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Managing Microfinance

Managing Microfinance. Lecture 12 Week 7. In this lecture we will:. 1) Start with an example on management failures 2) Look at microfinace through the lens of principal agent theory 3) Explain the profitability versus poverty alleviation dilemma

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Managing Microfinance

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  1. Managing Microfinance Lecture 12 Week 7

  2. In this lecture we will: 1) Start with an example on management failures 2) Look at microfinace through the lens of principal agent theory 3) Explain the profitability versus poverty alleviation dilemma 4) Spell out incentives for managers and staff to perform well without undermining social objectives?

  3. Example on Management Failures Corposol • An affiliate of ACCION Internacional based in Bogotá, Colombia • Corposol offered great promise in 1988 but went bankrupt in 1996 • Why?

  4. Corposol’s growth strategy • First, managers rewarded on the basis of number of clients  quantity matter more than quality • Second, managers rewarded on the basis of number of financial products  costs increased • Third, managers rewarded on the basis of loan volumes  further deterioration of portfolio quality  bankruptcy

  5. Microfinance through the lens of principal – agent theory Problem: how can the “principal” (top managers) induce managerial incentives to the agents (loan officers) Dates back to Alfred Marshall writings on sharecropping, and more recently to James Mirrlees (1974) & many other economists in different contexts Main problem: How to have the principal write a contract that would elicit maximum unobservable effort by the agents? → Problem: Trade off between risk and incentives!!! Problem exacerbated when top management has a dual objective: Poverty alleviation on the one hand and profitability on the other

  6. Objectives often conflict: The case of Bancosol (Mosley 1996)

  7. With poorer households, reliance on incentives decline as household become less poor, but “high-powered” incentives increase as microfinance institutions move to better off households

  8. Two observations First. Consider again the case of Corposol • Monetary rewards to managers and loan officers for increasing number of (poor) borrowers Vs • Monetary rewards to managers and loan officers for increasing loan amounts per borrower • Deterioration of the loan portfolio • Larger loans to less poor individuals not a good strategy

  9. Second. Consider the link between average loan size and gender • Poor generally request low average loan sizes • Poor clients also seem to be better clients • Poor clients are also women → should loan officers be rewarded on the basis of tiny loans to women clients?

  10. - Cultural Implications: Lessons from PRODEM (Bolivia) • - Incentives in teams • Combining Incentives: Lessons from BRI • Avoiding Myopia • Discouraging deception • Unbundling tasks: ASA & PROGRESA (Oportunidades) • Ownership: Commercialization versus Recovery •  Next Class: Case Studies (Consult Site For First Case Study: The Grameen Bank)

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