When Institutional Change Outruns the Change Agent:
The Contested Terrain of Entrepreneurial Microfinance for the Poor
Susanna Khavul, University of Texas Arlington, USA
Helmuth Chavez, Universidad Francisco Marroquin, Guatemala Garry Bruton, Texas Christian University, USA
IE Business School – January 2012
Presented at Strategic Management Society CK Prahalad Special Conference
Journal of Business Venturing - forthcoming
Background …
Increasingly we understand more about the lives of the poor including their need to access financing.
(Collins et al., 2009; Karlan and Morduch, 2009; Beck et al., 2008).
The provision of microfinancing is transforming into big international business as commercial lenders enter.
(Bruton, Khavul, and Chavez, 2011; Khavul, 2010; Battilana and Dorado, 2010).
As a result, entrepreneurial microlending for the poor has become a contested terrain to which multiple
competitors are laying strategic claims.
In our paper…
Through the lens of neoinstitutional theory we examine the dynamics of microlending in Guatemala over a fifteen year period.
Neoinstitutional theory emphasizes not only the embeddedness of
organizational fields but also how change agents bring innovation to the institutional environment.
There is a tendency to view outcomes at single point & time
What remains poorly understood is the process of how firms that are embedded in a given institutional setting respond to such change.
Tendency to view entrepreneurial change agents in ‘heroic terms” and incumbents as failures but in a process model the responses of institutional incumbents is critical
In our paper…
Our research shows that,
Microfinance are change agents and institutional entrepreneurs who demonstrate that financial services can be brought to the poor in an operationally efficient and profitable manner.
But there is a process in microfinance of ebbs and flows of strategic actions and counter actions from the established commercial banking sector
Initially microfinance was a separate field but commercial banks grow to see microfinance as a viable entity and seek to absorb it
Thus a stage model of institutional entrepreneurship
The result is that changes driven by commercial banks may ultimately outrun and become the dominant providers of microfinance in the future as they change the logics in the industry
Three contributions from paper…
1. Focus on process of institutional change not outcomes – a stage model of institutional change
2. Institutional change can bring unintended
consequences to those that start the process -- dominant players can respond and ultimately capture future growth
3. Contextualize institutional theory – Latin America and Base of the Pyramid plus help to fill gap of too few studies of institutional theory to understand profit motive
(Suddaby, et al., 2010)
Institutional change ….
Organizations seek to align with their institutional environment in order to gain support and legitimacy (DiMaggio & Powerll, 1983)
But it is also recognized that endogenous institutional change occurs (Hardy & Maquire, 2008)
The actors who cause change referred to as institutional entrepreneurs
Institutional entrepreneurs & institutional change now
typically seen as synonymous (Garud, et al., 2002)
Microfinance …
Provision of loans, savings accounts, health insurance, retirement plans, funeral insurance to base of pyramid
Half of the world’s population has no access to banking and other financial services (Beck, et al., 2008)
Typically in informal communities, lack of ability to read
& write common, information asymmetries, transaction costs
Latin America extensive history of micofinance
Guatemala…
14 million people
Guatemala City closer to DFW area than Washington, DC
Illustrates much of Latin America
178% increase in per capita income over 15 years
High level of unequal dispersion of income
51% of population live below poverty level
Indigenous population 78% live below poverty level
Nation of small and informal businesses
Who are the competitors…
Commercial Banks
14 of the 18 banks are involved in microfinance
Approximately 187,000 clients
$200 millions in loans
Average loan amount: $1,070
Top 5 banks 92% of market
MFIs
31 MFIs grouped in two associations: Redimif and Agremif
Approximately 340,000 clients
$190 millions in loans
Average loan amount: $558
Top 5 MFI 65% of market
Our Method: The Deep Dive
On the ground field work
Seek multiple strategic perspectives
We collected first hand primary field data over multiple years.
Understand the deep institutional story.
Cross-cutting perspectives and interpolation between field and theory.
We tapped into multiple levels in the financial ecosystem.
Recognize multiple strategic actors.
Contextualize the findings geographically, socially, and temporally.
Over 57 interviewees some at multiple periods of time.
Thousands of pages of transcripts analyzed and coded.
Borrowers (22)
Women and men
Group and individuals
City and rural
Microfinacing Institutions (9)
Large and small (4 of top 5)
For profit and non-profit
Commercial Banks (7)
Major and minor lenders (3 of top 5)
Non-players and observers
Regulators (2)
Banking and legislative authorities
Analysts and Commentators (10)
Who is being served?
Isolated Rural Communities Rural
Small Towns Urban
International
NGOs
International
NGOs Domestic
NGOs (MFIs) Domestic
NGOs (MFIs)
Commercial Banks Commercial
Banks
Remains underserved under current business practices. Technology may change that in the future.
primary secondary
Domestic Commercial
Banks Domestic Commercial
Banks
Microfinance Organizations
Microfinance Organizations
Regulatory wall: Only Banks Collect Savings
Bank Loans to Microfinance Organizations 14-17% interest
Microfinance loans to groups and individuals
30-85% interest year One year terms
$150-$800 loan size (Grameen at 20%)
Customer Drift to Commercial Banks
Microfinance Organization’s Customer Savings Bank’s
Customer Savings
Bank microfinance loans to individuals 20-60% per year 1-10 years
$250-$5,000 Coops
Credit Unions
(membership based)
International
Loans to members
Savings from members
International Funders and Donors
Up to 3600%
per year Informal
Money Lenders
International Funders, Agencies, Capital Markets
Khavul, Chavez, Bruton (2011)
Financial Flows in Microfinance
Notes: Interest rates are indicated as estimated APR conversions from “flat rates” quoted.
How did we get here?
Stages in evolution of microfinance
In cr e as in g N u m b e r o f C lie n ts
Status Quo
Aid and Development
Financial Sector Engaged
International Microfinance Enters
Alliances and Partnerships
Crowding Out
1945-early 1990s 1990s-mid 2000 mid 2000 to 2010 2010---2011----Future Redefining
Regulation
Opportunity Seeking and Blocking
© 2011
Engagement
Establishment
Redefinition
Restructuring
As we mapped the stages and analyzed the relationships, we saw that
As institutional entrepreneurs…
Microlenders successfully challenged the basic “taken-for-granted” (i.e.“dominant logic”) that the poor cannot be profitably banked.
But in doing so, they also create a window of opportunity for commercial banks.
These established central actors in the financial sector to became dominant competitors in providing microfinance to the poor.
As a result, the financial lives of the rural poor took on strategic importance in the competitive dynamics of the banking industry.
The institutional changes rapidly outrun the microlenders as commercial banks, the incumbents, usurped, modified, and improved the innovation.
We developed a process model to capture what we observed in the field.
Our paper developed a set of propositions across the stages.
Further we saw…
From a strategic perspective, the data suggest that the response of the banking sector may potentially have greater impact on the poor than the pioneering efforts of the original institutional entrepreneurs.
Consider the strategic consequences of a contested
terrain.
1 2
Microfinancing Field
Banking Field
Redefinition Struggle
Redefinition Struggle
Redefinition Struggle
3 Status
Quo
Establishment Engagement Competition Restructuring
Unregulated Microfinancing Organizations
Regulated Microfinancing Organizations Banks Active in Microfinancing Banks Not Active in Microfinancing Banks Engaging and
Experimenting with Microfinance
Microfinancing Organizations Engaging with Banks
Microfinancing Organizations Competing with Banks.
Banks Committing to Microfinance Business
Process Model of Institutional Change in Microfinance:
Inter-organizational field dynamics
Channels of Engagement
Time
late
‘80s ‘96
Timeline of critical events in the process of institutional change in Guatemala
Channels of Observation Channels of Experimentation
‘00
‘97 2002
1945 ‘98 ‘99 2003 2004 2005 2006 2007 2008 2009 2010 2011
early
’90s ‘01
Redefinition Struggle (2005-2007)
Redefinition Struggle (2009-2011) Old
Banking Law
Liberalization of i and ex-rates
New Banking Law
NGO
Law Risk Mgt.
Reg. MFI Defined
MFI Law Drafted Redefinition Struggle
(2001-2002)
MFI Enters
90s: MFI Established
MFI Assoc.
Formed Genesis Petition to Become a Bank
Grameen Enters 90s: Expansion
into Consumer Credit
BanCafe Enters Microfinance
BancaSol Enters Microfinance
BanCafe Fails
Compartamos Mexico IPO
Promeria Buys BancaSol
Microfinance Banks Regulatory
SKS India IPO Azteca
GyT Enter Microfinance
Banco Internacional Enters Compartamos
Mexico Converts to a Bank
Compartamos Mexico Enters Guatemanla Banrural/Grameen
Partnership End of
Civil War
1999 General Election
2003 General Election
2007 General Election
2011 General Election LA
Fin.
Crisis
9/11
Financial Credit Crisis
Political &
Economic
Study of Microfinancing Commissioned
1 2 3
Khavul, Chavez, Bruton (2011) Notes: Dashed lines indicate microfinancing field; solid lines indicate banking field.
Increasing thickness of the line indicates a larger number of field participants.
Looking at the process model…
Microfinance organizations create a new field along side the banks
But ultimately there is conflict in the two fields – this conflict is not in a single step but over various rounds
Round 1 (2001) – banks seek to have MFI regulated and MFI want to be able to collect interest bearing accounts
First round a draw but regulators commit to study and eventually act
Banks increasingly engage those at the base of the pyramid and
begin to learn about this sector more
Process model …
Round 2 (2005) – MFIs still unregulated but still cannot gather interest bearing accounts
New law proposed that would limit the size of the loans and who the MFIs could lend to and introduced greater regulation without the ability to gather interest bearing accounts
Nation’s largest bank enters the contested area of micoloans
Grameen Bank (one of world’s largest MFIs) enters the market and partners with a large local commercial bank
Movement to for profit status of large MFI in Mexico
Process model …
Round 3 (2009) – the MFIs continue to be largely unregulated but unable to gather interest bearing
accounts but at this stage banks are clearly embedded in the microfinance industry
New regulations that further constrict the MFIs and
create technology barriers that only banks could conduct
Only banks could conduct cell phone banking, etc.
Process model …
Initially MFIs enter and establish a new field
But over time the MFI and banks collide
The logic of the banking field ultimately change and the organizational field of the banks and in turn microfinance change
There is a competition among logics and those that start the process of institutional change will not always be the ones that long term are able to capture the benefits generated
Competition between MFIs and banks concerns human capital and regulations
But this is terrain that banks can compete more effectively
Implications for theory
Looking across time in neoinstitutional theory.
The story does not end when the institutional entrepreneur enters
When viewed over time the interplay between institutional
entrepreneurs and the established organizational fields is richer and more nuanced than previous research has suggested
.
The co-creation process in the evolution of microfinance
This is evident in Guatemala
Consumers have increased interactions among participants, that through the incorporation of best practices into new products and
services have enhanced price performance. The spillover effects of this improvements have benefited those in the upper sections of the
pyramid.
Implications for Practice
Regulation and Competition
The prevailing regulatory framework imposes restrictions in terms of strategic flexibility among participants (e.g. restrictions to collect savings by MFIs and to lend to the poorest by Commercial Banks), that lead to the seek of alliances to exploit synergies.
A more flexible regulatory framework can exploit the full potential of the coexistent business models.
Service Inclusion
Even though microfinance has delivered opportunities to poor people, there are still isolated communities that could not be served in a profitable way by the prevailing models.
Technology as the Future of Microlending
That strategic gap could be filled with technology, such as mobile banking, but is important to address the potential consequences of adapting a model that has worked (for example in mobile banking based micro credits, the role of the loan officer is minimized).
New interactions between organizational fields will emerge.
Conclusion…
The main contribution of the change agent we focused on (i.e. MFIs) has been to give, for the first time in centuries, a viable way for the poor to exercise
choice.
Choice that in most cases has being directed to entrepreneurial initiatives.
Such initiatives that are generating spillover effects trough the entire pyramid.
“We have to start with respect for individuals irrespective of their current condition. Deciding ‘what is good for them’ is against the very spirit of co- creation. Yes, we can educate them on the risks and benefits of choices. But they must exercise their choice”
“Large-scale and wide-spread entrepreneurship is at the heart of the solution to poverty”
CK Prahalad
