4.1. Descriptive Statistics
The panel data sets of this study included one dependent variable (operational self-sufficiency), and nine independent variables (interest rate spread, deposit to loan ratio, deposit to total asset ratio, the volume of deposits, the ratio of demand deposits, the number of members, the percentage of woman members, the age of the institution, and inflation rate). Descriptive statistics are presented in
Table 4.
This section summarizes the descriptive statistics of the variables used in this paper. The results of the descriptive statistics in
Table 4 show that, on average, RUSACCOs have operational self-sufficiency (OSS) with a mean value of 2.67, measured as the ratio of financial revenue to expenses, indicating that the RUSACCOs in the sample were operationally self-sufficient. The figure for this variable was above the standard; therefore, the financial revenues of the RUSACCOs were sufficient to cover their operating expenses. For operational self-sufficiency, a value above one indicates that the institution is covering its costs from its operating revenues. The standard deviation for OSS was 2.33, an indication of the existence of dispersion in the operational self-sufficiency of the RUSACCOs studied.
In
Table 4, interest rate spread (IRS) indicated that RUSACCOs in Ethiopia earned, on average, 10% IRS with a minimum of 0.29% and a maximum of 31.86%. This indicates that the more financially sustainable RUSACCOs earned 0.29%, and the less financially sustainable ones earned a 31.86% interest rate spread. It also showed that cooperatives that were operationally self-sufficient had a low spread between the loan and deposit rates. The standard deviation of 2.33% indicated that the spread variation from its mean was small. Likewise,
Table 4 showed that the deposit loan ratio had a value of 1.19, which demonstrates that RUSACCOs in Ethiopia, on average, used 1.19 deposits as a source of funds for loan portfolios to achieve operational self-sufficiency. A ratio of 1 means that the institution fully financed its loans from its own internally mobilized deposits, without depending on external borrowing and subsidies.
The value of the mean for the deposit to total asset (DTTA) ratio was 47.20 and showed that, on average, 47.20 of the RUSACCOs’ assets were financed by internally mobilized deposits. According to
Table 4, RUSACCOs in Ethiopia, on average, have 9.58 volumes of deposits (VD) to fund their loan portfolios. Furthermore,
Table 4 illustrates that the mean for the demand deposit ratio (DDR) was 0.04, which indicates that members of RUSACCOs in Ethiopia only save compulsory savings and that there were low voluntary savings products in the country.
Finally, for the control variables such as the number of members (NAM), the percentage of woman members (PWM), the age of institution (AGEI), and the inflation rate (INFL), we observed mean values of 4.19, 54.41, 1.04, and 8.26, respectively, and standard deviations of 0.88, 36.88, 0.67, and 1.32, respectively. The average mean of 54.41 for the percentages of woman members (PWM) showed high improvements in the participation of women in rural savings and credit cooperatives in Ethiopia over the study period.
4.2. Trend Analysis of RUSACCOs’ Financial Performance
Table 5 indicates trends of financial performance by sample RUSACCOs over the study periods. The trend of the average ratio for operational self-sufficiency (OSS) from
Table 5 was 2.273, 2.628, and 3.106, respectively, which showed improvements over the years. OSS measured how the RUSACCO generated sufficient revenue from operations to cover its operating and financing costs. It was calculated by dividing financial revenue to operating expenses plus financial expenses. The highest OSS was achieved in 2016, which were 3.106 (310.6%). According to MIX Market, the break-even point is 1 (100%). For all years, RUSACCOs achieved an OSS ratio above break-even points.
According to
Table 5, the average of the interest rate spread narrowed over the years, which indicated RUSACCOs were charging fair interest rates on both saving and loans over the years. In Ethiopia, the cooperative society’s proclamation no. 985/2016, part 6, article 48, subarticle 2, states that any cooperative society for the money it lends shall prescribe the interest rate in its by-laws based on the special resolution of the General Assembly. Based on this proclamation, different RUSACCOs in the country have their own by-laws, which state different interest rate levels on both lending and savings. In our sample RUSACCOs, the average yearly interest rate level charged on lending ranged from 9 to 12.5%, and the average interest rate level paid on savings ranged from 3 to 6.5%.
The results for the average of deposit to total asset ratio, the volume of deposit, the number of members, the percentage of woman members, and the age of the institution increased over the years. The average for the deposit to loan ratio was high in 2014 and decreased in 2015 and 2016. Average demand deposit ratio for the RUSACCOs was also decreased for all three years. From
Table 5, the average total volume of savings (10,074,333.54 ETB) was greater than the average of total loans (8,496,979.85 ETB) disbursed over the study period.
Table 5 shows that the deposit to loan ratio declined in 2015 and 2016, while the deposit to total asset ratio increased in the same year. The average percentage of woman members was 54.41 percent across the sample, and increased over the study periods. Finally,
Table 5 revealed that the average total incomes (3,348,119.14 ETB) generated by sample RUSACCOs exceeded the average total expenses (1,192,510.50 ETB) over the study period. This shows that RUSACCOs covered their operatizing expenses by internally generated revenues.
4.3. Fixed Effects Regression Results
The robust fixed effects models summarized in
Table 6 showed that all key and two control independent variables (age of institution and inflation) were statistically significant and the other two control variables were not significant. Since our model suffered from both autocorrelation and heteroskedasticity problems (see
Section 3.3), we employed heteroskedasticity-robust standard errors to estimate the coefficients of the variables as correction measures.
Rho is the proportion of variation due to the individual specific term. From the above table, a large proportion (87.33%) was explained by the individual specific terms and the rest due to idiosyncratic errors. The R-square showed that the fixed effects estimator could explain 24.90% within variations. The fixed effects regression results presented in
Table 6 show that the interest rate spread (IRS) negatively influences the financial sustainability of RUSACCOs in Ethiopia as it was statistically significant at 1%. This means that a unit increase in the interest rate spread within RUSACCOs over time will lead to a 3.01% decrease in the operational self-sufficiency of the RUSACCOs. A wide interest rate spread has two implications for financial institutions. Both affect the sustainability of the institution. The first is that borrowers are charged a high interest on loans, thus decreasing their demand for loanable funds. As the demand for loans decrease, the institution loses interest income from the loan. The second implication is that savers are paid low interest rates on their savings.
The implication of the negative relationship between interest rate spread and financial sustainability is that the wide interest rate spread discourages savers, which reduces the loanable funds of the institutions from which they can earn interest income for their sustainability. Loanable fund theory supports this finding. According to loanable fund theory, interest rate spread should not be very wide where one party feels exploited [
26]. Both savers and investors are at their happiest possible when at an equilibrium level. This shows that the market interest rate is determined by the intersection between the supply and demand for loanable funds [
75].
Savings constitute the most important source of the supply of loanable funds for financial cooperatives. It collects them from its net saver members to lend to its net borrower members with interest. This loan interest is the main source of income of RUSACCO societies. The negative relationship was consistent with Agapova and McNulty [
49], who found a negative relationship between the interest rate spread and traditional balance sheet measures of financial intermediation. High spread implies low efficiency in intermediating financial services.
The deposit to loan ratio was significant at 5% and positively related to financial sustainability. The results showed that a unit increase in deposit to loan ratio within RUSACCOs over time led to an increase in operational self-sufficiency by 14.80% in RUSACCOs. A high ratio implies that the institution is relying on its own deposits to make loans to its members without outside borrowing. The higher the ratio, the greater the RUSACCOs’ ability to fund its loan portfolio from its deposits and enhances operational self-sufficiency. Another implication of this finding is that the institution might have enough liquidity to cover any unforeseen funding requirements. An earlier study by Yaron [
48] supports this positive relationship. The changes in deposit to loan ratio over time indicate how the institution is successful in replacing external funding with its own savings. In a nutshell, a high ratio implies that the institution is dependent on deposits as a source of funds for loan portfolios from which it earns interest income. Fewer ratios mean fewer funds to loan to borrowers and reduce the opportunity to make revenue through interest earnings on loans.
Furthermore, this study found the deposit to total asset ratio to be statistically significant in determining the financial sustainability of RUSACCOs and had a positive and statistically significant coefficient at 10%. As the deposit to asset ratio changes within RUSACCOs over time, operational self-sufficiency also changes. This shows that a unit change in the deposit to asset ratio leads to a 0.663% increase in the operational self-sufficiency of RUSACCOs. This finding is similar to one of Mwangi and Muturi [
60], who found the deposit to asset ratio to be statistically significant in determining the financial sustainability of MFIs in Kenya. However, Bogan [
33] found a negative relationship between the deposit to asset ratio and financial sustainability. This may be attributed to the lack of experience in deposit mobilization.
The coefficient of the log of the volume of deposits (VD) revealed a positive and significant relationship with operational self-sufficiency at 1%. A unit increase in the volume of savings within RUSACCOs over time leads to an increase in operational self-sufficiency by 4%, and this result supports the idea that the entire business of savings mobilization hinges on high volume and low costs. The high volume of savings is integral to sustainability [
7]. This indicates that the more deposits a RUSACCO is able to attract, the more funds are available to lend to members. By mobilizing a large volume, financial institutions reduce costs and enjoy economies of scale. The higher the volume, the greater the probability of granting loans to borrowers and then by matching the incoming deposits with the outgoing loans, the higher the interest income from the loan for their sustainability. Large volumes of deposits provide a stable means to finance a growing loan portfolio and contribute to self-sustainability by providing the institution with cheaper funds.
The demand deposit ratio is positively related and statistically significant at 1%. A unit increase in the demand deposit ratio within RUSACCOs over time will lead to a 47.5% increase in the sustainability of the RUSACCOs, which is contrary to Cozarenco, Hudon [
76], who noted that taking voluntary savings was not related to financial performance. RUSACCOs are basically savings-led organizations and mobilize large numbers of small voluntary (demand) savings. They offer two savings products: compulsory and voluntary savings. Compulsory savings do not provide sufficient volume to fund loan portfolios [
7]. This limits the loanable fund amount from which RUSACCOs obtain interest income and limits the scope of operation, so then the continuity of the institution to provide financial services for their members on a sustainable basis will be in question.
In our study, the potential RUSACCOs members were farmers who only receive income once a year. Voluntary (demand) savings are very important to farmers who have a seasonal income. This is because farmers do not have a regular income to save regularly, instead if a voluntary savings product is available, they save large amount as voluntary savings during harvesting time and transfer funds monthly to their compulsory saving accounts [
59]. This ensures a regular cash flow for the institution, which leads to operational self-sufficiency.
Contrary to our expectations, a log of the number of members was not significant, but was positively related to operational self-sufficiency; this may be attributed to the fact that some members are inactive for long periods of time, especially in savings activities. The observed positive coefficient for the number of members indicated that as the number of members’ increased the volume of deposits also increases, which leads to the cooperatives having more liquidity to fund their loan portfolios from which they obtain interest income for operational self-sufficiency. Our findings were not in line with the previous study that argued that large memberships make rural cooperatives financially strong by increasing their capital base [
54]. Boehe and Barin Cruz [
77] also noted that high membership numbers would suggest that the microfinance cooperative can generate economies of scale.
Surprisingly, the percentage of woman members (PWM) was not significant and was negatively related to operational self-sufficiency. This might be because women still have less power in decisions regarding financial undertakings and are forced into financial dependency on their husbands in Ethiopia. Contrary to our finding, Abdullah and Quayes [
78] found a positive relationship between the percentage of woman members and financial performance. On the other hand, the findings of Boehe and Barin Cruz [
77] showed that there was a negative relationship. Since men tend to have more formal education than women in many developing country contexts, this may also account for the gender disparity [
17].
The variable age of the RUSACCO, as measured by the natural logarithm of the cooperatives’ age was significant at 5% and positively related to operational self-sufficiency. The regression results showed that an increase in the age of RUSACCOs over time resulted in a 33% increase in their operational self-sufficiency, thus verifying that mature (MIX Market classifies age of the financial institutions as new (0–4), young (5–8), and mature (>8) years) institutions are more likely to be operationally self-sufficient than younger institutions. This implies that the longer the RUSACCO has been in existence, the more experience it gains in deposit mobilization. It accumulates a sufficiently adequate capital that improves operational self-sufficiency over a period of years. This finding was consistent with the expectations of the life cycle theory, which posits that the sources of financing are related to institutional development [
33]. As the age of the institution increases, they gain more experience and therefore have better operational self-sufficiency. Our results are consistent with those of Mahinda and Jacob [
34], who found that older MFIs performed better than younger ones in terms of achieving financial goals. Contrary to our finding, Gutierrez-Goiria and San-Jose [
79] found that the oldest MFIs were less efficient in both economic and social terms in comparison with the young one.
Lastly, as expected, inflation was significant and negatively related to operational self-sufficiency, showing that inflation negatively affects both the institution and its members. High inflation rates could diminish the capacity of individuals to save by spending more of their income on consumption, and this reduces an institution’s ability to cover its costs. In our findings, when the inflation rate increased by 1%, all other things being equal, the operational self-sufficiency of the RUSACCOs decreased by 4.23%.