III.6.1- Determinants of a profitable institution
Generally speaking, for an institution to be profitable over one
period, its resources
should at least cover its expenditure. Profitability may be
reached according to two pathways: One is to reduce expenditure, more precisely
the transaction costs; the other consists in enlarging output by increasing the
interest rate on credits.
III.6.1.1- Reducing transaction costs
A transaction will take place through a process of
identification, meeting and negotiation
between the partners that are concerned (Howitt, 1985). Thus
it generates costs, which should be specified according to their nature and
origin (Diamond, 1987).
Poor population is a very risky population related to high
transaction costs. Being given that MFIs cannot elucidate all information on
their customers, they try to minimize their default
11 Comité d'Echanges, de
Réflexion et d'Information sur les Systèmes d'Epargne.
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Analysis of microfinances' performance and
development of informal institutions in Cameroon
By Djamaman Brice Gaétan
risk. On the one hand, they adopt innovating strategies such
as close collection of refunding, constitution of interdependent groups,
literacy programs, management training of the customers and monitoring: All
these elements generate high operation costs. In addition,
MFIs grant weak amount loans because they do not distinguish
good from bad customers, especially as regards start-up businesses. To these
costs of failure are added then administrative costs. Most typical and serious
errors often concern recruitment and staff management policy: Some MFIs
increase progressively the number of agents with the increase of customers and
the opening of local agencies, without evaluating beforehand short and medium
term profitability of their operations (Lelart, 2006). The reduction of
transaction costs is one of the surest and effective means enabling to build
self-reliant, viable and efficient institutions. To cut costs to the minimum,
especially ex-ante costs, the technique of proximity is generally used by the
lenders and very often, the literature is restricted to defend this
recourse.
Reaching poor customers who never had recourse to formal
banking services requires more interaction with the customers and more time
from the staff of the financial institution, which implies additional costs.
Costs of time use constitute the transaction costs for the MFI. They are
ex-ante, as regards costs of research of the funds to be lent, information
retrieval on the borrower, negotiation on the terms of contract, evaluation of
the borrowers and the project, design and registration of contracts, costs of
personnel, expenses for training both the staff and the customers,
transportation and communication in order to meet poor population; these
primary transaction costs are mostly of legal nature. In addition, costs are
ex-post, as regards the operation of contracts, costs of administration,
monitoring and control of the execution of agreements, in order to take care of
the contractual clauses, provisions, depreciation as well as the costs of
missed opportunities because of the agreements such as adjustment costs to
correct initial agreement or to establish another better agreement. These
various non-financial costs are transaction costs supported by the MFI and may
be gathered in three large headings. (Box 1).
Box 1: Transaction costs
TC = OE + LP + DE
TC = Transaction Costs
OE = Operating Expenses (expenses for personnel + other
administrative expenses + other operating expenses)
LP = Loss Provisions (variable expenses)
DE = Depreciation of Equipments (operating expenses or fixed
overheads)
42
Analysis of microfinances' performance and
development of informal institutions in Cameroon
By Djamaman Brice Gaétan
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