Commercialization?

05/06/2006

At the conference, there was quite some discussions on profitability vs. outreach in microfinance institutions. There was a widespread consensus that there is no tradeoff between outreach and profitability/sustainability (see for example Richard Rosenberg and Adrian Gonzalez’ paper). This is indeed what we can see from the numbers. But it is important to dicuss the exact consequences of these findings -and here it is not as clear what to tell from the data. At the conference, the consequence seemed to be an understanding of a certaininevitabilityor at least necessity of commercialization. In this way, commercialization is not just thought to be good for the microfinance business, but also to be the only way forward. It is this conclusion, which I would like to discuss briefly. Commercialization can here be defined in legal terms: It is when a microfinance institution is formally organized and registered as a private, commercial organization, and thus it’s Board and it’s CEO answers to the institution’s shareholders.

Whereas it holds true that NGOs can – and indeed often are – profitable without sacrificing outreach, the question is: Willa transformation of NGO’s into commercial institutions lead to a lesser degree of outreach? Here the evidence is mixed, both according to my own numbers below and to the Rosenberg/Gonzalez paper mentioned above. To be precise, it looks as if,on the average, commercial MFIs reach the poorer borrower to a lesser extent, and borrow less to women, than do their NGO counterparts. At the same time, they are not more financially sustainable/profitable. As I mention below, more careful research is definitely needed for this to be fully confirmed, but the data at least shows that such research is needed and would be justified.

My results, which are based on the very same data from the MicroBanking Bulletin as reffered to at the conference (though not corrected in the entire same way), are shown in the figure below. Here I use the average loan size, average savings size and percentage of women borrowers to capture MFIs social performance. As was also mentioned at the conference, these measures are far from perfect. But they are the best ones available – and they do give a tentative indication of outreach. When a do an F-test on the within-variance and the between variance, I find that there is no statistical difference in financial performance, but at the same time the difference in social performance is statistically significant on a 1%-level. I interpret this to mean that commercial MFI’s cannot be said to be more profitable than NGO’s. On the other hand there outreach is not as deep as the NGO’s.

Performance of different legal types of MFI's

Consequences for research and practice
A (very tentative) interpretation of these results has consequences for at least three areas related to microfinance:

  1. Current commercialization efforts by MFIs
  2. Commercial actors in microfinance in general
  3. Research on inclusive finance.

Current commercialization efforts by MFIs
MFIs who are thinking about commercializing should perhaps think twice. There are situations in which this is the right choice, but they might be fewer than first thought. The thing that matters to MFIs is their action space. The action space is defined as the possibilities they and their businesses have. Being able to collect savings expands the action space. Getting access to foreign credit to as well. Whether or not commercialization is a good idea depend on whether or not it expands the action space of the MFI significantly. An issue here is the difference between NGOs going commercial and commercial actors starting to do microfinance. The data does not give us any insights into this potential difference, even though it may be important for the conclusions drawn.

Commercial Actors
Commercial actors, like international banks, can play an important role in the scale-up and development of the microfinance business. But the numbers above suggests, that they should perhaps concentrate on strategic partnerships with NGOs/NBFI or cooperatively organized MFIs in order to support them with the expertise and the products these actors have, instead of setting up commercial subsidiaries in microfinance themselves. Several of the commercial actors follow this line of thinking already.

Research
For research, the question which need to be asked is: Why do we see these numbers? How come the commercial MFIs already in business perform so relatively – badly? That is, why are they not more financially efficient than the NGOs while they at the same time report lower outreach? Answers are pending, but it could be due to path dependency and their history of catering for the not-so-poor: Starting from scratch is perhaps easier than transforming the procedures and cultures which are already in the commercial institutions.
The other side of the coin is at least as interesting:: What drives NGOs and NBFIs to financial sustainability when the pressure from shareholders is not there? Is it a strong board, special MFI legislation, efficient management, culture or something else?

These question could very well be addressed in future research, and naturally, I hope to do just that when I continue the work on my thesis. Some of the questions will be answered through further analysis of the 301 MFIs, some will be investigated through two case studies in Benin, where I am going later this summer.

As always, comments are more than welcome here or at odrasmussen[at]gmail.com.

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Some results from World Bank Conference on Access to Finance

05/06/2006

The last two days I have been attending a conference at the World Bank as a journalist for DJF-bladet. An article by Thomas Skovgaard Pedersen and me will appear in the magazine this autumn after I return from Benin. The conference was very well organized and gathered an unusual large and diverse crowd of top microfinance and developing finance practitioners and researchers, discussing both developing and developed country issues. The latter was unusual in a World Bank setting, but definitely fruitful.

The issues were many, but the ones which in the end by were touched upon as particularly important by Marilou Uy, who is Director at the Operations and Policy Department, Financial Sector at the World Bank, were these:

1)To measure and monitor access to finance. Only by gathering data on access to finance, will we be able to monitor progress.

2)To measure and monitor impact of access to finance in order to give the strategy greater credibility.

3)To adapt technology in order reduce cost. Promote standards, networks, platforms, information registries.

4)To encourage institutional diversification. Microfinance is a function, not an institution. Thus, greater coverage will need participation of a wide range of institutions.

5)To promote product innovation. Innovation has been key until now, for the expansion and success of financial innovations targeted towards the poor and they are likely to be so in the future.

6)To foster participation of both public and private institutions, academic institutions, NGOs and financial entities.

7)To build capacity and leadership in the sector. This must be strengthened.

8)To enlist the governments in the development and implementation of the proper policies to create an enabling environment for better access to finance for all.

I will most likely post more information on the conference at a later point in time. Until then, please feel free to contact me if there is anything you wish to know.