Microfinance Institutions (MFIs):

Have original objectives been overtaken

by commercial considerations?

A Discussion Paper for the Panel on “The Social and Economic

Impact of MFIs on Underpriviledged Communities in Africa”

Syracuse University Conference on “Entrepreneurship in Africa”

Syracuse NY, April 1-2, 2010

Robin D. Kibuka,
Consultant
Original Grameen Bank objectives

 Provision of micro-credit to the poor with focus on rural women,

working through groups to reduce risk and expenses. Small regular
repayments. Limited training for Grameen staff.

 Expansion of services, (added deposit taking, insurance, and

pension schemes) shift from working out of commercial bank
branches to donor/government funding and eventually self-
sustaining model working independently on commercial basis.

 Further modification (formal training and specialized donor

funding,e.g., Grameen Trust, CGAP) to replicate model to other
regions in Bangladesh and several other countries--Thailand,
Philippines, South Africa etc.
Grameen Bank Models
 Grameen Classic System (GCS):
 (a) one basic loan payable weekly up to one year maximum.

 Grameen Generalised System (Grameen Bank II, adopted 2001)

 (a) flexible loan, permitting rescheduling of the basic loan to fit
into circumstance of borrower.
 (b) customized loan with borrower choice of terms.
 (c) mandatory pension saving scheme for loans exceeding
$138, effectively creating a steady source of deposit funds.
 (d) emphasis on savings products to enhance deposit taking.
Modifications to original model

 Business Model (already modified into Grameen Bank II)

 Regulatory Framework

 IT and other technological innovations

 NB:(Interrelated feedback between business model/the

regulatory framework/IT and technical innovations, resulting in
business and policy implications for MFIs’,in part, to adapt to
different regional environment).
Changing Business Model
 Government/donors’ roles in replicating MFIs in other countries--significantly
increasing coverage (number of MFIs and market penetration) but also giving
rise to financial sustainability issues. [In Africa for instance the initial base of
existing micro-credit institutions was very limited and infusion of govt/donor
funds remained unsustainable]

 The small scale of loans and cost of reaching clients increase operational
expenses, which absorb interest margins. Even most efficient MFIs operational
expenses are about 15-20 percent of loans compared to less than 5 percent for
banks operating in developing countries—(CGAP, 2000).

 To address large losses many early MFIs had to be restructured, recapitalized,

privatized, or liquidated. Benin (1989-93), Ghana (1990s), Guinea, and
Tanzania either restructured or liquidated MFIs to create self sustaining
institutions.
Changing Business Model (cont.)

 Proliferation of services offered to poor to reflect local conditions in

various regions of the world (shift from microcredit to provision of
savings, pension, money transfers, and micro insurance schemes) have
generated greater focus on deposit taking and broader and more robust
business model. (Developments concurrent with similar trends at
Grameen Bank)

 Success of several MFIs (in growing client base) has overtime

transformed them into full fledged commercial banks operating fully on
a profit making model. Examples include BancoSol (1992) in Bolivia;
Equity Bank in Kenya, Centinary Rural Development Bank (CERUDEB,
2008) in Uganda. In 2009, Equity Bank of Kenya entered into the
Uganda market by acquiring Uganda Microfinance Limited.
Changing Business Model (cont.)

 Efforts to integrate MFIs into the rest of the financial system (as opposed to
niche operators focused on the poor) have intensified formal links with
commercial banks and other financial institution. Key argument here is now that
the MFI revolution is well underway, the next major objective should be to focus
on holistic financial system reforms to cater for the needs of all (not just the
poor) on a sustainable basis.

 Globalization and the current financial crisis have created opportunities for
international capital to move into MFIs. In 2008, MFIs attracted $14.8 billion in
foreign capital (mostly from private investors, including pensions schemes and
private equity funds)—a 24 percent growth from 2007. Deluge of private
capital has freed MFIs from reliance on donor funding and some have switched
from a not for profit strategy to a money-making model generating return on
equity of 50 percent. (Wall Street Journal, March 2010).
Regulatory Framework
 While Grameen Bank developed as a single institution in Bangladesh, replication of
the model in other countries spawned growth of many similar institutions in most countries,
whose rapid growth led to need for regulatory frameworks (legal and supervisory systems).
Such development impacted the business model over time.

 Global financial crisis added urgency to regulatory issues, especially where rapid growth
of the MFIs sector had potential for systemic problems that could impact the entire national
or regional financial sectors. [e.g., capital, reserve, and reporting requirements, measures
to protect depositors and loan recipients, as well as controls on capital flows (to mitigate
contagion) impact the business model].

 Data requirements (from regulatory requirements and need to generate time series and
cross country comparisons e.g. data that meet international standards) have
generated reporting requirements that ultimately impact the business model. Other data
requirements are linked to financial, audit reports and credit ratings needs.
IT and other technical innovations

 Internet access has reduced costs and provided direct connection

between suppliers of funds and borrowers thus, intensifying competition
and need for MFIs to reduce costs;

 Enabling equipment (point of sales devices, smart card, fingerprint

readers, personal digital assistants, and debit card) lead to branchless
banking and growth of agencies (retail shops, internet kiosks, post
offices, and even lottery outlets, e.g., in Kenya, after two years of
operation, in 2009 Safaricom’s M-PESA service reached 7.5 million
people via 11,000 agents—CGAP, 2009) leading to significant access
especially in rural areas;
IT and other technical innovations (cont.)

 Entry by other players—notably cell phone operators have

forced MFIs to further adapt business models.

 Government to person (G2P) transfers (e.g., social transfer

and payments to current and retired workers) have significantly
expanded scope and range of services (est. to reach 170 million
people in 33 countries—CGAP, 2009). In particular, conditional
cash G2P transfers (e.g., requiring recipients to use education
and health services) help to expand financial services to users
through broader linkages.
Conclusions
 The transformation of Grameen Bank and its replication to other
countries has led to modifications in its original objectives, in part to adapt
them to conditions in other countries. The initial focus on rural microcredit
and role of govts/donors gave way to early concerns with financial
sustainability. Expansion of services to the poor and notably the eventual
emphasis on deposit taking and gradual transformation of poor clients into
middle class all contributed to a much faster trend toward commercial
business model.

 Interactions of regulatory requirements, and IT and other technical

innovations and the global financial crisis have also provided two way
links to the business model to accelerate the expansion of services to
the poor/middle class and the trend toward greater commercial
objectives.