Transcript Overview of MFI Model

SymBanc™:
A Simulator for Microfinance Institutions
Gary Hirsch, Guy Stuart,
Jay Rosengard, Don Johnston
International System Dynamics Conference
July 20, 2005
Microfinance
• Financial services for the poor
• Services
– Savings
– Credit
– Insurance
– Remittances and transfer payments
• Poor = those living in households where the per
capita expenditure is less than $1 per day, in
developing and transitional economies
• 2005 is the UN’s Year of Microcredit
Microfinance Institutions (MFIs)
• MFIs range in size and type from local savings
cooperatives to large (divisions of) commercial
banks
– E.g. Grameen Bank, Bank Rakyat Indonesia, BancoSol,
Compartamos, Mann Deshi Mahila Sahakari Bank
– Largest institutions are in Asia, especially South and
South-East Asia
• Mission can be one or all of:
–
–
–
–
Financial intermediation
Economic development
Poverty alleviation
Women’s empowerment
• Credit
Active Clients
– Active clients = has outstanding loan at time of report
– Microcredit Summit in 2004 reports that, as of 12/31/2003,
its 2,931 member institutions had just under 81 million active
clients -- this is hard to believe
– Good guesstimate: 60m to 70m active clients
• More savers than borrowers
– “Big four” Bangladeshi MFIs have over 10m savers (same #
as borrowers)
– BRI has 30m savers (10x the # of its borrowers)
– Numerous credit unions and cooperatives provide savings
services
• No good count of insurance clients – many borrowers
pay for life insurance to cover the outstanding balance
of their loan in case they die
– New medical insurance products being developed-jury is out
Strategic Questions
• Urban/rural
• Women only, men and women
• Group or individual lending
• Credit only, or credit and savings
Operational Issues:
Information and Cash Flows
• Large number of small transactions:
– Swakrushi Federation of cooperatives in Andhra Pradesh,
India process about 80,000 savings deposits of Rs.20 (40
cents) per month, through 259 coops
– In May 2004 BRI made 211,320 loans with avg. size of just
under $1,000, through approx. 4,000 local offices
– ASA in Bangladesh had 264 borrowers and 290 savers per
staff member as of 12/31/2003 (mixmarket.org)
• Highly reliant on local, non-formal information, and
information feedback from own operations. Results in:
– Step lending
– Aggressive delinquency management based on good MIS
– Great emphasis on maintaining institutional reputation of
“fair but firm”
Overview of MFI Model: Drivers of Borrowing
Area
Demographics
Size of
Loans
Target Borrower
Population
Applicants
Branches, Loan
Officers and Other
Staff
MFI
Strategy
Product
Design
Interest Rate
and Terms
Borrowers
Current Loans
by Stage
Funds Available
for Lending
Overview of MFI Model: Sources of Funds
Area
Demographics
Size of
Loans
Target Borrower
Population
Applicants
Borrowers
Funds Available
for Lending
Savings
Branches, Loan
Officers and Other
Staff
MFI
Strategy
Product
Design
MFI Equity
Current Loans
by Stage
Repayment
Loan Losses
Net Income
External Sources
Interest and Fee
of Funds
Income
Interest Rate
and Terms
Overview of MFI Model:Borrowing by Stage
.
New
Borrowers
Stage 1
Stage 2
Repeating
Stage N Curing
Delinquency
Delinquent
in Stage N
Current Loans
New to Stage N
in Stage N
Becoming
Delinquent
Dropping
Out
Going on to
Next Stage
Stage 3
Default
Overview of MFI Model: Delinquency and Default
Area
Demographics
Dropout
Size of
Loans
Target Borrower
Population
Applicants
Borrowers
Funds Available
for Lending
Savings
Branches, Loan
Officers and Other
Staff
Cost of
Funds
Current Loans
by Stage
Delinquent Loans
Repayment
by Stage
MFI Equity
Net Income
MFI
Strategy
Cured
Delinquencies
Interest and Fee
Income
Defaulted
Loans
External Sources
of Funds
Product
Design
Expenses
Interest Rate
and Terms
Loan Losses
Design Features to Enhance Learning: The Model
• Realistic constraints eliminate easy options, require
thoughtful strategies
• Tradeoffs require careful choices--e.g., aggressive
marketing or high interest rates may increase
revenue, but attract poor credit risks or create
repayment problems
• Short-term profitability vs. long-term viability
• Easy to “paint yourself into a corner” and run out of
money despite early breakeven
Design Features to Enhance Learning: Interface
• Students can control how often decisions are made, must
keep their “eye on the ball”
• They can compare results across strategies to identify
relative advantages
• Capability to drill down into detailed results to understand
what’s happening
• Dump results to spreadsheet to do more extensive analysis
• Challenging scenarios let students reality-test strategies
Defining Target Market
Loan Product Design Decisions
Staffing and Productivity Decisions
Results: Profit and Loss
In High Growth Strategy, Borrowers Grow Until
MFI Runs Out of Cash...
…Even Though MFI is Profitable
Rapid Growth of Branch Network Has Kept MFI
from Building Equity Required by Funders
Less Aggressive Growth Strategy Permits
MFI to Build Equity...
Capital Adequacy
1
0.75
Medium
0.5
0.25
High
0
0
6
12
18
24
30
36
42 48 54 60
Time (Month)
Capital Adequacy : high growth
Capital Adequacy : medium growth
Capital Adequcy Standard : medium growth
66
72
78
84
90
96
...and Ultimately Attract More Borrowers
Total Borrowers
40,000
30,000
20,000
High
Medium
10,000
0
0
6
12 18 24 30 36 42 48 54 60 66 72 78 84 90 96
Time (Month)
Total Borrowers : high growth
Total Borrowers : medium growth
What Students Learn from Using SymBancTM
• There are characteristic ways of failing such as
growth outrunning capital or pursuing high volume at
the expense of profit and building equity
• There is no single right answer; multiple ways to
succeed depending on objectives
• Strategies do require internal consistency--the right
combinations of target market, product design,
staffing and branch expansion, and funding sources
• Good strategies under some circumstances may not
survive economic shocks; need to be resilient
SymBanc™ As A Teaching Tool (1)
• SymBanc™ developed initially for FIPED (Financial
Institutions for Private Enterprise Development)
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International executive program at KSG/Harvard University
2-week program offered once a year since 1995
Covers both microfinance and SME finance (MSMEs)
Focuses on the sustainable provision of financial services
for MSMEs and low-income households
– Participants senior executives from financial institutions,
non-governmental organizations, and international
assistance agencies & high-ranking government officials
– Consists of core lectures, applied case studies, practical
exercises, simulated negotiations, participant presentations
SymBanc™ As A Teaching Tool (2)
• SymBanc™ funding from Harvard Provost’s Fund for
Instructional Technology – for promoting the
innovative use of IT in teaching
• Introduced in stages to facilitate familiarization
• Participants divided into three-person teams
• Taught as case studies
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Multiple scenarios with different policy objectives
Preparation at home with discussions in class
Interactive, iterative, and competitive
Everything in one small file on rented laptops
SymBanc™ As A Teaching Tool (3)
• More efficient & effective than conventional means to:
– Introduce complex policy (strategic) and operational
(tactical) interrelationships
– Explore tradeoffs between achievement of institutional
mission and financial sustainability
– Confirm or refute assumptions and preconceptions
• Reflects messiness of real world
– No single “correct” answer - bundles of viable scenarios
– Important to identify and mitigate unanticipated shocks
– SymBanc™ simulation is truly a dynamic system