
the
Middle East and
South Asia
 CHAPTER THREE

3. METHODOLOGY

The examination was sorted out by picking the procedure as per college rules, subsequently in
this said section “look into system" was regulated to convey this exploration has been depicted.
The principle points of this section are to clarify the methodological approach that was sorted out
to do this exploration. The strategy and procedure of the study contain various parts, for
example, Population of the study, sample size, estimation and technique for information
accumulation was examined. Additionally, measurements utilized for information examination
and translation examined including equation for ascertaining mean score have been expressed in
this portion.

Population

The population of this dissertation consisting of 10 micro-finance providing organization

including micro financing institutions, micro-finance banks and rural support program) reported
to and listed with micro-finance Pakistan Microfinance Network and FSA Report 2013-17.

Description of Sample

The Sample of current review containing on 10 microfinance providing organization

(Microfinance institutes, microfinance bank, and rural support programs) in Pakistan reported to
microfinance network Pakistan. This sample takes place 10 microfinance providing organization
by using convenient sampling technique (due to availability of data and size of firms)
representing, (Microfinance institutes, microfinance bank, and rural support programs). The time
duration of data for this study is range 2013- 2017. The financial information regarding the
existing study variables is gathered from the audited annual financial reports (FSA Report 2013-
17).

Sample Size

The present study is unique in its nature, resembling in the scope of Pakistan presently when the
study was conducting there were found very little evidence of exploring the financial
sustainability Microfinance providing organizations in Pakistan. Therefore, current study firstly
took 10 Microfinance providing organization listed with microfinance network of Pakistan out of
40 micro finance providing organization over the time period of 2013 to 2017 listed at
microfinance network in Pakistan by using annual audited reports.

Description of the Variables

According to this research, financial sustainability is used as a dependent variable whereas

Management efficiency, Size of Microfinance, Leverage, loan intensity, Deposit mobilization
and Age of Microfinance are considered as independent variables.

Financial Sustainability (OSS, ROA and ROE)

Meyer (2002) showed that measuring financial sustainability requires that MFIs keep up good
financial accounts and follow recognized accounting practices that give full transparency for
income, expenses, loan recovery and potential losses. The financial performance of MFIs is
frequently contemplated by the profits, the MFI earns as a percentage of assets (return on assets
ROA). Rai and Rai (2012) have utilized ROA, as descriptive factors to determine financial
sustainability of MFIs (as measured by OSS). Roy (2011) analyzed the delivery process and
profitability of MFIs. Profitability was dissected using ROA and ROE. This study used
correlation and descriptive analysis technique and found that MFIs of Assam had high
profitability.

Thus, keeping in view both long-term and operational sustainability of MFIs, OSS, ROA and
ROE have been taken as a dependent variable to measure the financial sustainability of the MFIs
in Pakistan. Mainly Financial Sustainability will be measured by the following formulas:-

OSS =Total operating income / Total operating expenses

ROA = Net Income / Total Asset

ROE = Net Income/ Total Equity

Management efficiency

Effectiveness can be measured by its efficiency (for example number of borrowers per staff) and
cost administration (for example cost per borrower) measurements. A review by Woller (2000)
on money related feasibility of town saving money to reassess the past execution and future
prospects of town keeping money show that the quantity of borrowers and cost per borrowers
were observed to be among the factors most very related with money and related maintainability.
Later Woller and Schreiner (2002) inspected the determinants of money related maintainability
and it was found that total efficiency was huge determinant of benefit additionally late review by
Ganka (2010) of Tanzanian.

The Coefficient of working cost proportion (OETA) is , of course demonstrating a negative

association with MFI’s with money related maintainability the out is measurable huge at the 1%
level and suggest that an expansion in this factor increments the money related supportability of
MFI’s in east Africa. Predictable to this discovering Pasiouras and Kosmidou (2007), Bourke
(1989) and Kosmidou (2008) have additionally found that poor cost administration to be among
the fundamental benefactors to the poor money related establishment benefits.

Formula of Management efficiency:-

MI = Operating Expense / Total assets

Size of MFI’s

By the size microfinance institutions the researcher of the study means that the natural log of
total asset of firm would be equal to the volume of MFls. The size of MFIs has positive
relationship with the institution financial sustainability. Formula is mentioned below

Size of MFI’s = Natural Log of Total Assets

Leverage

The coefficient of (Total long term debt) / (shareholders equity) (DE) is negative and accurately
(P>Z=0.039). This may be relied upon to the way that MFIs. Those don’t pay benefits and this
makes esteem a respectably humble wellspring of back appeared differently in relation to
commitment financing different surveys gives us correct confirmation supporting this negative
relationship between commitment level and affiliations executions or advantage. (Stall et al,
2001; Farma and French, 2002),

Leverage = Debt/ Equity

Loan intensity

The coefficient of credit to resource proportion (LTA) is sure and factually noteworthy at the 5%
level. This shows that money related maintainability is decidedly and essentially affected by the
proportion of gross credit portfolio to add up to resource. The gross credit portfolio is the
primary well spring of pay to a MFI and in this manner, different things steady, the higher the
credit, the income and benefits. Be that as it may, if a MFIs' hazard increment when its credit to
resource proportion increment, then benefits may diminish. This outcome repudiates with the
discovery of past writing which archive a negative effect of LTA on MFls' supportability
(Okumu, 2007).

LI= Long term Debt/ Total asset

Deposit Mobilization

Kinde, (2012) demonstrated that it is through reserve funds that MFls grow credit portfolios,
enhance maintainability, lessen crediting rates and move towards fulfilling request. However,
Tehulu, (2013) finds an immaterial impact in East Africa, Khandker, (1996) sees that funds
activation demonstrates a MFI's capacity to self-fund, consequently, achieve autonomy and
permanency (Khawari, 2004). lezza and La Cour, (2010) and Kin, (2008) noticed that store
fascination has a stamped commitment to FS, consequently, it has ended up the favored MFI
financing alternative. Stores are pulled in with ease and are utilized to produce advances
permitting MFIs to appreciate remarkable net revenues from the loan fee differential. This
decreases expensive obtaining for on-loaning by MFIs (Kiru, 2008; de SousaShields and
Frankiewicz, 2004). The recent research was conducted by Aderaw Gashayie & Dr Manjit Singh
(2015) in which there was no effect found of deposit mobilization in financial sustainability.

DM = Deposit / Total assets

Age of Micro-Finance

The age of micro finance is determined by the number of years MFI’s working. In the past Ayayi
and Sene (2010) has used this as independent variable and found positive relation with financial
sustainability by using correlation and regression model.

Model

The model used in this study is as follow:

F.S =β0 + β1ME + β2SOC + β3DM + β4LI + β5AGE + β6LEV + ε Where

F.S = Financial sustainability

β0 = Constant Term (The Intercept)

β1ME = Management Efficiency

β2SOC = Size of company

β3DM = Deposit Mobilization

β4LI = Loan Intensity

β5AGE = Age of Microfinance

β6LEV = Leverage

ε= Error Term
Hypothesis:

The hypothesis of present research is based on the literature discuss above to examine the
determinants affecting financial sustainability in various micro financial institutions.

H1 Management efficiency affects the financial sustainability of MFIs.

H2 Size of MFIs has an impact on the financial sustainability of the MFIs.

H3 Deposit mobilization, since it is a short term debt, contributes toward the financial
Sustainability of MFIs.

H4 Loans intensity affects the financial sustainability of MFIs.

H5 Age of Micro Finance has an impact on the financial sustainability of MFIs.

H6 Leverage has an impact on the financial sustainability of MFIs.

 Chapter 4:

Empirical Results

4. Descriptive statistics:

The descriptive statistics is used for qualitative analysis to present date in appropriate manners.
Descriptive statistics help to describe large sample data and this analysis include below items,

OSS SOC LEV DM AGE

Mean 1.239638 15.69912 4.141476 0.537246 2.184965

Maximum 6.164900 17.89240 11.56930 0.911000 2.833213

Minimum 0.397400 13.24060 0.035900 0.003800 1.609438

Std. Dev. 0.827760 1.338899 3.403149 0.284650 0.495380

Observations 50 50 50 50 50

Cross sections 10 10 10 10 10

The above table shows the descriptive statistics of the findings of the study .It illustrates that the
4 independent variables and their impact on 10 Micro finance institutions (MFI’s). This table
involved observations like Mean, Maximum value, Minimum value, Standard Deviation. This
qualitative investigation incorporates Size of Company, Leverage, Deposit Mobilization, Age of
Micro finance and OSS (operational self Sufficiency) which measures impact on Financial
Sustainability. The Sample size consisted of 10 MFI’s of Pakistan listed with micro finance
network over the time period of 2013-2017.

Table also shows indicates the correlation of coefficient among dependent variable Financial
Sustainability and independent variables. OSS mean value is 1.239638 with minimum range of
0.397400 to maximum range of 6.164900 and its standard deviation is 0.827760. Size of
company mean value is 15.69912 and its highest value is 17.89240 and lowest range is 13.24060.
Leverage mean value is 4.141476, standard deviation value is 3.403149, and Deposit
mobilization mean is 0.537246 where as its higher value is 0.911000 and the lower value is
0.003800, Age of micro finance mean value is 2.184965 and its minimum value is 1.609438 and
maximum is 2.833213.

Panel Regression Analysis:

To know the appropriate estimations model Redundant Fixed Effects Tests was conducted and
the result were highly insignificant which are shown below

Redundant Fixed Effects Tests

Pool: POOL
Test cross-section fixed effects

Effects Test Statistic d.f. Prob.

Cross-section F 1.061236 (9,37) 0.4130

Cross-section Chi-square 11.481662 9 0.2441

Which is inappropriate for the research so further it is finalized that we are going to use Common Effect
model (CEM) for panel analysis,

Method: Pooled Least Squares

Date: 01/03/19 Time: 19:45
Sample: 2013 2017
Included observations: 5
Cross-sections included: 10
Total pool (balanced) observations: 50

Variable Coefficient Std. Error t-Statistic Prob.

C -5.511705 2.102072 -2.622034 0.0119

SOC_? 0.453266 0.152970 2.963104 0.0049
LEV_? -0.055965 0.050805 -1.101565 0.2765
DM_? -1.362124 0.681372 -1.999089 0.0517
AGE_? 0.274168 0.228180 1.201542 0.2358
R-squared 0.202024 Mean dependent var 1.239638
Adjusted R-squared 0.131093 S.D. dependent var 0.827760
S.E. of regression 0.771598 Akaike info criterion 2.413934
Sum squared resid 26.79138 Schwarz criterion 2.605137
Log likelihood -55.34836 Hannan-Quinn criter. 2.486745
F-statistic 2.848175 Durbin-Watson stat 1.419002
Prob(F-statistic) 0.034571

The conclusion of the result shows that coefficient of variables is highly significant which show
that separately each variable (SOC, LEV, DM, and AGE) which is above mentioned in the result
has enormous effect on Financial sustainability. The variable coefficient is highly significant
because there are other variables which effect on Financial Sustainability.

Weighted Statistics:

R-squared 0.202024

Adjusted R-squared 0.131093

Prob(F-statistic) 0.03457 Durbin-Watson stat 1.419002

 CHAPTER FIVE

5.1CONCLUSION

In this investigation, we found that the financial sustainability fluctuates with the impact of
selected independent variables. This study was conducted to identify the relationship between
variables of financial sustainability. This study is based on secondary data (Annual audit report
FSA) for 10 MFIs comprising of 50 observations covering the time period from 2013-2017. The
study include age of microfinance, leverage, Size of company, deposit mobilization,
management efficiency, loan Intensity.

Based on the findings of the study all observations were run on Redundant fixed affect model
and the result shows that probability of the variables are highly insignificant, because of
insignificant result we are going with common effect model (CEM) and the result show that four
variables have impact on financial sustainability. Coefficient of SOC and Age of microfinance
has positive correlated and the other LEV and DM has negative correlation, Probability of SOC
and DM has highly significant whereas LEV and Age of microfinance has insignificant effect on
Financial sustainability. By keeping in view LEV and Age of microfinance are insignificant but
they both are increasing adjusted R-square.

The study proves that majority of the findings are lined up with the previous researchers.
Decision makers should consider these above variables in making investment decision for micro
financial institutions in Pakistan

5.2 Recommendations

The microfinance foundations need to strength their management effectiveness so as to extend

outreach. Since sustainability is generally a result of a solid and effective administration
structure, as the microfinance establishments fortify the structure to accomplish objective,
supportability will be accomplished at the same time. Microfinance accomplishes the effort
organizations are urged to build their effort by giving moderately little advances. The little
advance sizes can achieve more customers and in this manner accomplish a more prominent
effort.
Consequently, it is basic that proper approaches, legitimate routines and framework be set up to
reduce the cost for the microfinance organizations. The high need set by the administration on
vitality and infrastructural advancement and in addition data correspondence and innovation is a
vital arrangement system that will profit every one of the segments of the Pakistani economy,
including the microfinance business

The researcher take into account that deposit mobilization and debt-to-equity ratio, Long term
Debt/ Total asset Total operating income / Total operating expenses ,however other factors
should be considered just like retained earnings and macroeconomics factors like GDP this study
also cover up the developing countries like Pakistan where economic and political condition
differ timely

Finally further research could study the main factors of credit risk and lending behaviors of these
variables are the main factors of financial sustainability.