Managing Microfinance

Managing Microfinance

Introduction

For the most part, economists cite contract design to explain microfinance successes. Group lending is especially celebrated, followed by the dynamic incentives described in chapter 5. International donors tend to focus on financial choices instead, celebrating lenders that minimize subsidies and set interest rates at levels that promote saving and wise investment (as described in chapter 9). Both good contract design and pricing policy matter greatly. Still, they are necessary conditions for success, not sufficient conditions. A great deal of what distinguishes failed microfinance from successful microfinance ultimately has to do with management: Particularly with how staff members are motivated and equipped to do their jobs.’ In this, microfinance is no different from businesses that sell soft drinks or haircuts.

If one just read newspaper stories, it would seem that all microlenders can boast repayment rates above 98 percent and are making steady profits; management does not seem to be a big issue.2 But table 10.1 shows a wide range in levels of productivity indicators for the 147 leading microlenders surveyed by The Micro banking Bulletin. The first column and third columns give the range minus and plus one standard deviation from the mean. (If the indicators are distributed normally, the range should include about two-thirds of the observations, so one-third of programs would be even further away from the average.) The programs vary by age, scale, and location. Were the data made accessible, we could control for these factors, but the raw numbers suggest the basic point: While all of the lenders employ at least some of the mechanisms described in the previous chapters, much of performance variation is left unexplained by the type of loan contract.

Source: The Microbanking Bulletin 2002 and calculations by the authors. The Micro banking Bulletin calculates averages on the basis of values between the second and ninth percentiles, leading to some of the negative values when calculating values one standard deviation below the mean. The low-end group includes microlenders with average balances under $150 or under 20 percent of GNP per capita. The broad group includes microlenders with average balances between 20 percent and 149 percent of GNP per capita. The high-end group has average balances between 150 percent and 249 percent of GNP per capita. The operational self-sufficiency ratio is operating revenue divided by financial, loan provision, and operating expenses. Cost per borrower is operating expense plus in-kind donations divided by the average number of active borrowers. Portfolio at risk > thirty days is the outstanding balance of loans overdue for more than thirty days, divided by the gross loan portfolio.

Consider first the operational self-sufficiency ratio in table 10.1; it indicates whether lenders cover their operating costs (salaries, overhead, and the like). The ratio is a rough measure of efficiency, and the table shows that, on average, all programs are covering these costs. But there is wide variation, with some low-end lenders only covering 60 percent of costs, while others in the same category cover over 150 percent.3 Similarly, the amounts spent per borrower and the management of overdues varies widely; the latter range from near-perfection to delinquencies greater than 10 percent. The implications are investigated by Woller and Schreiner, (2003) who use a regression framework to analyze thirteen village banks in The Microbanking Bulletin data set in the period 1997вЂ"1999. By focusing only on village banks, they hold constant the social mission and target

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