Organizational Culture of MFIs Impacts & Influences

1. Organizational Culture of MFIs Impacts & Influences Saleh Khan European Microfinance Week 2011 October 2011, Luxembourg

2. Introduction • This is a work in progress, hopefully leading to a paper by Dr. ArvindAshta and myself • Draws upon our current work on “Cost Control in MFIs” – forthcoming in (the Journal of) Cost Management – a paper that evaluates the business case for lean operations management in MFIs • We intend to use this discussion forum to generate ideas, map operational knowledge and identify future collaborations

3. Defining Organizational Culture • “The way we do things around here” – Deal & Kennedy1 • “A belief system shared by an organization’s members” – Spender2 • “Corporate culture is the glue, if you will, that holds an organization together” – Mitchell3

4. And how this affects operations ... • Management philosophies and organizational culture can define how a Microfinance Institution (MFI) manages its business operations and strategic plans • From taking a patient approach to investments with a higher risk appetite (as demonstrated by donor or government driven MFIs) to strict risk management and operational practices (as required by commercial investors) these dictate the path followed by a MFI to sustainability • It also defines the ‘nature’ and ‘flavour’ of the institution, from Spartan offices like those of Grameen Bank or ASA to large Microfinance Banks in Nigeria often called ‘micro-commercial banks4’ • An examination of these culture and grouping them should improve our understanding of MFIs and their likely evolutionary path

5. Dominant Culture Types Impact Investing Social Businesses Triple Bottom line

6. Mapping Microfinance ‘Sub-Cultures’ The Double / Triple Bottom Line Zone “Lets do good” Social Businesses “local” MFIs Development Solutions Comprehensive Presence Scale / Outreach Social Motivation Technology Lean Management Price Skimming CSR Profit Orientation

7. The “Social Motive” Sub-Culture • Usually inspired by a “do good to people” philosophy and most institution sare structured as not-for-profit NGOs • Social motive seems to be the driving force for the majority of MFIs, looking at the institutional type for MFIs globally • They might be gigantic in size (as in Grameen Bank), but, most often are small scale MFIs that are focused within specific sub-regions of a country • Have broader development objectives beyond just providing microcredit or microsavings services • Microfinance is may be just one of the services offered by them – others being healthcare, education, etc. • Most MFIs are NGOs by charter type • But most clients belong to for profit institutions • Made famous by Grameen Bank • Mostly small MFIs (Tier 3 and Tier 2) • BRAC (for their holistic approach to development) • “Slow money” and “patient capital” movements Outer Circle: Number of Active Borrowers Inner Circle: MFI count Data Source: Mix Market for 2010

8. Scale and Outreach Sub-Culture Total Number of Active Borrowers by Region • Driven by the need to reach out to as many people as possible – due to various motivations • Could be to widen financial inclusion (BRI), to generate economies of scale (ASA), or simple to establish market dominance • Could be part of the government’s plan to expand access to finance and could be part of development assistance • Scale and outreach certainly depends on external factors, including population density and poverty rate • BRI (Indonesia) • VBSP (Vietnam) • Top 3 Bangladeshi MFIs (Grameen / BRAC / ASA) • Indian MFIs (SKS, Spandana) Data Source: Mix Market for 2010

9. Social Business – a ‘new’ Sub-Culture? • People, planet, profit • Double and Triple Bottom line seekers • Made famous by Dr. Yunus’ call for social businesses and his work in this field • Impact investing seeks to follow this model - most MF funds and MIVs are modelled along these lines • But, is this a new concept? Or are all MFIs, by pure definition of working with poor people and seeking to be sustainable, social businesses? • Grameen Bank initiatives – for example: Grameen Danone is a joint venture between four Grameen companies; Grameen Byabosa Bikash, Grameen Kalyan, Grameen Shakti and Grameen Telecom -- and Groupe Danone5 • Microfinance fund, such as BlueOrchard – a commercial microfinance investment company that invests in MFIs and seeks profitable return to its investors6

10. Operational Efficiency Sub-Cultures • Most sustainable MFIs seek to be ‘operationally efficient’ in order to reduce cost – could be a function of the outreach, by exploiting economies of scale, or by using technology to reduce costs • Some MFIs, however, make it their driving purpose / institutional philosophy to be the most cost efficient – such as ASA and it’s worldwide entities • The goal is to reach the maximum amount of people with the minimal cost • Could be a function of macro-environment (cost of doing business, population densities, etc.) • Largest MFIs • ASA in Bangladesh, most of its entities globally • Indian MFIs (Bandhan / Sarala / SKS) Data Source: Mix Market for 2010

11. Total expense/ assets (weighted average) – NG & BD • As an example we look at how operational culture plays a role in cost efficiency for Nigerian MFIs • Although cost of operations is higher in Nigeria than Bangladesh (used as a benchmark from South Asia), there are marked difference between for-profit and not-for-profit institutions • Operational philosophy plays a large role in cost acceptance / cost tolerance of an MFI – could be blamed on management apathy towards costs Data Source: Mix Market

12. Profit Making Sub-Culture • Driven by RoA and on providing a return to shareholders • Often criticized for being in the microfinance space • Some examples have been the recent IPOs in the sector • Could be dictated by external market conditions such as ‘acceptable’ margins in the country and the lending rates • Price skimming and price competition are examples of tactics employed • Recent examples are Compartamos – which came under criticism for its IPO • And SKS in India which also came under criticism for similar reasons • The debate remain on how much profit is ‘too much’? And should MFIs be allowed to generate surplus over a certain size? Should they distribute this? • Is there a space for commercial investors to be in, and a case for ‘commercial microfinance’? • But, perhaps this is a regional phenomenon?

13. Yield on GLP • Using Yield on Gross Loan Portfolio as a proxy of profitability, we see that there are wide regional variances • Africa, Latin America and MENA seems to command the highest Yield • South Asia being the lowest – perhaps because of intense competition and a mature market? Data Source: Mix Market for 2010

14. Next Steps for Us • Classify these and perhaps expand the classifications to include more organizational culture types • Get case studies and highlight practices for each

15. Bibliography • Deal, T.E & Kennedy, A.A. 1982. Corporate Cultures: The Rites and Rituals of corporate Life. Reading MA: Addison-Wesley. • Spender, J.C. 1983. Myths, Recipes, and Knowledge-bases in Organizational Analysis. Unpublished manuscript, Graduate School of Management, University of California at Lost Angeles. • Mitchell, C. 2000. A Short Course in International Business Culture. California, USA. World Trade Press. • Mr. Femi Fabamwo, Director , Central Bank of Nigeria,quoted by Abayomi, A., 2011. Why 103 MFBs Failed - CBN. [Online] Vanguard Nigeria Available at: http://www.vanguardngr.com/2011/01/why-103-mfbs-failed-%E2%80%94-cbn/ [Accessed 31 October 2011] • Source: http://www.socialenterpriseportal.org/files/Library/BSEP_Bangladesh_Case_Studies.pdf • Source: BlueOrchard’s website at http://www.blueorchard.com/jahia/Jahia

16. What MFIs say about themselves • OXUS(for-profit): Bottom-up/decentralized ; Efficiency-oriented; Committed • ADIE (not-for-profit): engagement, initiative, sérieux, respect, confiance (trust). How can we interpret it ? • Elements of profit orientation…or for-profit culture • OXUS: Efficiency oriented • Elements of social orientation (to poor) or a culture to think of the poor • OXUS: Committed • ADIE :  engagement, respect, confiance (trust). • Element of internal social orientation (to employees) or a culture of internal working • OXUS : Bottom-up/decentralized • ADIE:  Initiative, Serious