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Microfinance and financial performance on SMEs in Manado – Indonesia


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North Sulawesi is the suburban area with the potential for natural wealth is quite abundant: the sea is rich, the land is fertile, and nature is beautiful. Soil fertility is very clearly seen in the fertility of coconut, clove, and nutmeg plants as traditional commodities of this region. Rice and pulses also grow easily and fertile. The government together with the cooperative service and SMEs are trying to facilitate SMEs to get microfinance credit funds. This research aimed to see the significant difference in financial performance of nine Small Medium manufacturing Enterprises in coastal coast area before and after using funds microfinance credit in Manado. Based on the results shows that the financial performance of SMEs in Manado City from the year before using microfinance credit and after using microfinance credit is changing, which is the average value of the financial ratio analysis experienced good changes. SMEs should be more effective in utilizing existing resources to generate sales, and SMEs should know the condition of the company’s financial performance in their business from time to time so that the future can anticipate and quickly taking decisions for possibilities that could happen in the future, and further improve the company’s performance in the future.
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Year 2019. 1-2. issues
Table of contents
Amar Uuld – Robert Magda
Import demand analysis for wheat in Mongolia ....................................................................................................................2
Daniel Oigo – Zeman Zoltan – Richard Ndege – Peter Gaturu
Dividend pay-out and nancial performance of energy & petroleum listed companies
in Kenya ...................................................................................................................................................................... 6
Mirjam Hamad – Alexandra Szekeres
Business valuation by the Mckinsey model, comparison of two different
accounting systems ............................................................................................................................................. 13
Johan Reineer Tumiwa – Octavia Diana Monica Tuegeh
Micronance and nancial performance on SMEs in Manado – Indonesia ........................................ 18
Kecskes Andras
Sovereign Funds in an International and Hungarian Context ................................................................. 23
Gennadiy Marianenko
The unemployed future of the labor market in conditions of robotic production
and determination of trends in the development of education in digital space ............................................ 35
Nikola Trendov
Compare the agricultural industry of the selected eu-15 member states
in central-east europe ......................................................................................................................................... 39
Nina Poyda-Nosyk – Iryna Zhuravlyova – Svitlana Lelyuk
The methodology and empirics of enterprises nance security ........................................................... 48
Csaba Lentner – Pal P. Kolozsi
Old Problems in a New context – Excerpts from the New Ways of Thinking
in Economics after the Global Financial Crisis ............................................................................................ 53
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Law and economy
Financial and working capital management
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Economics & Working Capital
Year 2019. 1-2. issues
Wheat is one of the strategic product in Mongolia (Food Supply Law,
1995). Thus, Mongolian government implemented many projects to
protect the strategic product’s domestic market. One of the important
program is “Atar” 3rd Agricultural land Rehabilitation program. The
purpose of this program is to intensify development of the arable land
of Mongolia, by creating legally and economically favorable conditions
for engaging in farming and steadily supplying the population with
safe products (thus eliminating dependence on imports) (Third Atar
campaign, 2009). But we have still import for crop production. For
instance, wheat, flour, potato, vegetables and fruit. For that reason,
this paper analysed the factors affecting aggregate function of import
demand for wheat in Mongolia during the period 1997-2017 by us-
ing double log-linear regression model. Mongolia’s import demand
for wheat was determined as a function of gross domestic product per
capita, domestic production, real import price, exchange rate MNT-
US dollar and trend. The result have been estimated that a change of
exchange rate is strongly affective on th wheat import demand.
Key words: Wheat, import demand, double log-linear regression
Wheat is the one of the main producing crop in Mongolia. In
2017, total sown area in Mongolia was 524.3 thousand ha, which
of approximately 75 percent was wheat production, for the 25
percent in potato, vegetables and other crop production (NSO,
2017). Total production of wheat is 231.4 thousand tons, which
is twofold decrease from 467.1 thousand tons in the same period
last year and 42 percent lower than the five-year average.
Also, the national average yield for 2017 is estimated at 0.6
tonnes/hectare, compared with 2016 and average level of 1.34
tonnes/hectare. The reason of lower yield was drought climate
condition. The extended period of severe dry weather last year,
which was intensified by unusually high temperatures, severely
affected the wheat crop at the critical growing stages of head-
ing and flowering (FAO, 2017). The wheat import was 13.6
thousand tons in 2017 and 10 times lower than compared with
2016. Crop production has been increasing since 2008 when
the Third Land Rehabilitation Campaign started. Even do-
mestic production of wheat is increasing, amount of imported
wheat in Mongolia is still significant.
Import demand analysis estimates are important inputs into
most trade policy simulation models. Import demand func-
tions in aggregate level have traditionally included a relative
price variable, real income, and dummy variables to account
for unusual periods such as devaluations or policy changes.
The relative price measure is often the ratio of the import price
to the domestic price index for the commodity adjusted for
the exchange rate, which gives a measure of the real exchange
rate (T.A. Boylan, M.P. Cuddy and I. O’Muircheartaigh , 1980;
Tanyeri-Abur and Parr Rosson, 1998; M. Uzunoz and Y. Akcay,
The goal of this paper is to determine import demand fac-
tors for wheat in Mongolia during the period 1997-2017 by
using secondary data. We can not use other theoretical demand
systems, such as the Armignton model, AIDS and Rotterdam
models, for demand analysis of wheat. But, we can not used
these model because data is not enough and uncertainty. So, we
estimated using to analyse aggregate import demand function.
The paper is presented in three parts. The first part introduc-
es the Mongolia’s wheat market. The methodology and data
sources are in second part. The last part presents the empirical
result and conclusion.
MongolIAs wheAt MArket
The total sown area in Mongolia is 524.3 thousand ha that is de-
creased by 33.4 percentage ha in the 1990 year (Fig 1). The grain
area share approximately 75 percent was wheat production, for
the 25 percent in potato, vegetables and other crop production
(NSO, 2017). Until the middle of the 1990s Mongolia was self-
sufficient in wheat and an occasional exporter. At the peak of
agricultural production in 1989, approximately 1.38 million
hectares of land was classified as arable or planted in permanent
crops, and about 700,000 ha (50%) of this was actively harvested
(FAO 2008). During this period, crop production also became
a larger proportion of total agricultural production. Unfortu-
nately, the country has moved to free-market economy in 1990.
Since the political and economic transition has been charac-
terized by a 70% crash in total crop production across Mongo-
lia, and similar declines in land in production and yield. The
contribution of crops to the agricultural sector of the Mongo-
lian economy dropped from 23% in 1989 to 10% in 1992. The
amount of land actually harvested and total production has
crashed until 2005. Since 2005, the amount of sown area has
been increasing to about 525.0 thousand hectare in 2017. Total
production of wheat is 231.4 thousand tons and the yield is 0.6
tn/ha (Fig 2) in 2017. Wheat production is twofold decrease
from 467.1 thousand tons in the same period last year.
Total production of wheat is 231.4 thousand tons and the
yield is 0.6 tn/ha (Fig 2) in 2017. Wheat production is twofold
decrease from 467.1 thousand tons in the same period last year.
Source: Mongolian Statistical yearbook, 2017
Prior to the political and economic transition system, crop
production was generally met by domestic production. The
collapse of production since 1990 has been accompanied by
dramatic decreases in both the amount of land harvested and
efficiency (Fig 2). National average wheat yeald was 0.6 tonnes/
hectare in 2017, which was declined compared with 2016 aver-
Import demand analysis for wheat
in Mongolia
Economics & Working Capital
Year 2019. 1-2. issues
age level of 1.34 tonnes/hectare.
The average yield decline resulting from privatization of
crop production and drought to related impact of dzud and at-
tributed to the longer -term impact of transition and structural
reform in 1990s. Wheat yields in Mongolia fluctuated about an
average from 0.5 to 1.2 tn/per hectare. Especially after 2005,
it has increased, highest yield was 1.6 tn/per hectare in 2014.
Since 1997, Mongolia have been started import for wheat as-
sociated with that crop production dropped in earlier of transi-
tion system. For example, in 2002, total domestic production
met only 32.7%, and vegetable production only 30%, of local
demand. At a peak of wheat import was 171.3 thous.tonnes
in 2010 (Fig 3). Since 2010, wheat import had been declining
until 2016. These trends and reliance on imports is considered
a risk in terms of Mongolian food security. In earlier 2008, the
Mongolian government announced the start of the Third Atar
Campaign, to be implemented, at least preliminarily, from
2008-2010. Most of the imported wheat is Russian Federation
and Kazakhstan.
Methodology And dAtA source
Most of the studies on import demand analysis is based on
the derived demand for import. For example, Weining Mao,
Won W. Koo, Jon P. Suomala and Takeshi Sakurai try to defined
using the translog cost function is used to analyze import de-
mand for wheat differentiated by class and country of origin in
the Japanese wheat flour milling industry. Also, Jung-Hee Lee,
Won W. Koo, and Mark A. Krause was used AIDS model to de-
termine elasticities for Japanese wheat import demands. These
studies are based on expenditure function related with wheat
production cost and expenditure share of imports.
However, some studies of import demand analysis are
based on traditional import demand function especially at
aggregate level. These studies represented by Boylan, M.P.
Cuddy and I. O’Muircheartaigh (1980) and Tanyeri-Abur and
Parr Rosson (1998). For instance, Boylan, M.P. Cuddy and I.
O’Muircheartaigh estimated using traditional import demand
function real gross domestic product and ratio of the import
price for case of three European economies. Tanyeri-Abur and
Parr Rosson (1998) analysed import demand analysis for dairy
products in Mexico. They used to estimate import demand
function real income, real exchange rate, lagged imports of
products and time trend.
Aggregate import demand model
Import demand functions have traditionally included a relative
price, real income, and dummy variables to account for unusual
periods such as devaluations or policy changes (Tanyeri-Abur
and Parr Rosson, 1998). However, the simplest import demand
function (T.A. Boylan, M.P. Cuddy and I. O’Muircheartaigh ,
1980) is expressed as:
Mt = f (Yt’ P*) (1)
Where, Mtis the quantity of import demand in t time,
Yt– is the real GDP per capita in t time and P*is the relative
price -ratio of the price of import to domestic price level.
Mongolia’s import demand for wheat was determined as a
function of gross domestic product per capita, Mongolia MNT-
US dollar exchange rate, domestic production of wheat and
real price of import wheat. The model is expressed in general
form as:
d = f (Yt’ EXRt’ DPt’ Pt
m,T) (2)
1990 1995 200020052010 2015 2016 2017
Sown area Grain area
Total harvest, thous.tnYield(tn/ha)
Figure 1. Total sown area and grain area, thous.ha,
Figure 2. Total wheat production and average yield
per hectare, 1990-2017
Figure 3. Wheat import, between 1997-2017, by thous.
Economics & Working Capital
Year 2019. 1-2. issues
The general log-linear formulation form of the aggregate
import demand equation is:
d = a0+a1lnYt+a2lnEXRt+a3lnDPt+a4lnPt
m+a5T+st (3)
d – is the quantity of wheat import demand in t time, thous.
Yt – is the real GDP per capita in t time, thous.MNT
EXRt – MNT-US dollar exchange rate in t time
DPt – quantity of wheat domestic production in t time, thous.
m – real import price in t time, thous.MNT
T – time trend
εt,– is assumed to be an error term
a0, a1, a2, a3, a4, a5 – are estimated coefficient
In this study, annual data for the period from 1997 to 2017 were
used in this study. Mongolia’s wheat import started from 1997.
The all data has been collected from the Mongolian Statistical
Yearbook and Mongolian Customs Yearbook. Mt
d and DPt are
quantity of wheat import and doemstic production of wheat in
year t, Yt is real gross domestic product (GDP) per capita in year
t, GDP per capita at constant 2015 prices. Pt
m is price variable
real import price based also constant 2015 prices in year t.
estIMAtIon results
We estimated equation (3) for the wheat using ordinary least
squares. In many economic time series data are probably non-
stationary. Non-stationary variables imply the risk of spurious
regression unless they are co-integrated. An Augmented Dick-
ey-Fuller (ADF) test for identifying the order of integration for
the price and quantity ratio is conducted to determine the or-
der of integration. Each variable is integrated at the first order
I(1) (ADF test results shown in table 1). Thus, to avoid the risk
of spurious regressions these series are dropped from continu-
ing analysis.
Results of the estimation for wheat import demand are given
in Table 2. As per Table 2, the equation was Ad.Rsquare(0.67).
It is mean that our independent variables able to explain 67
percent of dependent variable of wheat import demand. The
statistically significant variables are GDP per capita, exchange
rate of MNT-US dollar(significant at 5 %), and real import
price (significant at 1 %). The domestic production variable
and constant a0 are non statistically significant.
But lagged domestic production variable is statistically
significant(significant lelvel at 1 %). Time trend variable was
non statistically significant. Also, the Durbin -Watson statistic
test was used to check if there was autocorrelation in our esti-
mation. The Durbin– Watson test was calculated (2.35) because
of the inclusion of the lagged domestic production and real
import price. If there is no-serial correlation, d(Durbin-Watson
test coefficient) is expected to be about 2 (Gujarati, 1995). Our
estimated Durbin-Watson was 2.35 which mean that our estima-
tion has not autocorrelation.
One of the important affecting factor to the import demand
for wheat is GDP per capita. When GNP per capita increases,
consumption will increase and vice versa. Income elasticity for
wheat was (1.038). This indicates the value for the amount of
imported wheat will increase more as incomes increase. Anoth-
er main factor is real import price. The import price coefficient
Table 1. ADF test result
Variables Level Difference (first order) Degree of
t-stat p-value t-stat p-value
Wheat import demand (Mt
d) -0.5891 0.4471 -3.3544 0.0023 I(1)
Real GDP per capita (Yt) 2.0643 0.9872 -2.0306 0.0432 I(1)
MNT-US dollar exchange rate (EXRt) 3.1581 0.9989 -2.5561 0.0137 I(1)
Quantity of domestic production (DPt) 0.2104 0.7363 -6.9623 0.0001 I(1)
Real import price (Pt
m) 0.0487 0.6868 -2.7754 0.0796 I(1)
Source: Result of E-views 10.0
Table 2. Estimation result for wheat import demand, 1997-2017
Dependent variable: Mt
Variables Coefficient t-Stat p-value
lnYt1.038 -2.641 0.0321*
lnEXRt3.195 2.216 0.0426*
m-2.646 -3.553 0.0029**
lnDPt–1-2.279 -4.245 0.0007**
m2.751 3.508 0.0032**
R2 = 0.74 Ad.R2 = 0.67 Observation = 20 DW=2.35
*– significant at 5 % level, **– significant at 1 % level
Economics & Working Capital
Year 2019. 1-2. issues
is (-2.646), which indicates that an increase in real import pric-
es of wheat by one unit would be associated with an decrease
of the value for the amount of imported wheat by 2.646 units.
Most strongly affecting factor is exchange rate MNT-Us dol-
lar for wheat import demand. Real exchange rate was positive
(3.195). The sign indicates that import value of wheat increase
with the increase of MNT/USD parities.
The lagged domestic production coefficient is negative
(-2.279). In other word, a 1 percent lagged domestic produc-
tion increase would cause wheat import demand to decreases
by 2.3 percent. Therefore, the lagged real import price was
statiscally significant but sign is positive.
This paper is providing estimates the factors affecting import
demand for wheat by using aggregate import demand func-
tion during the period 1997-2017 in Mongolia. Mongolian
government implemented many projects to protect the strate-
gic product’s domestic market. One of the important program
was “Atar” 3rd Agricultural land Rehabilitation program. Crop
production has been increasing since the Third Land Reha-
bilitation Campaign started. But, even domestic production of
wheat is increasing, amount of imported wheat in Mongolia is
still significant.
According to the results, the GDP per capita and exchange
rate of MNT-US dollars was found significant level of 5 %. The
real import price, lagged domestic production and lagged im-
port price was found significant level at 1 %. The results of
estimation indicate that there were very strong relationship be-
tween quantity of import demand and our independent vari-
ables. Mostly strong affecting variable was exchange rate.
In the future, this paper will be able to improve adding some
variables for instance domestic real price and value of domestic
production. Also, we will be using to improve another import
demand model AIDS, Rotterdam model.
Amar Uuld and Robert Magda, 2018. Estimating Armington
elasticities for wheat in Mongolia. Sustainable development of
Agriculture and economy, Issue ISSN 2519-2000, pp. 92-95.
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ganization of the United Nations.
FAO, 2017. Crop and Livestock Assessment Mission report, Ulaan-
baatar: s.n.
Food Supply Law, 1995. Food Supply Law. Ulaanbaatar: s.n.
Greene, W. H., 2000. Econometric Analysis. Fourth Edition. USA:
Prentice Hall Int.Inc.,.
Gujarati, D. N., 1995. Basic Econometrics. 3th Edition. Interna-
tional Edition ed. USA: McGraw-Hill, Inc..
Jung-Hee Lee, Won W. Koo, and Mark A. Krause, 1994. Jap-
anese wheat import demand. Agricultural Economics Report,
Volume No.317.
L. J. S. Baiyegunhi and A. M Sikhosana, 2012. An estimation
of import demand function for wheat in South Africa: 1971-
2007. African Journal of Agricultural Research , Vol. 7(37)(ISSN
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M. Uzunoz and Y. Akcay, 2009. Factors affecting the import
demand of wheat in Turkey. Bulgarian Journal of Agricultural
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in Mongolia (PALD) , Ulaanbaatar: Institute of Agricultural
NSO, 2017. Mongolian statistical yearbook. Ulaanbaatar: s.n.
Song, W., 2005. Import demand elasticities for Agricultural products
in Korea, Seoul: National Assembly Budget Office .
T.A. Boylan, M.P. Cuddy and I. O’Muircheartaigh , 1980. The
functional form of the aggregate import demand equation:
A comparison of threa European economies. Journal of Inter-
national Economics , Issue 10 (1980) , pp. 561-566.
Tanyeri-Abur and Parr Rosson, 1998. The NAFTA and Mexican
import demand for dairy product. San Antonia, USA, Depart-
ment of Agricultural Economics, Texas AM University.
Third Atar campaign, 2009. The national program on developing
arable land: “The 3rd Atar campaign”, Ulaanbaatar: Ministry of
Food and Agriculture.
Weining Mao, Won W. Koo, Jon P. Suomala, Takeshi Sakurai,
1997. Wheat Import Demand in the Japanese Flour Milling In-
dustry: A Production Theory Approach. Toronto, Canada, North
Dakota State University.
World bank, 2014. Review, Estimation and Analysis of Agricultural
Subsidies, Ulaanbaatar: s.n.
Amar Uuld
Ph.d student
Robert Magda
Associate Professor
Doctoral School of Management and Business
Szent Istvan University, Hungary
Economics & Working Capital
Year 2019. 1-2. issues
Abstract: One of the objectives of a firm is to maximize share-
holders return and the same time minimize costs. It is argued
that companies pay dividends not because they are financially
stable, but they do so because of the shock waves that are sent
out there to customers. We have had cases where companies
give out dividends even in cases where the companies have
a serious financial crisis. Most investors would want to invest
their money in viable projects or organizations. Therefore, the
issue of using dividend payout as a measure of financial perfor-
mance for a company may not be adequate tool for measuring
the financial performance of a company. Several studies done
in different countries and the findings revealed an associa-
tion between dividend payout ratio and firm’s financial per-
formance. None of the studies conducted have been focused
on the listed companies in the energy and petroleum industry.
General conclusions have been made but none of the scholars
has tried to validate the results using companies in the energy
and petroleum industry. Therefore, the main aim of this study
is to evaluate the financial implication of dividend payout on
performance of listed companies in the energy and petroleum
industries. The energy and petroleum industry of Kenya has
five listed companies in the Nairobi and securities exchange.
The study will use secondary sources of data from the finan-
cial statements of the listed companies. Panel data for the last
10 years from 2007 to 2017. A descriptive research design will
be used for this study. Dividend payout ratio will be the in-
dependent variable of the study. Return on Equity (ROE) and
Return on Assets (ROA) will be used as the dependent variable
for this study. To test the relationship between the variables
the inferential tests including the regression analysis was used
to determine the effect of dividend payout ratio on financial
Key words: Dividend Pay-out, Financial Performance, Lever-
age, Firm Size, ROA, ROE.
Customarily, the core goal of firms is to maximize the returns
of investors through growing the value of shares of savings.
Payment of dividends by companies is the motivation be-
hind all firms and they do so using two different ways by pay-
ing dividend to its shareholders and secondly by re-investing
through dividend reinvestment plan (Hamid, Khurram, &
Ghaffar, 2017).
Gordon theory on dividend policy Advocates for payment
of dividends as he says that it increases the value of the firm
(Press & Review, 2010).Contrary, Miller and Scholes belief
that it is irrelevant. In any business the concept of whether
to pay dividend or not remains a very controversial issue. In-
ourdays the concept of dividend policy remains a vital issue
that has received attention by many organizations. When
companies make profits, they must make two important de-
cisions on how the profit will be shared. One of the ways is
whereby the company decides to retain the profit generated
to expand the business through investments in new projects.
The other decision is that they must decide on the amount
they should pay as dividends to the shareholders. The divi-
dend policy is always viewed as a financial policy that cannot
be ignored by the company or as this is one of the strategy,
most companies or rather organizations use to lure inves-
tors into the company. In addition to that, there are other
interested parties including the government, workers, buyer
and other domineering bodies who are also interested with
the dividend policy. None of the researchers has been able
to bring out clearly the concept of dividend pay-out and its
influence on the financial performance. There is no clear
distinction that can be made in the capital markets on divi-
dend policy even in developing or developed countries.
Companies decide on the amount of money to retain for in-
vestment based on the dividend policy of their company as
they cannot give out all the profits that they have generated
in a financial period (Whitehurst, n.d.)
According to Baker, Veit, & Powell (2001) the dividend policy
can be used to influence the value of the firm as well as maxi-
mizing the shareholders wealth. The signalling theory is com-
mended in dividend policy as it is deemed a source of com-
muniqué that deliver information to financiers about the firm
performance. Shareholders always monitor steps of organiza-
tion and would be interested mostly in matters that can affect
the firm value as this has a direct sway on the performance and
profitability of the firm.
Therefore, Dividend involves spreading a percentage of the
firm’s earnings to the shareholder to maximize their wealth.
This being one of the main objectives that encourage invest-
ment by the shareholders. The proportion to investors is paid
after tax has been paid. Dividend pay-out reduces the amount
of retained earnings of a company. The main internal sources
of funding for a firm is the retained earnings since that is the
proportion of the profit that is put aside for investment. There-
fore, there is a conflict between the mangers of organizational
and the shareholders. This is since managers would want to
reduce the amount of dividend paid so that they can increase
the retained earnings. On the other hand, shareholders would
wish to be have a greater share of the profit through dividends.
In a book written by Firer et al in Yee (2017) dividend policy
of any organization are guidelines used by a company in decid-
ing the proportion of the profit that will go to the sharehold-
ers. The decision to pay dividend cannot be annulled once the
Dividend pay-out and nancial
performance of energy & petroleum
listed companies in Kenya
Economics & Working Capital
Year 2019. 1-2. issues
organization declares, as this becomes a debt to the business
Several renowned institutions in Kenya have gone under
even in circumstances where they have declared dividends to
shareholders. This being because they would like to send posi-
tive shocks to investors to prevent any cause of alarm. There-
fore, this study is concerned in establishing the connexion be-
tween dividend payment and financial performance of listed
companies in the Nairobi securities and exchange market.
lIterAture revIew
This study used two approaches to literature review. The first
one being a theoretical orientation or approach dealing with
theories related to the topic under study. The second part con-
sists of the empirical examination of literature. On the theories
on dividend policy, the study adopted two schools of thought,
as discussed below,
gordon theory
The main proponent of the theory was Myron Gordon in
1959. This theory also known as the bird in hand theory. My-
ron said that a bird in the hand is worth more in the push.
He argued that most shareholders prefer dividends in form
of cash to capital gains. He advocated for companies to pay
dividends. Companies paying dividend were as the best per-
form while those that did not pay were non-performing. He
added that shareholders should only invest their monies only
in companies or organizations that declare dividends as it is
a good sign of financial performance (Press & Review, 2010).
Investor who prefer retained earnings face price risk decline
as the dividend is increased. Gordon said that any return to
shareholders in form of dividend pay-out is a good and sure
thing compared to capital gains which is risky and therefore,
organizations should pay large dividend to shareholders to
maximize the share price of the firm (Turki & Al-khadhiri,
MIller And ModIglIAnI theory
The main proponent of this theory was Miller and Modigli-
ani (MM) in 1961. According to him, he said that dividend
to the shareholders were irrelevant and that they did not
have any influence on determination of the value of the firm.
In other words, according to MM financial performance of
an organization is affected by other factors non-other than
dividend pay-out. They said that payment of dividend has
no effect on owners’ wealth in an efficient market. Basic
earning power and business risk of a firm were the main
determinants of the net worth of any firm. Many scholars
however did not agree with this theory since it was viewed
that Miller and Modigliani based their assumption on a per-
fect market assumption which doesn’t exist in the real world
(Gugler & Yurtoglu, 2003).
eMpIrIcAl lIterAture
The concept of dividend payout is a topic of concern for many
businesses nowadays. Dividend policy is an important financial
policy not only to business stakeholders but also in the firms’
point of view (Ajanthan, 2013). Fundamentally, the liquidity
evaluation in a company is gauging the domino consequence of
firm’s strategies and set-ups in financial matters. These results
are simulated in the firm’s value added, return on investment,
and return on assets (Zriba, 2015).
Firm market value and dividend policy has been of interest to
many researchers in the recent past. Scholars and researchers
have tried to demonstrate the liaison between dividend policy
and its influence on the stock price of company and firm value
as well. Decisions on dividend pay-out are important because
they help in making individuals understand the proportion of
profit that is vested into investment and how much is given
to the investors (Primis & Whitehurst, n.d.). In some circum-
stances, decisions on dividend payout are not important and
that they have no influence on the value of the firm. Tradition-
ally, payment of dividend is advocated for the argument being
that they have a direct influence on the price of shares as well
as the owner’s worth when properly managed. In their assump-
tion Kanwal & Hameed (2017) argued that investors who are
paid cash dividends have no tax exemption and that the frim
can raise finances through the capital markets without bearing
significant issuance costs.
Yusuf (2015) conducted a study on the impact of paying divi-
dend on performance of some selected deposit taking banks
in Nigeria for the period between 2004 and 2013. The study
adopted an exploratory research design selecting four deposit
taking. The variables of concern by the researcher included lev-
erage, profitability and dividend payout ratio were gathered.
Correlation analysis and multiple regressions were conducted.
The findings revealed that dividend payout ratio was negative-
ly related to banks’ leverage and profitability. Dividend payout
was found to have an inversely relationship with performance.
A similar study sought to scrutinize the association between
dividend philosophy and stock price volatility. Cross-sectional
regression analysis conducted with earning volatility, payout ra-
tio, debt, firm size and growth in assets as control variables. The
results from the paper revealed a positive, but non-significant
association between stock value volatility and dividend yield.
A domineering assertion of this study was that, the share price
reaction to the earnings declaration was not like that of other
developed countries. Therefore, managers may not adopt the
dividend policy to influence their stock’s risk. The influence of
stock price risk through dividend may be also ambiguous due
to the ineffective capital market in Bangladesh (Rashid & Rah-
man, 2008).
Nishat & Irfan, 2008 conducted a research to determine the
influence of dividend payment philosophy on risk associated
with share price in Karachi Stock Exchange, Pakistan. The
study involved 160 listed companies from 1981 to 2000. Cross-
sectional regression analysis was used to find the relationship
between share price fluctuations and dividend payment hold-
ing constant the firm size, earning volatility, total debt to total
capital (Leverage) and asset growth. The findings revealed
that both measures of dividend policy had a significant influ-
ence on the volatility of the stock price. The responsiveness of
dividend yield to stock price volatility increased during reform
period (1991-2000). Payout ratio had a significant effect only
at lower level. In overall period, the size and leverage had a
positive and significant impact on stock price volatility. The
firm size effect was found to be negative during pre-reform
period (1981-1990) but positive during reform period. The re-
Economics & Working Capital
Year 2019. 1-2. issues
sults were in tandem with the behavior of emerging markets al-
though not strong enough as in the case of established markets.
A recent study was conducted by Yee (2017) on dividend
pay-out policy and firm performance. The researcher wanted
to evaluate if dividends are the key indicator of share price
and that share price was the key indicator of firm value. The
study was supporting the notion that to maximize the wealth
of shareholders, they should be awarded the highest combina-
tion of dividend and increase in share price. The objective of
the study was to help in understanding the concept of dividend
payment policy by reviewing existing literatures. Whereas, this
study was very imperative to establish the key pillars in support
of dividend payment, the researcher did not explain the meth-
odology used and sample size involved for this study. The key
findings from the study are also missing from his study.
Turki & Al-khadhiri (2013) conducted a research on factors
determining dividend payment in the Saudi Arabia stock ex-
changes (TASI). Regression analysis model was conducted from
panel data from non- financial firms listed in the stock market
from 2004 to 2010. The study involved 105 companies. The in-
dependent variables of the study included Earnings Per Share
(EPS), Dividend Per Share for previous year, Debt to Equity and
Capital Size on Dividends per Share. The results established
that current Earnings Per Share and past Dividend Per Share
were key determining factors for dividend payments.
Francis, Samuel, & Wu (2017) investigated the impact of the
stock-price formation process on payout. Secondary data for
the period 2001 to 2003 (inclusive) and 2005 to 2010 (inclusive
was used for the study. 2004 was omitted since the pilot firms
were not announced during that year. The findings revealed
that pilot firms were more likely to increase dividends payment
during this program. After the ending of the program, these
firms were less likely to increase dividends but continue to pay
dividends and the propensity to repurchase shares increases
too. The findings were consistent with signaling and agency-
based models. The results were more pronounced for firms
with higher information asymmetry and weaker governance. In
general, the study showed that stock price dynamics within the
secondary financial market had a significant and long-lasting
impact on firms’ payout policy.
A similar study was conducted by Kanwal & Hameed (2017)
on the association between the dividend payout ratio and fi-
nancial performance of the firm in Karachi stock exchange. A
study period of five years (2008 to 2012) was used. Correlations
and linear regression analysis were used in this study as forms
of inferential statistics in the study to find out relationships
among variables. The result of this study showed a positive as-
sociation between dividend payout on financial performance.
Dividend payout has an influence on financial performance of
Hamid et al., (2017) in his study for the period 2006-2014
on the dynamics of dividend policy and macroeconomic vari-
ables and their effect on stock price volatility in the financial
sector of Pakistan used panel data to identify the common,
fixed, random and GMM effect. The study resolved that divi-
dend payout ratio, market value, interest volatility and inflation
volatility have positive significant correlation with price volatil-
ity. Common impact model showed that dividend payout and
interest volatility had a major positive impact on share costs.
Whereas fixed effect model is more suitable and good fit than
random effect model, it was indicated that dividend payout ra-
tio had a significant positive impact and market volatility had
significant negative impact on stock prices. In addition to that,
GMM results also supported the fixed and random effect out-
come. It was therefore, concluded that the study considerably
contributed to the dogma of dividend policy choices and ap-
preciated the role of small and macro variables on stock value
volatility within the financial sector of the country.
Additionally, (Kanwal & Hameed, 2017) a connected study
on the association between the dividend disbursement ratio
and monetarist performance of the firm exhibited that divi-
dend payout positively influenced financial wellbeing of firm.
Conferring to the scholars basically, the dividend disbursement
is portion payment to shareholder by the organization from its
net earning while the financial performance comprises the net
profit after tax, return on equity, return on asset etc.
In another study the researcher scrutinized determining fac-
tors of performance in non-financial firms listed on Nairobi
Securities Exchange (Musiega, Alala, Douglas, Christopher, &
Robert, 2013). The study involved 50 listed non-financial com-
panies according to the NSE report (2012). Purposive sampling
technique was used and a sample of 30 non-financial companies
were selected for the duration of five years from 2007 to 2011.
Secondary data from audited financial reports were used. Divi-
dend payout ratio was the dependent variable while independ-
ent variables of the study included profitability, growth, current
earnings, and liquidity. Size of the business and business risk as
moderating variables. The discoveries exposed that return on
equity, current earnings and firms ‘growth activities remained
positively associated to dividend payout, business risk and size.
Introduction of business risk and firm size as moderating vari-
ables amplified the exactitude of significant variables from 95%
to 99%, which meant that they were among the major determi-
nants of dividend payout.
De Cesari & Ozkan, (2015) in their study examined how cor-
porate payout policy was influenced by managerial enticements
for 1,650 publicly listed firms from United Kingdom, Germany,
France, Italy, the Netherlands and Spain, for the period from
2002 to 2009. The findings of the study revealed that executive
stock option holdings and stock option deltas are connected
with lower dividend payments in the sampled countries in Eu-
ropean where dividend protection for executive stock options
was not observed. It was found out that the relationship was
mainly driven by exercisable stock options and by options that
are in the money. Furthermore, it was observed that executive
stock option holdings and stock option deltas had a negative
impact on total payout, suggesting that executives were not al-
lowed to substitute share repurchases for dividends. Addition-
ally, the portion of share repurchases in total payout surges as
executive stock option holdings and stock option deltas rise.
Baker & Smith (2006) sampled 309 firms exhibiting behavior
consistent with a residual dividend policy and their matched
counterparts to learn how they set their dividend policies. The
findings revealed that the sample firms were more likely than
their counterparts to maintain a long-term dividend payout ra-
tio, use long-run earnings forecasts in setting the dividend, and
be unconcerned about the cost of raising external funds. Yet,
firms behaving as though they follow a residual dividend policy
Economics & Working Capital
Year 2019. 1-2. issues
generally do not profess to follow the policy. At best, the sample
firms follow a „modified” residual policy in which they carefully
manage their payout ratio and dividend trend. Although it may
not be an explicit goal of such a dividend policy, consistently
low free cash flow typically results.
Adediran & Alade (2013) conducted a study to ascertaining
the relationship between dividend policy and corporate prof-
itability, Investment and Earning Per Shares. Annual report
and accounts of twenty-five quoted companies in Nigeria were
used. Regression analysis was conducted using e-views software
and the findings indicated a significant positive relationship
between dividend policies of organizations and profitability.
Secondly, a significant positive relationship was reported be-
tween dividend policy and investments and thirdly, the study
established a significant positive relationship between dividend
policy and Earnings per Share. It is recommended that Organi-
zations should ensure that they have a good and robust divi-
dend policy in place because it will enhance their profitability
and attract investments to the organizations.
Model suMMAry
Return on
Return on
Firm Size
Figure 1: Author 2019
Secondary data of financial companies of the five listed compa-
nies in the energy sector will be used for a period from 2003-
2013 for a period of 10 years. Correlational analysis and a mul-
tiple regression analysis will be used to establish relationships
between variables. The following regression model summary
will be used to determine relationships between the dependent
and independent variables.
(i) Y1 = α + β1X1 + β2X2 + β3X3 + ɛ
(ii) Y2 = α + β1X1 + β2X2 + β3X3 + ɛ
Y1 = Financial performance measured by ROA–indicator of
how profitable a company is relative to its total assets (Net in-
come to total assets).
Y2= Financial performance measured by ROE which is the
amount of net income returned as a percentage of sharehold-
ers equity. Net Income/Shareholder’s Equity
X1 = Dividend Payout ratio – Dividend per share/ Earnings
per share.
X2 = Firm size - The Log of total assets for a firm
X3 = Leverage – ratio of total debt to total capital of a firm
α = the constant term
β1, β2 & β3 = coefficient used to measure the sensitivity of
the dependent variable to unit change in the predictor vari-
ɛ = is the error term to capture unexplained variations in the
model and which is assumed to be normally distributed with
mean zero and constant variance
Correlations were used to establish if there was any linear re-
lationship between the predictor variables and the dependent.
The findings from the study were as shown below;
Table 1: Correlations
Leverage Pearson
Correlation .175 .241
Sig. (2-tailed) .275 .128
Payout Pearson
Correlation -.542** -.412**
Sig. (2-tailed) .000 .007
Firm Size Pearson
Correlation -.753** -.401**
Sig. (2-tailed) .000 .009
N 41 41
Using both return on equity and return on asset as the key
measures of financial performance in listed companies, firm
size had a very strong negative correlation (r=-0.753 p-Value
0.000) with return on Assets. Dividend payout on the other
hand a strong negative correlation (r=0.542, P-value 0.000)
with ROA. Lastly leverage had a very weak positive correlation
(r=0.175, p-value 0.275). A similar trend was observed when
ROA was replaced with ROE. The results revealed a negative
association between Firm size and ROE (r=-0.401, p-value
0.009). Dividend payout ratio had a negative association with
ROE (r=-0.412, p-value 0.07) and lastly the results revealed
a positive relationship between Leverage and ROE (r=0.241,
p-value 0.128). the p-value for dividend payout and firm size
was 0.000 (p<0.05) which means that the positive and nega-
tive association that occurred was significant. It was not due
to chance. The p-value for leverage in both the two instances
was above (p> 0.05) threshold which means that the differ-
ence in association between leverage ROA and ROE was not
significant. The study therefore concluded that firm size and
dividend payout were key indicators of financial performance
of the companies in the energy and petroleum. The relation-
ship however is inverse. Investors should not therefore invest
in companies that declare huge dividends but should consider
those ones with higher percentages of retained earnings than
MultIple regressIon Model usIng roA
Under this model ROA was used as the dependent variable.
The findings from the study were as shown below. (Table 2.)
From the model summary R=0.818. this showed that the
three-predictor variable; firm size, leverage and dividend
payout accounted for 81.8% of the total variance brought
about on the dependent variable. The close association also
between R and R Square shows that the model of the study
was reliable and could be used to make an inference. This
shows a great contribution from each of the independent vari-
able. (Table 3.)
Economics & Working Capital
Year 2019. 1-2. issues
The collinearity statistics were important to establish if our re-
search model would be affected by collinearity of variables. The
findings from the study revealed tolerance values within the ac-
ceptable range of Tolerance >0.2. Therefore, the variables were
not affected by collinearity in any way. Leverage was found to have
a positive relationship with ROA while dividend pay-out and firm
size had inverse relationships with ROA. The findings were simi-
lar to those of (Yusuf, 2015) The model summary was stated as;
Y1 = 30.636 + 3.401X1 – 0.322X2 – 2.758X3 + ɛ. (Table 4.)
second regressIon Model usIng roe
The model summary of R=0.548, this showed that the three-
predictor variable; firm size, leverage and dividend payout
accounted for 54.8% of the total variance brought about on
the dependent variable. The value of R Square and Adjusted
R Square was 0.301 and 0.244. The close range of associa-
tion also between R and R Square shows that the model of the
study was reliable and could be used to make an inference.
This shows a great contribution from each of the independent
variable. (Table 5.)
Collinearity diagnostic was conducted to ensure that the
variables were not affected by highly correlated components.
The findings from the study revealed tolerance values of >0.2.
Therefore, the variables were not affected by collinearity in
any way. Leverage was found to have a positive relationship
with ROE with p-value = 0.05. This means that the association
was significant and did not happen due to chance. The regres-
sion model of the study Y1 = 62.196 + 17.459X1 – 1.791X2
5.538X3 + ɛ. Dividend pay-out and firm size had inverse
relationships with ROE. Their corresponding p-values were
greater than 0.05. This means that the relationship between
the variables was not significant therefore concluding that it was
due to chance. Having conflicting research findings prompted
for more diagnostic analysis. Stepwise regression was therefore,
conducted to establish the significant influence of each predic-
tor variable on the dependent’s variable. The finding from the
study were as shown below;
stepwIse regressIon (roA) (Table 6.)
Firm size accounts for 75.3% of the model summary while, a
combination of firm size and leverage contributed 79.3% to
the model summary. All the three proctor variables contributed
81.8% to the model summary. The close association in range
between R Square and the Adjusted R Square showed that the
variables can be relied on in making an inference. (Table 7.)
The findings from the stepwise analysis showed a negative
relationship between firm size and firm financial perform using
ROA as the dependent variable. A reduction of dividend pay-
out showed that form size still maintained a negative relation-
ship whereas leverage had a positive relation on financial per-
formance. Using the three-dependent variable in the stepwise
analysis further showed a similar trend in the influence of the
variables on the dependent variable. (Table 8.)
The variance Inflation Factors from the findings revealed a
value of >2.0 which is the minimum threshold. Multicollinear-
ity was therefore not an issue to affect our regression model.
Leverage had a positive correlation with ROA while dividend
pay-out has a negative relationship with ROA. The p<0.05
Table 3. Coefficientsa
Model Unstandardized Coefficients Standardized
Coefficients T Sig. Collinearity Statistics
B Std. Error Beta Tolerance VIF
1 (Constant) 30.636 4.662 6.572 .000
Leverage 3.401 1.302 .248 2.611 .013 .990 1.010
Dividend Payout -.322 .151 -.229 -2.128 .040 .769 1.301
Firm Size -2.758 .448 -.667 -6.159 .000 .762 1.313
a. Dependent Variable: ROA
Table 2. Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .818a.670 .643 1.0715445
a. Predictors: (Constant), Firm Size, Leverage, Dividend Payout
Table 4. Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .548a.301 .244 7.1004430
a. Predictors: (Constant), Firm Size, Leverage, Dividend Payout
Table 5. Coefficientsa
Model Unstandardized Coefficients Standardized
Coefficients T Sig. Collinearity Statistics
B Std. Error Beta Tolerance VIF
1 (Constant) 62.196 30.890 2.013 .051
Leverage 17.459 8.630 .280 2.023 .050 .990 1.010
Dividend Payout -1.791 1.003 -.280 -1.785 .082 .769 1.301
Firm Size -5.538 2.967 -.294 -1.867 .070 .762 1.313
a. Dependent Variable: ROE
Economics & Working Capital
Year 2019. 1-2. issues
shows that the relationship between the variables was signifi-
cant and not due to chance. We therefore conclude that divi-
dend pay-out has an inverse relationship with ROA.
stepwIse regressIon (roe)
A repeated stepwise analysis was conducted further with ROE
as the dependent’s variable. The findings were presented as
shown below. (Table 9.)
From the table above 41.2% of the variance is brought about
by the dividend pay-out ratio. The closeness in value between
R Square and Adjusted R Square shoes that the model can best
explain the variance among the variables. (Table 10.)
Collinearity of the variables was not observed under this
model. The findings revealed that dividend had a negative
association with ROE r=-2.639 p-value 0.007 = p<0.05. We
therefore conclude that there is a significand difference be-
tween dividend pay-out and financial performance of listed
companies in the energy and petroleum sector in Kenya.
Leverage had a positive correlation with financial perfor-
mance while firm size has a negative association. The cor-
responding p-value were above 0.05, which shows that the
difference was not significant, and may have been due to
chance. The variables were therefore, removed from the re-
gression model.
The foremost objective of this article was to establish any asso-
ciation between dividend payment and financial performance
in the Nairobi and Securities and Exchange Markets. To find
the association between pay-out ratio and firm financial per-
formance Correlation and regression were used. The findings
from the study revealed that Asset and dividend pay-out had
an inverse relationship with financial performance while lever-
age had a positive relationship on financial performance. This
showed that the firm’s financial performance is affected by the
dividend payment philosophy. Consequently, the results sug-
gest that the dividend pay-out ratio highly influenced the firm
financial performance negatively.
Adediran, S. A., & Alade, S. O. (2013). Dividend Policy and
Corporate Performance in Nigeria. American Journal of
Social And Management Sciences.
Table 6. Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .753a.566 .555 1.1956411
2 .793b.629 .610 1.1202136
3 .818c.670 .643 1.0715445
a. Predictors: (Constant), Firm Size
b. Predictors: (Constant), Firm Size, Leverage
c. Predictors: (Constant), Firm Size, Leverage, Dividend Pay-out
Table 8 Excluded Variablesc
Beta In T Sig. Partial
Collinearity Statistics
Tolerance VIF Minimum
1 Leverage .252a2.536 .015 .380 .990 1.010 .990
Dividend Pay-out -.235a-2.027 .050 -.312 .769 1.301 .769
2 Dividend Pay-out -.229b-2.128 .040 -.330 .769 1.301 .762
a. Predictors in the Model: (Constant), Firm Size
b. Predictors in the Model: (Constant), Firm Size, Leverage
c. Dependent Variable: ROA
Table 7. Coefficientsa
Model Unstandardized Coefficients Standardized
t Sig.B Std. Error Beta
1 (Constant) 35.093 4.612 7.608 .000
Firm Size -3.112 .436 -.753 -7.137 .000
2 (Constant) 35.222 4.322 8.150 .000
Firm Size -3.216 .411 -.778 -7.831 .000
Leverage 3.452 1.361 .252 2.536 .015
3 (Constant) 30.636 4.662 6.572 .000
Firm Size -2.758 .448 -.667 -6.159 .000
Leverage 3.401 1.302 .248 2.611 .013
Dividend Pay-out -.322 .151 -.229 -2.128 .040
a. Dependent Variable: ROA
Economics & Working Capital
Year 2019. 1-2. issues
Ajanthan, A. (2013). Corporate Governance and Dividend Pol-
icy: a Study of Listed Hotls and Restaurant Companies in
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Table 9. Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .412a.170 .149 7.5347356
a. Predictors: (Constant), Dividend Pay-out
Table 10 Coefficientsa
Model Unstandardized Coefficients Standardized
Coefficients T Sig. Collinearity Statistics
B Std. Error Beta Tolerance VIF
1 (Constant) 9.155 1.363 6.716 .000
Dividend Pay-out -2.639 .933 -.412 -2.827 .007 1.000 1.000
a. Dependent Variable: ROE
Table 11. Excluded Variablesb
Beta In T Sig. Partial
Collinearity Statistics
Tolerance VIF Minimum
1 Leverage .255a1.795 .081 .280 .999 1.001 .999
Firm Size -.263a-1.616 .114 -.254 .769 1.301 .769
a. Predictors in the Model: (Constant), Dividend Pay-out
b. Dependent Variable: ROE
Economics & Working Capital
Year 2019. 1-2. issues
Abstract: Business and asset valuation are gaining ground
these days. Determining the value of a business is crucial for
the management to make the right decision, and it is an es-
sential step for individuals and investors who intend to in-
vest. Several models carry out business valuation by differ-
ent methods. In this study, we present the main features of
the McKinsey model, the model structure, which includes the
most important steps to carry out the valuation. The McKin-
sey model is a discounted cash flow model where the value of
a company is determined as the present value of future cash
flows from the difference between the accounting systems
mentioned above.
Keywords: business valuation, US GAAP, McKinsey model, dis-
counted cash flow model, accounting systems
Due to the globalization of the financial and capital market,
several opportunities are available for an investor to invest his
capital. By the 21st century, national and continental borders
had already ceased to exist to the extent that investments in the
United States are easily available for a European investor, or
even an Australian businessperson can easily buy shares at the
Tokyo Stock Exchange any time. Also, it allows the investor to
choose from a variety of investment possibilities and to choose
the best investment for his preference. (Dékán Tné Orbán I. (2016)
In order that an investor can decide about the share in-
vestments he should know which are the most beneficial
ones for him, he should be fully aware of the value of the
shares. The value of the shares is closely related to the value
of the company issuing them. Therefore, from an investment
point of view, the knowledge of the company value may be
crucial. The Information-Connection between the Strategic
Management-Accounting and the Company Valuation (Zé-
man 2011)
From the shareholders’ point of view, one of the main goals
is to increase the share values and maximize the company val-
ue. To determine the extent to which the shareholder value
increased, there is necessary to know the company value. Con-
sequently, valuation is indispensable both from the investors’
and the owners’ point of view.
The knowledge of the value of the business is also crucial in
the case of acquisitions because the vendor has to determine
the minimum value of the selling price, and the buyer has to
determine the maximum value of the buying price. A ration-
al investor does not pay more for a share or an asset than its
In addition to the previous, more aspects could be listed that
require corporate valuation (e.g. inheritance, a new owner in-
volvement, the sale of ownership, etc.).
1. the topIc of the study
There are several corporate valuation models, which means
that the evaluator can choose from several methods. The ques-
tion is defined as follows: Is it possible to compare the results?
Can different accounting systems of countries affect results, so
the items used for corporate valuation have different content?
In the research, there was evaluated companies operating
under two accounting systems, thus presenting the similarity
and difference of the results obtained. Also, the structure of
the McKinsey model used for corporate valuation and the cor-
rections needed for the evaluation. The paper presents the es-
sential steps of model building and the differences between the
two accounting systems, which should be taken into account in
the compilation of the valuation model highlighting the sig-
nificant differences.
1.2. The comparison of the US GAAP and the Hungarian
accounting system, presenting their basic differences
US GAAP (the United States Generally Accepted Accounting
Principles) is the US Accounting System of Accounting; it is
an accounting system that includes accounting principles, ac-
counts, methods, and procedures. (Beke J. 2014)
For US-listed companies, the SEC (Securities and Exchange
Commission, starting now referred to as SEC) requires US
GAAP, (Almássy 2006) requiring mandatory disclosure of
audited information. (Beke J. 2014) In the beginning, the SEC
was responsible for protecting investors and creating a rigor-
ous system of public disclosure of data, which is also the core
purpose of US GAAP, but now defines the form, content, and
structure of financial statements, which basically do not include
the regulation of accounting issues. (Madarasiné Sz. A.
2016) To establish accounting rules, the SEC implemented the
Financial Accounting Standard Board (FASB). (Madarasiné Sz.
A. 2016)
The Hungarian accounting is regulated by Act C of 2000,
which came into existence as an improved version of the regu-
lation introduced on January 1, 1992, and as a result of the
convergence to the EU directives and entered into force as a
new law as of January 1, 2001. (Harangozóné Tóth J.
Business valuation by the Mckinsey
model, comparison of two different
accounting systems
Economics & Working Capital
Year 2019. 1-2. issues
The main purpose of the accounting law is to define the re-
porting and accounting obligations of the entities covered by
the law, the compilation of the accounts, the principles to be
followed in managing the books, the rules built on them, the
requirements for disclosure and auditing rules. (Róth J.
1.3 Financial Statements in US GAAP
The primary purpose of the financial statement is to provide
useful information about the performance of an entity to cur-
rent or potential investors, creditors, and other stakeholders
making financial decisions. (Bragg, S. (2011)
The financial statements include the balance sheet, the in-
come statement, the cash flow statement, other financial state-
ments, and the equity statement of the shareholders. (Beke J.
The balance sheet is a statement that provides information
about the assets, liabilities and equity of an entity for a spe-
cific date. (Bragg, S. 2010) With the help of the information in
the balance sheet, we can determine the company’s solvency,
compare the size of current assets and liabilities, and examine
the company’s ability to pay dividends and interests. (Bragg,
S. 2010)
Balance function of US GAAP:
Assets = Liabilities + Equity [9].
Assets are a set of resources owned by a business entity that
can be tangibles, such as fixed assets or inventories, or intangi-
bles, such as patents. (Short, D –Welsch, G 1990) Accordingly,
the US GAAP does not have a prescribed structure. This is a
significant difference compared to Hungarian accounting since
they were laid down by the provisions of Act C of 2000, assets
are grouped according to the mandatory parts of the balance
sheet. Thus, the asset group consists of current assets, non-
current assets and accrued expenses. (Siklósi Á. 2018) Li-
abilities include loans and borrowings of the enterprise and
other liabilities. Equity shows the extent to which the owners
have a company stake. (Short, D. – Welsch, G. 1990)
In the Hungarian accounting system, the balance sheet is
prepared in the structure defined by the Act of Accounting,
(Róth J. 2015) which presents the assets and liabilities of
the enterprise in a balance sheet layout, and where the assets
are in reverse liquidity order and the funds are in reverse ma-
turity order. (Siklósi Á. 2018)
Income Statement is a statement that presents incomes,
expenses and net income over a specified period. (Short, D.-
Welsch, G 1990) It provides information on net income and
its components that can be used to measure business perfor-
mance. Although it provides information on past performance,
at the same time the investors, creditors, and other stakehold-
ers may make forecasts of future business performance using
this information. (Bragg, S. (2011)
In US GAAP, the company earnings can be calculated in two
ways: natural expense classification and functional expense
classification. (Beke J. 2014) The two methods are identical to
the methods used in Hungarian accounting. The difference
between these methods is in determining the operating profit,
but the results of the financial operations, the pre-tax profit
and the after-tax profit are the same. (Harangozóné Tóth J.
2003) In Hungarian accounting, the categories and rows of the
income statement are laid down by the Act of Accounting, no
derogations are possible. For a long time there was a similar-
ity between the two accounting systems for the extraordinary
profit category, but since 1 January 2016, this category of re-
sults is no longer included in Hungarian accounting, so this is
another difference.
2. busIness vAluAtIon by MckInsey Model
’Cynical man is the one who knows the price of everything but
knows nothing of its value’. (Damodaran, A 2015) This state-
ment suggests that whatever we buy, we should try to evaluate
it, to find out whether it is worth as much as its price, and to
make the decision accordingly. (Damodaran, A 2006) When
we deal with valuation, there are some factors to consider, and
then choose the most appropriate model for corporate valu-
ation. In our research, we used the corporate free cash flow
model to do the valuation, which is also referred to as the
McKinsey model.
Free Cash Flow (FCF) is the money amount that is available
to the company’s owners or creditors, without risking the conti-
nuity of its business operations . (Allman, K (2010)
Free cash flow is determined as follows:
FCF = Gross cash flow – Gross investments
Gross cash flow = NOPLAT + depreciation
Gross investment = Net investment + depreciation
NOPLAT = It is a financial measure including the firm’s op-
erating profits adjusted taxes relevant for EBIT . (Copeland, T. 1999)
Gross cash flow corresponds to the total cash flow generated
by the company that can be reinvested for company growth .
(Tarnóczi T. 2010a) When calculating the gross cash flow,
if it is necessary we adjust the operating profit reducing with
the adjusted tax and depreciation, which diminishes the profit
but does not result in an effective cash outflow . (Tarnóczi T.
The company value calculation using the simple annuity for-
mula (without growing):
Company value= FCF
FCF: free cash flow
WACC: Weighted Average Cost of Capital
In this case, the company assumes the same cash flows in the
long run and does not assume any change in the capital struc-
ture. It is very rare to exist such a company, if it exists at all,
that can operate under the same conditions without growth in
the long term, and obtains the same results because the results
and performance of the company are not only influenced by
internal factors.
A constant growth model for company valuation
Company value= FCF
WACC – g
Economics & Working Capital
Year 2019. 1-2. issues
3. the process of the MckInsey Model cAlculAtIon
In this research, two companies were evaluated by the Mc-
Kinsey model. The two companies include Kartonpack
Plc., which is listed on the Budapest Stock Exchange and
Flowserve Corporation, which is listed on the New York
Stock Exchange. Kartonpack Plc. makes its financial state-
ments based on the Hungarian accounting system while
Flowserve Corporation compiles its financial statements
based on US GAAP.
3.1. The structure and characteristics of the McKinsey model
The evaluation was done by a method described by (Jenner-
gren L.P. 2005) in the ’The Tutorial of the McKinsey Model
for Valuation Companies’, which is also known as the Mc-
Kinsey valuation model and is a discounted free cash flow
The main steps of the McKinsey model calculations:
1. Calculation of past free cash flows based on past income
statements and balance sheets;
2. Creating financial ratios using historical data, and calcu-
lating forecasting conditions;
3. Establishment of future profit and loss accounts and bal-
ance sheets based on financial ratios and forecast condi-
4. Derive the forecasted free cash flows from the forecasted
income statements and balance sheets;
5. Discounted future free cash flows.
The essential features of the McKinsey model:
1. The model uses already published and public data as in-
put data.
2. The purpose of the McKinsey model is to evaluate the
company’s equity. As a first step, the asset side of the bal-
ance sheet is evaluated. The value of the interest-bearing
debt is then deducted, and the value of equity is obtained.
Interest-bearing debt does not include suppliers and oth-
er current liabilities. It may seem that the calculation of
equity and the deduction of interest-bearing debt are an
indirect approach to the calculation of equity (i.e. it would
seem more direct to estimate equity by discounted future
dividends directly). However, this indirect approach is
used by the model as it is more transparent and results in
fewer errors in the evaluation process.
3. The value of the company, i.e. the value of the total asset
side, is determined by WACC discounting.
4. The asset side is evaluated in two parts: free cash flow
is forecast for the individual years in the explicit fore-
cast period . (Frykman, D – Tolleryd J 2003) Then, us-
ing the last explicitly determined free cash flow value, the
so-called residual value, which represents the corporate
value beyond the explicit period, must be determined.
The explicit forecasting period should be at least 7-10
years. The explicit forecast period can be considered as a
transitional phase. However, the interval after the period
is characterized by continuous growth.
5. Free cash flow for future years is calculated from forecast-
ed income statements and balance sheets.
6. Financial statements are forecasted in nominal terms.
Thus, the nominal free cash flow is, of course, discounted
at the nominal discount rate . (Koller T. et. al. 2005)
7. The value after the explicit forecast period is calculated
using the formula used in the annuity calculation. Free
cash flow increases over the period with a constant per-
centage year on year.
4. results And theIr evAluAtIon
The valuation of Flowserve Corporation and Kartonpack Plc.
was based on the McKinsey model presented above. The model
itself is not too complicated, but still uses a lot of data during
the valuation, which is complicated by the length of the fore-
casting interval, which is twelve years.
4.1. Past free cash flows
In order to determine the free cash flow, EBIT was calculated,
which requires a separate calculation for Katronpack Plc. As
past statements included extraordinary results1 forming an
individual output category, unlike the income statement of
Flowserve Corporation. Based on this, we determine the net
operating profit (NOPLAT) reduced by the adjusted tax, which
shows the company’s after-tax operating profit. To calculate
NOPLAT, the tax on EBIT should be determined. That is, it
would be a tax liability for the company if there were no interest
expenses or income.
It is important to mention that the tax payable on EBIT in-
cludes the tax paid and deferred, therefore, in order to deter-
mine the net operating profit reduced by the adjusted tax, the
change in the deferred tax liability should also be taken into
account. Since there is no deferred tax in the Hungarian ac-
counting system, it is only in the case of Flowserve Corporation
that the deferred tax liability may be charged.
To calculate free cash flows, the gross cash flow was first de-
termined, which is the sum of net operating profit (NOPLAT)
and depreciation reduced by the adjusted tax. The reason for
the depreciation is that it appears as an expense in the income
statement but does not involve an effective outflow of money.
Since different accounting systems are activated in different ac-
counting systems when acquiring a tangible asset, the basis of
depreciation may differ. Subsequently, gross investments are
determined, which is the sum of the change in working capital
and capital investments.
In calculating working capital, supplier’s liabilities and
other current liabilities are deducted from current assets that
are not interest-bearing liabilities. The increase or decrease in
working capital affects the amount of cash available to owners
and creditors, so a lower value results in higher free cash flow
in a given year, while a lower working capital change reduces
the available cash flow. A negative value generates a free cash
flow, which can be valued as a positive one, while a continu-
ous negative working capital change means that the company
sells its current assets at a higher rate than it can replace.
1 According to the amendment of the Hungarian Act of Accounting effective as of
1 January 2016, extraordinary items have expired, resulting in the result of or-
dinary entrepreneurial activity. Subsequently, extraordinary items are account-
ed for by their content and nature among items in other financial transactions.
Economics & Working Capital
Year 2019. 1-2. issues
Accruals in US GAAP are recognized in current assets and
are recognized in the balance sheet as accrued expenses and
other receivables and should be treated as receivables and, on
the same basis, accruals. In the Hungarian accounting system,
these items appear in the balance sheet as a separate category,
so these items had to be adjusted to calculate the free cash
flow as the model used for corporate valuation is aligned with
the US GAAP system. Deferred tax asset is a non-existent con-
cept in the Hungarian accounting system, but in US GAAP it
is included in current assets, treated as any tax receivable, so
it is included in receivables. Corrections were also required
in the case of repurchased treasury shares, as the Hungarian
accounting system categorized as securities, a reduction in eq-
uity in US GAAP.
4.2. Creating past ratios
Creating past ratios is essential in evaluating, as these ratios
are used to create future forecast values that are needed to pro-
duce future results. First, the ratios for the increase in net sales
are determined to calculate future results. Namely, the income
statement and certain elements of the balance sheet are fore-
cast as a percentage of net sales
4.3. Future forecast
As mentioned earlier, the model splits the future period into
two parts. The first phase is the explicit forecasting period,
which in this case is 11 years (from 2016 to 2026). The sec-
ond phase is the period after the explicit forecast period, which
runs from 2027 to infinity. Accordingly, future forecasts should
be made.
4.3.1. Forecasts for growth and working capital
At this step, future inflation and real growth in net sales should
be determined.
For the first year of the explicit forecast period (2016), the ra-
tios between the different categories of working capital and the
net sales and operating costs are based on the same ratios over
the past seven years. Since there are different valuation proce-
dures in the two accounting systems, so the contents of the ra-
tios are not the same, the items of the Kartonpack Plc. required
continuous transfer to comply with the steps and requirements
of the McKinsey model. As the Hungarian accounting system
classifies the funds as securities, the equivalents cannot be de-
cided without internal information, which can be reclassified
as equivalents, so the calculation of this current asset must be
applied in the Hungarian accounting system by way of deroga-
tion from the model.
After recording the different categories of working capital
and the ratios between net sales and operating costs for the
first year of the explicit forecast period, we assumed that nearly
all ratios for the last year of the explicit forecast period (2026)
are the explicit forecast period compared to its first year. For
intermediate periods, the ratios were calculated by linear inter-
polation. In the year following the explicit forecasting period
(2027), the same ratio was used in the last year of the explicit
forecast period (2026).
4.3.3. Forecasted income statements and balance sheets
The results are based on forecast assumptions. The items in
the forecasted balance sheets were mostly determined directly
through net sales, so we multiplied the value of the appropri-
ate forecasting condition with net sales. Then, the value of free
cash flows, as we did in previous years, was calculated.
4.4. Company valuation and determination of equity
Company valuation was done by discounted free cash flow mod-
el. The free cash flows available are discounted. The discount
rate used for this purpose was determined using the weighted
average cost of the capital model (WACC).
We first calculated the value of the assets of these companies
for the beginning of the year after the explicit forecast period
(2027); this value was determined by the Gordon model. The
value of the interest-bearing debt was deducted from the value
of the assets of the companies and thus we received the value of
the equity of the company for the year 2027.
We then made a similar calculation for the previous year,
i.e. the last year of the explicit forecast period. The value
of assets at the beginning of 2026 is equal to the value of
assets at the end of 2027 and the discounted value of free
cash flow at the end of 2026. We then discounted year after
year until we reached the first year of the explicit forecast
period (2016). Calculations are done annually. It is not dif-
ficult to notice that this one-off retraction gives the same
result as directly discounting each year’s free cash flow to
present value, early 2016. \ t However, this method makes it
possible to calculate the value of equity at the beginning of
each year of the explicit forecasting period, and not only at
the beginning of the first year of the explicit forecast period
. (Jennergren, L.P. 2005)
5. conclusIons And recoMMendAtIons
Our study suggests that an American company based on the
Anglo-Saxon accounting system is easier to evaluate with the
model used and more accurate results can be expected. Most
of the literature dealing with company and asset valuation is
based on the Anglo-Saxon accounting system, so there is more
literature available to the analyst, which does not need to be
transferred to the Hungarian accounting system during its as-
During the evaluation of Kartonpack Plc., Several simplifica-
tions had to be applied which distorted the result. In the case of
Flowserve Corporation, we did not feel the need for simplifica-
tion, so we determined almost all values based on the model,
which helped to make the exact assessment.
There are many concepts in the model that are not applied
in the Hungarian accounting system, such as the concept of
deferred tax and surplus marketable securities. Thus, it is clear
that the application of the model is more suitable for the as-
sessment of a US GAAP financial reporting company than for a
public limited company compiled according to the rules of the
Hungarian Accounting Act.
At the beginning of the analysis, it is worth examining the
external environment of the company you want to evaluate,
Economics & Working Capital
Year 2019. 1-2. issues
in which you carry out your economic activity. Because exter-
nal factors have an impact on the results, value, performance
and future development potential of the company. Exam-
ples of such external factors include the market activity of
competitors, the size of the economy in which the company
operates, the market entry barriers present in the economy,
the market share of competitors and the tax rules in force in
that country.
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and the Company Valuation pp.1-20 Social Science Research
Mirjam Hamad, PhD Student
University of Debrecen,
Faculty of Economics and Business
Alexandra Szekeres, PhD Student
University of Debrecen,
Faculty of Economics and Business
Economics & Working Capital
Year 2019. 1-2. issues
North Sulawesi is the suburban area with the potential for
natural wealth is quite abundant: the sea is rich, the land is
fertile, and nature is beautiful. Soil fertility is very clearly seen
in the fertility of coconut, clove, and nutmeg plants as tradi-
tional commodities of this region. Rice and pulses also grow
easily and fertile. The government together with the coop-
erative service and SMEs are trying to facilitate SMEs to get
microfinance credit funds. This research aimed to see the sig-
nificant difference in financial performance of nine Small Me-
dium manufacturing Enterprises in coastal coast area before
and after using funds microfinance credit in Manado. Based
on the results shows that the financial performance of SMEs
in Manado City from the year before using microfinance cred-
it and after using microfinance credit is changing, which is the
average value of the financial ratio analysis experienced good
changes. SMEs should be more effective in utilizing existing
resources to generate sales, and SMEs should know the con-
dition of the company’s financial performance in their busi-
ness from time to time so that the future can anticipate and
quickly taking decisions for possibilities that could happen in
the future, and further improve the company’s performance
in the future.
Keywords: microfinance credit, financial performance, small
and medium enterprises.
Most of the land in North Sulawesi is the suburban area with
the potential for natural wealth is quite abundant: the sea is
rich, the land is fertile, and nature is beautiful. Soil fertility
is very clearly seen in the fertility of coconut, clove, and nut-
meg plants as traditional commodities of this region. Rice and
pulses also grow easily and fertile. Abundant natural wealth has
not been utilized well enough. We can easily see the number
and extent of land that is not cultivated. Old coconut gardens
were not rejuvenated, many clove gardens were left unattended
- especially since the clove prices plummeted in 1998. Agri-
cultural potential, including livestock and fisheries potential in
this area, is far from optimal utilization, even though the need
for agricultural products remains high or even higher because
of the increasing population.
SMEs development is not free from the problem of manag-
ing finances. The common finances problem address by the
SMEs are insufficient capital due to the massive start-up cost
and expensive raw material. Other finances problem is about
the operational production activity, although high subsidies by
the government on gasoline and electricity. The solution to this
problem is to access external finance by the bank, but on the
other hands, generally, SMEs in Manado is lack of a histori-
cal financial report for a couple of years and lack of collateral
assets as requirements to the bank. To solve this problem and
to avoid SMEs from getting finance by other illegal or infor-
mal microfinance business, the Indonesian government issue
a program called: “Kredit Usaha Rakyat (KUR)” - microfinance
for small business. This finance is fewer requirements but has
a credit limit until 500,000,000 (IDR) or equals to 31,275.25
Euro (1 EUR = 15987.08 IDR).
Based on the explanation above, this research tries to explore
and investigate the significant difference of the SMEs financial
performance before and after microfinance. This research is
also understanding how vital contribution and role of bank mi-
crofinance bank pointed by the government to the Small me-
dium enterprise in Manado as a strategic area of the eastern
part of Indonesia not only for the abundant natural resources
and tourism destination. Meanwhile identifying problems and
challenges are essential, yet it will come to some possible solu-
tion to be offered and presented as a recommendation.
theoretIcAl revIew
Finance Management
Financial management according to Dobbins (1993) explains
that financial management is activity related to the task of be-
ing a financial manager in a business company. Financial man-
agers actively manage financial affairs from various types of
businesses, which are related to finance or non-financial, per-
sonal or public, large or small, proceeds of profit or non-profit,
and carry out various activities, such as budgeting, financial
planning, cash management, credit administration, analysis
of investment and business to obtain funds (Dobbins, 1993).
Further, also act as a restrain in financial performance, since it
does not contribute to return on equity (Rafuse, 1996).
Financial Performance
Financial performance for the general company can be di-
vided into five financial ratios as follows: Liquidity, Asset man-
agement, Debt management, Profitability, and Market value
(Brigham & Houston, 2015). This five financial ratio is almost
cannot be found in a small business. Financial performance for
small business can be generalized by adjusting the financial ra-
tio into Production, Sales Turnover, and Profit (Wijewrdena et
al., 2009; MacMahon, 2007; Gibson et al., 2014).
Micronance and nancial
performance on SMEs in Manado –
Economics & Working Capital
Year 2019. 1-2. issues
Microfinance for SMEs
According to Otero and Rhyne (1999) microfinance is the pro-
vision of financial services to low-income poor and very poor
self-employed people. Financing a small business does not
have many choices like a big company. The owner of the small
business needs to use a lot of information to access good fi-
nancing (Halabi et al.., 2010; Collis and Jarvis, 2002). In the
rural area, small business relatively does own more land and
depreciable assets and have lower inventory and other current
assets when compared to metro firms. Small business in the
rural area have relatively similar access to financial services, al-
though utilization varies and rely on a wide variety of sources
for financing; however, rural small businesses have significantly
more mortgages, loans from shareholders, and other types of
loans, but fewer credit cards (Gustafson, 2004). Based on the
literature study, the government need to provides conceptu-
alizing solution for the small business to access the financing
where public policy is currently usefully employed in address-
ing such financing problems (Tucker and Lean, 2003). The de-
terminants of MSE owners’ financing references to access good
financing factors are ownership type, acquisition type, level of
education of the owner/s and a reason for business startups are
found to be major (Gebru, 2009). Small business relies heav-
ily on their own funds and would not raise new equity from
sources outside the family; thus, there is a reluctance to use
new outside equity such as venture capital, business angels, etc
(Daskalakis et al., 2013). After the 2008 financial crisis, most of
the small business financing their operation using owner equity
as a primary source but try to obtaining less capital (Wille et al.,
Previous Research
Kibet et al. (2015) In the final analysis, the research clearly
found that MFC has a positive effect on the performance of
SMEs with a level of significance of less than 5%. In order to
enhance a sustained and accelerated growth in the operations
of SMEs credits should be client-oriented and not product-ori-
ented. It’s concluded that MFIs are concerned with the provi-
sion of financial services to people who are economically poor
and who therefore experience financial exclusion in that they
do not have ready access to mainstream, commercial financial
services. It is concerned with the provision of financial services
to poor people using means which are just, fair and sustainable
for example they accept social collateral rather than financial
collateral, access to larger amounts of the loan if repayment is
performance is positive, easy way to access finance is not much
paperwork and easy and short procedures.
Olowe, Moradeyo and Babola (2013) , the study was restrict-
ed to Ibadan metropolis Olowe, Moradeyo and Babola (2013)
study investigated the impact of microfinance on SMEs growth
in Nigeria. The population of the study consists of the entire
SMEs in Oyo State. The results also showed that high-interest
rate, collateral security, and frequency of loan repayment can
cripple the expansion of SMEs in Nigeria. The paper recom-
mended that MFBs should lighten the condition for borrow-
ing and increase the duration of their customers’ loan and also
spread the repayment over a long period of time.
Kalui and Omwansa (2015) the Microfinance products of-
fered (micro savings, microcredit, microinsurance, and train-
ing) have effects on the financial performance of SMEs. The
study recommended that MFIs have a great responsibility of
ensuring the proper use of credit which is an important facil-
ity in the financial performance of businesses. To achieve this,
credits should be SMEs-oriented and not a product- oriented.
Microfinance can research into very profitable business lines
and offer credit to SMEs who have the capacity to exploit such
business lines, microinsurance is paramount to SMEs in cush-
ioning them in the event of unfavourable occurrence, and
should be enhanced properly to the SMEs, and that business
and financial training should be provided by Microfinance on
a regular basis and most cases should be tailored toward the
training needs of the SMEs.
Oleka, Maduagwu, and Igwenagu (2014) the study is aimed
at evaluating the extent to which Microfinance banks have
helped in financing small and medium enterprises (SMEs) in
Nigeria, how they access funds from the microfinance banks to
finance their productions and how these accessed funds affect
their performances. The results show that the operation of mi-
crofinance banks is an impetus for the performance and growth
of small and medium enterprises. However, other firm-level
variables such as business size, business age, business location,
loan size, loan maturity etc. are found to have a positive effect
on enterprises’ growth.
H0: There is no significant different between before and after
microfinance apply on small business financial performance.
Ha: There is significant different between before and after mi-
crofinance apply on small business financial performance.
reseArch Method
This research used comparative and descriptive research with
the quantitative approach (Cooper and Schindler, 2003), and
conducted an interview in separate places according to the lo-
cation of every respondents in Manado – Indonesia in coastal
coast area. The population of this research is nine informants
who use microfinance credit on their manufacturing business
in Manado - Indonesia coastal coast area. In this research is
using saturated sampling method (Sekaran and Bougie, 2009;
262). This research used descriptive statistics and paired sam-
ple t-test to help researchers detect sample characteristics that
may influence their conclusions.
result And dIscussIon
Tables above are to find out the amount of contribution of
Microfinance Credit to performance by sector is to calculate
the average value of increase of performance indicator that is
production, sales turnover, and profit between before and af-
ter using Microfinance Credit. The tables above show the sig-
nificant different before and after microfinance credit apply to
small business financial performance. Sig. value shows the .000
indicates that there is a significant different before and after
Economics & Working Capital
Year 2019. 1-2. issues
microfinance apply on small business financial performance.
From result of calculation of average of performance indica-
tor can be known that the contribution of Microfinance Credit
in influencing the improvement of Financial Performance is in
Respondent 1 respondents with income stamping after using
Microfinance Credit increased by 30%.
Descriptive variable of monthly production cost before using
loan of Microfinance Credit and after getting loan of Microfi-
nance Credit at 9 SMEs in Manado have average monthly pro-
duction cost before using loan of Microfinance Credit as much
as Rp 1,272,200 and after get loan of Microfinance Credit as
much Rp 4,498,100, so on average the cost of production in-
creases after obtaining a loan of Microfinance Credit.
Descriptive characteristics based on monthly sales level be-
fore getting Microfinance Credit has average monthly sales
turnover of Rp 12,452,600 and after using loan of Microfinance
Credit has average monthly sales turnover of Rp 41,535,000
so on average the sales turnover increases after using Microfi-
nance Credit.
Descriptive variable profit / monthly profit before getting
loan of Microfinance Credit and after getting loan of Micro-
finance Credit at 9 SMEs in Manado have average monthly
profit as much as Rp 7,785,700 and after using Microfinance
Credit have average monthly profit as much as Rp 27,658,200
so on average monthly profit after earning a loan of Microfi-
nance Credit.
Current Ratio and Quick Ratio is good if the ideal value is
200% (Bringham and Houston, 2015). Based on the compari-
son of financial performance among SMEs stated that the aver-
age current ratio and the rapid ratio to the company’s liquidity
ratio still stands below 200%, meaning that financial manage-
ment is must be able to attract consumers, and they must con-
trol the business and find a strategic place to run the business
to make profit.
So, it can be concluded through this descriptive analysis, we
are able know the growth of financial performance of SMEs in
Manado city before and after using KUR, It can be seen that
after using KUR, the average growth of SMEs Manado is good.
According to Oleka, Maduagwu, and Igwenagu (2014) that mi-
crofinance credit and advances to the small and medium scale
entrepreneurs have a significant positive impact on the SMEs
enterprises component of GDP. This is influenced by the in-
creasing amount of production and account receivable of the
company’s. the Liquidity Ratio, Activity, and Profitability of
SME has increased, while one variable Leverage Ratio on the
average the number of SMEs is decreased. According to Kibet,
et al. (2015) these results suggest that most SMEs are able to
effectively and efficiently allocate the initially borrowed loans
and thus with knowledge gained through training by MFIs,
they are able to register positive results and also make savings.
The low percentage of using loans only shows that business fi-
nancial performance is sound thus SMEs are able to plow back
profits to expand their business. According to Oleka, Maduag-
wu, and Igwenagu (2014) the regression results imply that mi-
crofinance credit contribute more to the financial performance
of SMEs and hence higher return on assets. less able to allocate
more productive funds. Activity Ratio of SMEs after using the
average KUR experienced an increase in Inventory Turnover
and Receivable Turnover. This is due to increased receivables
and inventory on the company after using KUR. This has good
impact for the company because it means that sales have in-
creased and in Total Assets Turnover and Fixed Assets Turno-
ver. The average value of SMEs after using KUR has decreased
due to the increasing turnover of net sales. this is influenced by
the business climate faced by SMEs in the market which causes
the net sales amount obtained by each SME unstable.
Leverage Ratio of SMEs after receiving KUR funds experi-
enced an average decline, although the company used KUR
funds as additional capital of their business but they still main-
tain the existence of their assets. Despite having to meet short-
term obligations and long-term obligations, this does not affect
the value of production and sales because they use both per-
sonal mixed capital and borrowing through credit with por-
tions that are not much different from before. Leverage ratio is
considered fair if it has the highest average value above 50%,
the average amount of own capital. Despite the difference be-
tween before and after using KUR funds, the yield of leverage
ratio on total debt to assets and long-term debt to fixed assets
is below 50%. Profitability Ratio SME after using KUR on aver-
age value is increased compared to before using KUR. They
must have a strategy to maintain their business in both capital
and loan capital. Business owners must be able to attract con-
Table 1. Production Amount, Sales Turnover, and
Profit of SMEs Before And After Microfinance Credit
(In Million IDR)
Description Before After
Production Respondent 1 350 1,500
Respondent 2 500 2,700
Respondent 3 1,500 2,500
Respondent 4 1,000 3,540
Respondent 5 1,800 3,960
Respondent 6 2,850 3,388
Respondent 7 470 1,670
Respondent 8 1,905 4,185
Respondent 9 1,125 3,600
Sales Turnover Respondent 1 4,000 22,500
Respondent 2 18,750 68,000
Respondent 3 8,500 25,500
Respondent 4 15,620 46,160
Respondent 5 8,750 34,500
Respondent 6 10,380 30,420
Respondent 7 5,334 19,500
Respondent 8 28,240 94,240
Respondent 9 12,500 28,000
Profit Respondent 1 3,284 19,503
Respondent 2 3,656 13,551
Respondent 3 6,960 16,059
Respondent 4 12,897 34,955
Respondent 5 3,775 24,312
Respondent 6 7,510 21,931
Respondent 7 4,664 18,079
Respondent 8 22,150 79,169
Respondent 9 8,175 21,365
Source: Data processes, 2018.
Economics & Working Capital
Year 2019. 1-2. issues
sumers, and they must control the business and find a strategic
place to run the business to make profit.
So, it can be concluded through this descriptive analysis, we
are able know the growth of financial performance of SMEs in
Manado city before and after using KUR, It can be seen that
after using KUR, the average growth of SMEs Manado is good.
According to Oleka, Maduagwu, and Igwenagu (2014) that mi-
crofinance credit and advances to the small and medium scale
entrepreneurs have a significant positive impact on the SMEs
enterprises component of GDP. This is influenced by the in-
creasing amount of production and account receivable of the
company’s. the Liquidity Ratio, Activity, and Profitability of
SME has increased, while one variable Leverage Ratio on the
average the number of SMEs is decreased. According to Kibet,
et al. (2015) these results suggest that most SMEs are able to ef-
fectively and efficiently allocate the initially borrowed loans and
thus with knowledge gained through training by MFIs, they are
able to register positive results and also make savings. The low
percentage of using loans only shows that business financial
performance is sound thus SMEs are able to plow back profits
to expand their business. According to Oleka, Maduagwu, and
Igwenagu (2014) the regression results imply that microfinance
credit contribute more to the financial performance of SMEs
and hence higher return on assets.
conclusIon And recoMMendAtIon
Results from this study show that financial services obtained
from Microfinance Credit have highly benefited SMEs in
Manado and have facilitated the sharing of business skills
and innovative ideas, as well as alleviated the acute shortage
of finance to an extent. The policy implication of this study
is that microfinance contributes significantly to an enhanced
entrepreneurial environment by making the business environ-
ment more conducive and narrows the resource gap for small
When properly harnessed and supported, microfinance can
scale-up beyond the micro-level as a sustainable part of the
process of economic empowerment by which the poor im-
prove their situation. Based on findings from this study, the
use of Microfinance Credit has potentials for enhancing the
performance of small businesses in three major ways- regular
participation in microfinance credit, an offering of non – -
nancial services, and as a means to enhance entrepreneur’s
If we consider the variation in the impact of these factors on
the intensity of MSE growth and survival within any one sub-
sector, it is possible to define a common series of critical factors
for sub-sets of firms. This suggests that policies aimed at pro-
moting the performance of micro and small enterprises should
adopt a sectoral approach. Thus, approaches and resources
should address the most critical determinants of performance
in focal sub-sectors, aiming to augment access to critical re-
sources and, perhaps, overcome the disadvantages that cannot
be easily varied.
Based on the discussions and conclusions above, the author tries
to provide suggestions with the hope that it can be useful for the
management of the company in connection with the financial
condition of SMEs in the city of Manado. Microfinance Cred-
it should increase the duration of their clients’ asset loans, or
spread the repayment over a longer period of time, or increase
the moratorium. Also, the Microfinance Credit should employ
collective group-based loan disbursement strategy; this will re-
duce the default rate and the volume of the portfolio at risk.
In terms of policy on support services, Microfinance Credit
should assist their clients by providing training on credit uti-
lization and provide information on government programs
to Microfinance Credit operators in the country. Such Micro-
finance Credit support and training institutions should be
strengthened and properly funded while the services should
be properly delivered too. Microfinance Credit can partner
with relevant technology enterprise development organiza-
tions/skills training institutions to provide client-focused skills
training to their clients. Microfinance Credit should seek long-
term capital from the Pension and Insurance Companies in the
country. This will help to reduce their lending rates and enable
them to spread their interest payments over a longer period to
encourage the acquisition of capital assets and technology. The
Microfinance Credit should attend to loan proposals of Micro-
finance Credit through their business associations and other
self –help organizations. This will reduce the adverse effect of
information asymmetry. Social capital can be employed to obvi-
ate the need for tangible collateral.
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Table2. Paired Samples Statistics
Mean N Std. Deviation Std. Error Mean
Pair 1 Before 7283.1481 27 7144.09596 1374.88191
After 23881.0000 27 23962.88185 4611.65876
Source: Data processes, 2019.
Table 3. Paired Samples Test
t df Sig. (2-tailed)
Pair 1 Before - After -5.041 26 .000
Source: Data processes, 2019.
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Johan Reineer Tumiwa
University of Debrecen, Hungary
Octavia Diana Monica Tuegeh
Manado State University, Indonesia
Economics & Working Capital
Year 2019. 1-2. issues
Abstract: Sovereign funds are funds established and operated by the
state. They came into the limelight after the financial crises of 2007-
08, when they saved the most emblematic listed companies in the USA
and Europe. The aim of the article is to explore some key issues related
to sovereign funds. The paper discusses the origins of the term and
some related economic concepts, including factors which resulted in the
creation of sovereign funds. The legal background is also elaborated on
both international and national levels, giving an insight to the regula-
tory framework. The article closes with propounding a sovereign fund
in Hungary. This section gives an overview of state property manage-
ment and its legal background.
I. IntroductIon
Sovereign wealth funds are investment funds created and oper-
ated by states or their national banks. The first time they came
in the limelight was during the financial crises of 2007-2008
during which their intervention both in Europe and in the
United States saved emblematic listed corporations from bank-
ruptcy, much like a white knight would have done. Afterwards,
sovereign wealth funds captivated the public’s mind again in
2016 as a special form of state-backed institutional investor. As
of lately, sovereign wealth funds might be inclined to rearrange
their portfolios, if the price of crude oil dropped and stayed at
30-40 USD continuously. In that case, state-backed investment
funds may withdraw a staggering amount of capital up to
USD 404 billion – from the global securities markets. The rea-
son is that state budgets might be in need of these funds to sup-
plement the lost profits incurred from the low crude oil prices.
On the other hand, the position of sovereign wealth funds
could be drastically altered if Saudi-Arabia – with accordance
to the market’s expectations – would finally create the largest
fund ever, worth USD 2000 billion. This transaction would also
mean sovereign funds gaining a 20% share of the global capital
markets, which is worth around USD 30000 billion.
This topic raises relevant questions in Hungary as well. In
light of the successes of the monetary policies of the Hungarian
National Bank during the past two years resulted in the accu-
mulation of significant financial reserves. A possible beneficial,
and unprecedented in Hungary, utilisation of those reserves
could be the creation of a sovereign wealth fund managed by
the Hungarian National Bank.
Questions regarding the legal background of investment
funds are fundamental. Yet, there is even more emphasis on
regulatory framework in the case of sovereign wealth funds for
two reasons. Firstly, their capital is sourced from public funds.
Secondly, sovereign wealth funds are under the indirect control
of the state, usually exercised through national banks.
In Hungary it is hard to properly outline the relations of the
Central Bank, the state and the government only by relying on
the legal provisions. The Hungarian National Bank is a stock
corporation whose shares are owned by the state, as stipulated by
Act CXXXIX of 2013, section 5, subsection 1, and thus exercises
its right as a shareholder. According to section 1, subsection 1 of
the Act, the government and other bodies cannot influence the
activities of the Hungarian National Bank. Yet in turn, the state
as the owner is represented by the minister responsible for the
budget who happens to be a member of the government. Thus
the government, albeit indirectly, but still exerts significant influ-
ence over the Central Bank. Regardless, certain organs of the
Hungarian National Bank cannot be instructed directly. Under
section 6 subsection 1 of the Act, significant decisions – such as
ones relating to the alteration of the articles of association, or
about other important issues – may be made in the name of the
shareholders. Additionally, the chairman of the Hungarian Na-
tional Bank is nominated by the Prime Minister, as stipulated by
section 10, subsection 1 of the Act.
The chairman of the Hungarian National Bank has a duty to
report both orally and in writing to the Parliament, under the
Act CXXXIX of 2013, section 2 and section 131, subsections
1-2 and Section 9, subsection 4, point c refer the appointment
of the members into the Monetary Council to the Parliament’s
As sovereign wealth funds operate under the control of the
central banks – realising their strategic goals – it becomes clear
that governments and the state exerts influence over them. It
would be grave mistake to misinterpret this influence as direct
control though, as according to the relevant laws, states only
have ownership rights.
This paper only wishes to answer some of the questions
raised by sovereign funds. As we can see, the public law funda-
ments, the economic efficacy rooted in the capital markets laws,
and the managerial issues stemming from company law reveals
a wide-range of solutions in an international scale. It should
not be ruled out, though, that there will be further questions
regarding the management of sovereign wealth funds by the
state which will need addressing later on.
The most interesting Hungary-related issue is that there is no
legislation regarding sovereign wealth funds as of yet – unlike
many other countries. Thus, Hungarian sovereign wealth funds
founded in the future may only operate within the bounds root-
ed in public law and capital markets regulations on fund man-
agement, but there would be no concrete piece of legislation
that would specify their special legal status or impose further
legal criteria on their activities.
Additionally, an attempt is made at answering whether state
ownership of sovereign wealth funds can be attuned to their
institutional investor role. Also it is worth answering whether
the interests of each differing nation-state – both in relation to
Sovereign Funds in an International
and Hungarian Context
Economics & Working Capital
Year 2019. 1-2. issues
investors and the target country can be harmonised, and if
yes, what would be the proper instrument for doing so?
II. defInItIon of sovereIgn weAlth funds
In order to define sovereign wealth funds it is worth clarify-
ing in what sense are they sovereign in the classic sense, and
whether they fit the criteria for investment funds in light of the
traditional institutional investor concept?
1. Are sovereign wealth funds truly sovereign?
The most accepted meaning of sovereignty is the state of not
being subjected to the power of other person or group. Jean
Bodin, French jurist, the father of sovereignty, claimed that
sovereignty is simply the omnipotence of the ruler, which he
called “sovereign”. Thomas Hobbes, English philosopher held
similar views on the sovereign, in his words “the head of the
state is the embodiment of the one and indivisible sovereign-
ty”. John Austin, English jurist from the 19th century defined
sovereign as a person or a body which enjoys the subservience
of the majority, furthermore is not subjected to other earthly
powers. It is worth mentioning Carl Menger’s views on sover-
eignty, according to which a sovereign is someone who is able
to enforce his will against the law, if necessary. From Menger’s
definition, one can clearly see the trends of superseding the
doctrine of state sovereignty. One of such trends was the con-
cept of legal sovereignty which was laid out by Hugo Krabbe,
a Dutch jurist. According to Krabbe, sovereignty is an imper-
sonal potency emanating from the law. Thus, sovereignty lies in
the public awareness based on the people’s willpower, and not
on one person’s will, which in conclusion means the law is the
true sovereign. Let us summarise what has been said so far with
the thoughts of Antal Visegrády, in whose claims sovereignty is
the sine qua non of state power, as it is the political and legal
expression of power.
In light of the aforementioned it can be concluded that a sov-
ereign wealth fund is not sovereign in the classical sense of the
term. However, it goes without mentioning the ownership, con-
trol and monitoring rights are chiefly exercised by public organs
representing the sovereign state. Legislative constraints of the
state arising from membership in supranational organisations
may influence legislation to a great degree as most of the laws
and regulations are derived from supranational norms. One of
such example would be the directive on Alternative Investment
Fund Managers (2011/61/EU), which lays down the European
framework for the operation of alternative investment funds.
Compared to the directive, national laws cannot stipulate lesser
criteria (e.g. capital requirements), thus the state cannot legis-
late within the widest accepted limits of sovereignty regarding
sovereign wealth funds. In a sense, “sovereign wealth fund” is
not exactly the most precise term, in the case of certain coun-
tries “state fund” would be a much more apt alternative.
However, the usage of the term becomes more clear if it is
taken into account that it was originally used in the United
States of America, which as a federative state was not exposed
to the legislative trends dictated by supranational organisation,
unlike the member states of the European Union.
Therefore, sovereignty in the context investment funds does
not mean having more room for manoeuvre in contrast with
other funds, more favourable regulatory environment, or ex-
tra guarantees by the state. That would absolutely go against
the concept of free market. Sovereignty more likely means that
such funds are chiefly for furthering the sovereign’s (the state
in this case) economic agenda.
This study limits the meaning of sovereignty in the case of
sovereign wealth funds to the framework laid out previously.
The aim of the sovereign (e.g. the state) is to ensure the eco-
nomic benefits for the overwhelming majority, or even fore the
whole, society in the long run, which resulting from economic
or fiscal policies. A sovereign wealth fund utilises the capital
generated from the previously mentioned policies as an invest-
ment fund under market conditions (thus in a non-sovereign
manner), and its gains are channelled back into the society by
the sovereign operator itself.
2. In what sense is a sovereign fund an investment fund?
An investment fund is a financial instrument – a form of in-
vestment – which by utilising the benefits of pooled investment
draws in capital publicly or privately. Investors by trusting their
savings on professional asset managers basically purchase ex-
pertise. This expertise does indeed have a real price, which
is the asset management fee. This fee is specified by the asset
manager based on the value of the managed asset and the term
of the asset management.
The asset manager in the case of activist funds changes its
portfolio more frequently in a given term in contrast with a
passive fund. Passive funds are generally following the stock
market index or other complex financial indicators; thus they
are copying their portfolio. This means passive funds are only
adjusting their portfolios according to the changes made on
the originals.
Collectively managed assets are utilising the benefits of
both the economies of scale and portfolio diversification dur-
ing their operation, so that the owners of the fund may not
only invest in a wider range of instruments, but also gain ac-
cess to financial instruments which otherwise would be inac-
cessible to them with less saving, while also maintaining a
lower level of risk.
The assets of the investment funds are not only separated
in the balance sheet of the asset manager, but it also becomes
a different legal entity. This is one of the main differences be-
tween investment funds and portfolio-management mandates
or consignment, as the fiduciary asset management takes the
appearance of trust. A separate legal entity, the custodian is
responsible for monitoring the investment activities. The cus-
todian may veto any decision if it does not comply with the
policies of the investment fund. In the clear majority of invest-
ment funds administrative and marketing are outsourced to
third parties. The de facto separation of the assets guarantees
the preservation of their investment in the future, ensuring
their capital is in safe hands. Nevertheless, under no circum-
stances should it be taken a form of yield or capital guarantee,
as the yield of the investment fund may change for the better of
Economics & Working Capital
Year 2019. 1-2. issues
worse, depending on investment policies. The comparison of
yields is aided by the annual yield calculation and the calcula-
tions of the net asset value.
An investment fund is thus suitable for the professional man-
agement of a specific, separated asset, providing the proper in-
stitutional guarantees for the original owner. From this point of
view can we truly regard sovereign wealth funds as investment
funds. The user rights are transferred to the investment fund
manager in accordance with the investment policies. On the
other hand, ownership rights are more restricted than in the
case of trusts as they shall only be exercised on the asset classes
defined by the investment policy. Thus, sovereign wealth funds
operate more like fiduciary asset managers, as the sovereign
utilises the fund for designated beneficiaries (i.e. future gener-
ations) unlike the owners of an investment fund who are mainly
interested in realising their short or midterm goals.
Another important difference which requires special atten-
tion would be the activity of sovereign wealth funds. While most
of the investment funds are passive, the state during the opera-
tion of the sovereign fund exercises its ownership rights actively.
Meanwhile the shareholders of investment funds cannot even
exercise their right to vote or to be represented, as their shares
do not incorporate such rights. If the owners of the shares of
the investment funds are dissatisfied with the management’s
performance they may only resort to the Wall Street- rule, thus
sell their stake in the fund. Because of this a sovereign wealth
fund can only be operated as an investment fund if it is solely
owned by the state. In this case the state must comply with the
all the rules and regulations regarding investment funds and
fund managers, which would constrain the handling of state
assets, due to the complicated nature of it.
3. Definition of sovereign wealth funds
The term “sovereign wealth fund” was coined by Andrew Ro-
zanov, an investment banker. He applied it on state funds which
were created as a by-product of budgetary surpluses, due to the
favourable macroeconomic, trade and fiscal balance, which
were created by either long-term planning and austerity meas-
The International Working Group of Sovereign Funds (IW-
GSF), the most influential self-regulating group gives a much
more simplistic definition. According to them, a sovereign
wealth fund is a special investment fund over which the state
disposes. The fund itself was created for macroeconomic pur-
poses. A sovereign fund in order to fulfil its financial obligations
operates state owned assets and executes financials strategies
which include investment into foreign financial instruments.
Due to the above-mentioned difference in viewpoint it is well
in order to create our own definition in order to examine sover-
eign funds within a unified conceptual framework. Therefore, a
sovereign fund is a) managing state funds which are only avail-
able temporarily and in limited amount; b) achieves long-term
goals of the national economy; c) either employs its own asset
management organisation or an independent asset manager;
d) mainly invests in foreign economies, chiefly in financial in-
struments; e) is an entity with separate legal personality which
is subordinated under the ministry responsible for finances or
the central bank of a given state.
From this point on the definition given above will be used for
benchmarking the funds managed, the macroeconomic goals
to be achieved, the legal and organisational form of achieving
said goals and also the asset management and allocation strate-
gies employed by the sovereign funds.
III. hIstory of sovereIgn funds
The first sovereign funds fitting contemporary definitions
came to be in the 1950s. The Kuwait Investment Authority
(KIA) was inaugurated in 1953 in Kuwait, as the profit made by
the state from selling oil exploded in a great degree. Because of
that, to utilise the profit from the sale of oil in the long term a
legal solution was created, according to which an asset manage-
ment organisation (KIA) was to organise the sovereign funds
of Kuwait the Kuwait General Reserve Fund (GRF) and the
Kuwait Future Generation Fund (FGF). 10 % of Kuwait yearly
oil profit is channelled into the latter fund. By 2016 February
the cumulative capital of both funds amounted to USD 593
billion. The importance of both funds in the national economy
is underlined by the fact that the chairman of the board is the
minister of finance, and the membership includes the minister
of oil, the chairman of the central bank, the state secretary of
the Ministry of Finance, and five independent experts. Three
of them are working exclusively for the fund.
In 1956 in a small island state in the Pacific Ocean – Kiri-
bati – the world’s second sovereign fund was formed, called the
Kiribati Revenue Equalisation Fund. The purpose of the fund
was ensuring the future generation would enjoy the profits of
guano mining. The goal has been achieved as even though the
mining of guano used for producing phosphate – ceased a
long time ago, the assets of the fund grew to USD 400 billion,
of which 10 % revenue has increased the island’s budget about
16.5% of its GDP in 2008.
The next wave of establishing sovereign funds took place in
the 1970s-1980s due to the two oil crises. Between 1973 and
1978 certain oil exporting countries saw a surge in their in-
come as oil prices had increased fivefold. The oil price explo-
sion was deemed unsustainable by the markets as the increase
was the result of the collusion of OPEC states. Whereas in the
early 2000s the soaring raw material prices were the driving
force behind the creation of sovereign funds, after 2009 the
financial crises gave new incentives for creating funds which
were not based on raw materials, but capable of mitigating the
effects of crises.
Iv. the sources of cApItAl for sovereIgn funds
There are four clearly distinguishable categories for the sources
of capital for sovereign funds.
a) In the first place revenue generated from the produc-
tion of raw materials can be identified. Besides the oil
producer countries’ oil revenue, non-ferrous metals and
diamonds also a prominent source of income these days,
however, the aforementioned are not the only examples.
An interesting anomaly that in the long run raw-material
Economics & Working Capital
Year 2019. 1-2. issues
based growth may result in an economic recession, which
is aptly illustrated by the detrimental phenomenon
called “Dutch disease” which will be further elaborated
later on. This shows the importance of proper manage-
ment of budget surplus arising from the production and
sale of materials, for example by setting up sovereign
The importance of innovation – which is the fruit of hu-
man effort – cannot be stressed enough these days, as its
significance is comparable to the natural resources. The
innovation centres in California and Seattle, the Israeli
economy – which was rebuilt on innovation – and the eco-
nomic weight of the South Korean information and com-
munication technology sector serve as a testament to the
benefits of the expansion of economic sectors built upon
innovation for a nation.
b) Significant foreign currency reserves, usually resulting
from a continuous positive trade balance invite a won-
derful opportunity for initially capitalising of a sovereign
fund for strategic purposes. For example, the Hungarian
National Bank successfully managed its foreign currency
reserves between 2012 and 2015 by setting much more re-
alistic market value for the national currency than before.
This resulted in the appreciation in HUF of previously
allocated foreign currency reserves of the central bank
which appeared in the balance sheet of the Hungarian
National Bank as foreign exchange gains.
The surplus amassed this way could be utilised in more
than one ways. One of those could be setting up one (or
more) sovereign funds in Hungary. It is well-founded to
consider more than one funds, as countries with more
expertise in managing sovereign funds usually create at
least two different investment funds – one of which trades
domestically and the other which trades on foreign mar-
As foreign examples show, the vast majority of coun-
tries are not only using sovereign funds for managing the
gains from the appreciation of foreign currency reserves,
but also to manage them as well, since their intention is
not just to utilise, but to accumulate. The foreign cur-
rency reserves. There are some exceptions though, as for
countries with especially strong currencies – such as Swit-
zerland – amassing foreign currency reserves results in
the increase of deficit at the same time. We are currently
witnessing a shift in paradigm, as central banks used to
view foreign currency reserves as liquid assets, as of lately
they are utilising them as investment instruments which
in turn valorises their role.
c) Financial resources, especially in years ending with posi-
tive balance, may also serve as the funds for sovereign
funds. However, due to the short and midterm political
cycles such occurrences are rare, and even they are only
available for a very short time.
In China the real economic development and the mark-
edly export-oriented economic model of the past 10 years
resulted in grossly positive trade balance which in turn
manifested in budget surplus. From this development in
China stemmed many sovereign funds which would bene-
fit the whole society even if the economic focus has turned
to the domestic market.
Seemingly for Chinese fund managers, considerations
for distinguishing between certain types of fund are less
important; they operate plenty of hybrid – partially sov-
ereign – funds which are exclusively focused on develop-
ing the domestic market, promoting growth in individual
sectors and regions.
In China, an alternative solution to the problem of bad
credit facilities amassed between 2008 and 2016 by the
regional banks is the state increasing its share.
A markedly different counterexample would be practice
of the USA following 2008, as President George Bush’s
Troubled Assets Relief Program (TARP), which was a leg-
islative package for saving banks, raised capital by directly
gaining ownership instead of utilising sovereign funds.
This was for furthering the political goals of the govern-
ment as it tried to satisfy the electorate’s needs by giving
a wider monitoring role for the state in banks involved in
the financial crises of 2007-2009 concerning their activi-
In light of this it is quite an ironic turn of events that
communist China tried to hold in hand a part of its fi-
nancial sector through sovereign wealth funds, whereas
the birthplace of financial market capitalism, the United
States resorted to direct state ownership.
d) The state can also expand a sovereign funds resources
by rearranging its stock (and other securities) portfolio.
Such instruments may be either transferred directly (for
example by contribution in kind) or indirectly (the reve-
nue from privatisation or concessions) to sovereign funds.
Such measures allow for an extended period of time in
which the benefits of extra funds can be realised.
A sovereign fund can not only diversify its capital by
investing in short-dated instruments, but also by investing
in long-term, equity type instruments as well. This in turn
radically expands the sources of revenue, which is advan-
tageous as low-risk financial instruments’ yield may not
exceed the inflation rate. This may result in the erosion of
the value of the financial instrument reserves. Such cases
show the other advantage of sovereign funds: the possi-
bility of diversification, as it not only makes it possible
to obtain securities offered publicly, but also gives access
to the securities offered privately. The potential invest-
ment portfolio may also be further expanded by alterna-
tive investments, such as non-domestically produced raw-
material trade on the world market, foreign currencies, or
ownership right on such portfolios.
v. dutch dIseAse
Dutch disease is an economic process taking place after reveal-
ing a large scale source of raw material and its exploitation –
instead of the projected benefits – turns out to be detrimental
for the national economy as the consideration paid for the raw
Economics & Working Capital
Year 2019. 1-2. issues
material creates an immense buying pressure on the national
currency. This complex economic correlation was observed in
The Netherlands, after the revealing of the Gröningen gas site
in 1959, which gave its name to this phenomenon after the
resulting economic situation. The Dutch currency (the Dutch
Gulden back then – NLG) due to the increased exports in oil
temporarily spiked. The strong national currency raised costs
for the agricultural sector and other industries which were
mainly producing for the export markets as they were under-
taking domestic investments. This in turn drove down the
rate of export returns while also increasing wage-related costs
in an international context; the increased currency costs also
increased the expenses for the otherwise unchanged wages.
Thus, moving production abroad becomes economically viable,
as poorer countries have lower wage-related expenses. Howev-
er, sovereign wealth funds can help curing the ails of Dutch dis-
ease. The yields of selling raw materials can be extracted from
the short-term economic processes in the hopes of long-term
increase, but at the same time it can also prevent the previously
outlined effects.
The researchers of “resource curse” came to a similar con-
clusion as well. The focus of Jeffrey D. Sachs and Andrew M.
Warner examination in the early 1990s was the seemingly log-
ical correlation that the discovery of new raw material sources
results in economic growth whereas in reality the contrary
happens. In the1990 many economic analyses examined this
trend and all of them came to the same conclusion: the sud-
den abundance in raw materials results in an economic growth
even slower than before discovery. They also observed plenty
of detrimental aftereffects in the case of examined countries.
Among such were the proliferation of corruption, the growth
of inflation and income disparity, and the shrinking of eco-
nomic activities. Additionally, more cause of concern was that
societal tensions were reaching the boiling point in the ex-
amined period which radicalise politics, fatally polarises the
society resulting in a legal uncertainty. In light of that can we
truly understand the curse moniker, as the expected growth
turns into decline giving way to harmful social and economic
As it was previously mentioned, in order to avoid the detri-
mental effects of layering recessionary trends sovereign funds
provide an opportunity for strategically reallocating the rev-
enue from raw material export. This not only prevents the un-
wanted appreciation of the national currency, but also extends
the positive effects of economic growth. Besides, another ex-
tremely important benefit of operating sovereign funds must
be emphasised as well on the society. Given that a sovereign
fund is based on the ownership of the state the economic
growth within can exert its benefits on a broader scale for the
society than investment funds in private hands (e.g. hedge
funds, private pension funds). This reasoning served the basis
for setting up sovereign funds– amongst many others – such
as the Kuwait Future Generation Fund, the State Oil Fund of
Azerbaijan, the Australian Government Future Fund, the Gov-
ernment Pension Fund of Norway, and the Stabilisation Fund
of Russian Federation.
vI. AIMs of sovereIgn funds
1. Sovereign funds for stabilisation
The aim of sovereign funds for stabilisation is to divert assets
during an economic boom for potentially recessionary periods
during which they can provide resources for the state’s anticy-
clical policies without further raising national debt. Countries
lacking natural resources – thus gravely in need of imports
may also use such funds for countering price hikes for raw ma-
terials. Otherwise, in such case the weakening economies of in-
debted countries may not be able to additionally finance their
needs, or if they do, they may only be able to do it at an extra
cost, deepening the crisis further more. This may result in the
frequent and quick usage of reserves.
During the course of a crises the central bank may utilise
monetary instruments, meanwhile state may utilise fiscal in-
struments to enact anticyclical policies, either directly or indi-
rectly. Among the monetary instruments, the best-known indi-
rect instrument is the series of interest rate cuts, which allows
for more liquidity in the financial system, whereas the mone-
tary authority may increase liquidity on the markets by directly
purchasing securities.
In Hungary Act CXXXIX of 2013 on the central bank stipu-
lates its competences. The highest level decision-making organ
of the Hungarian National Bank is the Monetary Council. The
Monetary Council decides on the bank rate. The council can be
convened anytime, but its sessions are held on a monthly basis,
and it is their competence to decide on the monetary policies
and its execution. The board of the central bank is responsible
for executing the monetary policies.
Solely such solution can only be accounted for as a quick
win for acute liquidity problems. On the contrary, a state can
only rely on budgetary reserves to effectuate long-term infra-
structural investments in order to foster the demand for in-
vestments, to increase consumption and employment rate. The
significant fluctuation in raw material prices may require in-
tervention in the medium term, the investment period of such
funds shorten due to the reasons listed above.
Wealth preservation and savings funds
The importance of savings funds can chiefly be appreciated by
countries lacking in raw materials, or countries with climates
which constrains agricultural production to smaller geographic
area. The opportunities for setting up sovereign funds in the
case of countries strongly dependent on the profits made on
exporting goods mainly arise during periods when there is an
increase in demand – and thus prices – for their products. Cre-
ating funds enables them to prepare for the lean years occur-
ring as a result of the subsequent drop in the prices of products,
raw materials or resources. Thus it is no coincidence that main-
ly countries exporting raw materials are the most motivated at
accruing savings through sovereign funds. The exchange rate
fluctuation itself draws attention to the necessity of creating re-
serves. In the case of fossil fuels volatility and accessibility are
key factors, as the extraction rate of crude oil and natural gas
varies depending on characteristics of the quarry site. Further-
more, the extractability of previously revealed oil and natural
Economics & Working Capital
Year 2019. 1-2. issues
gas fields differs depending on their actual market price. This
problem surfaced with shale gas revolution of 2015-2016, as
in this period the price of crude oil plummeted from almost
USD 100 due to the advances in extracting technology. Frack-
ing made it economically viable to extract shale gas and shale
oil from the hard to access geological formations found in the
USA and Canada. However, oil prices below USD 50 and espe-
cially under USD 40 ceased the viability of such operation. The
increased supply may stabilise oil prices on a lower level which
in turn – due to the lack of reserves – may result in selling off
shares of large oil corporation through Initial Public Offerings.
This is akin to selling of the “family heirloom” as these sectors
were owned privately by states (or national investors) keeping
profits and controlling rights to themselves.
The above mentioned process started in Saudi-Arabia in
2016, as the privatisation of the national oil company was be-
ing prepared. Drawing the right consequences, Saudi-Arabia
took measures to create the world’s greatest sovereign wealth
fund by restructuring the financial instrument reserves of the
Within wealth preservation and savings funds two more sub-
types can be differentiated. The first subtype would the inter-
generation funds, which earmarks and invests – partially or
wholly – the profits arising from successful (or in