The impact of capital structure on the sustainability and social efficiency (SPI) of microfinance institutions in Vietnam

The sources of capital formation of microfinance institutions (capital mobilized from deposits, loans, other debts and equity) will be used as proxy variables for capital structure.

In addition to the group of capital structure variables, the group of variables on the characteristics of microfinance institutions are also used in the model, including size; proportion of female customers; cost per borrower; operating expense ratio; number of customers per credit officer; ratio of risky loans over 30 days; operating time, average return on total loans, legal status, lending method).

Based on the theoretical basis of capital structure, the results of previous studies, as well as the operating conditions of microfinance institutions in Vietnam, the author hypothesizes the impact of independent variables on dependent variables as follows:

Table 3.1. Hypothesized impact of independent variables on dependent variable

STT

Impact variable	Symbol	Direction of impact expected
1	Equity to total assets	EA	+
2	Capital mobilized from deposits to total assets	DP	+
3	Loan to Total Assets	THREE	-
4	Other liabilities to total assets	OA	-
5	Scale	Size	+
6	Percentage of female customers	FB	+
7	Cost per Borrower	CPB	-
8	Operating expense ratio	OER	-
9	Number of customers per credit officer	BPLO	+
10	Risk debt ratio over 30 days	PAR 30	-
11	Uptime	AGE	+
12	Average yield on total outstanding debt	PS	+
13	Legal status	RS	+
14	Lending method	LM	+

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3.2.2.2 Variables used in the model to assess the impact of capital structure on social efficiency of microfinance institutions in Vietnam

a) Dependent variable

The dependent variable used in the model to assess the impact of capital structure on social efficiency of microfinance institutions in Vietnam is the SPI variable with components to

The SPI value is calculated using 7 indicators: access level (A), average loan balance to average income ratio (B), cost per borrower (C), female customer ratio (D), self-sustainability ratio (F), risky debt ratio (G) and debt write-off ratio (H).

b) Independent variable

The sources of capital formation of microfinance institutions (capital mobilized from deposits, loans, other debts and equity) will be used as proxy variables for capital structure.

In addition to the group of capital structure variables, the group of variables on the characteristics of microfinance institutions are also used in the model, including scale (size, number of customers per credit officer, time of operation, average return on total outstanding loans, legal status, lending method).

Based on capital structure theory and results of previous studies, the author hypothesizes the impact of independent variables on dependent variables as follows:

Table 3.2. Hypothesized impact of independent variables on dependent variable

STT

Impact variable	Symbol	Direction of impact expected
1	Equity to total assets	EA	+
2	Capital mobilized from deposits to total assets	DP	+
3	Loan to Total Assets	THREE	-
4	Other liabilities to total assets	OA	-
5	Scale	SIZE	+
6	Number of customers per credit officer	BPLO	+
7	Average yield on total outstanding debt	PS	-
8	Legal status	RS	-
9	Lending method	LM	+
10	Uptime	AGE	-
11	Lagged average return on total outstanding loans	LagPS	+
12	Social efficiency lag	LagSPI	+

3.3 Research data and results

3.3.1 Description of statistics

3.3.2 Research results of the model to evaluate the impact of capital structure on the sustainability of microfinance institutions in Vietnam

3.3.2.1 Regression results

Table 3.5: Results of regression model estimation according to REM

Variable

coefficient	Std. Error	t-Statistic	Prob.
C	472.1715***	110.7141	4.264781	0.0000
EA	1.126835***	0.244797	4.603134	0.0000
DP	1.127743***	0.409753	2.752251	0.0066
OA	0.513946	1.152903	0.445784	0.6564
LOG_SIZE	-7.324464	11.25622	-0.650704	0.5162
FB	-3.126682***	0.905044	-3.454729	0.0007
LOG_CPB	-27.11789	25.25183	-1.073898	0.2845
OER	-2.552263*	1.528775	-1.669483	0.0970
BPLO	-0.005756	0.025502	-0.225721	0.8217
PAR_30	-7.101701	5.166675	-1.374520	0.1713
AGE	0.013726	1.313880	0.010447	0.9917
PS	1.460687***	0.544646	2.681901	0.0081
RS	-32.59415	29.70525	-1.097252	0.2742
LM	-47.42429***	18.01713	-2.632177	0.0093

Note: ***, **, * represent coefficients with statistical significance at 1%, 5% and 10% levels. Source: Author's analysis results from secondary data

Table 3.6: Results of reduced model 1

Variable

coefficient	Std. Error	t-Statistic	Prob.
C	401.0163	79.47154	5.046036	0.0000
EA	1.207609***	0.225602	5.352828	0.0000
DP	1.054746***	0.304674	3.461884	0.0007
FB	-3.312479***	0.833216	-3.975535	0.0001
OER	-3.087107***	1.142183	-2.702811	0.0076
PS	1.181572**	0.460051	2.568351	0.0111
LM	-31.30115**	15.07611	-2.076208	0.0394

Note: ***, **, * represent coefficients with statistical significance at 1%, 5% and 10% levels. Source: Author's analysis results from secondary data

The regression model results show that all variables have a significant impact on the sustainability of microfinance institutions in Vietnam at the 1% or 5% significance level. In addition, the direction of impact of the variables is quite similar to the research hypothesis put forward in section 3.2.1.

Table 3.7: Comparison between hypothesis and research results of model 1

Impact variable

Hypothesis	Result study	Conclude
Equity to total assets Product (EA)	+	+	Accept
Capital mobilized from deposits on total assets (DP)	+	+	Accept
Percentage of female customers (FB)	+	-	Reject
Operating Expense Ratio (OER)	-	-	Accept
Average return on total outstanding balance (PS)	+	+	Accept
Lending Method (LM)	+	-	Reject

Specifically, the capital structure variables including equity to total assets and capital mobilized from deposits to total assets all have a positive impact on the level of sustainability, as well as consistent with the research hypothesis. In addition, organizational characteristics variables such as average return on total outstanding loans also show a positive impact on the level of sustainability of MFIs in Vietnam. On the contrary, the variables of female customer ratio and lending method according to the regression results have a negative sign reflecting a negative relationship with the level of sustainability; at the same time, it also rejects the research hypothesis. Therefore, in the next section, the explanation of the impact direction of the variables will be clarified.

3.3.2.2 Discussion of results

Equity to total assets ratio (EA): The EA variable has a positive relationship with OSS. This result is completely consistent with the results in studies on the sustainability of microfinance institutions both domestically (Dao Lan Phuong, 2019; Nguyen Quynh Phuong, 2017) and internationally (Mwizarubi et al., 2015; Nyamsogoro, 2010). Specifically, according to the author, in Vietnam, the equity capital of microfinance institutions, especially registered institutions, is mainly derived from contributed capital and sponsored capital at very low costs; therefore, using this source of capital will certainly help microfinance institutions stabilize their operations as well as generate more profits. However, in the context of the increasingly declining sources of funding in the form of equity capital, especially since Vietnam entered the ranks of middle-income countries, maintaining the advantages from using equity capital will be more or less affected in the future.

Deposit to Total Assets Ratio (DP): The value of the regression coefficient is 1.054, which shows that deposit is important to the sustainability of microfinance institutions.

in Vietnam, and in particular, this result is completely similar to the conclusions of many researchers in the field of microfinance such as Mwizarubi et al. (2015); Iezza (2010); Muriu (2011) and Hossain and Asam (2016) when most of the authors stated that compared to other sources of capital, mobilized capital is assessed to have a relatively low cost of capital. Therefore, increasing the proportion of mobilized capital in total capital will help microfinance institutions in Vietnam save costs, thereby increasing profits and sustainability. Kinde (2012) on the other hand also believes that using mobilized capital with low cost of capital also indirectly helps microfinance institutions strengthen strong relationships with customers, and achieve long-term sustainability, when they can attract and provide credit to borrowers with more preferential and attractive interest rates.

Female customer ratio (FB): The FB variable has a regression coefficient of -3.31, reflecting a negative relationship with the level of OSS sustainability. This result is somewhat different from the conclusion made by many researchers such as Nyamsogoro (2010), Ali (2013) and Muriu (2011) when the researchers argued that female customers are customers with very high repayment commitment, as well as quite cautious in the process of using capital; therefore, lending to these customers will minimize risks, increase profits and sustainability. However, the negative relationship between FB and OSS has also been confirmed in previous studies on the sustainability of microfinance institutions in Bangladesh (Hossain and Asam, 2016). In addition, in the context of Vietnam, female customers may be those with high repayment commitment; However, their low power in the family, and especially their limited business capacity, are barriers that prevent loans for female customers from being effective. Specifically, Le Thi Thu Huong (2016) in her study on the difficulties and challenges of female workers in rural areas pointed out four points to note, including: (i) limited access to vocational training; (ii) increasing migration rates; (iii) limitations in improving social awareness and (iv) difficulties in integrating with the strong changes in socio-economic life. In addition, the amount of housework of rural women is also relatively large when most of them have to take on housework, raising children and taking care of the elderly; therefore, the efficiency of capital use is not high.

Operating Expense Ratio (OER): The OER variable has a regression coefficient of -3.08 reflecting a negative relationship with the level of OSS sustainability. This result is completely similar to the conclusion made by many researchers such as Nyamsogoro (2010) Hossain and Asam (2016),

Tehulu (2013) and Iezza (2010). Specifically, the authors all argue that an increase in operating costs will reduce profits and thus negatively impact the sustainability of microfinance institutions. In addition, when operating costs increase too high, a part of these costs will be passed on to borrowers; therefore, it will also indirectly put pressure on borrowers, and may affect the efficiency of their capital use in the future.

Average return on total outstanding loans (PS): The PS variable has a regression coefficient of 1.18, indicating a positive relationship with the level of OSS sustainability, and also reflects that, assuming other factors remain constant, if OER increases by 1%, OSS will increase by 19.1%. This result is completely similar to the conclusion made by Iezza (2010), and it is quite understandable that return on total outstanding loans or an increase in interest and fees will help microfinance institutions in Vietnam increase their level of sustainability.

Lending method (LM) : The LM variable has a regression coefficient of -31.3, reflecting a negative relationship with the level of OSS sustainability. In this study, a dummy variable is used to quantify the lending method currently applied at microfinance institutions with a value of 0 representing the individual lending method, a value of 1 representing the group lending method or a combination of both individual and group lending methods. Thereby, with a negative impact, it can be seen that the use of individual lending will help microfinance institutions in Vietnam achieve a higher level of sustainability than using group lending methods or a combination of both lending methods. According to the author, this result is due to differences in customer characteristics when using different lending methods. Specifically, the emergence of group lending is often associated with vulnerable groups of customers in society - those with low incomes, relatively limited educational levels, and no accumulated assets. Therefore, group lending was born with the desire to use social constraints and mutual support among group borrowers to improve the repayment capacity of this group of customers. In contrast, individual lending is often applied to customers with relatively better education and income levels. Therefore, the efficiency of capital use of individual customers in Vietnam may be better than that of group/group borrowers, and as a result, it will help MFIs achieve higher profits and sustainability.

3.3.3 Research results of the model to evaluate the impact of capital structure on efficiency

Society of Microfinance Institutions in Vietnam.

3.3.3.1 Regression results

Table 3.9: Regression model results according to GMM

Variable

coefficient	Std. Error	t-Statistic	Prob.
C	21.99939	3.831784	5.741292	0.0000
EA	16,773*	9,823	1.71	0.088
DP	36,854***	7.014	5.25	0.000
OA	-47.761***	17,685	-2.7	0.007
Log SIZE	-7.060***	1,832	-3.85	0.000
BPLO	0.048***	0.010	4.79	0.000
PS	-.1881	0.091	-2.05	0.400
RS	2,474	12,087	0.20	0.838
LM	3.501	6,930	0.51	0.613
AGE	42,638	28,796	1.48	0.139
SPI Lag	0.008***	0.001	4.60	0.000
PS Lag	-0.508***	0.110	-4.59	0.000

Note: ***, **, * represent coefficients with statistical significance at 1%, 5% and 10% levels. Source: Author's analysis results from secondary data

The regression model results show that all variables have significant impacts on the social efficiency of microfinance institutions in Vietnam. In addition, the direction of impact of the variables is quite similar to the research hypothesis put forward in section 3.2.1.

Table 3.11: Comparison between hypothesis and research results of model 2

Impact variable

Hypothesis	Result study	Conclude
Equity to total assets Product (EA)	+	+	Accept
Capital mobilized on total assets (DP)	+	+	Accept
Other liabilities to total assets (OA)	-	-	Accept
Size	+	-	Reject
Number of customers per staff	+	+	Accept

Impact variable

Hypothesis	Result study	Conclude
credit (BPLO)
SPI delay variable	+	+	Accept
PS delay variable	+	-	Reject

In addition, comparing the hypotheses put forward in the thesis and the actual model results, the author finds that the research results are basically consistent with the hypothesis (except for the scale variable and the average return on total outstanding debt delay variable). Specifically, the impact of each independent variable will be analyzed and discussed in the next section.

3.3.3.2 Discussion of results

Equity to total assets ratio (EA): The EA variable has a positive regression coefficient reflecting a positive relationship with SPI, or in other words, an increase in the equity ratio in total assets will have a positive impact on the increase in the index reflecting social efficiency at microfinance institutions. This result is somewhat inconsistent with the conclusion of Hartarska and Nadolnyak (2007) when the authors stated that equity has a negative impact on the ability to reach and serve customers of microfinance institutions, and therefore has a negative impact on the social efficiency of the organization. On the contrary, in the study of Hartarska and Nadolnyak (2007), mobilized capital is assessed to have a positive impact on social efficiency when Richardson (2003) pointed out that mobilized capital will help MFIs attract savings from customers with higher incomes - who will greatly support the organization in covering fixed costs, and help MFIs have a source of capital at a reasonable cost to serve poor customers. Therefore, mobilized capital has a positive impact on the social efficiency of MFIs. In this study, the impact of mobilized capital on social efficiency also has a positive impact.

In addition, the impact of equity capital on the social efficiency of microfinance institutions is very clear and completely similar to the results in the study on the social efficiency of microfinance institutions conducted by Khachatryan et al. (2017). The explanation for this result, according to the author, is that the equity capital of microfinance institutions in Vietnam, especially registered organizations, is mainly derived from contributed capital and sponsored capital at very low costs; creating conditions for microfinance institutions to reduce capital costs for customers. Thereby, current customers enjoy more financial benefits, as well as

reduce the risk of loan repayment, and as a result, the relationship between the organization and the customer is increasingly close and strong. Second, the attractive cost of capital also helps MFIs attract and reach more potential customers at different income levels; therefore, the customer network of MFIs also becomes more diverse and richer. As a result, the social efficiency of the organization is also improved.

Other liabilities to total assets (OA): The OA variable has a negative regression coefficient reflecting a negative relationship with the SPI social efficiency index, or in other words, an increase in the total of other liabilities in the total asset value along with the net value of accounts such as loan reserves and accumulated depreciation will have a negative impact on the social efficiency of the organization. This result is completely similar to the assessment of experts in the field of microfinance. Specifically, according to the manager of a large and reputable microfinance institution in the market, compared to the cost of using mobilized capital, the cost of using other debt sources is somewhat higher. Therefore, the increase in the ratio of other debts to total assets will lead to an increase in operating costs at MFIs; thereby indirectly increasing the financial burden on customers, as well as reducing the ability of microfinance institutions to reach and serve customers in the low-income segment in particular and the social effectiveness of the organization in general.

In addition to the impact of capital structure on the social efficiency of microfinance institutions in Vietnam, factors related to organizational characteristics such as size, number of customers per credit officer (BPLO), lagged SPI (Lag SPI) and lagged average return on total outstanding loans (Lag PS) have an impact on SPI with statistical significance at 1%, 5% or 10%.

Size (Log Size): The Log Size variable has a negative regression coefficient indicating a negative relationship with the indicator reflecting the social efficiency of microfinance institutions (SPI). This result is somewhat contrary to the results given by Awaworyi and Marr (2012), Bogan (2012); Hoque and Chisty (2011); Khachatryan et al. (2017) and Hartarska and Nadolnyak (2007) when the authors all found that size has a positive impact on the social efficiency of microfinance institutions. Specifically, according to Khachatryan et al. (2017), the larger the microfinance institutions, the more they can take advantage of economies of scale. In particular, large size also creates an advantage for microfinance institutions to access more borrowers and savers; therefore, the social efficiency of the organization is also improved. Not entirely in agreement with the view put forward by Khachatryan et al. (2017), Bibi et al. (2018) argue that large-scale MFIs can reach more customers, but this does not mean that large-scale MFIs can serve more customers in the lower-income segment than microfinance institutions.

have a smaller scale. In other words, scale can have a positive impact on breadth of reach, but not depth of reach; therefore, the impact of scale on social efficiency is not necessarily positive. In Vietnam, the results of this study show that the scale and social efficiency of MFIs are inversely proportional. The discrepancy in the results of this study with previous studies, according to the author, is partly due to different approaches to measuring the social efficiency of microfinance institutions. Specifically, previous studies mostly used only two indicators, breadth and depth of reach, to reflect the social efficiency of microfinance institutions; however, in this study, the index reflecting social efficiency is a composite index consisting of 7 factors with a more multidimensional assessment of social efficiency. In addition, small-scale financial institutions in Vietnam are still mostly receiving external funding with a clear orientation focusing on social goals; therefore, social efficiency when assessed is somewhat higher than that of large-scale organizations - organizations that are gradually becoming self-sufficient in terms of capital and must ensure the pursuit of more goals. In addition, with increasingly large scale, the ability to manage and care for each customer of employees in the organization will also be more limited than that of small scale; therefore, the social efficiency of the organization is also affected.

Number of customers per credit officer (BPLO): The BPLO variable has a positive regression coefficient reflecting a positive relationship with the SPI indicator reflecting the social efficiency of microfinance institutions. This result is completely consistent with the conclusion made by Pham Bich Lien (2016). Specifically, in her thesis on the development of microfinance activities at credit institutions in Vietnam, Pham Bich Lien pointed out that employee productivity or the number of customers per credit officer has a positive impact on the depth of outreach in particular and social efficiency in general. This stems from the fact that customers in the low-income segment with a high level of risk are often granted credit in the form of group loans instead of individual loans; therefore, the number of customers each credit officer manages for this customer segment is often high, and as a result, the depth and breadth of outreach are also improved, contributing to increasing the index reflecting the social efficiency of microfinance institutions.

Lag SPI variable: The Lag SPI variable has a positive regression coefficient indicating a positive relationship with the indicator reflecting the social efficiency of microfinance institutions (SPI). This result is completely consistent with the results of in-depth interviews with experts in the field of microfinance. Specifically, according to experts in the field of microfinance, MFIs often tend to maintain and develop social values brought to the community based on the activities of the previous period.

Lag PS: The Lag PS variable has a regression coefficient

negative indicates a negative relationship with the SPI indicator reflecting the social efficiency of microfinance institutions. This result is somewhat similar to the finding of Awaworyi and Marr (2012) in their study of the social efficiency of microfinance institutions in different countries around the world. Specifically, according to Awaworyi and Marr (2012), in low-income countries, not-for-profit microfinance institutions are often rated as having higher social efficiency than for-profit microfinance institutions.

3.4 Conclusion

Based on the results of models (1*) and (2*), the variables belonging to the group of capital structure variables of microfinance institutions that have a clear impact on the sustainability and social efficiency of microfinance institutions are summarized in the following table:

Table 3.12: Impact of capital structure on the sustainability and social efficiency of microfinance institutions in Vietnam

Capital structure

Sustainability	Social effectiveness
Equity to total assets product	Same direction	Same direction
Capital mobilized on total assets product	Same direction	Same direction
Other liabilities to total assets	There is a positive relationship, but it is not significant. statistical.	Opposite

Source: Author's synthesis from data analysis results

The statistical results from Table 3.12 show that in the group of capital structure variables, the variables of ownership and mobilized capital have a positive impact on both the sustainability and social efficiency of microfinance institutions. This result comes from the fact that the cost of using equity capital is relatively low because microfinance institutions in Vietnam, especially registered organizations, are receiving many preferential capital sources, funded in the form of equity capital. Therefore, microfinance institutions can take advantage of the outstanding advantages of this capital source to achieve a higher level of sustainability and social efficiency. However, in the context of the increasingly declining funding sources in the form of equity capital, especially since Vietnam entered the ranks of middle-income countries, maintaining the advantages from using this equity capital source will be more or less affected. Therefore, finding and developing an alternative source of capital to maintain and develop MFIs' operations in the long term is essential.

There is also a positive relationship with both the sustainability and social efficiency of microfinance institutions; mobilized capital is one of the key sources of capital that is highly appreciated. This stems from the fact that the number of licensed microfinance institutions in the market is still very modest; in addition, according to Circular 37/2019/TT-BTC, the total amount of voluntary savings deposits of microfinance programs and projects is limited to 30% of the total capital granted to microfinance programs and projects. Therefore, increasing the amount of mobilized capital in the total capital source at licensed and registered microfinance institutions is an extremely urgent issue and requires a specific long-term strategy. In particular, this will also be the key direction in solutions and recommendations in the coming time to achieve both sustainability and social efficiency goals.

CHAPTER 4: RECOMMENDATIONS ON CAPITAL STRUCTURE TO IMPROVE THE SUSTAINABILITY AND SOCIAL EFFICIENCY OF MICROFINANCE INSTITUTIONS IN VIETNAM

4.1 Operational orientation of microfinance institutions in Vietnam until 2025

Through the action programs to implement the national comprehensive financial strategy attached to Decision 149/QD-TTg, it can be seen that the action contents mostly focus on two main tasks: developing capital sources and developing products. Specifically, for the task of developing capital sources, the Government creates favorable conditions to support microfinance organizations, programs and projects to access preferential capital sources, and especially increases the mobilization of capital sources in society to serve the development of microfinance organizations, programs and projects.

Based on the orientation of capital sources of microfinance institutions in Vietnam until 2020, vision 2030 and based on the impact of capital structure on the sustainability and social efficiency of microfinance institutions in Vietnam identified from two quantitative analysis models in chapter 3, the author has built a basis to propose a number of recommendations for microfinance institutions in Vietnam and related entities.

The impact of capital structure on the sustainability and social efficiency (SPI) of microfinance institutions in Vietnam - 3

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