an analysis of grameen bank and asa

Efficiency and Sustainability of Formal and Quasi-formal Microfinance Programmes—AnAnalysis of Grameen Bank and ASAAuthor(s): M. A. Baqui Khalily, Mahmood Osman Imam and Salahuddin Ahmed KhanReviewed work(s):Source: The Bangladesh Development Studies, Vol. 26, No. 2/3, MICROFINANCE ANDDEVELOPMENT: EMERGING ISSUES (June-Sept. 2000), pp. 103-146Published by: Bangladesh Institute of Development StudiesStable URL: http://www.jstor.org/stable/40795614 .Accessed: 22/05/2012 21:59

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

Bangladesh Institute of Development Studies is collaborating with JSTOR to digitize, preserve and extendaccess to The Bangladesh Development Studies.

http://www.jstor.org

http://www.jstor.org/action/showPublisher?publisherCode=bids

http://www.jstor.org/stable/40795614?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp

The Bangladesh Development Studies Vol. XXVI, June-Sept. 2000. Nos. 2 & 3

Efficiency and Sustainability of Formal and Quasi-formal Microfinance Programmes- An

Analysis of Grameen Bank and ASA by

M. A. Baqui Khauly Mahmood Osman Imam

Salahuddin Ahmed Khan*

The Bangladesh microcredit market comprises of formal and quasi-formal microfinance institutions. The present paper examines and evaluates efficiency and sustainability of two microfinance programmes - formal and quasi-formal. Grameen Bank is formal and ASA is quasi-formal in nature, status and programme. The Efficiency and Subsidy Intensity Index (ESII), as developed by the authors, was used to examine the sustainability and efficiency of the two programmes. The analysis shows that both Grameen Bank and ASA have been operating with high degree of cost and financial efficiency. ASA being a quasi-formal organization is more cost-effective and sustainable than Grameen Bank, a formal organization. This is attributed to low salary base and high lending interest rate. GB is relatively costly because of higher salary, based on national pay scale, and relatively low lending interest rate. If ASA had to operate with the average salary of Grameen, given the present level of operation, it would be very worse-off. This was evident from a simulation of increase in wage rate. In contrary, Grameen Bank would be much better-off at a low salary base of ASA. During the period 1993-97, the degree of ESII has declined for both GB and ASA. The positive subsidy intensity of ASA is contrary to the traditional belief that it is a self-sufficient organization with no subsidy dependency. Consequently, social costs are associated with these two programmes. Grameen Bank will be able to reduce social cost and improve sustainability by improving cost efficiency, increasing loan size and lending interest rate, and changing portfolio mix without incurring any operating cost. Grameen Bank is close to achieving sustainability after its fifteen years of experience. Similarly ASA has attained higher degree of sustainability within seven years of its microcredit

M.A. Baqui Khalily is Professor and Mahmood Osman Imam and Salahuddin Ahmed Khan are Associate Professors in the Department of Finance and Banking, University of Dhaka, Bangladesh. The authors thank Professor M. Yunus, Mr. Shafiqul H. Chowdhury, Dr. Shahidur R. Khandker, Dr. Mark Schreiner and an anonymous reviewer for useful comments made on the earlier versions of the paper.

104 The Bangladesh Development Studies

operation. This implies that it takes longer time for a formal organization like Grameen Bank to be sustainable than quasi-formal organizations like ASA. However, some proxy measures suggest positive net social gains of both the programmes. The findings have implications for developing microcredit market and designing regulatory framework for MFIs in Bangladesh.

I. INTRODUCTION

There has been an upsurge of interest in the sustainability of Microfinance Programmes1 (MFPs) designed under the supply- leading finance strategy. This interest has, perhaps, cropped up partly because of high social costs associated with the continuation of the programme, and partly because of the interest in transforming programmes into financially viable ones. The programmes have been designed for the poor households, who do not have any access to credit in formal financial markets. They vary in structure and nature. Generally these programmes are subsidized. Quite a significant number of research studies have been conducted on the impact of microfinance at the household level (for example, Khandker and Rahman 1996; Khandker and Chowdhury 1996; Khandker 1998). The studies provide positive impact of microfinance on household income, consumption, employment, and nutrition. The euphoria over the success of microfinance programmes in reducing poverty level has been to some extent under-shadowed by the fact that these programmes involve a social cost and are financially unsustainable, in most cases. It has led to the emergence of questions like "when will the programme be sustainable" or "can these programmes be sustainable at all". These questions are quite legitimate.

People often argue that microfinance is a social good because access to credit is a human right, and credit is a necessary condition for economic upliftment of the deficit poor households. Therefore, sustainability should not be perceived as an objective. But it should be recognized that (a) poor households do not receive any subsidy; (b) micro lending interest rate is higher than bank interest rate and (c) microfinance programmes or institutions are part of rural financial markets. However, an unsustainable and subsidized institution is bound to create inefficiency and distortions in Rural Financial Markets (RFMs). Resources even in the world of microfinance are likely to be inefficiently allocated. Khalily and Imam showed that the relatively more donor funded institutions have high expense preference than do

^The word "programme" is used synonymously with the word "institution" as we consider only those microfinance institutions that are providing microfinancial services.

Khalily, Imam & Khan : Sustainability of Microfinance Programmes 105

the less donor-funded programmes. For example, small NGOs with no or little donor funds have less expense preference behaviour than the programmes or institutions like Grameen Bank and BRAC. This implies that cheap funds drive overhead cost up. Hence, an analysis of sustainability of MFIs is necessary to derive necessary policy implications for sound development of micro financial market as well as RFMs.

In the past, the issue of sustainability has been studied in a piecemeal way with little or no focus on the process of developing Microcredit Market (MCM). Should the market and MFIs be formal in nature? Should the institutions be regulated? These questions have to be linked-up with the issue of sustainability. In Bangladesh, these questions are important, as the MFIs are different in nature, status and programme. More than 1000 microfinance organizations have been providing both financial and social development services. In terms of formal structure, Grameen Bank is the only MFI registered under special ordinance, not under the Societies Registration Act. It provides all financial benefits to its employees as per government rules. Salary is determined by national pay scale. The other organizations are generally quasi-formal2 in nature and structure. Average salary, in most cases, is much lower than that of GB. As such, the formal MFIs are likely to be costlier than the quasi-formal MFIs. Therefore, it is likely to take relatively long time for the former MFIs to become sustainable. From the perspective of sustainability of MFIs, should the microfinancial market be quasi-formal? The basic objective of the paper is to examine the issue of sustainability and efficiency in relation to the development of microcredit market in Bangladesh.

Two major Microfinance Institutions (MFI) namely Grameen Bank and ASA have been selected to determine and analyze the issue of efficiency and sustainability of microfinance programmes in Bangladesh. There are several rationales in selecting these two programmes. First, Grameen Bank and ASA are microfinance institutions as they only provide financial services to their mobilized

^ Quasi-formal organizations are formal in structure but not regulated and monitored. Moreover, these orginizations do not have any ownership. As such, from the commercial objective perspective, they are not registered under any Companies Act or any ordinance. In contrary, formal organizations are formal in structure, monitoring and supervision. Furthermore, there are presence of ownership and stakeholders in governance. In Bangladesh, ASA and similar other organizations are quasi-formal, as they are registered under the Societies Registration Act and do not have any legal entity to operate as financial institutions. Grameen Bank is the only MFI that is registered under special ordinance.


target households. Second, GB is a formal and ASA is a quasi-formal. Third, social development and human resource development are not the critical part of these two programmes contrary to what is found in programmes like BRAC and PROSHIKA. Fourth, though more than 1000 small MFIs provide financial services, the coverage of Grameen Bank and ASA are more than 70 per cent. Finally, Grameen Bank and ASA are different in terms of programme design, coverage, financial efficiency and financial structure.

ASA, being a quasi-formal organization, is apparently recognized as cost-effective and sustainable programme (e.g. Jain 1999; Rutherford 1995). On the other hand, studies (e.g. Khandker, Khalily and Khan 1995; Yaron 1992) in the past have shown that Grameen Bank, a formal organization, is yet to be financially and economically sustainable despite its more than fifteen years of operating experience. These two MFIs are apparently different in terms of organizational and financial characteristics. Often it is argued that cost-effectiveness of ASA is largely attributed to low average salary and quasi-formal nature of operation. Is ASA really cost effective and self-sufficient? On the other hand, GB has been operating for fifteen years. How far has it been on the path of sustainability? Is it cost-effective? An analysis of the sustainability of ASA and GB will enable us to derive implications for developing microcredit market in Bangladesh.

The rest of the paper is designed as follows. Section II focuses on research methods. This section includes the concept and measurement of sustainability and social cost of microfinance programmes. Section III provides a brief discussion of the two major microfinance programmes - Grameen Bank and ASA. Structure and pattern of subsidy in ASA and Grameen Bank are discussed in Section IV. Section V contains an analysis of efficiency and sustainability of GB and ASA. Social costs of Grameen Bank and ASA are discussed in Section VI. Section VII contains sensitivity analysis for improving sustainability and efficiency. The linkage of sustainability to microcredit market development is presented in Section VIII. Finally, analysis of the findings and policy implications are derived in Section IX.

II. RESEARCH METHODS

Concept of Sustainability and Social Cost of MFP

Sustainability of credit programmes refers to both financial and economic sustainability of the programmes. Profitability analysis has been regarded as a popular and traditional approach to understand


financial sustainability. In addition, traditionally professionals have used cost and/or profit functions to estimate efficiency as an indicator of performance of financial institutions (Benston 1972; Lau 1972; Srinivasan 1988; Khalily 1991; Khalily, Meyer, Hushak 1987; Cuevas 1994; Khandker, Khalily and Khan 1995; Mullineaux 1978). But the use of traditional approaches over-estimates and mis-represents efficiency level and profitability of microfinance programmes as the role of subsidy in profitability analysis is not accounted for and recognized. A programme may be profitable or cost efficient but this may not be so when the programme is required to pay for financial cost savings arising out of subsidized funds, not accounted for in total cost estimation. As a result, the issue of performance and sustainability of microfinance programmes is not completely perceived by policymakers, donors or international agencies and professionals.

Microfinance programmes enjoy subsidized funds, borrowings at concessionary rates and grants, to support its credit operation for poor households. The subsidized funds, the resources that are made available to Microfinance Institutions (MFIs) at concessionary rates from both domestic and foreign sources, have been instrumental in the expansion of operations of Microfinance Programmes (MFPs) and institutional development. There exist opportunity costs of these subsidized funds that are required to be available to sustain a credit programme catering to the poor at least for some periods. Excess of opportunity costs of subsidized funds over the actual costs of these funds for on lending is known as social costs. In other words, social costs are related to the economic subsidy that a MFP enjoys. The nature of social costs in terms of subsidy and its measurement is crucial and related to the issue of sustainability.

There are two types of subsidy: financial and economic. If a MFP is not cost-effective, the programme will require financial subsidy for its survival if the programme's revenues can not cover its costs. Cost and financial efficiency, on the other hand, determine the degree of financial sustainability. A cost and financially efficient MFP can only be financially sustainable. However, financial sustainability of any MFP does not necessarily guarantee its economic sustainability if financial revenue is not sufficient to cover operating expenses and economic cost of cheap funds. An economic subsidy exists if the costs of resources for on-lending are less than the opportunity costs of these funds. Following Yaron (1992), economic subsidy can be divided into interest subsidy (financial cost subsidy), equity subsidy and income subsidy (grants for revenue expenditure). If the profit of a MFP is


greater than the economic subsidy, the MFP/MFI receives no net economic subsidy implying zero social costs for its continuing operations. The programme is then both financially and economically sustainable.

Measurement of Sustainability of MFP: Efficiency and Subsidy Intensity Index (ESII)

During the last several years, many studies were conducted on sustainability and social cost of MFPs or MFIs in Bangladesh (Yaron 1992; Khandker, Khalily and Khan 1996). These studies do not provide any in-depth analysis of sustainability. In addition, efficiency aspect in sustainability analysis is ignored. Two major index of sustainability were developed and used. Yaron developed Subsidy Dependency Index (SDI) in 1992 while Khandker, Khalily and Khan developed Subsidy Dependency Ratio (SDR) for evaluating sustainability and social cost of micro finance programmes. The SDI uses loan portfolio and its revenue contrary to total portfolio to determine dependency on subsidy. In addition, it has limited policy implications because of its specification and limited number of parameters. On the other hand, SDR is an improvement over SDI as it considers total portfolio mix instead of only loans portfolio as in Yaron. However, many important information are subdued in both the indices. The degree of subsidy dependency is determined by the degree of financial efficiency, operating cost efficiency, opportunity cost of funds, lending and borrowing interest rate. These information are not derived from SDI and SDR. Consequently, policymakers are unable to derive any broad-based policy implications from the estimates of subsidy dependency and its constituencies in either of the cases. Hence, the existing studies do not provide a clear understanding of the issue of sustainability and social costs of MFPs in Bangladesh. A broad-based index developed by the authors is used for evaluating the issue of sustainability and efficiency of MFIs. The index is broad-based in terms of number of parameters and policy implications.

Consider that a classical Microfinance Programme (MFP) provides two major types of financial services-credit and savings to the target households. Assume further that the programme is financed by borrowing (B), grants (G) and member savings (MS). It borrows from the banking system at a concessional interest rate, bj. It receives grants from different donor agencies. Furthermore, it mobilizes savings, which is built-in-within the system. Each member contributes every week a fixed amount as individual member savings. Hence, total


funds (TF) available to the MFP may be specified as: TF=B+G+MS (1)

A part of these funds is used for financing portfolio comprising of loan (L) and investment including fixed deposits (I). Assume that loans are extended at an interest rate of rx and investment is made in fixed deposits at an interest rate of rr Given the portfolio mix, total revenue of the programme is given by:

TR = (r/L) + (rt*I) + IG (2) Where, (r^L) and (r^I) refer to income from loans and investment,

respectively. Based on the practice of the MFPs, it is assumed that donors do provide income grant for reimbursement of operating expenses. This is represented by IG in equation (2). The MFP has to incur transaction cost for its loan output and investment output in addition to cost of fund. Given the sources of fund, member savings and borrowed funds, and the administrative costs, total expenditure (TE) of the programme is specified by:

TE = (w*Emp)+(bi*B)+(di*MS)+0L+OPE (3) Where, w refers to wage and ty and dj represent average borrowing

interest rate and interest rate on member savings, respectively, and 0 represents the ratio of loan loss to loan. The term 8L, therefore, measures the amount of loan loss. The term OPE denotes other operating expenses.

Considering eqs. (2) and (3), profit (71) is denoted by 7l=(r1*L)+(ri*I)+IG-[(w*Emp)+(bi*B)+(di*MS)+0L+OPE] (4) The reported profit of MFP does not provide much information

about its sustainability because these institutions are largely subsidized by the Central Bank and /or international agencies. A MFP is sustainable if it can pay for gross subsidy it enjoys. In most of the cases, MFPs are largely donor funded. Major sources of subsidy are cheap borrowed funds, grants including income grant, equity and reserve. Equity and reserve are considered as a source of subsidy on the ground that generally management does not have any equity ownership of the MFP, and in most cases grant funds or cheap borrowed funds along with profit (surplus of income over expenditure) are capitalized. Hence, capital funds (equity and reserve funds) do have opportunity cost.

Given the opportunity cost of subsidized funds and the financial structure, gross subsidy of any MFP may be specified as:

S = (G+EQF)*rm+(rm-bt)*B+IG (5) where IG is direct subsidy received by MFP as reimbursement of


some portion of operating expenses, and rm is market interest rate reflecting opportunity cost of fund. The first part of the equation (5) represents gross subsidy from equity (EQF) and grants (G). The second term shows gross subsidy from cheap borrowed funds from national and international lending agencies. The third part represents income grant. As argued earlier, the MFP is financially sustainable if it can pay for gross subsidy and total operating costs out of its total revenue. Thus, net subsidy (NS) can be defined using equations (4) and (5) as follows : NS = S-K&yU+d/IJ+IG}- {(w*Emp)+(bi*B)+(di*MS)+0L+OPE}] (6)

The first part of equation (6) refers to gross subsidy received by the MFPs, the second and last part of the equations indicate total revenue and total cost, respectively. If S „is greater than the sum of the second and third parts, then there is a positive net subsidy and vice-versa. Hence, it is necessary to be sustainable for any MFP to have the ability to pay for the gross subsidy out of its profit.

There are several major ways of eliminating or reducing net subsidy. They are : (a) improving cost efficiency through increasing productivity and exploiting economies of scale; (b) improving financial efficiency through increasing lending interest rate, and (c) optimizing portfolio mix through shifting resources away from low return generating investments to high return generating investments. Considering these policy parameters, we have developed a broad-based alternative index called "Efficiency and Subsidy Intensity Index" (ESII). We consider that an index should enable policymakers to derive information about cost and financial efficiency, gross subsidy- and-income grant intensity, and indicator of portfolio shift. In addition, it should allow flexibility to the policymakers to derive a set of policy decisions from the index itself.

Dividing equation (6) by {(r/LHír^I)} and subsequently dividing both numerator and denominator by (rx*L) and re-arranging the terms from the perspectives of broad-based analysis and deriving policy implications, we specify ESII as follows :

S ìf(w*Emp)+(bl*B)+{di*MS)^eL'¥OPE>i (r,*I) IG 1 ESII --™ (7)

The ESII is essentially comprised of several ratios. They are : (a) gross subsidy intensity in relation to income from loans as captured by the first part of the numerator; (b) cost and financial efficiency as


represented by second part of the numerator, (c) portfolio mix in relation to output price ratio as captured by third part of the numerator, (d) income grant intensity as captured by fourth part of the numerator, and (e) role of revenue from loans in relation to total income and its impact on subsidy intensity and efficiency as captured by denominator. Note that the degree of ESII is influenced by cost efficiency, portfolio mix, market interest rate and gross subsidy and income grant intensity. Furthermore, it is inverse of cost and financial efficiency and portfolio mix in relation to output price ratio. Higher the degree of cost and financial efficiency and portfolio mix and output price ratio, lower is the degree of efficiency and subsidy intensity index (ESII). A zero or negative value of ESII represents no subsidy dependency. The ESII is rich in terms of policy implications. First, causes and its effect on sustainability can be derived from the constituents of the index. Second, financial and cost efficiency as an indicator of competitiveness and sustainability can be examined. Third, the degree of allocative efficiency in terms of indicator of portfolio shift can also be deduced. Fourth, the role of income grant and gross subsidy intensity in sustainability can be evaluated as inverse relationship exists between income grant and gross subsidy intensity and sustainability. Finally, different 'policy options can be made from the index to eliminate or reduced subsidy dependency. Definition of Parameters and Data Sources

The empirical analysis of sustainability and social cost of Grameen Bank and ASA covers the period of 1992-97 as ASA has been operating as microfinance institution since 1992. Necessary and relevant data were directly collected from the institutions, and some data were generated from the annual reports and financial statements for the said period. As there is no standardization of financial reporting for MFPs/MFIs, necessary adjustments were made.

Market interest rate (rm) is defined as 36-month deposit interest3 rate since the financial market is liberalized and the MFIs are expected to finance their lending activities through resource mobilization. Lending interest rate (rj is measured as weighted average lending interest rate of the MFIs. Borrowing interest rate (fy) is similarly the average borrowing interest rate. Return on investment (r{) is the weighted average yield on investment.

° There has always been a debate over the opportunity cost of fund. Frequently, researchers have used in the past the 36+ month deposit interest rate in evaluating sustainability of MFIs on the ground that opportunity cost of fund for financial institutions should be. generally deposit interest rate as institutions would normally finance loans by mobilized deposits. Others have often argued that curb market interest rate should be the opportunity cost of fund. We have considered the former perspective of the opportunity cost of fund as we view MFIs as financial institutions. Though there


III. DESIGN AND PERFORMANCE OF GRAMEEN BANK AND ASA GB and ASA are the two major MFIs operating in the country. GB,

initiated in mid seventies, emerged as a formal bank for the poor under a separate ordinance in 1983. On the other hand, ASA emerged as a major MFI in the early nineties after long experiment and operational experience of more than ten years. Though both the organizations target poor households and follow the group approach, their models are different.

The credit delivery models of the two programmes have certain similarities in terms of their objective and procedure. Both the programmes emphasize group based and collateral free credit delivery to the poor households living below subsistence levels. However, the size of the group varies. In the case of GB, it is 5 and it is 20 in the case of ASA group. Both the models emphasize close supervision and monitoring of borrowers. This is reflected in the monitoring mechanism. There is a separate tier between group and branch in the GB model. This is called "center". It comprises of 5 to 8 group members. The center is headed by a Chairman elected by the group members. All business decisions and activities - loan application processing, loan recovery, and savings mobilization - take place at the weekly meeting of the center. One bank staff remains present at the meeting of the center to guide the members. On the other hand, in the case of ASA, it is simple. There is no intermediate tier between group and branch (known as unit). Credit officers are responsible for lending decision, monitoring and supervision. Maximum membership size of each GB branch is 2400 while it is 1440 in the case of ASA.

Both the models place special emphasis on savings mobilization as it is a necessary condition for any poor household to be sustainable in future. This is reflected in the design of the programmes. GB requires every member to save at least Tk.5 per week as compulsory savings. Until the mid-nineties, it used to be Tk.l per week (Khandker, Khalily and Khan 1995). In addition, GB borrowers are required to contribute 5 per cent of the principal loan to the "group fund" to increase financial savings of the target households at a relatively fast rate. Until recently, contribution to the group fund was not refundable though the members could borrow from such fund at an interest rate to be determined by the group members. In the case of ASA, each member is required to pay Tk.10 as admission fee, while saves at least Tk.10 per week.

may be variation in perspective and in deposit interest rate as opportunity cost of fund, we feel that researchers should explain the trend in subsidy and the factors contributing to such variation based on the perceived opportunity cost of fund. We have adopted such perception in our analysis of subsidy of MFIs.


Grameen Bank is the largest MFI in Bangladesh. During the past fifteen years, it has emerged as a vast organization. It had a network of 1105 branches with more than 11 thousand employees mobilizing over 2.2 million members and lending to over 2 million borrowers by the end of 1997. In 1985, it had only 226 branches and a total of 2777 employees. The number of branches increased to 781 and 1040 in 1989 and 1993, respectively (Khandker et al 1995). During the past five years, the rate of expansion of branches has slowed down. The branches are the profit centers of the bank. Every branch consists of 10 employees including seven field officers and a branch manager responsible for overall activities of the branch operation of on-lending, deposit mobilization and all other activities. About 10 to 15 branches are being supervised by an Area Manager. The Zonal Office maintains direct linkage between the Head Office and the Area Offices to maintain smooth flow of funds and also to communicate all other issues that will be required for proper implementation of the bank's policies and decisions. Loans outstanding and annual loans disbursement had increased significantly during the period 1993-97 (Table I). Annual disbursement increased from Tk. 12,017 million in 1993 to Tk. 16,958 million in 1997 contributing to an increase in average loan size to Tk.8375 from Tk.7,140. It should be noted here that annual loans disbursement in 1993 was almost double the amount of disbursement of Tk. 6,361 million in 1992 (Khandker et al 1995). Similar pattern is found in loans outstanding. It increased from Tk.8,961 million in 1993 to Tk. 16,958 million in 1997. About 84 per cent of annual loans disbursement was loans outstanding. Loan recovery rate4 has been consistently above 95 per cent during the period 1993-97. Khandker et al (1995) noted the recovery rate above 97 per cent during the period 1987-94. Savings mobilization remains as significant element in the design. By the end of 1997, the bank could mobilize Tk.2058 million as savings from its members. Average net savings per member increased to Tk.1833 in 1997 from Tk.1076 in 1993 (Table I). GB pays 8.5 per cent as interest on member savings. The bank has grown enormously as an organization. This is evident from the size of total assets. It was Tk. 22,011 million in 1997, an increase by over 40 per cent in five years.

ASA is essentially half the size of GB but it has grown at a fast rate as its microfinance operation is only seven years old in a formal sense. By the end of 1997, it had a network of 686 branches (known as units) with over 4700 employees mobilizing a total of 1.14 million members

4 Loan recovery rate, as measured by Grameen Bank, is loan recovered as percentage of the sum of loans recorvered and overdue. A loan is regarded, by Grameen Bank, as overdue if it is due two years past due date. This definition of overdue is different from the standard definition: a loan is overdue if it is due past due date.


1-4 »

2

i I o

fi CONÔÌOOOCNOitNCNinCD CD COCO .O N OOOOÔìÔOOìCDlfiÔN CN ^ <jj =2 05 <o £ ^ n. sBHiijnci-oi 9 d & ^3 (T) ^TtmcoNCNcocomco-« o ^

(T) zi Sjncooots-tf-'CNco

S OCOOOÔNCNCNOOmoO 00 N IO

J CD OCOCOM^lOlNin't^lßtp CN CÔ) E 0) m i2 W. °ì OìÒMÒoiodoÓCD 9 ÒO)

2 8S82*-3¡gN

lOinoooôocoinooNCDa) n in in W-) M^t'-'CN'tCDCDQqcOCDq-' (N ôi

UQ O) ow^^c^ oornco ^ H rt 00 "* ^

icioot^ôcDooco-HCOCD 'n noo ^ cû-HCQt^cooo)(Ncqcûino in ^lod -. mhoi»s(¿?)(Onn¿pí 9 oo> Xv c^qqqcoojcd^í'oooiN'^ o 1-1 <N <N ^

mcocîoooooìoìoooioo oo cooí

J5 05 «otócqpjirfoóiócíoJrtO) 9 do)^ b 05 NmmSOOfllCOHHOO O b Gì lfiO)lß<M t Oî « ■

g ^H (N -> N X,

j. 1 ocooo^*cqqoqcocoincD n îri j. 1 ^h o 10 QOoóooó^îocóco 9 ^0)<f

^ <n q co 2 N 00 oi °° ^ ^

<N N ^ « C ctì

OiinooocoocO'-ôoNco oí mese fQ tîß- icocDcoq- ^'tNooio co 9co™ gj oiniqoiçòçòoó^^pjoj^ q ^^CQ

05 .H&ooOOCONrtNh. « ^í-1 o N « « ~ - o ^ co - g g ci ^- - ~ - CN ¡ /« Ö /« tM irjco^ôô^toooiNco co coco.

in^coN^-NNcococo-i co q^w CLO OCOCOCOçQôQpj^^Qix) q ôig Ü05 ^^moNco^fin-ioooio o o; cüm ^HCoNCOOCNinococo g g ïï q 00 ¿

« - co oí N ^ ^

^ in-'O'tfooooocooN 00 co ^ ^ TtcocoNco-HOiO-^Ncoin in ôic ^r ooq^co^cQcoö^cNNco 9 ó o tí O) "-'oiOOOìCOOiO- 'COO'* O G 05 üoicoooiooocNqoíî" £ r-l 01 00 « - (¿ t¿ & ""

T3 ~* ~> -* ~ c a ooîco'tooooo^'^^to) m ^tcoiS rt^t^^CNCO^tOintÔiO) Iß Ôio

JO 05 o^tojoi^^coòpõòcooõ 9 doa 05 ~1o'<*CN-'COCNO-''<tN-' O OJ 05 ^ZoooocoinO'-o oí ^ 00 cq « co eo cí N ^

^ 13 - - - - I I cd S G

lili 1 i I I I ¿ è Ï

. slgSl ! f S £ I ! I . 1 I ííMííÜíjl!, ii f Ï

i ! ! ! 1 11 i Î f I If 1 K 1 i


and lending to nearly 60 per cent of the members based on the assumption of one loan one borrower. A member is required to save regularly. An accumulated savings of Taka.722.0 million was mobilized at the end of 1997 with average member savings of Tk.631 (Table I). ASA pays interest rate between 6 and 9 per cent on member savings. It provided loans to about 56 per cent of the total members. However, there are many savings members who do not borrow at all. The volume of annual loans disbursed had increased by about six times in 1997. It was estimated at Tk.3337 millions with average loan size of Tk.5258 and against Tk.572 million in 1993 with average loan size of Tk.2910 (Table I). Loan recovery rate, as reported, has been consistently above 99 per cent during the period 1993-97. Every branch (unit) has seven staff including four credit officers. About 8-10 units are supervised by a regional office headed by a manager sitting in a centrally local unit of a cluster of 10 units. A division office monitors the activities of 45-55 units and acts a liaison office between units and head office.

IV. STRUCTURE AND PATTERN OF SUBSIDY IN GRAMEEN BANK AND ASA

The extent of the subsidies that the two MFIs require can be measured using the available cost and revenue information and market interest rate. Financial subsidy is required if the profit net of income grant is negative. Income grants are received as reimbursement for some operating expenses. As noted earlier, a negative financial subsidy may not be sufficient to cover economic cost of subsidized resources. In this context, the MFIs could still be operating with subsidy. Therefore, social costs will be associated with the programmes or institutions. The social costs of both the programmes can be analyzed from the viewpoint of analyzing its subsidy structure, pattern, trend and causes of variation in subsidy over time. Trend in and Structure of Subsidy

Providing both credit and social development inputs to the poor is a high-cost activity. As such GB as well as ASA has required grants and subsidized funds for its institutional development and expansion. Subsidy was estimated using necessary financial and operational informations as reported in Table-II. Given the sources and the nature of fund, both GB and ASA are subsidized MFIs. The share of grants and borrowing together in loans outstanding in the case of GB was almost one implying full financing of loans by cheap funds. In the case of ASA, a little over 40 per cent of the loans outstanding was financed by

1 1 fi The Bangladesh Development Studies

o

O

I I

9 fs^ lO-HCOCONCDCO^lOQOO^CvJ

^ O) t^cooddoócõco^^ôóoico th n^ t^ ^ in oo ^ ^Hoo^-Hoooot^.

¡^^CNTt n^

CN -h <N <N

OONOiCDCONr-imOCOOOCOOO CO 99tr?ciCN!900.^!99CD.'':;t;""'

oilíJMlíJH^rfSHN^.-oi Xn t*- co o <n œ h m h s n

,r' O'*'*cDCT)ir5^Hino(NN.o^< -*< c^9c?°9cs!or?999c^liirl!ci -*< Ô 't^tNOCQCQ'tcSNoÖNdcii tf) O) ^

h O (N -h ^CD-(N

r-H ONCTiOOÔlrfOiOOiinaOO ^ cocqoqqcooiNNiocoqqN 5? 0(N^cOaJcÓcONCDN-¡ - OJ

rH --i CO

zj! cqqoo-HqNcocNiq'tiNNco 5? '¡tCNCOOÓCD^lOÒcOÒaJcÕ'* N Q) in ococN in^cN-^cN-« <j>

co

|^ ^ (NCDOCTJOiCOlONin^t^ttNOO 2 |^ ^ înqoqcqqt^qcNjco^'tcû

(Ti lOf-icOCO^ 0^^*0)000 ^ »-^ <N 00 m CN CN -o

CD <*oQqa>iqooa)OìqcN*-«cqa5 d O) in^toN<<toooó't'-¡o6o6-<io ^ /-p' incocoin^-1 cd^cnoíooo c

^ u; N^tOOO (N CONCO <U

c3 s CQ ° rHjO OìOìOCO'tfCNin^tOOìCO-'lN CO H*ir K'itq^NNoooqqq - cq^t "g (n2? inddoócoiriiríodNÓoJoóco Já ShQ) t^-OOC<l'-( CD OlflrfOO g pH ^j 0} CS 00 ^ CN CO CO ^ <U b^^00

^j m ooco -g

-H " inNO^t^t^tNOJOOOrtNCD ^ -H " co ^qcoqcDNNiocooqcocN § G) CDCO'^cOCDtv-OCuC¿CO(N-'C¿ G

Z' CDCNtN"^ O)*(N00Tt fc '"""'ÔCN - i CDCO T3

m ^J NCOOCOO^CNNOCOO^-íN t m ^J in coqqN^^cûqcq-Hâi o O) irioicocoirjcoîricoiriîricû S* (T5 incocNcN-^ r-H^pHcot^r^.00 ^

rH^co^ -■ COCO -% 3 I

(L) Ë «

I I 1 » í I 1 I 1 I i I i

I Isäljflijjf.. I a I II II 1 I ¡ I II I 1 s


grants and cheap funds in 1997. This suggests that ASA increasingly finances loans by its member savings.

The total amount of subsidy including the income grants has increased by 1.6 times from Tk.765.9 million in 1993 to Tk. 1215.7 million in 1997 for GB but with a fall in 1994 to Tk.238 million(Table III). This decline in total subsidy in 1994 was due to the lower financial cost subsidy caused by a fall in market interest rate. Total subsidy for ASA has increased from Tk.39 million in 1993 to Tk.165 million in 1997. It has an increasing trend and has risen at an increasing rate. However, this increase in total subsidy in 1997 was mostly due to increase in income grants for ASA. Nonetheless, both the programmes enjoyed economic subsidy evaluated at the market interest rate. An analysis of the economic subsidy structure, its pattern and trend for both GB and ASA is made based on the Table III.

While analyzing the subsidy structure in terms of shares of sources of economic subsidy, it is observed that the subsidy structure for GB and ASA is different. For GB, the interest subsidy, composed of financial cost subsidies from loan and grants, is the dominant component of the total subsidy. In contrast, for ASA, income subsidy (income grant) for revenue expenditure is the dominant component. It is shown in Table III that Grameen Bank enjoyed 88.5 per cent of total subsidy as interest subsidy in 1997. The share of interest subsidy increased slightly from 85.5 per cent in 1993 to 88.5 per cent in 1997 but declined to 61.1 per cent and 78 per cent in 1994 and 1995 respectively, for GB. This resulted from increases in foreign grants for on-lending. However, this effect is obscured in 1996 and 1997 because a large amount of grants was shifted to "Kallayan Fund" and then the amount was shown as borrowing from Kallayan fund. For ASA, interest subsidy increased in magnitude but the share of interest subsidy fell from 58.1 per cent in 1993 to 35.5 per cent in 1997 mostly due to fall in the share of subsidy from grants.

ASA enjoyed 47 per cent of total subsidy as income subsidy resulting from income grants received as reimbursement for some operating expenditure in 1997, while only 8.3 per cent of total subsidy were received by GB as income subsidy in the same year. The share of income subsidy remained unchanged for ASA over the last five years but it had a declining trend for GB. The income subsidy has increased by 5.5 times for ASA during the period 1993-97 from Tk.14 million to Tk.77 million showing a growth rate of 40.6 per cent. Income subsidy for GB has increased by 1.16 times during the 1993-97 period from Tk.86.9 million to Tk. 100.68 million growing at a rate of 3 per cent.

1 18 The Bangladesh Development Studies

3 CO

3 pH

I 5 p3

PQ S

(0

%

§ 5

1 fc t5Ss?ô§Rg|g§

•-H ^r cj ^ w

<S(3) N« ûo«; °°^ ^ • m,; °0r;

< ^H - - w w ^

S ns2» -a :^ gg Sg

i- i "~^ m ""^ m co o

¡2 -¿¡e:2S¡¡S-¿5§

^p-tCDlCOcsiOî £^2 ã

t 11 ■8 s Ì & ï t II s

¡ a * î *§ m M ° t i ïi a s *§ m ° í « - 5 ^ P 3 CO ¿ o

- en ^

"11 Sil!


The share of equity is relatively stagnant over the period of 1993-97 contributing to only about 3 per cent of total subsidy for GB but for ASA it increased from 5.6 per cent in 1993 to 18.5 per cent in 1997.

Causes of Variation in Economic Subsidy over Time An analysis of the changes in total economic subsidy from one year

to the next year leads to identify the causes of variation in subsidy over time. The changes in subsidy is due to the either singly change in the component of sources of subsidy, or singly change in the parameter (such as market interest rate, average borrowing rate) or change in the both. The effects of the change in either component of sources of subsidy or parameter alone are called direct effects of the component or of the parameter, while the effects of the change in both combinations are called interaction effects. Table IV shows the causes of variation in subsidy during 1994-97 in terms of direct and interaction effects.

An increasing trend in the positive change in GS was observed for Grameen Bank during the period 1993-97 with the exception of 1994. In 1993, aggregate change in GS was Tk.221 million. It was Tk. 235 million in 1995 and Tk.678 million in 1996. The change in GS in 1997 was modest. Direct effects of the sources of funds and interest rate parameters contributed to more than 80 per cent of the changes in gross subsidy during the period 1995-97. Three major factors contributed to such changes. They are (a) market interest rate; (b): borrowing and cost of borrowing; and (c) grant and income grant. First, a large fall in market interest in 1994 contributed to 86 per cent of the fall in GS. However, the amount of borrowing increased as borrowing interest rate also declined. Increase in borrowing contributed positively to change in GS but was offset by a large fall in market interest and borrowing interest rate. With the increase in market interest rate during the period 1995-97, its contribution in GS was positive and significant. In 1995, it was estimated at 22 per cent. This increased to 73 per cent in 1996 and 53 per cent in 1997. Second, increase in borrowing interest rate contributed significantly to change in GS. In 1995, the contribution was 55 per cent. It increased to 127 per cent in 1997 with a modest contribution of 24 per cent in 1996. Finally, fall in grant in 1996 and 1997 was partly affected by incremental borrowing. In 1996, decline in grants contributed negatively to 15 per cent while increase in borrowing contributed about to 5 per cent of change in GS. It declined further to 282 per cent as against positive contribution of borrowing by 159 per


s vH

•H

(0

& o

1 ¡

3 Œ) 8ó&¿2N2Nw.rife«-<Ño--'«>o6o6'H-oó ~ w - - - - ~ g o 2 ~ ~ ~ ~ îs w - £ - - - ~

¿ cd SgSoSôSôS^g^S^og^gssôgg C. G) 222

w ~ w £2 £2 !l Zl w w J, ~

g S g S g - s§ g fc g 2 g S g S g

œ 2 °° "¿ 2 2 f ¿

|« s § s gs §s = s 52 |s f s gg ôg 5s « § = a g co « § 2 S =7 V 2 s ¿s S S S S » °£ SÉS « - ö

I- ( idi' ' I J- I d. I J-

w S §S |8 s* g2 ;8 g 8 g a 58 ô8 g 8 gg 58 §

t a * 5 $ 'S ¿ « Ä "

Já Ä, 5 fi S ï 1 a I

I % ! ¡ c ¡ I I I If ÌI ! ! !

c l i II

ö g1 I e = I

% 3 1 I ||


cent in 1997. In brief, about 50 per cent of the aggregate change in gross subsidy of Grameen Bank was caused by net increase in borrowing, borrowing interest rate and income grants.

For ASA, the small increase in change in subsidy in 1994 was mainly due to the significant increase in income grants, being largely offset by the fall in the market interest rate. However, in 1995, the small decrease in change in subsidy was principally caused by the fall in income grants. In contrast, there was large increase in change in total subsidy in 1996. An increase in income grants as well as a rise in market interest rate is mainly responsible for the increase in change in total subsidy. The share of change in income grants and rise in market interest rate were 36.3 per cent and 33.6 per cent, respectively towards the contribution of variation of total subsidy. Again in 1997, there was large increase in change in total subsidy. The main causes of variation in total subsidy were an increase in income grants and in inexpensive borrowings. Of the direct effects capturing 97.3 per cent variation in subsidy, the shares of an increase in income grants and an increase in borrowing contributed to 55 per cent and 18 per cent, respectively of the change in subsidy.

V. EFFICIENCY AND SUSTAINABILITY OF GB AND ASA

Sustainability is analyzed in terms of financial and economic sustainability. Both Grameen Bank and ASA were financially sustainable during the period 1993-97 but were not able to cover economic cost of financial resources. This is evident from the trend in and structure of subsidy dependency.

Trend in Subsidy Dependency Though there has been an increase in the gross subsidy, generally

the intensity of subsidy dependency declined during the period 1993-97. However, the pace of decline was higher in 1994 and 1995 largely due to major fall in market interest rate (measured as 36 + month term deposit interest rate). In this sense, the year 1994 and 1995 can be considered as outlier in the trend analysis. This is applicable for both GB and ASA. Otherwise, there is a systematic pattern in subsidy dependency. However, there is an empirical problem in estimating subsidy intensity as reported excess of income over expenditure does not reflect actual operating profit due to the contribution of income grant. As has been evident^from the financial statements and other financial information, both GB and ASA generate


surplus out of income grant as the amount is not spent fully. Hence, the effect of income grant in net subsidy calculation is not fully recognized due to inflated profit. Consequently, subsidy intensity index will be under-estimated. As such, necessary adjustments were made in estimating intensity index so that reality is reflected.

As evidenct from Table V, the ESII, estimated based on the adjusted financial and operational information, declined for GB to 0.467 in 1997 from the level of 0.628 in 1993, declining by over 25 per cent over five years period. This is a significant achievement for GB. The estimate of 1997 suggests that Grameen Bank was able to pay about 53 per cent of net subsidy implying dependency of about 47 per cent on subsidy. On the other hand, contrary to the traditionally held perceptions and estimates that ASA is a self-sufficient organization with no dependency on subsidy, ASA shows positive dependency on subsidy, though lower than that of Grameen Bank. The ESII for ASA in 1997 was estimated at 0.345 as against 0.554 in 1993, a fall of about 39 per cent in five years. This implies that ASA could pay for about 65 per cent of net subsidy out of its revenue in 1997. Both the programmes performed well in 1997 and could reduce dependency on subsidy to a significant extent.

Variation in the Components of Subsidy Dependency The index does not have any policy implication until it provides

information on necessary parameters. The ESII captures gross subsidy intensity in relation to income from loans, financial efficiency, portfolio mix in relation to price ratio (indicator of shift). Therefore, variation in subsidy dependency can be explained by variation in these parameters. ; (aj Variation in Cost and Financial Efficiency

The cost of production of each Taka loan, popularly called as cost efficiency, of GB shows a steady and marginal decrease from 0.196 in 1993 to 0.19 in 1996. However, it increased in 1997 to 0.214. The increase in 1997 may have been due to adoption of national pay scale. Effectively cost of loan production is influenced by three factors: personnel cost, default cost and overhead cost5. Despite increase in salary, the share of personnel cost has more or less declined from about 44 per cent in 1993 to 33.1 per cent in 1997. It was due to increase in loan productivity. Overhead cost has remained consistently over 40 per cent during the period 1993-97. It is worth mentioning that one-third of the overhead cost was interest payment on

5. Overhead cost includes all expenditures other than personnel and default costs. This has been done in order to have separate understanding of the role of personnel cost, default cost and other costs in cost efficiency.

Khalily, Imam & Khan : Sustainability of Microfinance Programmes 1 2Í

pH

pH

i *

09

* i^ oíinco^H^toolcoincoN'í«^ * inr-iOcoOcoOoôopoooooo}

O) òoòi£d""óS2oòddòd i-H

S COO-hCOph^N^COCO-hÔOOO S O) in^-HrHQoqiopcoo^ôQOcooq 5 2 oò.ò£dwò£2c5dò-òod g

H

COO) ^csj^HÔTfOooicsôcooq ^

< f-t ddd$£d>~"d£2dddddd §

2 ooo£,o"o£ìoooooo a

0) Ncsj-H(Nq§ONO^-«-HOinoq -m 2 dddtd^d£idddddd o

Jr (Ohnûíôoôooico^h s o^ inoíOcoOcDOocoînq^N .» 2 ööö^löîö^^öooöo g

5^ cû^Hq^qdqidco^coqinN o;

S ^ SP

SS § § S « « t ^ 5 S H S Ü! fi ¿ v & (N^Hq^q^qco^cscoqc^N g*g

g^ ^'-Hq^HOoOoocscscooôq •» V * ^-t ddd£2d£ìd^l^ddddd 3 *

CO C£)CÛCÛ^N2^(N^CON00^00in öS

g isrHqcoq^q2<N<NNqcooq h 8* - & & li1 "II I I § i Ih

e Pli s « & a 2 ss S s •• ô « 3 S^°? a

«s-2 1 £ fil î I i 1 1 1 § | IH £ lull 1 1 ï I ^


borrowing. Importantly, default cost of GB has increased over time. It has increased gradually from 14 per cent of cost of loan production to about 27 per cent in 1997. The results suggest that GB needs to curb down overhead and default cost in order to be sustainable.

Cost efficiency does not guarantee financial efficiency if average lending interest rate covers cost of loan production per unit. Financial efficiency shows cost of loan production in relation to average lending interest rate. In 1997, it was estimated at 1.304 declining marginally from 1.307 in 1996. However, relatively high degree of financial efficiency was evident until 1995. But the ratio of financial efficiency in 1996 and 1997 exceeded the level of 1993. This was due to marginal fall in average lending interest from 1995. Financial efficiency of more than one implies that revenue from loan was not sufficient to cover cost of loan production.

ASA has generally been cost efficient. It declined systematically to 0.158 in 1997 from the level of 0.24 in 1993. This implies that average cost of loan production in 1997 was about 16 paisa per Taka loan. Personnel cost contributed to more than 53 per cent of cost of loan production in 1997, declining from about 73 per cent in 1993. Increasing share of overhead cost over time follows it. It increased to about 40 per cent in 1997 from 27 per cent in 1993. A little over 10 per cent of this cost was interest payment on borrowing. In addition to being more cost efficient over time, ASA is also financially efficient. Average lending interest rate of ASA is relatively high. Consequently, ASA had been financially efficient consistently throughout the period 1993-97. In 1997, it was estimated at 0.836 compared to 0.923 in 1993. This implies that cost of loan production was about 84 per cent of average lending interest rate in 1997. Consequently, ASA could become profitable even with income from loans only.

Grameen Bank and ASA are different in terms of cost and financial efficiency. First, aggregate cost efficiency of GB was lower than that of ASA until 1996 but in 1997 it was higher than that of ASA partly due to increase in salary. ASA had remarkably reduced its cost of loan production by about 21 per cent in 1997. Second, employee cost efficiency of GB is higher than that of ASA though its annual average salary is three times the average salary of ASA. Third, overhead cost is higher for GB than ASA because of increasing dependency on borrowed funds. It is evident from the share of interest payment on borrowing. It was three times higher for GB as compared to ASA. Fourth, despite being cost efficient, GB could not be financially efficient due to relatively low lending interest rate. These differences in results may be attributed to the process of formalization from quasi-formal to formal institution.


(b) Variation in Gross Subsidy Intensity Gross subsidy intensity has declined over time and this contributed

to change in the degree of subsidy dependency. Both Grameen Bank and ASA demonstrate a decline in the gross subsidy intensity. It declined for GB to 0.565 in 1997 from the level of 0.726 in 1993 by about 23 per cent in five years. Gross subsidy was about 57 per cent of income from loans implying increasing capability of GB to pay for gross subsidy (not net subsidy) out of its income from loans. In the case of ASA, the pace of change in gross subsidy intensity was lower than in GB. It declined by less than 18 per cent in five years from 0.724 in 1993 to 0.595 in 1997. The variation in gross subsidy intensity in the case of GB was largely influenced by change in market interest rate, borrowing interest rate and loan output, and on the other hand, in the case of ASA, increasing trend in income grant was the dominating factor. (c) Variation in Portfolio Mix and Indicator of Shift

Any organization can maximize profit by investing into high yielding portfolio. In the case of GB and ASA, portfolio comprises of loans and investments. Lending interest rate is generally higher than investment interest rate. This is likely to create portfolio investment bias in favour of loans. In fact, it is desirable in terms of the goal and characteristics of MFIs. GB and ASA differ in terms of portfolio mix. The ratio of average investment and average loans shows an upward trend for GB. It increased from 0.227 in 1993 to 0.406 in 1997. This implies higher growth of investment in fixed deposits. In other words, GB has more funds available for expanding loan volume. The ratio shows a declining trend for ASA. It declined from 0.195 in 1993 to 0.054 in 1997. This implies that portfolio of ASA, based on 1997 estimate, is basically loans. Such behavior is likely to be influenced by output price ratio what is termed as indicator of shift. As evident from Table V, the indicator of shift decreased from 0.708 in 1993 to 0.594 in 1997 for Grameen Bank. This implies that average lending interest rate has relatively grown over time than that of investment interest rate. In this situation, it was likely that GB would invest in loans than in term deposits. Unfortunately, the reverse trend was observed. This implies that despite having relatively high lending interest rate, GB invested relatively more in low yield term deposits. As argued it could be due to the fact that GB has more funds available in relation to absorption capacity and/or GB is risk averter. Hence, it can be argued that GB has generally been less allocative efficient. ASA seems to have responded to the movement of the indicator of shift. It is well observed from the


fact that the share of loans in total loanable funds increased significantly to as high as 95 per cent in 1997.

(d) Variation in Income Grant Intensity Both GB and ASA are on the path of sustainability. This could be

deduced also from the degree of income grant intensity. During the period 1993-97, GB could reduce quite significantly its dependency on income grant. It reduced from 6 per cent of income from loans in 1993 to about 4 per cent in 1997. In the case of ASA, it reduced to 2 per cent of loan income in 1997 from about 4 per cent in 1993 with an increase in 1995. This indicates that fall in income grant intensity has contributed to some decline in subsidy dependency.

VI. SOCIAL COST OF GRAMEEN BANK AND ASA Grameen Bank and ASA have been operating with relatively high

degree of cost and financial efficiency. But they are still dependent on subsidy. Social costs are associated with microfinance programmes. High transaction cost and start-up costs make it costly. Associated social costs may not be high if social benefits are compared. However, with high degree of efficiency and economies of scale, these programmes are able to reduce dependency on subsidy, in turn, social costs over time. This is well reflected in the trend of subsidy intensity.

Both GB and ASA had enjoyed net economic subsidy representing the net social costs for continuing operations as gross economic subsidy of GB and ASA is greater than income, net of expenditures. As GB requires financial subsidy, it increases economic subsidy and thereby social costs. Social cost of GB as percentage of average loans outstanding shows a declining trend. It decreased from 11.79 per cent in 1993 to 9.65 per cent in 1997 (Table VI). This implies that net gain of GB borrowers should be at least about Tk.10 for every Tk. 100 loans in order to exceed social cost. ASA could reduce social cost for its programme over a span of five years from 14.95 per cent in 1993 to 6.85 per cent in 1997 (Table VII). Based on the estimate of 1997, it can be suggested that in order to exceed social cost, social gains of ASA borrowers should be at least Tk.7 per Tk. 100 loan. Both the programmes demonstrated its efficiency and were able to reduce its social cost.

The ultimate beneficiaries of the net subsidy or social cost are supposed to be the rural poor households. Given total membership of GB, each member received subsidy of Tk.557.7 in 1997, increasing from Tk.436.80 and Tk.577.80, respectively, in 1993 and 1996. Social


i H

O

la S 9 £ 5 s g H § s (0 g

58

i

c "55 Si u ■> .a -2 « oo in q n cn $3 ££ <N O O in 03 2^^° <N O CO <N CN

si ° . iî1" ° 5 i *t o r*» N co : m g 03 co co oq in 3 C°i¿ t- CD N 03 03 CO S -r S « N O O - co

5 -Q O ^ CD N 00 = «s - - l , u. 2 g g g S

•ûi)^ - d oó ^ co ^ ,3

^ £ n ^ co co cn ^ >, S <tf - CN CD CD

¿uh CN CN IO 03 03 3 <U £ - O3 CN O CO ^ ^ 6 io n co co o # >> »- io cn io *t o O 32 o «t - CN CD CD

■§11 • S q 5q fc C/)C COÓCÒNN ^^fe COCOrft^lO ü2Ä <* - (N IO 10 Z OT ̂

CO-n'U (NO - IO IO SR w-î_^ qcococDO *á £^Ê (NoioioJ^ 2 Ü 3 Ü (N - (N VO CO C

C/2S ^ -< (N IO IO S

^2f?l g S 13 fe S I -gT3s¿>Srt ~ <N »t 03 O5 -M

«t,- fil S S s s S i o!2¿| g « - (N »* o> ai ed

|- ß (O h O ^ ifî en

3|<Bg |-

§ S Ê S S | en

fI I - ~ ■ - d l

ur¡- loiocooco "2 rj î) C . - * O) CD CD t^ « 2-o¿ií2

. ooo)oö<N «

S e^^ - ~ d d d ^ z ° S c

W^D lOlOrJ-OON o 6 T> 5t n io d co SS ijx lOOC^^CD Ü

SS CO Ol - (N 00 g -J J CNCÓÒÒCO -2 wVM CQ CD O CD CO C/) ^■tí N (N 00 O - - , <j=* CD O - (N CO

- £J ,

C

>, <N (N Oî - ^t S" u- „_, T3 oqioqqio u-

«"ffi tNÒ - ON "2 Z'S 03CDO03CD 5 3 N C^ tO - CN *

,„>"> COCNh-ON r$ co2 os q co co co _; offi lOoócòcNio SS r^3 CDCOr^lO-H 3

u, CO ^ IO CD N u d O) Oí 03 Oí O) 0 A| 03 03 03 03 03 O

I

O S

H

O

I fa O

i

s (0

8

2

C « í¿ U ■> ̂ -2 <u rt 3 g £ 2e0 rt 3

1 g £

£ - « 9 o 03 ^-gSfc Tto3i5oqo3 « 9 oZug (NN1OIOCÖ

! ÌV S '^S^ NcpcDioq

$u CNO3N0ÔO ai 00 <u 00OO00C0 ^ 0. CO CD CD N CD

3Û.| NIOIOO3O3 ^>^H 0ÓCDÒION t;2o . in t^ -h co m Z « ¿û

. -1 - - -

C/3CU> NOOOONlO W>,S 'Ô0.in.00.10. oî; ÓO3NCSO3 C'55,2 ONrtOOlO

¿ fe ü r3 OT

^ 'S CNOCNOOOO OT >, E Nioqiqcp u2 ¿ -¡TfoicDN Z«^ CNNOOCNOO

lÎ«î § S g 8 § ss °Ä s S S 2 8 5 s

kîfiï

¡ §^^SSS S < S S 8 5 S | ° S m ï= < 3 tS ¿ œ n » œ °

lPt|| » o, . . . I ¡till! § § S 2Ï I

£ g 8 "3&«£ N - CD CO IO 71 ^"2^0 O3CDWCNC0 co ÕG°£ -cNcoiqcp

co 03

H3£ oöddö 2

tfl , ^ "rt^^tft NOO^fCNlO _, 2^^£ incoocD"* _,

?

h^£ o o o o - ^j

£§> 00OC0NN S; ■Se -TtcDN-q g S^ «i CÓ ici N h Rj S W -i (N t N Ü

"c H

¡I s s ? s s I Sc 00 h « « in 5 Jrt O^t - ^tCDCTD . -tt CN CO IO X T* _

KSDÜ2 . - _

CO 'a I >, es n oo oo co ;r *- s °i °î °? 9 °?

d'w h oj in h o "2 Z-§ co - co n o g

CO «

I gt fe 8 8 S S? 2 £^ oicoodio^t rt Q3 CO rf rf Ol co 3

Jg co ^t m cd n 2 U 03 O3 03 03 O3 0 ï1-1 O3 03 03 03 O3 O ----- CO


cost of ASA programme per member was Tk.87.60 in 1997 while it was Tk. 121.77 in 1993 and Tk. 126.50 in 1996. Obviously, the members did not receive the subsidy directly but they derived the benefits in the form of training, loan facilities and institutional support. The benefits of such social costs are found in the long run assets accumulation, income increase and savings. As it is beyond the purview of this paper we could not derive such benefits. However, based on the assumption that savings is an increasing function of income and the fact that savings is tied with borrowing, we can use member savings as proxy measure of social benefits. It should be noted here that both GB and ASA pursue flexible savings programme for the members. In 1997, average member savings was Tk. 1833.50 in 1997 as against Tk.630.00 for ASA. Given the average social cost per member-borrower, it can be argued that a net transfer of Tk.100 to the poor households could have derived net social benefit of Tk. 293 for GB in 1997 and Tk.398 for ASA in the same year. It should be reiterated that such comparison is based on proxy estimate of social benefits. Therefore, the result should not be treated as actual net social gains. However, the fact remains that both GB and ASA programmes derive positive net gain for the society. Comparing return on investment at the household level, Khandker showed that investment in microfinance programmes is socially and economically beneficial. Nevertheless social costs are associated with the institutions or programmes. Such social cost is less than 10 per cent of average loans outstanding.

VU. SENSITIVITY ANALYSIS FOR IMPROVING EFFICIENCY AND SUBSIDY DEPENDENCY

Both GB and ASA are on the path of sustainability. The degree of subsidy dependency and efficiency can be improved in several ways in order to quicken the process of sustainability. In this section, four options are considered. They are : (a) changing portfolio mix from low yield deposit investment to high yield loans; (b) increasing lending interest rate, (c) changing simultaneously both portfolio mix and lending interest rate, and (d) reducing non-personnel overhead cost.

Improving Cost Efficiency Through Changing Profile Mix We assume that MFIs should at first improve sustainability through

improving cost efficiency and increasing loan size upto a certain level without increasing operating cost. This will require optimization of portfolio mix. Three scenarios are considered for the purpose of sensitivity analysis. They are shifting (a) 10 per cent; (b) 30 per cent,


and (c) 50 per cent of investment to loans. Results of the sensitivity analysis of changing portfolio mix are reported in Table VIII.

As expected, there has been an improvement in ESII, cost efficiency, gross subsidy dependency and average loan size. In the case of GB, the extent of improvement is quite significant. Based on 1997, a 50 per cent fall in investment, equivalent to about 15 percentage point increase in the share of loans in total loanable fund will reduce gross subsidy intensity and improves cost efficiency by about 1 7 per cent and will reduce ESII by about 18 per cent from 0.467 to 0.383. Average loan outstanding per borrower would increase by 17 per cent from Tk.6897 to Tk.8296. In the event of such increase appears to be difficult to achieve, we considered a fall in investment by 30 per cent equivalent to a marginal increase of 9 percentage point in the share of loans in total loanable fund. This will reduce gross subsidy intensity, improve cost efficiency and improve ESII by about 12 per cent. The average loan outstanding per borrower would increase marginally by about Tk. 900. The effect of a 10 per cent fall in deposit investment will be around 4 per cent improvements in subsidy dependency, cost efficiency and ESII.

The change in portfolio mix would have small effect on gross subsidy dependency, cost efficiency and ESII in the case of ASA as its share of loans in total loanable funds in 1997 was about 95 per cent. Therefore, there is a little scope for changing portfolio mix. A fall in deposit investment by 50 per cent would reduce ESII by about 2 per cent and by about 3 per cent in gross subsidy intensity and improvement in cost-efficiency. Further little will be the effects if deposit investment is reduced by 30 or 10 per cent.

Improving Cost Efficiency Through Reducing Overhead Cost Both GB and ASA will be able to improve efficiency and

sustainability through reducing non-personnel overhead cost. A sensitivity analysis of such reduction in overhead cost was considered. Three scenarios were considered: reduction in overhead cost by 10, 15 and 20 per cent. Results of simulations are reported in Table IX.

As would be evident from the table that GB would be able to reduce cost of loan production by 4 per cent if it increases non-personnel overhead cost by 10 per cent. Such rate will increase at the same pace with the successive reduction in the overhead cost. The effect of reduction in overhead cost on ESII will be significant. A 10 per cent fall will improve cost efficiency by a little over 9 per cent. This will improve by 27 per cent if reduced by 30 per cent. The effect is


§

i s

|

N * i * ^HNrHOOCUrHTÍrí iflCDCONCÛOCO^ C Oí OîlfltO^MNîfl OOiO<NCOOO<Ntj<(0 O

O) in-HOoqoqqcoa> irîôoqoqqcoo) çj <- • òòòòòòòò òòòòóòòò v~

O) iflHOjHNqnoo iD^HQoqc^qcooi h döddöödö dddddddd

(NÔ(NhOC0(Û COCDCOCO-"00(NO ÄG) '-Hr-iCDOONlDOO^t OiO(NCONTtrtOO

<írH ÔÔÓÒÔÔÔÔ ÓÓÔÔÓÓÓÔ

ri* ¿L Nf-Hrtoocooin-t ooincocooooin OJ iDMinÔO^HCOO cOhhoOOOhh^ G) ^nsmoohoo ^(Nt^pHqqôq •- ' dddddddd óôôôóôóó

CO -HCOCOíN-HinOCO TfNCSO-i^COCD O) "-"COONOlCOCOlO CJOCSNCQOCOOOOO Q N(NO)^^qiooq cofNQO-^rHqôq ^h dddddddd dddddddd

Xi dd-íddddd dddddddd

CD -HCONOO^NCOíN COOCOCN^tÔOO) H} NXlfl^H(<)H^ OONCDin^CQOOO) gr ©HMcotoqiflN inî-Hcscqq^N

^ ÏÏ óó^óóóóó óó^óóóoó

C IO ^NCO^tOitN-HN fHNC0NOOO<N

gii, dddddddd dddddddd

O 3 (NO^tC^(NCOr-llO irtr-H^NlNinCO^ O) COOIOOhSpjn« COOOCOlONCOrHCO

ph dddddddd dddddddd

£2 00^0^05000)0)^ +i O) CO N 00 00 NO- « O OOOJ-HOíOin^HCOÇj^QO^ÔlflMN q cDrH(N^Hts.qcooqgcûr-H^H^rs.qcqoq h ooôoooo.gooôoooo

1 î n!5 w M h! ? Iti 5 o S

w 5 h 1 ^ & 2 "T 5 h

-Sg cw g-s-w ,g £ w g 3 - b

Khalily, ¡mam & Khan : Sustainability of Microfinance Programmes 131

i I

Q) IÍ5 »- i 00 O CO O CO 0) ^h ÒÒÓÒÒÒÒÒ

CD rHCDCÛCOM'-ÔO'H O) OOONCOrHTt^Tt O) g: in-Hoqocsqcoo) ^H óòòòòdòó

CJ^ 00O)000ìN^tO- < m ^ C0-«Q0O-«O(NQ <^h òóòdòòoo

(j) ^-hco-hooooo h ÓÒÒÒÓÒÒÓ

CO OO'-hO'-'COÔO

2 òóòdóóòó

L. CONOOCOOCONlß o5 dd'Hodddd

rn ooooooooîNinco Q in-HO^cooôq

^^ dd'Hodddd

CQ C IO rH00C0NO500li?N fe C IO

}tn OCDOCN^MMQO Ü 2 NHOnnOHOO d 2 dd^ddddd jj

Ö ¡ g^ rH^q- co qqo) g ^h dd-îddddd B

I W *äMCO(N(NQ0^CO00 -S

^h 2^° ooooo O

-

! *

i è , ? ! . ï ï I è g S I 1 r ß I

Oük,a!c2i¿tLij asá)


ë

I d)

§ 8

s

oí 0)ioo)iooo<no^ cnTtinin^NNrt g •-• ÒÒÒÒÒÒÒÒ ÓÒÒÒqÒÒÒ i¿

<J) noioinH^^œ nooincoH^Hûo 0^ inrHoq^(NOcooo inôo-i(NOcooq r-H oööööddö òóòdòóòò

Oh(Û^HHH0) OCOCVjCOrHrHOOOi

(/3O ^CNOîCS'-hOCNCX) ÎNOIINhONOO <^h ÓÒÓÒÒÒÒÒ OÒÒÒÒOOÒ

2 noococoooo) Ncoincocoomo) W COfNinoOOOMNN Cû^h(N0000(N^N CD ^CNN<NOO^N -^(NNINOO^N ^ ÒÒÒÓÒÒÒd OÒÒÒÒÒÒÒ

O) (NCOOJOîŒiCOtNCO (NMNQO^COOCO Jj Ncôq-^-HOinoo ncnoo^ôiooo ^h ööööööoö ödöööodö

N (DinH(ÛTt0Oii5H CONOJCO^tOOCO^

^ óó^óóóóó dd-ídodod

CD CD(N00COÔ)00CO CÛCOOCO^Q^HCO m ^»ôhco«h rtNO)0-ico^^ m S CÛr-HCSJ^CÛO^N (D-H^^COOTtN

^ Íh dd^ddddd dd-îddddd

m ClO OC01O^0)C0tî*IO OlO(NÔ)COCÛlO Cm CO00O)O)^tCONN CON-tfOi^COWN ü^ NHONtOOHis CS-HOWCOq^N Ë in ooôdddd dd-íododo

0 5* CûlOr^rH(NN00C£l CDCDiOphînNNCD G) COOOlfl^SnNO COt^Œt^NCOCÔ ^ HHHtNtoqqoo rH-HO(Ncoqqoq ,- i dd^ddddd dd'-îddddd

O HOOOO)<NOCDOO'-' S ON"t<NOCDC0^

r-H gdd-îddddd « óó^óóóóó

r-t (N

'S 'S

lì î 5 S ? j É f 5I 5 * I il u ìì f îi S |l u II ! É . g « -g u S a S g « 3 u s ! .

I Í S a ? S « I s u g 3 at

Khalily, Imam & Khan : Sustainabllity of Microfinance Programmes 133

O) OicoíNinooweoT*

r* ÓÓÓÓÓÓÓÓ

q^ inrHoq^HcqocNjoq r-, ÓÓÓÓÓÒ6Ò

.10 OCOOOCO^rHLOO) <jm csiCT)NONino(N

<^h òóòòòòòò

3! NinococooÔi <J) COOOOOOOCSJCSN

^H ÒÒÒÓOÓÒÒ

CO ^HOOlflHtDHN

Ü, dòòòòòod

uj inrHr^TtinqcoN 2 öo^ööööd

CO (Din-HCOÔìriHCO

^2 dd^ddddd

PQ

a; S <N-"O)(NcoqqN tí 2 óóóóóóóó

6 ^ CDCDN'-hMNCOCO CD C0C0C0"^NC0(NO O^ ^^qcscDoqoq h dd-Jodooo

CO Tt^HCDNQO-HCOin O ONOOMOCOCT)^ Q^ N^HONNqôq _, óó^ôóóóó

- * to

11 fe I 5 I „ I §1 « -e w s S î. 3 I* §1 i

«

I -e

! w

i s

M S î.

t


relatively more for ASA. AIO per cent reduction in overhead cost will improve ESII of ASA by little over 10 per cent, and will reduce cost of loan production by 4 per cent. This suggests that both the organizations will be able to attain cost efficiency by reducing cost. It is more important for GB as the share of non-personnel overhead cost has been consistently over 40 per cent over the period 1993-97.

Improving Financial Efficiency Through Increasing Lending Interest Rate

Financial efficiency can be improved further through increasing lending interest rate. Sensitivity analysis of lending interest rate contains three scenarios of increase in lending interest rate: (a) 10 per cent; (b)15 per cent, and (c) 20 per cent. Results are reported in Table X. Quite understandably increase in lending interest rate will have positive impact on gross subsidy dependency, financial efficiency and ESII. The marginal change in gross subsidy intensity, financial efficiency and ESII will be equal to the marginal change in lending interest rate. This means, a 10 per cent increase in lending interest rate will improve financial efficiency and gross subsidy intensity as well as ESII by 10 per cent, Similar result will be derived for 15 and 20 per cent increase in lending interest rate.

Based on 1997 estimates, a 15 per cent increase in lending interest for GB will reduce ESII to 0.309 from the original estimate of 0.467, and gross subsidy intensity from 0.565 to 0.484. It should be noted here that such increase in lending interest rate for GB would make lending interest rate at 18.85 per cent, lower than that of ASA in 1997. A 20 per cent increase in lending interest will reduce ESII further to 0.26.

Average lending interest rate of ASA has gradually declined from 26 per cent in 1993 to about 19 per cent in 1997. A 15 per cent increase will reduce ESII from 0.345 to 0.177. The ESII will reduce further to 0.13 if a 20 per cent increase is made in lending interest rate.

Achieving Efficiency Through Increasing both Lending Interest Rate and Portfolio Mix

An attempt has been made here to determine the sensitivity analysis of simultaneous increase in both lending interest rate and portfolio mix. It was assumed that lending interest rate will only increase by 10 per cent and deposit investment will reduce by 10 per


î

I

o

H

j

I

N i -rv -h 00 O ID CO G) 00 NOONÔOOk^ C °> TînCÛO00rH(N ^ lD <N lO N ^H £* O <J) in^HNoqooqoî in^NONO^ q

O

•- ' ô ó ó ô ó ó ó òòòòòÒq s-

55 co o> o w w o co ôco^ôoo Q) oooiincD-H^cD coo'-icoooco^ 0) ^r-<oo^cNq<N rtr-.oq-ir-iqcQ ^h òòóòòód òdòòóóo

S oo-hoíionôo co-Hino"t^co C/) cocnoo-h-ho^ cocjoocsj-Hq^ <S oóòòòòò òòdòdòò

^ ÔOlDCOCOOOOO CDOOrfCOíNNCN ^3 M(NON00-h00 O<NN00NrH^t Oi ^(NNoqqq ^ cn co es p q o •- • dòòoòòó ò ó ó ó ö ó ò

W OOOOi^^CON OOCOinCOr-iN O in^tooNOìcO'-' coôococoin Q to n no h h q 1; cocNoq^-^qco rH òòóòòòó óóòòdòò

N (OûOCOOlOOO ^^t^CDNCOOì (T) O'HQOO^tCOlD OO'-hCOO'-hCOO Qv incN'-irfinqco ^cN^«tinqco ^h òò^òòòd dò-ìòòòò

CD ooooocoooiOrH cnoncot^ô Q) OOGiOOOincOCN C00)C0OC0C0t^ g^ in^H^HTtinq^ ifìr-H,-Hîoqco ^_ ó ò «-Î ó ó d ò dd^dddd

CiO o n ^ h oo h o oocNaí-Hâiin CÜO) OQTt*0)rHCOCN OOOìOìOMN

Ë^h ô ö ^ ó ó ô ô ö ó ó ô ô ô ó

O 2! comcO'-H'-iôi oomin-i^M^ 03 C^C7)O^r-HC0C0 ^HOinôocOO

r- i dd^dddd dd^dddd

J5 ococoN^ma^ cnco^ncococn Q © h h m (D o 'î q^qcNcoq^t r- t dd'-Hoddd dd>-Hdddd

| »H I pH »H pH

* _ Í | ? == | 5 5

s ! £ i * 2 ■£ S I i" I d 2 â

3 8 ô Í ï 1 2 % l 8 5 I I I o g


X

t COOON^OONO 0) o io o io co >-h co i-H ÒÒÒÒÒÒÒ

CO inooi^cDNO G) <* 0) N CO N CO CO

^h oööödöd

.IO O 00 N CO CO CN CO <eq) m i-i ^-t o ^ ^ oí (f) (j) co«oo(N^qo <í r- ( ÓÒÒÒÓOÒ

3^ OÍOOCDCOOCD^h O oocn^ooco-ho O) COCNCDINOOO i- < ÒÓÒÒÒÒÒ

CO cooo>mo>o<N

¡_^ dòòòòòò

-f. CO^QOOOÎCOCD

2 òò^dòdo

CO 0)O05C0<NC0C0 m COO)OOO^CO(N

^2 dd-iddod

CQ

53^ 0505ino)0)(Nco

ö 2 ddddddd

0 Q) '-hOî'-i^CÛCOCO O) pH^qcsifloq ^h dd^dddo

CO COCOGìNOOOì G) 00O5C0MO51O00 Qj inrHO<Ninqco r-H ddddddd

^ co

? 5 g S S c H >, w . I S c H

g» >, ^ ^ _

. O

& I I « s i t. i 3 S § S 2 § g


cent, 30 per cent and 50 per cent. As assumed earlier, fall in deposit investment will contribute to increase in average loan outstanding per borrower. The basic objective of this sensitivity analysis is to show a combined effect of marginal increase in lending interest rate and significant change in portfolio mix on efficiency and sustainability. Results are reported in Table XI.

Grameen Bank will be able to reduce ESII by about 35 per cent from 0.467 to 0.338, based on 1997 estimates, if it increases lending interest rate by only 10 per cent and changes the portfolio mix by increasing the share of loans to total loanable funds from 7 1 per cent to 80 per cent. Such significant changes will take place due to fall in gross subsidy intensity by 19 per cent, improvement in cost efficiency by around 4 per cent and financial efficiency by about 19 per cent. The combined effect of a fall in investment by 50 per cent and increase in lending interest rate will reduce ESII by 43 per cent. It should be noted here that combined effects of increase in lending interest rate and change in portfolio mix would be higher than the sum of independent effect of lending interest rate and change in portfolio mix.

The effects of simulation of change in portfolio mix will be small for ASA, as the share of loans in total loanable funds is already very high. It was 0.95 in 1997. Nevertheless, there will be marginal change in ESII with the change in portfolio mix and lending interest rate. A marginal increase in lending interest rate by 10 per cent and decline in deposit investment by 30 per cent for financing loans will reduce ESII by 35 per cent from 0.345 to 0.224 in 1997. The ESII will fall further to 0.222 if lending interest rate is increased by 10 per cent and investment is declined by 50 per cent.

In brief, GB will be better off if: (a) it increases loan volume as well as average loan size by reducing the size of investment in fixed deposits by 30 per cent; or (b) it increases loan volume through reducing investment in fixed deposits by 30 per cent and marginally increases lending interest rate by 10 per cent, and (c) it reduces non-personnel overhead cost. In either of the cases, GB will be able to reduce ESII and improve cost and financial efficiency quite significantly. The degree of change in portfolio mix and lending interest rate as well as ESII will still be lower than those of ASA in 1997. ASA will be able to improve sustainability by changing portfolio mix to a lesser extent, as their share of loan in total loanable fund is more than 95 per cent. Yet they will be able to improve ESII.


3

a a

i H

I tí Ö

li I tí Ö

8

ips ooncdoqido)Nt^ (NCDooNinoi^^t ^ u? coiom^to^Min eom^coo^MCO E CD inrHNoooocNOì io^noooocnoì o »-< ööddödöö dddddddd $¿

Q TtôOrH^Hqcíoq ^-Hoqq-iOíNa) pH ÖÖÖÖÖÖÖÖ ÖÖÖÖÖOÖÖ

^J2 ^^«N(0ifl0)O OC005COCOCOWO (ß Oi COMCOhhOhoü CONQOhhOhqo <rH dddddddd öööoöööo

3 NHtOtOtONHH rHOOCOCOCDOin 0) ^NtONoqooo cofNcOf-Hooqoq •-• ÓÓÓÓÓÓÓÓ ÓÓÓÓÓÓÓÒ

CO CDCOCOM^CîncO NSCOO^HTttO

55 èflOOHHqnOO CDINN^ÔCOOO rH dddddddd dddd9dcd

o

N comoiôcoooo ^^hncooôooo

gy ^«^coinqcoN. ^^q(Ninq<NN Jij dddddddd dddddddd

CO iflPÎNOOX'tHN ÔONOO^WOî (T> (UQO^îßCOO1* NNtOlOlflCOtOO) zJ iriHHqinq^s in^qNinqcoN

m^ dddddddd òô^óóôóó

tí Ifl CON^ÔOCDON MNON00NMM

g^ dddddddd dddddddd

0^ N01NHHC0C1N HOONlOHpjH. (0 O) rH^toNCDoqoo ^r-tq^cDOOoq rH ÒÓ^ÓÒÓÓÓ ÓÓ^ÓÓÓÓÓ

Q) CD^H^^CûqÔO iflHOHCDOÔO »-h dd'-idddd0 dddddddd

1) il ]! i íãlí i 3 1 i l§j = Ili fis ¡* I («£ t. ¡ i i ̂ g

flS « lililí Hi ssiliïs &


2 I

N co-tfOComoocsiTt

g> S ÏÏ í ã § S ES S r-H ÒÒOÒÓÒÒÒ

CD LOCONCONNO'-H 01 mooocooîcoo^

Xi ÒÒÒÒÒÓÒO

C/5S coôoq-ôqa) ^Ì_i òòòòòòòò

^ CSOOO^COCOlfìO

O) co-HCû-iqqqoo r-H ÖÖÖOOOOO

co oa>ioa>ôir5oo rp' O'-iCDOONCO^'-' rp' ^ cuiNNq-iqcço) 2 dódòòòod

^ dòóòdòdd

ro OOOOXCOOìlfìCO

k>^ ÒÒOÔOÓÒÓ

rHlO COOOCSNOOCDNN hü: oocûr-ic^^HiNcsoo J^Q

oocûr-ic^^HiNcsoo ^^q^coqqoo

g 2 dddddddd

è ^ O^-'tOO'-iOCÎCO (T) v> ^hNCOO^COOO (T) v>

rH^q^coqqo) Xh dddddddd

CO ißCD00CS)«tO)0000

g: irirHo^coqÔî Xi dòóòdòdd

fi I II ? § Î «li fe t. 3 ! „ i î:ï ^ s s .a ^ h 5 ä8H 2 "ö - ^ « ï < * ° b S £3 .0 .2 0 ^ «

i?? » i 5 I > a « n


VIII. EFFECT OF WAGE ON EFFICIENCY AND SUSTAINABILITY

It has been argued that GB is a formal organization while ASA is more of a quasi-formal organization in nature. These two organizations differ in nature of the programme, cost structure, and financial efficiency. It has been quite evident from the analysis that efficiency of GB is constrained by two factors: adoption of national pay scale, and low lending interest rate. Though GB can increase lending interest rate to make it at par with that of other MFIs, it is constrained by its own tradition of maintaining relatively low interest rate. The major constraint appears to be adoption of national pay scale. On the other hand, ASA is a quasi-formal organization with no legal entity to act as a financial institution. Its wage rate is quite low.

Higher average salary, among other factors, enables GB to take long time to be sustainable and cost efficient. Annual average salary of GB is three times higher than that of ASA. How important is the effect of wage on the efficiency and sustainability of GB and ASA ? An attempt was made to impose salary of GB on ASA and of ASA on GB in order to determine its impact on sustainability. Results are reported in Table XII.

As expected, GB becomes more cost effective and less subsidy-dependent than before. Compared to the original estimates, cost of loan production (cost efficiency) would have reduced by about 21 per cent from 0.214 to 0.170 in 1997. This has impact on sustainability. The ESII will decline by 46 per cent from 0.467 to 0.251. In contrast, ASA becomes more worse-off than before. Its cost of loan production in 1997 would have increased by about 88 per cent from 0.158 to 0.297. As such, its dependency on subsidy would increase enormously from 0.345 to 1.046.

The simulation results suggest that a quasi-formal organization like ASA would not be able to operate sustainably, given the present level of operation, if it had adopted national pay scale implying increase in wage as GB has done. Similarly, a formal organization like GB could be better off had it adopted quasi-formal salary of ASA. This implies that wage does significantly matter in cost-efficiency and sustainability. GB faces uphill task in attaining sustainability at a relatively high wage. Consequently, social cost of microfinance programme of formal MFIs will be relatively high. This finding has important implication on institutional development and microcredit market development.

Khalily, Imam & Khan : Sustainability oj Microfinance Programmes 141

ë

(D

s rS p (^ rS (^

j i* s

ü

ë I H

CD

G) in<N°?ioqoqqâ> G) •-1 dojj^öö^gö •-1 -

c^

CD rtrHrr-mcO^NCTrci

C/JiO ooo?:oo(Ohn«ûo

S ^!Ot(ÛMH(3)OÎ00 ^ òòcN^òdd^d *~ SI

,-h ddogr-îoddjjd

on ^mcr-Hin-Hin^N

îi CONgcOOOiog^ CD dd^r-Hodo^d -1 Si S «5

-M

pii ,.0) dd°0rôdd^d '-1 CO ^ 03 pii r-H '-1 CO ^ 03 S w ^ .s co te m ?

g ^ ÖÖ^ÖÖÖÖ^Ö tí

g ÎSSSSÊS «S | i: dd^ddoQ^d «u

"S CO cû^^mNoocoîn S ZJ Nr-HÔÎCNNCOÔO «

"" <u CO i . p co co "in co E v 5

r S "S w

I r s" s ^ â ©

t i a S ì s | I i 1 l 1 ? í eoo „ «

.So^c^ | t -n = fe £ 3 eoo „ .So^c^ Q oo Oü tu eu "C tì a K co


DL SUMMARY OF THE FINDINGS AND POLICY IMPLICATIONS

The issue of sustainability and social costs of microfinance programmes (MFPs) in Bangladesh has been revisited in this paper using ESII, an alternative index for measuring sustainability, efficiency, and the extent of subsidy dependency. This ESII index provides an analytical framework for explicit specification of net subsidy (social costs) into a number of ratios, such as, subsidy intensity, cost efficiency, financial efficiency, and portfolio mix. As it is evident that the extent of subsidy intensity is an inverse function of the degree of efficiency, and shift in portfolio mix leads to reduce subsidy dependency, the interaction of these ratios endowed with ESII tends to point out broad-based policy implications towards the achievement of sustainability. The major findings are summarized below in order to derive policy implications.

There are differences in the performances of ASA, a quasi-formal organization, and Grameen Bank, a formal organization. The differences are evident in programme design, cost and financial structure, interest rate, cost and financial efficiency, subsidy dependency and the degree of sustainability.

First, though gross subsidy had increased over time, the gross subsidy intensity has declined for both Grameen Bank and ASA. However, the intensity is lower for GB than ASA.

Second, interest subsidy resulting from inexpensive borrowings and grants for on lending is the dominating component of the total gross subsidy for GB, while for ASA, income subsidy is dominant. It is about 47 per cent of total gross subsidy for ASA as against a little over 8 per cent for GB.

Third, aggregate cost of loan production of GB was lower than that of ASA until 1996 but in 1997 it was higher partly due to increase in salary. But, ASA could reduce its cost of loan production by about 2 1 per cent in 1997. The higher degree of efficiency was more pronounced in employee cost efficiency. GB had higher employee cost efficiency than that of ASA, though its annual average salary is three times higher than that of ASA, reflecting higher productivity. However, GB is less efficient in non-personnel overhead cost.

Fourth, GB is less financially efficient than ASA despite being relatively more cost efficient. Two factors have contributed to it: (a) relatively low level of allocative efficiency implying inadequate response of GB to its change in indicator of shift (price ratio of two outputs-loan and investment), and (b) low lending interest rate.

Khcilily. Imam & Khan : Sustainability of Microfinance Programmes 143

Fifth, the subsidy dependency of both GB and ASA has declined over time. Increase in loan volume and cost efficiency has contributed to such decline in dependency. However, ASA could reduce dependency by a significant level through relatively higher lending interest rate.

Sixth, social costs, measured by net subsidy as percentage of average loans outstanding, of GB and ASA have declined over time. Based on the estimate of 1997, social gain of GB borrowers should be at least about Tk. 10 per Tk. 100 loan in order to exceed social cost. In the case of ASA, it should be about Tk. 7. On the other hand, given the fact that loan is tied to savings and savings is an increasing function of income, average member-borrower savings can be used as a proxy for social gains. If the net subsidy to the MFIs is treated as a net transfer to the poor, a net transfer of Tk. 100 might have generated savings by Tk. 293 in 1997 for GB and by Tk. 398 for ASA in the same year. Therefore, the proxy measure suggests positive net social gains for both GB and ASA.

The findings suggest that several factors explain differences in the sustainability of a quasi-formal MFI and a formal MFI. They are: (a) wage; (b) lending interest rate; (c) non-personnel overhead cost; and (d) subsidy for capitalization and operating expenses. ASA, as a quasi-formal organization, is more sustainable than GB because of lower wage, higher lending interest rate, low share of non-personnel overhead cost and dominating role of grants for capitalization and operating expenses.

Based on the findings, several policy implications can be derived: First, subsidy intensity can be reduced through changing portfolio

mix, increasing lending interest rate, and reducing non-personnel overhead cost. The options can be applied separately or simultaneously. A 30 per cent change in deposit investment (equivalent to the 9 per cent increase in share of loan to total portfolio) for GB, can alone reduce ESII by 12 per cent. Similarly, a 10 per cent reduction in non-personnel overhead cost will improve cost efficiency by 4 percentages and reduce ESII by a little over 9 per cent. A 10 per cent increase in lending interest rate will reduce ESII and improve financial efficiency by the same margin. However, a combination of the options will be more effective. An increase of 10 per cent in lending interest rate along with 30 per cent fall in deposit investment and increase in loans by about 9 per cent will enable GB to reduce ESII by 28 per cent, cost efficiency by 4 per cent and financial efficiency by about 19 per cent. The results are similar for ASA. These implications were derived through simulation and sensitivity analysis.


Second, ASA, as a quasi-formal MFI, is cost-effective and sustainable but this might not remain so when it, like other NGOs, will operate within a regulatory framework. A transformation from quasi-formal to formal organization will be necessary in the future. This might make its programme costly if such transformation leads to increase in wage. It has been evident from the simulation that higher wage will take ASA off the path of sustainability given its present level of operation. Therefore, ASA may have to bring some modification in their production technology in order to increase loan productivity and minimize cost of loan production.

Third, GB will have to reduce its personnel as well as non-personnel overhead cost. As was evident from the analysis, GB, by being formal organization, is constrained by higher level of wage. It might be able to reduce cost of loan production in several ways: (a) introducing flexibility in the programme so that fixed membership size per branch can be increased up to certain scale without increasing additional cost; (b) reducing qualification requirement for the officials at the branch level so that lower level of the pay-scale can be applied; (c) injecting competition and introducing incentive for efficiency among the branches; (d) developing alternative loan products so that loan size per borrower can be increased, and (e) reducing operating costs at the regional and head office levels through reorganization .

Fourth, the finding that GB, being a formal organization, is less cost effective and less sustainable than ASA, a quasi-formal organization, has policy implication for developing microcredit market. Such finding raises the basic question about the process of developing microcredit market in Bangladesh. From the perspective of sustainability and low social cost of microfinance services, quasi-formal MFIs like ASA should exist and continue to flourish. However, questions can be raised: should ASA be able to maintain its low cost of loan production in the long run as it grows organisationally and when it will be subject to regulatory framework? Regulatory framework for formal financial institutions, as perceived and if applied, might make operations of both quasi-formal and formal MFIs costlier than before. However, it will be costlier for quasi-formal MFIs. Therefore, an appropriate regulatory framework should be designed in a fashion such that both quasi-formal and formal MFIs can operate simultaneously. It will contribute to sound development of microcredit market and will inject competition between quasi-formal and formal MFIs from the perspective of sustainability of institutions as well as least cost services to the targeted poor households.

Khalily, Imam & Khan : Sastainability of Microfinance Programmes 145

REFERENCES

Bruntrup et al 1997: M. Bruntrup, S. M. Alauddin, A. Huda and M. Rahman, Impact Assessment of the Association for Social Advancement. ASA, Dhaka.

Benston 1972: G.J. Benston, "Economics of Scale in Financial Institutions", Journal of Money, Credit and Banking, Vol. 4, pp. 321-341.

Cueva 1994: Belén Cueva, An Evaluation of ASA. ASA, Dhaka. Fruman and Goldman 1997: Cecile Fruman And Mike Goldman,

Sustainable Banking With the Poor - Microfinance Practical Guide for World Bank Staff, Research Report of the Consultative Group to Assist the Poorest, World Bank, Washington, D.C.

Hossain 1988: Mahbub Hossain, Credit for Alleviation of Rural Poverty: The Grameen Bank in Bangladesh, Research Report 65, International Food Policy Research Institute, Washington, D.C.

Healey 1988: Kurt Healey, ASA Experience in Action, ASA, Dhaka. Hulme & Mosley 1992: David Hulme and Paul Mosley, Finance Against

Poverty, Volume 1 & 2, Routledge : London. Jain 1999: P.S. Jain, Maturing of Micro Credit Movement, ASA. Khalily 1991: M.A. Baqui, Khalily, An Analysis of the Viability of Rural

Banks in Developing Countries: The Bangladesh Case, Unpublished Ph.D. Dissertation, The Ohio State University.

Khalily & Imam 1998: M.A. Baqui Khalily and M. Osman Imam, "Behaviour of Micro Finance Institutions and The Case for Regulation and Supervision," Paper presented at the Workshop on "Poverty and Finance in Bangladesh: Emerging Institutional Issues", July 8-11, Dhaka.

Khalily et al 1987: M.A. Baqui Khalily, Richard L. Meyer and N.J. Hushak, "Deposit Mobilization in Bangladesh: Implications for Rural Institutions and Financial Policies", The Bangladesh Development Studies, XV4:85- 117.

Khandker 1998: Shahidur R. Khandker, Fighting Poverty with Micro Credit - Experience in Bangladesh, The Oxford University Press, N.Y.

Khandker & Chowdhury 1996:S.R. Khandker and O.H. Chowdhury, "Targeted Credit Programs and Rural Poverty in Bangladesh"


in M.A. Latif, S.R. Khandker and Z.H. Khan (eds.), Credit Program for the Poor; Household and Intra-household Impacts and Program Sustainability, Vol. 1, BIDS/World Bank, Dhaka.

Khandker et al 1995: Shahidur R. Khandker, M.A. Baqui Khalily and Zahed H. Khan, (ed.), Credit Program for the Poor: Household and Intra-household Impacts and Program Sustainability, Vol. 1, BIDS/World Bank, Dhaka.

Lau 1972: L.J. Lau, "Profit Functions of Technologies with Multiple Inputs and Outputs," The Review of Economics and Statistics, Vol. 54, No. 3, pp. 281-289.

Mullineaux 1978: D.J. Mullineaux, "Economies of Scale and Organizational Efficiency in Banking: A Profit Function Approach", Journal of Finance, Vol. 33, pp. 259-280.

Rahman & Khandker 1996: R.I. Rahman and S.R. Khandker, "Role of Targeted Credit Programs in Promoting Employment and Productivity of the Poor in Bangladesh", in M.A. Latif, S.R. Khandker and Z.H. Khan (eds.), Credit Program for the Poor; Household and Intra-household Impacts and Program Sustainabilitv. Vol. 1. BIDS/World Bank. Dhaka.

Rashid 1998: A.K.M. Aminur Rashid, How ASA Operates Profitably Serving the Poor, ASA, Dhaka.

Rutherford 1995: S. Rutherford, ASA- The Biography of an NGO, ASA, Dhaka.

Srinivasan 1988: Aruna Srinivasan, A Multiproduct Cost Study of Rural Bank Branches in Bangladesh, Unpublished Ph. D. Dissertation, Ohio State University.

Wahid 1998: Abu Wahid (ed.), The Grameen Bank: Poverty Relief in Bangladesh, Boulder Co., Westview.

Yaron 1992: Jacob Yaron, Successful Rural Finance Instituttons, World Bank Discussion Paper 150, Washington, D.C.

Yunus 1983: Muhammad Yunus, "Group-Based Savings and Credit for the Rural Poor: The Grameen Bank in Bangladesh", In Group Based Savings and Credit for the Rural Poor, Geneva, ILO.

an analysis of grameen bank and asa

Documents

mahmood osman

borrowing

lending interest

sustainability

bangladesh

interest rate

opportunity

dims