For any program or organisation, the issues of cost-effectiveness and efficiency are important. It is very important for Microfinance Institutions (MFIs) as well. In MFIs, it is not desirable to shift the burden of higher costs and inefficiency to the poor clientele. The MFI management should be committed and should have the capacity to provide financial services to the poor at the least cost. This is only possible if it has a dedicated full-time leadership, an efficient and effective management system, a strategic plan and a professional staff.
A clear understanding of the vision and mission of the microfinance program is very important on the part of all concerned. If the vision is a poverty free world and if the mission is to reduce poverty with microcredit, we must be very conscious about the optimal use of scarce resources (human & financial) to fulfil our mission. Time and knowledge are also very valuable in this respect. If we believe that there should not remain a single poor person on earth, we should set the time when we want to see it and we should know how to do it.
We have set our goals under the microcredit summit campaign to reach 100 million of the poorest households by 2005 and the UN has set the goal of halving the number of extreme poor by 2015, under its Millenium Development Goals. We can only keep our commitment within the given time frame, provided we know how to do it at least cost and at what degree of efficiency and speed.
For cost reduction it is a precondition that all cost items should be clearly known, enlisted and arranged in order of priority and importance. The expenses may be categorised into major and minor and also essential and non-essential. These may also be classified into financial (deposit, borrowing etc.) and non-financial (salary, training etc.) expenses. The cost estimates in the budget should be based on the evaluation of strategic options for each of the items and identification of steps which will immediately reduce costs. Brainstorming sessions could be organised on cost cutting initiatives.
Staff salary is the major item of non-financial expenditure for any microfinance program. Salary structure should be such that it is attractive to the employees to give their best and at the same time it is in line with the overall financial position of the institution. Adequate care should be taken to ensure that staff should be recruited according to the need and the plan, to perform a specific job and achieve a specific target. Any other consideration in the recruitment, ambiguity in the assignment and concession in the performance will increase the cost of operation. In case, any staff is not performing well or underemployed, he/she becomes a liability for the program. The program suffers from the indifference, inefficiency and underemployment of such a staff and incurs a higher cost. In order to keep the cost under control, it is necessary that the risk of default should be avoided and the amount of bad debt provision be minimised. It is also necessary that the key result areas of the program be carefully identified and developed through a participatory process. It should be widely circulated among the staff for their compliance.
Salary costs can be reduced by raising the productivity of the staff and giving them targets in terms of number of active borrowers, amount of loan outstanding, the rate of repayment, and mobilisation of saving. They should be well trained, motivated, committed and creative so that the costs of targeting, organizing, monitoring, supervising, accounting and measuring impact, remain at the minimum. The dropout rates of both the staff and the clientele should be as low as possible through motivation and performance based incentive package.
Decentralisation of decision making, promotion of team work, group based operation, development of performance standards and easy to follow guidelines will save both money and time. Whether the cost reduction strategies are appropriate or not, will depend on the efficiency of the management and the management efficiency can be improved by providing necessary training to the staff and setting key performance indicators keeping in mind the industry standard.
The costs of training, targeting and measuring impact, may be considered, planned and incurred in a way that these are cost-effective. To keep these and other costs within limit and to prevent fraud and forgeries, internal audit system should be introduced. External audit is also useful for transparency and verification.
Computerisation of accounting and Management Information System (MIS) plays a significant role in cost reduction. It saves time, increases efficiency, ensures accuracy, facilitates monitoring and portfolio tracking, provides security and improves the system as a whole. It also helps efficient fund management, stores varieties of information and provides analytical and reporting options at comparative costs.
There should be no unnecessary expenses on account of non-performing assets or expenses that are not compatible with the character of the poverty focused programs. Although, the whole operation is expected to be based on business principle of minimising cost and maximising return, it should have the character of social entrepreneurship where simplicity and social service are more important than making profit for personal enjoyment and aggrandisement.
As the program must achieve sustainability and operate on a sustainable basis, there is always the need for constantly comparing the cost and the return and reaching the breakeven point as soon as possible. A variance analysis of the actual expenses of line items with the budgetary provision is also important in this connection.
It is well known that with increasing scale of operation, there is increase in cost at a decreasing rate and hence there is cost saving. However, whether the program will really enjoy the benefit of economy of scale, will depend on the aggregate level of cost and revenue structure. It will depend on appropriateness of the strategies for reduction of interest and non-interest expenses and the amount of interest earning. Borrowing funds with lower rates of interest from different sources, using savings for on lending purposes and keeping minimal idle funds, will decrease the cost of fund.
How costs can be successfully reduced can be learnt from the innovative approaches of best practices like Grameen. In Grameen Bank, for instance, each field staff is well trained to provide financial services to 500 active borrowers and each branch is required to mobilise enough deposits to meet its demand for on-lending funds. The measures thus ensure the high productivity of each staff and reduce the cost of borrowing from the head office or other sources.
Computerisation of MIS and accounting system also helped Grameen in reducing its costs at all levels. It has computerised 95% of its branches (1196 branches in total), serving 3.5 million borrowers. Now the branch staff devote more time for the borrowers rather than spending on paper work. As an improved system, they are now provided with preprinted repayment figures for each weekly meeting. If every borrower pays according to the repayment schedule, the staff has nothing to put on the document, except his/her signature. Only the deviations are recorded. The only paper work to be done at the field level is to enter figures in the borrower’s passbook. Fourteen zones, out of 18 are connected with each other and the head office, through an Intranet. This has made communications and data transfer easier and cheaper.
Changes in retirement policy, transportation and traveling, purchase and procurements and above all the redesigning of loan and saving products and introduction of loan insurance savings fund under the Grameen Generalised System (Grameen Bank-II), have contributed a lot in cost reduction of Grameen operations. Given the continuous efforts for reducing costs, increasing efficiency and attaining self-sufficiency, the new Grameen branches are expected to reach the break-even point within first six months of their operation.
It is evident from the experiences of successful MFIs that strategies for reducing costs and improving efficiency are not something that can be developed over night or may be implemented once for all. This is a continuous process. This is possible if we really believe in it and if we are committed to it. The question is whether we should reinvent the wheel for this or we should learn from the experiences of others and concentrate on improving the system through our creativity and collaborative efforts. This is our own decision. We can go either way considering the cost of time and resources that we have. Given our access to the experiences of leading practitioners, we can develop appropriate strategies to effectively reduce our costs and improve our efficiency to provide financial services to the poor on a sustainable basis.