Saleh Khan
European 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
Profit
Oriented
Socially
Motivated
“Lets do good”
Social Motivation
Development
Solutions
Social
Businesses
“local”
MFIs
Comprehensive
Presence
The Double / Triple Bottom Line Zone
Scale /
Outreach
Technology
Lean
Management
Price
Skimming
CSR
Profit Orientation


Usually inspired by a “do good to people”
philosophy and most institution sare
structured as not-for-profit NGOs
Outer Circle:
Number of
Active Borrowers
41%
Social motive seems to be the driving force
for the majority of MFIs, looking at the
institutional type for MFIs globally
42%
Inner Circle:
MFI count
58%
59%



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.
Non-profit
For Profit
Data Source: Mix Market for 2010

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
2%
 Driven by the need to reach out to
as many people as possible – due to
various motivations
5%
Total Number of
Active Borrowers
by Region
3%
15%
South Asia
17%
East Asia and the
Pacific
Latin America and
The Caribbean
Africa
 Could be to widen financial
inclusion (BRI), to generate
economies of scale (ASA), or
simple to establish market
dominance
59%
Eastern Europe and
Central Asia
Middle East and
North Africa
 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
Data Source: Mix Market for 2010

BRI (Indonesia)

VBSP (Vietnam)

Top 3 Bangladeshi MFIs (Grameen /
BRAC / ASA)

Indian MFIs (SKS, Spandana)

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
$350
Cost per loan (weighted average)
$300
$250
$200
$150
$100



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 macroenvironment (cost of doing business,
population densities, etc.)
$50
$EECA
LAC
SSA
MENA
EAP
SA
Data Source: Mix Market for 2010

Largest MFIs

ASA in Bangladesh, most of its entities
globally

Indian MFIs (Bandhan / Sarala / SKS)
40%
 As an example we look at how
operational culture plays a role in
cost efficiency for Nigerian MFIs
30%
 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-forprofit institutions
20%
 Operational philosophy plays a large
10%
2007
2008
Nigeria (for profit MFIs)
Bangladesh
Data Source: Mix Market
2009
2010
Nigeria (not for profit MFIs)
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

Recent examples are Compartamos –
which came under criticism for its IPO

Often criticized for being in the
microfinance space

And SKS in India which also came under
criticism for similar reasons

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
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?

Price skimming and price competition
are examples of tactics employed
Yield on gross portfolio (real) (weighted average)
25%
20%
15%
10%
Africa
East Asia and the
Pacific
Eastern Europe and Latin America and The Middle East and North
Central Asia
Caribbean
Africa
South Asia
Data Source: Mix Market for 2010

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?
 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