Microfinance made simple

Last night I attended an event organized by JP Morgan and the Microfinance Club of New York (http://www.mfcny.org/) on successful microfinance strategies, featuring Mr. Shafiqual Haque Choudhury, founder of ASA Bangladesh (http://www.asabd.org/) which was recently ranked #1 on Forbes 50 top microfinance institutions list. He focused on strategies and innovations for achieving profits through operational efficiency and cost reduction rather than top-line growth (e.g. higher interest rates). Many may sound simple but, as he described, are often neglected by MFIs around the world:

1. Proximity to clients. Mr. Choudhury emphasized that MFI outlets "should be at the doorstep of people". This minimizes the travel cost for clients and makes funds more accessible. To have this ubiquitous presence also requires outlets to be as low cost as possible so they can be greater in number. I would add that developing infrastructure for micro-level funds transfer through mobile devices (as Globe Telecom has done in the Philippines) can further increase reach as well.

2. Observe after borrowing, as opposed to the more familiar methodology where the bank observes and evaluates the borrower before providing the loan. The benefit is reduced transaction cost and trust built up front by the MFI that motivates clients to repay the loan on schedule. I am slightly skeptical of this; while trust is important, I feel it doesn't address a borrower's ability to repay which can be partly assessed before transaction.

3. Minimize administration costs. While it seems obvious, the innovation is in how this can be done. ASA has done away with the complicated loan application form that requires multiple documents, pictures, etc. as well as long processing times and multiple visits by the client (thus decreasing access to funds). It also has no dedicated accountant or cashier. A branch may have just four loan officers who do everything from meeting clients to disbursing loans to managing the office (a loan officer at ASA handles an average of 412 loans).

4. Efficient branch design. Proximity to clients requires ubiquity of branches, making minimizing branch cost key. Contrary to many MFIs, which Mr. Choudhury described as having professional fronts, imported furniture, multiple rooms, and airconditioning, ASA branches are very minimal. The waiting area is in the same room as loan disbursement and a few ceiling fans substitute for airconditioning. Clients sit on a long bench as they await their turn.

5. No training. While training is a key component of the NGO model (Mr. Choudhury added that some MFIs spend up to 6 months on training officers), ASA follows a model of training through following a senior officer for six days, then learning on the job.

For all these innovations, ASA's cost for a $100 loan is $3 which is impressive. ASA is also able to maintain a 12.5% interest rate (though it should be noted that ASA follows a non-profit MFI model) and a NPL ratio of less than 1%. Comparing these ideas with my observations at Sahabat, the MFI I worked with in Indonesia, at first I was skeptical; from my experience there should be a balance between simplicity and excess. But then I realized how it works for ASA; with an average loan size of $130 and over 5.42 million borrowers (and 4.99 million savers) it is much more of a volume game, compared with the average loan size of Sahabat which was over $1000. The smaller loan size also implies a lower level of client sophistication which further reduces the need for sophisticated processes on the MFI's part. While I do feel these practices don't apply to every type of MFI, ASA stands as a testament to the value of operational simplicity.