Poverty and Business – the case of microfinance SESSION 8 Organizational perspectives: Models of microfinance

Poverty and Business – the case of microfinanceSESSION 8Organizational perspectives: Models of microfinance Lone Søndergaard and Ole Dahl Rasmussen Poverty and Business - the case of microfinance. Copenhagen University

Agenda • Before we start: Microfinance news • Organizational perspectives • Organizational typologies • Organizational publicness as typology • Consequences to performance: Statistics • Three case studies from Benin • Jonas Nøddekjær, DanChurchAid: Cambodian experiences. Poverty and Business - the case of microfinance. Copenhagen University

Before we start: Microfinance news mixmarket.org • Data on 1000 microfinance institutions • Financial • Social • Comparable • Data on microfinance investors • Market news Poverty and Business - the case of microfinance. Copenhagen University

Poverty and Business - the case of microfinance. Copenhagen University

Organizational perspectives: Models of microfinance Poverty and Business - the case of microfinance. Copenhagen University

Why organizations? General secretary of DCA, Henrik Stubkjær: “Let’s do a concept paper for Danida on how we can best spend 10m DKK (2m USD) on microfinance.” DCA should not do microfinance itself  We need to partner with other organizations. • What organizations? • What different organizations delivers microfinance? • What are the advantages and challenges of the different types? • How can we fulfill ”The microfinance promise”? Poverty and Business - the case of microfinance. Copenhagen University

What counts as a microfinance institution? • Does the legal status matter? • Some (Ouattara): Legal status does not matter. Informal intermediaries count. • Others (Woller 2002): Only NGOs should count. • This session: Formally recognized organizations. • Should provide financial services targeted the poorest. Poverty and Business - the case of microfinance. Copenhagen University

Typologies of microfinance institutions Different typologies • Contractual rationalistss typology • Individual based lenders • Solidarity group lenders • Village banks • Blueprint typolgy • Grameen bank-type • FINCA-model • SKS-model • Woller’s typology (Woller, Dunford et. al 1999: Where to microfinance and Woller: The promise and perils of commercialization) • Welfarists (emphasize poverty redution) • Institutionists (emphasize sustainability) Poverty and Business - the case of microfinance. Copenhagen University

2-by-2 discussion • What unit/level/characteristic is used in creating a specific typology? (What is the unit of analysis?) • For those who have read Pankaj Jain: How do organizations matter? • For those who have read Von Piscke: What’s his unit of analysis? Poverty and Business - the case of microfinance. Copenhagen University

The publicness typology Definition of publicness • Who has formal authority over an organization? • Types of formal authority (Bozeman 1987) • Political authority: Based on a public with equal power. • Economic auhotirty: Based on wealth. Tradeable, transferrable. Poverty and Business - the case of microfinance. Copenhagen University

The publicness typology (cont’d) Publicness is… • …a continuum: All organizations are public, but some are more public than others. • …a formal characteristic: Formal authority matters, not values. (vs. e.g. Antonsen, Marianne and Torben Beck Jørgensen (1997), "The "Publicness" of Public Organizations" ) Poverty and Business - the case of microfinance. Copenhagen University

The publicness typology (cont’d) Ownership and funding are typical sources or channels of authority (Wamsley and Zald 1973). Poverty and Business - the case of microfinance. Copenhagen University

Publicness in microfinance • Commercial MFIs • Non-profit MFIs • Member-based MFIs More public Compare to von Pischke, J. D. (2007), "Methodensteit and sustainability in microfinance:” Poverty and Business - the case of microfinance. Copenhagen University

Research question How does organizational publicness matter to the performance of microfinance institutions with respect to the social goal of making microfinance work for the poor and to the financial goal of reaching sustainability? • Describe: Does organizational publicness matter to the performance of microfinance institutions? • Explain: How does publicness affect the performance of microfinance institutions? • Understand: What are the causal mechanisms driving the connection between publicness and performance? Poverty and Business - the case of microfinance. Copenhagen University

1. Does publicness matter? Hypotheses: • No. • All organiations are equal • Yes. • More public microfinance institutions are different (on key parameters) from less public institutions Generic vs. core approaches by Scott and Falcone (1998). Poverty and Business - the case of microfinance. Copenhagen University

2. How does publicness matter? Hypotheses: • Public organizations are less efficient • More public microfinance institutions have lower financial performance than less public ones. • Public organizations are more socially oriented • More public microfinance institutions have a better social performance. (3. Causal mechnisms - will have to wait) Poverty and Business - the case of microfinance. Copenhagen University

Measuring performance Poverty and Business - the case of microfinance. Copenhagen University

Data Poverty and Business - the case of microfinance. Copenhagen University

Results: Financial performance P=0.66 Poverty and Business - the case of microfinance. Copenhagen University

Results: Av. loan balance P=0.001 Poverty and Business - the case of microfinance. Copenhagen University

Results: Savings balance P=0.19 Poverty and Business - the case of microfinance. Copenhagen University

Does publicness matter? • No. • All organiations are equal • Yes. • More public microfinance institutions are different (on key parameters) from less public institutions ÷ √ Poverty and Business - the case of microfinance. Copenhagen University

How does publicness matter Hypotheses: • Public organizations are less efficient • More public microfinance institutions have lower financial performance than less public ones. • Public organizations are more socially oriented • More public microfinance institutions have a better social performance. ÷ √ Poverty and Business - the case of microfinance. Copenhagen University

Prelimenary conclusion Public is not (necessarily) bad – not financially, not socially. Poverty and Business - the case of microfinance. Copenhagen University

Other sources After looking at ten cases: ”Contrary to the Ohio School, state sponsorship as such has neither a positive nor a negative role in determining financial success: many of the most successful schemes, including all the Indonesian ones, are state-sponsored…” (Hulme and Mosley I, p. 55)  Financially sustainable institutions have: Positive interest rate, intensive loan collection, voluntary savings, repayment incentives Poverty and Business - the case of microfinance. Copenhagen University

3. Causal mechanisms Understand: What are the causal mechanisms driving the connection between publicness and performance? Poverty and Business - the case of microfinance. Copenhagen University

Case studies Poverty and Business - the case of microfinance. Copenhagen University

Cases Poverty and Business - the case of microfinance. Copenhagen University

Commercial MFI: COMFI Directrice: One great difficulty is that because of our status as private, we are taxed at 100% [of our revenues]. In opposition to all our competitors, either the member based or associations, who are for the most part exempted from paying tax. Poverty and Business - the case of microfinance. Copenhagen University

Commercial MFI: COMFI Directrice: In the beginning, there was too little investment in our information system...the procedures and the like, and thus we have to deal with that now. Because COMBANK wanted to demonstrate that it can be done differently, and that in fact you can see the limits of this approach. Poverty and Business - the case of microfinance. Copenhagen University

Non-profit MFI: PADME Financial Director: The minister, he says: Listen, Mr. Director General, you can help me. I have a member of my village... Interviewer: And what do you say? Financial Director : The DG says: Ah! OK. We shall investigate, we shall investigate the files...and then he goes looking...and then today, then what? The DG does not have the right to say to the credit agents: Give them those credits. It is the agents themselves who are responsible for the credit. Poverty and Business - the case of microfinance. Copenhagen University

Non-profit MFI: PADME Financial Director: It's the folks who know our director. There are many officials in Freedom (From Hunger), who have already made interventions with PADME. They have been here to work for the World Bank, while PADME has benefited from support from the World Bank. They have much experience with PADME. And our director here is well known in the microfinance sector. Poverty and Business - the case of microfinance. Copenhagen University

Non-profit MFI: PADME Financial Director, on donors and donor funding: They do give us funds, that's true, but sometimes it seems as if they are writing the law for us. They impose things on us, right. You have to - it's that or nothing. You have to give me a report every month, you have to do this, you have to intervene...thus, it's a little...a little too much...it's a little rigid, right? (Financial Manager at PADME: 73124-73948). Poverty and Business - the case of microfinance. Copenhagen University

Non-profit MFI: PADME Financial director: We tell ourselves that with our level of activity, it is necessary to have a structure that will allow us to go ourselves and raise funds. An association cannot register in the capital market, go and raise funds. You need to have the classic structures. Poverty and Business - the case of microfinance. Copenhagen University

Member based: FECECAM USAID programme officer: Everybody knows why FECECAM is practically bankrupt. Everybody knows, because the big problem at FECECAM [is] at the level of governance. Because the members are also the beneficiaries. That means...the members have to make decisions, they are members of the board of directors. It's the farmers, it's the producers. Thus, it's the same producers that decide who gets a loan. Poverty and Business - the case of microfinance. Copenhagen University

Member based: FECECAM Manager:Financing agriculture is very risky because you cannot control the rain. In Benin, you can finance a farmer and if the rain does not come and everything is spoiled, how should he find the money to pay you back? Poverty and Business - the case of microfinance. Copenhagen University

Publicness - conculsions • Advantages of publicness: • Access to early investments and funding • Access to technical assistance • Strong social goal • Disadvantages • Unclear governance structure • Difficulties in finding early investors • Social performance can be difficult Poverty and Business - the case of microfinance. Copenhagen University

Poverty and Business – the case of microfinance SESSION 8 Organizational perspectives: Models of microfinance