Many developments and donor organizations already believe that it is only by weaning-off donor dependency and adopting a commercial orientation that MFIs can truly attract the capital and savings base they need to scale up their microloan portfolios, increase sustainability and outreach, lower lending rates, and meet the demand for financial services for the poor. Most experts see donor funding as useful only in an MFI’s start-up phase and thus unsustainable as an ongoing funding source(Armendáriz de Aghion & Morduch, 2005). Indeed, researchers argue that cost efficiency in microfinancing is now being driven by this shift from concessionary to commercial funding (Forkusam, 2014).
46
III
THEORETICAL FRAMING AND HYPOTHESISMany metaphors have been adopted in the academic literature to explain an organization’s development from its inception to termination. One of the prominent metaphors is the life cycle; usually used for ventures and organizations, products, and the developmental stages of an individual’s career. The Life-cycle theory has been used to describe how an organization starts, develops to maturity and eventually ceases to exist (Kimberly & Miles, 1980). According to Van de Ven and Poole (1995), life-cycle is the most common explanation of development in the management literature, next to teleology.
The life-cycle theory (LCT) posits that “the developing entity has within it an underlying form, logic, program, or code that regulates the process of change and moves the entity from a given point of departure toward a subsequent end that is prefigured in the present state.” In this inherent process of change, external environmental events and processes play a role in transforming the entity, but only through mediating the immanent logic, rules, or programs that govern the entity's development (Van de Ven & Poole, 1988).
The life-cycle model typically exhibits a single sequential progression of change events in stages or phases, where characteristics acquired by the entity in earlier stages are retained in later stages. Also, the stages are related to each other as they derive their sequence of events from a common underlying process. As such, each stage of development is seen as a necessary precursor of the succeeding stages.
Life-cycle theories of organizational entities often explain development regarding institutional rules or programs that require developmental activities to progress in a prescribed sequence.
47
Rogers (1983) building on the life-cycle theory proposed by Kimberly and Miles (1980), argued that not only do organizations’ development follow its life-cycle but innovations in organizations may follow a logical or natural sequence developmental stages. He posited five stages of innovation: need recognition, research on problem, development of idea into useful form, commercialization, and diffusion and adoption. The order among these stages is necessitated both by logic and by the natural order of Western business practices.
Kapper (2007) outlines and describes four stages of the MFI life cycle: start-up, expansion,
consolidation, and integration. In the start-up phase, MFIs are financed through donations and
concessionary funds. At this point, Kapper says, MFI investment is too risky to attract commercial equity investors, so donors provide equity to control the lending in line with their goals. NGO MFIs are most successful in this phase because of the subsidies and donations they receive.
In the expansion phase, MFIs focus on extending their operations and expanding credit
outreach to their clients. They also begin receiving equity capital from public investors to help stabilize their performance. International finance institutions provide seed capital, which offers excellent signals for commercial funding. However, subsidies, soft loans, and donations still flow in from donors (Brau & Woller, 2004).
The consolidation stage is characterized by the availability of commercial funding— including debt and short-term bank borrowings—for MFI operations. Some MFIs may acquire licenses to accept savings or deposits during this phase. Such deposits help expand loan creation at a low cost. Due to their low risk, only large MFIs can typically afford low-cost commercial funding, and private investors who expect good returns find them increasingly attractive. Also in this stage, local debt becomes a primary financing source for MFIs, because foreign debt—with its inherent exchange-rate risk and capital-flow regulations—can be quite expensive. Bank MFIs
48
may avoid this transition process, while others are most likely to progress in this way (Kapper, 2007).
In the final integration stage, subsidies and donations are no longer a significant part of the
MFI funding structure. Most MFIs are financially sustainable and profitable during this stage, which is associated with high outreach. However, some researchers have warned that MFIs may begin to neglect the core responsibility to the poor and focus on profitability alone (Morduch &
Haley, 2002; Morduch, 2000). This phenomenon, known as mission drift, is the theme of much
research. Rhyne (1998), however, has argued that as MFIs develop, their clients thrive as well. As such, depth of outreach increases—that is, the average loans to clients get much bigger.
This approach to the MLCT is not the only framework in the microfinance literature. Helms (2006) and Hoque & Chishty (2011) identified three MFI growth stages: formative, maturing, and matured. Another schema organizes stages by time, with years 0–4 categorized as the start-up stage, years 5–8 as the growing stage, and 9 years and older as the mature stage (Robinson, 2001). For this research, I adopt the MLCT framework proposed by Robinson (2001) and de Soussa & Frankiewicz (2004). In this framework, each of three stages is defined by an MFI’s years of operation: 1) the new phase (0–4 years); 2) the young phase (4–8 years); and 3) the mature phase
(8+ years). New MFIs are not financially viable and rarely show a profit, while young MFIs are
profitable and mature MFIs are financially viable (de Soussa & Frankiewicz, 2004). Several other
authors (Kooi, 2001; Van Maanen, 2005; Bogan, 2008) largely agree with this funding development framework and further argue that, in the new phase, MFIs need highly risk-tolerant subsidized capital in the form of donations and donated equity to support their early years of operation, as MFIs are not yet sustainable enough to attract commercial funding.
49