The Development of MICROFINANCE

INSTITUTIONAL STUDY OF MICROCREDIT -

SUCCESSES AND FAILURES
Arvind ASHTA

Burgundy School of Business

Schematic Representation of Areas
Researched 4 What Made Microcredit
Successful?
The central question is INSTITUTIONAL STUDY OF
how to spread MICROCREDIT 5 Unsustainable Growth Of
microfinance at Day 2 Microcredit
reasonable interest
rates
6 Enabling Institutions To Protect
Microcredit

7 MIS To Control Operating Costs

Introduction: Microfinance as And Increase Outreach
a Response to a Wicked INNOVATIONS TO MAKE
Corporate Social 8 Crowdfunding To Lower
Problem MICROCREDIT A MORE
Financing Costs And Increase
Responibility POWERFUL TOOL
Day 1 Day 3 Financing
1, 2, 3
9 Process Innovations Concerning
Risk, Outreach And Impact

10 Reducing Stress Through

Equity
OTHER MICRO PRODUCTS AND
SERVICES TO ATTACK THE
11 Levelling Wicked Problems
PROBLEM Through Wages, Insurance And
Day 4 Savings
12 Building Entrepreneurial
Capacity With Complementary
Institutions
Institutional Theory
• Institutional analysis • Institutional Entrepreneurship
• Structures and mechanisms of social order and • DiMaggio (1988)
cooperation
• Informal rules-in-use and norms • Dacin et al., (2002, Fligstein (1997)
• formal rules and law.
• How individuals and groups construct institutions,
• How institutions function in practice,
• Institutional Work
• Effects of institutions on each other, on individuals, • aimed at creating, maintaining and disrupting
societies and the community at large institutions
• Douglas North, Elinor Ostrom, but also Emile Durkheim • Lawrence et al. (2009).
• Resilience of Institutions
• Resilience of social structures
• Schemes, rules, norms, and routines govern behavior • Institutional Logics
• These have a logic which is not decided at micro-level • Competing logics
• DiMaggio, Paul J., and Walter W. Powell 1983. “The iron cage • Thornton et al. (2012)
revisited: Institutional isomorphism and collective rationality in
organizational fields,” American Sociological Review 48:147-6 • Friedland and Alford (1991)
4 WHAT MADE MICROCREDIT
SUCCESSFUL?

4.1 REGIONAL ANALYSIS

e s a se s
West ce in cr
st u d y show African s cr o f n a n
e l ev e l
A f r i can s app tudy Mi e i n com
North ws specifc efect r o p tll som hen reduces
ve reg riate and
sho h e lps u and t d by more
le g i s l a to n helps laton e
(replac l fnance)
forma
PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES
North African Study: 5 countries, but
information available only on 3
Morocco Egypt Tunisia Algeria Libya
Beginning of European influence 1832 1882 1881 1830 1912
Date of independence 1956 1952 1956 1962 1951
Length of colonization (in years) 124 70 75 132 39
Colonial form Protectorate Protectorate Protectorate Colony Colony
Colonial country France Great Britain France France Italy

Firstly socialism, Liberalism

Political influence Liberalism Socialism Socialism
then liberalism

Republic, but
Republic, official Republic, usually commonly
Constitutional
Political government Republic pluralist parties backed by considered as a
monarchy system military military dictator
system

Dominant Religion Islam Islam Islam Islam Islam

 2001 2004 2007 2010 2013
Number of MFIs reporting to MIX
Morocco 4 10 10 10 6
Egypt 5 10 14 12 6
Tunisia 1 1 1 1 1
Total 10 21 25 23 13
Number of Borrowers (MIX data)
Morocco 133,139 452,610 1,327,928 808,842 701,221
Egypt 73,687 252,504 676,761 811,000 350,049
Tunisia 4,739 15,946 63,794 156,852 231,520
Total 211,565 721,060 2,068,483 1,776,694 1,282,790
Average Loan size
Morocco 105 213 391 478 613
3 Egypt
Tunisia
335
181
187
248
176
350
213
359
181
446
Combined 228 202 269 340 441
Average yield
c Morocco
Egypt
38.9%
35.9%
30.9%
32.6%
30.4%
34.2%
36.4%
33.3%
o Tunisia
Combined
49.9%
39.1%
35.6%
32.0%
29.9%
32.5%
25.5%
34.2%
u Average Loan Loss rate
Morocco 0.24% 1.12% 0.85% 8.73% 2.51%
n Egypt
Tunisia
0.24%
0.38%
2.72%
0.20%
0.49%
0.37%
0.51%
0.76%
0.06%
-0.04%
t Combined
Average Return on Assets
0.26% 1.56% 0.63% 3.89% 1.52%

ri Morocco
Egypt
6.01%
3.12%
4.77%
1.60%
4.91%
3.92%
-1.45%
9.20%
2.46%
6.64%
e Tunisia
Combined
-12.89%
2.07%
13.76%
4.34%
9.72%
4.56%
6.38%
4.72%
1.77%
4.30%
s
 West Africa (WAEMU): 8 countries
World Bank Governance indicators and scale of
microcredit
World Bank Correlation
Governance Senegal Mali Benin Burkina Faso Togo Cote D'Ivoire Niger Guinea-Bissau with mirocredit P-value – 1 tail
Indicators 2007 scale

Percentile Rank 48.1 56.3 56.7 38.5 14.4 11.1 36.1 32.7 0.48 0.113
Voice and
Accountability Score (-2.5 to
+2.5) -0.02 0.26 0.32 -0.31 -1.16 -1.26 -0.38 -0.51 0.46 0.125

Percentile Rank 37.5 38.9 58.7 46.2 26.9 3.4 26.4 29.8 0.42 0.151
Political
stability Score (-2.5 to
+2.5) -0.18 -0.13 0.38 0.09 -0.52 -2.12 -0.55 -0.41 0.39 0.169

Percentile Rank 45 34.6 33.6 19 3.3 5.2 17.5 10 0.79 0.009***

Government
Effectiveness Score (-2.5 to -0.34 -0.55 -0.57 -0.84 -1.48 -1.37 -0.85 -1.21 0.69 0.029**
+2.5)
Percentile Rank 40.3 42.2 35.4 40.8 17 18 29.1 14.1 0.64 0.043**
Regulatory
quality Score (-2.5 to
+2.5) -0.35 -0.33 -0.44 -0.34 -0.98 -0.98 -0.56 -1.1 0.61 0.053*

Percentile Rank 45.2 45.7 36.2 41 18.6 2.4 20 6.2 0.75 0.016**
Rule of law
Score (-2.5 to -0.39 -0.37 -0.56 -0.48 -0.94 -1.54 -0.89 -1.36 0.71 0.024**
+2.5)
Percentile Rank 37.7 45.4 39.6 46.9 13.5 7.2 18.4 6.8 0.62 0.052*
Control of
corruption Score (-2.5 to
+2.5) -0.51 -0.43 -0.49 -0.4 -0.98 -1.09 -0.89 -1.11 0.65 0.039**

Microcredit
Scale (Gross $000 270595 114669 113874 88909 86083 32760 13789 223
loan portfolio)
4 WHAT MADE MICROCREDIT
SUCCESSFUL?

4.2 INDUSTRY ANALYSIS

The history of India
The history of Togo
shows the importance of
showed the importance Path dependence means
NBFIs and contradicton
of cooperatves and local history matters
between development
donor mimetcs
and market logics.

PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES

Indian history is different: Public
sector banks and NBFIs are the main
actors Estimated Outreach by legal status
50000000

45000000

40000000

35000000

30000000

25000000

20000000

15000000

10000000

5000000

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
4 WHAT MADE MICROCREDIT
SUCCESSFUL?

4.3 ORGANIZATIONAL ANALYSIS

r o ls co sts to n s n eed p e t ton

ASA cont payment Organ i za
u r e s fo rm As c o m
a te g i c r isks
re ce d , str
through ves and good pro a n c i a l and inc r e a se s
in g m or e
incent peratons f n m
managing nal risks are beco rtant
da r di ze do operato impo
stan

PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES

Microfinance Outreach in
Bangladesh
Big three are globally recognized
25000000

20000000
Gram
een
15000000 BR
AC
AS
10000000 A

5000000

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Risk and Return in B'Desh Top three
At that time ASA was the best!
Bangladest: Top Three MFIs 2004 2006 2008 2010 2012
Yield %
ASA 30.6% 28.5% 24.7% 26.2% 25.8% High
BRAC 28.0% 29.2% 25.5% 26.8% 25.9%
Grameen Bank 22.9% 19.5% 20.0% 19.8%
Loan Loss Rate %
ASA 0.24% 0.83% 0.52% -0.03% 0.36% Low
BRAC 1.35% 2.17% 4.60% 1.77% 2.25%
Grameen Bank -0.06% -0.67% -0.56% -0.47% 0.64%
Operating Expense as % of loan portfolio
ASA 8.07% 9.44% 15.06% 13.13% 9.79%
BRAC 14.40% 13.22% 11.06% 11.65% 10.19% Low
Grameen Bank 9.29% 11.17% 10.87% 11.84% 11.31%
Return on Assets %
ASA 15.44% 14.54% 5.85% 9.78% 11.41%
BRAC 3.40% 6.97% 2.33% 3.92% 5.81% High
Grameen Bank 0.19% 2.46% 1.66% 0.52% 0.86%
Different kinds of risks in
Microfinance
Financial Risks Operational Risks Strategic Risks
Credit Risks Transaction Risks Governance Risks
Transaction Human Capacity Mission Drif
Portfolio Information Technology Corporate Governance
Liquidity Risks Fraud / Integrity Risks Reputation Risks
Undeliverable Social
Lack of Funding Staff perpetrated fraud Expectations
Excess Funding Management Appropriation Transparency
Market Risks Legal & Compliance Risks External Business Risks
Interest Rate Inappropriate Regulation Competition
Foreign Exchange Insufficient legal advisors Political Interference
Example of an indirect risk:
inappropriate regulation
• Demonetization in India (November 2016)
• Wiped out many micro businesses since customers could not pay them
• They in turn could not pay MFI
• So MFI could not grow
• The negative impact seems to be over by last quarter of 2017

• https://www.syminvest.com/news/india-looking-beyond--
how-micro-finance-institutions-are-wiping-out-demonetisation-pang
s/2018/1/9/7276
5 UNSUSTAINABLE GROWTH OF
MICROCREDIT
5.1 THE IMPACT OF FINANCIAL
CRISIS ON MICROCREDIT
Initally, it was believed
that microfnance is
resilient to external crisis
in the country since it
was in informal sector
PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES
Then, we saw countries
Multple-lending is
where microfnance also
leading to fragile
sufered: since there are
borrowers: a little crisis
links between formal and
and they go under.
informal sectors
5 UNSUSTAINABLE GROWTH OF
MICROCREDIT

5.2 ETHICAL CRISIS WITHIN

MICROCRDIT ORGANIZATIONS
High growth based on high
profts and high interest
rates leads do stakeholder
discontent with using a
double bottom-line label
SKS experience shows that
even following industry
Certainly, we cannot satsfy
norms on interest rates is
all stakeholders
not sufficient to appease
stakeholders.

PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES

 Compartamos IPO in 2007
(Mexico)
30% 100%

Paid up capital 2000 $ 1.8M $ 6M

Book Value 2006 $ 38M $ 126M

IPO Proceeds 2007 $ 470M $1550M

Market Value 2007 $ 600M $2000M

 Compare Compartamos Mexico
with SKS India 2006 2007 2008 2009 2010 2011 2012 2013 2014
Global Medians (from MIX data)
N (average for the four variables)* 991 1045 1159 1121 1090 1195 965 784 632
Operating Expenses as % of Assets 14.50% 13.80% 14.60% 13.80% 14.00% 13.40% 13.10% 14.00% 13.70%
Financial Expenses as % of Assets 3.80% 4.10% 5.10% 4.80% 4.60% 4.80% 4.90% 4.90% 5.20%
Loan Loss rate % 0.10% 0.10% 0.10% 0.30% 0.30% 0.20% 0.30% 0.40% 0.30%
Return on Assets 2.40% 2.30% 2.10% 1.50% 1.80% 1.80% 1.70% 1.90% 1.90%
Yield 29.30% 28.80% 30.50% 28.00% 28.30% 26.30% 26.10% 27.40% 28.00%
Compartamos Banco Mexico IPO
Operating Expenses as % of Assets 29.30% 28.90% 30.20% 25.60% 27.60% 30.90% 33.10% 31.60% 33.20%
Financial Expenses as % of Assets 9.80% 8.30% 6.00% 5.30% 5.70% 8.00% 7.80% 8.80% 8.10%
Loan Loss rate % 0.60% 0.50% 1.90% 2.60% 3.20% 2.90% 4.10% 7.80% 8.00%
Return on Assets 22.20% 20.00% 19.10% 17.00% 18.40% 15.80% 13.00% 13.80% 16.20%
Yield 80.80% 78.40% 81.90% 72.80% 71.10% 73.10% 71.40% 73.10% 75.40%
SKS India IPO
Operating Expenses as % of Assets 10.50% 9.60% 10.60% 9.80% 10.80% 13.30% 13.70% 13.00% 9.40%
Financial Expenses as % of Assets 6.00% 6.80% 8.90% 8.30% 10.00% 8.00% 7.80% 8.80% 8.10%
Loan Loss rate % 0.60% 0.30% 0.60% 0.90% 1.60% 42.60% 0.80% 2.00% -0.80%
Return on Assets 0.80% 2.00% 3.70% 5.00% 2.40% -46.70% -15.80% 2.90% 5.50%
Yield 23.80% 25.30% 26.30% 25.60% 24.50% 13.40% 13.50% 16.40% 18.40%
*Medians based on voluntary data and so N differes for each year for each of four variables
Source: Ashta (2016): Compilation based on MIX data as on Oct 25, 2015          
In defence of Compartamos: Rawls and
stakeholders
Share-
holders

Existing
Donors
borrowers

Compartamos

Potential
Regulators
Borrowers

Employees
 Compartamos stakeholders

High Existing  Employees Managers

Borrowers

Shareholders

Interest Donors

Potential 
Borrowers

Regulators

Low

Low Power and influence High

Note: IFC gives equity as well as
loans
• In 2018, it financed Indonesia’s PT Radana Bhaskara Finance Tbk.
• $20 million from IFC’s own account
• plus another $20 million that IFC helped mobilize from three other
organizations including ResponAbility SICAV (Lux), IIV Mikrofinanzfonds, and
international fund manager Symbiotics SA.
• These were all five-year loans
• Radana then uses this to finance motor, multipurpose financing, working
capital and investment.
5 UNSUSTAINABLE GROWTH OF
MICROCREDIT
5.3 LIFE CRISIS AMONG
MICROCREDIT BENEFICIARIES
Male suicides go up,
perhaps because they
lose relatvely to
women
PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES
The AP Ordinance led
Microcredit penetraton
to reducton in
among the poor may
repayment rates and a
be a factor as some see
crash: social
others gaining
expectatons matter
6 ENABLING INSTITUTIONS TO
PROTECT MICROCREDIT
6.1 USURY LEGISLATION
Removal of Usury
Ceilings should have
increased supply of
microcredit, but it did
not
PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES
Insttutonal reasons
Behavioral reasons also
(guarantees, Basel 3,
play a part: social
overindebtedness
norms of fair interest
protecton) may be
rates
important
 The impact of usury ceilings on the market
for credit
Interest
rates Supply

E
r*
Usury
ru ceiling
Unsatisfied
demand

Demand

Loan
b a c Amount
6 ENABLING INSTITUTIONS TO
PROTECT MICROCREDIT

6.2 TRANSPARENCY
Countries difer on
The whole truth Legisltaton requires
which cost
(Efectve Annual APR even if they call
components to
Rates) is never it Global Efectve
include in
revealed rates
calculatons
PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES
The whole truth (Effective Annual
Rates) is never revealed
Table 2.7: Comparison of adjustments to be made in calculations of interest rates in different countries

United United
France Tunisia Morocco
States Kingdom
Drawdowns  
Repayments x x x  
Charges x x x
Interest x x x x
Commissions x X x
Taxes x x
Fees in connection with the credit 
x X x
agreement known to the creditor
Costs in respect of compulsive ancillary 
x x x X  
services relating to the credit agreement
when their 
amount can 
be given 
Legal officer’s fees accurately  x  
upon final 
conclusion of 
the contract
6 ENABLING INSTITUTIONS TO
PROTECT MICROCREDIT

6.3 RELIGION
The support and
Hinduism diferent from
permissiveness allowed by
Literature survey showed the three monotheistc
Hinduism may explain the
many unexplored areas in religions because in
success of microfnance in
religion and microfnance venerates money and
India but does not explain
permits high interest rates
the suicides.

PART 2: INSTITUTIONAL STUDY OF MICROCREDIT: SUCCESSES AND FAILURES

 Weekly payments Fortnightly payments Monthly payments Annual
Amount (principal and Amount (principal and Amount (principal and
interest with equalized Amount with interest interest with equalized Amount with interest interest with equalized Amount with interest Amount with interest and
Period payments) paid at beginning payments) paid at beginning payments) paid at beginning principal paid at the end
0 -520 -520 -520 -520 -520.00 -520.00 -520
1 12.00 114 24 124 52.00 147.33 624
2 12.00 10 24 20 52.00 43.33
3 12.00 10 24 20 52.00 43.33
4 12.00 10 24 20 52.00 43.33
5 12.00 10 24 20 52.00 43.33
6 12.00 10 24 20 52.00 43.33
7 12.00 10 24 20 52.00 43.33
8 12.00 10 24 20 52.00 43.33
9 12.00 10 24 20 52.00 43.33
10 12.00 10 24 20 52.00 43.33
11 12.00 10 24 20 52.00 43.33
12 12.00 10 24 20 52.00 43.33
13 12.00 10 24 20
14 12.00 10 24 20
15 12.00 10 24 20
16 12.00 10 24 20
17 12.00 10 24 20
18 12.00 10 24 20
Appendix: 19
20
12.00
12.00
10
10
24
24
20
20
21 12.00 10 24 20
22 12.00 10 24 20
23 12.00 10 24 20
Interest 24
25
12.00
12.00
10
10
24
24
20
20
rate 26
27
12.00
12.00
10
10
24 20

50 12.00 10
51 12.00 10
52 12.00 10
calculations Total payments
Of which, interest
624
104
624
104
624
104
624
104
624
104
624
104
624
104
Principal 520 520 520 520 520 520 520
number of periods in
year 52 52 26 26 12 12 1
IRR (for each period 0.71% 0.87% 1.40% 1.70% 2.92% 3.47% 20.00%
Annualized APR 37.02% 45.21% 36.41% 44.07% 35.07% 41.64% 20.00%
Annualized EAR 44.61% 56.86% 43.56% 54.81% 41.30% 50.58% 20.00%
Note: Rows 28 to 49 are hidden since they have the same repayment