Sa-Dhan Newsletter Volume 5 Issue 1

Operational Costs of Delivering MicroFinance

Basics of Costs in Microfinance Operations

-Dr Sankar Datta explains the costs that all

Micro-Finance institutions have to account for

W

Table I below provides an example one of the mF agencies.

hat are Costs?

Table 1

The Oxford English Dictionary defines cost as 'the payment

Income and Expenditure for the year ended

of (a specified sum of money) required before something can

March 31st 2002

be acquired or done'. To do anything we use some resources,

Sl. # Particulars

Amount

some efforts and some material. These are costs, whether

Income

paid in cash or not.

1.

Interest received from banks

68,165

2.

Sale of pass books to members

2,447

Even in microfinance programmes there are some costs of

3.

Service charges on loan to members

601,252

making the finance available to the poor wo/man. For

4.

Miscellaneous income

1,368

example: if the cash has to be delivered to the village, there

Total Income

673,232

will be the cost of the person who carries the money from

Expenditure

a nearby bank to the village. There will also be some cost

1.

Interest paid to Grameen Trust

23,236

involved in his/her travel from the office to the bank, and then

2.

Interest on Group Fund savings

4,399

to the village. These are all costs involved in making the

3.

Interest on loans from banks

198,249

money available to the poor wo/man. But, are these the only

4.

Salaries

546,544

costs? In all probability, they are not. Therefore, it is

5.

Staff welfare expenses & Provident Fund

261,855

necessary to explore what are the various elements of costs

6.

Travelling Expenses

25,572

-- direct and indirect.

7

Training and workshop expenses

128,143

8.

Rent, postage and other overheads

129,152

In a micro-finance institution (MFI) there are three kinds of

9.

Bank charges

5,804

costs that are of concern:

10.

Loan loss provision

37,500

Financial Cost

11.

Depreciation

89,251

q

Operating Cost

Total Expenditure

1,449,705

q

Cost of Loan Losses

Excess of Income over expenditure

(776,473)

q

What were the financial costs of this agency? The total

Financial Cost The material that an MFI delivers to the poor

financial cost of the institution was Rs 225,884 (being Rs

wo/men is money. And there is a cost attached to it. For eg.,

23,236 + Rs 4,399 + Rs 198,249), which comprised interest

if you were delivering food grains to a village there would be

paid to Grameen Trust, commercial bank and SIDBI as well

a price at which the grains would have been purchased. That

as to the groups, on the group savings fund held by the

would have constituted the cost of the material delivered to

agency. It did not include bank charges, which was not cost

the people. Similarly, when money is being delivered at the

of the Money but was the cost of transferring the money from

village, there is a 'price' of getting that money. Usually, this

one place to another or, in other words, cost of operating the

is called interest. In the development world other words, such

money.

as service charges, are also often used to indicate the cost

Therefore, this is a part of the operating cost of the MFI under

that one will have to incur to get the money.

scrutiny.

Operating Cost What are operating costs? Operating costs are

This cost is the financial cost of a microfinance operation.

those that are incurred for carrying out the operations of any

given activity. For example, in the food grain example,

There are often costs involved in handling this finance. These

operating cost would involve cost of storing the food grain,

include bank charges and commission paid. But, these are

transporting it and so on. Similarly, there are some costs of

not part of financial cost.

micro-finance operations as well, bank charges being one of

them.

There could be several parts to the financial cost. For eg., the

What are the other costs of operations? There are some that

MF agency could have borrowed funds from a financial

are easy to identify. For example, in Table 1 above, salaries,

institution such as NABARD, SIDBI, or a commercial bank.

staff welfare expenses and provident fund, travelling expenses,

They would have to pay an interest on this borrowing. In

training and workshop expenses, rent, postage and other

overheads are some of the operating expenses, adding up to

addition, they may also have to pay an interest, by whatever

Rs 1,097,070 only, including the bank charges of Rs 5,804

name it may be called, on the deposits or savings that the

only.

members have kept with the MFI. All these would constitute

financial cost for the MFI.

But all operating costs are not incurred at the time of

undertaking the operation. For example, if we have purchased

2