ACKNOWLEDGEMENT

To begin with, I would like to express gratitude to MY TEACHER NAME. She

significantly contributed to the thesis with her careful examination, useful pieces of advice,
patience and consistent support. She has steered the author in a proper direction and provided with
the necessary feedback when needed.

I would like to express particular gratitude to professor for her understanding, support,
kindness and constant encouragement to work.

Finally, I would like to thank friends and parents for inspiring and showing their support
during the years of study and particularly within the period of my Master thesis preparation. Their
contribution is highly appreciated and valued.

Overall, I would like to express sincere gratitude to all who stood by my side all the way
long.

1
 TABLE OF CONTENT

INDRODUCTION ....................................................... ERROR! BOOKMARK NOT DEFINED.

1 ANALYTICAL PART ................................................................................................................8
1.1 Scientific literature review..................................................................................................8
1.2 Overview of microfinance institution ...............................................................................10
1.3 The efficiency of MFI.......................................................................................................10
2 THEORETICAL PART ...........................................................................................................12
2.1 Empirical literature review ...............................................................................................12
2.1.1 The DEA effectiveness of MFI ......................................................................................13
2.1.2 External microfinance institution ...................................................................................15
2.2 The poverty alleviation of microfinance ..........................................................................18
2.2.1 The banking sector of MFI .............................................................................................19
2.2.2 The providers of microfinance institution ......................................................................20
2.2.3 Task financing ................................................................................................................21
2.2.4 Different Sources of MFI ...............................................................................................22
2.3 The accessibility and demographic factors of MFI ..........................................................22
2.4 The access barrier to payment and deposit .......................................................................24
2.5 Method ..............................................................................................................................25

2
 THE MICROFINANCE INSTITUTIONS EFFICIENCY IN SRILANKA

ABSTRACT

In this research, we will analyze the determinants and the technical efficiency of different
microfinance institution in the country of Sri Lanka. We may also use a bootstrap approach of two-
stage. In the first part, we will analyze the bias-corrected analysis of data envelopment to estimate
the MFI individual which is obtained by the procedure of homogeneous bootstrapped. They are
also regressed on an explanatory variable which may employee the regression approach of
bootstrap truncated. There are also two DEA models which are designed to achieve the scores of
DEA along with the social and financial perspectives. There are many MFI in the country of Sri
Lanka who may criticism of social and financial inefficient. In the second part, we will reveal the
regression about the age and the capital-to-asset which is significant on financial efficiency as the
type of return-on-assets and institution may have the crucial social efficiency. We will use the
methods and result to determine the efficiency score which is decreased after the bias-correction.
It is also consistent with the trends which his reported in the several researches. In this research,
we will examine the 8-microfinance institution in Sri Lanka who is using the three inputs that is
Number of employees, operating cost and total assets. We will also be discussing about how the
majority of MFI have get a good efficiency score in the year of 2013-16. The microfinance
institution is at the lead to provide several opportunities and fight against poverty for every woman
in Sri Lanka. We will also analyze the private and government sector through data envelopment
method.

Abbreviations: efficiency score, microfinance institution, financial perspective, capital-to-asset,

bootstrap approach, DEA model, bias-corrected analysis

BACKGROUND

There are constrained examinations in the productivity of microfinance organizations (MFIs),

particularly in poor people and creating nations, for example, Sri Lanka. A few investigations
which considered just money related effectiveness not offer regard for social productivity. This
social productivity study is much significant for approach creators and the board, the reason that,
after the year 2005 numerous new money related organizations entered the country fund showcase
in Sri Lanka and numerous business banks expanded their exercises to incorporate microfinance

3
administrations. Sri Lankan Microfinance industry is advanced as key player to serve the poor.
Consequently, evaluate that the efficiency of microfinance exercises in Sri Lanka.

To assess the efficiency of microfinance foundations working in public and government sectors in
five East African nations (Tanzania, Kenya, Uganda, Rwanda, Burundi) utilizing non parametric
methodology (DEA). Effectiveness for MFIs have blended outcomes with certain has higher
productivity utilizing VRS contrasted with CRS; some have a similar efficiency under both
methodologies. By and large the efficiency pattern is expanding from 2009 to 2011. Wastefulness
is chiefly brought about by specialized wastefulness. It was watched additionally that most banks
have preferable effectiveness over non-banks monetary organizations, for example, NGOs and
Cooperatives. NGOs and Cooperatives are prescribed to consider the market structure changes,
innovation and expanded challenge to endure.

The formal country money related area in Sri Lanka contains an enormous number of small
financial organizations (SFIs). Among SFIs, helpful provincial banks (CRBs) are prevailing in
giving microfinance benefits in Sri Lanka. In any case, CRBs horrible showing has been obvious.

So, study directed by Jayamaha is to assess the general productivity of SFIs in Sri Lanka from
2005 to 2010 by taking every one of the 1,933 CRBs work in 2010. Information envelopment
examination (DEA) is utilized to quantify effectiveness.

To looks at specialized efficiency and its determinants of 36 microfinance establishments (MFIs)

in Sri Lanka utilizing a two phase twofold bootstrap approach in public and government sectors.
Two diverse DEA models are intended to acquire DEA scores along financial and social points of
view. As per the outcomes from the principal arrange, numerous MFIs in Sri Lanka don't escape
analysis of money related and social wastefulness. Second stage relapse uncovers that age and
cash-flow to resources are noteworthy determinants on financial productivity though age, kind of
the establishment and profit for resources are the vital determinants of social efficiency.

The DEA model for building a creation wilderness, and for the estimation of productivity with
respect to the built recipe, is an inexorably famous instrument utilized in the nonparametric
methodology. By and large, DEA assesses the effectiveness of a given firm, in a given industry,
contrasted with the best performing firms in that industry by thinking about numerous sources of
info and yields. Along these lines, it is a relative estimation. In efficiency examination, most

4
scientists by and large use DEA to gauge the effectiveness in open part associations, non-benefit
making associations and private segment organisations3. Efficiency records for each firm are
resolved based on the information sources and yields of each firm. Such a record is known as a
DEA score. From these DEA scores, effectiveness can be estimated for an entire association or a
unit inside the association. The assessment unit is likewise alluded to as a basic leadership unit
(DMU). For instance, one bank office of the financial business or an area, for example, advance
segment, in a bank office can be considered as a DMU.

INTRODUCTION

The role of Microfinance institution of public and government sector is unprecedented to provide
the access of financial services to segment of underserved population. The society part is excluded
financially by the institution of financial to extend the loan without the collateral because of their
commercial goal. To ensure the continuous support, the social goal is strived by the Microfinance
institution for the sustainability of all the institution which is crucial. The MFI efficiency is a
primary key to achieve any sustainability. The efficiency may also refer to the resources utilization
which will maximize the services of the firms and the production of the good. It may also concern
with input resources relationship, for example, equipment, capital and labor cost and the output
which is produced by several inputs.

The efficiency is measured and may indicated about how well the organization may use their
resources to produce services and good and what rate the input resources is used to deliver or
produce the output. As Farrell (1957) said, the economic efficiency of any organization or firm
has two primary components that is allocated efficiency and pure technical efficiency. It may also
refer to the willingness and the ability by which as firm may avoid the waste to produce the input
as well as output. The firm may also not waste their production of good input or their services. The
product efficiency is achieved as the firm may use all the resources efficiently and may produce
the optimal output from the least input. The product efficiency is also categorized as economic
efficiency. The allocated efficiency may involve the input mix selection which allocates several
factors to the value uses and may introduce the factor input opportunity cost to productive
measurement efficiency. It is also categorized as theoretical benefit measure which is derived from
the actual or proposed selection in the resource allocation. The MFI efficiency may refer to how
well every Microfinance institution may allocate the input resources, for example, subsides, asset

5
and other personnel which will produce the output as measured in the poverty outreach and loan
portfolio. The efficiency of MFIs refers to how well these institutions utilize their inputs to produce
optimal outputs.

Efficiency measurement in MFIs of public and government sector is also very crucial as it gives
information about the firm performance especially on the use of resources and minimization of
wastes. It helps organizations in setting their targets for monitoring activities through better
management of their bottlenecks and its barriers hindering the performance and also helps the
measurement, monitoring and improvements of results leading into increased performance and
profitability of the firm.

RESEARCH OBJECTIVES

 To determine the factors affecting efficiency of microfinancing

 To determine the efficiency of small financial institution and micro financing in Sri lanka

HYPOTHESIS

 Total assets employed by a Microfinancing Institute (MFI) affect its efficiency

 The operating costs of MFI affect its efficiency

RESEARCH QUESTION

 Do MFI’s in Sri Lanka operate Efficiently?

Method

Qualitative Analysis will be used

Interviews and analysis of officially published reports will be employed

Limitations

 Data availability
 Quality of the data available
 Financial constraints of the research
 Etc etc

6
CONCEPTUAL FRAMEWORK

The microfinance institution of efficiency may have the following framework:

Productivity shows how well associations use their assets to create merchandise and ventures, and
the rate at which the info assets are utilized to create or convey the yields. Kipesha characterizes
effectiveness as better utilization of assets so as to boost the generation of the products and ventures
of the organizations.

LIMITATION

This investigation depends on optional information gathered from yearly reports which was
situated in MPCSs. Further, information sourced from CRBs' budget summaries, while reviewed,
may not be carefully exact and practically identical. The degree of variety in divulgence over the
example is additionally an impediment. Subsequently, the adequacy, unwavering quality, and
legitimacy of information are liable to the above impediments. Further, this examination
concentrated on just one kind of SFI, in particular CRB. No endeavor has been made to evaluate
the productivity of various sorts of SFIs working in Si Lanka. Different kinds of SFIs, for example,

7
TCCs Sanasa, Samurdi Banking Societies, and diverse microfinance foundations might possibly
have comparative issues, yet this examination does not endeavor to give proof to different SFIs.

1. ANALYTICAL PART
1.1. SCIENTIFIC LITERATURE REVIEW

This section may discuss the definition and key concept of research problem. It may also
describe theoretical and empirical scientific review on microfinance institution of Sri Lanka.
According to Simar and Wilson, I have analyzed that the data which is bias-corrected in the
Analysis of Data Envelopment efficiency. They have also estimated the MFI of every individual
which are obtained by procedure of homogeneous bootstrapped. They have regressed on
explanatory variables sets to employ the double truncated bootstrap approach of regression.

In my opinion, the author Kipesha have discussed about the efficiency to use different resources
to maximize the good and service production of different firms. It is very limited to efficiency of
different microfinance institution in developing and poor countries, for example, in Sri Lanka.

Jayamaha (2002) have stated that “There are many formal financial rural sectors for MFI of private
of government sector in the country of Sri Lanka that may comprises of a large and small number
of institutions of financial. There are many efficiencies of MFI in the Monetary Union and West
African economic which may reform and is undertaken in this industry. It is also used to measure
both the financial and social efficiency of microfinance institutions. It may define an efficiency to
maximize the good production and firm services for a better utilization of resources. The
developing and poor countries have limited studies in the microfinance institutions efficiencies,
for example, in Sri Lanka”.

The study of Wijesiri et al. (2000) have examined that the determinants and the technical efficiency
have 8 institution in the country of Sri Lanka using the approach of two stage double bootstrap.
The data envelopment method may indicate about how every organization may utilize different
resource to produce the services and good at which the resources of input is used to deliver or
produce the output.

8
Matin et al. have analyzed that “It is the design which may give the enhanced financial services.
He may also argue that microcredit may contribute greatly to the fight against the result and
vulnerability to reduce the poverty in the country. It was thought about the financing development
of top-down policy which may not impact on the poor financial services of microfinance
institution. The Second stage regression reveals that age and capital to assets are significant
determinants on financial efficiency whereas return on assets, age and type of the institution have
social determinants of microfinance efficiency”.

There are total 21 banks of commercial that may comprise of two stated institution who operate
with approx. 1900 branches, 9 privately institution and 11 foreign banks in the country of Sri Lanka
(CBSL 2010).

Silva et al. have said that “The measurement of efficiency of partial factor will consider only single
factor that will ignore several impacts of changes in all other factors. There are many CRB and
SFI and NGO who are working to become self-sufficient operationally and may begin to seek the
commercial refinancing process. It may also provide efficient microfinance services which also
contribute to the development of the overall financial system and is a critical element of an
effective poverty reduction strategy through integration of financial markets”. (ADB 2000).

To enhance self-sufficiency and provide access for rural people, according to my perspective,
Charitonenko (2008) have given the statement related to microfinance sector of private and
government in Sri Lanka which need structural changes for diversification to improve their
performance. Fried suggested that the DEA is an appropriate method to measure the measuring the
multiple decision-making units’ efficiency (Rosenberg,2006).

According to Dupas and Robinson (2013), I have analyzed that “the Microfinance institution of
public and government sector has played a key role in the fight against the promotion and exclusion
of entrepreneurship in many developing countries. The overarching aim of different institutions of
microfinance have becomes demonstrating viability. The constraints of internal constraints, for
example, the lack of awareness may have negative perception in microfinance, weak institutional
capacity and of the commercialization decision of different MFI”.

The management practices in MFIs have prioritized cost reduction and efficiency at the same time
(Blanco-Oliver et al., 2016). The nonparametric approach to data envelopment, Stochastic Frontier

9
Analysis (SFA) and Data Envelopment is a parametric approach to calculate the estimation by
boundaries of stochastic. Empirical research on this issue has also been conducted in different
regions, with different data, and for different periods.

We also estimated an OLS model with the cluster option, in order to gauge model robustness,
which is commonly used in model of right-censored and a simple left Tobit in this type of analysis
(Bravo-Ureta et al., 2007). According to my perception, Simar and Wilson model (2002) have
compared different MTE scores, for example, sample size, number of variables, specification
choices and the regions or areas where microfinance institutions are located in public and
government sector.

1.2. OVERVIEW OF MICROFINANCE INSTITUTION

The microfinance is associated with a new discipline for research of academic who may receive
an effective and unique approach and development. The MFI may extend the several financial
services which is eliminated by intermediaries of financial. It may also give access to the finance
which is essential to raise and create the wealth and productivity, encourage the entrepreneurship,
generate income, improve the health and access to the education, reduce poverty and empower
every woman.

Some studies which considered only financial efficiency not give attention to social efficiency.
This social efficiency study is much important for policy makers and management, the reason that,
after the year 2005 many new financial institutions entered the rural finance market in Sri Lanka
and many commercial banks diversified their activities to include microfinance services Sri
Lankan Microfinance industry is evolved as key player to serve the poor. Hence it is important to
assess that the efficiency of microfinance activities in Sri Lanka (Durrant,2002).

1.3. EFFICIENCY OF MFI

Most of the microfinance institution may not proportionally increase their output without
increasing the input. The technical efficiency is the efficiency aspect that may emphasize by Farell
(2014). The primary challenge is to analyze the efficiency component of allocated efficiency. It
may refer to input and output efficient combination that may take into productivity and input
account prices in several microfinance institutions of private and government sector. The risk
being biased, especially when the data are affected by measurement errors. The private sector in

10
microfinance lies in the difficulty of specifying a typical production function, as there are many
different situations in microfinance. The microfinance institution of government sector is efficient
if it may manage to minimize the cost of production to maximize the revenue as there many frontier
methods which are best known.

There are not any sources that may use to gather the information for effectiveness of microfinance
organizations in public and government sector which is the biggest challenge faced by the country
of Sri Lanka. This examination depends on the information gather from Microfinance Information
eXchange (MIX) (a worldwide electronic microfinance data stage) and the report on
"Microfinance Review" distributed by Lanka Microfinance Practitioners' Association (LMFPA)
which are perceived as most approved data hotspot for world and Sri Lankan setting individually
(Hashemi,2006),

11
 2. THEORITICAL PART

2.1. EMPIRICAL LITERATURE REVIEW

Experimental investigations on productivity of Microfinance foundations around the globe have

demonstrated various outcomes. Among the ongoing discoveries on Microfinance foundations
efficiency over the world, incorporated the examination which inspected the cost effectiveness of
Microfinance establishments crosswise over Africa, Asia and Latin America under two
suppositions, microfinance organizations as maker of advances to customers (profitability
productivity) and Microfinance foundations as go-between foundations (Intermediation
effectiveness) (Atapattu,2002).

It might plan to look at the 104 MFIs' efficiency in the West African Economic and Monetary
Union (WAEMU) after the changes that were embraced in the business. DEA is utilized to gauge
both the social effectiveness and money related efficiency of the MFIs. The investigation further
breaks down the determinants of productivity with factors of budgetary administration and hazard,
factors explicit to MFIs and natural factors. The outcomes demonstrate that manageability wins.
An expansion in money related effectiveness brought about diminishing of social efficiency
(Imboden, 2004).

The point of the examination was to assess the efficiency of microfinance establishments working
in five East African nations (Tanzania, Kenya, Uganda, Rwanda, Burundi) utilizing non parametric
methodology (DEA). Efficiency for MFIs have blended outcomes with certain has higher
effectiveness utilizing VRS contrasted with CRS, some have a similar productivity under both
methodologies. By and large the effectiveness pattern is expanding from 2009 to 2011.
Wastefulness is fundamentally brought about by specialized wastefulness. It was watched
additionally that most banks have preferable efficiency over non-banks money related
establishments, for example, NGOs and Cooperatives. NGOs and Cooperatives are prescribed to

12
consider the market structure changes, innovation and expanded challenge to endure as the sample
of this study is Microfinance institutions (Copestake,2005).

2.1.1 THE DEA EFFECTIVENESS OF MFI

Output and input selection are a key issue in the count of DEA effectiveness. After an exhaustive
audit of the writing on DEA and effectiveness of microfinance establishments, have chosen for
three sources of info and two yields. The three sources of info are standard in the writing: Total
Assets (TA), Operating Cost (OC) and Number of Employees (NE). The estimation of complete
resources has been incorporated into money related effectiveness models by these looks into.
Working expense has been recommended by. The quantity of representatives has been proposed
as a contribution by among others. Two of the yields are: Number of dynamic ladies borrowers
(WB) and Indicator of advantage to the most unfortunate (BP) Microcredit enables ladies by
reinforcing their financial jobs and expanding their commitment to their families' help; with the
goal that they can assume a functioning job in the improvement procedure. The quantity of ladies
borrowers is estimated by the quantity of dynamic borrowers who are female, as given in the Mix
market database. A significant point of microcredit is to battle against destitution. Karim and
Osada believe that the top-down approach of financing advancement is probably not going to effect
on poor people, Matin et al. talked about how to plan and give the best money related
administrations to poor people (CGAP,2003)

They contend that microcredit adds to the battle against powerlessness and results on destitution
decrease. The Indicator of advantage to the least fortunate has been incorporated into money
related efficiency models by on account of Zambia, and by in Bolivia and Nieto et al. in creating
nations. Table 1 summarizes the inputs and outputs used,

THE CATEGORY THE NAME OF THE SYMBOL OF THE UNIT

OF VARIABLE VARIABLE VARIABLE
THE INPUT 1 THE ASSET TA A SLR
THE INPUT 2 THE COST OF OC A SLR
OPERATING
THE INPUT 3 THE TOTAL TE A NUMBER
EMPLOYEES

13
 OUTPUT 1 THE ACTIVE BW A NUMBER
BORROWERS
(WOMEN)

The table may analyze the DEA efficiency result of different microfinance institutions for the year
of 2016. It may indicate the score of efficiency comparison among several samples. The score of
estimated efficiency for the year of 2013. All the microfinance efficiencies score may have
decreased except the NGO as compared to the efficiency score for the year of 2013. All the
institution of microfinance may have efficiency scores is greater than 0.5 as it may be considered
at average level for the year of 2013-16.

THE MFI THE EFFICIENCY IN THE SCORE OF 2016

THE YEAR OF 2013
The bank 0.879 0.545
The companies 0.78 0.64
The NBFI 0.64 0.49
The NGO 0.50 0.63
The public and private 0.53 0.61
companies
Table 1 shows the MFI and the efficiency in the year of 2013

Sri Lanka with a populace near 20 million individuals and per capita GDP of USD 3,280 is situated
as the nation in the lower center salary level. 1 Sri Lanka has seen a high GDP development of
about 7% year over year2 and the nation is performing great on different human advancement
markers. The budgetary arrangement of Sri Lanka is very different comprising of 20 business
banks, 47 authorized money organizations (LFCs), nine specific renting organizations (SLCs),
numerous essential sellers, annuity/fortunate assets and credit co-employable social orders.
Business banks rule the money related framework and record for almost 60% of the all-out
resource esteem (about LKR 7000 Billion or USD 65 Billion). With a sizable extent of populace

14
profiting fundamental monetary items, for example, investment accounts combined with the
generally high inclusion of credit agency.

The quantity of LFCs and SLCs in Sri Lanka developed at a fast pace in the most recent decade,
to a great extent sponsored by high development energy and credit request in the economy. In the
last 4-5 years, in any case, a large number of these organizations thought about operational and
administration issues affecting resource quality and productivity of the money related
administrations area in Sri Lanka. So as to improve the condition of monetary soundness of these
FIs, in 2013-14, the Central Bank of Sri Lanka revealed the plan for union in the LFC and SLC
fragment to reinforce the asset reports of the ambushed FIs. Nonetheless, there has been little
investigation on the advantages and difficulties looked during this combination procedure
(Thanassoulis,2007).

2.1.2. EXTERNAL MICROFINANCE INSTITUTION

The Firm characteristics have affected the ability of SME to access the external microfinance
institution in Sri Lanka. The age and size of the microfinance institution firm is identified as
essential variables. The size of firm has more important variables as it may access to credit. This
research is mainly focus on medium and small private and public companies as it doesn’t appear
to reflect the size as access determinant to microfinance access (Kao,2004).

Table 3 shows the small finance institution

THE TYPE OF INSTITUTIONS TOTAL NO. OF OUTLETS

The Banks of Regional Development 200
The Bank of Sanasa Development 34
The societies of Samurdhi Bank 1100
The Bank of Co-operative rural 1123
The credit co-operative and Thrift/Sanasa 3200
Other MFI which is limited by gurantee of 2300
LLC/NGO

Table 4 show the input and output descriptive statistics of DEA model

15
This co-relation of different co-efficient may show all the variables which have important and
positive relationship with each other around. All output variables may have estimated coefficients
variable for advances account and loan account which is co-related positively with number of
branches and deposit account (Jayamaha,2011).

There are many companies who have a 0.90 high co-relation in many occasions. These positive
statistically and positive co-relation among different variables to provide the support for selected
variables in the model of DEA in this research according to data envelopment method. The
correlation results show that change in one variable can be expected to impact the overall
efficiency of the CRBs. The reminder of this section discusses the efficiency of CRBs based on
estimated DEA scores (Silva,2002).

2.1.3 THE NON-FINANCIAL SERVICES OF MFI

There are different MFIs have looked beyond micro credit to provide non- financial services under
the heading of business development services (BDS) to microenterprises (Sievers and Vandenberg,
2007). BDS are non-financial services such as management training, vocational training skills,
marketing assistance and technology access provided to entrepreneurs by MFIs. The literature
shows that MFIs are confronted with some issues that hinder the provision of BDS. These issues
are that some microfinance practitioners perceive that the benefits to costs ratio of BDS is low;
that the BDS programmer cannot sustain itself; and that client demand for BDS is low. Despite
these issues, the literature reveals that some MFIs provide BDS because they enhance the
performance of both MFIs and microenterprises. BDS contribute to the performance of MFIs by

16
improving financial sustainability through improved loan repayments, client retention and client
outreach. Further provision of BDS help MFIs achieves social objectives (i.e. poverty alleviation).
They contribute to the performance of microenterprises by increasing their sales and profits. In Sri
Lanka, it has been found that only a few MFIs (e.g. SEEDS, WDF) provide BDS to clients; only
5% those who received microcredit had received BDS (Attapattu, 2009). The main reasons for this
low level of BDS provision are lack of funding, as MFIs are not receiving funds from donors as
Sri Lanka has grown to a lower-middle income country in recent times, and lack of client demand
for BDS (Fried,2002).

MFIs provide BDS to owner managers of microenterprises through counselling and training.
counselling refers to advice given by MFI counsellors to aspiring, embryonic and established
businesses on how to exploit growth opportunities and how to manage the many problems which
confront the microenterprise (Johnson, 1991). Through process facilitation, the small business
counsellor leads and assists clients in acquiring the capability to assess their current situation, to
assess the advantages and disadvantages of alternatives, and to make an informed decision on
whether to act or not. Above all, the counsellor practises personal competencies that develop
rapport and build relationships to assist the client in recognising and achieving personal,
entrepreneurial and business goals and objectives.

Further, MFI trainers use interactive training techniques (e.g. problem-solving games and role
playing, which improve action learning) and adult learning techniques (e.g. people learn new
things in relation to what they already know) to improve owner managers’ knowledge and skills
(ACCION, 2005). The training is conducted in a community-based environment where owner
managers have similar backgrounds and needs (Lovell, 2002).

The BDS in the microfinance context largely focuses on how BDS help improve the performance
of MFIs and owner managers on the impact of BDS mainly focuses on training intervention (i.e.
how business training improves the performance of MFIs and owner managers). No study has been
made on BDS focusing on counselling; though its two key functions, both counselling and training
should receive similar attention in order to appreciate the value of BDS provision at both individual
owner manager and MFI institutional levels.

17
2.2 THE POVERTY ALLEVIATION OF MICROFINANCE

Poverty alleviation is the main objective of many microfinance initiatives Microfinancing aims to
alleviate poverty by developing microenterprises. Often micro- entrepreneurs who operate in the
informal sector have no access to the credit provided by the traditional banking system (i.e. banks
often ask for collateral and micro entrepreneurs are not in a position to provide this). Thus credit
provided by MFIs without collateral to micro entrepreneurs helps them immensely to grow their
enterprises and escape from poverty (Silva,2002).

Today, microfinance is a developed and established industry, serving millions of poor people
(Khavul, 2010). There are thousands of MFIs operating in the world today, which service the
unmet needs of poor people. In addition, there are about 100 private equity funds comprising banks
and foundations, which channel close to $6.5 million to these MFIs. The basic idea of group
lending is that loans (i.e. microcredit) are given to the individual members of a group, but the group
is responsible for the repayment of the loans of the individual members to the MFI (group liability).
In general, a group consists of 3-10 members. Group lending methodology allows group members
to screen and monitor the other members of the group to reinforce the repayment of loans. They
meet regularly (e.g. once a month) and MFIs use these group meetings to collect loan instalments
and provide counselling and training to clients/members to develop their business ventures
(Mula,2011).

18
Figure 1 shows the access of group lending as compare to individual lending

2.2.1 THE BANKING SECTOR OF MFI

This study makes six contributions to knowledge and practice in the area of BDS in the
microfinance sector. Firstly, it identifies the contextual factors that influence coproduction in BDS.
Secondly, the study identifies the factors relating to counsellors, trainers and owner managers that
improve the incidence of co-production in BDS based on the case studies drawn from the
microfinance sector. Thirdly, it identifies the coproduction outcomes in BDS. The literature reveals
that there is a dearth of studies on BDS in the microfinance setting, in particular in the Sri Lankan
context. Thus, fourthly, the study will contribute to the literature on BDS in the microfinance
context. Many studies have been conducted on the concept of co-production. However, few have
been made on co-production focusing on dyadic relationships and on counselling and training.
19
Fifthly, the study will therefore contribute to co-production theory. The findings will be useful for
practising MFI managers to implement successful BDS programmes. Hence, sixthly, the study will
contribute to practice (Liu,2004).

2.2.2 THE PROVIDERS OF MICROFINANCE INSTITUTIONS

The Sri Lankan microfinance sector has a long history and can be traced back to 1900. The sector
is well established in Sri Lanka, with the main players covering the country with more than 10,000
branches. These microfinance providers in Sri Lanka are government owned MFIs, cooperative
rural banks/societies, non-bank financial institutions, bankMFIs and nongovernmental
organisations (NGO-MFIs). The microfinance sector in Sri Lanka is becoming commercialized at
the moment and this has resulted in banks and other financial institutions venturing into the sector.
Currently, the sector faces some challenges, such as lack of funding from donors, lack of a proper
regulation system and lack of financial sustainability faced by some MFIs. The government of Sri
Lanka is keen to develop the microfinance sector as it helps alleviate poverty through livelihood
development. It has therefore taken measures to develop the sector by managing some MFIs (i.e.
government- owned MFIs), providing funds to MFIs and trying to regulate it to enable the smooth
operation of MFIs (Silva,2007).

In Sri Lanka, it has been found that only a few MFIs (e.g. SEEDS, WDF) provide BDS to clients;
only 5% those who received microcredit had received BDS (Attapattu, 2009). The main reasons
for this low level of BDS provision are lack of funding, as MFIs are not receiving funds from
donors as Sri Lanka has grown to a lower-middle income country in recent times, and lack of client
demand for BDS. There are different Training refers to MFI provision of programmes on financial
literacy and business training, and follow up support to owner managers to solve practical
problems, which can be tailor-made or specific to the microenterprise (Dawson,2005).

MFIs also offered BDS to borrowers and these services were a pre- /core requisite for the credit
given. These BDS consisted of management training, such as developing a business plan. The idea
of giving BDS was that borrowers would make use of their credit wisely. Successful use of credit
meant MFIs could achieve poverty reduction goals while enjoying higher loan repayments.
However, in the late 1980s and early 1990s, MFIs scaled back BDS for several reasons. They
found a lack of demand from borrowers for BDS, which was due to the poor quality and narrow
focus of the business training provided by MFIs. In addition, loan officers who had to provide

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business training in addition to their loan work found it added to an already difficult workload.
There was also pressure from the industry for MFIs to become sustainable and they found BDS to
be a cost which affected their sustainability negatively. Moreover, they were not clear about the
benefits that BDS offered to both themselves and clients (Srinivasan,2008).

2.2.3 TASK FINANCING

Crowdfunding is an elective model for task financing, whereby an enormous and scattered group
of spectators takes part through moderately little budgetary commitments, in return for physical,
money related or social prizes. It is normally done by means of Internet-based stages that go about
as an extension between the group and the activities. In the course of recent years, scholastics have
investigated this theme, both experimentally and hypothetically. Be that as it may, the blended
discoveries and cluster of speculations utilized have come to warrant a basic audit of past works.

Crowdfunding has its underlying foundations in the more extensive idea of publicly supporting,
which enrolls the administrations of the group to get criticism, new thoughts and arrangements,
planned for advancing business exercises (Lambert and Schwienbacher, 2010). Just, on account of
crowdfunding, the objective is to pull in the money related assets fundamental for a specific task.
In any case, crowdfunding varies from customary seed fund since it includes little ventures from
less advanced financial specialists in each microfinance organizations effectiveness in the nation
of Sri lanka (Hulme,2012).

Anyway, small scale account segment of Sri Lanka has demonstrated significant development in
most recent couple of years. Miniaturized scale account practice number of monetary foundations
thus the organizations grows their administration to defeat the challenge in the microfinance part.
Be that as it may, miniaturized scale account benefits principally spread four key zones, for
example, investment funds, credit, smaller scale protection and cash moves these administrations
bolstered to expand expectation for everyday comforts, upgrade salary, responsibility for and level
of utilization of the family units. At last these administrations subject to destitution mitigation of
needy individuals. Basically, Sri Lankan microfinance activities depended on outside borrowings
and remote credits (Source). As indicated by the national bank report in 2015, the most recent year
remote credit encourage for the microfinance activities was higher than the money related getting
of the nation. Coming about, destitute individuals assembled around the microfinance with the

21
intension of diminishing their neediness level and expanding their expectation for everyday
comforts.

2.2.4. DIFFERENT SOURCES OF MFI

Microfinance is a significant wellspring of financing for poor, lower-salary individuals in creating

nations. (Nawaz, 2010). It usually connects with little, working capital credits that are put
resources into microenterprises or pay producing exercises. Microfinance is all the more for the
most part characterized as the arrangement of budgetary administrations to those prohibited from
the formal money related framework. As needs be, credit sum, reimbursement capacity,
availability of getting advance and financing cost were autonomous factors of the investigation
and destitution lightening was recognized as needy variable. There is distinctive area of open and
private small-scale account organizations and destitution mitigation in Sri Lanka utilizing
haphazardly chosen microfinance recipients. Consideration was mostly given to distinguish the
commitment of microfinance for the neediness easing (Rosenberg,2006).

Microfinance has existed, albeit for the most part in the shadows and concealed by easygoing
eyewitnesses, since the ascent of formal budgetary frameworks, and in fact likely originates before
them. It has just been inside the most recent four decades, in any case, that genuine worldwide
endeavors have been made to formalize money related administration arrangement to poor people.
This procedure started vigorously around the ahead of schedule to mid-1980s and has since
assembled a great energy. Today there are a great many MFIs giving monetary administrations to
an expected 100 - 200 million of the world's poor (Durrant,2002)

2.3 THE ACCESSIBILITY AND DEMOGRAPHIC FACTORS OF MFI

The MFI board has exceptional attributes. It isn't irregular for a few noteworthy partners to be
spoken to on the board. The real partner in a MFI are benefactors, value financial specialists,
insiders (workers and directors), and lenders (who frequently give a lot of subsidizing accessible
for small scale credits. Some MFIs have singular customers on their board (Campion, 1998). The
general intensity of these different partners influences effort and maintainability.

The motivating forces of top administration have been referred to as a significant administration
instrument as it guarantees the arrangement of the board with the investor’s premium (John and
Qian, 2004). As such, it fills in as an instrument of settling the irreconcilable circumstance between

22
the administrators and investors. Block et al., 2006 features that even chief pay could likewise
influence execution. With respect to the financial establishment, powerful impetuses may urge
supervisors to go out on a limb to accomplish the target of effort to the detriment of the
contributors, who might endure if the foundation falls (Duflos,2004).

Guideline could influence the presentation of the MFI in light of the fact that it might move the
accentuation away from both effort and supportability. This could happen on the grounds that
controllers advance less unsafe conduct by the administrator so as to advance the security of the
MFI itself and all the more extensively, the wellbeing of the money related framework. Less hazard
taking in any case, is proportional to lower returns and may meddle with the inclination of and
other people who reserve MFIs with the expectation that these foundations would serve
increasingly unsafe customers (poor people) and still win benefits (Charitonenko,2002).

Productivity demonstrates how well associations use their assets to deliver merchandise and
ventures, what's more, the rate at which the information assets are utilized to create or convey the
yields. Kipesha characterizes productivity as better utilization of assets so as to amplify the
generation of the merchandise and administrations of the organizations. There are restricted
investigations in the effectiveness of microfinance establishments (MFIs), particularly in poor
people and creating nations, for example, Sri Lanka. A few examinations which considered just
monetary productivity not offer thoughtfulness regarding social proficiency. This social
proficiency study is much significant for arrangement producers and the board, the reason that,
after the year 2005 numerous new monetary establishments entered the rustic account advertise in
Sri Lanka and numerous business banks enhanced their exercises to incorporate microfinance
administrations. Sri Lankan Microfinance industry is developed as key player to serve the poor.
Thus, evaluate that the productivity of microfinance exercises in Sri Lanka (CGAP,2003)

Hartarska (2005) utilizes a little example of MFIs from Eastern Europe and Central Asia to
experimentally analyze the connection among exhibition and board qualities, administrative
remuneration and establishment types. She finds that presentation-based pay of administrators isn't
related with better-performing MFIs. In any case, she finds no proof that board size and
administrative status impact MFI effort and manageability. Mersland and Strom (2009) analyze
the connection among execution and different corporate administration components in MFIs
utilizing a self-built worldwide dataset of MFIs. They additionally utilize monetary proportions to

23
quantify money related execution. They locate that money related execution improves with nearby
as opposed to universal executives, an interior board examiner and a lady CEO.

They further uncover that effort estimated by number of customers increments with CEO/Chair
duality. Strom et al. (2014) research the relations between lady authority, execution and corporate
administration models of 329 MFIs in 73 nations over the period 1998–2008. Observational
discoveries demonstrate that a lady CEO and a lady administrator of the board are emphatically
identified with money related execution of MFIs as estimated by profit for resources (ROA).

Rather than concentrates dependent on conventional bookkeeping proportions that measure MFIs
execution, Hartarska and Mersland (2012) utilize the SFA system for execution benchmarking.
They research the impact of a few administration components on MFIs' money related
maintainability and expansiveness of effort proficiency measurements. Their discoveries uncover
those proficiency increments with a block size of to nine individuals, though it diminishes with
bigger sheets. They demonstrate that MFIs where the CEO likewise seats the board and MFIs with
a bigger extent of insiders on the board are less productive. In any case, their investigation does
not catch the impact of administration structures on the presentation of MFIs regarding profundity
of effort (i.e., destitution level of customers). Then again, from a methodological perspective, the
principle downside of the SFA is that it expects from the earlier detail of the generation work. This
may therefore prompt incorrect parametric cost capacity gauges (Copestake,2005).

2.4 THE ACCESS BARRIER TO DEPOST AND PAYMENT

Tinker (2000) talks about disaggregation by social gatherings and microenterprise programs in the
US. She at that point extrapolates exercises that a US organizer could learn for ideal arrangement
suggestions. Lowe and Talbot (2000) study the British Small Business Service's endeavors in
prodding microfinance and microbusiness advancement. They explicitly center around how the
Small Business Service can improve its strategies to help arrangement for provincial
microbusinesses.

Copisarow (2000) likewise dissects key arrangement issues influencing microfinance in the UK
and portrays the principle obstructions looked by MFIs in the nation. She proceeds to prescribe
financing and working methodologies for microfinance projects working inside the current
legitimate and administrative UK structure. Likewise, with most issues in microfinance, the

24
adequacy of microfinance as an approach instrument for destitution lightening and the ideal
administrative setting for MFI improvement are as yet open inquiries. Inquiring about these issues
can possibly be a rich zone for discovery (Portela,2007).

2.5 METHOD

We have characterized and surveyed the initial five regions of microfinance. In this segment, we
talk about the last region of microfinance – endeavors to survey the effect of microfinance as
estimated by their effect on customers, their ventures, family units, and the networks where they
live. When in doubt, MFIs move in the direction of a twofold main concern—budgetary and
social—dissimilar to the run of the mill formal monetary establishment which works exclusively
toward a money related primary concern. Estimating money related returns is generally straight-
forward. Microfinance has obtained generously from the financial accounting and execution
gauges in the formal budgetary area. Ideas, for example, return on value, return on resources,
portfolio in danger, etc are progressively turning into the most widely used language of the
microfinance industry.15 Measuring social return, nonetheless, is definitely not clear. By and by,
the particular effects of microfinance are difficult to bind more diligently still to gauge. Effect
evaluations require selection of research approaches equipped for secluding explicit impacts out
of an entangled snare of causal and intervening elements and high decibels of irregular ecological
commotion, just as attaching explicit units of estimation to unmistakable and elusive effects that
could possibly loan themselves to exact definition or estimation.

The trouble and cost natural in evaluating social effect are to such an extent that most MFIs don't
attempt to survey social effect; in any case, givers and policymakers have a genuine enthusiasm
for evaluating the social comes back to their social speculations (Kao,2004).

Some learning of social effect is in this way fundamental for MFI the board and different partners
(e.g., benefactors and policymakers) to evaluate generally program viability. (Data on money
related execution alone gives an inadequate picture of program execution.)

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The results show that in the microfinance industry, MTE scores have increased over time.
However, with an MTE rate of approximately 60%, there is room for improving efficiency by40%.
The discrepancies between studies in their estimations of technical efficiency depended on the
number of variables used, the specification choices, the number of MFIs studied, the region the
MFI was located in, and the scale of analysis. Studies with a larger number of variables (inputs
and outputs) produced higher MTE scores than those with a smaller number of variables. Studies
using the variable returns to scale (VRS) assumption resulted in higher MTE scores than those
using constant returns to scale (CRS). In addition, those with a production approach had higher
MTEs than those using the intermediation approach, while studies of a large number of MFIs had
lower scores than those involving a small sample size. Moreover, research estimating social
efficiency generated lower MTEs compared to that Estimating financial efficiency. Studies using
data from African MFIs obtained lower MTEs than those on MFIs in Latin America and MENA
(Jayamaha,2011).

Technical efficiency (TE) in microfinance refers to the efficiency with which MFIs use resources
in the production process (Widiarto and Emrouznejad, 2015). It expresses the capacity of decision-
making units (DMUs, MFIs here) to produce the maximum number of outputs with a given
quantity of inputs or, conversely, to mobilize the minimum inputs for a given level of outputs.
When an MFI is unable to proportionally increase its output without Also increasing its inputs, it
is said to be technically efficient. However, technical efficiency (TE) is only one aspect of
efficiency, as Farell (1957) emphasizes. Another component of efficiency is allocative efficiency.
In microfinance, this refers to the efficient combination of inputs and outputs that takes into
account input prices and their productivity. In this perspective, an MFI is said to be efficient if it
manages to minimize its production costs or to maximize its revenues (Gant, 2002).

The economic efficiency of a decision-making unit (MFI) is thus the sum of technical efficiency
and allocative efficiency. This article focuses on technical efficiency, not only because it is the
most studied in the literature, but it is also easier to estimate. Calculating allocative efficiency, in
fact, requires information on the prices of inputs and outputs, which is very difficult to obtain in
microfinance.

Among all the techniques for estimating efficiency in general and microfinance in particular, there
are two main approaches: parametric and nonparametric. The former is based on an econometric

26
estimate of the efficiency frontier and subdivides into two groups: deterministic parametric
approaches and stochastic ones. The specificity of deterministic methods is that they consider any
deviation from the frontier as a result of inefficiency. Thus, they risk being biased, especially when
the data are affected by measurement errors. As an alternative, there are stochastic frontier
methods, of which SFA is the best-known. Compared to conventional parametric methods such as
OLS, the SFA approach is distinctive because the error term breaks down into a two-sided
component: a normally distributed random error term (µ) that takes into account exogenous factors
beyond the firm’s control, and an error term (ʋ) representing the firm’s technical inefficiency
(Fried,2002).

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