The critical success factors for commercialising microfinance institutions in Africa
Uncertainty of continued donor funding poses a risk to microfinance operations worldwide, and this study explores the circumstances under which African microfinance institutions (MFIs) will consider commercial funding as a viable alternative source of funding. This research aims to identify the factors that are associated with successful access to private capital for pro-poor financial institutions. It examines the suitability of new opportunities for accessing fresh capital by MFIs for development and poverty reduction using commercialisation as an option. In a world awash in private capital, it is vital to harness the power of the private sector to solve key development challenges (World Bank, 2007). As microfinance institutions grow, they increasingly find themselves in need of additional capital to finance expansion of services to cover more poor communities. The study undertook a cross-country data analysis of 103 microfinance institutions to help provide understanding of the critical success factors that underpin successful access to commercial capital. The study also tested the hypothesis on the viability of commercial finances, and developed and tested a commercialisation success model for tapping commercial funds. The prediction model based on firm-level data from a sample of 21 African countries between 1998 and 2003, aims to minimise chances of failure and act as a screening system by investors as well as a selfassessment tool for MFIs intending to seek commercial capital. On examining the direct and indirect impact of firm-level success factors on commercialisation, the study identified key predictors of success and guidelines for MFI financing’s integration with the larger financial system. The study finds that certain critical success factors (CSFs) define minimum pre-conditions for microfinance institutions considering commercial funding as an alternative source of finance. There is evidence to suggest that the desire to tap into the capital markets and capacity to link with commercial investors is a realisable vision for African MFIs. The research evidence is instructive of widened financing options for MFIs and capacity to relax growth constraint in the industry. Based on the CSFs, the study suggests how MFIs can break free from 'captive' donor funding as a necessary platform for the switch to commercial finance in the industry. However, the findings also suggest the need for MFIs to satisfy the interests and requirements of prospective commercial investors to overcome new challenges. In particular, the results show that the extent of organisational formalisation and transparency in financial reporting are absolutely essential in drawing commercial lenders to invest in microfinance. In addition the study establishes the reasons why traditional approaches to financing microfinance cannot work any longer. There are some concerns on mission drift; in particular whether the poor gain from commercialisation, and under what circumstances their interests are taken care of in order to preserve the long-term social value of microfinance as a poverty reduction strategy. vi The study was carried out based on a rather limited time series data. However, the number of firms and the diversity is considered adequate for the study, as well as sample representation across Africa. The study also used views of 'thought leaders' as the source of information. Other personnel calibre may have had different suggestions. Perceptions were drawn from commercial lenders/investors of microfinance programmes based in Africa. Needless to say, any generalisation of CSFs beyond the African microfinance context should be made with caution. This study is probably one of the first attempts to explore the possibility of a linkage between microfinance and capital markets and it will be of interest to MFIs, commercial banks, international donors and investment funds with an interest in investing in the microfinance industry. The findings suggest that the speed of increase in financial leverage per country depends as much on the dynamism of the market, as it does on the level of development of the finance sector. The results indicate that commercial investors will be attracted by good financial returns and administrative efficiency (return on assets, cash-flow adequacy and operating expense ratio), transparent reporting and information disclosure and clarity, as well as low inflation levels. Investors will also be looking for larger, regulated and profitable MFIs with a low-risk profile for their investment portfolios. The study found strong support to the hypothesis that the commercialisation index (CI) is a better measure of successful commercialisation than the LMA (leverage multiplier added), given the variables used. In all cases, compelling evidence shows that the CI has more explanatory power and is an accurate predictor of two-year success in commercialisation as examined by logistic regression. These results suggest that the superior predictive abilities of the CI commercial rating rule could be explored to guide screening efforts for winners, investment decisions and other binary classification investigations. Specifically, the model can be useful in guiding successful commercialisation schemes in Africa because it provides MFIs with a structured approach for achieving sustainable commercial microfinance.
- MKSU Doctoral Theses