Errores comunes de planificación: Cómo evitarlos

As microfinance has found increased use and recognition, its spread has moved beyond its original actors, NGOs and donor-financed initiatives, whose primary objective was entirely of a social character. There exists a plethora of individual case-based research studies and a few larger empirical ones, which support the notion that successful microfinance initiatives can provide a financially sustainable option in the struggle to reduce poverty (see, for example Cull et al., 2009; Odell, 2010; Goldberg, 2005; Robinson 2001). However, as the industry grows, the differences between social and financial strategies have become more apparent, and the critique of opposing viewpoints on both sides of the fence is fierce. With increased use has come a move among some microfinance institutions towards commercialisation, and with it, an interest in not just financial self-sustainability, but also the increased profitability of their microfinancial activity (e.g. Carrick-Cagna and Santos, 2009; Christen, 2002; Helms, 2006).

3.1.1. The Compartamos Controversy

The debate, which has raged both in academic and practitioner environments, came to a head, when the Mexican MFI Banco Compartamos went public in 2007. Banco Compartamos sold 30 percent of their holdings, bringing in a net worth of over $US1.6 billion, and from one side, praise for the bank was abundant: The Economist called the bank “...not the biggest, but the most important Mexican bank”, and venture capitalist Steven Funk expressed his support for the IPO, stating “...one must allow and support the development of capital markets to fund the impoverished“. (Economist, 2007; Cull et al., 2008; Malkin, 2008). A number of academic studies have also supported this transition from non-profit MFI to for-profit mode of operation, noting that relying on deposits and revenue rather than donations is more secure long-term, and these institutions appear to be more cost-effective (Bogan, 2012a; Caudill et al, 2009; Ledgerwood and White, 2006).

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However, Compartamos and other microfinance institutions taking a commercial approach, came under heavy fire from the supporters of more traditional microfinance. Yunus stated that Compartamos was “...on the money-lender’s side, not the poor” (Carrick-Cagna and Santos, 2009), and Chuck Waterfield of Microfin accused the MFI of “...monopolistic

exploitation of the poor” (Economist, 2008). Critics claimed that the MFI took advantage of

its market position, and charged interest rates which were far from a social optimum; close to 100%, allowing the company an average annual return of 53% (Carrick-Cagna and Santos, 2009). The bank was, along with other commercial initiatives, accused of simply substituting one form of loan shark with another (BusinessWeek, 2007). Others agree, arguing that the social impact of microfinance must take priority over full financial return (Grene, 2012). Additionally, some research contends that when commercial microfinance grows but does not raise the interest rate over time, the MFI will exhibit a natural tendency to stop being a microfinancial institution, in order to prevent falling below the profitability threshold (Jensen, 2009). As the organisation grows, overhead costs, transaction costs and shareholder expectations will increase. Consequently, the smallest MFI customers that were once profitable for the organization will over time no longer continue to be so. The smaller clients are considerably more expensive for the MFIs than the larger customers, and the new cost structures and legal limitations that the MFIs experience with growth will prevent the poorest clients from being served adequately. With upward-expanding markets, the low end of the market will be increasingly ignored (Jensen, 2009).

In contrast to commercial MFIs such as Compartamos, the average interest rate lies around 31% among non-profit MFIs (BusinessWeek 2007). However, the non-profit approach has its own set of critics, and its own challenges to meet. Placing primary focus upon poverty reduction, a large majority of the non-profit MFIs fail to keep themselves financially sustainable in their infant and growth stages, and struggle to even survive to maturity: according to Carrick-Cagna and Santos, only 2% of the non-profit microfinancial initiatives are considered self-sustainable (Carrick-Cagna and Santos, 2009).

Some literature holds that it is less a case of argument for or against commercialization, but rather a question of understanding the life-cycle stages that a successful MFI passes through (eg. Helms, 2006 and Bogan, 2012a).

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3.1.2. The Life-Cycle Theory

The life-cycle theory considers the nature of microfinance institutions from an institutional evolutionary perspective. It argues that most MFIs change capital structure as they mature, evolving from NGOs in their infant and youth stages, to eventually becoming full-fledged financial institutions in later stages of maturity (Farrington and Abrams, 2002; Helms, 2006; Maisch et al., 2006). Microfinance institutions thus typically start out with a social mission, financing their loan portfolio entirely through grants and concessional loans. Funding comes primarily from donors and international financial institutions, who “...effectively serve as the

primarily sources of risk capital for the microfinance sector” (Bogan, 2012a:1047).

The life-cycle theory states that sources of financing are directly linked with the maturity stage of the institution (Helms, 2006), suggesting that both age and organisational type may have significant impact on the levels of liquidity both held and created by the MFIs. Donor grants and soft loans make up the major part of funding at earlier stages of maturity, and eventually develop into more traditional funding in the form of deposits and equity capital (Bogan, 2008; Farrington and Abrams, 2002). In their 2002 article, Farrington and Abrams provide support for the claims of the life-cycle theory, finding that an increase in competition is changing the shape of the microfinance industry (Farrington and Abrams, 2002:5). According to the authors, the leveraging of capital is increasing, with non-profits having an average leverage of 4.5 times the value of their equity, compared to previous levels of 1.3. Additionally, they observe a strong increase in deposits, as well a move away from grants toward commercial funding, though the tendency demonstrates strong regional differences, with Latin America showing the strongest changes (Farrington and Abrams, 2002:6-7).

The life-cycle theory is also supported by the findings of other studies. In their 2007 study of Vietnamese NGOs, Nghiem propose that the degree to which either financial sustainability or social benefits is prioritised depends both on the nature and maturity level of the specific MFI (Nghiem, 2007). An example of this is for-profit MFIs, which in their infant stage often need subsidies from donors to cover initial establishment and operational costs, but in their maturity stage would be expected to sustain themselves with some profit margin. In contrast, the non-profit MFIs tend to start on a lower level of both outreach capacity and

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financial sustainability. Priority is typically given to increasing the depth of the services provided, rather than long-term sustainability (Schreiner, 2002; Nghiem, 2007).

In opposition to the life-cycle perspective, some academics and practitioners in favour of increased commercialisation and integration into the traditional financial system, argue against this. Microfinance institutions need to use commercial funding in all stages of development, in order to achieve both social and financial self-sufficiency. The supporters argue that commercial funding and a for-profit approach has a positive impact on both outreach and efficiency (Carrig-Cagna and Santos, 2009; Bogan, 2012a). Since donor grants are limited in both scale (limited amount) and scope (typically only given for one or two donor cycles, spanning 3-5 years), the theory argues that relying on donor grants can have detrimental impact on the operations of the MFI (Armendáriz and Morduch, 2010). Bogan finds support for the for-profit theory in her research, noting that grants and soft loans decrease the operational self-sufficiency (OSS) of microfinance institutions (Bogan, 2012a:1052).

Some recent empirical research argues that the distinction between profitability and commercialisation implies a belief that social and financial goals must be mutually exclusive, which may not be correct. Studies exploring the financial performance of for-profit MFIs and non-profit organisations find evidence that non-profit and for-profit MFIs perform equally well (Lützenkirchen, 2012; Mersland and Strøm, 2008 and 2009), and in some cases provide evidence of non-profits outperforming for-profits (Downey and Conroy, 2010a and 2010b). Supporting these findings, additional research suggests that mature non-profit organisations display increased rather than diminished efficiency (Nghiem, 2007).

Not all research agrees, though: Cull et al. argue that the non-profit and for-profit MFIs have to navigate between a number of distinct practical trade-offs. They find that the NGO median operating costs are roughly double of the for-profit initiatives, and ask whether the NGOs should “...move upmarket to provide larger loans and improve financial performance” (Cull et al., 2009: 4).

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3.1.3. Why Identity Matters

The debate on the primary nature of microfinance institutions is important, because it is directly linked with how the industry should be seen in relation to the rest of the financial market, and how the state should regulate it. Is it only a development tool, meant to primarily reduce poverty and grant access to finance for clients otherwise not reachable by more traditional financial institutions? Or has it developed into a niche financial market in its own right, functioning as a sustainable and profitable alternative to traditional financial institutions? The distinction becomes increasingly important as microfinance methodology is re-introduced into societies with more developed capital markets, for example in an effort to reach those left behind by the most recent financial crises. Do we regulate MFIs as a social initiative meant to reduce poverty, or as financial institutions embedded in the traditional financial market, on a par with banks and other commercial financial intermediaries? Should the state be allowed to direct or regulate the lending activities of MFIs, in an effort to optimize their social output, even if it happens at the expense of its financial self-sustainability? The answers given depend on the perceived identity of microfinance.

The first empirical chapter of the thesis uses current banking theory to calculate the level of liquidity created by microfinance institutions for the market they operate in, which is considered one of the primary functions of banks from a societal point of view. I do this to shed light on the ability of MFIs to perform like traditional financial intermediaries, and to better understand under what conditions an MFI may be able to contribute to the financial markets, and serve as liquidity creators on par with other financial institutions.