Microfinance Institutions Analysis:
Summary of Findings

Outreach. Microenterprise finance institutions can -- and those reviewed here do -- achieve strong outreach along all three basic dimensions: depth (reaching the very poor), extent (significant scale), and service quality. Clients of these institutions are often mainly women. The geographic range of the services is noteworthy, with successful institutions found in both urban and rural settings, and across three continents. The extent to which these services are filling an important gap in the lives of poor communities is demonstrated by rapid growth of demand, despite relatively high interest charges, and by low rates of default among borrowers.

Operational Efficiency. Ten of eleven institutions reviewed had achieved operational self-sufficiency: they covered administrative expenses out of interest income and client fees. This finding leads to the important generalization that operational efficiency can be achieved consistently in microenterprise finance, in a range of settings, and with a variety of clientele. The prerequisites to operational efficiency appear to include the adaptation of an effective service delivery methodology and significant institutional competence in such areas as delinquency control, information management, and staff development.

Full Self-Sufficiency (Profitability). Five institutions reviewed have achieved full self-sufficiency. Another is on the borderline. These programs generate a return on assets equivalent to returns expected in the private sector, without external subsidies. With only five of eleven passing this hurdle, in only three countries, it is not yet possible to conclude that full profitability can be consistently achieved in all countries. However, given the rapid progress in the field, it is likely that in a few years the ranks of self-sufficient programs will be significantly larger, and the issue of the universality of the emerging model should be revisited.

The Keys to Financial Viability. Among institutions analyzed, ten of which had already mastered the challenges of operational efficiency, only two variables were significant in determining their profitability:

higher real effective interest rates and

lower average salary compared with per capita GDP.

Both these factors are substantially within the control of program managers. Thus, given efficient operations, achieving full financial viability depends on institutional commitment to this goal, and willingness to apply that commitment in setting interest rates, controlling costs. and selecting personnel.

Factors Not Directly Correlated with Financial Viability. Contrary to conventional wisdom, the study demonstrated that, among efficient organizations, some variables are not strongly correlated with financial self-sufficiency. The organizations studied here have all found ways to overcome obstacles normally thought to inhibit financial viability.

Loan Size. Among the programs studied, there was no significant correlation between loan size and financial viability. Even among Level III institutions, the full range of loan sizes is represented, from programs serving only the very poor, to those serving a mixture of very poor and moderately poor clients. Several programs show that it is possible to achieve financial viability while serving the very poor.

Geographic Setting. Financially viable institutions and institutions with strong outreach were found in both urban and rural areas and in countries at various levels of development. Thus, the emerging model for microfinance appears to be widely applicable, if sensibly adapted to local circumstances.

Economic Setting. Successful institutions have been developed in countries over a broad range of absolute levels of development, with a range of growth trends, including extremely poor countries and countries where the economy has been stagnant. Programs can even tolerate significant inflation if the institution and general public are sufficiently experienced and have coping strategies. Nevertheless, economic growth and low, or at least stable, inflation, make it easier for microenterprise finance institutions to flourish.

Shortcomings of Microenterprise Finance Institutions. Two apparent shortcomings emerged among this sample of high-performing institutions.

Absence of Savings Services. Despite the importance for low-income people of access to voluntary savings services, only the institutions in Indonesia were providing such services on a broad scale. Several others were planning savings programs or were in the process of implementing them, but few had fully operationalized them. While this demonstrates a gap in service delivery, it is not a gap that can be filled immediately. Rather, it must await the development of new institutional skills and and appropriate approach to permission to capture savings from the public.

Lack of Adequate Information. Few institutions reported financial and outreach data at a sufficiently high standard. Relevant information plays a crucial role both in internal management and in convincing outsiders (donors, lenders, investors, depositors, regulatory authorities) of the soundness of an institution. Inability to provide such information will slow the development of an institution and limit its access to funding.


Implications for Donors

These findings suggest that donors and development decision makers should take action in certain directions. With the right model for self-sufficient financing and effective outreach, the findings suggest that microenterprise finance institutions can grow to the point where they address the demand for financial services in poor communities around the world. If such a broad development opportunity is truly within reach, it is important to make the effort to grasp it.


The Bottom Line: Scale and Leverage.

Decision makers should have a clear understanding of the performance standards that organizations examined here have achieved, and they should use those standards in making funding and policy decisions. These standards also lead institutions toward the ability to gain access to funds from non-donor sources, thus leveraging donor inputs.

This strategy speaks particularly to those who are concerned with reaching the very poor. The study shows that organizations can attain scale and leverage while including the very poor in their client group.

Donors should craft their support in ways that foster financial independence. In essence, they should view their role as supporting the commercialization of this field and themselves as start-up investors.


Elements of Donor Policy. Assessment findings suggest that donors need to pay close attention to several key issues as they formulate support efforts in microfinance.

Commitment to Efficiency. If operational efficiency can be achieved in most parts of the world and in a range of geographical and economic settings, donors should have clear expectations that any microfinance program they support will reach operational efficiency in a reasonable time period. They should select organizations for support that have a credible commitment to reaching operational efficiency.

Interest Rate Policy. Donors should insist that organizations they support price their services at a level that supports financial viability. In particular, programs must adjust adequately to the potentially erosive effects of inflation.

Reporting Standards. Donors should insist that supported organizations report on their performance according to generally understood and accepted standards in a way that makes subsidies transparent. They should be prepared to offer technical assistance to organizations to develop the capacity to do so.

Frontier Issues. Donors have an important facilitating role in helping top-performing institutions make the transition to full independence. Among the interventions that may be called for are policy dialogue with governments regarding supervisory standards for microfinance, technical support to transforming institutions and to those who wish to develop savings services, and support to the process of identifying and securing equity investors.

As more microenterprise finance programs cross the hurdles of operational efficiency and then full profitability, with strategically applied external support, they can begin to reach tens of millions of poor families with high quality financial services. In so doing they help those families lead more secure, empowered, and healthy lives and to provide their children with better economic opportunities. Enlarging opportunities is the ultimate purpose of microenterprise finance.

USAID, Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful Programs. 1995

Hari Srinivas - hsrinivas@gdrc.org
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