Master Thesis
The Effect of Cultural Differences on the
Success of Microfinance Institutions.
By
Daan Tjeenk Willink
S1385534
“Microfinance is an idea whose time has come."
Kofi Annan, United Nations Secretary-GeneralUniversity of Groningen
Uppsala University
Faculty of Economics and Business
Msc International Business and Management
&
Msc International Financial Management
Date:
May 2010
Address:
Rooseveltlaan 11-3
Postal Code and city:
1079 AA Amsterdam
E-mail:
daantw@hotmail.com
First supervisor:
Dr. Ing. N. Brunia
ii
Abstract
This paper investigates the effect of culture on the performance of microfinance institutions (MFIs). Culture is defined by Hofstede‟s Cultural Dimensions (Power Distance, Individualism, Masculinity, and Uncertainty Avoidance) and performance is measured by Depth of Outreach and Operational Self-Sufficiency, whereby the emphasis in this study is placed on the latter. The effect of Depth of Outreach on Operational Self-Sufficiency is also addressed. This research is aimed at the investor in MFIs to identify under what country cultural characteristics MFIs perform best.
Culture has an impact on the Operational Self-Sufficiency of an MFI, the indicator of economic performance. Power Distance (positive) and Individualism (negative) show statistically significant, though marginal, impact on the economic performance of MFIs. Masculinity and Uncertainty Avoidance do not show a significant effect on the Operational Self-Sufficiency.
Though the impact of culture on Depth of Outreach (the measure of social performance) has not been investigated, it becomes clear that there is a negative effect of Depth of Outreach on Operational Self-Sufficiency.
Keywords: Cultural Dimensions; Operational Self-Sufficiency; Depth of Outreach;
iii
Preface
This thesis is the result of a research about the effect of culture on the performance of Microfinance Institutions. I chose this subject because of my interest in cultures, in business, and in developing countries. These interests have its origins in several courses at the Rijksuniversiteit Groningen, The Netherlands, and the Uppsala University, Sweden and my experience in the developing world. I would like to thank both universities for their education and in addition a number of persons in particular.
First I would like to thank Dr. Ing. Brunia, who was my supervisor while writing this thesis, for his comments and help on my thesis.
Further, I would like to thank my parents, who gave me the opportunity to study at these Universities and for their help and support I always received while studying.
Finally, I would like to thank all the persons I met in Groningen for having an unforgettable time in this city.
I hope you have pleasure in reading this thesis.
iv
Snapshots on Microfinance
‘In Africa, women account for more than 60 per cent of the rural labour force and contribute up to 80 per cent of food production, yet receive less than 10 per cent of credit provided to farmers.’
‘The World Bank estimates that there are now over 7000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs world-wide is estimated
at US$2.5 billion and the potential for new growth is outstanding.’
‘There is concern that official assistance will be diverted from vital primary care aid programmes such as health, water projects and education into MFIs, owing to their popularity among donors.’
‘Though women appear to benefit most, studies indicate that many loans awarded to and paid back by women are in fact used by men.’
‘The widely-imitated Grameen Bank in Bangladesh aims to provide credit to those in extreme poverty. Some 94 % of those who meet the bank's criteria and take up loans are women. Grameen borrowers keep up repayments at a rate of around 98 %. The Bank lends US$30 million a month to 1.8 million
needy borrowers.’
‘Savings are important both as a vital safety net for the poor and as a source of funding that does not rely on external sources. Many strong MFIs, notably in Africa, recycle the savings of needy clients as a
principal source of loan funds for their customers.’
‘The Microcredit Summit estimates that US$21.6 billion is needed to provide microfinance to 100 million of the world's poorest families. The Summit planners say it should be possible to raise US$2
billion from borrowers' savings alone. The final figure may be even higher.’
‘Studies have shown that during an eight year period, among the poorest in Bangladesh with no credit service of any type, only 4 percent pulled themselves above the poverty line. But with individuals and
families with credit from Grameen Bank, more than 48% rose above the poverty line.’
‘Estimated: there are 13 million microcredit borrowers, with USD 7 billion in outstanding loans, and generating repayment rates of 97 percent. It has been growing at a rate of 30 percent annual growth.’
‘Fewer than 2 per cent of poor people have access to financial services (credit or savings) from sources other than money lenders.’
‘Under 10 million of the 500 million people who run micro and small enterprises have access to financial support for their businesses.’
‘The world's seven richest men could wipe out global poverty. Their combined wealth is more than enough to provide the basic needs of the poorest quarter of the world's people.’
Table of Content
Abstract ... ii
Preface ... iii
Snapshots on Microfinance ... iv
Table of Content ... v
1.
Introduction ... 1
2.
Literature review ... 4
2.1.
Success of Microfinance Institutions ... 4
2.1.1.
Social Success ... 5
2.1.2.
Economic Success ... 6
2.2.
Impact of Social on Economic Success ... 7
2.3.
Cultural Dimensions ... 9
2.4.
The impact of Culture on the Performance of MFIs. ... 10
2.4.1.
‘More Equal than Others’ ... 11
2.4.2.
‘I, We, and They’ ... 13
2.4.3.
‘He, She, and (S)He’ ... 15
2.4.4.
‘What is Different, is Dangerous’ ... 16
2.5.
Other influences on Success of Microfinance Institutions ... 19
2.5.1.
Control Variables ... 19
3.
Hypotheses and Methodology ... 21
3.1.
Hypotheses ... 21
3.2.
Methodology ... 21
4.
Data and Descriptive Statistics ... 26
4.1.
Selection Criteria ... 26
4.2.
Sources of Data ... 27
4.3.
Descriptive Statistics. ... 28
5.1.
Initial Results Independent and Dependent Variables. ... 31
5.1.1.
Effect of Depth of Outreach on Operational Self-Sufficiency ... 35
5.1.2.
Effect of Cultural Dimensions on Operational Self-Sufficiency ... 36
5.2.
Final Model Results ... 39
6.
Conclusion ... 42
6.1.
Results ... 43
6.2.
Implications ... 46
6.3.
Limitations ... 46
6.4.
Future Research ... 47
References ... 48
Appendices ... 53
Appendix 1: Diamonds The Mix. ... 53
Appendix 2: Microfinance Institutions. ... 54
Appendix 3: Descriptive Statistics. ... 55
Appendix 4: ANOVA and Kruskal-Wallis. ... 55
Appendix 5: Geographical Distribution. ... 56
Appendix 6: Median Comparison and Kruskal-Wallis. ... 56
Appendix 7: Curve Estimator ... 57
Appendix 8: Correlation Matrix. ... 57
Appendix 9: Regression Analyses. ... 58
1
1.
Introduction
"Give a man a fish, he'll eat for a day. Give a woman microcredit, she, her husband, her children and her extended family will eat for a lifetime."
Bono1
“This [Microfinance] is not charity. This is business: business with a social objective, which is to help people get out of poverty.”
Muhammad Yunus2
In this thesis the effect of cultures of country on the success of Microfinance Institutions (from now on MFIs) is investigated. The four traditional Cultural Dimensions of Hofstede (2003) - Power Distance, Individualism, Masculinity and Uncertainty Avoidance - are used to measure cultural differences.
Microfinance has a long history and evolution. In the early 1700s Jonathan Swift initiated a microcredit organization providing small loans to the rural poor (www.globalenvision.org)
.
An important event in this evolution is the start of research to investigate the possibility of a credit delivery system to provide financial services targeted to the rural poor by Muhammed Yunus in 1976. This resulted in the Grameen Bank in Bangladesh, which became an independent bank in 1983. The opening of the Grameen Bank is often seen as the start of modern microfinance.Microfinance covers insurance, deposit taking, and sometimes even pensions. However the most important element of microfinance today is still micro credit (Wellink, 2007), which includes several forms of lending programs. One important form, used by many MFIs, is group lending (www.yearofmicrocredit.com; Armendáriz de Aghion and Morduch, 2000), pioneered by Mohammed Yunus, and according to Hans Dieter Seibel (board member of the European Microfinance Platform) as a model used by many MFIs. This model can be defined as „a mechanism that allows a number of individuals to gain access to microcredit by providing a collateral or guaranteeing a loan through a group repayment pledge. The incentive to repay is based upon peer pressure; if one person in the group defaults, the other group members make up the payment amount´ (www.accion.org).
1
Irish singer and musician of the Dublin-based rock band U2 and one of the world's best-known philanthropic performers.
2
2
Another form of lending by MFIs works as follows: a loan is given to individuals in a certain village, whether belonging to one family or not. Once these individuals repay their money after a pre-specified time, new individuals will get a loan (Yunus, 2003). The village people will be more dependent on each other and will have to be more responsible as a group. This method is also pioneered by the Grameen Bank and often used by other MFIs.The original aim of microfinance institutions has been to reduce poverty and improve the quality of life through the provision of financial services to the poor. Nowadays MFIs are more and more becoming regulated, and transform into traditional commercial banks, whilst that does not mean that the original goal is changing. The number of MFIs has increased considerably, resulting in more competition between MFIs (Tucker, 2001; Mueller and Uhde, 2009). Because of the increasing competition, MFIs are trying to become less dependent on donors and government agencies and are trying to reach full sustainability (Crabb, 2008). This is not only relevant for the growth of the MFI but also for the outreach to the poor (Consultative Group to Assist the Poorest, 1995).
Quite a lot of research has been made into economical and social aspects of regions and countries and their influence on the success of MFIs (Crabb, 2008; Tucker, 2001; Sharma, 2004; Mueller and Uhde, 2009; Woller, 2000, 2001). However, not much research has been done on the potential cultural impact of countries on the success of MFIs. This paper is different from other articles about the success of MFIs, which also take cultural aspects into account, in that these other articles:
Often only focus on countries in a region with a common culture, e.g. Asia, Africa etc. (e.g. Mueller and Uhde, 2009; Parilti and Gokten, Hollis and Sweetman, 1998)
Do not address specific characteristics of cultures. (e.g. Christen et al, 1995; Sharma, 2004; Cornford, 2002)
Do address the effect of cultural aspects, but not on the success of MFIs, but rather on e.g. Management control systems or Economic Development. (e.g. Rana, 2008; Parry III and Roach, 2008; Lebas and Weigenstein,1986; Nadler and Zemanek, 2006 )
3
characteristics that generally give better results. Besides it could be useful for the prediction of future success of MFIs.Besides the above professional relevance, there is an academic relevance as the impact of (country) cultures on performance of MFIs has not been established nor measured.
To come to an answer for the investor and to have academic relevance the main research question is formulated as follows:
What is the effect of culture on the performance of Microfinance Institutions based on country characteristics?
To provide a reliable answer to this research question, several sub-questions are formulated:
1. What is the best way to measure the social performance of MFIs from the investor‟s perspective?
2. What is the best way to measure the economic performance of MFIs from the investor‟s perspective?
3. Does social performance have an impact on economic performance of MFIs? 4. Is there an impact of the Cultural Dimensions on the economic performance
of MFIs?
In this research, data of 160 MFIs from 30 different countries have been used. Of these data the mean and the median of each MFI over the period 2004-2008 have been calculated for the dependent variable (economic performance), independent variables (social performance and Cultural Dimensions) and six control variables. Several tests are used to confirm the hypotheses about effect of the independent variables on the economic performance of MFIs. The program Statistical Package for the Social Sciences (SPSS) is used for these statistical tests.
4
2.
Literature review
Literature has been researched to establish whether there is any effect of country cultures on MFI performance. The relevant variables are elaborated and further explained. Four hypotheses about the effect of the Cultural Dimensions on the economic success factors and one hypothesis about the effect of social success on economic success of the MFIs are presented. Control variables are also addressed.
2.1. Success of Microfinance Institutions
This research is focused on investors in MFIs. The mission of most MFIs, if not all, is to provide micro financial services to entrepreneurs and small businesses, contributing to improvement in their quality of life and the economic development for the country as a whole (Crabb, 2008). Not all definition is MFIs in literature are identical. Combining various definitions for MFIs, the following definition for MFIs is used in this research.
An organization that provides (access to) microfinance services to the poor and/or disadvantaged ‘unbankable’ people, to improve quality of life. It aims to reach sustainability
for both the organization as well as for their clients.
In this definition sustainability means that MFIs are not dependent on donors and /or government agencies and is vital for long-term success (Crabb, 2008); coverage of operating costs is a measure of sustainability (Mueller and Uhde, 2009). For an investor the mission of MFIs is of relevance; hence, the investor has an interest in improving quality of life and helping „unbankable‟ people, besides making profit. President of the Dutch Central Bank, Dr. A. Wellink (2007), states that „investors are typically private-sector funding arms of donors and socially motivated, privately-managed investment funds financed by public and private capital. Although both types of investors generally take a commercial approach in the rigor of their investment analysis and monitoring, they are not always fully commercial in the sense of trying to maximize profits‟.
5
Because of the double mission of MFIs, performance has two be measured in two ways: socially and economically. To measure social and economic success Depth of Outreach and Operational Self-Sufficiency are used and discussed below.2.1.1. Social Success
According to the Consultative Groups to Assist the Poorest (1995) MFIs want to maximize their outreach by providing financial services to poor people. Sustainability (i.e. covering the costs, refer 2.1) is considered to be a precondition for growth of MFIs, and therefore greater outreach to the poor. Besides, sustainability makes it possible to access the formal commercial sector as source of capital. With the access to the commercial sector, MFIs are able to source capital more rapidly and increase leverage, and hence are able to increase outreach (Drake and Rhyne, 2002). Hence the Consultative Groups to Assist the Poorest (1995) and Drake and Rhyne (2002) state that outreach is an important factor for the success of MFIs, and thus for the investor.
Also many other researchers have identified outreach as a useful indicator of success of MFIs. For example, Cull et al. (2009) investigated the impact of regulations on outreach and profitability. Mersland and Strøm (2009) investigated the influence of corporate governance, regulation and competition on MFIs performance and outreach. And McIntosh et al (2005) investigated the relation between competition amongst MFIs and outreach.
Dichter (1997) mentions the relevance of social performance in relation to economic performance when he refers to regulatory involvement that may lead to a mission drift: „practitioners also worry about the impact of regulations on the poverty alleviation mission‟, thus emphasizing the relevance of social performance. This is identical to the earlier mentioned dual mission of covering costs and providing financial services to the poorest. This dual mission is not only mentioned by Mueller and Uhde (2009) and Dichter (1997), but also by, for example, Hartarska and Nadolnayk (2007), implying the need to address social success.
6
although Hartarska and Nadolnyak (2007) use Breadth of Outreach, they finally state that Depth of Outreach is a better indicator for the outreach of MFIs.It is noted that a „decreasing average loan size is associated with a rise in Depth of Outreach, whereas an increase describes a shift in the composition of customer demographics described in the literature as „mission drift‟. This mission drift may be due to clients maturing and successfully developing their business and thus demanding larger loans‟ (Mueller and Uhde, 2009). In other words, if the social mission of MFIs is taken into account, MFI should try to reach as many as possible poor people. This means that helping a new client is a better social performance indicator than helping an already existing client. The smaller the loan size indicates that relatively more poor people are helped, which indicates that the Depth of Outreach is higher.
Summarizing, Depth of Outreach is used for measuring the social success factor of MFIs. This variable indicates „the ability to serve the poorest borrowers´ (Mueller and Udhe, 2009). This is defined as the ratio of the average outstanding loan size per borrower to GDP per capita. This means that it will focus on the MFIs ability to even serve the poorest borrowers. To be clear: a low value on Depth of Outreach is a positive indicator of Depth of Outreach.
2.1.2. Economic Success
Next to social success of MFIs, economic success is relevant to the investor. Sustainability is defined and described by Operational Self-Sufficiency and is used to measure economic success (Mueller and Uhde, 2009; The Mix). Operational Self-Sufficiency is measured by the ratio of total financial revenues to the sum of financial expenses, impairment losses on loans, and operating expenses (The Mix).
7
Crabb (2008) also investigated the economic success of MFIs. From his literature review, he concludes that sustainability is now widely considered a necessity for growth of an organization (also important for the growth in outreach of the MFI) and for staying operative and competitive in the market, which he also demonstrated by empirical research. As a measure of sustainability, Operational Self-Sufficiency is used, rather than the Return on Assets (which was used in many previous studies), by Crabb (2008) „as guides by to the current conventions in the industry‟.Another reason for using Operational Self-Sufficiency as measure for sustainability comes from an extensive review on the microfinance literature conducted by Brau and Woller (2005). They site many articles concluding that sustainability is a necessary goal for MFIs, because subsidized funds are more fragile (e.g. uncertainty of award/grants) and less focused (e.g. misalignment between MFI and Subsidy aims).
As said, Operational Self-Sufficiency is measured by the ratio of total financial revenues to the sum of financial expenses, loan loss provision and operating expenses (The Mix). Not taking opportunity costs of equity capital into account „a value of 1 (or higher)indicates full Operational Self-Sufficiency, whereas a value less than one indicates the institution must rely on outside sources‟ (Crabb, 2009 and The MIX). Lower scores on Operational Self-Sufficiency indicate that companies are relying more on outside resources, which is negative indicator of the economic performance of the company.In order to get a reliable indication of the sustainability of MFIs, a period of five years is taken into account to avoid long-term compensation for losses by MFIs making use of its own capital and past reserves.
2.2. Impact of Social on Economic Success
As MFIs have a dual mission, it is likely that there is a certain relation between the social and economic performance. The definition and mission of MFIs state that these organisations need to be sustainable, but also want to achieve an outreach as deep as possible. According to the Consultative Group to Assist the Poorest (1995), MFIs have to be sustainable if they want to reach a certain outreach to provide financial services to the poor. This does not automatically indicate that the MFIs are maximizing their Outreach potential (the highest possible outreach a MFI can get). As stated earlier, MFIs can also offer more money to certain lenders who are successful already. This could result in a higher profit and a higher ratio of Operational Self-Sufficiency for the MFI, but it could reduce the Depth of Outreach. Several research programs have investigated the relation between social performance and economic performance, as discussed in the following paragraphs.
8
Cull et al. (2009) researched the impact of regulations on the MFIs outreach and profitability. They provide empirical evidence that outreach is negatively related with profitability. Although current research investigates Operational Self-Sufficiency and not profitability, a similar negative relation between Operational Self-Sufficiency and Outreach may be expected. Moreover, Mersland and Strøm, (2009) examine the impact of corporate governance, regulation and competition on MFIs economic performance and outreach. They provide empirical evidence that competition is positively related to economic performance and negatively related to outreach, whilst governance and regulation do not show a significant effect. This supports again the assumption that social and economic performances are negatively related.Cull et al (2007) come with evidence that when MFIs grow larger they are becoming more susceptible to the earlier discussed mission drift (§2.1.1). Following Mueller and Uhde (2009) this will result in higher economic success, but reduces the outreach, confirming the negative effect of Depth of Outreach on Operational Self-Sufficiency. Furthermore, McIntosh et al. (2005) provide empirical evidence that increasing competition results in a lower outreach. As stated in §2.1 an increase in competition demands a higher economic performance. Thus, this also supports the assumption that economic and social performance are negatively related.
With the above mentioned articles it can be assumed that outreach is negatively related with the economic performance of MFIs. This conclusion is remarkable, because MFIs often state that they want to reach a high Outreach potential, but also want to reach Operational Self-Sufficiency. Maximizing both economic and social performance seems not to be possible. MFIs face a trade-off between social and economic performance. Increasing outreach reduces Operational Self-Sufficiency and if they push too far Operational Self-Sufficiency will drop below a level that is necessary to survive. It is important for the investor to realise this potential negative relation between the social and economic success of MFIs, whereby, following their mission, MFIs should face a continuous tensions between to maximizing the Depth of Outreach, whilst maintaining a minimum economic performance. However, there may be a continuum of opportunities for the investors as not all MFIs will be so dedicated to their missions (e.g. mission drift).
9
lower average loan size is indicates a higher Depth of Outreach (inverse relation)), as also described in §2.1.1.Table 1: Expected impact of Depth of Outreach on Economic Performance of MFIs.
Variables Operational Self-Sufficiency
High Low
Depth of Outreach Low High
Value Depth of Outreach High Low
Only the impact of Depth of Outreach on Operational Self-Sufficiency has been investigated and not the relation between the two performance indicators, because it is beyond the scope of this research.
2.3. Cultural Dimensions
Whilst the effect of Depth of Outreach on Operational Self-Sufficiency is addressed, the main issue in this thesis is the effect of culture on the economic performance of MFIs. The effect of cultural characteristics on Operational Self-Sufficiency is investigated. Cultural characteristics are the independent variables in this research, as well as Depth of Outreach (discussed above). One of the most accepted descriptions of cultural characteristics are the Cultural Dimensions as defined by Hofstede (1980). He did research at subsidiaries of IBM in around 70 countries by interviewing employees, and developed a cultural related research model. Hofstede (1980) concluded that four dimensions characterize the culture of country. These dimensions are Power Distance, Individualism, Masculinity and Uncertainty Avoidance. A fifth dimensions was later added by a study of Hofstede and Bond (1988): Long-term Orientation. This last dimension has not been included in this research, ass not enough country data are available.
10
1 Power Distance; Power Distance is defined as „the extent to which the lesspowerful members of institutions and organizations within a country expect and accept that power is distributed unequally‟ (Hofstede, 2003). „Institutions‟ represent the basic elements of society, like, school, family and community; „organizations‟ are the working place. (Hofstede, 2003). It suggests that a society‟s level in equality is endorsed by the followers as much as by the leaders (www.clearlycultural.com). The Cultural Dimension Power Distance is nicely expressed by the expression „More Equal than Others‟ (Hofstede, 2003), and further explained in §2.4.1.
2 Individualism; „Individualism pertains to societies in which the ties between
individuals are loose: everyone is expected to look after himself or herself and his or her immediate family. Collectivism as its opposite pertains to societies in which people from birth onwards are integrated into strong, cohesive in-groups, which throughout people‟s lifetime continue to protect them in exchange for unquestionable loyalty‟ (Hofstede, 2003). The Cultural Dimensions Individualism is nicely expressed by the expression „I, We, and They‟ (Hofstede, 2003), and further explained in §2.4.2.
3 Masculinity; „Masculinity pertains to societies in which gender roles are clearly
distinct (i.e. men are supposed to be assertive, tough, and focused on material success whereas women are supposed to be modest, tender, and concerned with the quality of life); femininity pertains to societies in which social gender roles overlap (i.e. both men and women are supposed to be modest, tender and concerned with quality of life)‟ (Hofstede, 2003). The Cultural Dimensions Masculinity is nicely expressed by the expression „He, She, and (S)He‟ (Hofstede, 2003), and further explained in §2.4.3.
4 Uncertainty Avoidance; Uncertainty Avoidance „is the extent to which the
members of a culture feel threatened by uncertain or unknown situations. This feeling is, among other things, expressed through nervous stress and in a need for predictability: a need for written and unwritten rules‟ (Hofstede, 2003). The Cultural Dimensions Uncertainty Avoidance is nicely expressed by the expression „What is Different, is Dangerous‟ (Hofstede, 2003), and further explained in §2.4.4.
2.4. The impact of Culture on the Performance of MFIs.
11
quarter of the variance of economic growth in 1970-1980 can be explained by cultural variables. This implies that culture may have impact on the economic performance of MFIs.2.4.1. ‘More Equal than Others’
The expected effect of Power Distance on Operational Self-Sufficiency of MFIs is in short (and further elaborated below):
o Power Distance has a negative effect on Operational Self-Sufficiency: cultures with higher scores on Power Distance have a lower score on Operational Self-Sufficiency in general.
As mentioned in §1 the role of MFIs is to provide financial services, of which lending either to groups or individuals are considered to be important models (Yunus, 2003, and Hans Dieter Seibel). The success of these lending models is dependent on peer pressure, responsibility for each other, interdependency, and equal rights. These characteristics are also found in cultures with a low Power Distance (table 2).
Table 2: Important Characteristics of Power Distance.
Source Low Power Distance High Power Distance
Hofstede (2003) Limited Dependence of subordinates on bosses, and preference for interdependence between subordinates and bosses.
The emotional distance between subordinates and boss is relatively small.
Considerable dependence of subordinates on bosses. The emotional distance
between subordinates and boss is large.
Hofstede (1983) All should be interdependent Hierarchy means an equality of
roles, established for convenience.
All should have equal rights. Cooperation among the
powerless can be based on solidarity.
A few should be independent; most should be dependent. Hierarchy means existential
inequality.
Power-holders are entitled to privileges.
Cooperation among the powerless is difficult to achieve because little faith in people is the norm.
www.mindtools.com Flatter organizations.
Supervisors and employees are considered almost as equals.
Centralized companies. Strong hierarchies.
Large gaps in compensation, authority, and respect.
12
Parry III and Roach (2008) also identified that in the current 'new' economy looking for the most suitable candidate for a leadership role seems to be essential, which hence can result in a younger person becoming the leader. In group-lending all members are responsible for each other and everybody has equal rights. Hereby a leader will be chosen by the MFI. This could mean that a younger person (with less 'power') could get the leadership role in an MFI ´lending group´. A higher Power Distance will be a disadvantage, because everyone has to be of similar importance and everyone carries more or less the same responsibilities.Pickering (2000) investigated the same region and did interviews among people. He concluded from these interviews that age and respect for elder are still important issues for this region, indicating a large Power Distance. Lack of communication between people was still a problem because of age and respect issues. Thus, lack of communication, large gaps in authority and unequal rights may have been the cause for unsuccessful microfinance activities.
Franke et al. (1991) did empirical research investigating the influence of cultural differences on the economic performance at the level of nations. They conclude that economic growth of nation‟s, families, organizations, and political life seems to be aided by equality of power among people in organizations, which means that a lower Power Distance is preferable for economic success. Nadler and Zemanek (2006) have investigated the relation between Cultural Dimensions and economic development (based on GDP per capita, a negative population growth rate, life expectancy and literacy rate) and concluded, based on empirical research, that Power Distance is significantly negative correlated with economic development of the countries (though it can be questioned whether this is also relevant for organizations). Furthermore, Van Everdingen and Waarts (2003) did empirical research about the role of national cultures on the differences of adoption rates of innovations by companies across countries. They conclude that high Power Distance has a significant negative influence on the innovation adoption rates, and one can expect that this would also apply for loans by MFIs and acceptance of MFIs in general, thus negatively effecting economic performance of MFIs. Finally, Pothukuchi et al. (2002) examine the relation between Power Distance and International Joint Venture Performance, measured by competitiveness, satisfaction with the joint venture and efficiency. Based on data of a survey of executives from joint ventures, they conclude that Power Distance has a negative effect on International Joint Venture performance.
13
Table 3: Expected impact of Power Distance on Economic Performance of MFIs.
Variables Operational Self-Sufficiency
High Low
Power Distance Low High
2.4.2. ‘I, We, and They’
The expected effect of Individualism on Operational Self-Sufficiency of MFIs is in short (and further elaborated below):
o Individualism has a negative effect on Operational Self-Sufficiency: cultures with higher scores on Individualism have a lower score on Operational Self-Sufficiency in general.
The role of MFIs is to provide financial services, of which lending either to groups or individuals are considered to be important models (Yunus, 2003, and Hans Dieter Seibel). The success of these lending models is assumed to be dependent on collectivity-orientation and the importance of expertise, order, and security provided by organization or clan. In MFI group-lending activities these characteristics are relevant because groups are meant to be a collective and individuals to be responsible for each other. These aspects are characteristic for low Individualism cultures (table 4).
Table 4: Important Characteristics of Individualism.
Source Low Individualism High Individualism
Hofstede (2003) Having training and opportunities.
Having good physical working conditions.
Fully using your skills and abilities on the job.
Having a job which leaves enough time for personal life. Having freedom for adopting a
personal approach to the job. Having challenging work. Hofstede (1983) Collectivity-orientation.
Expertise, order, duty, security provided by organization or clan.
Self-orientation.
Autonomy, variety, pleasure, individual financial security.
www.mindtools.com Emphasis on building skills and becoming masters of something. Work for intrinsic rewards. Harmony more important than
honesty.
High valuation on people's time and their need for freedom. An enjoyment of challenges,
and an expectation of rewards for hard work.
Respect for privacy.
14
in-groups or collectivities which are supposed to look after them in exchange for loyalty‟ (Hofstede, 1983). This is an important aspect of the success group-lending activities of MFIs.The other form of lending to clients is to individuals followed by loans to other individuals ones the first individual has repaid his/her loan (see §1). The village people will be dependent on each other and will have to be more responsible as a group, which implies that more self-oriented cultures (Individualism) will likely be less successful in microfinance lending programs. Fewer individuals will receive loans and this could result in a lower economic performance of MFIs and starting companies.
Franke et al. (1991) did empirical research investigating the influence of cultural differences on the economic performance at the level of nations. In their article they mention, that individualism has a negative effect on social cohesion, „which might inhibit effective economic enterprise‟. They come to a conclusion, based on data collected within subsidiaries of IBM around the world, that less individualistic countries experience more economic effectiveness and growth. It is expected that Operational Self-Sufficiency of MFIs will be higher in less Individualistic countries.
NB. Whilst it is noted that individualistic countries might face less growth, they often have on average higher per capita GDP. However, MFIs are generally focused on developing countries which, if successful, show a high economic growth, hence are more effective in less individualistic countries.
Pothukuchi et al. (2002) examine the relation between Individualism and International Joint Venture Performance, measured by competitiveness, satisfaction within joint ventures and efficiency. They conclude that Individualistic cultures have a negative effect on International Joint Venture performance. Furthermore, Flynn and Saladin (2002) investigated the relation between national culture and quality management practices. They researched empirically 165 randomly selected manufacturing plants, stratified by industry and nation. They found that leadership, process management and business results were stronger in more collective cultures.
15
Table 5: Expected impact of Individualism on Economic Performance of MFIs.
Variables Operational Self-Sufficiency
High Low
Individualism Low High
2.4.3. ‘He, She, and (S)He’
The expected effect of Masculinity on Operational Self-Sufficiency of MFIs is in short (and further elaborated below):
o Masculinity has a negative effect on Operational Self-Sufficiency: cultures with higher scores on Masculinity have a lower score on Operational Self-Sufficiency in general.
The role of MFIs is to provide financial services, of which lending either to groups or individuals are considered to be important models (Yunus, 2003, and Hans Dieter Seibel). The success of these lending models is assumed to be dependent on interdependency, and no differences in sex roles. The mission of MFIs states that they should have a people orientation and want to improve quality of life. A low Masculinity is aligned with the above mentioned characteristics. The characteristic of Masculinity are shown in table 6.
Table 6: Important Characteristics of Masculinity.
Source Low Masculinity High Masculinity
Hofstede (2003) Having a good working relation with your superior.
Working with people who cooperate well.
Living in a desirable area for your family.
Having employment security to work for your company.
Having opportunities for high earnings.
Getting recognition for doing a good job.
Having opportunities for advancement to higher level jobs.
Having challenging work to do. Hofstede (1983) People Orientation.
Quality of life and environment are important.
Work to live.
Interdependence ideal. Sex roles in society should be
fluid.
Differences in sex roles should not mean differences in power.
Money and things orientation. Performance and growth are
important. Live to work. Independence ideal.
Sex roles in society should be clearly differentiated. Men should dominate in all
settings. www.mindtools.com A woman can do anything a man
can do.
Powerful and successful women are admired and respected.
Men are masculine and women are feminine.
There is a well defined
distinction between men's work and women's work.
16
country to another contain a dimension from very assertive and competitive and maximally different from women‟s values on the one side, to modest and caring and similar to women‟s values on the other. The assertive pole has been called „masculine‟ and the modest caring pole „feminine‟´. Several feminine characteristics are important for the success of MFI lending programs. Working with people who cooperate well, the importance of quality of life and environment, a people orientation and caring for each other, interdependency, and no differences between men and women are important feminine characteristics (and some are included in the mission of an MFI) and are essential for the success of MFIs and their lending programs. Masculine traits, including assertiveness, materialism/material success, self-centeredness, power, strength, and individual achievements (www.clearlycultural.com), are not supportive for the success of MFIs lending programs, because these characteristics counteract the required collaboration by group members needed for microfinance activities.Van Everdingen and Waarts (2003) did empirical research about the role of national cultures on the difference of adoption rates of innovation by companies across countries. They conclude that high Masculinity has a significant negative influence on the innovation adoption rates, and one can expect that this would indicate that Masculinity has a negative influence on the acceptance and thus the economic performance of MFIs.
Barkema and Vermeulen (1997) investigated the relation between Masculinity and the chance of survival of joint ventures. This is tested on longitudinal data about 826 foreign entries in 72 countries between 1966 and 1994. They conclude that Masculinity has a negative impact on the chance that joint ventures survive. The success of an MFI depends on the cooperation between stakeholders. Therefore the chance that an MFI performs in a high Masculinity environment may be considered less.
Based on the above, it is expected that Masculinity has a negative effect on the economic performance of MFIs, which is measured by Operational Self-Sufficiency. This will be the fourth hypothesis (H4) in this research and is summarized in table 7.
Table 7: Expected impact of Masculinity on Economic Performance of MFIs.
Variables Operational Self-Sufficiency
High Low
Masculinity Low High
2.4.4. ‘What is Different, is Dangerous’
17
o Uncertainty Avoidance has a negative effect on Operational Self-Sufficiency: cultures with higher scores on Uncertainty Avoidance have a lower score on Operational Self-Sufficiency in general.The role of MFIs is to provide financial services, of which lending either to groups or individuals are considered to be important models (Yunus, 2003, and Hans Dieter Seibel). The success of these lending models is assumed to be dependent on a positive attitude toward younger people, more willingness to take risks in life, focussed on the long term and supporting equality. These aspects are characteristic for low Uncertainty Avoidance cultures (table 8).
Table 8: Important Characteristics of Uncertainty Avoidance.
Source Low Uncertainty Avoidance High Uncertainty Avoidance
Hofstede (2003) Relatively small amount of persons feels nervous or tense at work.
The idea to break a company rule, for whatever good reason, is accepted by most people. Changing employers is more
popular, for it means venturing into the unknown.
Relatively large amount of persons feels nervous or tense at work.
The idea to break a company rule, for whatever good reason, is rejected by most people (because it introduces ambiguity).
Changing employers is less popular, for it means venturing into the unknown.
Hofstede (1983) More positive attitude towards younger people.
More willingness to take risks in life.
Younger people are suspect. Concern with security in life www.mindtools.com Informal business attitude.
More concern with long term strategy than what is happening on a daily basis.
Accepting of change and risk.
Very formal business conduct with lots of rules and policies. Need and expect structure. Sense of nervousness spurns
high levels of emotion and expression.
Differences are avoided.
The impact of Uncertainty Avoidance on the economic success of MFIs follows from the following literature. Newman and Nollen (1996) investigated the impact of Uncertainty Avoidance on return on assets (ROA) as a function of management practices. They demonstrated, with the help of data from 176 work units on one large US-based corporation located in 18 countries, that independent of the management practices the ROA was higher in cultures with low Uncertainty Avoidance. ROA is considered to be a fair reflection of economic performance.
18
joint venture and efficiency. They conclude that cultures with higher Uncertainty Avoidance have negative effect on International Joint Venture performance. The success of an MFI depends on the cooperation between stakeholders. Therefore the chance that an MFI performs in a high Masculinity environment may be considered less.Van Everdingen and Waarts (2003) did empirical research about the role of national cultures on the differences of adoption rates of innovation by companies across countries. They conclude that high Uncertainty Avoidance has a significant negative influence on the innovation adoption rates, and one can expect that this would indicate that Uncertainty Avoidance has a negative influence on the acceptance and thus economic performance of MFIs.
Lebas and Weigenstein (1986) discuss the efficacy of Management control systems in organizations, which are characterized by Hofstede‟s Cultural Dimensions. The Culture and Market approaches in control systems are becoming more important, because of greater environmental uncertainty for more industries (Lebas and Weigenstein, 1986). Remarkable is that both these approaches are expected to have a low Uncertainty Avoidance. Control systems are supporting performance of organizations, a lower degree in Uncertainty Avoidance should be better.
Finally, there will always be a risk factor in investing, and this also applies for each client of an MFI. Although the goal of an MFI is to help the poor as their clients, not every loan or investment will be a success. Clients have to be prepared to take a risk to ultimately get a better quality of life. A culture with high Uncertainty Avoidance limits the amount of risk taking and hence the acceptance of support of MFIs, limiting their economic growth and performance.
Based on the above, it is expected that Uncertainty Avoidance has a negative effect on the economic performance of MFIs, which is measured by Operational Self-Sufficiency. This will be the fifth hypothesis (H5) in this research and is summarized in table 9.
Table 9: Expected impact of Uncertainty Avoidance on Economic Performance of MFIs.
Variables Operational Self-Sufficiency
High Low
19
2.5. Other influences on Success of Microfinance Institutions
There are several other variables possibly influencing the impact of the Cultural Dimensions on Operational Sufficiency and of Depth of Outreach on Operational Self-Sufficiency of MFIs. Whilst the Cultural Dimensions and Depth of Outreach are called the independent variables, these additional influencing factors are from now on called control variables.
2.5.1. Control Variables
The control variables used in this research are mostly similar to the control variables used by Crabb (2008), and partly used by Mueller and Uhde (2009). Crabb‟s (2008) control variables were based on previous research and he concluded that there are country and MFI specific variables which have significant influence on the performance of MFIs.
Country Specific Control Variables:
o Change in Real Gross Domestic Product: measures the economic growth. Following Crabb (2008) a „positive economic growth should increase the sustainability of a MFI‟ and thus the Operational Self-Sufficiency. According to Laeven and Mojani (2003) GDP is associated with the further developed business cycles, which is positively correlated with the opportunity to provide loans (a performance indicator for MFIs).
o Index of Economic Freedom: According to Crabb (2008), a higher degree of economic freedom indicates a growth in sustainability (and thus in Operational Self-Sufficiency). He investigated the relationship between economic freedom and sustainability and provided empirical evidence that especially government intervention and banking have a negative influence on the sustainability.
Microfinance Institutions Specific Control variables:
o The following variables measure economies of scale in the institution (higher economic scale increase the sustainability (and thus Operational Self-Sufficiency)):
Gross Loan Portfolio => positive sign of coefficient expected. Number of Borrowers per Staff Members => positive sign of
coefficient expected.
20
o Control against risks. Greater risks increase costs and this will reduce thesustainability of the MFI (Crabb, 2008):
Percentage of Portfolio at Risk (portfolio overdue > 30 days) => negative sign of coefficient expected.
In table 10 and overview is given for all variables used in this research. All definitions and sources are shown.
Table 10: Definitions and Sources of all variables used in this research.
Variables Definition Type Source
Operational
Self-Sufficiency OSS
Financial Revenue / (Financial Expense + Impairment Losses on Loans +Operating Expense)*
Dependent Variable
www.themix.org Depth of
Outreach DOO
The ability to serve the poorest borrowers => ratio of the average outstanding loan size per borrower to GDP per capita
Independent Variable
Mueller and Uhde 2009 Power
Distance
PDI
Is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect
that power is distributed unequally
Independent Variable
www.geert-hofstede.com Individualism
IND
On the one side versus its opposite, collectivism, that is the degree to which individuals are integrated into groups
Independent Variable
www.geert-hofstede.com
Masculinity
MAS
Versus its opposite, femininity, refers to the distribution of roles between the genders which is another fundamental issue
for any society to which a range of solutions are found
Independent
Variable www.geert-hofstede.com
Uncertainty Avoidance
UAI
Deals with a society's tolerance for uncertainty and ambiguity; it ultimately refers to man's search for Truth. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations
Independent Variable www.geert-hofstede.com Change in real Gross Domestic Product GDP
GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or
for depletion and degradation of natural resources.
Country Specific Control variable www.worldbank.org Index of Economic Freedom IEF
Economic freedom is the fundamental right of every human to control his or her own labor and property.
Country Specific Control variable www.heritage.org/index Gross Loan Portfolio GLP
Gross Loan Portfolio, adjusted for standardized write-offs MFI Specific Control Variable
www.themix.org Borrowers per
Staff Member BSM
Adjusted Number of Active Borrowers / Number of Personnel MFI Specific Control Variable www.themix.org Percentage Portfolio at Risk (>30 days) PPR
Outstanding balance, portfolio overdue > 30 days + renegotiated portfolio / Adjusted Gross Loan Portfolio
MFI Specific
Control Variable www.themix.org Number of
Active Borrowers NAB
Number of Borrowers with loans outstanding, adjusted for standardized write-offs
MFI Specific Control Variable
www.themix.org
21
3.
Hypotheses and Methodology
Cultural Dimensions are expected to have an effect on Operational Self-Sufficiency. Also Depth of Outreach is expected to have an effect on Operational Self-Sufficiency. The impact of these variables is investigated while controlling for certain country and MFI specific (control) variables.
3.1. Hypotheses
This research studies the impact of culture on the performance of MFIs. Operational Self-Sufficiency, as indicator of economic performance, is the dependent variable. The independent variables are Hofstede´s Cultural Dimensions which have been mentioned more specifically in the previous chapters. Furthermore, Depth of Outreach, as an indicator of social performance, is also used as independent variable.
From the literature review several hypotheses are formed with respect to the impact of Cultural Dimensions and Depth of Outreach on the economic performance of MFIs. The hypotheses and the expected effect are shown in table 11. Note that the value of Depth of Outreach gives an opposite effect to that of the actual Depth of Outreach. This means that a negative effect of Depth of Outreach will have a positive sign for the value of Depth of Outreach.
Table 11: Hypotheses and Expected Effect.
Variables Operational Self-Sufficiency
Hypothesis High Low Effect
Depth of Outreach H1 Low High Negative
Value Depth of Outreach H1 High Low Positive
Power Distance H2 Low High Negative
Individualism H3 Low High Negative
Masculinity H4 Low High Negative
Uncertainty Avoidance H5 Low High Negative
3.2. Methodology
22
For every variable annual data for the period 2004-2008 are available for all 160 MFIs. Over this period the mean for every variable of each MFI is calculated. This is called theAnnual Mean. The annual means are used for the Curve Estimator and Regressions Analyses.
Once the annual means per variable for each MFI are known, the independent variables are divided into groups, whereby the lowest 20% annual mean scores of the independent variable belong to group 1, the following 20% belong to group 2 etc. This results in 5 MFI groups per independent variable.
To establish a relation between independent and dependent variables statistical tests are used (Mean and Median Comparison, Kruskal-Wallis analyses, ANOVA analyses, and Post-hoc LSD analyses). Hence, per group the annual means of the dependent variable (Operational Self-Sufficiency) are averaged again: this result in the Group Mean OSS. Also the Group Median OSS is calculated, as the Kruskal-Wallis analysis is based on medians.
Finally, the overall mean and median calculated from all annual means will be referred to as the Total Mean or the Total Median. Figure 1a gives an overview of all kinds of means and medians. 160 MFIs Data 2004-2008 Annual Means / Medians Independent Variable Group 3 (20%) Independent Variable Group 4 (20%) Independent Variable Group 2 (20%) Independent Variable Group 1 (20%) Independent Variable Group 5 (20%) Total Mean / Median Dependent Variable Group Mean Dependent Variable Group Median
Figure 1a: Structure of definitions of the various means and medians.
23
Annual Means Group 1 Power Distance (Lowest) Group 1 Individualism (Lowest) Group 1 Masculinity (Lowest) Group 1 Uncertainty Avoidance (Lowest) Group 1 Depth of Outreach (Lowest) Group 1 Mean Operational Self-Sufficiency Group 1 Median Operational Self-Sufficiency Annual means of all variables per MFI.MFI Groups per Independent variable.
Mean and Median of dependent variable per MFI group / independent variable.
Group 5 Depth of Outreach
(Lowest)
Figure 1b: Structure of definitions of various means and medians for one variable.
The same procedure has also been followed starting with the Annual Medians, instead of Means.
The following statistical tests are done to investigate the effect of the Cultural Dimensions and Depth of Outreach on Operational Self-Sufficiency.
1. Both annual mean and median descriptive statistics are given for all variables.
2. Tests are performed to investigate whether all variables have a normal distribution. A Kolmogorov-Smirnov test is performed. This test is used to compare the distribution of the variables with a theoretical distribution (Huizingh, 2006), in this case a normal distribution. A low significance value (p-value) indicates that there is not a normal distribution.
3. The dependent variable group mean and median are compared between the 5 groups. This is done per each independent variable.
4. In the event that the dependent variable (Operational Self-Sufficiency) is not normal distributed, a Kruskal-Wallis test is used to determine whether there is a significant change of the median of Operational Self-Sufficiency between the formed groups per independent variables. The disadvantage of the Kruskal-Wallis test is that is does not give an indication of the type of impact.
24
distributed. However in the event the distribution is not normal distributed, the results should be treated with caution.6. Because an ANOVA only shows whether there is a change of group means, a Post Hoc LSD analysis is performed, to establish between which groups this change occurs. With this test a possible type of relation between the independent variable and Operational Self-Sufficiency may be identified.
7. A Curve Estimator is used to determine which type of relation is most likely. Tests are done on linear, exponential, logarithmic, quadratic, and cubic relations. The equations for these five models can be found under steps 9 and 10.
8. A Correlation Analysis is performed between all variables using the annual means, i.e. the dependent and independent variables, in combination with the control variables. With the resulting matrix, correlations between variables can be seen. Only variables which show a significant correlation are used in the next step, the regression analysis. 9. Regression Analyses are performed to confirm the results found under steps 6 and 7. It establishes the effect of the independent variables on the dependent variable, including all correlated (control) variables. Regression analyses give more reliable and specific results. The equation used for a linear analysis is:
(1) Yi = α + β * Xi + Γ * Zi + ε
Where, Y is the dependent variable, X the independent variables, Z the control variables, β and Γ are the regression coefficients for X and Z, i are the MFIs considered, and ε denotes the standard error term.
For a regression analysis it is necessary that the error term is normal distributed. Again, a Kolmogorov-Smirnov test is used to test on normality. If the test shows that there is not a normal distribution, the results for that specific relation are seen as not correct.
10. Regression analyses are also performed for other relations. The equations for the other models are:
a. Logarithmic Model:
(2) Yi = α + β * ln(Xi)+ Γ * Zi + ε Where ln() is the natural log function. b. Quadratic Model:
(3) Yi = α + β1 * Xi + β2 * Xi 2
+ Γ * Zi + ε
25
If β3 is positive, the slope is upward; if β3 is negative, the slope is downward.d. Exponential Model:
(5) ln(Yi)= ln(α) + β * Xi + Γ * Zi + ε
If α is negative, the slope is downward; if α is positive, the slope is upward.
11. Finally, to establish the total impact of Cultural Dimensions on Operational Self-Sufficiency, a new overall final model is made. This model combines the significant relations found of Cultural Dimensions that show impact on Operational Self-Sufficiency.
26
4.
Data and Descriptive Statistics
To investigate the impact of the Cultural Dimensions on Operational Self-Sufficiency of MFIs it is important to select as many countries (with different cultures) as possible. All countries score differently on the Cultural Dimensions by Hofstede. Also reliable data about MFI performance is needed.
4.1. Selection Criteria
The following criteria have been used to select data: 1. Available data on MFI performance.
2. Countries with identified Cultural Dimensions. 3. „For profit‟ and regulated MFIs.
4. Reliable data.
5. Year of MFI establishment.
Ad 1. Data are needed from MFIs worldwide. Data are derived from The Microfinance Information Exchange Inc. (The Mix) (www.themix.org and www.mixmarket.org), a non-profit organization. More information about the Mix can be found in §4.2. The Mix „follows a quality control system to help ensure the validity of MFI data by verifying the information posted and reviewing it for coherence and consistency‟ (Crabb, 2008). The database contains data of more than 1300 MFIs around the world (in more than 110 countries) and can be seen as the most reliable source to obtain information on MFIs.
Ad 2. Culture is defined by means of Hofstede‟s Cultural Dimensions. Hofstede did not investigate all countries and many of them where developed countries having no MFIs (or no data available within The Mix). Hofstede scored 66 countries on four Cultural Dimensions. Comparing the countries from The Mix and the investigated countries by Hofstede leaves 42 countries with 668 MFIs.
27
Ad 4. For reliability and accuracy of data, only MFIs with 4 or 5 diamonds (mentioned by The Mix) are included in this research. MFIs with 4 or 5 diamonds provide audited financial statements guaranteeing a high level of data quality and a high degree of disclosure (Mueller and Uhde, 2009). For explanation of the diamonds see appendix 1. This criterion limits the number to 181 MFIs in 30 countries.Ad 5. For better comparison and financial coverage over several years only MFIs established prior to 2005 and still active in 2008 are included in the research. As a result, the population in this research consists of 160 MFIs in 30 countries. The MFIs studied can be found in appendix 2.
4.2. Sources of Data
In previous chapters the variables used in this research have been explained. The independent variables are the Cultural Dimensions by Hofstede and Depth of Outreach. Data about the cultural characteristics of the countries investigated are obtained from two sites. The first is the official site of Geert Hofstede (www.geert-hofstede.com) and the second site is Clearly Cultural (www.clearlycultural.com). These sites give information about and characteristics of the Cultural Dimensions. In addition, scores for every country can be obtained from these sites.
Depth of Outreach is an indicator of the social performance of MFI, but is also used as independent variable in this research. Depth of Outreach is calculated as the ratio of the average outstanding loan size per borrower to GDP per capita. The loan size per borrower is obtained from The Mix and the GDP per capita is obtained from the IMF (www.imf.org).
28
Change in real Gross Domestic Product is one of the country specific control variables. The source for these data is the World Bank (www.worldbank.org). The other country specific control variable is the Index of Economic Freedom which is obtained from the Heritage Foundation‟s Index of Economic Freedom. „Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please,with that freedom both protected by the state and unconstrained by the state. […]. [The
Heritage Foundation] measure ten components of economic freedom, assigning a grade in each using a scale from 0 to 100, where 100 represent the maximum freedom. The ten
component (business freedom, trade freedom, fiscal freedom, government spending, monetary
freedom, investments freedom, financial freedom, property rights, freedom from corruption and labour freedom) scores are then averaged to give an overall economic freedom score for each country‟ (www.heritage.org/index).
All institution specific control variables (Gross Loan Portfolio, number of Borrowers per Staff Member, Number of Active Borrowers, and Percentage of Portfolio at Risk) are also acquired from The Mix.
4.3. Descriptive Statistics.
As mentioned, data of 160 MFIs in 30 countries for a five years period (2004-2008) have been used. The annual mean for every MFI and for each variable is calculated. With all annual means Descriptive Statistics are obtained with the statistical program SPSS. Table 12 gives an overview of the descriptive statistics. Descriptive statistics are also measured for the annual median of years 2004-2008 and can be found in appendix 3.
Table 12: Descriptive Statistics of the annual mean data for the period 2004-2008.
N
Total Mean
Total
Median Minimum Maximum Std. Deviation
Kolmogorov-Smirnov test (p-value) Operational Self-Sufficiency 160 1.18 1.17 0.55 2.17 0.23 0.079 Depth of Outreach 160 0.45 0.38 0.01 2.97 0.43 0.000 Power Distance 160 74.30 77 47 94 12.12 0.000 Individualism 160 26.63 27 8 65 12.16 0.001 Masculinity 160 50.22 46 28 73 10.57 0.000 Uncertainty Avoidance 160 66.80 67 30 95 19.17 0.001
Change in Gross Domestic Product (%) 160 6.85 7 3 12 2.01 0.003
Index of Economic Freedom 160 57.60 56.42 45.82 77.80 4.96 0.011
Gross Loan Portfolio (USD X1000) 160 67,837 12,548 174 1,860,976 190,400 0.000
Borrowers per Staff Member 160 190.13 128.5 17 7,296 572.30 0.000
Percentage Portfolio at Risk > 30 days (%) 158 6.82 4.85 0.03 48.43 7.35 0.000
