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CHAPTER NO 1

Introduction

1.1 Background

Access to financial markets is seen as a precursor to growth

and development. In Pakistan, much like the rest of the

developing world, the cash impoverished, financially

unsound, strata of the population is left rather wanting.

Deemed too risky; a significant proportion of the Pakistani

populace remains un-served by formal institutional players

of the countrys burgeoning financial markets.

The Pakistani financial landscape has evolved considerably

over the past two decades (2002). The 1990s brought

sweeping reforms: nationalized commercial banks (NCBs) were

wrested away from state control and put into the hands of

the market; also, the State Bank of Pakistan (SBP) was given

precedence over the Pakistan Banking Council, having been

made the sole supervisory authority responsible for

regulating the banking sector (Burki & Niazi, 2003).

Resultantly, state owned banks that previously controlled

92% of total banking assets (as per 1990 estimates) lost

significant ground and saw their share of the market shrink

by approximately 1/4thto 70% by 2000s end (Burki & Niazi,

2003); this figure now rests at less than 20% as per recent

SBP reports.

Unconstrained access to formal, and semi-formal, sources of

funds is seen as imperative to the developmental goals of

countries. Vatta (2003) underlines the role credit plays in

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extracting households from the maws of poverty giving

individuals the opportunities to: invest in capital, both

human and social, insure themselves against external shocks

by building a diverse asset base, and profiting from

lucrative economic propositions as and when they present

themselves. Formal credit institutions however have largely

failed the poor. Informal lenders are the primary source of

funding for the large segments of low-income economic actors

in the developing world.

The concerned authorities however seem to be taking note of

the unsustainable nature, and the discriminating effects of

current practices. The SBP recently, in association with the

Department for International Development (DFID), initiated

the Financial Inclusion Program (FIP) to help extend the

financial markets reach, and reign in the formally

ostracized via innovation, education of the masses regarding

financial matters, capacity building, and research and its

consequent institutionalization (PMN, 2008).

Inclusiveness is of essence since 24 million Pakistanis

live below the national poverty line (IFC, 2008).

Microfinance and expansion of microcredit are seen as

linchpins of any policy, local or international, aimed at

rescuing the marginalized from their present predicament.

Microfinance involves facilitating the poor with unbridled

access to financial products and services by providing them

with loan amounts deemed too small for conventional

intermediaries to furnish. As Weber (2004) explains: micro-

level schemes are an effective way to empower the poor and

bring the women into the realm of decision-making and money

management rights, accruing to traditions and customs,

that they have been continually denied. Microfinance

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essentially uses the informal lenders business model as a

prototype incorporating into its strategy the concept of

group lending, high rates, and frequent payments to ensure

low default rates (Hammil, Matthew, and McCarter, 2008).

The institutions responsible for the above also have a

social dimension to their work: mitigating food insecurity,

women empowerment and employment, development of creditors

and green issues are all seen as natural offshoots of the

microfinance promise (Nieto, Cinca, and Molinero, 2007).

Pakistan, much like its fellow regional partners, has taken

an active interest in the development of its microfinance

sector. This is evident in the series of reforms introduced

by the SBP to streamline workings of microfinance

organizations promulgation of the Microfinance

Institutions Ordinance (2001), its supporting ancillary

statutes, and the introduction of programs such as the

Microfinance Sector Development Program underline the

efforts the chief regulatory body seems to be making in

order establish microfinance as a viable business

opportunity and not just a tool to effect social development

of the masses (PMN, 2008).

The history of microfinance in Pakistan although dates back

to the 1960s with the Comilla Project and its so-called

experimentation with microcredit, the sector itself only

began to take-off and gained prominence in the 1990s (PMN,

2008).

Presently there are a number of Microfinance Providers

(MFPs) operating in the country the Pakistan Microfinance

Network (PMN) categorizes these as: Microfinance

Institutions (MFIs), Microfinance Banks (MFBs), and Rural

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Support Programs (RSPs). The national rural support

programs of which there are four were primarily inspired

by the work of private players such as the Aga Khan Rural

Support Program (AKRSP) that operated largely in the

Northern Areas and busied itself with dispersing credit and

mobilizing savings to/from the surrounding rural areas (Rauf

& Mahmood, 2009; PMN, 2008).

1.2 Problem Identification

Poverty is one of the main causes of low economic

development in developing countries and people are compled

to lead a miserable life below the poverty line. There is a

substantial portion of the population of the developing

countries which are living below the line and thus trap in

the vicious circle of poverty. The concerned authorities

however seem to be taking note of that situation and

formulating policies which address the issue of poverty. The

microfinance is one of the suggested solutions which shows

its benefit and fruitfulness in many developing countries

like Bangladesh. In Pakistan microfinance institutions are

also operational but the matter of concern for this

literature is that are the microfinance institutions are

efficient enough to address the issue or this situation is

going adverse due to inefficiency of microfinance

institutions. The SBP recently, in association with the

Department for International Development (DFID), initiated

the Financial Inclusion Program (FIP) to help extend the

financial markets reach, and reign in the formally

ostracized via innovation, education of the masses regarding

financial matters, capacity building, and research and its

consequent institutionalization (PMN, 2008).

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Inclusiveness is of essence since 24 million Pakistanis

live below the national poverty line (IFC, 2008).

Microfinance and expansion of microcredit are seen as

linchpins of any policy, local or international, aimed at

rescuing the marginalized from their present predicament.

Microfinance involves facilitating the poor with unbridled

access to financial products and services by providing them

with loan amounts deemed too small for conventional

intermediaries to furnish. As Weber (2004) explains: micro-

level schemes are an effective way to empower the poor and

bring the women into the realm of decision-making and money

management rights, accruing to traditions and customs,

that they have been continually denied. Microfinance

essentially uses the informal lenders business model as a

prototype incorporating into its strategy the concept of

group lending, high rates, and frequent payments to ensure

low default rates (Hammil, Matthew, and McCarter, 2008).

The institutions responsible for the above also have a

social dimension to their work: mitigating food insecurity,

women empowerment and employment, development of creditors,

and green issues are all seen as natural offshoots of the

microfinance promise (Nieto, Cinca, and Molinero, 2007).

Pakistan, much like its fellow regional partners, has taken

an active interest in the development of its microfinance

sector. This is evident in the series of reforms introduced

by the SBP to streamline workings of microfinance

organizations promulgation of the Microfinance

Institutions Ordinance (2001), its supporting ancillary

statutes, and the introduction of programs such as the

Microfinance Sector Development Program underline the

efforts the chief regulatory body seems to be making in

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order establish microfinance as a viable business

opportunity and not just a tool to effect social development

of the masses (PMN, 2008).

The history of microfinance in Pakistan although dates back

to the 1960s with the Comilla Project and its so-called

experimentation with microcredit, the sector itself only

began to take-off and gained prominence in the 1990s (PMN,

2008).

Presently there are a number of Microfinance Providers

(MFPs) operating in the country the Pakistan Microfinance

Network (PMN) categorizes these as: Microfinance

Institutions (MFIs), Microfinance Banks(MFBs), and Rural

Support Programs (RSPs). The national rural support

programs of which there are four were primarily inspired

by the work of private players such as the Aga Khan Rural

Support Program (AKRSP) that operated largely in the

Northern Areas and busied itself with dispersing credit and

mobilizing savings to/from the surrounding rural areas (Rauf

& Mahmood, 2009; PMN, 2008).

Given the recent increase in the frequency and magnitude of

disasters the world over there seems to be an apparent

fatigue setting in amongst donors and donor organizations.

Its all come to the oft-repeated economic principle of too

little resources relative to continually amassing needs.

Resultantly microfinance providers, much like the rest of

their economic counterparts, have to largely depend upon

their performance to attract much needed funding. Nieto et

al. (2007) however are right in stating how traditional

approaches of assessing performance of institutions does not

seem compatible with the current state of affairs;

especially that pertaining to microfinance service providers

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- Questions regarding how then to appropriately measure

performance of MFPs, and contextualize the discussion in

reference to these specialized units abounds in the

literature accumulated over the course of this study (Nieto

et al., 2007; Lapenu & Zeller, 2004; Bassem 2008).

1.3 Problem Statement

The efficiency analysis of microfinance institutions is

conceptually different than that of conventional banks that

primarily rely on information regarding financial

independent and dependent variables to arrive at numbers

reflecting the respective banks success in harnessing its

intermediary abilities (Nieto et al., 2007).

Murdoch (1999) explains how MFIs cannot be treated as

conventional banks and have their financial performance

judged purely on the basis of their financials, in fact a

microfinance institutions primary concern is with deepening

outreach and widening its influence and thus such

considerations should made part of their efficiency

framework to arrive at meaningful conclusions.

1.4 Research Question

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Are the microfinance institutes in Pakistan efficient? The

efficiency of microfinance institutes is vital to achieve

the objectives of microfinance in country. Do the factors

such as, utilization of assets, operational efficiency in

terms of cost, profitability & capital structure have direct

impact on the sustainability & efficiency of microfinance

institutions? Stock price in the market is one of the tools

for determining the confidence which is directly related to

the profitability & efficiency of institutions.

1.5 Rationale of the Study

The study will provide knowledge regarding the efficiency of

the microfinance institutions in Pakistan. The efficiency of

microfinance institutions is vital in order to achieve the

objective of microfinance in Pakistan. The prime objective

of microfinance is poverty reduction in the country which

can only be ensured if the providing institutions are

efficient. This study also provides information about the

effectiveness of microfinance in Pakistan so it gives

information about multiple dimensions of microfinance in

Pakistan.

1.6 Objectives of the ResearchThe objectives of this study are to determine the overall

performance of micro finance institutes (MFIs) in Pakistan,

identify the operational efficiency. The study also

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establishes the link between the stock price, operation

efficiency and capital structure. It will determine the most

efficient institution among the sample. IT analyzes the

(MFIs) individually among the variables.

1.7Limitations

Similar to other studies, this study is not without its

restrictions. Our sample process consists of four micro

finance institutes may bound the generalisability of the

outcome. The study can be strengthened by raising the sample

size as a finding and result may differ considerably when

the sample size is increased or decreased. As only few micro

finance institutions may not represent whole MFIs in

Pakistan, more MFIs would create a more diffused results and

findings. Finally, more variables can also be included in

the theoretical framework can be caused by many different

aspects of the MFIs.

1.8 Scope of the Research

The research analyzes the impact of total revenue, total

debt, total assets and operating expenses on the share price

of micro finance banks in Pakistan. The research is

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descriptive in nature and collection of data from secondary

and reliable sources. Thus this study process guide and help

the micro finance institutes for future dealings.

1.9 Theoretical Frame Work

Independent variables Dependent variable

There are five variables involved in the proposed model. The

proposed variables represent the five factors such as stock

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price, total assets, debt, profitability & operating

expenses. These are the factors which directly linked with

the efficiency of microfinance institutions.

Dependent Variable

The study uses the econometric model based which establishes

the relation between the stock price & other financial

indicators so stock price is the dependent variable in the

stock market. The investors feel confidence on investing in

the MFI if its performance is adequate in the market.

1.10 Definition of terms

Financial Revenue

The amount of money a company earns through the sale of goods

or services, rents, and other sources. Revenue is the amount

the company makes; it should not be confused with profit, which

is revenue less expenses. Likewise, it should not be confused

with cash flow, as revenue can be money owed but not yet paid.

Operating Expense

A category of expenditure that a business incurs as a result of

performing its normal business operations. One of the typical

responsibilities that management must contend with is

determining how low operating expenses can be

reduced without significantly affecting the firm's ability to
http://financial-dictionary.thefreedictionary.com/Moneyhttp://financial-dictionary.thefreedictionary.com/Earnshttp://financial-dictionary.thefreedictionary.com/Salehttp://financial-dictionary.thefreedictionary.com/Servicedhttp://financial-dictionary.thefreedictionary.com/Rentshttp://financial-dictionary.thefreedictionary.com/Profithttp://financial-dictionary.thefreedictionary.com/Expenseshttp://financial-dictionary.thefreedictionary.com/Cash+Flowhttp://financial-dictionary.thefreedictionary.com/Owedhttp://financial-dictionary.thefreedictionary.com/Owedhttp://financial-dictionary.thefreedictionary.com/Cash+Flowhttp://financial-dictionary.thefreedictionary.com/Expenseshttp://financial-dictionary.thefreedictionary.com/Profithttp://financial-dictionary.thefreedictionary.com/Rentshttp://financial-dictionary.thefreedictionary.com/Servicedhttp://financial-dictionary.thefreedictionary.com/Salehttp://financial-dictionary.thefreedictionary.com/Earnshttp://financial-dictionary.thefreedictionary.com/Money

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compete with its competitors.

Total assets

Total assets are everything that a business or an individual

owns. For a company, total assets are listed on a balance

sheet. These assets are valued based on their purchase prices,

not the current market value of the assets.

Assets typically can be converted from a physical item into

cash. The ease in which an asset can be turned into money is

known as liquidity. Assets can take various forms, ranging from

real estate and investment securities to equipment

and inventory. Cash also contributes to the sum of assets.

Total debt

Total debt includes long term debt and current liabilities.

Investors can find it listed on the balance sheet in a

companys annual report. A companys total debt is an important

component in the total debt-equity ratio, an indicator of a

companys debt level. Debt can be a good tool for a

corporation. It can help the company invest in new plants and

equipment that will increase profitability. Too much debt,

however, is risky. It locks the company into regular interest

payments whether earnings are up or down. If a company

stumbles, it may have trouble recovering under a heavy debt

load.

Share price

A share price is the price of a single share of a number of

saleable stocks of a company. Once the stock is purchased, the
http://www.wisegeek.com/what-is-a-balance-sheet.htmhttp://www.wisegeek.com/what-is-a-balance-sheet.htmhttp://www.wisegeek.com/what-is-market-value.htmhttp://www.wisegeek.com/what-is-an-estate.htmhttp://www.wisegeek.com/what-is-inventory.htmhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://www.wisegeek.com/what-is-inventory.htmhttp://www.wisegeek.com/what-is-an-estate.htmhttp://www.wisegeek.com/what-is-market-value.htmhttp://www.wisegeek.com/what-is-a-balance-sheet.htmhttp://www.wisegeek.com/what-is-a-balance-sheet.htm

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owner becomes a shareholder of the company that issued the

share.

1.11 Hypothesis

The Hypotheses which have drawn from the theoretical framework

are as follows.

H1:Financial revenues has a significant impact on share price.

H2: Operating expenses has a significant impact on share

price.

H3: Total Revenue has a significant impact on share price.

H4: Total Debt has a significant impact on share price.
http://en.wikipedia.org/wiki/Stock#Shareholderhttp://en.wikipedia.org/wiki/Stock#Shareholder

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CHAPTER NO 2

Literature Review

The microfinance literature geared at assessing the

performance of the institutions seems to differ due to many

of the reasons such as literacy, accessibility & demography

etc. Two competing schools of thought are diverse from one

another and can be categorized as the Welfarists and the

Institutionists (Brau and Woller, 2004). Sustainability,

defined by Chaves and Gonzales-Vega (as cited in Nieto et

al., 2004) as the institutions ability to generate

sufficient funds so as to meet the opportunity costs of

utilizing all inputs, which is also explained by Meyer

(2002) an important concept when seen through the

perspective of MFIs since those excluded from formal

financial markets require continued access to lines of

credit and not one-off loans if they are to successfully

hold poverty at bay.

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Welfarists argue that microfinance providers can achieve

this sustainability and remain liquid, solvent, operative

and works without having to become completely self-

sufficient as seen through the prism of financial self-

sufficiency (Brau & Woller, 2004; Ejigu, 2009).

As documented by Meyer (2002) financial self-sufficiency is

a difficult measure to achieve since it requires MFIs to

generate additional revenues to build reserves to both

sustain/drive growth, and help cushion against contingencies

that may arise in the future. Also, becoming financially

self-sufficient entails achieving a certain level of

adeptness in the reporting and recording of company

financials which itself is an arduous and ambitious task and

is seen to be the product of improved institutional wide

transparency (Meyer, 2002).

Institutionists believe that for MFPs to achieve their

social objective of alleviating poverty it is necessary for

them to self-sustain their activities and operate sans

subsidies (Ejigu, 2009) this viewpoint becomes more

relevant with time as donor fatigue sets in and funds seem

to be diminishing given the overwhelming number of

tragedies, both man-made and naturally occurring, vying for

a limited pool of donor resources. Provided that social

investors unlike their counterparts in traditional,

commercial markets, do not require higher financial returns

and are instead motivated by mere philanthropic drive,

however, it is the institutions/programs that exhibit their

effectiveness and efficiency in achieving their mission and

demonstrate little drift that attract the most coveted,

costless, source of funding i.e. donor funds (Morduch,

1999).

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Sustainability and outreach, as previously alluded, however

are seen to be two conflicting objectives with the rift

between the two driven by informational asymmetries and high

transaction costs they entail (Mosley and Hulme, 1996).

Welfarists empathize with the programs social objectives

concerning the economic upliftment, and development of its

clients, and promote the use of subsidized debt and donors

funds to achieve this purpose by extending financial

services to a large number of applicants, at low cost

(Ejigu, 2009).

Institutionists however, emphasize upon the unreliability of

donor funds and thus promote extending services to clients

at high cost i.e. at near market rates, prevailing in highly

lucrative informal markets all over the developing world, so

as to achieve the financial sustainability required to

attract competitively priced commercial financing necessary

for growth and perpetuity (Ejigu, 2009).

Recently, more and more research is being conducted in an

attempt to evaluate the ability of MFPs in utilizing their

resources in a manner as to arrive at optimum levels of

output in other words, the textbook definition of,

efficiency.

The efficiency of financial institutions has long been a

matter of concern for researchers and policy makers alike.

Farrell argued that information regarding the productivity

and efficient operations of a firm is necessary to ascertain

how performance can be improved by optimizing output while

making no additions to present input reserves (as cited in

Cook and Seiford, 2009).

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Also, Ramanathan (2003) stresses how conventional

productivity analysis is centered around measuring average

factor productivity usually appropriate for single input-

output firms, whereas what todays management decisions are

concerned with is assessing total factor productivity

consistent with multiple input-output firms. Consequently, a

seemingly large number of studies have busied themselves

with evaluating similar performance measures for

intermediaries operating across regions rather than for

specific countries; studies by Bassem (2008), Fiordelisi,

Marques, Ibanez, and Molyneux (2010), Haq et al. (2009),

Nieto et al. (2004) can be cited as reference points.

Berger and Humphrey (1997) present an analysis of 130

studies using parametric and nonparametric techniques to

evaluate different financial institutions efficiencies

across 21 countries. Differences in efficiency scores

obtained across studies are seen to be a product of a

variation in measurement methods undertaken to calculate the

said efficiency, a difference in the concepts used to model

efficiency, and exogenous variables not accounted for by

various studies i.e. the environmental effects at play

(Berger and Mester, 1997).

Among the various measures available for ascertaining

institutional efficiency there has been a noted shift from

traditional ratio analysis to more comprehensive approaches

such as the data envelopment analysis (DEA) and the

stochastic frontier analysis (SFA) approach. The two

abovementioned approaches form a part of the frontier

analysis techniques used to model relative efficiencies of

entities with reference to the best practice or best

performing unit(s) from among the sample being considered.

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The so-called best performing firm is then used as a

benchmark against which others are continually assessed and

thus the scores obtained help policy makers and/or managers

identify areas of concern, and also quantify the effects of

various developments such as mergers, and (de)regulations,

on the performance of respective MFIs (Berger & Humphrey,

1997).

Efficient firms are seen to lie on the said frontier whereas

their inefficient counterparts are enveloped by the frontier

and thus lie below it; efficient firms are resultantly given

a score of 1 while others waver between 0 and 1(Ramanathan,

2003).

Schaffnit, Rosen, and Paradi (1997) hold performance

evaluation to be at the heart of managerial activity.

Frontier analysis excels at allowing individuals with little

institutional insight to sift best practice MFIs from a

given sample, and then further facilitates experts in

quantifying the qualitative knowledge they already possess

thus making it an essential, and informative policy tool

allowing users to improve the workings of their respective

institutions with regards to market leaders and yield higher

productivity gains than they would otherwise achieve (Berger

and Humphrey, 1997).

Microfinance should be about establishing long lasting local

financial institute to better serve the society. Robinson

(2001) has claimed in his literature that most institutes

who provide subsidized loan mostly fail to survive for long

time. Even though the successful institutions who are

providing subsidized loan can meet only the small portion of

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the aggregate demand for the microfinance and also it is not

possible for the donors to provide fund for the long period,

Woller (1999).

The profitability approach focuses on the mobilization of

savings and financial sustainability by commercial means. It

is market oriented and financial deepening approach in which

extreme poor are excluded from the microfinance program and

social well being of the society is the by-product. Rhyne

(1998) proclaims that access to microfinance institutes in a

sustainable way is more important the poverty alleviation.

Some of the successful and best institutions based on this

approach are Bank of Rakyat Indonesia, BancoSol in Bolivia

and Association for Social Advancement Bangladesh. This

approach is promoted worldwide and CGAP found that 5% of

worldwide microfinance institutions are financially

sustainable, while IMF claims that it is only 1%.

Microfinance also helps is promoting consumption

smoothening, financial deepening and economic growth,

(Ministry of Finance, 2003). Mosley and Hulme (1996 & 1998)

come to the conclusion that most of the todays microfinance

programs are not as effective as they could be. Arguments

regarding the success of the microfinance have been

countered by heavy criticism regarding unchanging poverty

levels, exploitation of women, inability to effectively

cater to target groups, loan re-payment and high interest

rates, Dignard and Havet (1995), Christen (1997), Brau and

Woller (2004).

Christen (1997) suggests that fashionable microcredit

programs have countered this view by elaborating that

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responsibility essentially lies upon or under the control of

microfinance institutions i.e., institutional factors such

as staff inefficiency and skill as well as clear

communication of re-payment expectations.

Amin at el (2003) focus their editorial on the capability of

microfinance to reach poor and helpless. They focus their

literature on the grounds that microfinance credit is

available only to the poor who are slightly above and below

the poverty line. Copestake et al (2001) analyze the impact

of microfinance credit on the households and firms

wellbeing, respectively. Copestake focuses on the

relationship of business performance and household income.

Evans et al (1999) approaches the microfinance in different

aspect and check the viability of microfinance as the

important tool of poverty alleviation. Kabeer (2001) focus

the role of microfinance on the women empowerment.

Kandker (1998) concluded that microfinance is an important

tool of poverty alleviation in the Bangladesh. Robinson

(2001) promotes the view of Kandker (1998) with addition

that it is applicable in national settings other than

Bangladesh. Younus (1999) recalled how he had to struggle to

convince the eligible women to accept credit.

In Pakistan many microfinance programs charge very low rates

in comparison to the many other countries of the world due

the main aim is to alleviate poverty, DIFD (2006), this

reveals that these institutions are not sustainable and are

running on heavy subsidized donations. This makes it

extremely important to develop such a microfinance program

which is more sustainable as well as it charge as much as

low rate as possible so that maximum strength of the poor

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can get benefit. Poverty is definitely a grave concern for

Pakistan and the government has selected microfinance as a

vital tool for the poverty alleviation (Ministry of Finance,

2003) which is more effective when it is designed as per the

cultural or regional requirements.

Unluckily, microfinance for poverty alleviation and economic

growth has been applied in many Islamic countries like

Pakistan, but religious barriers have completely been

ignored. This vital condition may hinder many potential

clients from assessing microfinance, Segrado, (2005) same is

to be expected in Pakistan.

Rahman (2007) finds that Grameen borrowers supplemented

their microcredit payments by borrowing from the other

sources thus, endless trail of debts started.

The government of Pakistan has selected microfinance as an

important tool for the purpose of poverty alleviation and

empowering the vulnerable. This strategy of microfinance has

been applied in addition to the major program of poverty

alleviation. There are numerous policies including

microfinance are currently being used for the poverty

alleviation in Pakistan. In this regard, government has

granted many facilities for expansion of microfinance in

Pakistan such as facilitation for legal framework and

lenient procedures for license of microfinance institution

and formation of Khuskhali Bank as first microfinance

institutions by the government (Ministry of Finance, 2003).

In Pakistan the microfinance market is dotted with an

increasing number of local and international players who in

addition to state sponsored rural support programs help

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furnish low cost, convenient, and effective credit to the

nations poor. Currently, as outlined in Rauf and Mahmood

(2009), three different microfinance models are operative in

the country, namely: Microfinance Banks (MFBs), NGO-MFIs,

and Rural Support Programs (RSPs). These microfinance

providers (MFPs) reached a total of 2 million borrowers in

FY10 and managed to grow by 13% and 40% in credit and

savings outreach, respectively (MicroWatch, 2010).

The social and economic viability of microfinance operations

have led conventional commercial financial intermediaries to

scope out the scene and add small borrowers to their list of

potential customers ORIX leasing, and the National Bank of

Pakistans (NBPs) Rozgaar Scheme program both offer their

services to meet the needs of these high-risk patrons,

heretofore financial pariahs for some (PMN, 2010; Rauf &

Mahmood, 2009).

MFPs in order to increase the quality and quantity of

financial services offered need to achieve a certain level

of financial sustainability ensuring continued, and

effective operations. The World Banks report on South Asian

MFPs (2005) outlines the funding patterns of these

intermediaries and also tabulates the degree of funding

required from different sources for these institutions to

evolve into commercially sustainable entities; as per their

findings MFPs need to wean themselves off donor capital and

generate higher (voluntary) deposits and attract additional

financing from commercial investors to achieve the elusive

status of commercially sustainable ventures. Afghanistan and

Pakistan are seen to rely primarily on donor financing, with

the Pakistani MFPs now moving to seek funds from apex

organizations on a subsidized basis; whereas Indian MFPs tap

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into the pool of compulsory savings they initiate, and are

now increasingly attracting funds from commercial banks who

have begun to view MFPs as a viable investment given

continued incentives provided for by the Central Bank and

its insistence that microfinance be labeled a priority

sector(World Bank, 2005).

Pakistan Microfinance Network (PMN) purports MFBs to have

the most sustainable and balanced funding structure of all

presently functioning organizational types although, a

hefty 90% of all deposits emanate from institutional

depositors even though small depositors account for more

than 90% of the total number of MFB depositors (PMN, 2010).

The remaining NGO-MFIs and RSPs generate funds via donor

reserves, and subsidized debt: which makes up 70% of the

institutions total debt profile; given the high prevailing

rates of interest, in excess of 12% (KIBOR), and a lack of

incentives for increased institutional investment -

commercial debt is expected to be maintained at its current

low levels (PMN, 2010).

Given their considerable scope for growth it is essential

that Pakistani MFPs raise additional financing to

effectively leverage their equity and attract commercial

funding via providing for improved transparency to ensure

access to greater, cheaper financing which in turn would

facilitate these institutions to become self-sufficient and

profitable ventures (World Bank, 2005).

The financial & economic experts argue that the microfinance

institutions are efficient if they are able to address the

issue of poverty reduction in the country. The efficiency of

microfinance institutions can also be determined through

establishing the link between the share price & some vital

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factors specific to the institutions which have direct link

with the movement of the stock price (Kandker, 1998). This

current study focuses on the efficiency of the microfinance

institutions through establishing the relation between the

stock price of the company & other companys specific

financial indicators.

CHAPTER NO 3

Research Methodology

3.1 Sample

This chapter explains & discusses the ways through which

efficiency of the microfinance institutions can be

determined. The study is empirical as it is based on the

facts & figures published under the financial reporting and

statutory obligations.

Data

Typically for influence analysis, ground level studies and

panel data were recommended so that researcher could

incarcerate the secular impact and trend of the intervention

and could compare the preceding and future scenarios. But

unluckily, many of the Microfinance Institutes (MFIs) or

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researchers do not have recommended data and manage with the

cross-sectional data at one point in time.

Microfinance institutions which were included in this study

work in urban and as well as in rural areas but their main

focus were in urban areas. The larger proportion of their

work is in the main urban centers such Lahore and Karachi

and their suburbs. The problem aroused in selecting the

control groups and localities as there are approximately

more than 95000 thousand borrows in Lahore with more than 70

offices of microfinance institutes as with Karachi and some

other urban centers with continuous increase in the number

of offices of MFIs. Hence, the knowledge and accessibility

of microfinance in these centers was vast. This made it

difficult to such areas which were unexposed to

microfinance. In that scenario, an effort was made to find

control areas where microfinance was not persistent so that

can be calculated precisely as much as possible.

Only those MFIs were selected for this study who met the

criteria. The criteria was that MFIs had at least three

years of work experience in the field of microfinance and

had a sound business plan for at least next three years and

had a portfolio of at least 2200 active borrowers and have

conducted annual audit for last three years and last but not

the least who were willing to participate in this social

impact assessment study.

The selected sample contains four (4) micro finance

institutions on the basis of most active borrowers. The

microfinance institutions on the basis of active borrowers

are Bank, NRSP, Kashf Foundation, FMFB Pakistan and TMFB.

The sample size comprises of 16 quarterly values. The data

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is secondary in nature. The share prices are also comprises

of 16 quarterly average values.

3.2 Instruments and measures

The study uses the ordinary least square (OLS) for the

determination of efficiency of microfinance institutions

(MFIs). The ordinary least square regression use multiple

independent variables and with the dependent variable so

that relation between the dependent and multiple independent

variables can be established. For the current study this is

the relation which determines the efficiency of the

microfinance institutions.

This studys choice of independent and dependent variables

are seen to be consistent with both the production and

intermediation approaches. Microfinance institutions however

differ from other financial and depository institutions in

the fact that a majority of them are seen to focus on the

micro-credit aspect of microfinance and most, as in

Pakistans case, are barred by regulatory bodies from

accepting deposits (PMR, 2010).

The study focuses on four independent variables i.e., total

assets, operating expenses, total debt & financial revenues

against the stock price.

Further, since the intent of the given paper is to assess

overall cost efficiencies of selected microfinance

institutions, additional information regarding input prices

is necessary to help achieve the said goal.

Personnel as vital component of operating expenses is an

important variable and used widely in efficiency studies for

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financial institutions. Fiorentino, Karmann, and Koetter

(2006) use labor as an input in order to estimate

efficiencies of German banks; they define labor as full-time

or equivalent employees actively employed by the respective

institutions.

Haq et al. (2009) similarly account for MFI employees as an

input in their efficiency analysis, so does Rizvi (2001) in

his seminal study on the liberalization of the Pakistani

banking industry and its consequent effects on bank

efficiency. Here we sift labor to include only loan officers

as variable in our study, following a stance assumed by

Nieto et al. (2007) we exclude other personnel from our

analysis as these might include individuals whose workings

are unrelated to the core activities of the MFPs so they

dont fall in the category of operating personnel thus

excluded from operating expenses. Jansson et al. (2003)

define loan officers as personnel who are responsible for

the management of the loan portfolio (as cited in Nieto et

al., 2007).

Operating Expenses in general are defined by Jansson et al.

(2003) as expenditures related to the operations of the

institution including administrative, depreciation, and

board expenses (as cited in Nieto et al., 2007).

The inclusion of operating expense as a variable is

justified on the basis that these expenditures are necessary

for the MFP to continue operations and facilitate extension

of micro-credit and other services. The variable is also

suggested for use by Berger & Mester (1997).

As previously outlined in the paper, financial capital makes

up a significant portion of a majority of Pakistani MFPs

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financing structure (PMN, 2009). Resultantly, total debt is

incorporated into the model as a variable. Fiorentino et al.

(2006) use borrowed funds as a variable in their cost

efficiency study; as do Manlagnit (2011), and Sun and Chang

(2010).

3.3 Procedure

The model which is estimated is as follows

S = f(Y, X, M, C)

Where

S =Stock Price

Y = Financial revenues of selected MFI

X = operating expenses of selected MFI

M = Total Assets of MFI

C = Total debt of MFI

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1500

2000

2500

3000

3500

4000

45000

5000

1000

1500

2000

2500

08:1 08:3 09:1 09:3 10:1 10:3 11:1 11:3

TATD

TRP

CHAPTER NO 4

Results and Discussion

Figure 4.1: Graphical representation of Kashf Foundation

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The above

diagram shows the decline in total assets and operating

revenues during the period spanning from 2008 to 2011. The

total debt and operating expenses show stability during the

given period.

Table 4.1 Regression analysis of Kashf Foundation

Dependent Variable: SHAREMethod: Least SquaresDate: 05/18/12 Time: 00:46

Sample: 1 16Included observations: 16

Variable Coefficient Std. Error t-Statistic Prob.

TA -0.000574 0.001062 -0.540953 0.5993TD -0.001979 0.008783 -0.225358 0.8258OE -0.000144 0.000846 -0.170525 0.8677RE 9.33E-06 9.14E-06 1.021334 0.3290C 22.48922 9.964116 2.257021 0.0453

R-squared 0.120847 Mean dependent var 12.06937Adjusted R-squared -0.198845 S.D. dependent var 0.759328S.E. of regression 0.831402 Akaike info criterion 2.718900Sum squared resid 7.603524 Schwarz criterion 2.960334

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Table 4.1 depicts relation between the share price and total

assets are insignificant as the p value is greater than the

level of significance which is taken as 0.05. The negative

sign shows there is negative relation between the share

price and the increase in the assets. In simple words, it

means that the increase in the assets has negative impact on

the share price in the market. The negative impact may be

due to the fact that the increase in the assets is due to

the increase in the cash and cash equivalent in hand which

gives negative signals to the shareholders that the

institution is not utilizing its available assets.

The relation between the share price and total debt is

insignificant as the p value is greater than the level of

significance which is taken as 0.05. The negative sign shows

there is negative relation between the share price and the

increase in the total debt. In simple words, it means that

the increase in the assets has negative impact on the share

price in the market. The negative impact may be due to the

fact that the increase in the total debt increases the

gearing of the institution which results in the decline of

Log likelihood -16.75120 F-statistic 0.378011Durbin-Watson stat 0.586012 Prob(F-statistic) 0.819746

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32

300

400

500

net worth of the institution which also gives negative

signals to the shareholders in the market so they are not

much willing to invest in the MFI.

The relation between the operating expenses is negative &


significance of 0.05. The negative sign with the coefficient

of operating expense shows that the increase in the

operating expense reduces the profitability of the financial

institution so investors and shareholders are earning less

on their investment than before. The decline in the

profitability has negative impact on the shareholder

expectation from the institution so they are not that much

willing to invest in the market.

There is positive and insignificant relation between the

share prices and operating revenues because it is directly

linked with the profitability of the MFI. This shows that

the increase in the profitability has positive impact on the

share prices in the market. The increase in the

profitability can only be possible through efficiency in its

operations. The value of R-squared is also shows the

consistency in the share prices.

Figure 4.2: Graphical representation of National Rural

Support Program (NRSP)

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The above diagram shows fluctuation in both total assets and

operating revenues but there is no significant difference

between the values at the start of the period and end of the

period. There is stability in operating expenses and total

debt.

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Table 4.2: Regression analysis of National Rural Support

Program (NRSP)

Dependent Variable: SHAREMethod: Least Squares

Date: 05/18/12 Time: 00:51Sample: 1 16Included observations: 16


TA -2.91E-05 0.000202 -0.143934 0.8882TD 9.00E-05 7.31E-05 1.230936 0.2440OE 0.000134 0.000226 0.594469 0.5642RE 1.05E-05 7.11E-06 1.473926 0.1685C 8.006383 1.526760 5.244037 0.0003

R-squared 0.216782 Mean dependent var 10.54375Adjusted R-squared -0.068025 S.D. dependent var 0.242236S.E. of regression 0.250340 Akaike info criterion 0.318310

Sum squared resid 0.689369 Schwarz criterion 0.559744Log likelihood 2.453522 F-statistic 0.761155Durbin-Watson stat 2.243683 Prob(F-statistic) 0.571814

Table 4.2 shows the relation between the share price and

total assets is insignificant as the p value is greater than

the level of significance which is taken as 0.05. The

negative sign shows there is negative relation between theshare price and the increase in the assets. In simple words,

it means that the increase in the assets has negative impact

on the share price in the market. The negative impact may be







significance which is taken as 0.05. The positive sign shows

there is positive relation between the share price and the


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35

the increase in the assets has positive impact on the share

price in the market. But in the opinion of most of the

financial experts the positive relation is not good due to

the fact that the increase in the total debt increases the




much willing to invest in the MFI. The current results shows

another school of thought which argues that the increase in

the debt provides slight cushion to shareholders from risk

associated to MFI so some of the shareholder interested in

investing geared institution.

The relation between the operating expenses is positive &


significance of 0.05. There is positive and insignificant

relation between the share prices and operating revenues

because it is directly linked with the profitability of the

MFI. This shows that the increase in the profitability has

positive impact on the share prices in the market. The

increase in the profitability can only be possible through

efficiency in its operations. The value of R-squared is also

shows the consistency in the share prices.

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0000

1000

2000

3000

4000

50000

200

400

600

800

08:1 08:3 09:1 09:3 10:1 10:3 11:1 11:3

TA

TDOE

TR

P

Figure 4.3:Graphical representation of Tameer Microfinance

Bank(TMFB)

The diagram shows the decline in the total asset during the

period and there is fluctuation in operating revenues but

there is no substantial change in it. The operating expenses

also show continuous decline during the period. There is

also increase in the total debt in the last few years of the

given period.

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Table 4.3Regression analysis of Tameer Microfinance Bank

(TMFB)




TA -7.45E-05 0.000257 -0.289436 0.7776TD 0.000129 4.00E-05 3.216264 0.0082OE 0.000725 0.000256 2.827574 0.0164RE -2.54E-05 3.33E-05 -0.760720 0.4628C 6.166780 2.291843 2.690752 0.0210

R-squared 0.778040 Mean dependent var 12.63438Adjusted R-squared 0.697327 S.D. dependent var 0.807002S.E. of regression 0.443978 Akaike info criterion 1.464224Sum squared resid 2.168284 Schwarz criterion 1.705658

Log likelihood -6.713795 F-statistic 9.639606Durbin-Watson stat 1.848583 Prob(F-statistic) 0.001340

Table 4.3 highlights the relation between the share price

and total assets is insignificant as the p value is greater

than the level of significance which is taken as 0.05. The

negative sign shows there is negative relation between the

share price and the increase in the assets. In simple words,








significant as the p value is less than the level of




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investing geared institution. The significant result shows

that the variable should not be considered in the analysis

of the current MFI.



significance of 0.05. There is negative and significant

relation between the share prices and operating revenues.

The variable of operating revenue is significant so it

should be excluded from the analysis of current MFI. The

value of R-squared is also shows the consistency in the

share prices.

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6000

8000

0000

2000

4000

6000 0

1000

2000

3000

4000

5000

08:1 08:3 09:1 09:3 10:1 10:3 11:1 11:3

TA

TD

OE

TR

P

Figure 4.4:Graphical representation of First Microfinance

Bank Ltd (FMFB)

The above diagram shows substantial increase in the total

assets and slight decline in the operating revenues during

the period. Total debt has also declined during the period

and also shows consistency after the sudden decline.

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Table 4.4 Regression analysis of First Microfinance Bank Ltd

(FMFB)




TA -7.19E-05 4.94E-05 -1.455664 0.1734TD 5.02E-05 1.91E-05 2.632781 0.0233OE 8.05E-05 4.43E-05 1.819670 0.0961RE -4.95E-05 1.70E-05 -2.922347 0.0139C 11.19398 0.889984 12.57773 0.0000

R-squared 0.688893 Mean dependent var 9.413750Adjusted R-squared 0.575764 S.D. dependent var 0.265879S.E. of regression 0.173176 Akaike info criterion -0.418709Sum squared resid 0.329890 Schwarz criterion -0.177275

Log likelihood 8.349669 F-statistic 6.089413Durbin-Watson stat 2.508682 Prob(F-statistic) 0.007785

Table 4.4 States the relation between the share price and

total assets is insignificant as the p value is greater than

the level of significance which is taken as 0.05. The

negative sign shows there is negative relation between the

share price and the increase in the assets. In simple words,












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investing geared institution. The significant result shows

that the variable should not be considered in the analysis

of the current MFI.



significance of 0.05. There is negative and significant

relation between the share prices and operating revenues.

The variable of operating revenue is significant so it

should be excluded from the analysis of current MFI. The

value of R-squared is also shows the consistency in the

share prices.

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CHAPTER NO 5

Conclusion & Recommendations

5.1 Conclusion

The above analysis gives insight information regarding the

efficiency of the micro finance institutions in utilization

of its assets, total debt and total operating expenditure

which generate operating revenues. The above results shows

slight variance in the behavior of the share prices in themarket with reference to the four variables of the model

i.e., total assets, total debt, total operating revenues and

operating expenses. The relation between the total assets

and the share price in the market is consistent in all the

statistical outcomes. There is also consistent relation

between the share price and operating revenues in the

outcomes. There is variability in the relation between the

share prices and total debt & operating expenses.

The relation between the total debt and total operating

revenues should be negative rationally which is evident in

statistical analysis of two MFIs. The reason is already

mentioned in the above chapter that why it should be

negative. The positive relation between the two specific

variables i.e., total debt & operating expenses with share

prices may be due to the signaling theory as mentioned in

previous chapter or may be due to some non-financial factors

which are affecting the stock prices in the market.

The above shows that the financial institutions in Pakistan

are considerably efficient irrespective of some variation of

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movement of specified variables in the study. There is

substantial room available for the microfinance institutions

to improve their efficiency in utilizing assets and

operations.

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5.2 Recommendations

Based on the analysis and conclusion the microfinance

institutions should do the following to improve the

operational efficiency:

MFIs should utilize their cash and cash equivalents to the

maximum but keeping the adequate liquidity so that they

dont trap in liquidity risk.

MFIs should utilize their non-currents in such a way that

they get better and improved returns The operating expenses should reduce so minimum possible so

that targeted profitability is ensured.

The revenues should be maximized which can be possible

through increasing the customer base

The total debt should be utilized appropriately and

effective because debt also affects the profitability by

percentage of financial charge on the debt.

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Data set

Quarterly values from year (2008-2011)

Kashf Foundation

The figures are in 000

(Total revenues, operating expenses, total assets, total debt)

Share price in PKR

Total Assets Total debt Operating exp Revenues Prices

KASHF FOUNDATION

14022 1359 13876 248000 12.30

13764 1283 13762 192700 12.68

12920 1189 12878 125900 11.36

12100 1077 11875 60900 11.98

11613 1099 11348 37200 12.54

12129 1140 11533 38500 12.48

12246 1124 11869 81500 13.25

11891 1106 11762 64200 13.54

12330 1076 11071 42800 12.91

12625 1204 12190 46000 11.65

12544 1212 12496 54600 11.25

12269 1164 12123 50800 11.36

12136 1157 12058 59000 11.48

12218 1132 11810 77300 11.78

12455 1108 11289 73100 11.19

12768 1176 12359 146500 11.36

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Data set


National Rural Support Program (NRSP)



Share price in PKR


NRSP

10481 9488 9813 66647 10.36

10539 9545 10519 55100 10.45

9859 9131 9722 80100 10.89

10602 9304 9326 79600 10.5410731 1023 10428 142600 10.68

10285 9371 10178 71100 10.69

9979 9558 9658 72145 10.78

10012 9371 9614 73245 10.58

9562 8816 9387 69458 10.25

9381 8684 9206 69235 10.34

9978 8971 9159 65485 10.86

9842 8566 9350 65258 10.25

8710 7679 8676 65936 10.65

7941 7174 7721 110241 10.87

7328 6806 7162 98756 10.15

7435 6841 7277 104587 10.36

8038 6899 7202 100245 10.34

7077 5284 6860 124978 10.98

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Data set


First Microfinance Bank Ltd(FMFB)



Share price in PKR

Data set


FMFB

6118 5258 5727 45698 9.25

6244 4782 5377 42365 9.36

9187 5865 5865 43168 9.15

9187 9183 9187 43698 9.75

9187 9179 9183 41258 9.65

9461 9178 9180 40245 9.45

11061 8999 9208 41654 9.63

12276 1004 10584 42587 9.12

13283 1134 12289 40125 9.18

15201 1170 12131 39785 9.17

15739 1505 15122 36547 9.35

15334 1451 15126 35874 9.93

15156 1382 14934 40125 9.4814371 1334 14017 45879 8.98

14876 1385 14077 35124 9.69

14331 1288 13999 34852 9.48

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Tameer Microfinance Bank (TMFB)



Share price in PKR

* share prices are collected from Karim Securities Karachi through Mr. Shafiq Khan.


TMFB

14909 1355 14321 64587 13.95

13365 1200 13354 61234 12.95

13854 1181 12214 69789 12.56

14290 1295 13740 63458 13.25

13806 1287 13772 67895 13.78

12994 1205 12961 69847 13.64

12376 1125 12370 60458 12.98

11496 1084 11272 62357 12.45

12047 1116 11180 64125 11.36

11272 1002 11272 68167 11.28

10744 9697 10041 68004 11.98

11298 1094 10619 60124 11.63

11635 1053 11328 63078 12.43

10563 9799 10513 63897 12.35

10908 9365 10064 58796 12.69

10498 9438 10498 59321 12.87

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Plagiarism Report

p2 22-5-12 - courier new

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