Asia Paciﬁc Management Review 24 (2019) 1e9 Contents lists available at ScienceDirect H O S T E D BY Asia Paciﬁc Management Review journal homepage: www.elsevier.com/locate/apmrv Financial sustainability and outreach performance of saving and credit cooperatives: The case of Eastern Ethiopia Melesse Semaw Henock Haramaya University, Department of Management, Ethiopia a r t i c l e i n f o a b s t r a c t Article history: Received 23 November 2017 Received in revised form 12 June 2018 Accepted 22 August 2018 Available online 15 October 2018 Financial cooperatives and microﬁnance institutions are typical models that disprove the traditional assumption that the poor are neither creditworthy nor able to save. The principal objective of Savings and Credit Cooperative Societies are accumulating savings and creating a source of credit to members at a fair and reasonable interest rate. SACCOs need to be ﬁnancially sustainable and accessible in order to provide sustainable ﬁnancial products and effectively serving the poor. The main objective of this study is to examine the sustainability and outreach performance of SACCOs in Eastern Ethiopia. The study employed both descriptive and causal research design. 46 SACCOs that have been operating at least for three years with audited ﬁnancial reports were selected for the study. The study used secondary data sources mainly audited ﬁnancial statement of the society for the year 2016. The study found that SACCOs in Eastern Ethiopia are ﬁnancially sustainable and their outreach performance is at moderate level. Return on asset, operational efﬁciency, debt equity ratio, donation, and deposit mobilization are statistically signiﬁcant predictor variables in determining the ﬁnancial self-sufﬁciency of SACCOs. Similarly, ﬁnancial self-sufﬁciency, size, debt equity ratio and donation are statistically signiﬁcant predictor variables in determining the outreach performance of SACCOs. © 2018 College of Management, National Cheng Kung University. Production and hosting by Elsevier Taiwan LLC. All rights reserved. Keywords: Deposit mobilization Financial sustainability Operational efﬁciency Outreach SACCO 1. Introduction Finance is the most important means for socio-economic development effort and alleviation of poverty in any country. The majority of the economically active population is excluded from mainstream ﬁnancial services in most developing countries (Marwa, 2015). According to Mori, Richard, Isaack, and Olomi (2009) the most important reasons for such exclusion by ﬁnancial institution is the presence of high transaction cost per borrower, lack of sufﬁcient collateral to secure loan, information opacity, higher risk of default and low rate cost of recovery. As a result, the mainstream ﬁnancial institutions almost have fail in ﬁnancing and providing services tailored to the poor and microenterprises in most developing nations. Due to this market failure, Micro Finance Institutions (MFIs) have emerged to bridge the gap as alternative remedy. Financial institutions have been expanded and the services have been E-mail address: [email protected] Peer review under responsibility of College of Management, National Cheng Kung University. diversiﬁed recently. They exercise relevant social work since they ﬁnancially support the poorest people, who, by creating a microenterprise, can escape the socioeconomic situation of exclusion in which they ﬁnd themselves (Blanco, Pino-Mejías, Lara, & Rayo, 2013). Many ﬁnancial institutions such as Saving and Credit Cooperatives (SACCOs) are providing ﬁnancial products tailored for the poor. Microﬁnance has been centred on providing loans to ﬁnancially excluded people in the past, while savings have been neglected. Financial cooperatives and specialized microﬁnance institutions are typical models that disprove the traditional assumption that the poor are neither creditworthy nor able to save. They largely demonstrate that the poor can be bankable the poor can borrow, pay substantial rates of interest, and save continuously (Abate, Borzaga, & Getnet, 2013). These institutions target the poor through innovative approaches which include group lending, progressive lending, regular repayment schedules, and collateral substitutes (Thapa, 2006). SACCO is one type of cooperative society with the principal objective of accumulating saving and creates a source of credit to its members at a fair and reasonable rate of interest. Financial https://doi.org/10.1016/j.apmrv.2018.08.001 1029-3132/© 2018 College of Management, National Cheng Kung University. Production and hosting by Elsevier Taiwan LLC. All rights reserved. 2 M. Semaw Henock / Asia Paciﬁc Management Review 24 (2019) 1e9 cooperatives meet a signiﬁcant gap in the market with a sustainable institutional and business model. This is based on a memberowned service organization reaching an unserved but bankable clientele with products determined by demand, and with prudent ﬁnancial management based on members' resources and a “savings ﬁrst” approach to credit discipline (World Bank, 2007). Unlike bank clients, members in cooperatives act both as borrowers and lenders, providing both the demand for and supply of loanable funds. SACCOs are owned and operated by members and for its members (Frank, Mbabazize, & Shukla, 2015). Members are required to save regularly and then they are encouraged to borrow for productive purposes out of the accumulated savings. Since both borrowers and depositors are members of their own SACCOs they are actively involved in creating and managing the demand and supply of loans. Additionally, members can impose wide variety of economic and social sanctions if borrowers fail. As Turtiainen (2008) stated that the majority of households in most developing countries have only limited access to ﬁnancial services, except from such non-institutional sources as traders, money lenders, voluntary saving clubs, friends, and so on. In Ethiopia, the key providers of formal ﬁnancial services to the unbanked section of the society are SACCOs and MFIs. This is because of the market failure by the mainstream ﬁnancial institutions. As proponents argue that microcredit mitigates market failures, spurs micro-enterprise growth, and boosts borrowers' well-being (Karlan & Zinman, 2011). Thus, SACCOs are trying to satisfy the growing demand for micro saving and credit services. Currently, there are 11, 850 primary level saving and credit cooperatives and 81 credit unions (FCA, 2014). Despite SACCOs surged in number have faced many challenges and they also had registered remarkable achievement recently. This quantitative increment in number, membership, savings and loan disbursement calls for rigorous investigation of their sustainability and outreach performance. SACCOs should be ﬁnancially sustainable and accessible in order to provide sustainable ﬁnancial products and contribute for poverty reduction. SACCOs are mushrooming in number both in rural and urban areas in Ethiopia. This quantitative growth is induced by relentless effort of the government and NGOs. Cooperatives by nature must be initiated voluntarily from people who need to exploit the beneﬁts of cooperatives. Likewise, SACCOs must be formed by members who are willing and able to meet the responsibility of membership. The success of SACCOs should be measured in terms of sustainability and outreach performance. Almost all are organized and promoted by the government and NGOs with little regard for feasibility and sustainability of cooperatives. As a result, it could have negative impact in the performance of cooperatives at large. Thus, it is imperative to investigate the sustainability and outreach performance of SACCOs. As Filene (2011) deﬁned sustainability, it is the ability of an entity to continue a deﬁned behaviour indeﬁnitely. It is one among the proﬁtability indicators used to measure the ﬁnancial performance of microﬁnance institutions. Financial sustainability means the smooth operation of ﬁnancial institutions with the necessary proﬁtability, having adequate liquidity to overcome any challenges of bankruptcy while outreach measures the scale and depth of penetration of services (extent of services and number of clients in certain categories or areas) by providers of ﬁnancial services to a targeted clientele. According to Meyer (2002) the two kinds of sustainability (operational efﬁciency and ﬁnancial self-sustainability) can be observed in assessing MFIs performances. Operational self-efﬁciency requires SACCOs to meet all administrative costs and loan losses from operating income which is measured by dividing operating income by operating expenses. In short, ﬁnancial self-sufﬁciency (FSS) is a ratio which measures the sustainability of a SACCO in terms of the ﬁnancial capacity. Outreach means the number of clients served by an entity. It can be measured using average loan size and percentage of women borrowers that measures depth of outreach, and average length of client relationships and time between instalment payments as a measure of length and scope of outreach. The contemporary debate on ﬁnancial sustainability in microﬁnance institutions is dominated by the welfare and institutional schools of thought on whether it should be one of performance indicator or not (Marwa & Aziakpono, 2015). Based on welfare school of thought, the ﬁnancial sustainability is not treated as one major goal rather they do advocate that depth of outreach is the key performance indicator since MFIs are established to reduce poverty. However, the critics of this approach argue that donor funds are volatile and unsustainable and that ignoring ﬁnancial sustainability may erode the quality of the revolving fund and jeopardize the future availability of the service. Therefore, ﬁnancial sustainability is signiﬁcant performance indicator of those institutions. The growing commercialization and competition in microﬁnance drives the focus of micro lenders from outreach to achieving ﬁnancial sustainability in serving the poor (Abate et al., 2013). Thus, it has become imperative and of great policy interest to investigate the both the sustainability and outreach performance of SACCOs. Moreover, today's ﬁnancial systems approach to both in urban and rural ﬁnance recognizes that sustainable institutions by offering a menu of ﬁnancial services priced to cover costs reach the greatest number of producers and enterprises. In this regard, Marwa (2015) measured the sustainability of ﬁnancial cooperatives in Tanzania in terms of return on asset, operational efﬁciency, loan size, deposit mobilization and cost per loan portfolio and concluded that ﬁnancial cooperatives are operating at satisfactory level. Additionally, Kereta (2007) used dependency ratio and non-performing loan to loan outstanding ratio as a proxy to study ﬁnancial sustainability MFIs in Ethiopia. Similarly, Abate et al. (2013) have indicated in their study that operational efﬁciency of the ﬁrm, return on asset, loan size, gross loan portfolio, yield and donation over loan has signiﬁcant effect on sustainability of microﬁnance while age of the institution did not found to be signiﬁcant. On the other hand, the outreach performance of micro ﬁnance has been measured using average loan size, proportion of women borrowers, total active borrowers and length of client relationship. To this effect, some studies have shown that MFIs in Namibia are almost not sustainable. The study on Nepal micro ﬁnance concluded that they are not sustainable. Even worth that, Thapa (2006) concluded that microﬁnance in all the developing regions except Africa were sustainable. However, microﬁnance is found to be operationally and ﬁnancially sustainable in Tanzania (Marwa, 2015; Marwa & Aziakpono, 2015; Nyamsogoro, 2010). Similarly, ﬁnancial cooperatives in Swaziland proved a high level of outreach, failed in ﬁnancial sustainability (Zikalala, 2016). According to Turtiainen (2008) SACCOs in Kenya, Burkina Faso, and Brazil registered a larger outreach and sustainability performance. Likewise, sustainability and outreach performance of SACCOs are remarkable in India, Senegal and Mali (World Bank, 2007). In case of Ethiopia, microﬁnance is found to be operationally sustainable and have high dependency rate (Abate et al., 2013; Kereta, 2007). Although SACCOs are recently emerged and highly promoted business enterprises by development institutions and the government; there is limited study on ﬁnancial cooperatives in Ethiopia. Thus, the main purpose of the study is to the measure sustainability and outreach performance of SACCOs in Eastern part of Ethiopia. M. Semaw Henock / Asia Paciﬁc Management Review 24 (2019) 1e9 2. Saving & credit cooperatives (SACCOs) SACCOs are village level cooperative which directly deals with the local mass. They provide short-term credit and inculcate saving habit on members. They are ﬁnancial organization owned and operated by and for its members according to democratic principles for the purpose of encouraging savings and using pooled funds to extend loans to members at reasonable rates of interest and providing ﬁnancial services to enable members improves their economic and social wellbeing (Frank et al., 2015). According to Zikalala (2016) ﬁnancial cooperatives are viewed as a vehicle to cultivate a culture of saving among low income earners. In short, SACCOs are memberbased institutions, that intermediate savings into loans. They are usually rather small, independent ﬁnancial institutions. This enables the rural and urban poor population to deposit savings as well as to take loans (Distler & Schmidt, 2011). Small loans are believed to bring signiﬁcant improvement in the lives of the active poor by increasing their productive capacity. Credit enables the poor to boost their businesses, agriculture production and able to meet the household daily needs (Nnyanja, 2017). Membership is voluntary and open to all people who are willing to take the responsibility of membership such as payment of registration fee and buying minimum number of shares and active economic participation. Only members can use the services of SACCOs. Members control their cooperatives by attending in annual general meetings and electing a board of directors. The board of directors hires a manager who will control the day to day operations of the society. The principles of cooperation and Ethiopian Cooperative Act No. 985/2016 prohibit SACCOs to take savings or lent out money to the public. It enables members to save their money on a regular basis, or according to their needs. Loans are granted to members out of the members' accumulated savings. Saving is the major source of ﬁnance for SACCOs. In addition, SACCOs are supported by NGOs in the form of grant in some selected regions like Eastern Ethiopia. Unlike other ﬁnancial institutions, the SACCO sector in Ethiopia is regulated by both the National Bank of Ethiopia and the Federal Cooperative Agency. Research questions This study provides answer for the following questions. 1. What are the major determinant factors that affect the performance of ﬁnancial cooperatives? 2. Does cooperative model of ﬁnancing the poor is sustainable? 3. How deep the ﬁnancial service of cooperatives is accessible to the poor? 3 operating in the region. In the study area, there are 395 SACCOs operating 19 districts. Most of those SACCOs are organized very recently and dormant. All SACCOs are similar in size and at primary level. Majority of them are not audited and running informally without appropriate account keeping system. Due to limited capacity of the supervisory authority, even those that are following proper accounting system are not audited every year. However, 46 SACCOs were audited in the year 2016 than any other years. In this regard, the SACCOs included in this particular study were those operating at least for more than three years with audited ﬁnancial statement. Accordingly, 46 SACCOs satisﬁed these criteria. After dropping institutions that are not audited, 46 SACCOs were targeted for enquiry. Thus, this study used a purposive sampling technique. Secondary data was collected from membership register ﬁle, annual audit report of the society for the year 2016 using a wellstructured questionnaire from auditors and inspection experts of Dire Dawa City Administration and East Hararghe Zone Cooperatives Promotion Ofﬁces through document analysis which are the regulatory body of cooperatives in the area. Since there is no regular audit, most SACCOs are audited once in three to four years. As a result, the audit report of the year 2016 is a consolidated ﬁnancial performance measure, not a single year performance indicator. 3.2. Method of data analysis Data gathered through questionnaires has been analysed with the aid of Stata version thirteen. Quantitative data was analysed using descriptive statistics such as mean, and standard deviation to better understand and interpret the data. In addition, analytical statistics in terms regression analysis has been employed to measure the magnitude of relationship that exist between ﬁnancial self sufﬁciency and outreach with its determinant factors. 3.3. Dependent variables The dependent variables in this section are the sustainability of SACCOs which is measured by ﬁnancial self-sufﬁciency. The ﬁnancial self-sufﬁciency is measured as the ratio of adjusted ﬁnancial revenue to adjusted operating expenses. On the other hand, depth of outreach performance of SACCOs can be measured by a proxy variable, Average loan size which is the ratio of gross loan outstanding to total number of active borrowers. This is summarized in the following table for better clarity (Table 1). Adopted to the standard measures provided by Consultative Group to Assist the Poor (CGAP, 2003). In short, FSS ratio can be computed as follows: Adjusted Operating Income Adjusted Operating Expenses 3. Materials and methods FSS ¼ This study has attempted to measure and determine factors affecting sustainably and outreach performance of SACCOs. It has employed both descriptive and causal research design in order to address the main objectives of the study. The adjustment is crucial to show the true ﬁnancial picture of an institution on an unsubsidized basis, where funds would be raised on the commercial market, rather than through donor grants or subsidized capital. Since the inﬂation rate erodes the value of equity, ﬁnancial equity balances must be adjusted to account for inﬂation (Marwa, 2015). Therefore, adjustment on the ﬁnancial equity balance was made to account for inﬂation which was 7.3 in 2016 on the operating income side. Also members deposit and debt were adjusted to reﬂect market rates on loans (9%) and deposits (5%) on the expense side. Regression model was developed to explore the impact of operational efﬁciency, return on assets or proﬁtability, debt equity ratio, deposit mobilization, donation, yield, interest rate, size and age of SACCOs on ﬁnancial sustainability. Can SACCOs be proﬁtable 3.1. The data The study was conducted in Eastern Ethiopia particularly in the Dire Dawa City Administration and East Hararghe zone. It is densely populated and drought affected region of the country. As result, majority of the people are poor. To this effect, many SACCOs are organized with the support of NGOs and the government to break the poverty cycle. Thus, it is signiﬁcant to examine the sustainability and outreach performance of those SACCOs that are (1) 4 M. Semaw Henock / Asia Paciﬁc Management Review 24 (2019) 1e9 Table 1 Dependent variables. Variables Name Measurement (Formula) Financial Self-Sufﬁciency (FSS) Average Loan Size (ALS) Adjusted Financial revenue/(Financial expense þ Loan loss provision þ Operating expenses þ Expense adjustment) Gross Loan Outstanding/No. Active Borrowers while serving the poor? The following model will answer this question. The linear regression model that was developed looks as follows FSS ¼ b1OE þ b2ROA þ b3DEMO þ b4DONA þ b5YIELD þ b6SIZE þ b7DER þ b8IN þ b9AGE þ ε (2) Where, FSS, indicates ﬁnancial sustainability scores, b1- b9, coefﬁcient of each explanatory variables, OE ¼ Operational efﬁciency, ROA ¼ Return on Asset, DEMO ¼ Deposit mobilization, IN¼ Interest rate, Age and ε is the error term. The following regression model relates the relationship between ALS, used as proxy dependent variable to measure depth of outreach, and ﬁnancial sustainably, donation, debt equity ratio, size and age of SACCOs. The speciﬁcation of the model is as follows: ALS ¼ b1FSS þ b2DONA þ b3DER þ b4Size þ b5Age þ ε (3) ALS denotes average loan size which measures of depth of outreach of SACCOs. b1- b5, coefﬁcient of each explanatory variables. FSS is ﬁnancial self sufﬁciency that measures the ability of the institution to generate sufﬁcient revenues to cover its costs and it has been included in the model since it has implication on outreach performance too. Before analysis, presence of multi-collinearity and the problem of heteroscedasticity were checked. Accordingly, the regression model meets all the necessary assumptions. 3.4. Independent variables Depending on the research questions the independent variables used to determine the factors affecting ﬁnancial sustainability and outreach performance are age, operational efﬁciency, return on asset, deposit mobilization, donation, debt to equity ratio, and yield on gross loan portfolio and size of SACCOs. Those variables are reported signiﬁcant in the following literatures; (Abate et al., 2013; Kereta, 2007; Marwa, 2015; Marwa & Aziakpono, 2015; Nyamsogoro, 2010; Thapa, 2006; Zikalala, 2016). Age, operational efﬁciency, return on asset, deposit mobilization have a signiﬁcant positive effect on ﬁnancial sustainability because of the accrued incremental learning through trial and error in business, overhead cost, learning curve and relationship building. Likewise, donation, yield on gross loan portfolio and size of SACCOs have a positive signiﬁcant impact on ﬁnancial sustainability and outreach performance since it generates additional ﬁnancial capacity. On the other hand, debt to equity ratio negatively affects sustainability with more monetary burden whilst positively affects outreach performance of the institutions with more loanable fund. The following table presents the description of the explanatory variables used in this study of FSS and ALS (Table 2). Some of the variables are presented in their log form for regression purpose. 4. Results and discussions 4.1. Descriptive result This part will presents the result based on the descriptive statistics of both the dependent and independent variables which are described under the following sections. This is done for the years under consideration (2016). The descriptive statistics result is analysed separately for the dependent and independent variables. 4.1.1. Dependent variables FSS is a ratio of the adjusted ﬁnancial revenue to the ﬁnancial and operational expense as well as the loan loss provision and expense adjustments. The adjustment is crucial to show how the ﬁnancial picture of an institution would look like on an unsubsidized basis, where funds would be raised on the commercial market, rather than through donor grants or subsidized capital. The value of one and above for both variables (OE and FSS) indicates that the SACCOs are operationally and ﬁnancially self-sufﬁcient and the value below this point indicates they are not sustainable. The following Table 3 presents the descriptive statistics for the dependent variables: Financial self-sufﬁciency (FSS) and Average Table 3 Descriptive statistics for the dependent variables. Variable Obs ¼ 46 FSS ALS Mean Std. Dev. Min Max 1.649153 6804.348 .9358341 5901.486 .5035688 1000 4.412106 30000 Extracted from Stata result Table 2 Independent variables. Variables Name Measurement Variable Name in Regression Model Variable Description as used in regression Expected model Effect Age of SACCOs Debt to Equity Ratio Yield on Gross loan Portfolio Operational Efﬁciency Return on Asset Age of SACCOs since their establishment Adj. Total Liabilities/Adj. Total Equity Adjusted ﬁnancial revenue from Loan Portfolio/Adj. average GLP Financial revenue/Operating expense Income/Average Total Asset AGE DER YIELD No. of years of operation þ Debt as a percentage of Equity e Financial Revenue as a percentage of GLP þ OE ROA Donation Size of SACCO Deposit Mobilization Grant/capital Total Asset of SACCO Total Deposit/Gross Loan portfolio DONA SIZE DEMO Interest Rate Lending rate IN Revenue as a percentage of expense Percentage of net income to average total asset Percentage of grant to average total asset Natural Logarithm of Total Asset Percentage of deposit to gross loan portfolio Rate of interest þ þ þ þ þ þ M. Semaw Henock / Asia Paciﬁc Management Review 24 (2019) 1e9 5 Table 4 Descriptive statistics for independent variables. Variable AGE DONA OE DER SIZE ROA DEMO INTEREST YIELD % of Women Borrowers Obs ¼ 46 Mean Std. Dev. Min Max 9.195652 .3683115 6.483508 2.163788 12.55957 .1490659 .4763981 6.26087 .1411024 .7385477 4.389986 .299748 5.874305 4.458194 1.174689 .0932355 .3717277 1.878945 .1240259 .2937417 3 0 1.104399 .1361194 10.1695 .0079878 0 5 0 .1125 16 .8896962 30.31716 23.78088 15.90886 .3734751 1.260552 10 .597945 1 Extracted from Stata result Loan Size (ALS). Accordingly, the mean value of ﬁnancials selfsufﬁciency of SACCOs is 1.65 (165%) which indicates that SACCOs in Eastern Ethiopia are ﬁnancially sustainable. Likewise, outreach performance of SACCOs can be measured through average loan size which measures the depth of the outreach. The mean value of average loan size shows that SACCOs extend on average birr (6804.05) to a single borrower. The maximum amount of the average loan is birr 30,000 while the minimum is birr 1000 that have been given for a single borrower. Therefore, the loan size that SACCOs provide to its members is very small. These results are in line with Kereta, 2007. Based on the descriptive result presented in Table 4 the following statistical inference has been reached for the independent variables of the study. Age shows the duration in which the SACCOs have been providing services to their members. It denotes the number of years of operation. The mean value for this variable shows that SACCOs in Eastern Ethiopia have served on average for 9 years. This indicates SACCOs in Eastern Ethiopia are young in terms of operation. Some of them have served up to 16 years while some are 3 years in operation. Donation is the ratio of the grant to equity ﬁnancing. The higher is value, the more it implies that the institutions are dependent on external equity capital than internal source. As per the mean value of this variable (0.37) indicates that SACCOs in Eastern Ethiopia are dependent on external equity capital. This means on average 37% of their capital is ﬁnanced by donors. On the other hand, the minimum value is 0.00 indicating a few SACCOs are ﬁnanced only by their member's share capital rather than any form of grant. However, the maximum value for this variable is 0.8897 which indicates that few SACCOs have more than 89% of their capital ﬁnanced by grant which is considered as nonproportional ﬁnancing structure and extremely dependent. Operational Efﬁciency is the ratio of operating income to expense. Based on the descriptive result, the mean value of operational efﬁciency of SACCOs is 6.48 (648%) which indicates that ﬁnancial cooperatives are operationally sustainable. This value shows that SACCOs operating income is six times plenty enough to cover their operational costs like salaries, supplies, loan losses, and other administrative costs. Debt to Equity ratio (leverage) is the ratio of the debt ﬁnancing to equity ﬁnancing. The higher this value is, the more it implies that the institutions are leveraged than ﬁnanced through equity capital. As per the mean value of this variable (2.16) indicates, SACCOs in Eastern Ethiopia are leveraged on average than ﬁnanced through equity capital. On the other hand, the minimum leverage (debt to equity) is 0.14 indicating few SACCOs are ﬁnanced more through equity capital than debt. However, the maximum value for this variable is 23.78 which indicates that debt ﬁnancing is more considered instead of having proportional ﬁnancing structure, therefore they are badly leveraged. Size which is measured by the total asset of the institutions indicates whether they are large enough to be operationally as well as ﬁnancially sustainable and cover their operational costs or not. The mean value of the variable is 12.56 in its natural logarithm value, whereas the minimum and maximum values are 10.17 and 15.91 respectively. These values are in their log form and when they are transformed into their real values they will become birr 643,476.5, 8,112,048 and 26,095 for the mean, maximum and minimum values respectively. Return on Asset is the ratio of the net income to asset of the SACCOs. The higher this value, the more it implies that the institutions are generating more surplus out of their asset. As per the mean value of this variable (0.149) indicates, SACCOs in Eastern Ethiopia are generating a proﬁt on average 15% of their total asset. According to ACCION cited in Marwa (2015) the optimal range for return on assets is 3% and above. Based on this benchmark, SACCOs are doing well on average in terms of proﬁtability. On the other hand, the minimum return on asset is 0.008 indicating few SACCOs are generating less net income (0.8%) in relation to their asset. However, the maximum value for this variable is 0.3735 which indicates that some of them are proﬁting up to 37% of their total asset. Deposit mobilization is the ratio of the deposit to gross loan portfolio. The higher this value, the more it implies that the institutions are mobilizing deposits that will be used for satisfying loan demands. As per the mean value of this variable (0.48) indicates, SACCOs in Eastern Ethiopia are mobilizing deposit internally. This means that on average 48% of their gross loan portfolio can be ﬁnanced with mobilized deposit. On the other hand, the minimum value is 0.00 indicating a few SACCOs didn't start providing loan out of the mobilized savings. However, the maximum value for this variable is 1.26 which indicates that a few SACCOs have a surplus deposit (26%) which is not disbursed to ﬁnance loan. This is due to less loan demand. The yield on gross loan portfolio indicates the ability of a SACCOs to utilize the short term assets to generate cash revenue. It also indicates the efﬁciency of SACCOs in generating cash revenue out of its resources. The higher the ratio is, the higher the efﬁciency. The mean descriptive statistics for this variable shows that SACCOs in Ethiopia generates 0.1411. This means that they generate on average 14.11 cents of cash for each single birr in the outstanding loan portfolio. The maximum yield on the gross loan portfolio for this study is 0.60. This means some of the efﬁcient SACCO generates up to 60.00 cents. The interest rate on gross loan portfolio indicates the lending rate of a SACCOs which charges for the price of loan. It also indicates the gross yield of SACCOs that generates interest income out of its loan extended. The higher the rate is, the higher the income. The mean value shows that SACCOs in Eastern Ethiopia charged on average 6.26% interest rate. The minimum and maximum interest 6 M. Semaw Henock / Asia Paciﬁc Management Review 24 (2019) 1e9 Unexpectedly deposit mobilization is negatively inﬂuencing ﬁnancial sustainability scores. This ﬁnding is supported by Marwa (2015). This is due to the accumulation of too much savings than loans in those saving and credit cooperative which could be the result of less net borrowers than savers. Conversely, donation and debt equity ratio negatively affects the ﬁnancial sustainability of SACCOs in Eastern Ethiopia signiﬁcantly. These variables affect the ﬁnancial sustainability signiﬁcantly at 1% and 5% signiﬁcance level respectively. As per the result, an increase on donation and debt equity ratio decrease their ﬁnancial sustainability and vice versa. On the other hand, the coefﬁcients of age and size of SACCOs, interest rate and yield are insigniﬁcant predictors. These variables are not signiﬁcant in determining the ﬁnancial self-sufﬁciency of SACCOs in Eastern Ethiopia. The ﬁnding for Age, interest rate and yield of a SACCO in this study indicates that, its correlation with ﬁnancial self-sufﬁciency is positive but insigniﬁcant. This ﬁnding is supported by the ﬁnding of Melkamu (2012), Abate et al. (2013) and Nadiya (2011) only with regard to age. However, the size of SACCOs shows that its correlation with ﬁnancial self-sufﬁciency is negative and insigniﬁcant. In general, this indicates that there is no enough evidence for SACCOs ﬁnancial sustainability to depend on their age, size, interest rate they charged and yield in the study area. Table 6 below presents the multiple regression results for the factors explaining outreach performance of SACCOs. The variables included in the model explained about 75% of the total variation of depth of outreach scores which is reasonably a good ﬁt. Moreover, it measures 75 percent of the total variation in the outreach performance, is explained by independent variables (donation, debt equity ratio, size, and ﬁnancial self-sufﬁciency) jointly. Therefore, these four variables that explain 75% of the variance of outreach performance. The regression result of the analysis indicates that donation, debt equity ratio, size and ﬁnancial self-sufﬁciency positively affect the ﬁnancial sustainability of SACCOs signiﬁcantly. This ﬁnding is supported by the ﬁnding of Abate et al., 2013 with regard to ﬁnancial self-sufﬁciency. These variables affect the outreach performance signiﬁcantly at 1% signiﬁcance level. As expected higher amount of donation has a positive important inﬂuence on the depth of outreach. Similarly, SACCOs which have higher, asset size, debt equity ratio and FSS scores will have higher outreach performance and vice versa. As the asset, debt and proﬁtability of the institutions increase it will generate more loanable fund which in turn increases the depth of outreach signiﬁcantly. rate charged on extended loan is 5% and 10%. This means SACCOs are charging less interest rate on loans they have extended to their members than the market interest rate. Percentage of women borrowers indicates that the proportion of women borrowers to total borrowers. The higher the percentage is, the higher the depth of outreach. On average 74% of borrowers are women. The minimum and maximum percentage of women borrowers are 11% and 100%. This shows that SACCOs are extending much loan to women beneﬁciaries. 4.2. Regression diagnostic tests Table 5 Below presents the multiple regression results for the factors explaining ﬁnancial sustainability of SACCOs. The variables included in the model explained about 74% of the total variation of ﬁnancial sustainability scores which is reasonably a good ﬁt. Moreover, it measures 74 percent of the total variation in the FSS ratio, is explained by independent variables (donation, debt equity ratio, operational efﬁciency, return on asset and deposit mobilization) jointly. Therefore, these ﬁve variables explain 74% of the variance of ﬁnancial self-sufﬁciency. The regression result of the analysis indicates that operational efﬁciency and return on asset positively affect the ﬁnancial sustainability of SACCOs signiﬁcantly. These variables affect the ﬁnancial sustainability signiﬁcantly at 1% signiﬁcance level. Operational efﬁciency indicates the ratio of operating income to operating expense. An increase in operational efﬁciency increases the ﬁnancial sustainability of SACCOs. Likewise, return on asset indicates the ability of a SACCO to utilize the total assets to generate proﬁt. Therefore, the more a SACCO utilizes its assets, the greater it generates higher the ﬁnancial surplus, which on the other way round causes for higher sustainability. This study also founds the same thing, that it affects ﬁnancial selfsufﬁciency positively. This variable is highly and statistically signiﬁcant at 1% signiﬁcance level in affecting the ﬁnancial sustainability of a SACCOs. Thus, the ﬁnding shows that the return on asset affects ﬁnancial self-sufﬁciency positively and signiﬁcantly. These results are in line with the theory and support the ﬁnding from Marwa (2015), Kinde, 2012, Nyamsogoro, 2010, and Kereta, 2007. In this particular study, deposit mobilization is found to be negatively affecting the ﬁnancial self-sufﬁciency of SACCOs. This variable is signiﬁcant at 5% signiﬁcance level. Theoretically, it is expected that high deposit mobilization will lead to lower cost of capital and hence high level of ﬁnancial sustainability. Table 5 Multiple regression analysis results on ﬁnancial sustainability. Source SS Model Residual 29.1178052 10.2925405 Total 39.4103457 df MS Number of obs F (9, 36) 9 36 Adj R-squared 45 ¼ 3.23531169 .285903904 ¼ .87578546 11.32 Prob > F R-squared 0.6735 Root MSE ¼ 46 ¼ ¼ 0.0000 0.7388 ¼ .5347 FSS Coef. Std. Err. t P>t [95% Conf. Interval] AGE DONA DER SIZE OE ROA DEMO INTEREST YIELD Cons .0220061 1.730826 -.0484405 -.0453841 .0551305 4.00672 -.6289623 .0522944 .5670624 1.696605 .02258 .303973 .0247582 .1092263 .016806 1.418814 .3144947 .0586831 1.210301 1.207353 0.97 5.69 1.96 0.42 3.28 2.82 2.00 0.89 0.47 1.41 0.336 0.000*** 0.058** 0.680 0.002*** 0.008*** 0.053** 0.379 0.642 0.169 -.0237882 2.347311 -.0986525 -.2669053 .0210462 1.129232 1.266787 -.0667203 1.887543 -.7520208 .0678004 1.11434 .0017714 .1761372 .0892147 6.884207 .0088626 .1713092 3.021667 4.145231 ***Signiﬁcant at 1%; ** Signiﬁcant at 5%. Extracted from Stata result M. Semaw Henock / Asia Paciﬁc Management Review 24 (2019) 1e9 7 Table 6 Multiple regression analysis results on outreach performance. Source Model Residual Total SS 1.1822eþ09 385078958 1.5672eþ09 df MS Number of obs F (5, 40) 5 40 Adj R-squared 45 ¼ 236432035 9626973.94 ¼ 34827536.2 24.56 Prob > F R-squared 0.7236 Root MSE ¼ 46 ¼ ¼ 0.0000 0.7543 ¼ 3102.7 ALS Coef. Std. Err. t P>t [95% Conf. Interval] AGE DONA DER SIZE FSS Cons 85.01476 9551.34 836.0717 2672.089 2089.123 34746.42 118.3764 1952.175 126.5939 479.4006 619.1816 6169.963 0.72 4.89 6.60 5.57 3.37 5.63 0.477 0.000*** 0.000*** 0.000*** 0.002*** 0.000*** 324.2624 5605.848 580.2159 1703.184 837.71 47216.38 154.2329 13496.83 1091.927 3640.994 3340.536 22276.46 ***Signiﬁcant at 1%. Extracted from Stata result 4.3. Outreach and ﬁnancial performance trade off The depth of outreach to ﬁnancial performance trade-off is an issue that has received attention from all observers (including policy makers) who are concerned about the social performance of microﬁnance providers (Abate et al., 2013). In this regard, Kereta (2007) found no evidence of trade-off between outreach and ﬁnancial sustainability for Ethiopian case, rather positive correlation was observed between them (Table 7). Based on the simple correlation result of this study, the outreach performance shows a negative sign but not signiﬁcantly associated with ﬁnancial self-sufﬁciency. 5. Conclusions and recommendations This study has attempted to analyze the ﬁnancial sustainability and outreach performance of saving and credit cooperatives in Eastern Ethiopia. The ﬁndings of descriptive and regression analysis show that SACCOs in Eastern Ethiopia are ﬁnancially sustainable and their outreach performance are at a moderate level. SACCOs in Eastern Ethiopia are young and infant in terms of operation and have served on average for 9 years. On average 37% of SACCO's capital is ﬁnanced by donors, but they are operationally efﬁcient and proﬁtable. SACCOs in Eastern Ethiopia are leveraged on average than ﬁnanced through equity capital and their average total asset is around 29 thousand USD. SACCOs in Eastern Ethiopia charge on average 6.26% interest rate on loans and generate on average 14.11 cents of cash for each single birr in the outstanding loan portfolio. On average 74% of borrowers are women. Therefore, the outreach performance of SACCOs in Eastern Ethiopia is very high. On the other hand, return on asset, operational efﬁciency, debt equity ratio, donation, and deposit mobilization are statistically signiﬁcant predictor variables in determining the ﬁnancial selfsufﬁciency of SACCOs. Similarly, ﬁnancial self-sufﬁciency, size, debt equity ratio and donation are statistically signiﬁcant predictor variables in determining the outreach performance of SACCOs. SACCOs play a signiﬁcant role in mitigating the credit market failure by providing ﬁnancial services tailored to the poor and low income earners. The business model of SACCOs is effectively sustainable in ﬁnancing the poor. The results obtained from the analysis show that the effect of return on asset, operational efﬁciency, debt equity ratio, donation, and deposit mobilization on ﬁnancial sustainability are important. The study found that SACCOs with high return on asset, operational efﬁciency and donation are ﬁnancially sustainable. High return on asset increases the sustainability of the institution by earning reasonable proﬁt margin from business dealing with the poor. Similarly, as operational efﬁciency of SACCOs increases ﬁnancial sustainability increases as well. Donation is equally important for ﬁnancial sustainability. However, it can improve sustainability if it is supported with good return on asset and operational efﬁciency. Otherwise, it would bring the opposite result. Conversely, debt equity ratio and deposit mobilization scores have inﬂuenced ﬁnancial sustainability negatively. When debt equity ratio is higher the equity capital cannot preserve the institution to operate sustainably. Deposit mobilization supposed to be positively affecting sustainability. Nevertheless, it has affected negatively since there is higher deposit than loan extended to members. As a result, SACCOs has lower deposit mobilization performance. Similarly, SACCOs with higher ﬁnancial self-sufﬁciency, size, and debt equity ratio and donation scores have higher outreach performance. Exceptionally, there is inverse relationship between debt equity ratio and ﬁnancial sustainability but positive relationship with outreach performance. The study determined factors affecting sustainability and outreach performance of SACCOs in Eastern Ethiopia. This study also found that no evidence of trade-off between outreach and ﬁnancial sustainability rather compatibility between them. Therefore, this study found that the cooperative ﬁnancing model can be both ﬁnancially sustainable and accessible while serving the poor. Thus, there is a point where the objective of welfare and institutional school of thought can be attained. Hence, SACCOs should work to achieve both sustainability and outreach performance at the same time. Based on the ﬁnding, the following operational and policy recommendations are proposed. It is recommended that SACCOs which are less ﬁnancial sustainable should increase their return on asset, operational efﬁciency and reduce their debt equity ratio and improve deposit mobilization performance. Table 7 Outreach and ﬁnancial performance. FSS Pearson Correlation Sig. (2-tailed) N % of women Borrowers ALS .012 .938 46 -.008 .957 46 8 M. Semaw Henock / Asia Paciﬁc Management Review 24 (2019) 1e9 ➢ It is found that debt equity ratio is signiﬁcant factor in achieving ﬁnancial sustainability and outreach performance of SACCOs. Therefore, SACCOs should balance into the capital structure of their cooperatives. They have to increase their equity capital through raising the par value of shares, increasing the number of new members joining their cooperatives. The SACCOs therefore should conduct member education program for membership drive. ➢ The main objective of a SACCO is not merely accumulating savings of members. They should provide at least short term credit to their members. The savings of members should be lent to other member borrowers who can invest the loan into any productive sector. Therefore, SACCOs should give education and training to members on credit utilization and management in order to increase loan demand and deposit mobilization. ➢ The ﬁnancial self-sufﬁciency and outreach performance can be achieved when SACCOs are able to utilize their short term asset to earn cash revenues in order to increase the yield on the gross loan portfolio. Therefore, the more a SACCO utilizes its short term assets to generate greater ﬁnancial revenues, it brings higher sustainability and outreach performance. This can be further explained as, since higher the ratio the better the outreach of a SACCO. The SACCOs should utilize its resource to the maximum possible level so as to increase the ﬁnancial revenue in the form of interests, fees, penalties and commissions from the gross loan portfolio. As indicated in the discussion, the yield on gross loan portfolio, is relatively strong predictor variable for outreach performance. ➢ It has been also seen that SACCOs in Eastern Ethiopia extended small loans. Managing small loan increases operational costs. An increase in the average loan balance increases the operational self-sufﬁciency of SACCOs by reducing the PAR and the cost per borrower. Therefore, SACCOs should increase their loan size that they lend to borrowers in order to reduce cost per borrower in proportion to the amount they lend. ➢ It is also found that size of a SACCO is signiﬁcant in achieving better outreach performance; therefore, SACCOs should increase their value of total assets. If they own more assets, they will have enough resource to address needs of large number of loan seekers. In general, managers have to work on improving capital structure, credit management, increasing yield on gross loan, loan size and the total asset of SACCOs in order to achieve better sustainability and outreach performance. APPENDIXES Appendix 1a Multi-collinierity test for FSS Variable VIF 1/VIF YIELD ROA SIZE DEMO DER INTEREST AGE OE DONA 3.55 2.75 2.59 2.15 1.92 1.91 1.55 1.53 1.31 0.281965 0.363073 0.385929 0.464869 0.521497 0.522581 0.646597 0.651875 0.765288 Mean VIF 2.14 Appendix 1b Heteroscedasticity test for FSS Breusch-Pagan/Cook-Weisberg test for heteroskedasticity Ho: Constant variance Variables: ﬁtted values of FSS chi2 (1) ¼ 3.23 Prob > chi2 ¼ 0.0724 Appendix 2a Multi-collinierity test for ALS Variable VIF 1/VIF DONA FSS DER SIZE AGE 1.60 1.57 1.49 1.48 1.26 0.624780 0.637153 0.671636 0.674582 0.792174 Mean VIF 1.48 Appendix 2b Heteroscedasticity test for ALS Breusch-Pagan/Cook-Weisberg test for heteroskedasticity Ho: Constant variance Variables: ﬁtted values of ALS chi2 (1) ¼ 0.69 Prob > chi2 ¼ 0.4048 References Abate, G. T., Borzaga, C., & Getnet, K. (2013). Financial sustainability and outreach of microﬁnance institutions in Ethiopia: Does organizational form matter? 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