...My future is Bright
PROFITABILITY & SUSTAINABILITY:
WHAT WORKS FOR MICROFINANCE INSTITUTIONS
Presented By
Bunmi Lawson
MD/ CEO, Accion Microfinance Bank Ltd
CBN ANNUAL MICROFINANCE CONFERENCE
7/02/2012
Why Do Microfinance Institutions Exist?
• To provide a panacea to poverty
• To provide access to funding to the poor for income
generating purposes
• To provide a range of financial services to the poor
• To bank the unbankable and underserved
• To make a profit
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Triple Bottom Line (TBL)
• TBL argues that companies should be preparing three different (and
quite separate) bottom lines. One is the traditional measure of
corporate profit—the “bottom line” of the profit and loss account.
• The second is the bottom line of a company’s “people account”—a
measure in some shape or form of how socially responsible an
organisation has been throughout its operations.
• The third is the bottom line of the company’s “planet” account—a
measure of how environmentally responsible it has been.
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Triple Bottom Line (contd.)
• A triple bottom line enterprise seeks to benefit many constituencies, not exploit
or endanger any group of them.
• In some ways, the TBL is like the balanced scorecard as it operates on the same
principle of :what you measure is what you get, because what you measure is
what you are likely to pay attention to.
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Triple Bottom Line
Environment
Social
Profit
5
Well defined mission
For example in this mission statement -
“ To economically empower
micro-entrepreneurs and low income earners
by providing financial services
in a sustainable, ethical and profitable manner”
6
Bottom Line 1 – Profit
• Some people infer that Microfinance should be non profit as profit making is
seen as profiting from the poor
• There is the worry that an excessive concern for profit in microfinance will
lead MFIs away from poor clients to serve better-off clients who want larger
loans
• Profit focused microfinance may lead to over-indebtedness of poor clients
• M. Yunus rightly says that the lure of profits has, in some cases, attracted
players with questionable motivations and with practices that must be
condemned.
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The benefit of making profit
• Attracts Capital
• Attracts better and more qualified Board for good
Governance
• Attracts better qualified and competent/ committed staff
• Generates additional resources
• Enables the MfB Reach more people in its social mission
• Empower more people
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Non- Profit
• Not sustainable short term life
• Can only make small size loans
• Usually small without reaching scale
• Threat of insolvency if donation flow is cut off
• Poor customer service
• Low innovation
• Less transparent than For- Profit
• Poor use of technology
• Profit is good for the Microfinance Institution
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How profitable should Microfinance Banks be?
• How Profitable?
– A balance must be struck between making a profit and social
issues that are pertinent to the existence of the customer/ business
• What is acceptable in the Environment/ Market of
operation?
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How profitable should Microfinance Banks be?
• What are the costs of operations? Are they efficient?
– Microfinance is a high cost business. As a business model, its greatest
challenge is to lower the operating costs in order to reduce the cost of service
borne by borrowers.
– Since operating expenses are the main component of interest rates, identifying
their drivers and quantifying them constitute the first steps in finding ways to
improve efficiency of microfinance institutions worldwide.
– The fixed cost of processing loans of any size, the assessment of potential
borrowers, their repayment prospects, administration of outstanding loans,
collecting from delinquent borrowers, all affect the costs of operations
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How profitable should Microfinance Banks be?
• What are the funding costs?
– How expensive is it to get funding?
– Cost of funding may be related to interest rates charged
– Source for cheaper funds/ grants, etc
• Subsidized loans
• Non – Interest loans
• Increase in savings deposit
• “As MFIs, we have always stated that the growth of the base (of customers)
will be critical to the reduction of costs. In addition, we can reduce costs if
cheaper source of funds are made available to us,” Vijay Mahajan (President,
Microfinance Institutions Network).
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How profitable should Microfinance Banks be?
• ROI benchmarks with competitors in the same market
• What ROI attracts additional investments?
• Beware of Mission Drift
– Pressure to expand outreach can pose a dilemma to MFIs. The concern is
that efforts to reach a significant scale by securing financial sustainability
may lead to a tendency to provide larger loans to less poor clients and to
employ stricter loan screening procedures. In other words, scale-up could
lead to a drift from an MFI’s poverty alleviation mission.
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Generating profit in a Microfinance Bank
• Income
– Appropriate pricing policy
• How many competitors and similar products are in the market and in what price
structure?
• A complete understanding of production costs, profit objectives, customers, competition,
and other market information helps you determine the pricing strategy that best fits your
product and company.
• What Interest rates to charge? Flat, declining, mixture of both.
• What fees to charge? Administrative/ transaction, Service fees, etc
• With this information, you know the minimum interest rate you can charge to break even
and the maximum interest rate you can charge based on an estimate of customer demand.
• Competition and profit objectives factor in to determine the interest rate chargeable
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DETERMINANTS OF PRICE?
Price Ceiling (“What will the market bear?”)
?
?
?
Final Price (How does the company
position its product/service?
Acceptable
Price
Range
?
?
?
?
?
?
?
?
Price Floor (“What are the company's costs?”)
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?
Generating profit in a Microfinance Bank
• Income contd.
– Pricing Strategies
•
To determine the interest rates to be charged, the MFI will need to factor in the effects
of competition and profit objectives. This is difficult due to the subjectivity and
estimates involved. To ease subjectivity, most companies subscribe to one of five main
pricing strategies:
•
Premium pricing
•
Value pricing
•
Cost/plus pricing
•
Competitive pricing
•
Penetration pricing
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Generating profit in a Microfinance Bank
Strategy
Substitutes
Entry barriers
Price
sensitivity
Economies of
scale
Goal
Premium
None
Very high
None
None
High per unit
margin
Value
Few
High
Low
Low
Profit
Cost/plus
Some
Medium
Medium
Medium
Market share and
profit
Competitive
Many
Low
High
High
Protect market share
Penetration
Many
Low
High
High
Market growth and
leadership
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Generating profit in a Microfinance Bank
• Income contd.
– What do customers need? (Adequate product development)
• What value and benefits do customers perceive in the product and how willing
are they to pay for it?
• What can customers affect?
• Increasing competition in the microfinance sector, means that customers can
switch to other providers if their needs are not being met.
• Our approach should be towards researching and responding to customer needs
with a strong, well-defined corporate brand, which is key to reaching and
retaining more target clients.
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Generating profit in a Microfinance Bank
• Income contd.
– What resources do we have?
• Good Governance – Qualified & Experienced Board
– generates investor goodwill and
– governance plays a critical role in the performance of MFIs . The
independence of the board and a clear separation of the
positions of a CEO and board chairperson have are crucial to the
success of the organisation.
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Generating profit in a Microfinance Bank
• Income contd.
– What resources do we have?
– Human Resource
• After recruitment, the training & capacity building figure out as a predominant
factor in preventing turnover in an MFI.
• HRD should align with Business Strategy - The Human Resource person
must be involved at the strategic level of decision making.
• Churchill (1997) report on Managing growth: The Organizational Architecture of
Microfinance Institutions signifies that the foundation of any MFI lies at the locus of
interaction between the institution and its customers. The role of front line staff
assumes critical importance.
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Generating profit in a Microfinance Bank
• What resources do we have?
Human Resources contd.
– Train staff on core ideology, mission and vision
– Mentorship/ On the job training
– Continuous professional development
– Senior Managers development
–
MFIs that have the capacity—including a proven lending methodology, a well-managed staff
learning program, an effective information system, access to large volume of loan capital, and
the administrative capacity to process volumes of applications efficiently; are probably ready to
achieve economies of scale in operation.
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Generating profit in a Microfinance Bank
• Income contd.
– What resources do we have?
– Scale/ Outreach
Minimum number of Clients needed to be profitable
Customers willing to pay N100/ transaction
Cost of business = N1,000,000
You must have at least 100,000 clients to be profitable
– Mass Market Strategy
• Breakeven point
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Generating profit in a Microfinance Bank
• Reducing Cost
• Scale
–
reduce cost per borrower
– Reduce dependence on donor funds
• Design determines cost – design the product with cost reduction in
mind
• Standardize processes
• Retention of customers reduces cost
– Lower cost of customer acquisition
– Reduced use of resources based on good repayment / behavior
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Generating profit in a Microfinance Bank
• Reducing Cost
– Reduce overheads
• Procurement Costs
• Better customer service leads to more sales
• Retention reduces cost
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Generating profit in a Microfinance Bank
• Cost - Reducing Cost
– Streamline processes
• Efficiency
• Using and improving on technology available
• Balance control Vs service efficiency
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Generating profit in a Microfinance Bank
• Reducing Cost
– Invest in new and relevant technology
• Technology driven Vs manual
– POS
– ATM
– Mobile Banking
• Core banking software
• Automate key processes: accounting, HR etc
• Risk Management
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Social assessment score card
Objective of most Microfinance Banks is to address poverty and help increase
income .
S = Social Mission
AMfB has
developed its Social
and Environmental
Assessment Score
Card
O= Outreach
C = Client Service
I = Information, Transparency & Consumer
protection
A = Association with the Community
L = Labour
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Social Mission
Performance Indicators
1. Define Social Mission
2. Evidence of Commitment to Mission
– Staff: Board: Strategic Plan
3. Evaluation of Mission Fulfillment
-
What should be evaluated/monitored
4. Client Outreach
–
% Category of Client
–
% Income to GDP
–
Average Loan Size
–
Increase in income over 5 years
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Outreach
Performance Indicators
1. Geographical Coverage – Local Government and Growth in Numbers.
2. Depth of Reach
– % Female
– % Male
– % Education Level
– % Without Prior Banking
3. Products and Services – Simple, Easy & Friendly
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Client Service
Performance Indicators
1. Client Retention
2. Benefit to Long Standing Customers
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Information Transparency & Consumer Protection
Performance Indicators
1. Transparency
– Disclosure of loan terms to clients
2. Disclosure of Accounts on the Mix
3. Website
4. Consumer Protection
5. Code of Conduct for Board & Employees
SMART Campaign- aligning behind six key principles of consumer protection
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Association with the Community
Performance Indicators
1. Defined Corporate Social Responsibility Project
–
Positive impact on clients
–
Benefit to Immediate Community
–
Benefit to larger community
2. Leadership role in NAMB
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Association with the Community contd.
3. Environmental
impact
• Exclusion List
– Firearms
– Alcoholic beverages
– Tobacco
– Gambling, Casinos
– Radioactive Materials
– Harmful Child labour
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Labour Climate
Performance Indicators
1. Staff Retention %
2. Training Cost as a % of Salary
3. Compensation Bench Mark
4.Staff Feed Back mechanism
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Key pitfalls for Microfinance Banks
• Weak Board/ Governance
– Balance of Control
• Weak Management
– Poor Salary Scales
– Poor recruitment practices
• Lending Methodology
– Less than N250,000 loan to low income should be at least 80%
• Weak Risk Management Methodology
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Key pitfalls for Microfinance Banks contd.
• PAR Delinquency Management
– Strict compliance to repayment terms –
– from one day, charge penalties
– Reward good clients
• Weak Technology
– Invest in Technology over cars, buildings, etc
• Weak Branding Methodology
– Awareness
– Communication Gaps and Inadequate Awareness
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Profitability and sustainability of MFB 2009: MIX
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•
Falling returns especially from East and
Southern Africa. Drop in revenues
•
Steady rise in PAR which has raised red
flags amongst institutions.
•
Operating Expenses remain the highest
in the world. (19%)
•
Financial expense are amongst the lowest
globally, due to strong deposit base.
•
Low Levels of Financial intermediation
correlate with poor performance
•
Social mission still remains a challenge.
(i.e. Poverty alleviation, Women
empowerment , Endorsing the Client
Protection Principles-CPPs and
incentives/benefits)
•
Social Performance integrated into the
Strategic Planning process
Profitability
What are the two key profitability
ratios?
Return on Assets (ROA)
Return on Equity (ROE)
Operating
Operating
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Profitability: Return on Assets (ROA)
Measures the capacity of the MFI’s assets to generate
profits
Indicator:
Net Operating Income
Average Assets
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Profitability: Return on Assets (ROA)
Industry Averages
All
FSS
MBB
0.6%
2.6%
ACCION
5.1%
4.94%
ACCION
CAMEL
Africa
LA
(1.1%) 1.7%
0.6%
5.9%
> 3.0%
AMfB
40
Asia
Banks NGOs
0.2%
0.8%
0.8%
N/A
6.1%
1.8%
Profitability: Return on Equity (ROE)
Measures MFI’s ability to increase equity base via
earnings from operations
Indicator:
Net Operating Income
Average Equity
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Profitability: Return on Equity (ROE)
Industry Averages
MBB
ACCION
Partners
All
FSS /
OSS
Africa
LA
Asia
Banks
NGOs
3.2%
11.9%
(3.2%)
7.2%
2.3%
5.8%
2.4%
20.2%
22.6%
(0.3%)
22.8%
N/A
24.6%
6.3%
ACCION
CAMEL
> 15.0%
AMfB
42
Profitability: Operating Self-Sufficiency
Averages
Op Rev / (Fin + Op
Expenses)
Reg.
NGOs
LA
Africa
All Partners
105%
119%
116%
110%
115%
ACCION CAMEL Recommended Range
MFIs
Operating Revenue/(Financial + Operating
Expenses)
AMfB
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> 100%
Profitability: Operating Self-Sufficiency
Industry Averages
Op Rev / (Fin +
Op Expenses)
All
FSS
Africa
LA
Asia
Banks
NGOs
124%
137%
117%
123%
123%
132%
132%
115%
>120%
110%
116%
105%
119%
ACCION Network
Op Rev / (Fin +
Op Expenses)
AMfB
44
Efficiency & Productivity
Operating Efficiency:
• How much is being spent to maintain the outstanding
portfolio?
• The efficiency of an MFI can be controlled: how much is being
spent on what?
• Important variables include: Staffing, administrative
expenses, client base
Productivity:
• Personnel expense is usually the largest operating expense.
Larger caseload = greater efficiency!
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Operating Efficiency
Definition: Measures the MFI’s efficiency level
Indicators:
Operating Expenses
Average Portfolio
or
Operating Expenses
Average Assets
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Profitability: Operating Efficiency
Industry Averages
All
FSS
Africa
LA
Asia
Banks
NGOs
MBB
19.2%
16.3%
31.7%
19.5%
16.0%
16.4%
23.5%
ACCION
Network
27.6%
23.7%
42.0%
25.0%
N/A
26.9%
30.0%
ACCION
CAMEL
< 20%
AMfB (Portfolio)
AMfB (Assets)
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Comments
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