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Ongoing Research
research projects aim at enhancing operational efficiency and financial sustainability of MFIs
over the long run.
4.1 Transaction costs in group microcredit in India: case
studies of three microfinance institutions 27
Objective and methodology High transaction costs associated with microfinance are the
primary reasons why interest rates are higher than rates on traditional bank loans. The study
aims to understand the composition of lenders' transaction costs in the MFI group lending
model, and to provide recommendations to MFIs on how to reduce their costs. Detailed case
studies of three MFIs 28 were undertaken to estimate direct and indirect costs 29 .
Findings These are discussed in Shankar (2006). In brief, collections are the largest contributor
to direct transaction costs (28-37 percent), followed by group formation (19-23 percent).
Geographic location had a major bearing on the cost structure. The time required to form
groups is lower when other MFIs are also operating in the same area. Salary structure, conveyance
costs and number of groups per field worker are some of the key factors of overall operational
costs. The drivers of indirect transaction cost are the number of layers of fixed cost in the MFI
system, and the number of mature branches. The maturity of the branch explains much of the
inter-branch variation in costs.
4.2 Activity-based-costing for microfinance with MCFI (Micro
Credit Foundation of India) 30
Objective and methodology This study uses activity based costing (ABC) to identify cost
drivers of MFIs' transaction costs. ABC involves calculating resources used for each activity
and then mapping those activities to every product and service that the organization offers.
This allows the organization to pinpoint the profitability of each of its products and services,
and the primary sources of high transaction costs. It also helps in analyzing the total cost-toserve
a customer in terms of the transaction and financing cost components. The study covers
both direct and indirect drivers of transaction cost. 31
Preliminary findings The cost structure of MCFI fits into a cost hierarchy consisting of
member driven costs, group driven costs, activity driven costs, and fixed costs. Analysis of
the actual cost of one zone showed that the cost-to-serve an individual varies from Rs 114 to
Rs 300 per loan cycle approximately, and the cost-to-serve a group varies from Rs 2,200 to
Rs 6,000 approximately. A variance analysis reveals that cost goes up because of the additional
Basic Awareness Training (BAT) training required in those areas due to dissolution of the
groups, turnaround of groups and members.
High
transaction
costs associated
with
microfinance
are the primary
reasons why
interest rates
are higher than
rates on
traditional bank
loans. The study
aims to
understand the
composition of
lenders'
transaction
costs in the MFI
group lending
model, and to
provide
recommendations
to MFIs on how
to reduce their
costs
4.3 Staff incentives in MFIs 33
Objective and methodology MFIs juggle with competing goals: they seek to grow quickly,
serving as many poor clients as possible, while maintaining very high repayment rates. This
may be time-consuming, requiring visits to clients in rural locations. As loan officers make
decisions about large amounts of money, it is imperative to provide them with incentives that
align their behavior with the mission of the organization. In the first phase of the project,
senior level officers of 12 MFIs were interviewed to identify different incentive and
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