Saleh KhanSaleh KhanEuropean Microfinance Week 2011

October 2011, Luxembourg

This is a work in progress, hopefully leading to a paper by Dr. Arvind Ashta and myself

Draws upon our current work on “Cost Control in MFIs” – forthcoming in (the Journal of) Cost Management – a paper that evaluates the business case for lean operations management in MFIs

We intend to use this discussion forum to generate ideas, map operational knowledge and identify future collaborations

“The way we do things around here” – Deal & Kennedy1

“A belief system shared by an organization’s members” – Spender2

“Corporate culture is the glue, if you will, that holds an organization together” – Mitchell3

Management philosophies and organizational culture can define how a Microfinance Institution (MFI) manages its business operations and strategic plans

From taking a patient approach to investments with a higher risk appetite (as demonstrated by donor or government driven MFIs) to strict risk management and operational practices (as required by commercial investors) these dictate the path followed by a MFI to sustainability

It also defines the ‘nature’ and ‘flavour’ of the institution, from Spartan offices like those of Grameen Bank or ASA to large Microfinance Banks in Nigeria often called ‘micro-commercial banks4’

An examination of these culture and grouping them should improve our understanding of MFIs and their likely evolutionary path

Impact Investing

Social Businesses

Triple Bottom line

The Double / Triple Bottom Line ZoneThe Double / Triple Bottom Line Zone

Profit OrientationProfit Orientation

Socia

l M

oti

vati

on

Socia

l M

oti

vati

on

PriceSkimmi

ng

PriceSkimmi

ng

LeanManageme

nt

LeanManageme

nt

Comprehensive

Presence

Comprehensive

Presence

SocialBusiness

es

SocialBusiness

esDevelopment

Solutions

Development

Solutions

CSRCSR

“Lets do good”

“Lets do good”

Scale /Outreac

h

Scale /Outreac

h

“local”

MFIs

“local”

MFIs

Technology

Technology

Usually inspired by a “do good to people” philosophy and most institution sare structured as not-for-profit NGOs

Social motive seems to be the driving force for the majority of MFIs, looking at the institutional type for MFIs globally

They might be gigantic in size (as in Grameen Bank), but, most often are small scale MFIs that are focused within specific sub-regions of a country

Have broader development objectives beyond just providing microcredit or microsavings services

Microfinance is may be just one of the services offered by them – others being healthcare, education, etc.

Most MFIs are NGOs by charter type But most clients belong to for profit

institutions Made famous by Grameen Bank Mostly small MFIs (Tier 3 and Tier 2) BRAC (for their holistic approach to

development) “Slow money” and “patient capital” movements

Outer Circle: Number of Active Borrowers

Inner Circle: MFI count

Data Source: Mix Market for 2010

Driven by the need to reach out to as many people as possible – due to various motivations

Could be to widen financial inclusion (BRI), to generate economies of scale (ASA), or simple to establish market dominance

Could be part of the government’s plan to expand access to finance and could be part of development assistance

Scale and outreach certainly depends on external factors, including population density and poverty rate

BRI (Indonesia) VBSP (Vietnam) Top 3 Bangladeshi MFIs (Grameen / BRAC / ASA) Indian MFIs (SKS, Spandana)

Data Source: Mix Market for 2010

Total Number of Active

Borrowers by Region

People, planet, profit

Double and Triple Bottom line seekers

Made famous by Dr. Yunus’ call for social businesses and his work in this field

Impact investing seeks to follow this model - most MF funds and MIVs are modelled along these lines

But, is this a new concept? Or are all MFIs, by pure definition of working with poor people and seeking to be sustainable, social businesses?

Grameen Bank initiatives – for example: Grameen Danone is a joint venture between four Grameen companies; Grameen Byabosa Bikash, Grameen Kalyan, Grameen Shakti and Grameen Telecom -- and Groupe Danone5

Microfinance fund, such as BlueOrchard – a commercial microfinance investment company that invests in MFIs and seeks profitable return to its investors6

Most sustainable MFIs seek to be ‘operationally efficient’ in order to reduce cost – could be a function of the outreach, by exploiting economies of scale, or by using technology to reduce costs

Some MFIs, however, make it their driving purpose / institutional philosophy to be the most cost efficient – such as ASA and it’s worldwide entities

The goal is to reach the maximum amount of people with the minimal cost

Could be a function of macro-environment (cost of doing business, population densities, etc.)

Largest MFIs

ASA in Bangladesh, most of its entities globally

Indian MFIs (Bandhan / Sarala / SKS)

Data Source: Mix Market for 2010

Data Source: Mix Market

As an example we look at how operational culture plays a role in cost efficiency for Nigerian MFIs

Although cost of operations is higher in Nigeria than Bangladesh (used as a benchmark from South Asia), there are marked difference between for-profit and not-for-profit institutions

Operational philosophy plays a large role in cost acceptance / cost tolerance of an MFI – could be blamed on management apathy towards costs

Driven by RoA and on providing a return to shareholders

Often criticized for being in the microfinance space

Some examples have been the recent IPOs in the sector

Could be dictated by external market conditions such as ‘acceptable’ margins in the country and the lending rates

Price skimming and price competition are examples of tactics employed

Recent examples are Compartamos – which came under criticism for its IPO

And SKS in India which also came under criticism for similar reasons

The debate remain on how much profit is ‘too much’? And should MFIs be allowed to generate surplus over a certain size? Should they distribute this?

Is there a space for commercial investors to be in, and a case for ‘commercial microfinance’?

But, perhaps this is a regional phenomenon?

Using Yield on Gross Loan Portfolio as a proxy of profitability, we see that there are wide regional variances

Africa, Latin America and MENA seems to command the highest Yield

South Asia being the lowest – perhaps because of intense competition and a mature market?

Data Source: Mix Market for 2010

Classify these and perhaps expand the classifications to include more organizational culture types

Get case studies and highlight practices for each

1. Deal, T.E & Kennedy, A.A. 1982. Corporate Cultures: The Rites and Rituals of corporate Life. Reading MA: Addison-Wesley.

2. Spender, J.C. 1983. Myths, Recipes, and Knowledge-bases in Organizational Analysis. Unpublished manuscript, Graduate School of Management, University of California at Lost Angeles.

3. Mitchell, C. 2000. A Short Course in International Business Culture. California, USA. World Trade Press.

4. Mr. Femi Fabamwo, Director , Central Bank of Nigeria,quoted by Abayomi, A., 2011. Why 103 MFBs Failed - CBN. [Online] Vanguard Nigeria Available at: http://www.vanguardngr.com/2011/01/why-103-mfbs-failed-%E2%80%94-cbn/ [Accessed 31 October 2011]

5. Source: http://www.socialenterpriseportal.org/files/Library/BSEP_Bangladesh_Case_Studies.pdf

6. Source: BlueOrchard’s website at http://www.blueorchard.com/jahia/Jahia

OXUS (for-profit): Bottom-up/decentralized ; Efficiency-oriented; Committed

ADIE (not-for-profit): engagement, initiative, sérieux, respect, confiance (trust).

 

How can we interpret it ?

  Elements of profit orientation…or for-profit culture

OXUS: Efficiency oriented

Elements of social orientation (to poor) or a culture to think of the poor OXUS: Committed ADIE :  engagement, respect, confiance (trust).

  Element of internal social orientation (to employees) or a culture of internal

working OXUS : Bottom-up/decentralized ADIE:  Initiative, Serious