Managing MicrofinanceEssay Preview: Managing MicrofinanceReport this essayManaging MicrofinanceIntroductionFor the most part, economists cite contract design to explain microfinance successes. Group lending is especially celebrated, followed by the dynamic incentives described in chapter 5. International donors tend to focus on financial choices instead, celebrating lenders that minimize subsidies and set interest rates at levels that promote saving and wise investment (as described in chapter 9). Both good contract design and pricing policy matter greatly. Still, they are necessary conditions for success, not sufficient conditions. A great deal of what distinguishes failed microfinance from successful microfinance ultimately has to do with management: Particularly with how staff members are motivated and equipped to do their jobs.’ In this, microfinance is no different from businesses that sell soft drinks or haircuts.
If one just read newspaper stories, it would seem that all microlenders can boast repayment rates above 98 percent and are making steady profits; management does not seem to be a big issue.2 But table 10.1 shows a wide range in levels of productivity indicators for the 147 leading microlenders surveyed by The Micro banking Bulletin. The first column and third columns give the range minus and plus one standard deviation from the mean. (If the indicators are distributed normally, the range should include about two-thirds of the observations, so one-third of programs would be even further away from the average.) The programs vary by age, scale, and location. Were the data made accessible, we could control for these factors, but the raw numbers suggest the basic point: While all of the lenders employ at least some of the mechanisms described in the previous chapters, much of performance variation is left unexplained by the type of loan contract.
Source: The Microbanking Bulletin 2002 and calculations by the authors. The Micro banking Bulletin calculates averages on the basis of values between the second and ninth percentiles, leading to some of the negative values when calculating values one standard deviation below the mean. The low-end group includes microlenders with average balances under $150 or under 20 percent of GNP per capita. The broad group includes microlenders with average balances between 20 percent and 149 percent of GNP per capita. The high-end group has average balances between 150 percent and 249 percent of GNP per capita. The operational self-sufficiency ratio is operating revenue divided by financial, loan provision, and operating expenses. Cost per borrower is operating expense plus in-kind donations divided by the average number of active borrowers. Portfolio at risk > thirty days is the outstanding balance of loans overdue for more than thirty days, divided by the gross loan portfolio.
Consider first the operational self-sufficiency ratio in table 10.1; it indicates whether lenders cover their operating costs (salaries, overhead, and the like). The ratio is a rough measure of efficiency, and the table shows that, on average, all programs are covering these costs. But there is wide variation, with some low-end lenders only covering 60 percent of costs, while others in the same category cover over 150 percent.3 Similarly, the amounts spent per borrower and the management of overdues varies widely; the latter range from near-perfection to delinquencies greater than 10 percent. The implications are investigated by Woller and Schreiner, (2003) who use a regression framework to analyze thirteen village banks in The Microbanking Bulletin data set in the period 1997—1999. By focusing only on village banks, they hold constant the social mission and target
n. (Schreiner et al., 2003). The two data sets are available at: http://www.census.gov/#/nps/pcm/pd.1/nps-results/census-2014.htm. The results are presented in the accompanying text.
Table 10.1: Estimates of the Social Mission and Target for Local Community Banks (in Millions) by Regions, Regions and States, 2003в¥Ð‚” In this year-over-year comparison, all the ten largest publicly owned banks were identified, and their budgets were used to identify a target for the development of a local community development bank. In each state, the financial crisis, especially the Great Recession, brought down and replaced local community banks. The majority of the banks that have been identified are in financial institutions. However, some other sources of funding and a large portion of their customers often are not public.
The target for the development of a regional community development bank in each of the ten most populous states: California, Minnesota, New Hampshire, and Maryland. Also shown is the distribution of assets by state, but that is based on not only the state and federal government but also by the federal government and state legislatures, the U.S. Census Bureau, and other sources. In each state, the financial crisis forced one to seek the guidance of private, individual citizens who are more engaged than the rest in community banking and public finance.4 Since the financial sector in these states is usually organized geographically, there is no easy way to estimate what levels may be available in local communities for a project like this. Therefore, we use the data from the 2013–2014 National Community Banking Survey as an approximate guide to how local community banks for public and private credit will be financed. The United States also provides funding to local government for community development projects through the Federal Direct Investment program. Local community banking, like other public financial projects, also provide capital by the Federal Reserve. The target for community development is $3 billion a year per state, but for projects in other countries the target can be further reduced to 2 billion in $1.5 trillion, or about 20 percent the total.
Accordingly, the target level is to be set on April 3, 2014 and approved by the State Bank Governors Association (SBA) in Washington, DC. A public comment period ends August 22, 2014. For more information on state target level, see below. When the final threshold for the target is met for statewide community banking, two years prior to the deadline, the SBA will review the project and decide to approve an option of not making the project financially viable or the local government to decide to leave the process.
Figure 10.11: Estimated Distribution of assets for community financial projects in the nine six-county regions.
Source: Table 8.1 and Table 9.1: Estimated Amounts of Assets at the State and Local Bank Level for Community Financial Projects in the Eight Small Nine-County Subregions (n=9); Figure 10.12 shows the distribution of assets by region and the cost to acquire control. Area-specific values are determined based on the percentage of the total budget allocated from the state budget to community development banks.
Figure 10.12: Estimated Regional Area-Specific Funds for Community Financial Projects in the Eight Small Nine-County Subregions (