A COMPARATIVE ANALYSIS OF THE FINANCIAL

PERFORMANCE OF MICROFINANCE
INSTITUTIONS OF INDIA AND BANGLADESH

Thesis submitted in fulfillment for the requirement of the Degree of

Doctor of Philosophy
by

ANAND KUMAR RAI



JAYPEE BUSINESS SCHOOL

JAYPEE INSTITUTE OF INFORMATION TECHNOLOGY UNIVERSITY
A-10, SECTOR 62, NOIDA, INDIA
July, 2012
i















@ Copyright JAYPEE INSTITUTE OF INFORMATION TECHNOLOGY UNIVERSITY, NOIDA

July, 2012

ALL RIGHTS RESERVED
ii
TABLE OF CONTENTS
TOPICS PAGE NO.
INNER FIRST PAGE i
DECLARATION BY THE SCHOLAR v
SUPERVISORS CERTIFICATE vi
ACKNOWLEDGEMENT vii
ABSTRACT viii
LIST OF ACRONYMS AND ABBREVIATIONS x
KEY TERMS xii
LIST OF FIGURES xiv
LIST OF TABLES xv
CHAPTER 1
INTRODUCTION 01-06
1.1 PROBLEM STATEMENT 1
1.2 OBJECTIVES AND HYPOTHESES 3
1.3 SIGNIFICANCE OF THE STUDY 5
1.4 LIMITATIONS OF THE STUDY 5
CHAPTER 2
REVIEW OF LITERATURE 07-19
2.1 THEORETICAL LITERATURE
2.1.1 DEFINITION OF MICROFINANCE 7
2.1.2 APPROACHES TO MICROFINANCE 7
2.1.3 MICROFINANCE DELIVERY MODELS 8
2.1.4 PERFORMANCE EVALUATION MODELS 10
2.1.5 MIX MODEL FOR PERFORMANCE EVALUATION 12
2.1.6 ISSUES OF SUSTAINABILITY 16
2.2 EMPIRICAL LITERATURE REVIEW 17
CHAPTER 3
OVERVIEW OF MICROFINANCE INSTITUTIONS IN INDIA AND
BANGLADESH
20-65
3.1 MICROFINANCE: INDUSTRY OVERVIEW AND
EXPANSION STRATEGIES
20
3.1.1 THE RISE OF MICROFINANCE SINCE 1970S 20
3.1.2 SOCIAL AND ECONOMIC IMPACTS 22
3.1.3 REACHING THE POOREST 23
3.1.4 STRENGTH AND WEAKNESS OF MICROFINANCE 24
3.1.5 STRATEGY OF INTEGRATION 25
3.1.6 EXPANSION STRATEGIES IN MICROFINANCE 26
iii
Cont
TOPICS PAGE NO.
3.2 MICROFINANCE INSTITUTIONS IN INDIA 38
3.2.1 ECONOMY 38
3.2.2 POVERTY 38
3.2.3 THE NEED FOR MICROFINANCE 39
3.2.4 CONCERN IN INDIAN MICROFINANCE SECTOR 42
3.2.5 MAJOR MFIS AND THEIR ROLE IN INDIA 45
3.2.5.1 SWAYAM KRISHI SANGAM (SKS) 45
3.2.5.2 SHARE MICROFINANCE LTD 47
3.2.5.3 BASIX FINANCE 51
3.3 BANGLADESH-HISTORY AND OVERVIEW 56
3.3.1 HISTORY 56
3.3.2 LAND AND PEOPLE. 56
3.3.3 ECONOMY. 57
3.3.4 STRUCTURE OF THE EDUCATION SYSTEM. 57
3.4 MAJOR MFIS AND THEIR ROLE IN BANGLADESH 58
3.4.1 BRAC 59
3.4.2 GRAMEEN BANK. 60
3.4.3 ASSOCIATION FOR SOCIAL ADVANCEMENT (ASA) 63
CHAPTER 4
RESEARCH METHODOLOGY 66-75
4.1 THE DATA AND THE SAMPLE 66
4.2 MODELS AND TECHNIQUES 68
4.2.1 FINANCIAL INDICATORS USED FOR FINANCIAL
PERFORMANCE EVALUATION
69
4.2.2 MANN-WHITNEY U TEST 72
4.2.3 KRUSKAL-WALLIS ONE WAY ANOVA 73
4.2.4 MULTIPLE LINEAR REGRESSION ANALYSIS 74
CHAPTER 5
DATA ANALYSIS AND FINDINGS 77-107
5.1 INDEPENDENT TWO SAMPLE (INDIA AND BANGLADESH)
MANN-WHITNEY U TEST FOR THE INDICATORS
77
5.2 TREND OF VARIOUS FINANCIAL PERFORMANCE
INDICATORS OF MFIS OF INDIA AND BANGLADESH
78
5.3 INDEPENDENT TWO SAMPLE (NBFC AND NGO OF INDIA)
MANN- WHITNEY U TEST FOR INDICATORS
85
5.4 AGE-WISE COMPARISON OF INDIAN MFIS USING
KRUSKAL-WALLIS H TEST
86
iv
Cont
TOPICS PAGE NO.
5.5 AGE-WISE TREND OF FINANCIAL PERFORMANCE
INDICATORS OF INDIAN MFIS
87
5.6 FINANCIAL FACTORS AFFECTING SUSTAINABILITY OF
INDIAN MFIS USING LINEAR REGRESSION
94
5.7 FINANCIAL FACTORS AFFECTING SUSTAINABILITY OF
MFIS OF BANGLADESH USING LINEAR REGRESSION
96
5.8 COMPARISON OF YIELD AND OPERATING EFFICIENCY
OF INDIAN MFIS
98
5.9 COMPARISON OF YIELD AND OPERATING EFFICIENCY
OF MFIS OF BANGLADESH
99
5.10 MODEL FOR FINANCIAL SUSTAINABILITY INDEX 100
5.10.1 INTRODUCTION 100
5.10.2 DEFINITION 100
5.10.3 METHODOLOGY TO DEVELOP THE MODEL 102
5.10.4 MODEL VALIDATION 105
5.10.5 SIGNIFICANCE OF THE MODEL 106
CHAPTER 6 107-110
CONCLUSIONS AND RECOMMENDATIONS
6.1 CONCLUSIONS 107
6.2 FUTURE RESEARCH AND THINKING 110
REFERENCES 111-113
APPENDIX 114-162

v
DECLARATION BY THE SCHOLAR

I hereby declare that the work reported in the Ph.D. thesis entitled A Comparative
Analysis of the Financial Performance of Microfinance Institutions of India
and Bangladesh submitted at Jaypee Institute of Information Technology
University, Noida, India, is an authentic record of my work carried out under the
supervision of Dr. Moonis Shakeel (Internal supervisor) and Dr. Kanwal Anil
(External supervisor). I have not submitted this work elsewhere for any other degree or
diploma.




(Signature of the Scholar)
(Anand Kumar Rai)
Jaypee Business School
Jaypee Institute of Information Technology University, Noida, India
July 23, 2012





vi
SUPERVISORS CERTIFICATE

This is to certify that the work reported in the Ph.D. thesis entitled A Comparative
Analysis of the Financial Performance of Microfinance Institutions of India
and Bangladesh, submitted by Anand Kumar Rai at Jaypee Institute of
Information Technology University, Noida, India, is a bonafide record of his
original work carried out under my supervision. This work has not been submitted elsewhere
for any other degree or diploma.






(Signature of Supervisor)
(Dr. Moonis Shakeel)
Jaypee Business School, Noida
July 23, 2012









vii
ACKNOWLEDGEMENT

I deem it a privilege to begin this acknowledgement by expressing my profound sense of
gratitude to my revered internal supervisor Dr. Moonis Shakeel for his sagacious and
intellectual stimulation throughout the present study. His scholarly suggestions, research
acumen, immense interest and affectionate behaviour have been a great inspiration for me.
I am thankful to my external supervisor Dr. Kanwal Anil for her careful and critical review
without which this thesis would have been far less illuminating and readable.
I am grateful to Dr. Neerja Pande, Director, Jaypee Business School, Noida for providing an
environment conducive for learning, her encouragement and guidance that made my efforts
see the light of day.
This work has also been enriched by the insights gained by me during my interface with a
galaxy of distinguished Indian academicians: Dr. Ravi Shankar, Dr. Naseem Abidi, Prof.
Rahul Chandra, Dr. Rana Singh, Dr. Surender Kumar, Dr. Meghna Sharma and Dr.
Sujata Kapoor. I am grateful to each one of them for sparing their valuable time to discuss
issues and methodology with me.
I would like to thank Mr. Kaushal Kishore Singh, UDC, Army Institute of Management &
Technology, G. Noida for his computer related support.
This study could not have been possible without the support of my family.
I am indebted to all my family members who have been a constant source of encouragement
for me. I am indebted to my parents, parents-in-law and Mr. Anil Rai (brother-in law), who
always encouraged me to go ahead with the completion of the thesis.
I would be failing in my duties if I do not thank my wife Prof. Sandhya Rai, who was more
concerned than me about this work. Her support and encouragement gave real pace for this
study.
I am thankful to my son Shrestha and daughter Adhisthi. Their smiles always encouraged
me to work effortlessly.
I also thank everyone associated directly or indirectly with completion of this work.
Last, but not the least to almighty god for his blessings and guidance.


July 23, 2012 Anand Kumar Rai
viii
ABSTRACT
India and Bangladesh are two developing countries in the world. Poverty is the major problem
in these countries. In these economies, it is argued that among others absence of access to
credit is presumed to be the cause for the failure of the poor to come out of poverty. Lending
to the poor involves high transaction cost and risks associated with information asymmetries
and moral hazards. Microfinance is one of the ways of building the capacities of the poor who
are largely ignored by commercial banks and other lending institutions and graduating them
to sustainable self-employment activities by providing them financial services like credit,
savings and insurance.
To provide microfinance and other support services, Microfinance Institutions (MFIs) should
be able to sustain themselves for a long period. Bangladesh has been the pioneer in the field
of microfinance movement and a significant contribution to the development of the country
has been made by the several MFIs. Grameen Bank, BRAC, ASA and Prashika are some of
them. Therefore it is interesting to compare the financial performance of MFIs of India and
Bangladesh and to see where they stand against each other.
This study has found that from last five years i.e. from 2005 till 2010, the Indian MFIs have
performed better than the MFIs of Bangladesh in most of the financial indicators.
Portfolio quality in India (PAR>30 days = 2.4%) is far better than the Bangladesh of 12.1%
and global median of 3.1%. The operating efficiency of Indian MFIs is better and increasing
because of the higher growth in outreach and better utilization of manpower (the main
operating expense of MFIs). Despite the improvement in operating efficiency, the yield of
Indian MFIs is rising. This means that Indian microcredit borrowers are now paying a
relatively high cost for their microcredit. And at the same time there has been a substantial
widening in the margin available to the average MFIs for covering financial expenses, loan
loss provisions and surplus. The MFIs of Bangladesh are having relatively better Capital to
Asset ratio but the trend is increasing for Indian MFIs. Still Indian MFIs have to increase their
capital base so as to serve the large poor population.
In terms of outreach or the absolute number of active borrowers, both the countries are at the
same level. However, the growth rate of Indian MFIs is much higher (60% CAGR in the last
five years) as compared to Bangladesh (stagnant). Though the market penetration is quite low
in India particularly in UP, MP, Bihar, Orissa, Chhattisgarh, which shows that there exists
huge business opportunities for Indian NBFC MFIs. However, at the same time the Indian
MFIs will have to explore the cost effective means to reach to the least densely populated
ix
area.
In case of Operational Self Sufficiency, Yield to Gross Loan Portfolio and Return on Asset,
no significant differences have been found between Indian MFIs and the MFIs of Bangladesh.
However, it can also be observed that both these countries have above 90% clients as women
borrowers, which justify the social commitment of MFIs of their respective countries.
In Return on Equity indicator, the equity holders will be more interested in investing into
India MFIs than the MFIs of Bangladesh, as they will earn higher return on their investment.
It has also been concluded that the MFIs, which are converting themselves into NBFC, are
financially more viable and their outreach is high.
The Young MFIs of India are creating better quality asset and at a faster rate while the mature
MFIs are utilising administrative and personnel expenses in a much better manner.
Through the analysis of the second objective, it is found that the outreach and capital
adequacy are the prominent factors, which are affecting the financial sustainability of MFIs.
Nevertheless, the capital structure does not affect the sustainability. In case of Bangladesh, the
asset quality and capital adequacy are the main factors which affect the sustainability of
MFIs. Again, the capital structure does not affect the sustainability of MFIs.
A model for checking financial sustainability of MFIs is also suggested which is used to
create a sustainability index for various countries and help the regulator identifying the strong
and weak areas of the sector. In addition, the existence of new model is also expected to
facilitate MFIs to access to capital markets. Having access to sustainability information may
reduce some of the transaction uncertainty.
While microfinance remains a small proportion of the overall financial system in terms of
portfolio size, it is growing much faster; bank credit grew by 17.5% during 2008-09 while
microfinance portfolios grew by around 100%. As a result, in terms of portfolio size as well
as number of clients served it is becoming an increasingly significant part of the financial
system.





x
LIST OF ACRONYMS & ABBREVIATIONS

ACTB Number of Active Borrowers
ADB Asian Development Bank
BPSM Borrowers per Staff Member
BRAC Bangladesh Rural Advancement Committee
CA Capital to Asset Ratio
CAR Capital Adequacy Ratio
CGAP Consultative Group to Assist the Poor
CIBIL Credit Information Bureau India Ltd.
DFID Department for International Development, United Kingdom
FSS Financial Self Sufficiency
GDP Gross Domestic Product
GLP Gross Loan Portfolio
IFC International Finance Corporation
IPO Initial Public (Stock) Offering
IRDA Insurance Regulatory and Development Authority
JLG Joint Liability Group
M&A Mergers and Acquisitions
MFI Microfinance Institution
MIX Microfinance Information Exchange
MSME Micro, Small, and Medium Enterprise
MYRADA Mysore Resettlement and Development Agency
NABARD National Bank for Agriculture and Rural Development
NBFC Non-Banking Finance Company
NGO Non-Governmental Organization
NPL Nonperforming Loan
OELP Operating Expense to Loan Portfolio
OSS Operational Self Sufficiency
PACs Primary Agricultural Credit Societies
xi
PAR Portfolio at risk
RBI Reserve Bank of India
RFAS-2003 Rural Finance Access Survey 2003
ROA Return on Assets
ROE Return on Equity
RRB Regional Rural Bank
RTGS Real-Time Gross Settlement System
SBPL Self-Help Group Bank Linkage Program
SEWA Self Employed Womens Association
SHG Self-Help Group
UN United Nations
WB Women Borrowers
xii
KEY TERMS

MICROFINANCE: The provision of a broad range of financial services such as deposits,
loans, money transfers, and insurance to small enterprise and households
CAPITAL/ASSET RATIO: Adjusted Total Equity / Adjusted Total Assets
It indicates how much of a safety cushion the institution has to absorb losses before creditors
are at risk. Currently all NBFCs are required to maintain Capital Adequacy Ratio to Risk
Weighted Assets of 15%.
NUMBER OF ACTIVE BORROWERS:
The number of loans extended per year and since inception shows the ability of the MFI to
reach more clients and achieve a degree of scale.
PERCENTAGE OF WOMEN BORROWERS:
Percentage of Women borrowers shows the commitment of MFIs towards social welfare and
poverty alleviation.
RETURN ON ASSETS: (Adjusted Net Operating Income - Taxes) / Adjusted Average Total
Assets
Return on Assets is a measure of the productive use of the companys assets.
RETURN ON EQUITY: (Adjusted Net Operating Income - Taxes) / Adjusted Average
Total Equity
ROE measures an MFIs ability to reward shareholders investment, build its equity base
through retained earnings, and to raise additional equity investment. By excluding donations
and non-operating revenues, ROE demonstrates an institutions ability to generate income
from its core financial service activity
OPERATIONAL SELF SUFFICIENCY: Financial Revenue / (Financial Expense +
Impairment Losses on Loans + Operating Expense)
OSS Measures how well an MFI can cover its costs through operating revenues. It is the most
basic measurement of sustainability, indicating whether revenues from operations are
sufficient to cover all operating expenses.
YIELD ON GROSS PORTFOLIO: Adjusted Financial Revenue from Loan Portfolio /
Adjusted Average Gross Loan Portfolio
Yield on gross portfolio measures the ability of MFIs to generate Financial Revenue from its
Loan Portfolio. Therefore the higher Yield means the higher interest rate the MFIs are
xiii
charging from its borrowers.
OPERATING EXPENSE/LOAN PORTFOLIO: Adjusted Operating Expense / Adjusted
Average Gross Loan Portfolio
The Operating Expense Ratio highlights personnel and administrative expenses relative to the
loan portfolio and is the most commonly used efficiency indicator. The lower the operating
expense ratio, the more efficient the MFI.
BORROWERS PER STAFF MEMBER: Adjusted Number of Loans Outstanding /
Number of Personnel
This ratio is defined as the overall productivity of the MFIs personnel in terms of managing
clients, including borrowers, voluntary savers, and other clients. The ratio should also be
evaluated in light of portfolio at risk to ensure that productivity gains are not at the expense of
asset quality.
PORTFOLIO AT RISK> 30 DAYS: Outstanding balance, portfolio overdue > 30 days +
renegotiated portfolio / Adjusted Gross Loan Portfolio
PAR is important because it indicates the potential for future losses based on the current
performance of the loan portfolio.
FINANCIAL SUSTAINABILITY: Financial sustainability is defined as having an
operational sustainability level of 110% or more, while Operational sustainability is defined
as having an operational self-sufficiency level of 100% or more.
MIX MARKET : MIX market is a global, web-based, microfinance information platform.
It provides information to sector actors and the public at large on microfinance institutions
(MFIs) worldwide, public and private funds that invest in microfinance, MFI networks,
raters/external evaluators, advisory firms, and governmental and regulatory agencies
Sa-Dhan: Sa-Dhan is the Association of Community Development Finance Institutions
Founded by SEWA Bank, BASIX, Dhan Foundation, FWWB, MYRADA, RGVN, SHARE
and PRADAN in 1999. Its mission is to help its member and associate institutions to better
serve low-income households, particularly women, in both rural and urban India
MULTIPLE REGRESSION ANALYSIS: Statistical procedure that attempts to assess the
relationship between a dependent variable and two or more independent variables. Example:
Sales of cars (the dependent variable) is a function of various factors, such as its price,
advertising, fuel efficiency, interiors and the prices of its major competitors (the independent
variables)
xiv
LIST OF FIGURES
Figure
No.

Caption Page No.
3.1
Customer-centric Approach 29
3.2 Firm-centric Approach 29
3.3 Steps Corresponding to Expansion Strategies 31
3.4 Franchising: Creating Value by Leveraging Successful Business
Model
32
3.5
Value Creation through Differentiation 34
3.6 Value Creation through Synergy 37
5.1 Return on Asset of MFIs of India and Bangladesh 79
5.2 Return on Equity of MFIs of India and Bangladesh 80
5.3
Operational Self Sufficiency of MFIs of India and Bangladesh 81
5.4 Yield on Gross Portfolio of MFIs of India and Bangladesh 82
5.5 Operating Expense/ Loan Portfolio of MFIs of India and
Bangladesh
83
5.6 Borrowers per Staff Member of MFIs of India and Bangladesh 84
5.7 Portfolio at Risk > 30 days of MFIs of India and Bangladesh 85
5.8 Age-wise Capital/Asset Ratio of Indian MFIs 88
5.9 Age-wise Outreach of Indian MFIs 88
5.10 Age-wise Return on Asset of Indian MFIs 89
5.11 Age-wise Return on Equity of Indian MFIs 90
5.12
Age-wise Operational Self Sufficiency of Indian MFIs 91
5.13 Age-wise Yield on Gross Portfolio of Indian MFIs 92
5.14 Age-wise Operating Expense/Loan Portfolio of Indian MFIs 93
5.15 Age-wise Borrowers per Staff Member of Indian MFIs 93
5.16 Age-wise Portfolio at Risk > 30 Days of Indian MFIs 94
5.17 Histogram for dependent variable OSS 96
5.18 Comparison of Yield and Operating Efficiency of Indian MFIs 98
5.19 Comparison of Yield and Operating Efficiency of MFIs
of Bangladesh
99
5.20 Scales of Financial Indicators 104


xv
LIST OF TABLES
Table
No.
Caption Page No.
3.1 Social System Framework 26
3.2 Market and Strategies 27
3.3 BRAC at a glance 60
3.4 Grameen Bank at a glance 62
3.5 ASA at a glance 65
5.1 Capital/Asset Ratio of MFIs of India and Bangladesh 78
5.2 Number of Active Borrowers of MFIs of India and Bangladesh 78
5.3 Percent of Women Borrowers of MFIs of India and Bangladesh 79
5.4 Return on Asset of MFIs of India and Bangladesh 79
5.5 Return on Equity of MFIs of India and Bangladesh 80
5.6 Operational Self Sufficiency of MFIs of India and Bangladesh 81
5.7 Yield on Gross Portfolio of MFIs of India and Bangladesh 82
5.8 Operating Expense/Loan Portfolio of MFIs of India and
Bangladesh
83
5.9 Borrowers per Staff Member of MFIs of India and Bangladesh 84
5.10 Portfolio at Risk > 30 Days of MFIs of India and Bangladesh 85
5.11 Age-wise Capital/Asset Ratio of MFIs of India 87
5.12 Age-wise Number of Active Borrowers of MFIs of India 88
5.13 Age-wise Return on Asset of MFIs of India 88
5.14 Age-wise Return on Equity of MFIs of India 89
5.15 Age-wise Operational Self Sufficiency of MFIs of India 90
5.16 Age-wise Yield on Gross Portfolio of MFIs of India 91
5.17 Age-wise Operating Expense/Loan Portfolio of MFIs of India 92
5.18 Age-wise Borrowers per Staff Member of MFIs of India 93
5.19 Age-wise Portfolio at Risk > 30 days of MFIs of India 94
5.20 Model Summary of Linear Regression for Sustainability of
Indian MFIs
95
5.21 ANOVA (b) 96


xvi
Table
No.
Caption Page No.
5.22 Model Summary of Linear Regression for Sustainability of
MFIs of Bangladesh
97
5.23 ANOVA (b) 97
5.24 Comparison of Yield and Operating Efficiency of MFIs
of Bangladesh
99
5.25 Weight for the Indicators 103
5.26 Indicators Range and standard 104
5.27 Data on SKS Microfinance (NBFC) and SEWA (Bank) for the
year 2009-10
105
5.28 Score of the indicators for the standards and MFIs 105