Financial Performance and Development Impact Evidence from Research in Ghana and Uganda

Transcription

1 Financial Performance and Development Impact Evidence from Research in Ghana and Uganda Ph.D. Candidate Frankfurt, 20th July 2012 UMM - PhD- v1 _ 14Jul2012 -JF.pptx

2 The Ph.D. research is driven by several hypotheses - one of them provides the basis for the evidence presented today Hypothesis There is a trade off between financial performance and development impact 2

3 Different methodologies for a quantitative and qualitative research on macro, meso and micro level are used Data analysis Mix Market Sample of institutions Quantitative Full MixMarket data set Identification of correlations and regressions between values and indicators Identification of key drivers of financial performance Quantitative Ten sample banks in Ghana and Uganda Comparison of sample banks to MixMarket averages Du-Pont analysis Qualitative 3+ interviews per institution (CEO, branch manager, loan officer) Structured observations Fuzzy logic to link qualitative and quantitative characteristics Descriptive and analytical assessment on micro, meso and macro level 3

4 Microfinance industry in Ghana and Uganda is fairly advanced the examples presented reflect the insight from the research sample Status quo of industry in target markets Institutions in Ghana and Uganda Markets in both countries highly fragmented over 1,000 registered institutions per country MixMarket institutions mostly with positive RoE strong selection bias Negative RoE often hidden in loan portfolios defaulting loans are not written off or insufficient provisions Highly competitive environment institutions sometimes must pay license fee to communities Impact? Clients in Ghana and Uganda Strong savings culture in Ghana based on a history of informal savings schemes Comparably high usage of loans in Uganda, driven by strong involvement of development partners and governmental interventions Most clients work with several institutions to decrease risk of savings loss and increase loan accessibility High inflation currently a major challenge in Uganda 4

5 Higher portfolio yield does not automatically translate into higher profits and do clients benefit from lower portfolio yields? Data for 1Q , Observations PY 14,83 % 2,733 PY 17,74 % Interest Income 423 Fee Income 62 All income 485 Financial expense Operational expense Profit 1 Operational expenses decisive driver of profitability Higher mobilization of local savings leads to measurable decline of refinance expenses In this case default rates below 1 % included in operational expenses B1 B2 Interest Income Fee Income All income Financial expense Operational expense Profit All numbers in million UGX exchange rate to EUR ~ 1 : 3,000 5

6 Client segments differ in profitability - institutions tend to move towards more profitable sectors when profits decline Portfolio yield by sector and branch Portfolio yield by sector for different branches Agriculture Interest rate: 3 % p.m. 5 % 10 % 15 % 20 % 25 % Interest rate: 4 % p.m. Trading / production Observations Reverse relationship between profitability and use of low interest products struggling institutions move towards higher yield segments 731 1,938 5 % 10 % 15 % 20 % 25 % Formal employment Interest rate: 5-8 % p.m. 5 % 10 % 15 % 20 % 25 % Micro Business Loan 247 Salary Loans Small Business Loan 1 Agric Group 6

7 High loan default scenario is the recipe for disaster institution collapse sadly remains a common phenomenon in Africa Steps towards institution collapse 1 Loan default 3 Counter measures 4 Savings abuse No track record of distributed loans No measures to enforce repayment Diversion of loans Over-indebtedness of clients Shift towards high interest segments Limited distribution of loans Delayed distribution of loans Strong push for mobilization of savings Use of savings for operational expenses 2 'Cover up' 5 Collapse Free extension of repayment time No provision for portfolio at risk No write off for defaulted loans Shutting down of institution and loss of all client savings Savings withdrawal in neighboring banks Local / regional domino effect 7

8 Financial performance is the key for stabile institutions high interest rates are not the decisive driver of profitability Key drivers of financial performance 1 Loan recovery 3 Refinancing Selection of clients that are capable of repayment Capability to assess economic situations of clients crucial role of loan officers 2 Efficient operations 4 Target segment Delivery channels define basic cost structure Innovative models based on branchless banking and technology Little role of subsidized refinancing Governmental programs often tied to constraints Savings mobilization is key Little role of subsidized refinancing Governmental programs often tied to constraints Savings mobilization is key Competitive market does not allow strong variation of interest rates not interest rate Interest rate defined by target segment, not by profitability of institution 8

9 The link between use of savings and loans and development impact remains unclear - Steps towards institution collapse Financial performance Microfinance plus (plus) Dual institution approach Financial performance increases financial sustainability clearly a positive development impact Institutions with good financial performance less likely to move towards high interest products Still mixed results of impact assessment of microfinance only approach Combination of microfinance and measures that create direct impact on the household level Microfinance plus business training or other measures that provide some measurable return for the financial institution, i.e. business training, financial literacy Microfinance plusplus development measures with no financial benefits of provider, i.e. health care Combination of for-profit and not-for-profit institution under one roof, i.e. foundation that owns financial institution Strong trend within international microfinance networks, NGOs and commercial financial institutions 9

10 The answer to the hypothesis depends on the understanding of microfinance for 'microfinance only' no trade off was observed Response to hypothesis depends on the understanding of microfinance: Provision of financial products and services In a competitive environment the conditions for financial products and services are not driven by interest above the market rate Profitability of institutions avoids collapse which is the worst case scenario for impact There is no trade off between financial performance and development impact Element of comprehensive development intervention Achieving measurable and short term impact requires interventions that go beyond the simple provision of financial products and services Additional interventions are costly at no or little financial benefit to the provider There is a trade off between financial performance and development impact A dual institution approach seems to be the best suited tool to achieve the goals that the development community has articulated for the concept of 'microfinance' 10

11 Discussion UMM - PhD- v1 _ 14Jul2012 -JF.pptx 11