Analysis of microfinance performance and development of informal institutions in Cameroon

III.6.1.2- Carrying out a financial margin

MFIs need to be financially autonomous in order to ensure financial intermediation. That

can be reached by carrying out a financial margin (Box 2), i.e. a sufficient positive differential between the rate paid by MFIs to access funds and the rate earned on loans, so as to cover both direct and indirect costs related to the activity (Labie, 1996).

Box 2: Financial margin

FM = (Earned Interest - Paid Interest)/Financial Assets

F M: Financial margin ratio

Financial Assets: assets ensuring financial returns (investments, gross value of loan portfolio, etc.)

III.6.2- Perennial MFIs

Perennial MFIs can be envisioned from two angles: Life cycle and dependence upon subsidies.

III.6.2.1- Life cycle

The life cycle of a (successful) MFI represents an ideal way to reach financial balance and thereafter become perennial (Otero and Drake, 1993): It corresponds to the transformation of a supportive institution towards a thorough financial intermediation institution, according to a three phases process (Box 3).

The first phase of "demonstration" defines an operating mode adopted by the supportive institution, which enables it to lend to poor according to its environment and its constraints, and that it will progressively refine with its experiment. The phase of "second generation" must lead the institution, which has now reached a certain maturity, to consolidate its operating mode in order to tend towards relative autonomy. The last phase is that of the "operational development related to expansion", within which the transformation into a true bank dedicated to poor can be considered, especially in many countries where regulations prohibit NGOs to collect savings (Cornée, 2007): The institution aims at gradually providing the function and the status of a financial intermediary. Seven variables should evolve during these three phases: Administrative duty, customers, financing sources, methodology for the provision of financial services, financial management, autonomy and staff training (Counts et al., 2006).

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Analysis of microfinances'performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

Box 3: Life cycle of a successful MFI

Supportive Institution Microfinance bank

Time

Phase of demonstration Phase of second generation Phase of operational development

Perennial MFIs can be envisioned from another angle: Regarding access to financial Autonomy as a decreasing function of subsidies necessary to the operation of the MFI programs (Otero and Rhyne, 1994, in Labie, 1996), according to a process that encompasses four levels (Box 4).

Box 4: Perennial MFI according to dependence upon subsidies

			Dependence upon subsidies Time

Large subsidies Necessay ubsidies Doing without subsdies Financing through savings

The fir l concerns "tradit programs benefiting fm large subsidies": Inco

Are below operation costs; subsidies are the resources covering these costs and feed the

Loan funds decrease due to inflation and non-refunding from customers (Hamed, 2004). The institutions of the second level carry out interests that cover the cost of funds and part of administrative expenses; subsidies remain necessary to finance some operating elements and institutions borrow below the market rate. The institutions that reach the third level are those which for most of subsidies are eliminated; nevertheless they cannot do without some subsidies, although this stage is necessary to reach a volume of operation on a large scale.

The passage of the third level to the fourth level whereby MFIs become a true intermediate pole requires time; this last level is reached when the program is entirely financed thanks to the customers? savings and funds raised through market rates from official financial institutions (Labie, 1996). However, very few programs have reached this level, although it is regarded as an essential condition for perennial MFIs; most cases, which are generally at the third level, are those one regards as successful, e.g. Grameen Bank.

With respect to the two solutions at hand, reducing transaction costs or increasing the interest rate, few MFIs manage today to reach balance at their starting point. In general, reducing transaction costs proves to be difficult; indeed, it is necessary to increase the interest rate,

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan

although this solution is far from being the best strategy. The recourse to subsidies proves to be necessary when MFIs begin their activity and carrying out a financial margin is the key element of any long-term strategy.

III.7- The mission drift of MFI: The institutionalists and the welfarists III.7.1- The concept of mission drift

At the heart of the debate, the question arises whether a trade-off between the financial sustainability and efficiency and the outreach to the poorest microfinance clients by MFIs exists. The occurrence of a trade-off between the financial and social performance of MFIs is captured by the concept of mission drift.

Armendáriz & Szafarz (2009, p. 2) defined mission drift as «a phenomenon whereby an MFI increases its average loan size by reaching out wealthier clients neither for progressive lending nor for cross-subsidization reasons». In other words, an increase in average loan sizes may result from progressive lending, whereby microfinance clients reach out to higher credit ceiling based on their performance and demand. Also, average loan sizes may be higher resulting from cross-subsidization. Cross-subsidization means that a MFI reaches out to the wealthier unbanked, using larger average loan sizes, in order to finance a larger pool of the poorest unbanked, using small average loan sizes. Instead, the authors argue that mission drift occurs because MFIs find it more profitable to reach out to wealthier clients while crowding out poorer clients. In addition, the authors add that mission drift can only occur when MFIs announced mission is not aligned with the MFIs maximization objective.

Cull et al., (2007, p. 23) underlined that mission drift occurs when MFI show «a shift in the composition of new clients, or a reorientation from poorer to wealthier clients among existing clients».

Mersland & Strøm (2009, p. 3) reported that «if mission drift occurs, the MFIs outreach to poor customers, its depth of outreach (Schreiner, 2002), is weakened». In practice, the average loan size is the most common used proxy for measuring the depth of outreach¹². Alternatively, the authors argue that increasing the depth of outreach implies increasing the outreach to women clients. Also, the authors argue that switching from the group-based lending methodology to the individual lending methodology can be an indication for the occurrence of mission drift.

¹² Schreiner (2002), Cull, Demirguç-Kunt & Morduch (2007), and Mersland & Strøm (2009).

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Analysis of microfinances' performance and development of informal institutions in Cameroon

By Djamaman Brice Gaétan