Is the model “loans‐plus‐savings” better for microfinance in Eastern Europe and Central Asia? A propensity score matching comparison

• Author: Vardan Baghdasaryan,Valentina Hartarska,Knar Khachatryan
• DOI: http://doi.org/10.1111/rode.12589
• Published date: 01 August 2019
• Date: 01 August 2019

Rev Dev Econ. 2019;23:1309–1330. wileyonlinelibrary.com/journal/rode

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© 2019 John Wiley & Sons Ltd

DOI: 10.1111/rode.12589

REGULAR ARTICLE

Is the model “loans- plus- savings” better for

microfinance in Eastern Europe and Central Asia?

A propensity score matching comparison

KnarKhachatryan1

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VardanBaghdasaryan1,2

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ValentinaHartarska3

1American University of Armenia,

Yerevan, Armenia

2CERGE-EI, Prague, Czech Republic

3Auburn University, Auburn, Alabama

Correspondence

Knar Khachatryan, Manoogian Simone

College of Business and Economics,

American University of Armenia, 40,

Baghramyan Avenue, 0019 Yerevan,

Armenia.

Email: kkhachatryan@aua.am

Abstract

Microfinance institutions are gradually evolving into multi-

service organizations offering not only loans but also sav-

ings, and other financial and nonfinancial services. We

contribute to the literature aimed at identifying how com-

bining credit with savings affects outreach and sustainabil-

ity in microfinance institutions (MFIs). We apply the

propensity score matching method as well as its augmented

dose–response version to compare the performance of

loans- plus- savings MFIs with that of lending- only in a sam-

ple of 710 observations from Eastern Europe and Central

Asia. Owing to our unique capital structure data, we control

for the use of subsidized capital, which related work ignores

while existing evidence points to tradeoffs between subsi-

dies and savings. We find that financial performance and

breadth of outreach are positively associated with savings

mobilization, while the evidence on depth of outreach points

to a possible mission drift.

JEL CLASSIFICATION

G21, F30, O16

KEYWORDS

economies of scope, Microfinance institutions, performance, propensity

score matching, savings

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KHACHATRYAN eTAl.

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INTRODUCTION

Microfinance institutions (MFIs) emerged as an economic and social development mechanism in

Eastern Europe and Central Asia (ECA) in 1990s. The MFIs have changed their focus from small-

scale credit- only services to the provision of multiple financial services such as collecting savings and

related remittances payment facility and insurance. The challenge for the industry is no longer only

about making loan products accessible, but about responding to a wider variety of clients’ needs and

offering more inclusive and flexible financial products and, in particular, savings. This paper uses the

propensity scored matching (PSM) approach to evaluate if the trend toward diversification and multi-

ple services and the combination of loans with savings has been associated with improvements in the

financial results and outreach of MFIs in the ECA region.

Previous work attributes improvements in the productivity of MFIs to economies of scope in

savings- collecting MFIs, providing evidence for lower costs when small- scale loans are combined

with small- scale savings (Delgado, Parmeter, Hartarska, & Mersland, 2015; Hartarska, Parmeter,

Nadolnyak, & Zhu, 2010; Malikov & Hartarska, 2018)1. A study of Lensink, Mersland, Vu, and

Zamore (2017) examines the impact of combined financial and nonfinancial services (so called mi-

crofinance “plus”) on the performance of MFIs. The authors find that the provision of social services

is associated with improved loan quality and greater depth of outreach. Similarly empirical work sug-

gests that the poor savers and borrowers may be two different groups, and that scope economies arise

from sharing physical infrastructure, and not from sharing of information from microborrowers to

improve savings product design and vice versa (Hartarska, Parmeter, & Nadolnyak, 2011). Thus, more

underserved clients—both borrowers and savers—may be reached as a result of the joint provision of

loans and savings. Yet, this work does not show if serving more clients (borrowers and savers) may

be at the expense of reaching fewer poor and a larger number of wealthier borrowers. Our work con-

tributes to understanding this gap. We use the PSM approach to establish if in the ECA region savings

collection by MFIs improves financial sustainability and credit outreach and thus strengthens the case

for continuing the trend toward commercialization that is taking place across the industry. Another

major contribution is our ability to control for the role of subsidy, which has not been previously con-

sidered. Controlling for subsidy is important because Cozarenco, Hudon, and Szafarz (2016) suggest a

possible tradeoff between savings and subsidies because MFIs that collect voluntary savings (not only

compulsory savings, which act as collateral for loans) receive fewer subsidies than their credit- only

counterparts. Our detailed capital structure data allows us to control for the source of capital that the

MFIs use (subsidized or not) and thus we are able to incorporate concerns not addressed explicitly in

previous work2 .

From a demand side perspective, ability of MFIs to offer savings also matters. There is strong

evidence that not only the poor can, but also they are willing to, actively save (Collins, Morduch,

Rutherford, & Ruthven, 2009). Well- designed savings products can help poor households manage their

volatile daily cash flow and smoothen their consumption. Access to savings has positive impacts in

terms of increased household expenditures (Brune, Giné, Goldberg, & Yang, 2016) as well as entre-

preneurial investment in developing countries (Beck, Pamuk, & Uras, 2017), enhanced possibilities for

the poor to cope with health emergencies, improved female business investment (Dupas & Robinson,

2013), and contribute to women's empowerment (Ashraf, Karlan, & Yin, 2010; Guérin, 2006).

Despite the general consensus on the need for savings, MFIs offering savings products are still

under- studied. Several scholarly research papers (Akotey, Oscar, & Adjasi, 2016; Assefa, Hermes,

& Meesters, 2013; Jan et al., 2011; Rossel- Cambier, 2010, 2012) tackle the impact assessment of

offering combined loans and savings on the financial (efficiency) and social (outreach) performance

of MFIs: depth and breadth. In the light of the ongoing debate on the “mission drift” (Armendariz &