Comparative Analysis of Financial Sustainability of Nepalese Microfinance Institutions

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1 IJBMEIT: Vol. 4, No. 2, July-December 2012: Comparative Analysis of Financial Sustainability of Nepalese Microfinance Institutions SUN SHAOYAN 1 AND BAL RAM DUWAL 2 1 Jilin University, Research Center for China Public Sector Economy, Changchun, Jilin , China, ( jlcssy@sina.com) 2 PhD Candidate in Jilin University, College of Economics, Changchun, Jilin , China, ( balramduwal@gmail.com) Microfinance institutions are divided into two campaigns as Institutionalist and Welfarist. The Institutionalist s major target is cost recovery and maintaining financial self-sufficiency whereas the Welfarist s focus is on poverty alleviation by providing financial services with lower interest rate, etc. In this paper the Nepalese Microfinance Institutions (MFIs) are studied from financial sustainability point of view and analyzed whether different modalities of microfinance institution make differences in their financial performance. In Nepal, there are mainly four different modalities of MFIs in operation viz. The GI-GBB, PI-MFB, FINGOs and Coop. Based on the empirical data, it is proved that the financial performance of Nepalese MFIs varies in accordance with the applied modalities of the MFIs. Except for government initiated microfinance banks, other Nepalese MFIs are financially sustainable and in the context of Nepalese financial market Welfarist MFIs still need to cover the poorest of the poor and to broaden their financial services. Keywords: Microfinance, Financial Sustainability, Nepalese Microfinance. 1. INTRODUCTION 1.1. Background The Microcredit Summit Campaign recently announced that over 3,500 Microfinance institutions (here after MFIs) have provided microloan to more than 190 million people in 2009 and the number of very poor families with a microloan has grown more than 16- fold from 7.6 million in 1997 to 128 million in These figures show that the microfinance industry is rapidly growing in all over the world. On one hand the growing number of MFIs has a significant effect in poverty alleviation and on the other hand it also raises the question of sustainability of MFIs. Does this growing number of MFIs show the latter are sustainable or not? Unlike formal sector financial institutions, the large majority of MFIs are not sustainable, where sustainability is equated in microfinance literature and parlance with financial self-sufficiency (James et al.; 2004). Financing the poor is not a short-term development project; rather it is a long-term process related with livelihood of poor household. Sustainable MFIs can provide better financial services to their clients particularly the poor. During early 1970s experimental programs extend tiny loans to groups of poor women to invest in micro business. In effect, modern microcredit was born 2. The Grammen Bank in Bangladesh, ACCION International in Latin America and the Self-Employed Women s Association Bank in India are the pioneers of microcredit service providers. In 1980s, the microcredit programs throughout the world improved on their original methodologies. The microfinance revolution was developed in the 1980s and came of age in the 1990s. According to Robinson (2001), this was the general context in which the financial self-sufficiency of MFIs has become a major priority. It occurred when the many advances of previous decades in market knowledge, lending methods and savings mobilization were combined with a commercial approach to financial mediation for low income people; making financially sustainable microfinance possible. This breakthrough first occurred in Indonesia, Bangladesh and Latin America in the 1980s. After this breakthrough the issue of financial sustainability of MFIs has gradually gotten the focus in global microfinance industry. In 1990s, high repayment and cost-recovery interest rates permitted some MFIs to achieve long-term sustainability and

2 234 / Sun Shaoyan and Bal Ram Duwal reach large numbers of clients (Brigit Helms; 2006). The debate between financial sustainability issue and the primary objective of MFIs i.e. providing financial services to financially excluded poor households still not end. In this context; the conceptual framework The Triangle of Microfinance (Zeller Meyer; 2002) summarizes recent shifts in paradigms; strategies and development practices in the field of microfinance during the 1990s; leading to the recognition of the three overall policy objectives: financial sustainability; reaching of the poor and welfare impact. Microfinance is generally divided between two approaches viz. Institutionalist (Financial Systems/ Self-Sufficiency/Cost Recovery) approach and Welfarist (Subsidized) approach. Elisabeth Rhyne named it as Sustainability Camp and Poverty Camp. Those institutions which are using Institutionalist approach give more focus on financial sustainability of the institutions that means cost recovery. The Institutionalist approach views microfinance from the perspective of banking practices and its adherents remain transfixed by the potential of microfinance to surmount the four great problems of small-scale lending: high transaction costs, the difficulty of measuring risk, the cost of monitoring clients, and the absence of collateral. Adherents to this approach seem committed in principle to commercialized microfinance and more interested in determining its profitability than determining its impact on poverty (Bruce E. Moon; 2007). The commercial approach of MFIs is strongly advocating and implementing this Institutionalist approach. The three key principles which constitute a commercial approach to microfinance are profitability, competition, and regulation (Nikhil Chandra Shil; 2009). Further he stated that the commercialization of microfinance was reflected in strong financial performance. In contrast, it has been experiencing that the primary goal of the Welfarist programmers is to reach the poor; especially the poorest of the poor with financial services. Many institutions using this approach provide microcredit to poor borrowers at low cost. The Welfairst approach vision that microfinance is but one tool to achieve broad-scale social or human development. Consequently; the practitioners and development-oriented scholars who make up this school of thought naturally compare the performance of microfinance against various forms of foreign aid and other humanitarian programs that seek developmental outcomes (Bruce E. Moon; 2007). Furthermore, Welfarists argue that MFIs can achieve sustainability without achieving financial self-sufficiency. They argue that donations serve as a form of equity and as such, the donors can be viewed as social investors. Unlike private investors who purchase equity in a publicly traded firm, social investors do not expect to earn monetary returns (James et. al, 2004). The social investment is new concept in microfinance industry, which can create the necessary funds to invest in microfinance in general and particularly in poverty alleviation. Nobel Laurent Mohammad Yunus also proposed new type of business named as social business 3 can be link with microfinance to serve more and more poor with various services including financial service. Recently developed Interest-free MFIs 4 (Janat Ara Parveen; 2009) are an example of MFIs which are following the Welfarist approach. From the Institutionalist s perspective financial self-sufficiency is the essential part of the MFIs. The Ohio State University Rural Finance Program, the World Bank, CGAP, USAID,; ADB,; Mario Otero (ACCION International) and Elisabeth Rhyne (formerly USAID) support the Institutionalist approach whereas the researcher Welfaries Christen (1997) and Rodey(1997) support the Welfarist approach. It does not have any significant meaning to justify the one approach is best one in current microfinance industry. We have to know that only one approach is not appropriate and best for this diverse world. What is important is that the followers of both approaches are dedicated to provide better financial service to the poor Meaning of Financial Sustainability Generally, sustainability refers to the ability to be continued in the future. In the case of MFIs, financial sustainability means the long-term regularity in providing financial services to the clients with recovering the cost. Sustainability includes generating sufficient profit to cover expenses while eliminating all subsidies, even those less-obvious subsidies, such as loans made in hard currency with repayment in local currency (Tucker and Miles, 2004). It is well perceived that those MFIs which are able to maintain their operating costs by their own resources are known as financially sustainable MFIs. So, the financial sustainability of MFIs can be known as its capacity to obtain revenues to cover the transactional expenses; operational (administrative) expenses and financial (interest) expenses. According to Brienkerhoff (1991), sustainability can be defined as the ability of a program to produce outputs that are valued sufficiently by beneficiaries and other stakeholders that the program receives enough resources and inputs to continue production. This definition transforms the debate about sustainability for it opens the very real possibility that

3 Comparative Analysis of Financial Sustainability of Nepalese Microfinance Institutions / 235 an MFI could be viable in the long-term, despite dependence on donor funding. (Gary Chirtopher & Warner, 1999). Pissarides (2004) states that MFI can be proclaimed to be self-sustainable if, without using of subsidies, grants or other concession resources can profitably provide finance to poor on an acceptable scale. However, today many MFIs are dependent upon the subsidies and grants. In such context, subsidies and grants should be considered while analyzing the financial sustainability of such institutions. The self-sufficiency of the MFIs is categorized into operational self-sufficiency and financial selfsufficiency. These two layers of self-sufficiency are elaborated by McFurie & Ors (1998). (Abdualaziz M. Al-Haidi (2009); citing from (McFuire & Ors; 1998)). Committee of donor Agencies defines two layers of selfsufficiency; first is operational self-sufficiency that requires MFIs to cover all administrative costs and loan losses from operating income. The second one is the financial self-sufficiency requires MFIs to cover all administrative costs and loan losses from operating income; after adjusting inflation and subsidies and treating all funding as it had a commercial cost. Elisabeth Rhyne (1998) elaborated the inter connection between the poverty reduction and sustainability of MFIs. According to her, Poverty and the Sustainability are the Yin and Yang of Microfinance and they are two sides of a whole; each is incomplete without the other. This view emphasizes that reaching the poor and sustainability are in large measure complementary; and particularly that sustainability serves outreach. Only by achieving a high degree of sustainability have microfinance programs gained access to the funding they need over time to serve significant numbers of their poverty-level clients. This image reveals that there is, in fact, only one objective - outreach. Sustainability is but the means to achieve it. Sustainability is in no way an end in itself; it is only valued for what it brings to the clients of microfinance. This is a point on which poverty camp frequently misstates motives of the sustainability camp. It would do wonders for the state of the debate if the poverty camp more readily acknowledged that the sustainability camp valued sustainability only as tool. Gonzalez-Vega (1994) diagnosed the primary cause of failure to be the lack of institutional viability which led logically to two principal conclusions: (1) institutional sustainability was key to successful provision of financial services to the poor and (2) financial self-sufficiency was a necessary condition for institutional sustainability (James et al., 2004). The author tried to link between the Welfarist approach and Institutionalist approach however author concluded that the financial self-sufficiency is an essential thing for MFIs sustainability. Nowadays even commercial, private microfinance banks are practicing to run MFIs on sustainability camp. Robinson (2001) had explored this reality. He viewed that sustainable microfinance is carried out by commercial institutions (both public such as banks and member-based such as credit unions) that deliver financial services to the economically active poor at interest rate that enable the institutions to cover all costs (including the commercial cost of funds) and risks; and to generate a profit. Some researchers reached the conclusion that the commercialization of MFIs is the best way of maintaining financial sustainability. Among them, Miki Hamada (2010) is one who expressed that the commercialization of MFIs is one solution for financial sustainability. In sum, the financial sustainability of MFIs is one of the major parts of MFIs. Financial sustainability means covering all operational, administrative and financing costs which are incurred while providing financial services to the targeted clients. Financially sustainable institutions can serve their clients longer without depending on any external donation and subsidy. So, financial sustainability is taken as the main tool of measuring success of MFIs. 2. METHODOLOGY AND DATA The present study attempts to analyze and compare the financial performance of the Nepalese MFIs primarily from a sustainability point of view. To attain the research objectives the cross-sectional descriptive analytical research design is adopted. The required data are taken from the MIX Market. The Microfinance Information Exchange (MIX) is the premier source for microfinance data and analysis which provides objective data and analysis with the goal of strengthening the microfinance sector. MIX Market ( is the premier source for objective and unbiased microfinance data and analysis. According to the Central Bank of Nepal 5 (Nepal Rastra Bank - NRB) 21 Microfinance banks, 15 Saving and Credit Cooperatives Limited (having license of limited banking activities from NRB), 45 NGOs (financial intermediaries) are providing microfinance services. In addition, 10,558 6 saving and credit cooperatives limited are also providing microfinance services in Nepal under the cooperative department of Government of Nepal. According to the Mix Market database, there are 38 MFIs which are registered in NRB during the years 2006 to However, some

4 236 / Sun Shaoyan and Bal Ram Duwal MFIs had not reported regularly. In this study, 12 MFIs are taken from four different types of MFIs. Each group contains three MFIs. The groups are: Government initiated Rural Development Banks (Grammen Bikas Bank, here after GI-GBB); Privately initiated Microcredit Development Banks (Microfinance Banks, here after PI-MFB); Financial Intermediary Non- Governmental Organizations, here after FI-NGOs); and Community Initiated Saving and Credit Cooperatives, here after Coop). Also sample MFIs are selected on the basis of higher outreach and with long operation period (age). This researcher analyzes the financial sustainability of Nepalese MFIs by using five years consecutive data of sample MFIs from 2006 to The list of sample MFIs is listed in annex. In this study, we have set hypotheses related with financial sustainability of MFIs. Hypothesis: There is no any significant difference in financial performance of different modalities of MFIs. 3. DATA PRESENTATION AND ANALYSIS Generally speaking, successful MFIs can be measured by the scope and penetration of the target market and good financial result. To be successful, financial intermediaries that provide services and generate domestic resources must have the capacity to meet high performance standards. They must achieve excellent repayments and provide access to clients and they must build toward operating and financial self-sufficiency and expanding client reach.( S.C Veterivel et al., 2010) This good financial result relates to an institution s financial sustainability which is measured in terms of growth, productivity, efficiency, profitability, control of default, risk management, etc. In other words, profitability is taken as the key indicator of financial sustainability of institutions which is not enough to judge the MFIs. Furthermore, to analyze financial sustainability it will be better to study various factor and parameters of the MFIs. Here, financial sustainability of the MFIs is analyzed through these seven parameters: 1. Financial Structure 2. Operating Performance 3. Revenue 4. Expenses 5. Efficiency and Productivity 6. Risk Management. These parameters are most comprehensive and globally accepted indicators of financial health of MFIs as Mix Market uses it across the world for classification. In addition to these seven parameters, Mix Market also use the outreach parameter to classify and analyze the MFIs. To analyze the available data ratio analysis and one way ANOVA test (the application of difference of means test) are used. Ratio analysis is a financial management tool that enables managers, donors, practitioners and users of MFIs to access their progress in achieving sustainability. The application of difference of means test has been done at a=0.05 (degree of freedom at 95%). The five years ( ) consecutive data are taken in study and derived averaged from this five year data. In this case, only averaged data are presented for the comparative study. Furthermore, the 2009 Global and Financial Self Sufficient (FSS) MFIs Benchmark figure are used in order to compare with the performance of global MFIs Financial Structure The overall financing position of assets, equity and liabilities of the MFIs is shown by financial structure ratio. Assets mean what the MFIs had or are owed. Liabilities are what the MFIs owe and equity is what MFIs own. These indicators give the answer whether the institutions are dependent upon own resources or not; and how much portion external funds are used in financing. Capital Asset Ratio is higher in both FI-NGOs and Cooperatives. This ratio is far below than the Global and FSS benchmark. That means Nepalese MFIs should increase the portion of capital in their financial composition. Debt (liabilities) to equity ratio measures the overall leverage of an institution and how much cushion it has to absorb losses after all liabilities are paid. Deposit-taking MFIs and saving-based organizations usually have higher ratios than other MFIs. Debt to equity ratio is too much higher in GI-GBB means GI-GBB has greater creditor risk. This ratio is also very high in Nepalese MFIs in comparison to global benchmark. Deposit to loans ratio and Deposits to total assets ratio are significantly very high in cooperatives that show the cooperative MFIs are more dependent on deposit collection and deposit are the main source of investment for these institutions. These two ratios are significantly much higher than the benchmark ratio which stated Nepalese MFIs are more dependent on deposit than equity capital. Equity capital should be increased and greater portion of equity capital helps to get financially sustainable position. Gross loan Portfolio to Total Assets positions is the same in GI-GBB, PI-GBB, FI-NGOs but less in the Cooperatives.

5 Comparative Analysis of Financial Sustainability of Nepalese Microfinance Institutions / 237 The p-value is highly significant in deposits to loans ratio and deposits to total assets ratio which means there is difference in collection of deposits and mobilization of deposits. The major reason behind this result is the community and member based nature of saving and credit cooperative societies. By their nature, cooperative microfinance providers are saving nature and these institutions collect the deposit from the members regularly from which they maintain the loan demand. Table 1 Indicators Financial Structure Benchmark Sl. No. Indicators (in Percentage) GIGBB PIMFB FINGOs Coop Overall Global FSS F test Ave. P-Value 1. Capital/ Asset ratio Debt to equity (in ratio) Deposits to loans * 4. Deposits to total assets * 5. Gross loan portfolio to total assets Operating Performance 6. Return on Assets * 7. Return on Equity Operational Self-sufficiency Revenue 9. Financial revenue/ Assets * 10. Profit margin Yield on gross portfolio (nominal) * Expenses 12. Total expense/ Assets Financial expense/ Assets Provision for loan impairment/ Assets Operating expense/ Assets * 16. Personnel expense/ Assets * 17. Administrative expense/ Assets Efficiency and Productivity 18. Operating expense/ loan portfolio * 19. Cost per borrower (in USD) Cost per loan (in USD) Borrowers per staff member (in no.) * 22. Depositors per staff member(in number) * Risk Management 23. Portfolio at risk>30 days * 24. Write-off ratio Loan loss rate Risk Coverage * * Reject Null Hypothesis of average means at the 95% significant level means there is a significant difference in mean levels of performance between GI-GBB, PI-MFB, FI-NGOs and Cooperatives.

6 238 / Sun Shaoyan and Bal Ram Duwal 3.2. Operating Performance Are the MFIs profitable enough to maintain and expand their services without continued injections of subsidies or not? We get answer from analyzing operating performance of MFIs. In banks and other commercial institutions, the most common measurement of profitability is Return on Assets (ROA). This reflects the organization s ability to deploy its assets profitably.; Return on Equity (ROE) measures the returns produced on the owners investment whereas Operating Self-sufficiency shows the covering of financial and operating expenses by own resources. It is the most basic measurement of sustainability indicating whether revenues from operations are sufficient to cover all operating expenses. It reflects the MFI s ability to continue their operations if they receive no further subsidies. The positive and higher ROA is preferable. ROE should be near to the market interest rate on saving. ROE is important for profit earning institution. For long-term sustainability of operation, MFIs should obtain over 100% Operational Self-sufficiency ratio. Nepalese MFIs are performing higher and good ROA and ROE position in comparison to Global and FSS benchmark except in GI-GBB. All the studied MFIs except for GI-GBB have obtained good Operational Self-sufficiency ratio that is higher than the benchmark ratio of FSS MFIs. The indicators of all operating performance show that the FI-NGOs are maintaining higher and good position among other Nepalese MFIs. From the operating performance point of view except for GI-GBB, all the MFIs are profitable and financially sustainable, too Revenue Revenue from loan portfolio, interest on loan portfolio, revenue from investment and other operating revenues are the sources of financial revenues of the MFIs. The major source of income in MFIs is the interest on loan portfolio. After deduction of financial and operating expenses from financial revenue, we get net operating income. Higher degree of financial revenue to assets ratio indicates the proper utilization of assets to generate the revenue. Profit margin is derived from dividing net operating income by financial revenue and yield on gross portfolio (nominal) is calculated through dividing the financial revenue from loan portfolio by average gross loan portfolio. Here, financial revenue to assets ratio is almost the same in studied MFIs but the GI-GBB s have huge amount of negative profit margin, i.e %. The FI-NGOs have the highest yield on gross portfolio (nominal), i.e % and GI-GBB has the lowest one. Nepalese MFIs are gaining high profit margin (except GI-GBB) compared to global benchmark, however, financial revenue to asset ratio is lower than the benchmark. Only FI-NGOs are maintaining sound yield on gross portfolio. The p-value is significant in financial revenue to assets ratio and yield on gross portfolio Expenses Providing financial services to the clients by minimizing the cost is the major administrative objective of most MFIs. The lower the cost, the higher productivity and efficiency, vice versa. Even though in the growing phase the operating cost might be higher for institutions, it is found that total expenses to assets and financial expenses to assets ratio of Nepalese MFIs are more or less similar. But, these ratios are far below than the Global and FSS benchmarks. The amount of loan impairment is a negative asset on the balance sheet and reduces the gross loan portfolio. The provision for loan impairment to assets ratio is higher in both GI-GBB and FI-NGOs. Here, the operating expenses to assets ratio and personnel expenses to assets ratio are found significantly lowest in cooperative MFIs and the GI-GBB has the highest among the studied MFIs. The administrative expense is comparatively higher in FI-NGOs. From the expense point of view, Nepalese MFIs are economic than other MFIs in the world and the cost of operating MFIs is lower in Nepal Efficiency and Productivity Efficiency and Productivity indicators reflect the ability and skill of MFIs on efficient use of their resources. They also show how well the MFI control their operating costs. The operating expenses to loan portfolio works as a means of comparing administrative and personnel expenses to the MFIs yield on the loan portfolio. The lower the ratio, the more efficient the MFIs are. The operating expenses to loan portfolio is the lowest in Cooperative MFIs in contrary to other types of MFIs that have similar ratio but cost per borrower is higher in Cooperative MFIs among others. Cost per loan is the lowest in FI-NGOs where as other MFIs have the same ratio. PI-MFB has greater amount of borrowers and depositors per staff member. The higher ratio is preferable in borrowers per staff member and depositors per staff member. Depositors per staff member is very high in Nepalese MFIs compared to global MFIs which clarify that Nepalese MFIs are also concentrating on deposit collection from their clients. As a result, they can be called as the saving oriented MFIs.

7 Comparative Analysis of Financial Sustainability of Nepalese Microfinance Institutions / 239 The Nepalese MFIs operating expenses to loan portfolio ratio is lower than the global benchmark. Both cost per borrower and cost per loan ratios are very low in Nepalese MFIs. From this point of view, it can be concluded that the Nepalese market is cheaper than other regions of the world. So it has significantly low cost per borrower and Cost per loan ratios. Borrower per staff member is also higher than the global benchmark. All these five indicators of measuring efficiency and productivity of MFIs show that the Nepalese MFIs are more efficient and productive which is a good sign of Nepalese MFIs financial sustainability Risk Management Finally, high delinquency makes financial sustainability impossible. Risk management is the major part of every financial institution. The management/administrative body should give proper attention to maintain the risk level. Portfolio at risk is the major indicator of risk level of the institutions also often used as the threshold beyond which loans are considered to be at higher risk. Greater value of portfolio at risk > 30 days is more risky and vice versa. The FI-NGOs have nominal portfolio at risk greater than 30 days ratio, i.e % but GI-GBB has large portion of this ratio, i.e %. The GI-GBB s portfolio at risk is out of control. So, it should take immediate corrective action to recover its portfolio which is at risk> 30 days. Otherwise, it will negatively affect the institutions asset. The portfolio at risk > 30 days ratio is almost same in PI-MFB compared with FSS benchmark. Write-offs are the challenging job for MFIs because they result in a reduction of the MFI s assets and its current and future earnings ratio. It is believed that higher ratio indicates a problem in the MFI s collection efforts. An aggressive write-off policy reduces the portfolio at risk ratio. The FI-NGOs write-off ratio is 0.17% though it has fewer portfolios at risk> 30 days which indicates FI-NGOs are conscious on maintaining of risk management. Except the Cooperatives, other MFIs have higher write-off ratio though these are lower than the benchmark ratio. Almost all Nepalese MFIs have negative loan loss rate. So, we can say that these institutions loan recollection mechanism is also satisfactory. The risk coverage ratio is an approximate indicator of preparation for the worst-case. That is if all the portfolio at risk>30 days became uncollectible, the risk coverage ratio of FI-NGOs is much highest one. It has the lowest portfolio at risk on one side and on the other side it has maintained hig h amount of impairment loss allowance. Therefore, it has huge risk coverage ratio. The portfolio at risk>30 days and risk coverage ratio are significantly different in different modality of Nepalese MFIs. 4. CONCLUSION From the above data analyses, we can conclude that the financial performances of Nepalese MFIs are varied based on the modalities that mean the hypothesis is rejected. This is reflected in 12 out of the 26 parameters studied. The p-values of indicators/parameters such as deposits to loans, deposits to total assets, return on assets, financial revenue to assets, yield on gross portfolio (nominal), operating expenses to assets, personnel expenses to assets, operating expenses to loan portfolio, borrower per staff member, depositors per staff member, portfolio at risk>30 days and risk coverage are significant. From the analysis of all of these financial parameters, we can conclude that Nepalese microfinance industry is in profitable condition and operating in self-sufficiency level, which is positive signal for investor, donor agencies and microfinance practitioners. However, Nepalese MFIs have comparatively low clients. Nepalese MFIs are enjoying in less operating expenses compare to global benchmark. This is one of the strong points for Nepalese MFIs which can easily attract more international investors and donor agencies. Remarkably, Nepalese MFIs are also practicing to collect deposit from its clients which we rarely found in other MFIs operating in different parts of the worlds. So, it can be said that the Nepalese MFIs are deposittaking MFIs and saving-based organization but these MFIs are more dependent on deposit than equity capital. Equity capital should be increased and the greater portion of equity capital helps to get financially sustainable position. These MFIs are financially sustainable, too. The FI-NGOs and PI-GBB are performing better than the GI-GBB and Coop in terms of outreach, portfolio quality, profitability, productivity and efficiency. These institutions have good public relation with social mobilization; they are also concentrating on social development of their clients with financial services. Some of the leading FI-NGOs were already upgraded into microfinance a bank like Nirdhan NGO transformed into the Nirdhan Uttan Bank Ltd in 1999 and the Center for Self-help Development (CSD) also promoted to the Swabalamban Bikas Bank Ltd. in These transformed microfinance banks financial position are also sound and financially sustainable, too. The information s and dates are not sufficient to clarify the Nepalese MFIs whether these institutions

8 240 / Sun Shaoyan and Bal Ram Duwal are following Institutionalist approach or Welfarist approach. However, from an analysis of overall financial performance of Nepalese MFIs, it can be noticed that the PI-MFB and leading FI-NGOs are trying to follow Institutionalist approach whereas Cooperative societies are following Welefarist approach. The GI-GBBs are also transforming towards the Institutionalist approach. Microfinance is generally targeted towards the poverty alleviation and empowering the poor from socio-economic aspects. If Nepalese MFIs totally followed the Intuitionalist approach, the people residing in rural and remote area hardly get access to financial services from these institutions. Due to difficult geographical location and, scattered demographic location the operation cost naturally became higher than the other region of the country. An Intuitionalist tries to make profit and maintain the financial self-sufficiency level which put more burdens to poor clients. It discourages them to link with MFIs and they voluntarily exclude from formal financial market. The Cooperative society model seems more suitable rather than big micro finance banks for the remote and rural areas. The Welfarist MFIs can provide financial services to those poor household with reasonably lower interest rate. The government should make favorable and friendly environment to flourish MFIs in Nepal. The Welfarist approach cannot be avoided in the context of Nepalese rural financial market. In other words, it is still needed to reach the poorest of the poor to alleviate poverty. Notes 1. < h t t p : / / w w w. m i c r o - c r e d i t s u m m i t. o r g / n e w s / record_128_million_of_worlds_poorest_received_a_microloan_in_2009/> 2. Brigit Helms (2006), Access for All: Building Inclusive Financial Systems; CGAP, pp Mohammad Yunus (2007), Define social business as a new type of business that pursues goals other than making personal profit-a business that is totally dedicated to solving social and environmental problems. It may be owned by one or more individuals, either as a sole proprietorship or a partnership, or by one or more investors, or by government or a charity, or any combination of different kinds of owners. This business cannot incur losses indefinitely. But any profit it earns does not go to those who invest in it. Thus, a social business might be defined as a non-loss, non-dividend business. 4. Rural Development Scheme of Islamic Bank Bangladesh Limited is a recently developed Interest Free Microfinance Institutions introduced in Nepal Rastra Bank, Banking and Financial Statistics No. 56 (Mid-Jan, 2011). 6. < (Accessed in July 7, 2011). References Brigit Helms (2006), Access for All: Building Inclusive Financial Systems. Washington, DC, CGAP, The World Bank, pp. 3. Bruce E. Moon (2010), The Great Divide in Microfinance: Political Economy in Microcosm, in Todd A. Watkins, Karen Hicks (ed.) Moving Beyond Storytelling: Emerging Research in Microfinance (Contemporary Studies in Economic and Financial Analysis, Volume 92), Emerald Group Publishing Limited, pp Gary M. Woller et. al (1999), Where to Microfinance?, International Journal of Economic Development, Vol. 1, No.1, pp , Retrieved from scholar? James C. Brau and Bary M. Woller (2004), Microfinance: A Comprehensive Review of the Existing Literature, Journal of Entrepreneurial Finance and Business Ventures, Vol. 9, Issue 1, pp Miki Hamada (2010), Financial Services to the Poor: An Introduction to the Special Issue on Microfinance, Institute of Developing Economies, JETRO, Chiba, Japan. The Developing Economies (March 2010) Vol. 48, No. 1, pp Muhammad Yunus (2007), Creating a World without Poverty: Social Business and the Future of Capitalism. Newyork, Public Affairs. Nepal Rastra Bank (2010), Banking and Financial Statistics No. 54 (Mid-Jan, 2010). Kathmandu, Nepal Rastra Bank. Nikhil Chandra Shil (2009), Microfinance for Poverty Alleviation: A Commercialized View. International Journal of Economics and Finance, Vol. 1, No. 2, pp Pankaj K. Agrawal and S.K. Sinha (2010), Financial Performance of Microfinance Institutions of India-A Cross Sectional Study. Delhi Bushiness Review, Vol. 11, No. 2, pp Robinson Marguerite (2001), The Microfinance Revolution; Sustainable Finance for the Poor. Washington DC, The World Bank. Rural Microfinance Development Centre Ltd. (2009), State of Microfinance in Nepal. Kathmandu, RMDC. S.C. Vetrivel and S.Chandra Kumarmangalsam (2010), Role of Microfinance Institutions in Rural Development. International Journal of Information Technology and Knowledge Management (July-December 2010) Vol. 2, No. 2, pp The SEEP Network and Alternative Credit Technologies (2005), Measuring Performance of Microfinance Institutions: A Framework for Reporting, Analysis, and Monitoring. Washignton DC, The SEEP Network and Alternative Credit Technologies. Tucker Michael and Miles Gerard (2004), Financial Performance of Microfinance Institutions: Comparison to Performance of Regional Commercial Banks by Geographic Regions. ESR Review (2004) Vol. 6, No. 1, pp 41-54, Brigham Young University Marriott School of Management. www. microcreditsummit.org

9 Comparative Analysis of Financial Sustainability of Nepalese Microfinance Institutions / 241 ANNEX List of Sample MFIs Sl. No. Name of MFIs Year of Establishment Government initiated Rural Development Banks: GI-GBB 1. Grammen Bank Nepal, Biratnagar Jan 1, Madhyamanchal Grameen Bikas Bank Ltd. Jan 1, Purbanchal Grammen Bikas Bank Ltd. Jan 1, 1994 Privately initiated Microcredit Development BanksÿPI-MFB 4. Chhimek Bikas Bank Ltd. Sep 13, Deprosc Development Bank Ltd. Jan 1, Nirdhan Utthan Bank Ltd. Jan 1, 1993 Financial Intermediary Non-Governmental Organizations: FI-NGOs 7. Centre for Self-help Development Jan 1, Forum for Rural Women Ardency Development Jan 1, Development Project Service Centre - Nepal Sep 26, 1993 Community Initiated Saving and Credit Cooperatives: Coop 10. Chandeshwori Saving and Credit Co-operative Society Ltd. Jan 1, Janasachetan Saving and Credit Cooperative Society Ltd. Jan 1, Women Cooperative Society Ltd. Jan 1, 1995 Source: