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FEATURE ARTICLESFigure 5: Comparison of Factors Driving Self-sufficiency among Nine Village Banking InstitutionsInstitutionFinancial Selfsufficiency(%)Portfolio Yield(%)Interest Spread (%)Administrative Expense/ Average Loan Portfolio(%)Salary Expense /Average Loan Portfolio(%)Cost per Borrower (US$)Staff Productivity(no.)Depth(%)Borrowers(000’s)Salary Structure(multiple of GNP/ capita)1. Compartamos 143.7 111.4 (1) 48.8 (1) 62.6 (7) 36.1 (5) 63 (8) 207 (3) 3.4 (7) 48.8 (1) 1.9 (1)2. FINCA Kyrgyzstan a 108.0 107.7 (2) 18.2 (4) 89.5 (9) 57.2 (9) 67 (9) 78 (9) 17.7 (3) 9.9 (8) 5.4 (7)3. World ReliefHonduras107.1 75.3 (4) 33.3 (2) 42.0 (4) 30.9 (4) 35 (2) 134 (8) 11.5 (5) 18.7 (4) 4.2 (4)4. Pro Mujer Bolivia 100.1 39.4 (8) 1.6 (7) 37.8 (3) 21.0 (3) 47 (4) 180 (4) 11.5 (5) 18.9 (3) 5.1 (6)5. FINCA Nicaragua 99.0 75.1(5) 18.3 (3) 56.8 (6) 39.0 (6) 42 (3) 169 (6) 18.1 (2) 13.7 (6) 11.0 (8)6. CRECER 92.3 42.0 (7) 5.6 (6) 36.4 (2) 17.4 (2) 48 (5) 168 (7) 16.4 (4) 14.6 (5) 4.3 (5)7. AGAPE 88.5 61.6 (6) 9.3 (5) 52.3 (5) 39.7 (7) 57 (7) 175 (5) 3.2 (8) 4.9 (9) 2.2 (3)8. FINCA Uganda 87.7 84.4 (3) -1.0 (9) 85.4 (8) 47.8 (8) 49 (6) 221 (2) 19.4 (1) 20.8 (2) 16.1 (9)9. Kafo Jiginew(VB product)72.0 32.7 (9) -0.2 (8) 32.9 (1) 14.0 (1) 16 (1) 242 (1) 6.5 (6) 11.1 (7) 2.0 (2)Correlation Coefficient -- .73* .89* .28 .31 .63 -.27 -.20 .81* -.20Source: The MicroBanking Bulletin, September 2000. Note: Figures in parentheses denote rank order by factor.* Statistically significant at 5 percent level.a 1998 figures.Performance StandardsAfter so many years and so much talk about bestpractices, we are still a ways from defining bestpractices for village banking institutions. Theredoes appear to be broad consensus that bestpractice, at a minimum, translates into operationaland financial self-sufficiency. Beyond that,however, we can offer little more than broadrecommendations to keep costs low, improveefficiency, charge an adequate spread over costs,and scale up. It is argued here that we have beeninhibited in our search by a conception of bestpractices that pays too little attention to crucialdifferences in institutional characteristics and that,as a result, attempts to apply standards that are notalways relevant.What is needed is to identify a set of peer groupclassifications along a continuum of institutionaltypes and then develop performance standardsrelevant for each peer group, in addition toperformance standards that apply more or lessequally to all MFIs. Ideally this process will beaccompanied by a complementary process ofqualitative learning to provide necessary contextbehind the numbers. Used in isolation, theusefulness of performance indicators for informingbest practices among village banking institutions islimited, but used in conjunction with peer groupsand with the contextual information, their usefulnesscan be significant. The work of the Bulletin inidentifying peer groups and providing contextualinformation behind the numbers marks a significantstep in moving this process forward.All of the above being said, what insights do thenine VBIs examined for this article give us aboutspecific performance standards for village bankinginstitutions? This question is hard to answer giventhe limitations of the data set. Nonetheless, thesense from the data is that those VBIs that canpush administrative expenses significantly below 40percent of average loan portfolio, push the cost perborrower down into the US$30s, increase staffproductivity beyond 200, and earn an interestspread in the 15 to 20 percent range (andparticularly those who achieve a combination ofthese) will be expanding the frontiers of bestpractices in village banking.Gary Woller is an associate professor at the RomneyInstitute of Public Management in the Marriott School atBrigham Young University. During the last year, he wason sabbatical at FINCA International in Washington DC,where he served as acting Research Director. Gary canbe reached at gmwoller@hotmail.com. He thanksSEEP’s Poverty Lending Working Group for theirassistance with this article, and the nine village bankinginstitution for their willingness to share their performancedata.8 MICROBANKING BULLETIN, SEPTEMBER 2000
FEATURE ARTICLESA Business Model for Going Down Market:Combining Village Banking and Credit UnionsKathleen Stack and Didier ThysFew microfinance institutions consider going downmarket (serving poorer clients) as a good businessopportunity. Instead, they broaden services toreach a better-off clientele, or they say financialviability must be compromised to reach the poorest,or they reason that microfinance cannot help thevery poor, who need different types of socialservices. Even those who argue that breadth anddepth of outreach are compatible (with a fewnotable exceptions) have yet to demonstrate thatlarge numbers of the truly poor can be reachedviably.But what if there was a strategy that could reachvast numbers of the poorest and make goodbusiness sense? This paper presents a businessmodel for profitably serving the poorest segments ofthe microfinance market, along with someencouraging preliminary results.Recent Trends in Reaching the PoorestThe trend in the microfinance industry is towardcommercialization to ensure long-termsustainability. Unfortunately, this trend is coupledwith movement away from serving the very poor.This is because, in the search for financial viability,institutions are going up market. They have either:1) increased average loan sizes by growing withtheir customers; and/or 2) developed new, largeloanproducts for new markets.Using average loan size as a proxy for depth ofoutreach, microfinance success stories, such asBRI and BancoSol, are not serving particularly poorclients. The average loan size of each of theseinstitutions is more than US$500. In fact,BancoSol’s average outstanding balance has beencreeping up over the years so that as of 1998, itstood at US$914. 7Some might say that these large, financiallysustainable institutions are still reaching asignificant number of poor borrowers. But a studyof five Bolivian MFIs found that this is not so. 8 Only3 percent of BancoSol’s borrowers—900 people—7 The data are from a recent unpublished study on cooperativesand microfinance, Jeffrey Ashe et al. USAID, 1998.8 Navajas, Sergio, Mark Schreiner, Richard L. Meyer, ClaudioGonzalez-Vega and Jorge Rodriquez-Meza, “Microcredit and thePoorest of the Poor: Theory and Evidence from Bolivia", WorldDevelopment 28(2): 333-346 (1999).were considered to be among the poorest andindigent, and the total number of very poor reachedby all five institutions in the study was 2,600.The StrategyFreedom from Hunger, a US-based microfinancesupport organization, designed Credit withEducation to serve poorer segments of the marketsustainably. This integrated financial andeducational product is intended to be financiallyviable while reducing the causes of chronic hungerand malnutrition in rural households. It combines:1) group-based lending and savings services(village banking) for poor women with 2) low-cost,high-impact education sessions in nutrition, healthand better business.To achieve large-scale outreach with a financialproduct designed for very poor people, Freedomfrom Hunger has partnered with credit unions inseveral countries. We decided to collaborate withcredit unions for the following reasons: Outreach: Credit unions supply more lendingand savings services than any other type offinancial institution with the exception of banks.They are widespread, particularly in rural areas,and often have regional and national creditunion networks that can promote efficientproduct dissemination. Mission and Ownership: Credit unions werecreated to improve the welfare of their membersand communities through financial services. Asmember-owned institutions, credit unionsmaintain a commitment to both social andfinancial goals. Financing: They have the capacity to financenew products from internally generatedresources (savings). The savings-firstapproach of the credit unions is an attractivelong-term, self-financing feature. Multiple Products: Credit unions offer multipletypes of loan products. This product menumitigates against the risk of portfolioconcentration that occurs with MFIs that offeronly one or two types of loans. Also, as a creditunion client, a poor member can graduate froma group-based product to other credit unionproducts when and as the need arises.MICROBANKING BULLETIN, SEPTEMBER 2000 9
Page 1: THEMICROBANKINGBULLETINFocus: Reach
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