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The Impact of Profitability of Micro Finance (Micro Credit) on the Banking Sector of Pakistan

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  • Kumar, Kunal

Abstract

Current studies have shown that the microfinance industry is developing while enduring a change from the donor-driven NGO background towards a greater degree of capital market involvement. This change is due to many details, e.g. that offerings are getting harder to find, and businesses have started to see possibilities for profit in this industry. The main intention of this research is to find the aspects that regulate profitability, and to find out whether the high interest rates go hand in hand with high returns for the microfinance institutions as demanded by some detractors. To accomplish the goals, previous literature, studies, and theory from the commercial banking industry have been framed into a background study. Classifying certain indicator groups with economic implication: outreach financing structure, expenses, revenue, efficiency, quality of portfolio, and the peer group comparisons of deposit taking, age, legal status, and profit status to be factors of profitability and thereby to be examined further in an empirical analysis. The data used in the empirical analysis is originated though MIX market, and a sample of 8 MFI’s was managed and examined to test profitability model with return on assets as the dependable variable. I found that large adjustments in the microfinance industry became a problem when trying to evaluate models to explain patterns, since the Linear, regression is much influenced by outliers. Still, certain statistical trends were found which also bring into line with theory or previous studies. Factors that statistically influenced profitability are the operating expense over loan portfolio, and number of active borrowers which had a positive influence. On the other side there is capital asset ratio, with a negative influence over Return on Asset. The unpredicted signs of the variables could be explained by other influencing variables or other relationships than linear. It is, therefore, clear that there is still much diversity in this industry, and no clear set of best practices for becoming profitable has been defined. However, as the industry is young and still changing, this is not a surprising result.

Suggested Citation

  • Kumar, Kunal, 2015. "The Impact of Profitability of Micro Finance (Micro Credit) on the Banking Sector of Pakistan," MPRA Paper 116428, University Library of Munich, Germany, revised 28 Nov 2021.
    • Handle: RePEc:pra:mprapa:116428
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    References listed on IDEAS

    as
    1. Rizvi, Aoun & Ali, Syed Babar, 2011. "Risk Taking Behavior of Investors of Pakistan," MPRA Paper 64342, University Library of Munich, Germany.
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    6. Hussain, Zahir & Ali, Syed Babar, 2009. "Implementation of Operational Risk Regime: A Case of Commercial Banks in Pakistan," MPRA Paper 64469, University Library of Munich, Germany.
    7. Ayi Gavriel Ayayi & Maty Sene, 2010. "What drives microfinance institution's financial sustainability," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(1), pages 303-324, September.
    8. Syed Babar Ali & Manzoor A.Khalidi, 2020. "Valuation of Equity Securities, Private Firms, and Startups," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 16(1), pages 125-140.
    9. B Gutiérrez-Nieto & C Serrano-Cinca & C Mar Molinero, 2009. "Social efficiency in microfinance institutions," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(1), pages 104-119, January.
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    More about this item

    Keywords

    Micro finance; micro credit;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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