MICROBANKING BULLETIN - Microfinance Information Exchange

FEATURE ARTICLESFigure 4: Comparison of the Return on Portfolioacross Lending MethodologiesPortfolioYield(%)InterestSpread(%)Lending MethodologyIndividual 36.5 15.6Solidarity Group 41.2 -4.5Village Banking 54.5 5.4Nine VBIs 70.0 14.9AGAPE 61.6 9.3Compartamos 111.4 48.8FINCA Kyrgyzstan a 107.7 18.8FINCA Nicaragua 75.1 18.3FINCA Uganda 84.4 -1.0CRECER 42.0 5.6Kafo Jiginew (VB product) 32.7 -0.2Pro Mujer Bolivia 39.4 1.6World Relief Honduras 75.3 33.3Source: The MicroBanking Bulletin, September 2000.a1998 figures.Factors Driving Relative Self-sufficiencyamong Our Nine VBIsSome insight into the factors driving the selfsufficiencyof our nine VBIs can be found in Figure5, which lists the nine institutions from the highestto the lowest on financial self-sufficiency and ranksthem on nine performance indicators thought to bedeterminants of financial self-sufficiency.Scanning across the rows in Figure 5, no patternemerges. None of the institutions performeduniformly well or poorly. While somewhere theremight exist a self-sufficient VBI that combines lowcosts, high productivity, and a high return onportfolio, it does not exist among our nine VBIs.Additional insight to this question can be gained byrunning a series of bivariate correlations betweenfinancial self-sufficiency and the same nineindicators. As seen in the bottom row of Figure 5,three indicators have large and statisticallysignificant correlation coefficients with financial selfsufficiency:portfolio yield, interest spread, and thenumber of borrowers. Of course, these are onlysimple correlations and do not imply causation;nonetheless, the strength of the correlations relativeto those of the other indicators suggests arelationship with financial self-sufficiency that isrelatively more robust. The conclusion, based onthis small, handpicked sample, is that for financialself-sufficiency, both the interest rate and scaleappear to matter most.Implications for Best PracticesThe (not surprising) implication for best practices isthat to achieve financial self-sufficiency, VBIsshould charge high interest rates at an “adequate”spread over costs and scale up. More surprisingare the weak correlations between financial selfsufficiencyand the other indicators in Figure 5. Allnine have taken different paths toward selfsufficiency,although each (with the exception ofKafo Jiginew) does appear to have compensatedfor relatively high administrative cost structures bycharging high interest rates.Although interest rate policies appear to have beenintegral to their success, it is necessary to questionthe long-term viability of this strategy. VBIs cancharge high rates because there is an excessdemand for loans. When competition and thesupply of loans increase, the equilibrium marketprice will fall. (It is probably no coincidence that theportfolio yields for Pro Mujer and CRECER areamong the lowest of the nine institutions. Bolivia isone of the more competitive microfinance marketsin the world.) Moreover, consumer preferences andother determinants of market demand change overtime. Therefore, it is probably not wise to base aninstitution’s long-term viability on the assumptionthat it can indefinitely charge monopolistic-typeinterest rates—although it is perhaps an effectivestrategy in the short to medium term.This returns us to consideration of other factorswhen discussing best practices, particularly that ofinstitutional efficiency. Despite the low correlationsof efficiency variables with financial self-sufficiencyamong our nine VBIs, policies and innovations(such as increased use of information systems andother technology) that drive down costs, increaseproductivity, and enhance the attractiveness ofproducts and services will be more important thaninterest rates over the long-run in determining aVBI’s financial viability. If the history of thecommercial banking industry is any indication, VBIshave barely scratched the surface in these areas.Improvements in efficiency will also free VBIs tocharge lower interest rates and still maintain anappropriate spread over costs (as the ILIs appear tohave done).This last point is especially important for povertylenders concerned about both depth and breadth ofoutreach. Charging very high interest rates mayreduce the demand for loans among the very poorwhose enterprises do not yield a rate of returnexceeding the interest rate (although perhaps stillyielding a moderate to high rate of return) andamong those segments of the low-income selfemployedwho have lower-cost borrowingalternatives. Once freed to charge lower interestrates, VBIs can reach downward, outward, andupward to all segments of their target markets.MICROBANKING BULLETIN, SEPTEMBER 2000 7