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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
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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
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