The effect of capital structure on sustainability and social performance of MFIS in vietnam

Thứ ba, there have been no studies in Vietnam is designed to analyse the effect of capital structure on both sustainability and social performance of MFIs... - Scope of the study on tim

BANKING ACADEMY OF VIETNAM

-

NGUYEN BICH NGOC

THE EFFECT OF CAPITAL STRUCTURE ON SUSTAINABILITY

AND SOCIAL PERFORMANCE OF MFIs IN VIETNAM

Major: Banking - Finance Code: 9 34 02 01

SUMMARY OF DOCTORAL THESIS IN ECONOMICS

HaNoi, 2021

Scientific suppervisor

1 Assoc Prof., Dr Đao Van Hung

2 Assoc Prof., Dr Le Thanh Tam

Referee 1:

Referee 2:

Referee 3:

The thesis will be defended against the doctoral thesis examining committee‟s

judgement, held at Banking Academy of Vietnam, at ………., ………

The thesis can be found at:

- Library of Banking Academy of Vietnam

- National Library of Vietnam

Above all, people living in poverty have been central of attraction because there are many barriers such as education, sex, risk level preventing them from accessing financial services in formal instituitions Therefore, in 17th century, microfince had been appeared with the hope that can help poor people find easier to get financial services This model after that has developed and quickly multiplied in many countries in the world

Particularly, statistics of Microfinance Barometer showed that microfinance instituions (MFIs) in the world provided services for about 136 million low-income people in 2016 and 139 million customers in 2017 Also, growth rate of MFIs‟ customers in 2016 and 2017 was 9.6% and 5.6% respectively It is clear that, althought there was an increase in the number of MFIs‟ customer, the growth rate has been gradually slow down More importantly, when comparing between the number of MFIs‟ customer and the number of people living on less than $2 per day, it is a huge gap

Therefore, it is neccessary to maintain as well as develop microfinance activities in long term to help more and more poor people improve their living standard To do that, Crabb (2007); Daher and Le Saout (2013) and Quayes (2015) all demonstrated that long term sustainability is the key to solve this problem because only when MFIs have become sustainable organisations, they can bring their customers out of poverty in long term (Rhyne, 1998; Meyer, 2002) More importantly, researchers in Vietnam like Nguyen Kim Anh et al (2012, 2013) also argued that sustainability will lay the foundation for customers extension in the future

However, Ndanyenbah (2017) in his research about evolution, collapse and financial sustainability of MFIs showed that donors and goverment funding is not enough to support poor people through microfinance activities Therefore, capital structure is really a big

challenge to MFIs because they have to raise capital from market to maintain their operation

by themself However, commercialization of microfinance at the same time also pose the problem of mission drift because MFI‟s activities might be affected by investors‟ wishes (Jasmina Devinck, 2013) Therefore, the change in capital structure of MFI might exerts effect on both sustainability and social performance

1.2 Practical approach

To be formed from early 1980s, microfinance activities in Vietnam has witnessed 40 years of construction and development with many achivements such as the increase in both asset size and number of customer (Le Van Luyen and Nguyen Duc Hai, 2016) and high customer appraisal (VMFWG, 2017)

On the other side, MFIs‟ activities in Vietnam has also faced many difficulties Particularly, source of fund from NGOs have gone down when Vietnam officially become an middle income country, leading to capital shortages Therefore, MFIs have to quickly find another source of fund to finance operating cost in long term However, to raise fund from market, it

is required that MFIs have to fulfill requirements of regulations on operations and financial regimes, which might be challenge to managers of MFIs

Moreover, mannagers of MFIs in Vietnam also have to balance between sustainability and social performace – the root of microfinance (Sinha, 2006) Particularly, from 2010 to now on, staitistics of Vietnam Microfinance Working Group (VMWG) showed low level of MFIs‟ ability to cover operating cost from income Besides, social performance index (SPI) as calculated result of this research also went down As a result of that, it is neccessary to do a research in capital structure, and especially the impact of capital structure on sustainability and social performance of MFIs to propose policy

recommendations The author decided to choose “The effect of capital structure on sustainability and social performance of MFIs in Vietnam” as a thesis tittle

2 Literature review and research gap

2.1 Literature review about capital structure and sustainability

capital structure on MFI‟s sustainability However, most of them agreed that mobilized capital has positive impact on sustainability

Doing research about sustainability of MFI but only in one country, Nyamsogoro (2010), Sekabira (2013), Kinde (2012), Kidzuga (2011), Kyereboah – Coleman (2007), Mwizarubi et all (2015) and Hosain & Asam (2016) also claimed that although there is differences in characteristics of financial market in each country, mobilised capital is still appreciated that it has beneficial effect on MFI‟s sustainability

There are few main points need to be considered:

- Firstly, most of researchers stress the importance of capital structure in improving

MFI‟s sustainability However, due to differences in characteristics of financial market in each country, the sign of impact might be not the same Therefore, it is necessary to do a research in microfinance in Vietnam to understand more clearly about MFIs as well as the

effect of capital structure on sustainability of MFIs in Vietnam

- Secondly, foreign researches often use database of MFIs from many countries with

differences in operational requirements to test the relationship between capital structure and MFI‟s sustainability Therefore, there is lack of policy recommendation for the improvement of MFI‟s sustainability Besides, there is limited studies in Vietnam focus on aim at analyzing capital structure of MFI as well as the impact of capital structure on MFI‟s

However, the results are mixed and especially there is a disagreement over which index is chosen as proxy for social performance of MFI

2.2.2 Researches in Vietnam

In Vietnam, there is growing concern over social impact of a business „s operations

in recent years This phenomenon has become even more common when there are more and more multi-national compananies has been opened in Vietnam However, in stead of doing research in both four aspects of social performance such as outreach, service quality, customer‟s benefits and social responsibility, studies in Vietnam mostly concentrate on firm‟s social responsibility only Moreover, the number of research carrying out social performance of MFIs is still rare

Particularly, social performance of MFIs in Vietnam has just been analysed by Lebovics etc (2016) and Pham Bich Lien (2016) However, previous studies only use outreach as a proxy for social performance of MFI as well as do not evaluate the impact of capital structure on social performance Therefore, there are few main points need to be

considered:

Firstly, there are many ideas about how to define as well as evaluate social

performance of MFI, in which two most common methods are based on outreach and social performance indicators However each method has both strengths and weaknesses; therefore, researchers have different choice for proxy of social performance of MFI In Vietnam, not much research on social performance of MFI is being done Moreover, previous studies have just only analyse outreach but other aspects of MFI‟s social

performance

-Secondly, although capital structure is considered as one of the most important

factors impacting social performance of MFI in many studies, there is very little research on

this topic in Vietnam

2.3 Research gap

Based on previous studies, the author pinpoints the following research gaps:

Firstly, there has not been any research that recaps a comprehensive theoretical

framework on social performance of MFI

Sưcondly, there have been no studies in Vietnam attempt to develop set of indicators

for social performance of MFI

Thứ ba, there have been no studies in Vietnam is designed to analyse the effect of

capital structure on both sustainability and social performance of MFIs

- Capital structure, sustainability and social performance of MFIs in Vietnam

- The impact of capital structure on sustainability and social performance of MFIs in Vietnam

5.2 Scope

- Content: capital structure, sustainability and social performance of registed and licensed MFIs

- Scope of the study on space: registed and licensed MFIs

- Scope of the study on time:

+ Analysing current situation for the period of 2011 – 2019

+ Doing quantitative research on the effect of capital structure on sustainability and social performance of MFIs in Vietnam: 2011 – 2017

Diagram 1: Research process

Co

Literature review

The effect of capital structure on sustainability and social performance of

MFI

Strategies for Developing the Theoretical Framework

- Review related literature

- List and clarify the constructs and variables based on topic

- Synthesize information and form theoretical framework

Building a theoretical framework Choosing suitable research model

Collecting secondary data (VMFWG, The Mix) Conducting in-depth interview with experts and managers of MFIs in

Vietnam

Anaysing and comparing

indicators

- Doing regression analysis

- Selecting REM or FEM through Hausman test

Final

Theoretical research

Practical research

6.2 Research method

6.2.1 Data collecting

The thesis used both primary and secondary data, in which the first one is collected through doing in-depth interview with experts and managers of MFIs in Vietnam Besides, statistics on MFIs in Vietnam which has been released by VMFWG is used as reliable

secondary data for this thesis

Firstly, based on previous studies, two main source of data which are often used by

researchers in this field are Vietnam Microfinance Working Group (VMFWG) and the MIX market However, at the time this thesis is conducted, MFIs‟ data were transferred from MIX market to World Bank, and more importantly up till now this data set still is not available on official website of World Bank Therefore, this thesis only used secondary data derived from Vietnam Microfinance Working Group

Secondly, author did in-depth interview with experts and managers of MFIs in

Vietnam to thoroughly understand current situation of microfinance activities as well as MFIs in Vietnam Particularly, both face-to-face and telephone interview as well as questionnaire survey were conducted to collect information related to capital structure, activities of MFIs, problems and operating results of MFIs ( appendix 6)

+ Comparative analysis of index methods: Based on secondary data collected from VMWG and primary data derived from in-depth interview with managers of MFIs, author did compare index of MFIs through years to identify tendency and degree of volatility of MFIs‟ capital structure, sustainability as well as social performance from 2011 to 2019 in chapter 2

- Quantitative mathod: both Pooled Ordinary least squares (OLS), fixed effect model (FEM) and random effect model (REM) were used in this thesis to analyse panel data of MFIs in Vietnam from 2011 to 2017 Besides, Hausman test also was used to select appropriate model in chapter 3

7 New contributions of the thesis

The doctoral thesis has some new theoretical and practical contributions as following:

Firstly, the doctoral thesis provided a clear definition of capital structure, sustainability, and

especially social performance of MFIs

Secondly, the thesis built model explaining the way in which capital structure affects MFI‟s

sustainability and social performance of MFIs M&M theory, trade-off theory, and pecking order theory are often mentioned in researches on the capital structure of firms in general and MFIs in particular However, the impact of capital structure on the performance of MFIs might not be the same as companies‟ one, and more importantly, this problem has not been shown in previous studies The thesis did analyze characteristics of MFI‟s capital structure, contributing to build an impact model

Thirdly, the thesis used both primary and secondary data for evaluating capital structure,

sustainability, and social performance of two groups of MFIs in Vietnam (licensed MFIs and registered MFIs) In which secondary data was acquired from the data book

“Microfinance Institutions in Vietnam” and primary data was collected from an in-depth interviews with experts and MFIs‟ managers Both sustainability and social performance of MFIs in Vietnam all witnessed a downward trend

Fourthly, based on the theory and current situation of MFIs in Vietnam, the thesis

developed a model for evaluating the impact of capital structure on sustainability and social performance of MFIs in Vietnam

Finally, the thesis proposed policy recommendations to MFIs in Vietnam and regulatory

agencies for the improvement of sustainability and social performance of MFIs in Vietnam Particularly, based on model results, the thesis suggested that MFIs in Vietnam should concentrate on mobilized capital Besides, based on the current situation of MFIs in Vietnam as well as the results of in-depth interviews with MFIs‟ managers, regulatory agencies play important role in supporting MFIs in attracting more capital

of microfinance institutions in Vietnam

Chapter 3: Assessing the impact of capital structure on sustainability and social performance of microfinance institutions in Vietnam

Chapter 4: Capital Structure Recommendations for Improving the Sustainability and Social Performance of Microfinance Institutions in Vietnam.1.1: QUY TRÌNH NGHIÊN CỨU LUẬN ÁN

CHAPTER 1: THEORETICAL FOUNDATIONS OF CAPITAL STRUCTURE,

SUSTAINABILITY, AND SOCIAL PERFORMANCE OF MFIs

1.1 Overview of microfinance institution

1.1.1 Definition and role of microfinance institution

1.1.1.1 Definition of microfinance institution

Microfinance institution is defined as organizations established to provide financial and non-financial services to low-income and disadvantaged people in society to help them eradicate poverty in sustainable way

In this thesis, data on licensed microfinance institutions (presented under the name

of licensed MFIs) and microfinance social funds, microfinance programmes (presented under the name of registered MFIs) will be focused on analysis

1.1.1.2 Role of microfinance institution

Economic aspect: Microfinance institutions help low-income customers in society

have access to basic financial services such as credit, savings, and insurance Thereby, poor people have more opportunities to participate in production and business activities as well

as increase income and reduce poverty

Social aspects: In addition to financial services, microfinance institutions also

provide non-financial services to improve the health, awareness, and skills of low-income people to help customers confidently integrate better into economic and social activities in

the community

1.1.2 Products and services of microfinance institutions

Based on the human development life cycle, the World Bank has identified the basic human financial needs including the need for capital to do business; they need to accumulate money to invest in future needs such as education, marriage, maternity; insurance needs for life and property; the need to receive and transfer money to relatives; investment needs, accumulated in old age and the need to pay hospital fees during illness or other emergencies Therefore, products offered by microfinance institutions need to be diversified to fully meet the basic needs of the people in general and the poor in particular Specifically, micro-credit, savings, insurance, and payment products are gradually formed Besides, support services or social services that help improve the living conditions of the poor are also provided by microfinance institutions in parallel with financial services to bring sustainable development to customers

1.2 The capital structure of microfinance institution

1.2.1 The definition of the capital structure of microfinance institution

The capital structure of a microfinance institution is defined as a flexible combination of funding sources with commercial capital sources (deposits, equity, loans) to maintain the operation of microfinance institution

1.2.2 The proxy of the capital structure of microfinance institution

To measure the capital structure of MFIs in Vietnam, there are many different coefficients based on the source forming capital from debt and equity of MFIs (capital raised from deposits, borrowed funds, other debts, and capital owner) will be used

1.3 Sustainability of microfinance institution

1.3.1 Definition

Financial sustainability is defined as an organization's ability to generate revenue from providing products and services to poor customers to cover all input costs as well as foster long term development of the organization

1.3.2 The proxy of the sustainability level of microfinance institution

In an assessment of the financial sustainability of a microfinance institution, three indicators are often used by researchers to analyze the sustainability of a microfinance institution including self-sustaining ( OSS), financial self-sufficiency (FSS), and subsidy dependency coefficient (SDI) (Marakkath, 2014)

1.4 Social performance of microfinance institution

1.4.1 Definition

The definition of social performance of a microfinance institution can be understood

in both broad and narrow meanings; in which, in a narrow sense, the social performance of MFI is the results and benefits that microfinance institutions bring to all stakeholders, the community, and the society In a broad sense, social performance is demonstrated through the way an organization sets up a whole process from planning, making policy ideas, establishing operational processes to results

1.4.2 The proxy of the social performance of microfinance institutions

Corresponding to the view of defining social performance in a narrow and broad sense, studies on the social performance of MFI also show that there are two commonly used methods in measuring the social performance of MFIs In which, in a narrow sense, the authors often measure social performance based on the findings from reports In a broad sense, social performance is measured based on a survey or an evaluation from the perspective of the management and implementation process

1.5 The impact of capital structure on sustainability and social performance

1.5.1 M&M theory

1.5.1.1 The content of M&M theory

Modern capital structure theory is derived from the theory of Modigliani and Miller (1958) With the assumptions of a perfect capital market such as no taxes, no transaction costs, no asymmetric information phenomenon, and both firms and investors are price takers (Levati et al The, 2012), the M&M theory states that the value of an enterprise does not depend on the capital used to finance its operations

1.5.1.2 Theoretical studies

In support of the M&M theory, Stiglitz (1969) demonstrated the capital structure theory of Modigliani and Miller that not only holds the assumptions about perfect capital markets but also occurs in markets where borrowing is limited personal capital or signs of bankruptcy

The first objection to the M&M theory is Durand (1959) when the author argues that two hypotheses related to perfect substitution and arbitrage business opportunities are not possible in perfect markets Besides, based on capital market imperfections, Arzac and Glosten (2005), Dann (1981), Masulis (1983) and Graham and Harvey (2001) also contradict the M&M theory by pointing out that there exists a close relationship between

firm value and financial leverage

1.5.2 Trade-off theory

1.5.2.1 Theoretical content

Developed by Kraus and Litzenberger (1973) the trade-off theory shows that there is a trade-off between the benefits and costs of using debt Therefore, managers need to consider finding an optimal debt ratio (Graham & Harvey, 2001) to maximize the value of the firm (Abor, 2005)

1.5.2.2 Theoretical studies

Supporting the view of trade-off theory are studies conducted by Tong and Green (2005), Graham and Harvey (2001), Flannery and Rangan (2006), Marsh (1982), Opler and Titman (1994), Taggart ( 1977), Hackbarth et al (2007)

On the contrary, Baker and Wurgler (2002, p 3) argue against the theory of trade-offs and conclude "capital structure is the result of the effort over time in the stock market" In addition, Fama and French (1998), Dawar (2014), Daskalakis and Psillaki (2005), and Salim

and Yadav (2012) also have counter-ideas to this theory

1.5.3 Theory of pecking order theory

1.5.3.1 Theoretical content

Contrary to the trade-off theory, the pecking order theory, which is introduced by Myers and Majluf (1984) denies the existence of a target debt ratio However, this theory also agrees on building a priority selection for capital sources used by businesses

1.5.3.2 Theoretical studies

Supporters of this theory are researchers such as Remolona (1990), Baskin (1989), De Jong et al (2011) Also carried out research to check the suitability of pecking order theory, but Lery and Roberts (2010) found that this theory only explains about 20% of financial decisions of businesses, which is lower than the results given by De Jong et al (2011) Besides, a number of studies also show that the level of explanation of pecking order theory for the organizational capital structure is not high (Seifert and Gonenc, 2008; Helwege and Liang, 1996; Frank and Goyal, 2003; Graham and Harvey, 2001)

1.5.4 Capital structure characteristics of microfinance institution

The difference in the mission and operation method has made the capital structure of microfinance institutions and enterprises clearly different

Firstly, microfinance institutions often receive more preferential capital sources than

enterprises

Second, the capital structure of microfinance institutions always fluctuates based on

changes in customer demand

Third, microfinance institutions have to comply with capital adequacy regulations, while businesses do not

1.5.5 The mechanism of the impact of capital structure on social sustainability and efficiency

Based on differences in capital structure characteristics of MFI and business‟ ones, the author finds that bankruptcy and agency costs do have little impact on the capital structure of microfinance institutions In contrast, taxes and especially transaction costs have considerable impact on the relationship between capital structure, the sustainability and social performance of financial institutions Therefore, the mechanism for impacting capital structure on the level of sustainability and social performance is built as follows:

Chart 1.3 Mechanism of capital structure impact on sustainability and social

performance of microfinance institutions

Source: Self-developed author

The choice of different sources of funding determines the cost of capital that each microfinance institution must pay to maintain its operations This cost will have a direct impact on the financial cost, and then on the sustainability of the organization In addition, microfinance institutions have always been known to operate with the goal of helping to eradicate hunger and reduce poverty Therefore, the use of capital sources with different costs is also intangible, creating a certain pressure on the managers and executives of the organization to ensure the balance between financial goals and social goals As a result, the social performance of microfinance institutions will also be affected

Capital

Structure

Taxes, transaction costs Financial expenses

Sustainability level

Balancing between financial and social goals

Social performance

CHAPTER 2 THE CURRENT SITUATION OF CAPITAL STRUCTURE, SUSTAINABILITY AND SOCIAL PERFORMANCE OF MICROFINANCE

INSTITUTIONS IN VIETNAM

2.1 The process of establishment of microfinance institutions in Vietnam

2.2 The legal environment for microfinance activities in Vietnam

2.3 Microfinance institutions in Vietnam

Microfinance providers in Vietnam are quite diverse However, according to the definition in the concept of microfinance institutions, the thesis only focuses on analyzing the converted organizations licensed to operate under the credit institution law (including TYM, M&MFI, Thanh Hoa MFOs / MFIs, and CEP) and social funds, microfinance organizations/programs/projects that are registered and have annual statistics and reports to the State Bank

Also, due to being formed after microfinance institutions operating in other countries in Asia, MFIs in Vietnam are not only different in several service providers, but also, more importantly, there are distinct characteristics compared to MFIs in the peer group

First, the scale of Vietnamese MFIs is smaller than that of peers, and savings mobilization has not played a major role in microfinance institutions By contrast, equity and debts make up the majority of the total capital of microfinance institutions in Vietnam Besides, loans from private entities make up only a very small proportion

Second, the operating costs of MFIs in Vietnam are recognized as lower than MFIs in other countries, laying foundation for microfinance institutions in Vietnam to be easier to achieve profitability and maintain sustainability than microfinance institutions

in other countries

Thirdly, the majority of MFIs Vietnam customers are women, showing that microfinance institutions in Vietnam are ensuring the pursuit of social performance

2.4 The capital structure of microfinance institutions in Vietnam

2.4.1 The capital structure of licensed MFIs in Vietnam

Based on data provided by the Microfinance Working Group in Vietnam, the author found that the capital structure of licensed microfinance institutions in Vietnam is quite diverse In particular, licensed microfinance institutions have an impressive growth in the ratio of capital mobilized from deposits to total capital, and also affirmed that savings are

gradually becoming an important source of capital On the contrary, due to legal problems, the ratio of borrowing capital in total capital has declined over time

2.4.2 Current status of the capital structure of registered MFIs in Vietnam

Compared with licensed MFIs, registered institutions have a less diverse complementary capital structure Particularly, equity accounts for nearly 50% of the total capital of registered MFIs Loans and mobilized capital accounts for about 21% - 28% Finally, other capital accounts for a relatively modest proportion of 1% - 4%

2.5 Sustainability of microfinance institutions in Vietnam

2.5.1 Current Situation of Sustainability of Licensed MFIs in Vietnam

The OSS ratios of institutions are all higher than 100% reflecting the operating income of licensed microfinance institutions can cover the full operating costs More importantly, the OSS has not witnessed a big change over the years However, based on international standard, currently only OSS of TYM and CEP fulfil the requirements, which

is higher than 120% More importantly, the OSS of TYM is not much different from the standard threshold, OSS of CEP is not really stable and can fluctuate in the following years Therefore, maintaining and improving this index in the coming time is essential to ensure the sustainable operation of licensed MFIs

2.5.2 Current Situation of Sustainability of Registered MFIs in Vietnam

The average OSS of registered organizations over the years has been 120% higher, and particularly somewhat higher than that of licensed organizations However, when focusing on the OSS analysis of each registered organization, it can be seen that there is a huge difference in the sustainability between organizations Moreover, the number of registered organizations which have OSS higher than 120% is declining

2.6 Social performance of microfinance institutions in Vietnam

2.6.1 Access level (A)

A comparison of the average number of borrowing clients of licensed and registered microfinance institutions shows that the accessibility of licensed institutions is higher than

that of registered institutions

2.6.2 The ratio of average outstanding loans to average income (B)

A comparison of the change in average outstanding loans/ GNI per capita over the years of the licensed and registered organization can be seen that this ratio has not changed

much over time

2.6.3 Cost per borrower (C)

The average cost per borrower of a licensed organization is relatively higher than that

of a registered organization

2.6.4 The proportion of female customers (D)

The proportion of female customers to the total number of borrowing customers of licensed and registered microfinance institutions always accounts for over 88%

2.6.5 Number of branches (E)

The number of branches in this study is considered to have very little variation; and therefore, will be excluded when calculating the SPI value

2.6.6 The portfolio at risk (G) and write-off ratio (H)

The percentage of the gross loan portfolio for all open loans that is overdue by more

than 30 day and the average write-off rate of licensed organizations are always lower than

that of registered organizations