Sa-Dhan Newsletter Volume 5 Issue 1

Operational Costs of Delivering MicroFinance

distances from the branch (which is generally the case)

its urban locations, given that any other option that the

would mean that the officers cannot possibly visit more than

client may have, would be much more expensive.

a certain number of meetings each day. There is also a

high level of credit monitoring, again contributing to costs.

c)

Target Clientele

Economies of scale do come into play but only when the

MFI can get to a certain level of `borrowers per branch'

The cost structure of the MFI would vary according to which

to cover their costs.

section of the poor the MFI undertakes to serve. MFIs

reaching parts of the bottom quartile in the population (the

The Individual Lending model:

very poor) would obviously incur higher costs than an MFI

that serves the second and third quartiles. The relationship

between the level of poor that are served and operational

There are MFIs in India that undertake individual lending,

self-sufficiency is mostly inverse. The lower down the ladder

but the number would perhaps be smaller compared to the

you go, the more it will cost you to serve that section of

SHG and Grameen MFIs. The prime example for individual

the population. There are MFIs that seem to be able to do

lending would be Cooperatives (individual loans are given

both, i.e. reaching the poor and being self-sufficient at the

to members) or MFIs like BASIX. Cooperatives in India at

same time, but this can be attributed to their pricing, which

the moment either function under the mutually-aided co-

would be high enough to recover all costs. MFIs therefore

operative law pioneered by the state of Andhra Pradesh and

have to make the decision about exactly which segment

adopted by a few other states, or under the traditional

they wish to serve. Outreach comes at a cost and while

cooperative law.

it is a cost the MFI may be willing to incur, it is also an

aspect to be fully conscious of, given the rather significant

Operating costs with respect to individual lending would

need to be sustainable.

be higher for the MFI than for the client. Individual lending

involves fewer clients per credit officer and MFIs that lend

The MBB categorises MFIs by target clientele as `low-end',

to clients at their doorstep (thus obviating the need for

`broad', `high-end' and `small business'. The ratio of

clients to travel to and from the branch office) naturally

operating expenses over loan portfolio in the MBB for

incur high operating costs. But the costs when compared

financially self-sufficient MFIs shows that MFIs that reach

to the SHG and Grameen models are still relatively lower.

low-end clients seem to be the highest cost providers, with

Especially since in most cases, although loans are made

a ratio of 27.73% compared to only 8.9% for the MFIs

to individuals, the borrowers are organised into groups (for

that cater to small businesses.

example Joint Liability Groups). This system makes the loan

more accessible for the client, involving minimum time and

effort on his/her part. It is thus a cheap and efficient option

d)

Rate of Growth

for the client and is also probably more transparent.

The annual rate of growth is another factor that tells on

However, the risk level of the portfolio shoots up in this

an MFI's operating costs. Expanding into newer (especially

form of lending. Also, if loan officers are to be adequately

rural) locations, setting up new branches and tapping new

incentivised, which is mostly the case in successful

markets requires substantial investment. It also takes time

programmes, in order for them to maintain/improve their

for branch offices to function at full capacity and break even.

portfolio quality, it will invariably translate into higher

For instance the lists of top five Latin American MFIs at

operating costs for the institution.

the end of 2001 both in terms of `Portfolio Growth' and

`Efficiency' do not have a single institution in common. So

Operating Expense as

as a rule, the fastest growing MFIs will very rarely show

Percentage of Loan Portfolio (by methodology)

up as being the most efficient in terms of operating costs.

MBB # 9, July 2003

Economies of scale are to be expected and generally, the

Individual

17.0

larger your portfolio size, the lower your operating cost

ratio. But economies of scale obviously do not apply when

Solidarity Groups

24.6

the expansion is into completely new locations, especially

Village Banking

41.6

backward locations where there is an almost total lack of

infrastructure.

b)

Rural vs Urban Lending

The Top Five Latin American MFIs in 2001

Yet another factor that could influence operating costs is

Rate of Growth

the geographical environment within which the MFI func-

tions. Urban MFIs tend to incur lower costs compared to

Name of the MFI

Portfolio Growth

their rural counterparts, the primary reason for this being

Comparatamos (Mexico)

146%

the high population density. Delivering financial services to

the urban poor will not entail the kind of costs that a rural

Confianza (Peru)

80%

MFI would incur, given that the latter's staff would have

Edyficar (Peru))

72%

to cover many more miles to reach the same number of

clients. Also with MF being more prevalent in rural areas

F.J.Nieborowski (Nicaragua;)

54%

and perhaps not so commonly found in urban locations,

WWB Bucaramanga (Colombia)

52%

it is possible for the MFI to go in for higher pricing in

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