Efficiency and Sustainability of Formal and Quasi-formal Microfinance ProgrammesAn Analysis of Grameen Bank and ASA Author(s): M. A.

Baqui Khalily, Mahmood Osman Imam and Salahuddin Ahmed Khan Reviewed work(s): Source: The Bangladesh Development Studies, Vol. 26, No. 2/3, MICROFINANCE AND DEVELOPMENT: EMERGING ISSUES (June-Sept. 2000), pp. 103-146 Published by: Bangladesh Institute of Development Studies Stable URL: http://www.jstor.org/stable/40795614 . Accessed: 22/05/2012 21:59
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The Bangladesh Development Studies Vol. XXVI,June-Sept.2000. Nos. 2 & 3

and of Efficiency Sustainability Formaland Microfinance Quasi-formal Programmes-An Analysisof GrameenBank and ASA
by M. A. Baqui Khauly Mahmood OsmanImam Salahuddin AhmedKhan*
The Bangladesh microcredit marketcomprises of formaland quasi-formal microfinance institutions. The presentpaper examines and evaluates efficiency and sustainabilityof two microfinance programmes formaland quasi-formal. Grameen Bank is formal and ASA is quasi-formal in nature, status and The Efficiency and Subsidy Intensity Index (ESII), as developed by programme. the authors, was used to examine the sustainabilityand efficiency the two of The analysis shows that both Grameen Bank and ASA have been programmes. operating with high degree of cost and financial efficiency.ASA being a and quasi-formalorganizationis more cost-effective sustainable than Grameen Bank, a formal organization. This is attributedto low salary base and high lending interestrate. GB is relatively costlybecause of highersalary, based on national pay scale, and relatively lendinginterestrate. IfASA had to operate low with the average salary of Grameen, given the present level of operation, it would be veryworse-off. This was evidentfrom simulationof increase in wage a rate. In contrary, GrameenBank would be much better-off a low salary base of at ASA. During the period 1993-97, the degree of ESII has declined forboth GB and ASA. The positive subsidy intensityof ASA is contraryto the traditional belief that it is a self-sufficient organization with no subsidy dependency. social costs are associated withthese two programmes.Grameen Consequently, Bank will be able to reduce social cost and improvesustainabilityby improving cost efficiency, increasing loan size and lending interest rate, and changing mix without incurringany operatingcost. Grameen Bank is close to portfolio achieving sustainabilityafterits fifteen years of experience. SimilarlyASA has attained higher degree of sustainabilitywithin seven years of its microcredit M.A. Baqui Khalilyis Professor and Mahmood Osman Imam and Salahuddin Ahmed Khan are Associate Professorsin the Departmentof Finance and Banking, University of Dhaka, Bangladesh. The authors thank Professor Yunus, Mr. Shafiqul H. Chowdhury, M. Dr. Shahidur R. Khandker, Dr. Mark Schreiner and an anonymous reviewerforuseful commentsmade on the earlierversions of the paper.

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This implies like thatit takeslonger timefora formal operation. organization GrameenBank to be sustainablethan quasi-formal like organizations ASA. some proxy measuressuggestpositive net social gains of both the However, The findingshave implicationsfor developingmicrocredit programmes. and market designing framework MFIsin Bangladesh. for regulatory I. INTRODUCTION

There has been an upsurge of interestin the sustainability of Microfinance (MFPs) designedunderthe supplyProgrammes1 leading finance This interest because has, perhaps,croppedup partly strategy. ofhighsocial costs associatedwiththe continuation the programme, of and partlybecause of the interest transforming in into programmes viable ones. The programmes have been designedforthe financially poor households, who do not have any access to credit in formal financial markets. and nature.Generally these Theyvaryin structure are subsidized. Quite a significant numberof research programmes studies have been conductedon the impact of microfinance the at householdlevel (forexample,Khandker and Rahman 1996; Khandker and Chowdhury 1996; Khandker1998). The studies providepositive of microfinance on household income, consumption, impact employment,and nutrition. The euphoria over the success of microfinance in level has been to some poverty programmes reducing extentunder-shadowed the factthat these programmes involvea by socialcostand are financially in unsustainable, mostcases. It has led to the emergence of questions like "when will the programmebe sustainable"or "can these programmes sustainable at all". These be questionsare quite legitimate. is People oftenargue that microfinance a social good because access to creditis a human right, and creditis a necessarycondition for economic upliftment the deficitpoor households. Therefore, of shouldnotbe perceived an objective. it shouldbe as But sustainability that (a) poor households do not receiveany subsidy; (b) recognized rate and (c) microlendinginterest rate is higherthan bank interest microfinance or are programmes institutions part of rural financial markets. an and subsidized institution bound is However, unsustainable in to createinefficiency distortions RuralFinancialMarkets and (RFMs). Resources even in the world of microfinanceare likely to be allocated. Khalilyand Imam showed that the relatively inefficiently than do moredonorfundedinstitutions have highexpensepreference
as is with ^The word"programme" used synonymously theword"institution" we microfinancial services. consider that institutions are providing onlythosemicrofinance

Imam& Khan : Sustainability Microfinance Khalily, Programmes105 of the less donor-funded For programmes. example,small NGOs withno or littledonorfundshave less expensepreference behaviourthan the or institutions Grameen like Bank and BRAC.This implies programmes that cheap funds drive overhead cost up. Hence, an analysis of sustainability of MFIs is necessary to derive necessary policy marketas well for of implications sound development microfinancial as RFMs. has been studied in a In the past, the issue of sustainability with littleor no focus on the process of developing piecemeal way in Microcredit Market(MCM).Should the marketand MFIs be formal These questionshave to be nature?Should the institutions regulated? In be linked-upwith the issue of sustainability. Bangladesh, these in are important, theMFIs are different nature,statusand as questions More than 1000 microfinance organizationshave been programme. services.In termsof both financialand social development providing under formalstructure,Grameen Bank is the only MFI registered Act. not underthe SocietiesRegistration It provides special ordinance, rules.Salaryis as all financial benefits its employees pergovernment to are determined nationalpay scale. The otherorganizations generally by in salary,in mostcases, is quasi-formal2 natureand structure. Average MFIs are likely be to muchlowerthan thatofGB. As such, the formal it MFIs. Therefore, is likelyto take costlierthan the quasi-formal MFIs to become sustainable. From relatively long timeforthe former the perspective sustainability MFIs, should the microfinancial of of market quasi-formal? basic objective thepaper is to examine be The of in to the issue of sustainability efficiency relation thedevelopment and in market Bangladesh. of microcredit Two major Microfinance Institutions (MFI) namelyGrameenBank and ASA have been selected to determine and analyze the issue of efficiencyand sustainability of microfinance programmes in Bangladesh. There are several rationales in selecting these two programmes. First, Grameen Bank and ASA are microfinance institutions theyonlyprovidefinancialservicesto theirmobilized as
^ Quasi-formal are formalin structure but not regulatedand organizations monitored. theseorginizations nothave any ownership. such, from do As the Moreover, commercial underany Companies or Act perspective, theyare not registered objective In formal are in and anyordinance. contrary, organizations formal structure, monitoring there are presence of ownershipand stakeholdersin supervision.Furthermore, In ASA other are as governance. Bangladesh, and similar organizations quasi-formal, they are registered underthe SocietiesRegistration and do not have any legal entity Act to as institutions. Grameen Bankis theonlyMFIthatis registered under operate financial specialordinance.

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and ASA is a quasi-formal. households.Second, GB is a formal target and human resourcedevelopment not are Third,social development the critical to whatis foundin ofthese twoprogrammes contrary part like BRAC and PROSHIKA.Fourth,though more than programmes 1000 small MFIs providefinancialservices,the coverageof Grameen Bank and ASA are morethan 70 per cent.Finally, Bank and Grameen ASA are different termsof programme in design,coverage,financial and financial structure. efficiency is as ASA,beinga quasi-formal organization, apparently recognized cost-effective sustainableprogramme and Jain 1999; Rutherford (e.g. 1995). On the otherhand, studies (e.g. Khandker, Khalilyand Khan 1995; Yaron 1992) in the past have shown that GrameenBank, a formal organization, is yet to be financially and economically sustainabledespiteits morethan fifteen yearsofoperating experience. These twoMFIs are apparently in different termsoforganizational and financialcharacteristics. Oftenit is argued that cost-effectiveness of ASAis largely to attributed low averagesalaryand quasi-formal nature of operation.Is ASA reallycost effective self-sufficient? the and On otherhand, GB has been operating fifteen for years. How far has it been on the path of sustainability? it cost-effective? analysis of Is An the sustainability ASA and GB willenable us to deriveimplications of fordeveloping in microcredit market Bangladesh. The rest of the paper is designedas follows. SectionII focuseson research methods. This section includes the concept and measurement of sustainability and social cost of microfinance Section III providesa briefdiscussion of the two major programmes. microfinance programmes GrameenBank and ASA. Structureand of Bank are discussed in Section pattern subsidyin ASA and Grameen IV. SectionV containsan analysisofefficiency sustainability GB of and and ASA. Social costs of GrameenBank and ASA are discussed in Section VI. Section VII contains sensitivity analysis for improving and of to The sustainability efficiency. linkage sustainability microcredit marketdevelopment presentedin SectionVIII. Finally,analysis of is in thefindings policy are and implications derived SectionIX.
II. RESEARCH METHODS Concept of Sustainabilityand Social Cost ofMFP

to of refers both financialand Sustainability creditprogrammes of economicsustainability the programmes. Profitability analysis has been regardedas a popular and traditional approach to understand

Imam& Khan : Sustainability Microfinance Khalily, of Programmes107 have In financialsustainability. addition,traditionally professionals to as an indicator functions estimate used cost and/orprofit efficiency of performance financialinstitutions of (Benston 1972; Lau 1972; Hushak 1987; Cuevas Srinivasan1988; Khalily1991; Khalily, Meyer, and Khan 1995; Mullineaux1978). But the 1994; Khandker, Khalily use of traditional approaches over-estimatesand mis-represents as of level and profitability microfinance programmes the efficiency is not accounted for and role of subsidy in profitability analysis or but A may be profitable cost efficient this recognized. programme is requiredto pay forfinancial may not be so when the programme cost savingsarisingout ofsubsidizedfunds,not accountedforin total and the As cost estimation. a result, issue ofperformance sustainability of microfinance programmes is not completely perceived by donorsor international agenciesand professionals. policymakers, at Microfinance programmes enjoy subsidized funds,borrowings to its forpoor rates and grants, support credit operation concessionary households. The subsidized funds, the resources that are made Institutions available to Microfinance (MFIs) at concessionaryrates in and foreign from bothdomestic sources,have been instrumental the Programmes(MFPs) and expansion of operations of Microfinance costs of these institutionaldevelopment.There exist opportunity subsidizedfundsthat are requiredto be available to sustain a credit cateringto the poor at least forsome periods. Excess of programme costs of subsidized funds over the actual costs of these opportunity fundsforon lendingis knownas social costs. In otherwords,social costs are related to the economic subsidy that a MFP enjoys. The is nature of social costs in termsof subsidy and its measurement to crucialand related theissue ofsustainability. and economic. a MFP is Thereare twotypesofsubsidy:financial If will not cost-effective, programme requirefinancial the subsidyforits if survival the programme's revenuescan not coverits costs. Cost and financial efficiency, the other hand, determinethe degree of on A financial efficient can onlybe MFP sustainability. cost and financially sustainable. However, financialsustainability any MFP of financially does not necessarily if guaranteeits economicsustainability financial revenueis not sufficient cover operatingexpenses and economic to cost of cheap funds. An economic subsidy exists if the costs of resourcesforon-lending less than the opportunity are costs of these funds.Following Yaron (1992), economicsubsidycan be dividedinto interestsubsidy (financialcost subsidy),equitysubsidy and income If of subsidy (grantsfor revenue expenditure). the profit a MFP is

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greaterthan the economic subsidy, the MFP/MFI receives no net economic subsidy implyingzero social costs for its continuing and is The programme thenboth financially economically operations. sustainable. of and Measurement Sustainability MFP:Efficiency Subsidy of Intensity Index (ESII) During the last several years, many studies were conductedon and social cost of MFPs or MFIs in Bangladesh (Yaron sustainability 1992; Khandker, Khalily and Khan 1996). These studies do not In provideany in-depth analysis of sustainability. addition,efficiency in sustainabilityanalysis is ignored. Two major index of aspect were developed and used. Yaron developed Subsidy sustainability Index (SDI) in 1992 while Khandker, Dependency Khalilyand Khan Ratio(SDR) for developed SubsidyDependency sustainability evaluating and social cost of micro finance programmes. The SDI uses loan and its revenue contraryto total portfolio determine to portfolio on it dependency subsidy.In addition, has limited policyimplications and On because of its specification limited numberof parameters. the otherhand, SDR is an improvement over SDI as it considers total mix instead of only loans portfolio in Yaron. However, as portfolio information subdued in both the indices. The are many important is degreeof subsidydependency determined the degreeof financial by cost efficiency, cost efficiency, operating opportunity of funds,lending and borrowing interest rate. These information not derivedfrom are SDI and SDR. Consequently, are policymakers unable to deriveany broad-based policy implications from the estimates of subsidy in and its constituencies eitherof the cases. Hence, the dependency of studies do not providea clear understanding the issue of existing and sustainability social costs ofMFPs in Bangladesh.A broad-based index developedby the authors is used forevaluatingthe issue of in and of sustainability efficiency MFIs.The indexis broad-based terms ofnumber parameters policy of and implications. Considerthat a classical Microfinance (MFP) provides Programme two major typesof financialservices-credit savingsto the target and households. Assume furtherthat the programmeis financed by (B), borrowing grants(G) and membersavings (MS). It borrowsfrom the banking systemat a concessional interestrate, bj. It receives it donor agencies. Furthermore, mobilizes grants from different contributes the Each member whichis built-in-within system. savings, member weeka fixed amountas individual every savings.Hence,total

Imam& Khan : Sustainability Microfinance Programmes109 of Khalily, as: funds(TF)availableto theMFP maybe specified TF=B+G+MS (1) of A part of these fundsis used forfinancing portfolio comprising Assumethatloans fixed loan (L) and investment deposits(I). including is rate of rxand investment made in fixed are extendedat an interest rateofrr Giventhe portfolio at an interest mix,totalrevenue deposits is ofthe programme given by: + TR = (r/L) + (rt*I) IG (2) loans and investment, to and (r^I) refer incomefrom Where,(r^L) Based on the practiceof the MFPs, it is assumed that respectively. of do provide income grant for reimbursement operating donors IG in equation (2). The MFP has to by expenses.This is represented incur transactioncost forits loan output and investment output in membersavings additionto cost of fund.Giventhe sources of fund, and borrowed costs, total expenditure funds,and the administrative is (TE) ofthe programme specified by: TE = (w*Emp)+(bi*B)+(di*MS)+0L+OPE (3) w to Where, refers wage and tyand dj represent averageborrowing and rate on member interest rate and interest savings,respectively, 0 representsthe ratio of loan loss to loan. The term 8L, therefore, measures the amount of loan loss. The term OPE denotes other expenses. operating (71) eqs. (2) and (3), profit is denotedby Considering 7l=(r1*L)+(ri*I)+IG-[(w*Emp)+(bi*B)+(di*MS)+0L+OPE] (4) The reportedprofitof MFP does not providemuch information are subsidized because theseinstitutions largely aboutits sustainability A MFPis sustainable theCentral Bank and/orinternational by agencies. ifit can pay forgrosssubsidyit enjoys.In mostofthe cases, MFPs are largelydonor funded.Major sources of subsidy are cheap borrowed incomegrant,equityand reserve.Equityand funds,grantsincluding reserveare consideredas a source of subsidy on the ground that of does not have any equityownership the MFP, generally management and in most cases grantfundsor cheap borrowed funds along with are capitalized. Hence, profit(surplus of income over expenditure) funds(equity and reserve cost. funds)do have opportunity capital Giventhe opportunity cost of subsidizedfundsand the financial ofanyMFPmaybe specified as: structure, grosssubsidy S = (G+EQF)*rm+(rm-bt)*B+IG (5) whereIG is directsubsidyreceivedby MFP as reimbursement of

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rate some portionof operating expenses, and rm is marketinterest cost of fund.The first of the equation (5) part opportunity reflecting represents equity(EQF) and grants(G). The second grosssubsidyfrom term showsgrosssubsidyfrom fundsfrom nationaland cheap borrowed international incomegrant. The third partrepresents lending agencies. As arguedearlier, MFPis financially the if sustainable itcan payfor gross and total operating costs out of its total revenue.Thus, net subsidy : subsidy(NS)can be defined usingequations(4) and (5) as follows NS = S-K&yU+d/IJ+IG}-{(w*Emp)+(bi*B)+(di*MS)+0L+OPE}](6) The first to partofequation(6) refers grosssubsidyreceived the by MFPs,the second and last partofthe equationsindicatetotalrevenue and totalcost, respectively. S is greater If than the sum of the second and thirdparts, then thereis a positivenet subsidy and vice-versa. to Hence,it is necessary be sustainableforany MFP to have the ability to payfor grosssubsidyout ofits profit. the There are several major ways of eliminatingor reducing net cost efficiency subsidy.They are : (a) improving throughincreasing and economiesof scale; (b) improving financial productivity exploiting rate, and (c) optimizing efficiency through increasing lendinginterest portfoliomix through shiftingresources away from low return generating investments to high return generating investments. these policyparameters, have developed broad-based we a Considering alternative indexcalled "Efficiency SubsidyIntensity and Index"(ESII). We consider that an index should enable policymakers derive to information about cost and financial efficiency, gross subsidyand-income grant intensity,and indicator of portfolioshift. In it to to addition, should allow flexibility the policymakers derivea set ofpolicydecisionsfrom indexitself. the Dividingequation (6) by {(r/LHr^I)} and subsequentlydividing and re-arranging terms the bothnumerator denominator (rx*L) and by fromthe perspectivesof broad-based analysis and derivingpolicy : ESII as follows we implications, specify S ESII (r,*I) f(w*Emp)+(bl*B)+{di*MS)^eL'OPE>i -- IG 1 (7)

of The ESII is essentially comprised severalratios.They are : (a) loans as captured in to by intensity relation incomefrom grosssubsidy as the firstpart of the numerator; cost and financialefficiency (b)

Imam& Khan : Sustainability Microfinance Programmes111 Khalily, of mix in representedby second part of the numerator,(c) portfolio relation to output price ratio as captured by third part of the as numerator, incomegrantintensity captured fourth (d) by partofthe and (e) role of revenue fromloans in relationto total numerator, incomeand its impacton subsidyintensity efficiency captured and as denominator. Note that the degree of ESII is influenced cost by by rate and gross subsidy and mix,marketinterest efficiency, portfolio incomegrantintensity. it of Furthermore, is inverse cost and financial and portfolio mix in relationto output price ratio. Higher efficiency the degreeofcost and financial and mix efficiency portfolio and output lower is the degree of efficiency and subsidy intensity price ratio, index (ESII). A zero or negativevalue of ESII represents subsidy no The ESII is rich in termsof policyimplications. First, dependency. causes and its effecton sustainabilitycan be derived fromthe constituents the index. Second, financial of and cost efficiency an as indicator competitiveness sustainability be examined. of and can Third, the degree of allocative efficiency termsof indicatorof portfolio in shift can also be deduced. Fourth, role of incomegrantand gross the subsidy intensityin sustainability can be evaluated as inverse exists betweenincomegrantand gross subsidyintensity relationship and sustainability. Finally,different 'policyoptionscan be made from the indexto eliminate reducedsubsidydependency. or Definition Parameters Data Sources of and The empirical and analysisofsustainability social cost of Grameen Bank and ASA coversthe periodof 1992-97 as ASA has been operating as microfinance institution since 1992. Necessaryand relevantdata were directlycollected fromthe institutions, and some data were fromthe annual reportsand financialstatementsforthe generated said period.As thereis no standardization financialreporting of for weremade. MFPs/MFIs, necessary adjustments Marketinterest rate (rm) defined 36-month is as depositinterest3 rate since the financial market is liberalized and the MFIs are expected to finance their lending activities through resource mobilization.Lending interest rate (rj is measured as weighted rate of the MFIs. Borrowing interest rate (fy) averagelendinginterest is similarly averageborrowing the interest rate. Returnon investment averageyieldon investment. (r{)is the weighted
Therehas alwaysbeen a debate overthe cost opportunity of fund.Frequently, researchers have used in the past the 36+ monthdepositinterest rate in evaluating of cost of fund for financial sustainability MFIs on the groundthat opportunity institutions should be. generally rate as institutions would normally depositinterest finance loans bymobilized Others haveoftenarguedthatcurbmarket interest deposits. rateshouldbe theopportunity offund. have considered former cost We the perspective oftheopportunity offundas we viewMFIs as financial cost institutions. Thoughthere

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ANDASA BANK OF III. DESIGNANDPERFORMANCE GRAMEEN in GB and ASA are the twomajorMFIs operating the country. GB, initiatedin mid seventies,emergedas a formalbank forthe poor in undera separateordinance 1983. On the otherhand,ASA emerged as a major MFI in the early nineties after long experimentand operational experience of more than ten years. Though both the the organizations targetpoor householdsand follow groupapproach, theirmodelsare different. have certain models of the two programmes The creditdelivery similaritiesin terms of their objective and procedure. Both the freecreditdelivery emphasizegroupbased and collateral programmes the to the poor householdslivingbelow subsistencelevels. However, size of the groupvaries. In the case of GB, it is 5 and it is 20 in the and case ofASA group.Both the modelsemphasizeclose supervision monitoringof borrowers. This is reflected in the monitoring mechanism. Thereis a separatetierbetween groupand branchin the GB model. This is called "center".It comprises of 5 to 8 group members. The centeris headed by a Chairmanelectedby the group members. All business decisions and activities loan application and loan recovery, savingsmobilizationtake place at the processing, remainspresentat the of weeklymeeting the center.One bank staff of meeting the centerto guide the members.On the otherhand, in tier the case of ASA, it is simple.There is no intermediate between for are groupand branch (knownas unit). Creditofficers responsible Maximummembership and decision,monitoring supervision. lending size ofeach GB branchis 2400 whileit is 1440 in thecase ofASA. as Boththe modelsplace special emphasison savingsmobilization for it is a necessarycondition any poorhouseholdto be sustainablein GB in This is reflected the designofthe programmes. requires future. member save at least Tk.5 per week as compulsory to savings. every it Untilthe mid-nineties, used to be Tk.l per week (Khandker, Khalily to are GB and Khan 1995). In addition, borrowers required contribute 5 per cent of the principal loan to the "group fund" to increase fast householdsat a relatively rate.Until financial savingsofthe target the to contribution the groupfundwas notrefundable though recently, memberscould borrowfromsuch fund at an interestrate to be In determined the groupmembers. the case ofASA, each member by is requiredto pay Tk.10 as admissionfee,whilesaves at least Tk.10 per week.
cost rate interest as opportunity offund, and in maybe variation perspective in deposit we feel that researchers should explain the trend in subsidy and the factors We cost based on theperceived to opportunity offund. have contributing such variation of of in suchperception ouranalysis subsidy MFIs. adopted

Imam& Khan : Sustainability Microfinance Programmes113 of Khalily, GrameenBank is the largestMFI in Bangladesh.Duringthe past It of as fifteen years,it has emerged a vast organization. had a network over 1105 brancheswithmorethan 11 thousandemployees mobilizing 2.2 millionmembersand lendingto over 2 millionborrowers the by end of 1997. In 1985, it had only226 branchesand a total of 2777 employees.The numberof branches increased to 781 and 1040 in 1989 and 1993, respectively et (Khandker al 1995). Duringthe past fiveyears, the rate of expansionof branches has slowed down. The branchesare the profit centersof the bank. Everybranchconsistsof 10 employeesincludingseven field officers and a branch manager of foroverallactivities the branchoperation on-lending, of responsible mobilization and all otheractivities. About 10 to 15 branches deposit are beingsupervised an Area Manager.The Zonal Office maintains by direct linkage between the Head Officeand the Area Officesto maintain smooth flow fundsand also to communicate other all issues of of thatwill be requiredforproperimplementation the bank's policies and decisions.Loans outstanding annual loans disbursement and had increased significantly duringthe period 1993-97 (Table I). Annual disbursement increasedfrom 12,017 millionin 1993 to Tk.16,958 Tk. millionin 1997 contributing an increase in average loan size to to Tk.8375 from Tk.7,140. It should be noted here that annual loans in disbursement 1993 was almostdouble the amountof disbursement ofTk. 6,361 million 1992 (Khandker al 1995). Similarpattern in et is foundin loans outstanding. increasedfrom It in Tk.8,961million 1993 to Tk.16,958 millionin 1997. About 84 per cent of annual loans disbursement was loans outstanding.Loan recovery rate4has been above 95 per cent duringthe period 1993-97. Khandker consistently et al (1995) noted the recovery rate above 97 per cent duringthe 1987-94. Savingsmobilization remainsas significant in element period the design. By the end of 1997, the bank could mobilizeTk.2058 million savingsfrom members. as its net Average savingsper member increased to Tk.1833 in 1997 fromTk.1076 in 1993 (Table I). GB on pays 8.5 per cent as interest member savings.The bank has grown as an organization. This is evidentfrom the size of total enormously assets. It was Tk. 22,011 million 1997, an increaseby over40 per in centin five years. ASA is essentially halfthe size ofGB but it has grown a fastrate at as its microfinance is onlysevenyearsold in a formal sense. operation the end of 1997, it had a network 686 branches(known units) of as By withover4700 employees a mobilizing totalof 1.14 millionmembers
4 Loan recovery rate, as measured by GrameenBank, is loan recoveredas of and A percentage thesum ofloans recorvered overdue. loan is regarded, Grameen by Bank, as overdueif it is due twoyears past due date. This definition overdueis of different thestandard from definition:loan is overdueifit is due past due date. a

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Imam& Khan : Sustainability Microfinance Programmes115 of Khalily, and lending to nearly 60 per cent of the membersbased on the A is assumptionof one loan one borrower. member requiredto save An accumulatedsavingsofTaka.722.0 million was mobilized regularly. at the end of 1997 withaveragemembersavings of Tk.631 (Table I). ASApays interest ratebetween and 9 per centon member 6 savings.It loans to about 56 per cent of the total members.However, provided at thereare manysavingsmembers who do notborrow all. The volume ofannual loans disbursedhad increasedby about six timesin 1997. It was estimatedat Tk.3337 millionswithaverageloan size of Tk.5258 and againstTk.572 million 1993 withaverageloan size ofTk.2910 in Loan recovery has above rate,as reported, been consistently (TableI). 99 per cent duringthe period1993-97. Every branch(unit)has seven staff fourcredit officers. About8-10 unitsare supervised a by including in office headed by a manager local unitofa regional sitting a centrally clusterof 10 units. A divisionoffice monitors activities 45-55 the of unitsand acts a liaisonoffice between unitsand head office.
IV. STRUCTURE AND PATTERN OF SUBSIDY IN GRAMEEN BANK AND ASA

The extent of the subsidies that the two MFIs require can be measuredusingthe availablecost and revenue information market and interest rate. Financial subsidyis requiredif the profit of income net for grantis negative.Income grantsare receivedas reimbursement some operating a financial expenses.As notedearlier, negative subsidy to may not be sufficient covereconomiccost of subsidizedresources. In this context, the MFIs could still be operatingwith subsidy. social costs will be associated with the programmes or Therefore, institutions. social costs ofboththe programmes be analyzed The can from the viewpoint analyzingits subsidy structure, of trend pattern, and causes ofvariation subsidy in overtime. Trendin and Structure Subsidy of both creditand social development Providing inputsto the poor is a high-cost As and activity. such GB as wellas ASAhas required grants subsidized funds for its institutional and expansion. development Subsidy was estimated using necessary financial and operational informations reported Table-II.Giventhe sources and the nature as in offund, bothGB and ASA are subsidized MFIs.The share ofgrants and in in borrowing together loans outstanding the case of GB was almost one implying financing loans by cheap funds.In the case ofASA, full of a littleover 40 per cent of the loans outstanding was financedby

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Imam& Khan : Sustainability Microfinance Programmes117 Khalily, of grantsand cheap fundsin 1997. This suggeststhatASA increasingly loans byits member finances savings. The total amount of subsidy includingthe income grants has increasedby 1.6 times from Tk.765.9 millionin 1993 to Tk. 1215.7 in million 1997 forGB but witha fallin 1994 to Tk.238 million(Table III). This decline in total subsidy in 1994 was due to the lower rate. Total financialcost subsidycaused by a fall in marketinterest forASA has increasedfrom Tk.39 millionin 1993 to Tk.165 subsidy millionin 1997. It has an increasingtrend and has risen at an rate. However, this increase in total subsidyin 1997 was increasing due to increase in incomegrantsforASA. Nonetheless, both mostly the programmes economicsubsidy evaluated at the market enjoyed interest rate.An analysisofthe economic its subsidystructure, pattern and trend bothGB and ASAis madebased on theTable III. for Whileanalyzing subsidystructure terms shares ofsources the in of of economicsubsidy,it is observedthat the subsidystructure GB for and ASA is different. For GB, the interestsubsidy, composed of financial cost subsidies fromloan and grants, is the dominant of for component the total subsidy.In contrast, ASA, incomesubsidy is It (incomegrant)forrevenueexpenditure the dominant component. is shownin Table III thatGrameen Bank enjoyed 88.5 per centoftotal subsidy as interestsubsidy in 1997. The share of interestsubsidy increased slightly from85.5 per cent in 1993 to 88.5 per cent in 1997 but declinedto 61.1 per cent and 78 per centin 1994 and 1995 for increasesin foreign respectively, GB. This resultedfrom grantsfor thiseffect obscuredin 1996 and 1997 because is However, on-lending. a largeamountofgrantswas shifted "Kallayan to Fund" and thenthe amountwas shownas borrowing from Kallayanfund.ForASA,interest but the share of interest subsidyincreasedin magnitude subsidyfell from 58.1 per cent in 1993 to 35.5 per centin 1997 mostly due to fall in theshareofsubsidy from grants. ASA enjoyed 47 per cent of total subsidy as income subsidy for resultingfromincome grants received as reimbursement some in expenditure 1997, whileonly8.3 per cent oftotalsubsidy operating werereceived GB as incomesubsidyin the same year.The share of by incomesubsidyremainedunchangedforASA overthe last fiveyears but it had a declining trendforGB. The incomesubsidyhas increased Tk.14 million to by 5.5 timesforASA duringthe period1993-97 from Tk.77 million a rate of 40.6 per cent. Incomesubsidy showing growth forGB has increasedby 1.16 timesduringthe 1993-97 periodfrom Tk.86.9 millionto Tk.100.68 milliongrowing a rate of 3 per cent. at

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Imam& Khan : Sustainability Microfinance Programmes119 of Khalily, The share of equityis relatively stagnantoverthe periodof 1993-97 to onlyabout 3 per cent of totalsubsidyfor GB but for contributing 5.6 ASA it increasedfrom per centin 1993 to 18.5 per centin 1997. in overTime Causes ofVariation EconomicSubsidy An analysisofthe changesin totaleconomic one subsidyfrom year in the to thenextyearleads to identify causes ofvariation subsidyover time.The changesin subsidyis due to the eithersingly changein the of sources of subsidy,or singlychange in the parameter component interest rate,averageborrowing (such as market rate)or changein the both. The effects the change in eithercomponentof sources of of alone are called directeffects the component of subsidyor parameter or of the parameter, while the effectsof the change in both combinations called interaction Table IV shows the causes are effects. of variation in subsidy during 1994-97 in terms of direct and interaction effects. An increasing trendin the positive changein GS was observedfor Grameen Bank duringthe period1993-97 withthe exception 1994. of In 1993, aggregate change in GS was Tk.221 million.It was Tk. 235 millionin 1995 and Tk.678 millionin 1996. The change in GS in 1997 was modest.Directeffects the sources of fundsand interest of rate parameters contributed morethan 80 per cent of the changes to in gross subsidy during the period 1995-97. Three major factors contributed such changes. They are (a) marketinterestrate; (b): to and cost of borrowing; and (c) grant and income grant. borrowing in interest 1994 contributed 86 per cent to First,a largefallin market of the fall in GS. However,the amount of borrowing increased as borrowing interest rate also declined. Increase in borrowing contributed to positively changein GS but was offset a largefallin by marketinterestand borrowing interestrate. With the increase in market interest rate duringthe period1995-97,its contribution GS in was positive and significant. 1995, it was estimated 22 per cent. In at This increased to 73 per cent in 1996 and 53 per cent in 1997. interest rate contributed Second, increase in borrowing significantly to change in GS. In 1995, the contribution was 55 per cent. It increasedto 127 per cent in 1997 witha modestcontribution 24 of per cent in 1996. Finally, fallin grantin 1996 and 1997 was partly affectedby incremental borrowing.In 1996, decline in grants contributed to negatively 15 per cent while increase in borrowing contributed about to 5 per cent ofchangein GS. It declinedfurther to 282 per cent as againstpositive contribution borrowing 159 per of by

120

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Imam& Khan : Sustainability Microfinance Programmes121 Khalily, of cent in 1997. In brief, about 50 per cent of the aggregate change in of Grameen Bank was caused by net increase in gross subsidy interest rate and incomegrants. borrowing, borrowing For ASA, the small increase in change in subsidy in 1994 was increasein incomegrants, mainlydue to the significant beinglargely offset the fall in the marketinterest rate. However, 1995, the in by small decreasein changein subsidywas principally caused by the fall in incomegrants.In contrast, therewas large increase in change in totalsubsidyin 1996. An increasein incomegrantsas wellas a rise in market interest rate is mainlyresponsible the increase in change for in total subsidy. The share of change in income grantsand rise in market interest rate were 36.3 per cent and 33.6 per cent, towards contribution variation totalsubsidy. the of of respectively Again in 1997, therewas largeincreasein changein totalsubsidy.The main causes ofvariation totalsubsidywerean increasein incomegrants in and in inexpensive Of effects 97.3 per borrowings. the direct capturing in cent variation subsidy,the shares of an increasein incomegrants and an increase in borrowing contributed 55 per cent and 18 per to ofthechangein subsidy. cent,respectively
V. EFFICIENCY AND SUSTAINABILITY OF GB AND ASA

Sustainabilityis analyzed in terms of financial and economic Both Bank and ASAwerefinancially sustainable sustainability. Grameen duringthe period 1993-97 but were not able to covereconomiccost offinancial resources.This is evident from trendin and structure the ofsubsidydependency. Trendin SubsidyDependency Thoughtherehas been an increasein the grosssubsidy,generally the intensityof subsidy dependency declined during the period 1993-97. However, pace of declinewas higherin 1994 and 1995 the rate (measured as 36 + largelydue to major fall in marketinterest monthtermdeposit interest rate). In this sense, the year 1994 and 1995 can be considered as outlier in the trend analysis. This is there is a systematic applicable forboth GB and ASA. Otherwise, pattern in subsidy dependency. However, there is an empirical in as excess of income problem estimating subsidyintensity reported over expenditure does not reflect actual operating due to the profit contribution incomegrant.As has been evident^from financial of the statements otherfinancial and both information, GB and ASA generate

122

Studies The BangladeshDevelopment

Hence, surplus out of incomegrantas the amountis not spent fully. the effect income grant in net subsidy calculation is not fully of index due subsidyintensity profit. Consequently, recognized to inflated weremade in willbe under-estimated. such, necessary As adjustments is indexso thatreality reflected. intensity estimating As evidenct fromTable V, the ESII, estimated based on the declined for GB to adjusted financialand operationalinformation, 0.467 in 1997 from the level of 0.628 in 1993, declining over 25 by achievement for per cent over fiveyears period.This is a significant Bank was able to pay GB. The estimate 1997 suggeststhatGrameen of of about 53 per cent ofnet subsidyimplying dependency about 47 per held to centon subsidy.On the otherhand, contrary the traditionally and estimatesthat ASA is a self-sufficient organization perceptions on on withno dependency subsidy,ASA shows positivedependency ASA in Bank. The ESII for lowerthanthatofGrameen subsidy, though 1997 was estimated 0.345 as against0.554 in 1993, a fallof about at 39 per centin five years.This impliesthatASA could pay forabout 65 cent of net subsidy out of its revenue in 1997. Both the per on well performed in 1997 and could reducedependency programmes to a significant extent. subsidy in Variation the Components Subsidy of Dependency until it provides The index does not have any policyimplication The ESII capturesgrosssubsidy information necessary on parameters. intensityin relation to income from loans, financial efficiency, of mix in relationto price ratio (indicator shift).Therefore, portfolio in in can variation subsidydependency be explained variation these by parameters. ; (aj Variation Costand FinancialEfficiency in of called as cost The cost ofproduction each Taka loan, popularly 0.196 in decreasefrom of GB shows a steadyand marginal efficiency, it 1993 to 0.19 in 1996. However, increased in 1997 to 0.214. The of increasein 1997 mayhave been due to adoption nationalpay scale. cost of loan productionis influencedby three factors: Effectively personnelcost, defaultcost and overheadcost5. Despite increase in salary,the share of personnelcost has more or less declined from about 44 per cent in 1993 to 33.1 per cent in 1997. It was due to cost has remained Overhead increasein loan productivity. consistently over40 per cent duringthe period 1993-97. It is worthmentioning that one-third of the overhead cost was interest payment on
costs. and 5. Overhead other thanpersonnel default cost includesall expenditures of This has been done in orderto have separateunderstanding the role of personnel costsin costefficiency. costand other cost,default

Imam& Khan : Sustainability Microfinance Khalily, Programmes 12 of

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default cost of GB has increasedovertime.It Importantly, borrowing. to 14 has increasedgradually from per centofcost ofloan production about 27 per centin 1997. The resultssuggestthatGB needs to curb to downoverhead and default costin order be sustainable. if does not guaranteefinancialefficiency average Cost efficiency interest rate coverscost ofloan production unit.Financial per lending in to shows cost of loan production relation averagelending efficiency at interest rate. In 1997, it was estimated 1.304 declining marginally from 1.307 in 1996. However,relatively high degree of financial in until1995. But the ratiooffinancial was efficiency efficiency evident 1996 and 1997 exceededthe levelof 1993. This was due to marginal fallin averagelending from 1995. Financialefficiency more of interest to than one impliesthat revenuefrom loan was not sufficient cover costofloan production. to ASA has generally been cost efficient. declinedsystematically It 0.158 in 1997 fromthe level of 0.24 in 1993. This implies that in averagecost of loan production 1997 was about 16 paisa per Taka loan. Personnelcost contributed morethan 53 per cent of cost of to loan production 1997, declining in about 73 per cent in 1993. from it. share of overheadcost overtimefollows It increasedto Increasing 27 about 40 per cent in 1997 from per cent in 1993. A littleover 10 In on per centofthis cost was interest payment borrowing. additionto efficient. over time,ASA is also financially being more cost efficient rate ofASA is relatively high. Consequently, Average lendinginterest ASA had been financially the efficient consistently throughout period 1993-97. In 1997, it was estimatedat 0.836 comparedto 0.923 in was 1993. This impliesthatcost ofloan production about 84 per cent ASA could of average lendinginterestrate in 1997. Consequently, loans only. becomeprofitable evenwithincomefrom in of Grameen Bank and ASA are different terms cost and financial of cost efficiency GB was lowerthan thatof First,aggregate efficiency. due thanthatofASApartly to ASAuntil1996 but in 1997 itwas higher reduced its cost of loan increase in salary. ASA had remarkably productionby about 21 per cent in 1997. Second, employeecost than that ofASA thoughits annual average of efficiency GB is higher overhead cost is salaryis threetimesthe averagesalaryofASA.Third, on for dependency borrowed higher GB thanASAbecause ofincreasing on the funds.It is evident from share ofinterest payment borrowing. to for It was threetimeshigher GB as compared ASA. Fourth, despite due to efficient GB being cost efficient, could not be financially in interest rate.These differences resultsmaybe low relatively lending to from attributed the process of formalization to quasi-formal formal institution.

Khalily,Imam & Khan : Sustainabilityof Microfinance Programmes 125 (b) Variation in Gross Subsidy Intensity Gross subsidy intensity has declined over time and this contributed to change in the degree of subsidy dependency. Both Grameen Bank and ASA demonstrate a decline in the gross subsidy intensity. It declined for GB to 0.565 in 1997 fromthe level of 0.726 in 1993 by about 23 per cent in fiveyears. Gross subsidy was about 57 per cent of income fromloans implying increasing capabilityof GB to pay forgross net subsidy) out of its income fromloans. In the case of subsidy (not ASA, the pace of change in gross subsidy intensitywas lower than in GB. It declined by less than 18 per cent in five years from0.724 in 1993 to 0.595 in 1997. The variation in gross subsidy intensityin the case of GB was largely influenced by change in market interest rate, interestrate and loan output, and on the other hand, in the borrowing case of ASA, increasing trend in income grant was the dominating factor. (c) Variation in PortfolioMix and Indicator of Shift

can into Anyorganization maximize profit investing highyielding by In of portfolio. the case of GB and ASA,portfolio comprises loans and investments. rate is generally than investment Lendinginterest higher interest rate.This is likely createportfolio to investment in favour bias ofloans. In fact,it is desirablein termsofthe goal and characteristics of MFIs. GB and ASA differ termsof portfolio in mix. The ratio of and for averageinvestment averageloans showsan upwardtrend GB. It increasedfrom 0.227 in 1993 to 0.406 in 1997. This implieshigher of in growth investment fixeddeposits.In otherwords,GB has more fundsavailableforexpanding loan volume.The ratioshowsa declining trendforASA. It declinedfrom 0.195 in 1993 to 0.054 in 1997. This of implies that portfolio ASA, based on 1997 estimate,is basically loans. Such behavioris likelyto be influenced outputprice ratio by what is termedas indicatorof shift.As evidentfromTable V, the indicator shiftdecreased from of 0.708 in 1993 to 0.594 in 1997 for GrameenBank. This implies that average lendinginterestrate has overtimethan thatofinvestment interest rate. In this relatively grown situation,it was likelythat GB would investin loans than in term the deposits.Unfortunately, reversetrendwas observed.This implies that despitehavingrelatively rate, GB invested high lendinginterest morein lowyieldtermdeposits.As arguedit could be due to relatively the fact that GB has more funds available in relationto absorption and/orGB is riskaverter. Hence,it can be arguedthatGB has capacity been less allocativeefficient. ASA seems to have responded generally to the movement the indicator shift. is well observedfrom of of It the

126

The BangladeshDevelopment Studies

fact that the share of loans in total loanable funds increased to significantly as highas 95 percentin 1997. (d) Variationin IncomeGrantIntensity Both GB and ASA are on the path of sustainability. This could be deduced also fromthe degreeof incomegrantintensity. During the on its 1993-97,GB could reducequite significantly dependency period income grant. It reduced from6 per cent of income fromloans in 1993 to about 4 per cent in 1997. In the case ofASA,it reducedto 2 about 4 per cent in 1993 with per cent of loan incomein 1997 from an increasein 1995. This indicatesthatfallin incomegrantintensity has contributed some declinein subsidydependency. to BANK ANDASA VI. SOCIALCOST OF GRAMEEN GrameenBank and ASA have been operating withrelatively high on But efficiency. theyare stilldependent degreeof cost and financial subsidy. Social costs are associated withmicrofinance programmes. High transactioncost and start-upcosts make it costly.Associated social costs maynot be highifsocial benefits compared. are However, with high degree of efficiency and economies of scale, these are on programmes able to reducedependency subsidy,in turn,social costs overtime.This is wellreflected the trend subsidyintensity. in of Both GB and ASA had enjoyednet economicsubsidyrepresenting the net social costs for continuingoperations as gross economic As thanincome, ofexpenditures. net subsidyofGB and ASA is greater GB requires financial subsidy, it increases economic subsidy and of social costs. Social cost of GB as percentage averageloans thereby 11.79 per cent trend.It decreasedfrom shows a declining outstanding in 1993 to 9.65 per centin 1997 (TableVI). This impliesthatnet gain Tk. ofGB borrowers shouldbe at least aboutTk.10 forevery 100 loans in orderto exceed social cost. ASA could reduce social cost forits overa span of fiveyears from14.95 per cent in 1993 to programme 6.85 per cent in 1997 (Table VII). Based on the estimateof 1997, it can be suggestedthat in orderto exceed social cost, social gains of ASA borrowers should be at least Tk.7 per Tk. 100 loan. Both the its and demonstrated efficiency were able to reduce its programmes socialcost. The ultimatebeneficiaries the net subsidy or social cost are of of to be the ruralpoor households.Giventotalmembership supposed GB, each memberreceivedsubsidy of Tk.557.7 in 1997, increasing in from Tk.436.80 and Tk.577.80,respectively, 1993 and 1996. Social

Imam& Khan : Sustainability Microfinance Khalily, Programmes 127 of

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cost of ASA programme member was Tk.87.60 in 1997 while it per was Tk.121.77 in 1993 and Tk.126.50 in 1996. Obviously, the membersdid not receivethe subsidy directly but they derivedthe benefits the form training, facilities institutional in of loan and support. The benefitsof such social costs are foundin the long run assets incomeincreaseand savings. it is beyond purview As the accumulation, ofthispaperwe could notderive such benefits. based on the However, function incomeand the of assumptionthat savingsis an increasing factthatsavingsis tiedwithborrowing, can use member we savingsas measureofsocial benefits. shouldbe notedherethatbothGB It proxy In and ASA pursueflexible for savingsprogramme the members. 1997, member was Tk. 1833.50 in 1997 as againstTk.630.00 average savings for ASA. Giventhe averagesocial cost per member-borrower, be it can thata net transfer Tk.100 to the poorhouseholdscould have of argued derivednet social benefit Tk. 293 forGB in 1997 and Tk.398 for of is ASA in the same year.It shouldbe reiterated thatsuch comparison the resultshould based on proxy estimate social benefits. of Therefore, that as the notbe treated actual netsocial gains.However, factremains bothGB and ASA programmes derivepositive gain forthe society. net at Comparingreturnon investment the household level, Khandker showed that investment microfinance in is programmes sociallyand beneficial. Nevertheless social costs are associated with economically the institutions programmes. or Such social cost is less than 10 per centofaverage loans outstanding.
VU. SENSITIVITY ANALYSIS FOR IMPROVING EFFICIENCY AND SUBSIDY DEPENDENCY

The Both GB and ASA are on the path of sustainability. degreeof in can and efficiency be improved severalways in subsidydependency In orderto quicken the process of sustainability. this section,four mix low portfolio from optionsare considered. Theyare : (a) changing to yield deposit investment high yield loans; (b) increasinglending mix and both portfolio interestrate, (c) changing simultaneously overheadcost. interest rate,and (d) reducing non-personnel lending We assume thatMFIs shouldat first sustainability through improve loan size upto a certainlevel and cost improving efficiency increasing of withoutincreasingoperatingcost. This will require optimization mix. Three scenarios are considered for the purpose of portfolio (a) analysis.Theyare shifting 10 per cent; (b) 30 per cent, sensitivity
ThroughChangingProfileMix ImprovingCost Efficiency

Imam& Khan : Sustainability Microfinance of Khalily, Programmes129 to and (c) 50 per cent of investment loans. Results of the sensitivity in mixare reported Table VIII. ofchanging analysis portfolio in As expected, there has been an improvement ESII, cost and averageloan size. In the case efficiency, grosssubsidydependency ofGB, the extent improvement quite significant. of is Based on 1997, a 50 per centfallin investment, to about 15 percentage equivalent point increasein the share of loans in totalloanable fundwillreducegross and cost efficiency about 17 per centand subsidyintensity improves by will reduce ESII by about 18 per cent from 0.467 to 0.383. Average loan outstandingper borrower would increase by 17 per cent from Tk.6897 to Tk.8296. In the event of such increase appears to be difficult achieve,we considered fallin investment 30 per cent to a by to increaseof 9 percentage equivalent a marginal pointin the share of loans in totalloanable fund.This will reducegross subsidyintensity, cost efficiency improve and ESII by about 12 per cent. The improve would increase marginally averageloan outstanding borrower per by about Tk. 900. The effect a 10 per cent fall in depositinvestment of willbe around 4 per cent improvements subsidydependency, in cost and efficiency ESII. The change in portfolio mix would have small effecton gross cost efficiency ESII in the case ofASA as its and subsidydependency, share ofloans in totalloanable fundsin 1997 was about 95 per cent. thereis a littlescope forchangingportfolio mix. A fall in Therefore, depositinvestment 50 per cent would reduce ESII by about 2 per by cent and by about 3 per cent in gross subsidy intensityand in Furtherlittlewill be the effects if improvement cost-efficiency. is depositinvestment reducedby 30 or 10 per cent. Cost Efficiency Overhead Cost Improving Through Reducing Both GB and ASA will be able to improve efficiencyand sustainability through reducing non-personneloverhead cost. A in cost was considered. sensitivity analysisof such reduction overhead Three scenarios were considered:reductionin overheadcost by 10, 15 and 20 per cent.Resultsofsimulations reported Table IX. are in As wouldbe evident from tablethatGB wouldbe able to reduce the cost of loan production 4 per cent if it increases non-personnel by overhead cost by 10 per cent.Such ratewillincreaseat the same pace with the successive reductionin the overhead cost. The effectof reduction overheadcost on ESII will be significant. 10 per cent in A fall will improvecost efficiency a littleover 9 per cent. This will by is improveby 27 per cent if reduced by 30 per cent. The effect

130
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in moreforASA. AIO per cent reduction overheadcost will relatively ESII ofASA by little over 10 per cent,and willreducecost of improve loan production by 4 per cent. This suggests that both the will cost. It is by organizations be able to attaincost efficiency reducing moreimportant GB as the share of non-personnel overheadcost for has been consistently 40 per centoverthe period1993-97. over Financial Efficiency IncreasingLendingInterest Through Improving Rate further Financial efficiency be improved can throughincreasing interestrate. Sensitivity analysis of lending interestrate lending interest rate: (a) 10 per containsthreescenariosofincreasein lending and (c) 20 per cent. Results are reportedin cent; (b)15 per cent, rate will increase in lendinginterest Table X. Quite understandably financial have positive on grosssubsidydependency, efficiency impact financial and ESII. The marginalchange in gross subsidyintensity, and ESII will be equal to the marginalchange in lending efficiency interest rate. This means, a 10 per cent increasein lendinginterest as and ratewillimprove financial efficiency grosssubsidyintensity well willbe derived 15 and 20 per for as ESII by 10 per cent,Similarresult interest rate. centincreasein lending Based on 1997 estimates, a 15 per cent increase in lending estimateof the interest GB willreduceESII to 0.309 from original for from 0.565 to 0.484. It should be 0.467, and gross subsidyintensity rate forGB would noted here that such increase in lendinginterest rateat 18.85 per cent,lowerthanthatofASA in make lending interest 1997. A 20 per cent increase in lendinginterestwill reduce ESII further 0.26. to 26 declinedfrom rateofASAhas gradually interest lending Average per centin 1993 to about 19 per centin 1997. A 15 per centincrease to will reduce ESII from 0.345 to 0.177. The ESII will reduce further rate. interest 0.13 ifa 20 per centincreaseis made in lending Efficiency Increasingboth LendingInterestRate Through Achieving Mix and Portfolio An attempthas been made here to determinethe sensitivity analysis of simultaneousincrease in both lendinginterestrate and mix. It was assumed that lendinginterestrate will only portfolio will increaseby 10 per cent and depositinvestment reduceby 10 per

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Imam& Khan : Sustainability Microfinance Programmes 137 of Khalily, fall cent,30 per cent and 50 per cent.As assumed earlier, in deposit will to investment contribute increasein averageloan outstanding per The of borrower. basic objective this sensitivity analysis is to show a combined effect marginalincrease in lending interestrate and of mix on efficiency and sustainability. change in portfolio significant in Resultsare reported Table XI. GrameenBank will be able to reduce ESII by about 35 per cent if from 0.467 to 0.338, based on 1997 estimates, it increaseslending mix by interestrate by only 10 per cent and changes the portfolio 7 the share ofloans to totalloanable fundsfrom 1 per cent increasing to 80 per cent. Such significant changeswilltake place due to fallin in 19 per cent,improvement cost efficiency by grosssubsidyintensity around4 per centand financial about 19 per cent.The by efficiency by combined effect a fallin investment 50 per cent and increasein of by lendinginterestrate will reduce ESII by 43 per cent. It should be noted here that combinedeffects increase in lendinginterest rate of and change in portfoliomix would be higher than the sum of of independenteffect lendinginterestrate and change in portfolio mix. The effects simulation changein portfolio willbe small for mix of of ASA,as theshareofloans in totalloanablefundsis already very high.It was 0.95 in 1997. Nevertheless, therewillbe marginal changein ESII withthe changein portfolio and lendinginterest mix rate.A marginal increasein lendinginterest rate by 10 per cent and declinein deposit investment 30 per cent forfinancing loans will reduce ESII by 35 by to per cent from0.345 to 0.224 in 1997. The ESII will fall further 0.222 if lending interest rate is increased by 10 per cent and investment declinedby 50 per cent. is In brief, willbe better if:(a) it increasesloan volumeas well GB off as average loan size by reducing the size of investment fixed in deposits by 30 per cent; or (b) it increases loan volume through in reducinginvestment fixeddepositsby 30 per cent and marginally increases lending interestrate by 10 per cent, and (c) it reduces overheadcost. In either the cases, GB willbe able to of non-personnel reduce ESII and improve cost and financial efficiencyquite The degree of change in portfolio mix and lending significantly. interest rate as well as ESII will still be lowerthan those of ASA in 1997. ASA willbe able to improve sustainability changing by portfolio mixto a lesser extent, theirshare of loan in totalloanable fundis as morethan 95 per cent.Yet theywillbe able to improve ESII.

138
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VIII. EFFECT OF WAGE ON EFFICIENCY AND SUSTAINABILITY

It has been arguedthat GB is a formal whileASA is organization moreofa quasi-formal in organization nature.These twoorganizations in differ nature of the programme, cost structure,and financial It has been quiteevident from analysisthatefficiency the of efficiency. GB is constrained twofactors: adoptionofnationalpay scale, and by low lendinginterestrate. Though GB can increase lendinginterest rate to make it at par withthatof otherMFIs, it is constrained its by own tradition maintaining of low rate. The major relatively interest constraint appears to be adoptionofnationalpay scale. On the other with to hand,ASAis a quasi-formal organization no legalentity act as a financial institution. wagerateis quitelow. Its enablesGB to takelong factors, Higher averagesalary,amongother timeto be sustainable and costefficient. AnnualaveragesalaryofGB is threetimeshigherthan that of ASA. How important the effect is of on the efficiency sustainability GB and ASA ? An attempt and of wage was made to imposesalaryofGB on ASAand ofASAon GB in orderto determine impacton sustainability.Resultsare reported Table its in XII. As expected, GB becomes more cost effective and less than before. Comparedto the originalestimates, subsidy-dependent cost of loan production would have reducedby about (cost efficiency) 21 per cent from0.214 to 0.170 in 1997. This has impact on The ESII will decline by 46 per cent from0.467 to sustainability. 0.251. In contrast, ASA becomesmoreworse-off before. Its cost than ofloan production 1997 wouldhave increasedby about 88 per cent in from0.158 to 0.297. As such, its dependencyon subsidy would increaseenormously from 0.345 to 1.046. like The simulation resultssuggestthata quasi-formal organization ASAwouldnotbe able to operatesustainably, levelof giventhe present if increase in operation, it had adopted national pay scale implying like a wageas GB has done. Similarly, formal organization GB couldbe better had it adoptedquasi-formal off salaryofASA. This impliesthat GB in and matter cost-efficiency sustainability. wagedoes significantly faces uphilltask in attaining at sustainability a relatively highwage. MFIs of social cost of microfinance Consequently, programme formal will be relatively has important implicationon high. This finding institutional and market development. development microcredit

Imam& Khan: Sustainability Microfinance Programmes 141 oj Khalily,

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DL SUMMARY OF THE FINDINGS AND POLICY IMPLICATIONS

The issue of sustainabilityand social costs of microfinance in (MFPs) in Bangladesh has been revisited this paper programmes indexfor ESII, an alternative sustainability, efficiency, using measuring and the extentof subsidy dependency. This ESII index providesan for of analyticalframework explicitspecification net subsidy (social cost costs) into a number of ratios, such as, subsidy intensity, mix.As it is evidentthat financialefficiency, portfolio and efficiency, the extentof subsidyintensity an inversefunction the degreeof is of and shift in portfoliomix leads to reduce subsidy efficiency, the of dependency, interaction these ratios endowedwithESII tends to pointout broad-basedpolicyimplications towardsthe achievement ofsustainability. The majorfindings summarized belowin orderto are derivepolicyimplications. There are differences the performances ASA, a quasi-formal in of organization, and Grameen Bank, a formal organization. The differences are evident in programmedesign, cost and financial structure, interest rate, cost and financial efficiency, subsidy and dependency the degreeofsustainability. First, thoughgross subsidy had increased over time,the gross subsidy intensityhas declined for both Grameen Bank and ASA. the is for However, intensity lower GB thanASA. Second, interestsubsidy resultingfrominexpensiveborrowings of and grantsforon lendingis the dominating component the total ASA,incomesubsidyis dominant.It is grosssubsidyforGB, whilefor over ASA as againsta little about 47 per centoftotalgrosssubsidyfor 8 percentfor GB. of cost ofloan production GB was lowerthan that Third, aggregate due to increasein ofASA until 1996 but in 1997 it was higher partly by salary. But,ASA could reduceits cost ofloan production about 2 1 was more per cent in 1997. The higher degree of efficiency cost GB in cost efficiency. had higher employee pronounced employee than that ofASA,thoughits annual averagesalaryis three efficiency timeshigher than thatofASA,reflecting However, productivity. higher cost. in overhead GB is less efficient non-personnel than ASA despite being efficient Fourth,GB is less financially to have contributed it: (a) Two factors morecost efficient. relatively low level of allocative efficiency implyinginadequate relatively of response of GB to its change in indicator shift(priceratio of two rate. interest and and outputs-loan investment), (b) lowlending

Programmes Imam & Khan : Sustainability Microfinance of Khcilily.

143

the subsidy dependency both GB and ASA has declined of Fifth, overtime. Increasein loan volumeand cost efficiency contributed has to such decline in dependency. However, ASA could reduce level throughrelatively dependencyby a significant higherlending interest rate. Sixth, social costs, measured by net subsidy as percentageof of average loans outstanding, GB and ASA have declinedover time. Based on the estimateof 1997, social gain of GB borrowers should be at least aboutTk. 10 perTk. 100 loan in orderto exceedsocial cost. In thecase ofASA,it shouldbe aboutTk. 7. On theother the hand,given factthatloan is tiedto savingsand savingsis an increasing function of for income,averagemember-borrower savingscan be used as a proxy social gains. Ifthe net subsidyto the MFIs is treated a net transfer as to the poor,a net transfer Tk. 100 might of have generated savingsby Tk. 293 in 1997 forGB and by Tk. 398 forASA in the same year. the Therefore, proxymeasure suggests positivenet social gains for bothGB and ASA. The findings in suggestthat severalfactors explaindifferences the of MFI MFI. Theyare: (a) sustainability a quasi-formal and a formal overheadcost; wage; (b) lendinginterestrate; (c) non-personnel and (d) subsidyforcapitalization operating and expenses. ASA,as a is moresustainable thanGB because oflower quasi-formal organization, wage, higher lending interest rate, low share of non-personnel overhead cost and dominating role of grants forcapitalizationand expenses. operating Based on the findings, severalpolicy can implications be derived: can First,subsidyintensity be reducedthrough portfolio changing mix, increasing lending interestrate, and reducingnon-personnel overhead cost. The options can be applied separately or simultaneously. A 30 per cent change in deposit investment (equivalent to the 9 per cent increase in share of loan to total for a portfolio) GB, can alone reduceESII by 12 per cent. Similarly, 10 cent reductionin non-personnel overheadcost will improve cost per 4 percentages and reduceESII by a little over9 per cent. efficiency by A 10 per cent increase in lendinginterest rate will reduce ESII and financial efficiencyby the same margin. However, a improve combination the optionswill be moreeffective. increase of 10 of An cent in lendinginterest rate alongwith30 per cent fallin deposit per investment increasein loans by about 9 per centwillenable GB to and reduceESII by 28 per cent,cost efficiency 4 per cent and financial by for efficiency about 19 per cent. The resultsare similar ASA. These by werederived simulation sensitivity and implications through analysis.

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and Second, ASA, as a quasi-formal MFI, is cost-effective sustainablebut thismight remain whenit,likeotherNGOs,will not so A from operate within a regulatoryframework. transformation in willbe necessary thefuture. This to formal quasi-formal organization if such transformation make its programme leads to costly might from simulation the that higher increasein wage. It has been evident willtake ASA off path of sustainability its presentlevel the wage given in of operation. ASA may have to bringsome modification Therefore, in orderto increaseloan productivity and theirproduction technology minimize cost ofloan production. Third, GB will have to reduce its personnel as well as from analysis,GB, by the overhead cost. As was evident non-personnel is by being formal organization, constrained higherlevel of wage. It in be might able to reduce cost of loan production severalways: (a) size in so membership flexibility the programme thatfixed introducing per branch can be increased up to certainscale withoutincreasing additional cost; (b) reducing qualificationrequirementfor the officials the branchlevelso thatlowerlevelofthe pay-scalecan be at incentivefor and introducing applied; (c) injectingcompetition efficiency among the branches; (d) developingalternativeloan can be increased,and (e) productsso that loan size per borrower levelsthrough and head office costs at the regional operating reducing . reorganization is the that Fourth, finding GB, beinga formal organization, less cost has thanASA,a quasi-formal effective less sustainable and organization, market. Such finding microcredit fordeveloping policyimplication microcredit raises the basic questionabout the process of developing and of in market Bangladesh. Fromthe perspective sustainability low MFIs likeASA should social cost ofmicrofinance services, quasi-formal exist and continueto flourish. However,questions can be raised: in its shouldASA be able to maintain low cost ofloan production the and run as it growsorganisationally when it will be subject to long for framework formalfinancial framework? Regulatory regulatory as institutions, perceivedand if applied, mightmake operationsof it MFIs costlierthan before. However, and formal both quasi-formal an will be costlier for quasi-formalMFIs. Therefore, appropriate framework should be designedin a fashionsuch thatboth regulatory and formalMFIs can operate simultaneously. It will quasi-formal and willinject market of to contribute sound development microcredit between quasi-formal and formal MFIs from the competition as of of perspective sustainability institutions wellas least cost services households. to thetargeted poor

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