This paper examines factors affecting loan portfolio quality of MFIs in Haiti, over the period of October 2016 to September 2021, using a sample of four non-cooperative MFIs (MFI1, MFI2, MFI3 and MFI4) offering individual loans. This study applies the Ordinary Least Squares (OLS) regression to estimate the effects of two macroeconomic variables (exchange rate and inflation rate) and two micro-variables (loan amount per borrower and gross loan portfolio) on loan portfolio quality, measured by portfolio at risk over 30 days (PAR30). One statistical model has been specified for all MFIs and one statistical model has been specified for each MFI individually. Overall, the results show that portfolio at risk of MFIs can increase with the depreciation of local currency and as the inflation rises; but the results are not statistically significant. However, distinctively, the findings of MFI1 and MFI3 indicate a positive and statistically significant association with the exchange rate, while the output of MFI4 suggests a negative and insignificant relationship with the exchange rate. Only the result of MFI2 indicates a negative and insignificant relationship between the loan portfolio quality and the inflation rate. On the other hand, the growth of the loan portfolio affects adversely and significantly the loan portfolio at risk of MFIs globally and individually, except MFI3 that indicates a negative and insignificant association with the gross loan portfolio. Among the four MFIs, only the finding of MFI4 shows that the loan portfolio quality would significantly improve as the amount disbursed per borrower increases. In contrast, for the rest of MFIs, as the loan amount increases, the PAR30 would rise. Some implications can be drawn in light of these findings. Authorities should create a promising macroeconomic environment that would help MFIs to limit their credit risk. Moreover, MFIs should reinforce their credit analysis, collection procedures and practices, in order to ensure their loan portfolio growth, without compromising its quality.
Since early 1990s microfinance has been claimed to be a means to release the productive capacities of poor people relying on self-employment (Hulme & Mosley, 1996). In 2013, Muhammad Yunus asserted that microfinance would transform borrowers’ businesses by providing them with capital, which would increase their incomes and consequently eradicate poverty (Singh, 2018). Due to their vulnerability, poor people could not have access to the traditional credit market. Lack of collateral and formal documents constitutes among others elements of constraints that poor people are faced with. Information asymmetries are pointed out to be a constraint of standard lending contracts, indicating that banks did not possess all required information to assess credit risk of borrowers (Stiglitz & Weiss, 1981). Microfinance has therefore been considered to be the tool which introduced innovations in credit contracts, mostly group lending and installment lending (Armendáriz & Morduch, 2000). Microfinance shows more largely a new way of development intervention, one that deemphasizes governments as the central actors and turns to market-mechanisms to deliver services through diverse organizations incorporating social and financial goals (Conning & Morduch, 2011).
Globally, the microfinance sector has realized important progress during the past decades on the path to achieving its goal of reducing poverty around the world. Microfinance has shown that poor people are sustainable customers, established numerous robust institutions centered on poor people’s finance, and attracted the interest of private investors. In 2018, 139.9 million borrowers benefited from the services of microfinance institutions (IMFs) against 98 million in 2009, which represents a growth of 42.8% in less than 10 years. Of these 139.9 million borrowers, 65% are rural borrowers. The gross loan portfolio was estimated at USD 124.1 billion at the same period. Compared to 2017, MIFs recorded a yearly growth of 8.5% of their gross loan portfolio (Convergences, 2019).
In Haiti, where nearly 70% of the population are poor and 50% are extremely poor, with a low income per capita of USD 1149.50 in 2020 (World Bank, 2021), the informal economy and the working poor dominate the whole economy. These poor people are often excluded from accessing financial services from the formal financial system, mostly due to economic reasons, such as lack of collateral. To satisfy their financing needs, Haitian micro entrepreneurs are often obliged to turn to loan sharks with high interest rates. This situation promoted the emergence of a new financing technology adapted to the needs of Haitian micro entrepreneurs, which is microfinance. Indeed, knowing the effectiveness of micro enterprises, several categories of institutions have embarked on the microfinance sector in order to make small funds available to micro entrepreneurs. The elimination in 1995 of the interest rate cap of 22% constituted one of the incentives for several Haitian banks to integrate the microfinance sector by creating a dedicated subsidiary (Lustin, 2005).
Over the last two decades, the contribution of these institutions to reduce the financial exclusion gap by providing those ignored by the formal financial system with access to affordable capital has been significant. The financial services they offer play an important role in poverty alleviation in the country. In spite of all the political, social, and environmental disturbances which occurred in Haiti, according to. DAI Finance Inclusive (2019), the number of clients recorded an increase of 6.8% in two years, passing from 1.1 million clients in 2017 to 1.2 million clients in 2019. On the contrary, during the same periods, the number of borrowers decreased of 2.37%, passing from 272,082 in 2017 to 265,639 in 2019. In terms of total amount of loans outstanding, an increase of 11.21% was recorded in two years (USD 222.2 million in 2019 compared to USD 199.8 in 2017). Despite their progress and contribution to income generation, access to sustainable financial services and resilience of Haitian micro entrepreneurs, MFIs continue to tackle with a deteriorating loan portfolio quality. In 2019, the MIFs recorded a rate of 6.88% of their portfolio at risk (PAR) > 30 days, compared to 6.32% in 2018, i.e. a yearly deterioration of almost 10.00% (DAI Finance Inclusive, 2019). The rates of PAR > 30 days recorded both in 2018 and 2019 are higher than the internationally accepted threshold which is typically less than 5.00%. This poor performance is seen as an increasing concern for the MFIs, because their loan portfolio represents their main asset and also their major source of risk (MicroRate, 2014). Therefore, the loan portfolio quality is very critical. The sustainability of the MFIs depends on a good portfolio quality.
However, scholarly studies carried out on the Haitian microfinance sector have mainly focused on poverty outreach to better understand the poverty profile of microfinance clients. These were interested in knowing whether MIFs reached out the poor or not (Dewez, HornWelch, & Devaney, 2003; Julien & Cadet, 2013). Other investigations emphasized the impacts of microfinance on microenterprise performance (Ciguino & Paul, 2016; Ciguino & Paul, 2021); the role of microfinance in poverty alleviation (Lustin, 2005). Authors like Paul, Garrabé and Daméus (2011) studied the impact of the credit granting policy on borrower behavior. The topic of loan portfolio quality has been though neglected in scholarly research in Haiti, while it is vital to the MFIs, mostly over the past five years, where managing the loan portfolio quality has become more and more challenging. Thus, lenders and practitioners are eager to identify the main drivers of the loan portfolio quality in the Haitian context.
The deterioration of the loan portfolio quality observed during recent years in the Haitian microfinance market might be attributed to several factors. But, the aim of this paper is to assess the influence of the exchange rate, the inflation rate, the loan amount per borrower and the gross loan portfolio on the loan portfolio quality of the microfinance institutions in Haiti. This research emphasizes the following questions:
1) Does the exchange rate HTG/USD affect the loan portfolio quality of Haiti’s microfinance institutions?
2) Does the inflation rate affect the loan portfolio quality of microfinance institutions in Haiti?
3) How does the loan amount per borrower affect the loan portfolio quality of a microfinance institution?
4) Does the gross loan portfolio impact the loan portfolio quality of the Haitian microfinance institutions?
The rest of this paper is structured as follows: Section 2 reviews the theory and the relevant literature related to our research topic; Section 3 describes the data and the method used to carry out our statistical analysis; Section 4 presents and discusses the main findings of the research; and Section 5 concludes this study.
This study used the Modern Portfolio Theory (MPT), attributed to Harry Markowitz (1952). The MPT is considered to be one of the most important and powerful economic theories in finance and investment. This theory is particularly widely used in portfolio and risk management. The MPT refers to an investment theory that allows investors to select and build assets portfolios that maximize expected return for a given level of risk. The theory assumes that investors are risk-averse. For a given level of expected return, they always prefer the least risky portfolio. The selection and the construction of investment portfolios are then based on maximizing the expected return and simultaneously minimizing the investment risk (Fabozzi et al., 2002). The MPT argues that rational investors diversify their portfolios in order to optimize them (Pfaff, 2012). This can be achieved by choosing to use different amounts of investments which are carefully selected while taking into account how the investment is likely to be affected by the other elements of the portfolio rather than choosing individual securities (Francis & Kim, 2013). Each security has its own risks, which is higher than that of a portfolio containing diverse securities (Pfaff, 2012). The risk component of MPT can be measured, using various mathematical formulations, and reduced through the concept of diversification which aims to suitably select a weighted collection of investment assets that together show lower risk factors than investment in any individual asset. Diversification is known as the central concept of the MPT (Mangram, 2013).
Microfinance institutions (MFIs) which target low income people have to balance the different types of risks within their portfolio (Adugna, 2014). Credit risk, interest rate risk, and liquidity risk are the common risks faced by MFIs (Adugna, 2014). Credit risk results from the unwillingness or inability among borrowers to repay their loans. Consequently, MFIs portfolio deteriorates, revenues decrease, and operating expenses increase. The risk that affects Haitian MFIs may include the risk of default, untimely repayments by borrowers, weakness in borrowers’ creditworthiness assessment, and inadequate knowledge on how to efficiently manage collection activities. The more the macroeconomic and socio-political environment of the microfinance sector worsens in Haiti, the greater this risk and the higher is the likelihood of experiencing a deteriorating loan portfolio.
Loan portfolio constitutes the core investment of MIFs. The objective of shareholders is to optimize their profits with a minimal portfolio at risk according to modern portfolio theory. Thus, identifying factors that can affect loan portfolio quality of MFIs has become an important issue for practitioners and investors. In the light of this, scholars (Jote, 2018; Agasha et al., 2020; Mikir & Milkessa, 2020; Dung, 2020) investigated determinants of loan portfolio quality of MFIs. The following subsections summarize previous studies carried out on relationships between loan portfolio quality and the two macroeconomic factors (exchange rate and inflation rate) and the two specific variables to MFIs (loan amount by borrower and gross loan portfolio) targeted by this study.
Since the loan portfolio is the foremost asset of a microfinance institution, it constitutes its main source of risk. In general, loans granted by MFIs are not backed by collateral. As a result, the loan portfolio quality is very central to MFIs. In the microfinance industry, there are four indicators commonly used to measure loan portfolio quality: Portfolio at Risk (PAR), Write-off Ratio, Impairment Expense Ratio, and Risk Coverage Ratio. The PAR measures the portion of the loan portfolio affected by delinquency as a percentage of the total portfolio. The Write-Off Ratio is obtained by dividing total write-offs for the period by the period’s average gross loan portfolio. The Impairment Expense Ratio, also known as the Provision Expense Ratio, is determined by dividing the impairment expense for the period by the period’s average gross loan. The Risk Coverage Ratio is calculated by dividing impairment reserve by the outstanding balance of loans that are in arrears over 30 days (PAR30). The PAR is the commonly used measure of portfolio quality in the microfinance sector. It does not underestimate risk and is comparable across institutions (MicroRate, 2014). For a microfinance institution, a loan is usually considered to be at risk if a payment on the loan is over 30 days late. The lower the PAR30 ratio, the better the loan portfolio quality.
This study investigates factors affecting loan portfolio quality of the Haitian microfinance institutions, using exchange rate, inflation rate, loan amount per borrower, and gross loan portfolio. Insights from previous related studies helped draw the following conclusions.
While many studies examined the influence of exchange rate on non-performing loans (NPL) of commercial banks across the world, literature on the effects of the foreign exchange rate on credit risk of microfinance institutions look limited. Since commercial banks and microfinance institutions generally target different clientele with different characteristics, the exchange rate might affect differently their respective loan portfolio quality. The reactions of the clienteles to a change of the exchange rate could differ. So, reviewing literature analyzing the impacts of the exchange rate on non-performing loan of commercial banks might not be convenient to this paper. However, due to the lack of literature on the microfinance sector, it is useful to note some conclusions drawn from studies related to the banking sector, in order to have a general view about the effects of exchange rate on loan portfolio quality. Examining the macroeconomic variables on the non-performing loans (NPL) in the Albanian banking sector, Shingjergji (2013) found that the real effective exchange rate has a positive relationship with NPL levels. Khemraj and Pasha (2009) revealed that the real effective exchange rate has a positive impact on NPLs in the Guyanese banking sector, indicating that with an appreciation in the local currency, the NPLs of commercial banks are likely to increase. Akinlo and Emmanuel (2014) also found that exchange rate has positive influence on non-performing loans in Nigeria, suggesting that exchange rate appreciation might contribute to a deterioration of loan portfolio quality of banks. Heiden, Klein and Zwergel (2013) showed that exchange rate depreciation is associated with lower banks assets quality, mainly in countries with widespread currency mismatches.
Numerous studies have focused on the effect of inflation on non-performing loans of the banking sector. On the contrary, very little work has been carried out in the microfinance industry. However, the impact of inflation rate on loan portfolio quality of MFIs was investigated by (Hitchcock, 2014; Necesito, 2016). The finding shows that the association of loan portfolio quality of Philippine MFIs with the inflation rate is positive and significant, indicating that the inflation is a factor that strongly affects the portfolio at risk of MFIs (Necesito, 2016). Conversely, using different measures of loan portfolio quality as dependent variables (among others, PAR30 days and PAR90 days), Hitchcock (2014) indicates that inflation has a strongly negative and significant relationship with all of dependent variables. This suggests that as the inflation rises, the credit risk might decrease. The study also indicates that inflation is significant for for-profit MFIs, but not for non-profit ones. However, the author does not provide any explanations to support this output.
The effect of loan amount per bower on portfolio quality was examined by previous studies (Schreiner, 1999; Vogelgesang, 2003; Papias & Ganesan, 2009; Setargie, 2013; Pal & Mitra, 2017). Using data from a Bolivian microfinance institution, Schreiner (1999) estimated the probability of overdue loans. Among other things, results indicated that loan size influence significantly borrowers’ repayment behavior. The larger the loan size, the more likely the loan is to be overdue. Vogelgesang (2003) researched repayment determinants for loans from Caja Los Andes, a Bolivian microfinance institution. Results indicated that higher loan sizes (for first loans) increase the likelihood that a loan becomes overdue. Using data of 632 MFIs from 37 countries of the Sub-Saharan African region and employing a GMM technique, Chikalipah (2018) found that credit risk is positively related to loan sizes. The credit risk is more likely to increase with an increase of the loan sizes. However, other related studies carried out by Berger and Udell (1995), Harhoff and Körting (1998), Leeth and Scott (1989) found a negative and statistically significant relationship between credit risk and loan sizes. Other things constant, an increase in the loan sizes might imply a decrease in the credit risk of MFIs.
Several studies focused on the impact of the gross loan portfolio on the loan portfolio quality of MFIs. Tehulu and Abegaz (2016) concluded the gross loan portfolio has a negative and significant impact on the credit risk of MFIs, represented by PAR30 days ratio. Other things constant, this result indicates that an increase in the size of loan portfolio will imply a decrease in the credit risk. However, Pal and Mitra (2017) found that the gross portfolio has a positive and significant impact on the loan portfolio quality, using data from 1575 MFIs. This suggests that an increasing loan portfolio is associated with greater portfolio value at risk. With panel data of 15 MFIs in Ethiopia, Teferi (2019) investigated the determinants of loan portfolio quality. The study employed the pooled ordinary least squares and random effects generalized least squares. Findings showed a positive and significant coefficient for outstanding loan ratio with PAR30 days and write-off ratio, two dependent variables used as proxies to measure the loan portfolio quality. This result implies that the more the proportion of loan portfolio to total assets of a MFI increases, the higher the portfolio at risk is likely to be, due to the fact that the magnitude of default loan increases with the size of the loan outstanding.
The study adopted an explanatory research method that is quantitative and hypotheses tested by measuring the correlation between the studied variables using econometric models.
This study focuses on factors influencing loan portfolio quality of microfinance institutions in Haiti, using a sample of four non-cooperative MFIs extending individual loans1: MFI1, MFI2, MFI3 and MFI4. Their choice is particularly motivated by their significant market shares in the whole Haitian microfinance sector, in terms of gross loan portfolio size. As of September 2021, their portfolio outstanding loans reached USD 126.4 million for a total of 60,562 active loans. The study uses monthly data which were collected from SOGESOL(Société Générale de Solidarité), through the information exchange established among members of ANIMH (Association Nationale des Institutions de Microfinance d’Haïti). ANIMH is a group of nine non-cooperative MFIs (https://animhaiti.net/). The macroeconomic (Exchange rate and inflation rate) data were collected from the official website of the Haitian Central Bank (https://www.brh.ht/). The research covers five fiscal years of data, from October 2016 to September 2021, resulting in sixty observations for each variable.
This paper examines the impacts of the Exchange rate, the Loan amount per loan officer, the inflation rate and the gross loan; portfolio on the Loan portfolio quality measured by the Portfolio at Risk over 30 days (PAR30) ratio.
Portfolio at Risk > 30 Days Ratio (PAR30)
The study measures loan portfolio quality by portfolio at risk over 30 days (PAR30) whose researchers indicated the potential for future losses based on current performance (Bitok et al., 2020). This does not undervalue risk and is comparable across MFIs. The PAR30 days indicates that loans are effectively at risk compared to PAR1-30 days. The PAR30 ratio is calculated by dividing the outstanding balance of all loans with arrears over 30 days by the outstanding gross loan portfolio.
Exchange rate (EXR)
The performance of banks can be affected both directly and indirectly by exchange rate volatility (Keshtgar et al., 2020). The direct effect of exchange rate volatility on banks performance is associated with the banks operating in the foreign exchange related activities. Indirectly, exchange rate volatility impacts the behavior and performance of depositors and borrowers, and unfavorably affects banking risk and banks performance. Exchange rate fluctuation is known as an important factor in explaining the ratio of non-performing loan to total lending of the banks and create credit risk for the banks.
Based on the HTG/USD exchange rate fluctuations over the last five years, it is convenient to examine its impacts on the portfolio quality of MFIs, which serve a large number of Micro, Small and Medium enterprises (MSME) of the informal sector, dominated by trade in imported products. As the exchange rate increases, the price of imported products in terms of local currency increases. This can result in a decrease of goods demand, impacting harmfully MFIs borrowers’ capacity to repay their loans. The Exchange rate (EXR) is defined as the local currency (HTG) units per U.S. dollar. Hence, we hypothesize that an increase in the Exchange rate would critically affect the loan portfolio quality.
Inflation Rate (INFL)
The rise in price of goods and services in an economy, over a period of time, is known as inflation.
It is calculated as:
Current consumer price index − historical consumer price index Current consumer price index × 100 .
From a theoretical view, the direction of the effect of inflation on credit risk is ambiguous (Necesito, 2016). If the inflation rate rises to hyperinflation levels, the portfolio risk increases. On the contrary, higher inflation may help borrowers if they obtained fixed-rate domestic loans. Hence, the expected relationship of the inflation rate with the portfolio at risk of Haitian MFIs is either positive or negative.
Loan Amount per Borrower (LAB)
The loan amount per borrower represents the amount disbursed to borrower on average. This variable indicates the level of a borrower’s indebtedness. With excess borrowing, a micro-borrower may use more funds for non-productive purposes, and as a result, the surplus generated out of the productive use of the funds may not be sufficient to meet the repayment obligations (Pal & Mitra, 2017). As a result, the higher the loan amount per borrower, the more likely is the risk to increase.
Gross Loan Portfolio (GLP)
The gross loan portfolio represents all outstanding principal for all outstanding client loans. It includes current, delinquent and restructured loans. Following Pal and Mitra (2017), Teferi (2019), we hypothesize that a higher gross loan portfolio would be related to a greater portfolio at risk.
This study employs the Ordinary Least squares (OLS) regression to estimate factors affecting loan portfolio quality of Haitian MFIs. OLS is a method for estimating the unknown parameters in a linear regression model. This statistical technique allows minimizing the sum of squared vertical distances between the observed responses in the dataset and the responses predicted by linear approximation (Daly & Frikha, 2016).
This research formulates five equations. These are specified as follows, using logarithmic transformation:
L n ( P A R 30 s t ) = β 0 + β 1 L n ( E X R t ) + β 2 L n ( I N F L t ) + β 3 L n ( L A B s t ) + β 4 L n ( G L P s t ) + ε s t (1)
L n ( P A R 30 M F I 1 t ) = β 0 + β 1 L n ( E X R t ) + β 2 L n ( I N F L t ) + β 3 L n ( L A B M F I 1 t ) + β 4 L n ( G L P M F I 1 t ) + ε M F I 1 t (2)