Pacific Accounting Review

Gender, operational efficiency, population density and the performance of

mirofinancing institutions
Gemunu Nanayakkara Lokman Mia
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performance of mirofinancing institutions", Pacific Accounting Review, Vol. 24 Iss 3 pp. 314 - 333
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PAR
24,3 Gender, operational efficiency,
population density and the
performance of mirofinancing
314
institutions
Gemunu Nanayakkara and Lokman Mia
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Department of Accounting, Finance and Economics, Griffith University,

Brisbane, Australia

Abstract
Purpose – The purpose of this research is to investigate the effect of operational efficiency, gender of
the borrowers and the population density on the performance of microfinancing institutions that play a
significant role in alleviating poverty in developing countries.
Design/methodology/approach – A model showing the relationships among the variables is first
proposed based on the hypotheses developed in the literature review. Then the model is tested with
empirical data using multiple regression and path analysis. Data used in the analysis relate to
234 microfinancing institutions across 63 countries.
Findings – The study finds that operational efficiency and gender of the borrowers have a direct
impact on the performance of microfinancing institutions. Although population density does not have
a direct impact on performance it has an indirect effect through operational efficiency and gender of
the borrowers.
Practical implications – The findings of this study reveal to the policy makers and managers of
microfinancing institutions the importance of focussing on the three factors analysed (operational
efficiency, gender of the borrowers and population density) to reduce poverty.
Originality/value – The study enhances the current knowledge in the literature relating to
microfinancing. The findings help to improve the performance of microfinancing institutions resulting
in efficient and effective utilisation of hundreds of millions of donor funds originating from tax payers
in developed countries.
Keywords Microfinancing, Gender, Operational efficiency, Population density, Performance,
Performance management
Paper type Research paper

1. Introduction
Microfinancing institutions (MFIs) provide financial services to the poor who are
deprived of any access to institutional credit (e.g. banks) due to their lack of income and
assets to offer as security. The MFIs help the poor by granting relatively small loans
usually without security. An example of a successful MFI is “Grameen Bank” which
has been operating in Bangladesh since the late 1970s (Hossain, 1988). By 1998,
Grameen Bank was offering loan facilities to 2.3 million poor borrowers with an
Pacific Accounting Review outstanding loan portfolio of US$2.3 billion.
Vol. 24 No. 3, 2012
pp. 314-333
q Emerald Group Publishing Limited
0114-0582
The authors wish to acknowledge the anonymous reviewers for their helpful and constructive
DOI 10.1108/01140581211283896 feedback.
 Most developing countries have embraced the microfinancing concept in their battle Performance of
against poverty. Because of the positive impact of microfinancing on the financial microfinancing
condition of the poor, developing and developed countries, multilateral lending
agencies, bilateral donor agencies and non-government organisations (NGOs) support institutions
the MFIs operating in developing countries. Hundreds of millions of dollars of donor
funds have been injected into the microfinancing sector. For example, during 2009 the
World Bank has granted US$378 million to MFIs. The total figure over the years 315
amounts to US$1.29 billion (World Bank Annual Report, 2009). Given the responsibility
of properly utilising such large sums of donor funds and for the significant positive role
played by the MFIs, identifying factors that may facilitate/enhance the MFIs’
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performance is a critical issue. Following the extant literature, this study identifies
three such factors and empirically investigates the impact of these factors on the MFIs’
performance. These factors are operational efficiency, population density and
borrowers’ gender. A particular MFI’s operational efficiency refers to the extent to
which the MFI’s internal processes can satisfy the donors and borrowers in alleviating
the borrowers’ poverty (for this study, the MFIs’ performance). We posit that
operational efficiency results in lowering operational expenses (per loan or customer)
which, in turn, enable the MFIs to serve more poor people for a given amount of
resources under its control. This, in turn, may contribute more in terms of alleviating
poverty. It is plausible that population density is positively associated with the
performance of a microfinancing organisation. Since MFIs usually provide loans
without security, they have to closely and personally monitor borrowers’ utilisation of
the borrowed funds. Therefore, the monitoring costs per borrower in densely populated
area(s) are likely to be relatively low, resulting in higher MFI performance. For example,
Ladd (1992) reports that the cost of providing the public services by the local
government authorities decreases with an increase in population density. There is a
relatively strong body of literature which suggests that countries or economies with
high gender inequalities suffer from high poverty (World Bank Report, 2001). In other
words, increasing income by women may help faster alleviation of poverty in a society.
This argument is based on the widely accepted presumption by many MFIs that
women spend more of their income on children and other household expenditure than
men, thus improving the welfare of the whole family. Therefore, assisting women
generates a multiplier effect that enlarges the impact of the support activities
(Deshpanda, 2001). This study empirically tests the posited impact of the above
explained factors on the MFIs’ performance.
In the literature there is a lack of research and understanding about microfinancing
from a customer-centric view (Bruton et al., 2011). This study looks at the population
density and gender which are more closer to the perspective of the client than the
microlender. Therefore, this study also contributes to fill this gap to some extent.
The remainder of this paper is structured as follows. Section 2 reviews the
literature in relation to “performance” of MFIs and the reasons for considering the
above mentioned factors to have an effect on the performance. This leads to
development of the hypotheses. Based on these hypotheses, Section 3 describes the
model that is empirically tested in this study. Measurement of variables, sample and
data collection are also discussed under Section 3. Section 4 describes the data
analysis and the results. Finally, Section 5 summarises the main findings and offers
some conclusions.
 PAR 2. Literature review
24,3 Following the relevant literature, the concept of population density, gender of the
borrowers, and operational efficiency of MFIs can be clearly defined and understood.
However, it is not the case with regard to the term “performance” in relation to MFIs.
Therefore, first, what we mean by “performance” and how it is measured in this study
is addressed prior to developing the hypotheses.
316
2.1 Performance of MFIs
MFIs have different objectives such as alleviating poverty and improving the standard
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of living of the poor which are different from those relating to commercial financial
institutions like banks. Therefore, the standard criteria such as profit, return on
investment, share price, etc. are not appropriate to measure the “performance” of MFIs.
Earlier research in microfinancing was primarily focused on finding out whether
microfinancing actually helps the poor to improve their income. These studies implied
the “performance” of a MFI as the extent to which the MFI made an impact to increase
the standard of living of its poor borrowers. For example, Hulme and Mosley (1996)
analysed the improvement in income over 4,000 microfinancing borrowers across four
countries and found that the increase in income of the sample was significantly higher
than that of the control group. Similar studies have analysed the impact of
microfinancing services on a number of social and financial indicators such as income
generation, attainment of food security, nutritional adequacy, children’s education,
health and infant mortality, etc. of the poor (Khandker et al., 1995; Khandker and Baaqui,
1996; ADB, 2000; Foundation for Development Corporation, 1992; CGAP, 2002; Pitt and
Khandker, 1996; Yunus, 1998; Dunford, 2001). All these studies have found that
microfinancing helps the poor to increase their income and standard of living. While the
above studies have implied the “performance” of MFIs as the external impact made
by them on the poor borrowers, the donors are also concerned about the internal
operations of the MFIs when delivering the services to the poor. In other words, how
efficiently and effectively are the resources being utilised by MFIs to alleviate poverty.
A study by Yaron (1992) has shown that many MFIs operating as NGOs continue to
depend on subsidies and could not operate on a commercially-viable basis (Christen,
1998). In the early 1990s it was estimated that there were about 140 MFIs in Bangladesh
and about 100 in Bolivia and Gambia that provided microfinancing services to less than
100 customers, all heavily dependent on subsidies (Adams, 1998). A survey in 1999
conducted by the Bank of Zambia highlights that many MFIs in the African continent
did not focus on efficient, transparent, sustainable service provision (Mudenda, 2002).
Similar findings have emerged from the Caribbean (Lashley, 2004).
The World Bank, one of the largest donors to the microfinancing sector, has developed
a subsidy dependence index (SDI) to assess the extent to which MFIs depend on
subsidies. Therefore, it is important to note that both the external impact that MFIs make
in alleviating poverty of their borrowers and the efficient and effective utilisation of
resources in their poverty alleviation efforts needs to be considered when assessing the
performance of MFIs. Morduch (2000) argues that it is possible to achieve both these
aspects at the same time. The Consultative Group to Assist the Poor (CGAP) is an
international organisation set up to develop the microfinancing sector. It is funded by
25 major donor agencies including the two main players; the World Bank and the Asian
Development Bank. In 2004, CGAP suggested five indicators (outreach, depth of outreach,
 portfolio quality, financial sustainability and efficiency) for the donors to assess the Performance of
performance of MFIs. Considering that the main purpose of MFIs is poverty alleviation, microfinancing
Nanayakkara (2012) argues that increase in outreach (increase in number of customers),
depth of outreach (the poverty level of the customers), portfolio at risk and sustainability institutions
(ability to operate as a “going concern”) as key indicators to measure the performance of
a MFI over a given time period. Based on this, an index which is independent of the size
or the exchange rates of different countries is developed to assess the performance of 317
MFIs around the world (Nanayakkara, 2012). In this study, this index is used because it
is a more objective measurement which assesses both the internal operations of the MFI
as well as the external impact made by the MFI on the poor borrowers.
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2.2 Operational efficiency and performance of MFIs

The mission of MFIs is the alleviation of poverty which is measured by the
“performance” in this study. Improvement in operational efficiency will lead to satisfied
donors and borrowers which is essential for MFIs to achieve this mission. For example,
MFIs with higher operational efficiencies will encourage donors to provide more
funding to help them achieve their mission (improving performance). Higher operational
efficiency will also result in savings that will enable MFIs to serve more poor people
with lower interest rates for a given amount of resources under its control. Case studies
have shown that the MFIs are operating at varying degrees of efficiency. The results of
some studies have indicated that the operational efficiency of self-funding MFIs to be
about one third compared to that of the MFIs which depend on external funding
(Getubig et al., 2000). For example, Ayayi and Sene (2010) has found that sound
management practices which lead to improving operational efficiency contribute to
financial sustainability. There is also evidence of improving operational efficiency
leading to growth in customer base and lending in case studies done in Latin America
(Battilana and Dorado, 2010). There is no study in the literature that has looked at the
relationship between the operational efficiency and the performance (as defined earlier)
of MFIs.
In conclusion, an increase in operational efficiency is likely to result in more
resources (from donors as well as internal savings) for MFIs to offer financial
assistance to more poor borrowers and achieve sustainable operations. This will then
contribute to enhancing the performance in alleviating poverty in an effective manner.
Therefore, the H1 tested in this study is:
H1. There is a positive relationship between the operational efficiency and the
performance of a MFI.

2.3 Population density and performance of MFIs

The impact of population density on the performance of MFIs (or on any other type of
organisation) is one of the least studied areas. Almus and Nerlinger (1999) in their study
of the growth of high technology manufacturing companies in Germany examined the
effect of the inhabitants/km2 as an independent variable in the model. They found that
population density has a minor effect on the growth rates. However, their study related
to high-technology industries. The market for the products of these companies may
have been elsewhere, and therefore, may have little to do with the population density
of the local area. Storey (1994) has concluded that some locations can be more favourable
to the growth of companies. For example, Davidsson (1989) argues that characteristics
 PAR of the geographical area have a major impact on industries where firms are bound to the
24,3 local market. MFIs serve poor customers in their local area and are bound to the local
market. Successful MFIs such as Grameen Bank have used innovative methods to
reduce the transaction costs. For example, loans are made to small groups and
the repayment and monitoring of the individual loan of each member becomes the
responsibility of the group. Peer pressure acts as a controlling factor in the monitoring
318 and repayment of the loans (Stiglitz, 1990). In densely populated areas the members of
each group will be living close to each other; hence, the cost of attending regular
meetings, monitoring and collection of repayments is much lower (Jolis and Yunus,
2001). The transaction costs for borrowers also depend on proximity to the MFIs.
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Travelling time to make a transaction increases transport costs and the opportunity cost
foregone of using that time to earn an income. Therefore, MFIs operating in densely
populated areas have access to a larger customer base with lower transaction costs. Such
MFIs will find it easier to capture a larger customer base, because of the lower
transaction costs to both the borrowers and the MFIs themselves. Support for this
concept is found in a study covering 247 county areas in the USA, where it was found
that the cost of providing the public services by the local government authorities
decreases with an increase in population density (Ladd, 1992). Morduch (1999) argues
that success for microfinancing has been limited in regions with highly seasonal income
patterns and low population densities.
Another factor that affects the performance of the MFIs is the success of the small
business enterprises for which the clients borrow money. Borrowers who operate these
small businesses find it easier to sell their products in densely populated areas owing
to the easy access to a larger market and low transport costs. Moreover, most of these
small industries in developing countries are labour intensive. Research has shown that
labour productivity is higher in areas where population density is higher (Smoluk and
Andrews, 2005). It may also be noted that countries such as India, Bangladesh and
Indonesia, which have an increasing number of MFIs, have higher population densities
compared to many other countries.
All the above-mentioned factors support the view that there may be a positive
relationship between population density and the performance of the MFIs and also that
the population density can help to improve operational efficiency in a number of ways.
There is no evidence in the literature of any empirical studies in this regard. The next
hypotheses to be tested empirically in this study are stated as:
H2a. There is a positive relationship between the performance of a MFI and
population density in the area in which the MFI operates.
H2b. There is a positive relationship between the population density in the area in
which the MFI operates and the operational efficiency of an MFI.

2.4 Gender of the borrowers and the performance of the MFIs

The gender of the customers may be important for the performance of the MFIs in
achieving their objective of alleviating poverty. Some MFIs deliberately target women
when providing their microfinancing services. For example, in 2001 over 95 per cent of
the customers of the Grameen Bank, a very successful MFI, were women ( Jolis and
Yunus, 2001). However, in its early stages, in 1983, females accounted for only 44 per cent.
The question remains whether increasing the proportion of female customers
 contributed significantly to the success of the Grameen Bank. Ayayi and Sene (2010) Performance of
argues that one way to approach reliable poor customers is to target women. Women microfinancing
make up 80 per cent of the clients in the worlds 34 largest MFIs (Mody, 2002).
There are valid reasons for the MFIs to make a special effort towards helping women. institutions
Research has shown a negative impact on economic growth and development due to
gender inequalities in developing countries. For example, a study carried out in 2001 by
the World Bank concluded that economies with wider gender inequalities end up with 319
more poverty and a slower economic growth, resulting in a lower living standard for
their people (World Bank, 2001). According to the Human Development Report by the
UNDP (1996), there is a very strong correlation between its women’s empowerment
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measure and its “Human Development Index”. Despite these findings, data collected
by leading international institutions have shown that women in general are still worse
off than men in many respects. For example, the same report by the UNDP (1996) has
found that 70 per cent of the 1.3 billion people living on less than $1 per day were women.
The “Gender Statistics Data Base” of the World Bank shows that the unemployment
rate for women is higher than that for men in almost every country. Baden and Milward
(1995) have found that:
Although women are not always poorer than men, because of the weaker basis of their
entitlements, they are generally more vulnerable and, once poor, may have less options in
terms of escape.
Another important reason claimed by many organisations for directing their efforts
towards women is based on the presumption that women spend more of their income
on children and other household expenditure than men, thus improving the welfare of
the whole family. For example, based on survey findings, the Special Unit on
Microfinance of the UNCDF has reported that:
Womens’ success benefits more than one person. Several institutions confirmed the
well-documented fact that women are more likely than men to spend their profits on
household and family needs. Assisting women therefore generates a multiplier effect that
enlarges the impact of the institutions activities (Deshpanda, 2001).
Several other case studies carried out in this regard support this view. According to a
study by the Women’s Entrepreneurship Development Trust Fund in Zanzibar,
Tanzania, women spend 15 per cent on clothing, 18 per cent on children’s education and
55 per cent on household items. Another study done in Latin America also indicates
similar findings to support this view. In Guandalajara, Mexico, men contribute only
about 50 per cent of their salaries towards their families. In Honduras and in three cities in
Mexico, this is about 68 per cent, while the women tend to spend everything on the
family. The result is that more money is available for improving the welfare of families in
households headed by women (Chant, 1997). A study in Bangladesh has found that
an increase of 100 per cent in the volume of borrowing by females leads to an average
increase of 5 per cent in per capita household non-food expenditure and 1 per cent
increase in food expenditure. Similar figures for men amounted to 2 and 0 per cent,
respectively, (Khandker, 2003).
Although the factors discussed earlier make compelling arguments for the MFIs to
assist the women, it is not clear whether focusing on women increases the “performance”
(as defined earlier) of the MFIs. For example, do women utilise the borrowed money
productively to earn a sufficient return to repay the loans? Note that the performance
 PAR of the MFIs also depends on the successful repayment of the borrowers. This area is not
24,3 covered extensively in the literature. A study on the Grameen Bank customers in 1991
has shown that 15.3 per cent of the male borrowers had difficulty in making repayments,
compared to 1.3 per cent of female borrowers (Khandker et al., 1995). Experience of an
MFI in Ghana (Sinapi Aba Trust) had shown that women have better repayment
records than men. However, these two studies are not sufficient to draw generalised
320 conclusions.
It is easier for MFIs to emphasize female borrowers (gender) when operating in
densely populated areas. If the population is widely spread out, it may become difficult
for MFIs to choose their customers based on selective predetermined criteria such as
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gender of the borrowers, because proximity to customers can influence the performance
of MFIs. Moreover, in developing countries females look after domestic matters and
children and hence find it difficult to travel long distances to visit MFIs. This is also
aggravated by the poor transport and security in developing countries. Therefore, the
next hypotheses to be tested empirically in this study can be stated as:
H3a. There is a positive relationship between the emphasis placed on targeting
female borrowers and the performance of an MFI.
H3b. There is a positive relationship between the population density in the area in
which the MFI operates and the emphasis placed on targeting female
borrowers.

3. Method
3.1 The model
Based on the hypotheses developed above, the model to be tested in this study is shown
in Figure 1.
As shown in Figure 1, the operational efficiency, emphasis on female borrowers
(gender) and population density may all have a direct impact on the performance
(H1, H2a, H3a). Population density may also have an indirect effect on performance
through the operational efficiency and gender (H2b, H3b).

Operational
Efficiency
H2b (LEFFICIENCY) H1

Population
Density H2a Performance
(LDENSITY)

H3b
H3a
Emphasis
Figure 1. on female
Model based on borrowers
the hypotheses (Gender)
 Using the standard regression notation the above model can be specified as: Performance of
Operational Efficiency ¼ b10 þ b11 ðPopulation DensityÞ þ 11
microfinancing
institutions
Emphasis on female borrowers ¼ b20 þ b21 ðPopulation DensityÞ þ 12

Performance ¼ b30 þ b31 ðOperational EfficiencyÞ þ b32 ðPopulation DensityÞ 321

þ b33 ðEmphasis on female borrowersÞ þ 13

where:
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bij Regression coefficients (i ¼ 1,2,3 and j ¼ 0,1,2,3).

1i Standard error terms (i ¼ 1,2,3).

3.2 Testing the mediating effects

The mediating effects shown in the model shown in Figure 1 were tested by using the
method developed by Baron and Kenny (1986) which is described below (Figure 2).
Baron and Kenny (1986) method for assessing mediating effects. In the first step a
standard regression is run with Y as the dependent variable and X as the independent
variable. A statistically significant regression coefficient for X indicates that
X influences Y. Next a similar regression is run with M as the dependent variable and
X as the independent variable. A statistically significant regression coefficient once
again indicates that X influences M. (If this is not the case then X has no impact on
M and it can be concluded that M is not a mediating variable.) Finally a regression is
run with both X and M as independent variables and Y as the dependent variable:
It is not sufficient just to correlate the mediator (M) with the outcome (Y); the mediator and the
outcome may be correlated because they are both caused by the initial variable X. Thus, the
initial variable must be controlled in establishing the effect of the mediator on the outcome
(Baron and Kenny, 1986).
If the regression coefficient of X is zero when controlled for M, then M has complete
mediation and X has no direct effect on Y. If the coefficient of X is statistically
significant but less compared to the coefficient of X when run alone with Y as in the
first step, then partial mediation exists.

M
Mediating
Variable

X Y
Independent Dependent
Figure 2.
Variable Variable Effect of mediating
variable
 PAR Using the above explanation offered by Baron and Kenny (1986), the two mediating
24,3 relationships shown in Figure 1 were analysed in this study (for similar analysis see
Banker et al. (2008) and Mia and Winata (2008)). The results are given in Section 4.

3.3 Operationalisation and measurement of variables

The independent and dependent variables shown in Figure 1 have to be operationalised
322 into measureable variables prior to empirically testing the hypotheses and the model.
The variables relating to each of the hypotheses at the conceptual level are listed below.
Dependent variable. “Performance” which consists of four dimensions
(Nanayakkara, 2012):
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(1) increasing the outreach;

(2) depth of outreach;
(3) sustainability; and
(4) portfolio at risk.

Independent (explanatory) variables

.
population density;
.
operational efficiency of the internal processes; and
. emphasis on targeting female borrowers.

It is important to define the time frame over which these variables are measured to test
the hypotheses. In this study, the performance and the factors assumed to have an
impact on the performance are analysed over a one-year period. A one-year time frame
was considered in this study due to a number of reasons. First most organisations, as
well as the MFIs, adopt one year as the standard financial reporting period and
generally report their performance on an annual basis. Second adopting a period of
more than one year would have reduced the number of MFIs that were selected for the
sample from the data base due to non-availability of data for longer periods. However,
the same variables can be used for any other time frames if desired. The definitions
given by the CGAP in the document “Microfinance Consensus Guidelines” (CGAP,
2003) has been used as far as possible below because they are well accepted in the
microfinancing industry.
Performance. The performance (P *) is operationalised and measured by an indicator
comprising the four dimensions as follows (Nanayakkara, 2012):

P* ¼ C* þ S* þ ½1 2 D*
þ ½1 2 PAR*

where:
P* Performance of the MFI during the period under study.
C* Increase in outreach.
S* Sustainability.
D* Depth of outreach.
PAR * Portfolio at risk greater than 30 days.
 Operational efficiency. A number of indicators are recommended by the CGAP to Performance of
measure the efficiency/productivity of the MFIs in relation to their internal business microfinancing
processes (CGAP, 2003). The most common measure is the “operating expense ratio”
which is defined as the total operating expense over the average gross loan portfolio. institutions
However, the CGAP warns that care must be taken when using this ratio to compare
MFIs:
This ratio is the most commonly used efficiency indicator for MFIs. It includes all 323
administrative and personnel expenses. Care must be taken when using this ratio to compare
MFIs. MFIs that provide smaller loans will compare unfavorably to others, even though they
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may be serving their target market efficiently. Likewise, MFIs that offer savings and other
services will also compare unfavorably to those that do not offer these services (CGAP, 2003).
Because of the above reason, this study does not use the operating expense ratio to
measure the efficiency of the internal business processes. As mentioned before,
microfinancing is not a machine-intensive, high-tech operation. The lending operations in
MFIs are labour intensive (Battilana and Dorado, 2010). It is most common in developing
countries, and the efficiency of the internal processes can be reasonably assumed to be
predominantly affected by the productivity of the employees who assess the loan
applications and then disburse and collect the repayments of the loans on a regular basis.
Therefore, in this study, productivity of the employees is used as a proxy for measuring
the operational efficiency of the internal business processes. The CGAP recommends that
this be measured by the ratio of active clients to the number of employees:
The MFI may wish to measure the overall productivity of the MFI personnel in terms of
managing clients, including borrowers, savers and other clients. This ratio is the most useful
ratio for comparing MFIs (CGAP, 2003).
This ratio also does not suffer from the difference in exchange rate values in different
countries.
Gender – emphasis on targeting female borrowers. The emphasis placed by each
MFI on targeting females is operationalised and measured by the number of female
borrowers as a ratio of the total borrowers. A higher ratio in this indicator reflects a
higher emphasis by the MFI in targeting female borrowers.
Population density. The population density is measured as the number of
inhabitants per square kilometre. The figure is computed for the year in which the
performance is assessed.

3.4 Sample and data collection

The data was collected from a sample of 234 MFIs spread across 63 countries and
listed in the database created and funded by the CGAP. Because most MFIs need
assistance from donors, at least in the early stages, they are associated with the CGAP
as it helps them to obtain funding from the major donors. Other than facilitating the
access to donor funds, registration with the CGAP and providing information to
the CGAP database also provides many other benefits for the MFIs. For example,
the CGAP provides many resources such as advisory and consultancy services in
many areas that are helpful to the MFIs.
The only criteria used for selecting these 234 MFIs was the availability of data
required for the study over two consecutive years. (Note that to compute some variables
such as increase in outreach, data relating to two years are required.) All the MFIs which
 PAR have provided the data irrespective of size, country of origin, type of ownership, etc.
24,3 were included in the sample. The number of employees range from four to 18,926.
The average size was 306 employees. The performance range from 2 4.56 to 6.8 with
an average of 2.8. A breakdown of the number of MFIs in relation to the type of
ownership as per the standard classification used by CGAP is given in Table I.
The hypotheses to be tested represent three independent variables. The
324 “rule-of-thumb” requires the sample size to be at least five times the number of
independent variables to obtain reliable statistical results in a regression analysis
(Coakes and Steed, 2000). The number of MFIs in the sample amounts to 234 which is
well above this minimum number of 15.
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Data relating to population density were extracted from the World Bank, World
Health Organisation and United Nations economic data bases. All the other data
relating to the MFIs were collected from the CGAP funded information data base. The
characteristics and the descriptive statistics of the collected data are discussed in detail
under Section 4.1 in the next section.

4. Data analysis and results

4.1 Descriptive statistics
First, a univariate analysis on all the variables was conducted by screening the data to
assess the distributions, outliers, missing values and any potential data entry errors.
This process was considered an important aspect prior to carrying out the main data
analysis since any skewed distributions and outliers can significantly impact the
results of the regression analysis (Tabachnick and Fidell, 2001). Two outliers were
found and discarded from the data set. The distributions relating to population density
and efficiency showed positive skewness. Therefore, log transformations were carried
out to minimise this. (Variables with log transformations are shown with a “L” in
front.) This was not required in the case of the other two variables; performance and
gender. The descriptive statistics relating to all the variables are given in Table II.
The correlations among the variables are shown in Table III.

4.2 Analysis of the relationship between population density, operational efficiency and
performance
The hypotheses to be tested in this study are illustrated by the model shown in
Figure 1. For the purpose of the analysis, this model can be considered as consisting of
two relationships which were analysed using the Baron and Kenny (1986) method as
explained below. The Baron and Kenny (1986) method is based on the significance of
the regression coefficients (t- or p-values) and not on the coefficient of determination
(R 2). Therefore, the analysis given below is based on the t- or p-values.

Type of MFI Number Percentage

NGO 100 42.6

Bank 22 9.4
Corporative/credit union 37 15.7
Table I. Non bank financial institution 65 28.1
Different types of MFIs Others 10 4.3
included in the sample Total 234 100
 According to the model shown in Figure 1, the relationships between the above three Performance of
variables can be shown as in Figure 3 and they were tested using the Baron and Kenny microfinancing
(1986) method.
The analysis showed that population density has a significant direct impact on both institutions
operational efficiency and performance when tested individually ( p , 0.05). However,
the impact of population density on performance is not significant when controlled for
the effect of operational efficiency. Therefore, operational efficiency acts as a mediating 325
variable (complete mediation) in the relationship between population density and
performance. The results are summarised and shown in Table IV.
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4.3 Relationship between population density, gender and performance

According to the model shown in Figure 1, the relationships between the above three
variables can be as shown as in Figure 4.
Once again when tested using the Baron and Kenny (1986) method, the results show
that the impact of population density on performance, when controlled for gender,

Variable Minimum Maximum Mean Median SD

LDensity 0.69 6.87 4.00 4.07 1.10

LEfficiency 2.20 6.52 4.72 4.79 0.72
Gender 0.00 1.00 0.64 0.63 0.26
Performance 24.58 6.8 2.80 2.95 1.03
Increase in outreach 20.74 4.26 0.31 0.21 0.47
Depth of outreach 0.03 7.38 0.68 0.60 0.86
Sustainability 0.53 2.88 1.22 1.17 0.35 Table II.
Portfolio at risk 0.00 0.60 0.04 0.03 0.06 Descriptive statistics

Population density Operational efficiency Gender Performance

Population density 1.0

Operational efficiency 0.109 * 1.0
Gender 0.202 * * 0.203 1.0
Performance 0.109 * 0.437 * * * 0.332 * * * 1.00
Table III.
Note: Significant at: *p , 0.05, * *p , 0.01 and * * *p , 0.001 (one-tailed) Correlation matrix

Operational
Efficiency
(LEFFICIENCY)

Figure 3.
Hypothesised relationship
Population
between population
Density density, operational
Performance
(LDENSITY) efficiency and
performance
 PAR is not significant. Therefore, gender acts as a mediating variable in the relationship
between population density and performance. The results are summarised in Table V.
24,3 Based on the above findings, the model shown in Figure 1 can be concluded to be as
shown in Figure 5.

4.4 Relationship between population density, gender, operational efficiency and the four
326 dimensions of performance
The above analysis was extended to assess whether the hypotheses are supported
across all the four dimensions of performance. Using population density, operational
efficiency and gender as independent variables five regressions were run on
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performance (P *), increase in outreach (C *), depth of outreach (D *), portfolio at risk
(PAR *) and sustainability (S *) as dependent variables. These models can be specified
as follows:
P* ¼ b10 þ b11 ðLEfficiencyÞ þ b12 ðLDensityÞ þ b13 ðGenderÞ þ 11
C* ¼ b20 þ b21 ðLEfficiencyÞ þ b22 ðLDensityÞ þ b23 ðGenderÞ þ 12
S* ¼ b30 þ b31 ðLEfficiencyÞ þ b32 ðLDensityÞ þ b33 ðGenderÞ þ 13

Total effect Direct effect Indirect Spurious

Linkage (rij) ¼ ( pij) þ effect þ effect

Density 2 Operational
efficiency 0.109 0.109
Table IV. Operational efficiency/
Decomposition of performance 0.437 0.431 0.006
effects in model Density/performance 0.109 0.047 0.062

Emphasis
on female
borrowers
(Gender)

Figure 4.
Hypothesised relationship
Population
between population Density Performance
density, gender and (LDENSITY)
performance

Total effect Direct effect

Linkage (rij) ¼ ( pij) þ Indirect effect þ Spurious effect

Table V. Density 2 Gender 0.202 0.202

Decomposition of Gender 2 Performance 0.332 0.323 0.009
effects in model Density 2 Performance 0.109 0.065 0.044
 Performance of
Operational
Efficiency
microfinancing
r12 = 0.109*
(LEFFICIENCY)
r24 = 0.431** institutions

Population
327
Density Performance
(LDENSITY)
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r13 = 0.202**
r34 = 0.323**
Emphasis on
female
borrowers
(Gender) Figure 5.
Path analysis relating to
performance
Note: *p < 0.05 and **p < 0.001

D* ¼ b40 þ b41 ðLEfficiencyÞ þ b42 ðLDensityÞ þ b43 ðGenderÞ þ 14

PAR* ¼ b50 þ b51 ðLEfficiencyÞ þ b52 ðLDensityÞ þ b53 ðGenderÞ þ 15
where:
bij Regression coefficients (i ¼ 1,2, . . . ,5 and j ¼ 0,1,2,3).
1i Standard error terms (i ¼ 1,2,. . .5).
The results of these regressions are summarised in Table VI.
The results shown in Table VI indicate that the three independent variables have a
significant impact on depth of outreach (D *) and portfolio at risk (PAR *). It must be
noted that lower portfolio at risk and lower depth of outreach indicate better
performance. Hence negative coefficients indicate a positive impact by the
corresponding independent variables. Using the Baron and Kenny (1986) method
and considering the impact of population density on both the operational efficiency and
gender which is already established, the significant relationships of the independent
variables on the performance dimensions of depth of outreach (D *) and portfolio at risk
(PAR *) can be concluded to be as shown in Figures 6 and 7.

Performance Increase in outreach Sustainability Depth of outreach Portfolio at risk

(P *) (C *) (S *) (D *) (PAR *)

LDensity 0.015 0.017 0.014 20.057 0.234 Table VI.

LEfficiency 0.343 * * 20.053 0.043 20.366 * * 20.118 * Standardised regression
Gender 0.259 * * 20.048 20.020 20.317 * * 20.059 coefficients on each of the
four dimensions
Note: Significant at: *p , 0.05 and * *p , 0.001 of performance
 PAR
Operational
24,3 Efficiency
(LEFFICIENCY)
r12 = 0.109* r23 = –0.118*

328
Population
Figure 6. Density
Portfolio at
Risk
Path analysis relating (LDENSITY)
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to portfolio at risk

Operational
Efficiency
(LEFFICIENCY) r24 = –0.336**
r12 = 0.109*

Population
Depth of
Density
Outreach
(LDENSITY)

r13 = 0.202**
r34 = –0.317**
Emphasis on
Figure 7. female
Path analysis relating to borrowers
depth of outreach (Gender)

4.5 Regression diagnostics

Regression diagnostics were carried out to check for multicollinearity between the
independent variables and normality in the residuals. Multicollinearity was tested by
checking the variance inflation factors (VIF) and tolerances. No significant effect of
multicollinearity was found between the independent variables.

5. Discussion and conclusion

5.1 Summary of findings
This section looks at the conclusions that can be drawn in relation to each hypothesis
based on the results of the regression models analysed in the previous sections. The
output of the regression that includes only the population density as the independent
variable indicates that this variable has a statistically significant impact
on performance. However, when the other variables (gender, operational efficiency) are
included into the model, the impact is not statistically significant. Therefore, the
population density does not have a direct impact on performance and H2a is not
supported. This result supports the findings of the study by Almus and Nerlinger (1999)
which reports that there is only a minor effect of population density on the growth
 of manufacturing companies in Germany. That study also controlled for the effect Performance of
of other variables in the regression model. microfinancing
However, the population density has a direct effect on the operational efficiency and
emphasis on female borrowers. Therefore, H2b and H3b are supported. Both factors institutions
have statistically significant direct impacts on performance even when controlled for
the population density. Therefore, H1 and H3a are also supported.
The fact that the population density affects the operational efficiency supports the 329
findings of Ladd (1992) who concluded that the cost of providing public services by the
local governments decreases with an increase in the population density.
The internal operations of MFIs in developing countries are more labour intensive
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(Battilana and Dorado, 2010). Hence for operational efficiency (measured as the ratio of
borrowers per staff member) to have a positive effect on performance was expected.
The findings of this study strongly support the view that emphasis on female
borrowers improves the performance of MFIs. The regression coefficient of “Gender” is
shown to be highly significant with a p-value of less than 0.01. This concurs with the
findings of previous studies relating to this area which found that:
.
Women spend more of their share of income on household expenditure and hence
benefit more people having a multiplier effect (Chant, 1997; Deshpanda, 2001;
Khandker, 2003).
.
Women are more careful with the use of money they borrow than men
(Khandker et al., 1995; Todd, 1996).

This is also supported by the fact that the Grameen Bank increased its percentage of
female borrowers from 44 per cent in 1983 to over 95 per cent in 2001 (Jolis and Yunus,
2001). Therefore, the H3a is strongly supported in this study.
In conclusion the above findings reveal that population density does not have a
direct effect on performance. However, it has a direct impact on operational efficiency
and targeting of female borrowers. Both these factors have statistically significant
direct effect on the performance of MFIs. Therefore, the impact of population density
on performance is mediated by the gender of the borrowers and operational efficiency
as shown in Figure 5.
The analysis was further extended to assess which specific aspects or dimensions of
performance are influenced by the three independent variables. The results showed that
the independent variables contribute to improving the “depth of outreach” (poverty
level) and “portfolio at risk” dimensions of performance. The depth of outreach is directly
affected by the operational efficiency and gender of the borrowers. This also means that
population density has an indirect effect on depth of outreach through operational
efficiency and gender of the borrowers as shown in Figure 7. The impact of gender on the
depth of outreach (poverty level) indicates that women are poorer than men. This
supports a number of past studies in the literature (UNDP, 1996; Baden and Milward,
1995). Therefore, when MFIs target women they are likely to be helping poorer people
that enhance their performance in achieving their main objective of alleviating poverty.
The finding that operational efficiency has a positive impact on depth of outreach is an
interesting one. It may be due to the fact that efficient MFIs have more resources to
reach out to the poorer customers. Cull et al. (2007) has found that there is a trade-off
between profitability and serving the poorest and that benefits of cost cutting diminish
 PAR when serving better off customers. However, further research is needed to investigate
24,3 this area before coming to any conclusions.
The population density affects the portfolio at risk through operational efficiency as
shown in Figure 6. However, the effect of gender of the borrowers on portfolio at risk is
not significant. This challenges the previous findings that females have a better
repayment record than males (Jones et al., 2003). This study finds that gender has no
330 difference in loan repayments.

5.2 Policy implications

The findings of this study have a number of practical and policy implications to the
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management of performance of MFIs. It shows that population density helps to

improve the performance of MFIs. Therefore, government authorities and donors can
adopt a policy of setting up or funding MFIs in areas of higher population density. This
is also evident from the fact that large numbers of MFIs are operating in countries like
Bangladesh, Indonesia and India where the population density is very high.
The results show that focusing on female borrowers is another key aspect of the
performance management of MFIs. It helps the MFIs to target very poor borrowers.
The study also shows that the number of borrowers per employee is a key performance
indicator in the performance management of MFIs. The regulatory authorities of MFIs
can incorporate borrowers per staff member and percentage of female borrowers as
mandatory reporting requirements for MFIs in their policy frame work.

5.3 Limitations and future research

The finding of our study, that emphasis on female borrowers improves the performance
of MFIs, identifies an important area of future research in microfinancing. Following the
results, we argue that future research identifying relevant factors and empirically
investigating potential influence of these factors on female borrowers’ ability to better
utilise their loan would be useful. One such factor we believe is the female borrowers’
education. An ability to read and write may help the borrowers in effectively managing
their business activities leading to the borrowes’ business success which, ultimately, will
promote performance of the relevant MFI. Studies reporting positive results (if any) on
the relationship between the borrowers’ education level and their business success may
encourage MFIs to undertake initiatives of child, and adult female education in remote
areas of the country or countries of operations. Anecdotal evidence suggests that a high
percentage of the female borrowers is illiterate. The other factors that also might be
relevant for future study are the female borrowers’ marital status and their family size.
We also view that adequately developed and easily accessible transport facilities in
rural areas of the countries of operation will help an MFI to serve more borrowers,
thereby improve its performance with respect to “increasing in outreach” as defined
earlier in the paper. Such facility would also assist an MFI’s borrowers to sell their
produce direct to consumers in market-place for a price better than what they usually get
from middlemen. In turn, the borrowers will be capable of repaying their loans on time
resulting in improving the MFI’s “portfolio at risk” and sustainability. In other words,
future research testing our model of the study incorporating impact of “availability of
transport facilities” to an MFI’s borrowers would be a useful extension of the study.
Further research opportunities arise from the limitations of this study. First
limitation relates to the effect of time lag in relation to the impact of one variable
 on another. This study only considered the data relating to a period of one year. Performance of
However, there may be situations where the variation in one variable could take more microfinancing
than one year to make an impact on another variable. For example, the operational
efficiency in the current year could have an impact on the sustainability or outreach institutions
dimensions of performance after two or three years rather than in the short period of
one year. If any, these relationships do not emerge in this study. Future research can be
undertaken to explore these relationships, by collecting data over a number of years to 331
conduct longitudinal studies.
In addition to the independent variables that were considered in this study, there
could be other factors that might have a significant impact on performance, but were
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not analysed in this study. For example, the level of the infrastructure facilities
available and their affordability to the customers of the MFIs could have an impact on
the performance of the MFIs because access to the microfinance services depend heavily
on this. The performance of MFIs are also affected by a number of macroeconomic
factors. For example, Ahlin et al. (2010) found that operational self sufficiency improves
with economic growth and that higher job participation rates slows down the increase in
outreach. The levels of regulation and political influence are also two other factors that
might have an impact on the performance of the MFIs. Armendariz and Morduch (2004)
argues that level of regulation in respective countries can affect the performance of
MFIs. Allowing for flexibility of repayments is another factor (Field and Pande, 2008).
These variables were not controlled for in this study. Future research may be
undertaken by extending our model with these variables. However, it may be noted that
instruments to accurately measure some of these variables may be another challenge
that will have to be met in future research.

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Corresponding author
Gemunu Nanayakkara can be contacted at: g.nanayakkara@griffith.edu.au

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