“An empirical analysis of Thai village funds and saving groups’ financial performance”

Microfinance institutions (MFIs) play an important role in enabling poor households to escape poverty. MFIs cannot help borrowers if their own performance is poor. This study evaluates financial performance of Village Funds (VFs) and Saving Groups for Production (SGPs) to determine how well the MFIs are performing financially and how to improve the institutions’ future performances. The study evaluates MFIs’ per- formance, including MFI characteristics, outreach, productivity, financial structure and financial performance. Data are collected from the annual reports of MFIs be- tween 2014 and 2016. VF and SGP annual reports were collected by the Government Savings Bank between 2014 and 2016. Data are analyzed using descriptive statistics, such as means, to compare the VFs’ and SGPs’ performance. The result shows that SGPs are bigger than VFs in terms of the average number of members and borrow- ers. However, VFs provide more loans than SGPs to poorer clients. In terms of loan management, SGP staff are more efficient than VF staff. SGPs’ profits are significantly higher than VFs’ profits. In the context of financial structure, SGPs are funded through member deposits, while VFs receive government subsidies. The results indicate that both VFs and SGPs are profitable and financially sustainable. or 5.47 million people (ADB, 2019; NESDB, 2015; Warr, 2011). However, income inequality remains a significant problem in Thailand. The Gini index shows that income inequality in Thailand is the highest in Southeast Asia (Bird, Hattel, Sasaki, & Attapich, 2011). The index changes between 1988 and 2017 from 0.487 to 0.365, despite a declining poverty rate over the period (WBG, 2019). The Thailand Twelfth National Economic and Social Development Plan (12th NESDP), established in 2017 over a five-year period, shows the overall development vision linked to the vision of the 20-year national strategy (2017–2036). The plan shows that the development of microfinance institutions (MFIs) is considered important to achieve inequality alleviation. MFIs play a vital role in helping the poor escape poverty.


INTRODUCTION
Over the past six decades, Thailand has been developing its economy based on national and social-development plans. These plans enhanced economic growth by supporting the manufacturing industry, with the aim of increasing exports. As a result, the Thai economy has been one of the fastest growing economies in the world; GDP grew 10% per year in the 1990s (Warr, 2000). Between 1988 and 2017, the poverty rate dramatically declined from 65.17% of the population, or 34.2 million people, to 7.9%, or 5. 47

THAILAND
MFIs in Thailand can be divided into three main groups (Bird, Hattel, Sasaki, & Attapich, 2011). The first group includes formal MFIs, such as banks and nonbanking institutions that are regulated by prudential regulations. This group consists of commercial banks and special financial institutions (SFIs). The second group consists of semi-formal MFIs, which are not regulated by prudential regulations. However, these institutions still have legal status (Tambunlertchai, 2015). The second group includes cooperatives, Saving Groups for Production (SGPs) and Village Funds (VFs). The last group includes informal MFIs, which are not established or regulated by government legislation. This group is smaller than the formal and semi-formal groups. They are often saving groups, which operate at the village level (Bird, Hattel, Sasaki, & Attapich, 2011; Tambunlertchai, 2015).
Studies have shown that, in Thailand, most low-income and poor people can access financial services from community-based MFIs, such as VFs, cooperatives, and SGPs (ADB, 2013; Suwaruchiporn, 2016). ADB (2013) reveals that over 50% of VF borrowers and 40% of SGP borrowers have average incomes of less than THB 6,000 per month. Therefore, these Thai MFIs can ultimately help them escape poverty. This study focuses on VFs and SGPs.

Village Funds (VFs)
The VF program, the largest government microfinance program in Thailand, was established by the government in 2001. The Thai government provided THB 1 million (about USD 22,500 at USD 1 = THB 44.5 in 2001) per village, to more than 77,000 villages and urban communities across the country (Fongthong & Suriya, 2014

Saving Groups for Production (SGPs)
SGPs were established in 1974 by community leaders to encourage members to save. SGPs involve gathering people with different status in the village to help each other to solve their investment problems (Luxchaigul, 2014). The local people regularly save money in their cash pool. Savings are the best way for fund accumulation (Luxchaigul, 2014). SGPs' economic activities begin with savings for welfare provision and loans. Borrowers obtain loans to invest in their businesses (Luxchaigul, 2014). SGPs also provide loans to improve livelihoods of their members and to deal with emergencies. SGPs play an important role in providing microfinance services to the poor (Meagher, 2013).

LITERATURE REVIEW
MFI performance assessment involves evaluating progress and determining if an MFI has achieved its goals. The most important goal of MFIs is to improve the living standard of the poor and to eradicate poverty.
Evaluating MFI performance can be accomplished based on three criteria, which are referred to as the triangle of microfinance (Zeller & Meyer, 2002). These criteria are outreach, financial sustainability and welfare impact. Outreach refers to the total number of poor, including the total number of women, who are served by microfinance programs (Mokhtar, 2011). This criterion means that microfinance programs can reach the poorest with a variety of financial services. Financial sustainability is measured using 11 financial performance indicators, such as portfolio at risk, the provision expense ratio, the risk coverage ratio, the write-off ratio, the operational expense ratio, cost per client, personnel productivity, credit officer productivity, the funding expense ratio, the cost of funds ratio, and loan loss reserves (Mokhtar, 2011). The welfare impact is measured by the benefits borrowers gain from the program. This measurement is essential in determining the success of a microfinance program. Welfare information is used by donors and governments to justify their investment in the program. This study compares institutional characteristics, outreach, productivity, financial structure and financial performance of VFs and SGPs in Thailand using the performance indicators and ratios of financial structure shown in Table 1. There are five financial structure ratios used in this study. They are capital per asset ratio, debt per equity (%), deposit per loans (%), deposits per total assets (%), and gross loan portfolio per assets (%). The capital per asset ratio is used to evaluate MFI solvency. This variable shows an MFI's ability to meet its obligations and absorb unexpected losses (Yenesew, 2014). Yenesew (2014) states that the determination of an acceptable ratio level is generally based on an MFI assessment: expected losses, financial strength, and ability to absorb losses. This means that the ratio measures the amount of capital required to cover unexpected losses. This study uses capital per asset ratio as a proxy for MFIs' capital. Thus, if an MFI has higher capital per asset ratio, it is safer than lower ratio institutions. Daher and Le Saout (2015) analyzed a global dataset from 2005 to 2011 and identified those MFIs that had high capital to assets ratio and financially outperformed. Using a panel data set of 210 African microfinance institutions, Muriu (2011) finds that that capital adequacy has significant positive association with MFI profitability.
The debt per equity ratio is measured by dividing total liability by total equity. Total liability includes all the debt that an MFI owes, such as de-posits, borrowings, and other liability accounts. This ratio is the simplest indication of capital adequacy, since the ratio reflects an MFI's overall leverage (Yenesew, 2014). Muriu (2011) evaluates MFIs' profitability in 32 countries. The author asserts that if MFIs employ more debt in their capital structure, these institutions can increase their profits. Muriu also shows that a higher debt per equity ratio can improve ROE. Dissanayake (2012) investigates factors affecting MFIs' profitability in Sri Lanka. The author finds that the debt to equity ratio is negative but is statistically insignificant in relation to MFIs' performance.
The deposit per loan ratio indicates self-sufficiency and an institution's ability to mobilize savings (Eur-U-Sa, 2011). Eur-U-Sa (2011) evaluates the performance of the Bank of Agriculture and Agricultural Cooperatives (BAAC) in Thailand and finds that the deposit per loan ratio of the BAAC gradually increased between 1967 and 2009. This means that the bank is moving towards becoming a self-financing institution. Bhuiyan, Siwar, Ismail, and Talib (2011) estimate financial sustainability and outreach of MFIs in Malaysia and Bangladesh. They find that the deposit per loan ratio of MFIs in Malaysia is higher than the ratio in Bangladesh. This means that Malaysian MFIs have greater levels of self-financing than Bangladeshi MFIs.
The deposit per total asset ratio is measured by dividing total deposits by total assets. This ratio is only relevant for mobilizing MFIs' deposits. If an MFI has an efficient deposit program, this ratio will be high. This means that an institution has low funding costs (Muriu, 2011). Muriu explains that external funding is more costly than deposits, thus MFIs may effectively use local depositors. However, Rahman and Mazlan (2014) find that Bangladeshi MFIs do not use deposits as their main source of funds. Their main source of funds comes from debt-financing, which explains why the debt to equity ratio of these MFIs is high. Agarwal and Sinha's (2010) results show that the debt to equity ratio of these Indian MFIs is high. This means that their main funding is debt.
The gross loan portfolio per asset ratio is measured by dividing the gross loan portfolio by total assets. This ratio shows the financial structure.

Equity Assets
Debt per equity (%)

Liabilities Equity
Deposit per loan (%)

Deposits Gross Loan Portfolio
Deposits per total assets (%)

VF and SGP characteristics, outreach and productivity
The average number of staff members per VF and SGP is 10.68 and 11.26 persons, respectively, and significantly different at the 5% level. VFs and SGPs have similar numbers of borrowers per staff member (9.08 and 8.77) (see Table 2). However, for SGPs, loans per staff member are significantly higher at the 1% level than for VFs. Total loan amounts per staff member for SGPs and VFs are 288,952.6 and 194,390.7 baht, respectively. In addition, SGP profits of 118,253.6 baht per year are significantly higher at the 1% level than VF profits.
SGPs' total assets are significantly higher at the 1% level, almost double those of VFs (5,513,542 baht and 2,576,263 baht, respectively) (see Table 2). SGPs have significantly higher (at the 1% level) liabilities than VFs, approximately 36 times (2,861,209 baht and 78,813.04 baht, respectively). SGP and VF total equities are similar. The total equities are 2,693,207 and 2,499,516 baht, respectively (see Table 2).

VF and SGP financial structures
This section compares the VFs and SGPs financial structures using the capital per asset, debt per equity, deposit per loan, and gross loan portfolio per asset ratios. The VF capital per asset ratio is significantly higher at the 1% level than the SGP. Both the VFs and SGPs capital per asset ratios are significantly higher than the Global and FSS benchmarks (see Table 3). Note: *, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively. The SGP average debt per equity ratio is above the VF average ratio and significantly different at the 1% level. Both the VF and SGP average ratios are higher than the Global and FSS benchmarks, particularly the SGP ratio (see Table 3). The finding shows that SGP profits are significantly higher at the 1% level than VF profits, 118,253.60 baht per year.
There is a significant difference in the deposit to loan ratio of VFs and SGPs at the 1% level. The VF deposit per loan ratio is lower than the Global and FSS benchmarks, but the SGP ratio is much higher. The VF and SGP gross loan portfolio per asset ratios differ significantly at the 5% level but they are similar to the Global and FSS benchmarks.

VF and SPG financial performance
This section evaluates the financial performance of VFs and SGPs based on ROA, ROE, and OSS. Table  4 compares the financial performance of VFs and SGPs between 2014 and 2016. The results show that there is a significant difference between the ROAs for VFs and SGPs at the 1% level. Both VFs and SGPs' ROA ratios are higher than the Global and FSS benchmarks. In terms of ROE, the SGP ratio is significantly higher at the 1% level than the VF ratio. The SGPs' average ROE is above the Global and FSS benchmarks, while the VFs' average ROE is lower than both benchmarks. Table 4 shows that the OSS of VFs is significantly above SGPs at the 1% level. The OSS of both VFs and SGPs is higher than the Global and FSS benchmarks.

DISCUSSION OF EMPIRICAL FINDINGS
This study evaluates the performance of VFs and SGPs, including characteristics (such as age, assets, total liabilities, total equity), outreach (average loan balance per borrower), productivity (numbers of borrowers per staff member), financial structure and financial performance.
Age refers to the total years that an MFI has been in operation (Woldeyes, 2012 Robinson (2001) explains that experienced MFIs, or those over six years old, are 102% financially self-sufficient. Those between three and six years old are 86% financially self-sufficient, whereas those that have been in operation for less than three years are only 69% financially self-sufficient. This implies that an MFI's age affects its financial sustainability. The result suggests that VFs and SGPs benefit from organizational learning. Lewis, Tambunlertchai, Suesuwan, Adair, and Hickson (2013) state that Thailand MFIs can use networking to share knowledge and experience to improve their performance. The authors suggest that the Community Development Department (CDD) encourages SGPs to network at the district, provincial and regional levels to share their knowledge to improve their performance.
The average loan balance per borrower is measured using depth of outreach (Ledgerwood, 1998).  Table 2 shows that VFs provide more loans to poorer clients than SGPs in terms of depth of outreach.
A higher number of borrowers per staff member reflects an MFI's ability to use its staff members efficiently. The finding indicates that the efficiency of staff member for both MFIs does not differ in terms of monitoring borrowers. The loans per staff member ratio is used to measure staff productivity in terms of loan management. Table 2 suggests that SGP staff members are more efficient in loan management than VF staff members.
The MFI assets reflect the size of the institution. Larger MFIs can benefit from economies of scale by reducing operating expenses and therefore achieving greater financial performance (Meyer, 2019). The results suggest that SGPs gain more benefit from economies of scale than VFs. SGPs' total assets are significantly higher at the 1% level, almost double those of VFs. In terms of profit, SGP profits are significantly higher at the 1% level than VF profits. In addition, larger MFIs can reach more people than smaller MFIs (Mersland & Storm, 2009). The result indicates that SGPs can reach greater number of borrowers than VFs.
Total liabilities include all deposits, debts, accounts payable, and other liability accounts (CGAP, 2003). When MFIs take on more debt instruments, efficient liability management and planning are key to growing the institutions (Bayai & Ikhide, 2016). SGPs were established by community leaders or citizen groups to promote savings among members, to provide credit to improve members' lives, and to make emergency funds available (Meagher, 2013). In short, SGPs are funded through member deposits. The results suggest that if SGPs manage and plan their liabilities efficiently, then they can grow more than VFs. However, long-term debts are relatively more expensive and, therefore, employing a high proportion of such debts can lead to lower profitability (Kar, 2012). SGPs should be concerned about the cost of such liability.
Total equity is the sum of all equity accounts net of any equity distributions, e.g., dividends, stock repurchases, or other cash payments made to share-holders (CGAP, 2003). Equity has an impact on MFI performance because equity is cheap, leading to higher FSS (Bayai & Ikhide, 2016;Kar, 2012). Nyamsogoro (2010) states that equity is a relatively cheap source of funding; equity can improve MFI sustainability. VFs derive their equities from the government. The programs do not make profit from poor people. This makes equity a relatively cheap source of finance and, thus, improves their financial sustainability. On the other hand, SGPs derive their equities from the members in the rural areas. The local people regularly save money in a cash pool. Savings for SGPs are the best way of fund accumulation (Luxchaigul, 2014).
In terms of financial structures (the capital per asset, debt per equity, deposit per loan, and gross loan portfolio per asset ratios), the capital per asset ratio is used to evaluate MFIs' solvency. This ratio also shows an MFI's ability to meet its obligations and absorb unexpected losses (Yenesew, 2014). Yenesew (2014) states that the determination of an acceptable ratio level is generally based on an MFI's assessment measures, which include expected losses, financial strength, and the ability to absorb losses. This ratio measures the amount of capital required to cover unexpected losses. The current study uses the capital per asset ratio as a proxy for MFI capital. MFIs that have high capital to assets ratio are financially outperformed (Daher & Le Saout, 2015). This means that if an MFI has a higher capital per asset ratio, it is safer in terms of ability to meet its obligations and absorb unexpected losses than lower ratio institutions. Therefore, both VFs and SGPs are relatively safe in terms of financial strength compared with the Global and FSS benchmarks.
The results of the average debt per equity ratio indicate that SGPs are saving-based organizations (the SGP ratio is much higher than the VF ratio). This implies that SGPs have greater creditor risks. However, Muriu (2011) concludes that if MFIs employ more debt in their capital structure, these institutions can increase their profit.
The deposit to loan is one of the indicators that shows financial structure of an MFI. Eur-U-Sa The lower VFs' average ROE is not surprising given that its equity comes from the government; they do not prioritize profits because their core objective is to assist the poor. VFs play an important role in the credit market of Thailand, especially for poor individuals who live in rural areas and cannot access formal financial services (Fongthong & Suriya, 2014). The ROE ratio is important only for profit-earning institutions (Duwal, 2012

CONCLUSION
This study compared VFs and SGPs in terms of characteristics, outreach, productivity, financial structure, and financial performance. It was found that both VFs and SGPs could benefit from organizational learning because VFs and SGPs have been operating for an average of 13.09 and 10.61 years, respectively. SGPs are bigger than VFs in terms of the average number of members and borrowers. However, VFs provide more loans than SGPs to poorer clients. In terms of loan management, SGP staff are more efficient than VF staff. SGPs' profits are significantly higher than VFs' profits.
In terms of financial structure, SGPs are funded through member deposits, while VFs receive government subsidies. Both the VFs and SGPs capital per asset ratios are above the Global and FSS bench-marks. The result shows that both VFs and SGPs are safe in terms of financial strength. This implies that both VFs and SGPs are able to meet their obligations and absorb unexpected losses. The gross loan portfolio per asset ratio indicates that both VFs and SGPs have lending as their core earning asset. The results indicate that both VFs and SGPs are profitable and financially sustainable.
To achieve sustainability, both VFs and SGPs should ensure their social and financial goals are adequately balanced. It proposed that both VFs and SGPs use a mixed approach. It is recommended that both VFs and SGPs follow profit maximization principles and the government and donors support this approach to help them to be sustainable. They should create a robust financial infrastructure to assist MFIs to reduce their costs. This will require the participation of information intermediaries to assist both VFs and SGPs to reduce their costs, such as credit rating, credit bureaus or credit scoring agencies.
This study suggests that both VFs and SGPs should embrace technology to minimize their transaction costs. They can use management information software and other innovative banking technologies, such as internet banking, mobile phone banking, smart card operation, and credit scoring, to minimize transaction costs. These technologies can decrease administrative costs, increase staff productivity and improve the institution financial accounts' reliability (Muriu, 2011). Thus, VFs and SGPs adopt modern technology to minimize transaction costs.