The effect of religion in development efforts – evidence from the microfinance industry

and a research agenda

Roy Mersland University of Agder, Kristiansand, NorwayBert d’Espallier Hogeschool-Universiteit Brussel, Belgium

Magne Supphellen Norwegian School of Economics, Bergen, Norway

Religion is a hot topic in development

• “Neglected factor”• May influence:– Recipients

• Moral guidance, will and effort etc.• Some studies (e.g. Teer Haar and Ellis, 2006)

– Providers• This study

• Policy interest: – UK, Holland, Norway, World Bank– Former president Bush

The debate

• Supporters– Faith based organizations can produce important

social outcomes because:• They take people’s faith into account• They have access to local networks (churches)• They are motivated

• Skeptics– Public money will be used for religious purposes– Unprofessional organizations– “Rice Christians”

Faith based organizations on many arenas

• Schools / education• Hospitals / health care• Nursing homes / homes for retired• Here too, the effect of religion on providers’

performance remain an unsolved and debated puzzle

The Weber theorem

• “The protestant ethic and the spirit of capitalism”• Claims that protestant ethic, with its focus on

personal responsibility and diligence, spur economic development

• Protestant countries should therefore have higher economic growth than catholic countries

• Still uncertain whether Weber was right– What is happening in Latin countries moving from

being mainly catholic to having larger protestant populations?

What do we know about performance differences between Christian and secular actors?

• Very little actually• Compared to secular actors Christian

development actors (Harper et al. 2008):– Receive lower portions of their budgets from public

donors– Have more donors– Have more volunteers– Pay lower salaries to top management– Pay equal salaries to the rest of the employees– Have equal fundraising costs

Why should we expect Christian and secular actors to be different?

• Institutional theory: Organizations become similar when:– They all depend on the same donor (e.g. Norad)– They all need to follow the same regulations (e.g.

Riksrevisjonen and Innsamlingskontrollen)– They all depend on the same networks (e.g.

Bistandstorget)– They have sub-networks tailored especially for

them (e.g. Bistandsnemnda)

Christian organizations and individuals have long been involved in entrepreneurship and finance

• Pawn shops in Italia 500 years ago (Franciscans)• Hans Nielsen Hauge• “The father of savings banks” (Duncan) 200 years

ago• Catholic priests’ involvement in the savings and

credit cooperative movement 150 years ago and ungoing

• MEDA in Paraguay in the 1950-60ties• David Bussau and Al Whittaker (1971)• Misjonsalliansen 1991

There are many Christian microfinance initiatives

• Opportunity International – 43 MFIs in 26 countries

• World Visión– 41 MFIs in 41 countries

• Habitad International– World’s largest housing finance initiative for poor

• MEDA– Pioneers

• Catholic Relief Services– Have moved down market

• Funds:– Oikocredit– Eclof– Cordaid

• Norway– Misjonsalliansen– Strømmestiftelsen– NCA– PYM

Our study

• We use data from the microfinance industry to study the effect of Christian religion on organizational performance

• Data from 405 microfinance providers over up to 8 years in 73 countries

• 1 in 6 institutions have a Christian origin

Performance areas that we study• Social performance– Outreach to poor clients– Outreach to female clients

• Financial performance– Maximizing income– Minimizing financial costs– Minimizing operational costs– Minimizing loan losses

• Bottom line performance– Return on assets– Financial sustainability

Why should Christian actors perform better?

• Social performance– Outreach to the poor• Care for the poor is a Christian virtue

– "If you would be perfect, go, sell what you possess and give to the poor, and you will have treasure in heaven; and come, follow me."

– Outreach to women• Female empowerment may in some contexts still be

against Christian doctrine• But, women are poorer and Christians should care for

the poor

Why should Christian actors perform better?

• Financial performance– Maximizing income

• Charging high interest rates is a stark dilemma for Christian actors

• An antithesis of charity inherent in Christian organizations• The mission is to “help” the customers

– Cost of funds• Fewer local networks (operate in isolation)• Larger international networks (easy access to funds)• Many Christian international lenders

Why should Christian actors perform better?

• Financial performance– Minimizing operational costs

• Being Christian should foster self-regulation and self-control (less corruption)

• More motivated work force• Greater goals, more rewarding, a divine calling• BUT;

– Work goals at odds with efficiency?– Uncompetitive organizational cultures?– Low staff efficiency ratios?– Difficult to fire staff?– Only hiring staff with the “right faith”?– Too focused on the mission and lack financial control?– Management and boards focusing on theology and not efficiency?

– Minimizing loan losses• Slack loan enforcement because want to help the customers• Ethical challenges related to loan enforcement

Hypotheses Christian versus secular actors

hypt. number Performance variables expected relation

1 a Poorer clients negative

1 b Female clients positive

2 a operational income negative

2 b Financial costs negative

2 c operational efficiency ?

2 d Loan losses positive

2 e Bottom line perform. ?

Initial findings simple statistics

mean values median valueschristian secular t-stat christian secular χ²-stat

financial performance driversportfolio yield 0.35 0.40 3.61*** 0.30 0.35 13.95***

cost of funds 0.05 0.08 4.78*** 0.05 0.07 16.63***

operational costs / TLP 0.31 0.31 0.40 0.23 0.24 1.50PaR30 0.07 0.06 -0.14 0.03 0.03 0.11bottom line financial performanceROA -0.01 0.01 1.89** 0.02 0.03 2.58**OSS 1.14 1.13 -0.23 1.12 1.11 0.03FSS 0.91 0.96 1.56* 0.93 0.98 3.47*social performanceaverage loan 641 749 1.40 360 387 0.37% female clients 0.63 0.73 4.69*** 0.63 0.74 12.63***

Social performance differences – advanced statistics (RE-model)

Social perf. average loansize % female clientsChristian MFIs -119.0 -0.067***

firm-specific controlslnta 76.01** -0.02***age 3.46 0.001dumregulation 83.80 -0.06**dumownership 156.98 -0.11***

contextual controlsheritage -3.38 -0.001GDP per capita 15.93 0.00HDI -1417 0.29

regional dummies yes yestime dummies yes yesmodel statsn 1354 680Wald χ² 194.40*** 25.56***R² 0.16 0.34

Financial performance differences – advanced statistics (RE-model)

Financial performance drivers

yield cost of funds costs / TLP PaR30

Christian MFIs -0.025** -0.026*** 0.016 -0.001

firm-specific controlslnta -0.005 0.004 -0.059*** -0.001age -0.003* 0.001 -0.001 0.002*dumregulation -0.074** -0.006 -0.014 0.003dumownership 0.059** -0.001 0.034 -0.004

contextual controlsheritage 0.00 0.00 0.01 0.00GDP per capita 0.00 0.00 0.00 0.00HDI 0.62*** 0.11* 0.42** -0.01

regional dummies yes yes yes yestime dummies yes yes yes yesmodel statsn 1387 1281 1377 1330Wald χ² 119.63*** 89.09*** 191.90*** 79.95***

R² 0.18 0.08 0.21 0.10

Bottom line performance differences – advanced statistics (RE-model)

Bottom-line perf. ROA OSS FSSChristian MFIs -0.023*** -0.031* -0.059*

firm-specific controlslnta 0.029*** 0.099*** 0.092***age -0.01 -0.007 -0.006dumregulation -0.013 -0.012 -0.012dumownership 0.003 0.042 0.051

contextual controlsheritage -0.001 -0.004 -0.006GDP per capita 0.000 0.000 0.000HDI -0.083 -0.189 0.041

regional dummies yes yes yestime dummies yes yes yesmodel statsn 1383 825 799Wald χ² 97.16*** 135.05*** 174.46***R² 0.17 0.12 0.17

Are there differences between Catholic and Protestant actors?

Financial performance drivers

portfolio yield cost of funds PaR30 costs/TLP

Catholic MFIs (yes/no) -0.071** -0.033*** -0.01 -0.029

Protestant MFIs (yes/no) 0.014 -0.015** 0.006 0.058*

firm-specific controlslnta -0.004 -0.003 0.006* 0.005 -0.006 -0.006 -0.058*** -0.057***

age -0.003* -0.003* 0.00 0.00 0.002* 0.003* -0.001 -0.001dumregulation -0.071*** -0.069** -0.005 -0.005 -0.003 -0.002 -0.016 -0.014

dumownership 0.044* 0.043* -0.004 -0.004 -0.003 -0.003 0.026* 0.024

contextual controls added added added added added added added addedregional dummies yes yes yes yes yes yes yes yestime dummies yes yes yes yes yes yes yes yesmodel statsn 1317 1317 1220 1220 1261 1261 1312 1312Wald χ² 113*** 112*** 82*** 65*** 75*** 78*** 189*** 187***R² 0.21 0.2 0.07 0.07 0.11 0.11 0.23 0.23

Are there differences between Catholic and Protestant actors?

Bottom line and social perf.

% female clients average loan FSS ROA

Catholic MFIs (yes/no) -0.076* -127.49 -0.017* -0.080**

Protestant MFIs (yes/no)

-0.036* -126.67 -0.067** -0.087**

firm-specific controlslnta -0.033*** -0.032*** 76.28** 75.27** 0.092*** 0.091*** 0.065*** 0.064***

age 0.006* 0.006* 1.88 2.26 -0.006* -0.006* -0.004** -0.004**dumregulation -0.039* -0.038* 82.96 81.01 0.038 0.037 -0.011 -0.013dumownership -0.102*** -0.097*** 181.98 186.32 0.017 0.021 -0.017 -0.014

contextual controls added added added added added added added addedregional dummies yes yes yes yes yes yes yes yestime dummies yes yes yes yes yes yes yes yesmodel statsn 620 620 1294 1294 770 770 1238 1238Wald χ² 22.93*** 23.60*** 174.42*** 180.21*** 154.64*** 163.29*** 105.16*** 102.41***

R² 0.34 0.34 0.17 0.17 0.19 0.19 0.17 0.17

Summary of findings• Christian actors are as good in enforcing loan

repayment as secular actors• Christian actors struggle in reaching female clients• Christian actors don’t reach poorer clients than secular

actors• Christian actors have lower cost of funds probably

because they have better access to international networks and thereby funding– Are they being spoiled?

• The lower cost of funds are in Catholic institutions brought forward to the clients (lower interest rates) while the protestant actors become inefficient

Implications for Christian practitioners

• Reaching out to women is still an issue in Christian development efforts– Local partners are a challenge?

• Reaching the most vulnerable does not come automatically because you are a Christian organization

• Easy access to international funding may result in inefficiencies– Donors need to strengthen their monitoring role

• Christian actors disappear if they don’t assure their financial performance– International donors need to strengthen financial monitoring and

somewhat loosen social monitoring?• Time to use our Christian motivation to become better and not use it

as a “sleeping pillow”• Christian actors should be the most efficient actors servicing the

most marginalized groups while assuring their long term survival

Remember that statistics is about averages

• Several Christian top performers– E.g. Diaconia FRIF in Bolivia