Are "upmarket" MFIs really more sustainable?
July 16, 2008, Christoph Kneiding
Can microfinance institutions reach poor people and cover their costs at the same time? In the graph below, we plotted Operational Self-Sufficiency (a common measure of the extent to which MFIs cover their costs) for three types of institutions: providers of “small”, “medium”, and “large” loans (as measured by the average loan balance in percent of GDP per capita). What difference do we see? Not much, in fact. The average operational self-sufficiency for the “up-market” MFIs is slightly higher, but in general the three curves are quite similar. This observation doesn’t change if we break down average loan balances into more subgroups.
In his blog post of June 20, Rich Rosenberg showed that loan size is one factor – but not necessarily the only one – that drives MFIs’ interest rates. Smaller loans tend to carry higher interest rates, probably because the effort involved in extending a $100 loan is practically the same as for a $1,000 loan. Putting all these observations together, it seems that MFIs offering smaller loans offset higher operational costs by a combination of charging higher interest rates to their clients and securing concessional sources of funding. But they do not, on average, need to cover more of their costs through recurring injections in the form of grants or equity funding than the average MFI in the MIX.
Where does this leave us in the old outreach-sustainability discussion? 10 years ago, fronts were hardened between a “poverty camp”, advocating that microfinance should first and foremost reach the very poor, and a “sustainability camp”, whose proponents argued that MFIs should target financial sustainability, starting with covering all their operating costs. People in the poverty camp feared that pursuit of financial objectives would impede MFIs’ ability to serve poorer clients. The graph above suggest a more optimistic conclusion: sustainability seems to be decoupled from outreach, and most poverty-focused MFIs seem to be able to factor their operational costs into their loan prices.
