Practical Challenges of Microfinance Institutions Dilin Lim Master in Advanced Finance candidate December 2009
Completed with direct supervision of: Prof. Eloy Gracia
This research paper discusses the optimal combinations of stable funding and operating efficiency of Microfinance Institutions to reduce interest lending levels to the Micro Entrepreneurs.
PRACTICAL CHALLENGES OF MICROFINANCE INSTITUTIONS
HYPOTHESIS: In all models of microfinance, what are required are optimal combinations of stable funding and operating efficiency. We will examine to what extent the operational aspects of developing an efficient lending structure, transparency, loan follow-up and stable sources of funds contribute to the reduction of interest rates paid by the poor i.e. the client. INTRODUCTION The considerable interest that has been developed in the financial world and academia for the topic of microfinance cannot be underestimated. In fact, one of the most impressive developments in the world of social economic development in the last few years has been the successful explosion and impact of microfinance on society at large. Ever since socio-economic development became institutionalised in the form of the objectives guiding development banking, the elimination of poverty has been proved elusive. However, well known bottom of the pyramid seems to have now found in Microfinance is most effective partner. In this analysis I intend to explore how is that microfinance actually contributes to empower those at the bottom of the pyramid by allowing them to unleash the smaller or greater degree of creativity and entrepreneurship inherent that is in any human being. I intend to look into some of the detail of how the organisations that channel the funds to the micro borrowers operate and how the pecuniary costs and benefits are or not transferred to these. Certainly, there is a wealth of information regarding micro-financing activities in general but it becomes more difficult to obtain information when it comes to analysing a specific institution; generally, information provided in financial statements and websites do not offer the kind of detail that would be necessary to perform a sound financial analysis of the cost benefit relationship. Nonetheless, based on the material available there are some interesting findings and conclusions that can provide a worthwhile analysis. For example, by analysing the Asian versus the Latin American model of microfinance, it can be inferred what drives each and which of the two is more profitable from the purely financial and from the socio-economic point of view. Furthermore, within each of these two general models there are different variations depending on memberships and partnerships. These also have an impact on their cost structure and benefits to be pass-through to their members. In the findings, we list specific situations that address some of these variations but, in general, these are not conclusive. Further analysis will be required with the kind of data that was not available for this work. The conclusion reached is given that the breath of activity in the micro-financing field, there are so many “business” models that is not possible to reach a blanket conclusion as to which is better or worse. They all have their own merits and weaknesses and each has to be evaluated in the context of the groups (including owners) which they serve. Regarding the transfer of pecuniary benefits to the borrowers and beneficiaries they all do receive them, otherwise the industry would not be as successful as it seems to be, but it can be concluded with some certainty that there is plenty of room for additional benefits to be passed-through as a result of more effective cost management practices and application of low cost mass communication technology.
Professor: Eloy Garcia
DILIN LIM - MIAF 2009
PRACTICAL CHALLENGES OF MICROFINANCE INSTITUTIONS RESEARCH & FACTUAL...