4.3 Measures of Outreach and Sustainability
4.3.1 Outreach Dimensions
4.3.2.3 Costs Control
For all its short-cornings, the SDI has provided analysts and rnicrofinance practitioners with a tool to evaluate the true cost of rnicrofmance programmes without incurring huge expenses in doing so (Schreiner and Yaron, 1999). A subsidy dependent organisation may still be sustainable - this is not necessarily a poor allocation of resources, as long as the funds could not have been applied in a better alternative development use. Subsidy independent organisations may not necessarily improve welfare if they impart huge costs to users of the financial services. Data permitting, the SDI will be computed in this KZN study for the MFOs that are subsidized. The simplest form of the SDI calculation will be used since data collected from the financial organisations are very much at an aggregated level.
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using cost effective fmancial technologies to screen loan applicants, enforce loan contracts and to service savings (Yaron, 1994; Riley, 1996).
4.3.2.3.1 Administrative Costs
Christen et a!', (1994) and Riley (1996) suggest several measures of cost-effectiveness that will also be used in this study, where possible, including:
• Administrative costs as a% of annual average loan portfolio
• Number of loans per staff member
• Number of loans per branch
• Average loan portfolio per staff member
• Average loan portfolio per branch
• Personnel costs as % of average loan portfolio
• Personnel costs as a% of total administrative costs
Best practice MFOs maintain high levels of productivity. However, controlling costs is also a relative issue since some financial technologies, together with the target market that MFOs service, may necessarily imply slightly higher operational costs. Operational costs are also strongly linked to scale and loan size, withlarger MFOs being able to spread fixed costs over a bigger client base. Administrative costs are thus a complicated mixture of scale of operations, loan size and administrative efficiency, and these need to be analysed holistically to obtain a true understanding of cost-effectiveness (Riley, 1996; Gonzalez-Vega et al."
1997}
4.3.2.3.2 Loan Losses
Best practice MFOs control loan losses, which are a function of the financial technology that is able to effectively screen loan applicants and create the necessary incentive for borrowers to repay their debt. Several measures have been used in studies by Christenet al., (1994) and Yaron (1994). Rosenberg (1999) provides a concise ~et of measurement tools to measure delinquency rates in MFOs, including collection rates, arrears rates and portfolio-at-risk (defmed as the ratio of outstanding balance of loans with overdue payments to total outstanding balance). An important aspect of arrears monitoring is that arrear measures must higWight repayment problems early, indicate when delinquency levels have reached viability threatening levels, help predict how much of the portfolio will eventually be lost, and not be open to manipulation to hide the true level of arrears.
Collection rates are a common measure of delinquency. Of critical importance is the composition of the numerator and the denominator. Rosenberg (1999) argues that the traditional collection rate (also known as the Asian collection rate - where it was first used) where the numerator incorporates all money received and the denominator incorporates all amounts due in a period can give erroneous information if bad debt is not written off, since amounts due then accumulate in the denominator. This makes it difficult to accurately collections on installments due in the current period not alerting the MFO to any immediate collection problems. Instead, revised collection rates are proposed that firstly measure the amounts collected on-time and in cash in the current period (excludes arrears and advance payments) relative to the amounts due for the first time in the current period (referred to as the on-time collection rate). A second collection rate measures the amounts collected in cash in the current period (arrears and advance payments included) relative to the amount due for
the first time in the current period (current collection rate). Both of these collection measures give a better reflection of what the true loan collection rates for the MFO are.
Inthis KZN study, the collections as computed by the study MFOs will be documented and then adjusted. Collection rates will be estimated to establish whether existing measures deviate substantially from recommended measures. The arrears rate, measured as late payments over balance outstanding, is also a common measure and will be computed in this study where possible. Rosenberg (1999) cautions against this measure since it has a tendency to create an overly-optimistic view of arrears, particularly in a rapidly growing portfolio.
Portfolio-at-risk, calculated as the outstanding balance of loans with late payments over total outstanding balance, is the third measure that will be used in this study. The numerator of this measure can be pegged to any degree of lateness, with MFOs arguably having a tighter definition of loans, as terms are relatively short.
It is important when assessing the outreach and sustainability of MFOs that the financial technology plays a pivotal role in enabling MFOs to achieve substantial levels of outreach on a sustainable basis (Gonzalez-Vegaet aI., 1997). Zander (1997) reports three dimensions of innovations: flnancial system innovations, process innovations, and product innovations.
Financial system innovations affect the financial system as a whole and include the establishment of new types of intermediaries and changes to the legislative framework.
Process innovations cover the introduction of new business processes leading to increased efficiency or market expansion. Product innovations include the introduction of new products in response to specific market conditions or to be able to better serve a specific niche clientele.
Best practice MFOs have successfully introduced process and product innovations within a given legal and regulatory framework to achieve high levels of outreach on a sustainable basis. This has enabled these institutions to shift the production possibilities frontier outward through fmancial innovation (Gonzalez-Vega, 1993; Meyer and Nagarajan, 1997). Process and product innovations have occurred in several different ways and have enabled MFOs to effectively service different niche markets (Navajas, 1999). The most notable innovations have been in the area of loan applicant screening and loan contract enforcement. Numerous examples exist in Bolivia, Bangladesh and Indonesia where MFOs have cost-effectively reduced the problem of asymmetric information and divergent incentives between borrower and lender (Christen et al., 1994; Yaron, 1994; Chaves and Gonzalez-Vega, 1996; Gonzalez- Vega et at., 1997).
In this study, the evaluation framework will document financial technologies used by KZN MFOs, and how these technologies have changed over time to make a qualitative assessment of their relative success. Section 4.4 briefly outlines some of the aspects covered in the analysis of MFO financial technologies.