How Should We Fund Micro Finance

How Should Microfinance Institutions
Best Fund Themselves?

Felipe Portocarrero Maisch
lvaro Tarazona Soria
Glenn ! "estle#
Inter-American Development Bank
"ashin$ton% !&!
Sustainable Development Departament
Best Practices Series
Cataloging -in-Publication data provided by the
Inter-American Development Bank
Felipe Herrera ibrary
Portocarrero M!% Felipe 'Portocarrero Maisch(!
How should microfinance institutions )est fund themselves? * Felipe Portocarrero Maisch% +lvaro
Tarazona Soria% Glenn ! "estle#!
p!cm! 'Sustaina)le evelopment epartment Best practices series , MSM-./0(
Includes )i)lio$raphical references!
.! Microfinance1Finance! 2! Small )usiness1Finance! .! Tarazona Soria% +lvaro! II! "estle#%
Glenn ! III! Inter-+merican evelopment Ban3! Sustaina)le evelopment ept! Micro% Small and
Medium 4nterprise ivision! I5! Title! 5! Series!
//2!672 P//1dc22
HG.68!/ !P// 2009
Felipe Portocarrero Maisch is a consultant and researcher in the field of microfinance! lvaro Tarazona
Soria is a consultant in microfinance! Glenn ! "estle# is senior advisor for microenterprise in the Micro%
Small and Medium 4nterprise ivision of the Sustaina)le evelopment epartment! The authors wish to
than3 Socorro +cu:a '&M+& +re;uipa(% Pedro +rriola and Gerardo Mendieta 'Banco <os +ndes Pro-
credit(% 4duardo Bazo)err# 'Prodem(% =o)erto Guanilo '&M+& Tru>illo(% ?ulio Her)as 'Bancosol(% ?aime
@uesada '&=+& Se:or de <uren(% +ndrAs Br;uidi 'FI4(% Pedro Talledo '&M+& Piura(% n$ela MarCa
Becerra 'FinamArica(% Dlaus Ge#er and +ntonio MartCnez 'Procredit% Eicara$ua(% Todd Farrin$ton and
amian von Stauffen)er$ 'Micro=ate(% Flemin$ uarte% Felipe Morris and Bo) 5o$el! In addition% the
authors reco$nize the wor3 of Greta Greathouse% GMI% <<& and the GMI staff who prepared the material
on which +nneF + is )ased and also for contri)ution of material on capital mar3ets! =esearch was under-
ta3en with the support of the Institute of Peruvian Studies 'I4P(% which efficientl# or$anized adminstra-
tive tas3s and provided a stimulatin$ framewor3 for the discussion of results! In particular% we wish to
reco$nize &arolina Trivelli% I4P irector! Finall#% we than3 5anessa Banchero for her a)le provision of
research a ssistance!
The views and opinions eFpressed herein are those of the authors and do not necessaril# represent the of-
ficial pos ition of the Inter-+merican evelopment Ban3! Permission is $ranted to reproduce this paper in
whole or in part for noncommercial purposes onl# and with proper attri)ution to the authors% the Sustain-
a)le evelopment epartment and the Inter-+merican evelopment Ban3!
Eovem)er 2009
This pu)lication '=eference Eo! MSM-./0( can )e o)tained throu$hG
MSM Pu)lications
Micro% Small and Medium 4nterprise ivision
Sustaina)le evelopment epartment
Inter-+merican evelopment Ban3
./00 Eew Hor3 +venue% E!"!
"ashin$ton% !&! 20I66
e-mailG mip#meJiad)!or$
FaFG 202-/.2-7./7
"e)siteG www!iad)!or$*sds*msm
Foreword
The microfinance industr# is well on its wa# to maturit#! Knl# a few #ears a$o% the focus was on how to
$rant and recover loans and reach sustaina)ilit#! "hile these continue to )e important concerns% toda#
other issues have also come to the fore% such as the financin$ of microfinance institutions 'MFIs(! In their
start-up phase% man# MFIs depended on )orrowin$s from donors and $overnments! &urrentl#% however%
deposits are their main source of funds% easil# surpassin$ other fundin$ options!
In eFaminin$ this and related phenomena% the current stud# $athers to$ether a lar$e data)ase on the fund-
in$ side of <atin +merican MFIs% providin$ detailed covera$e of 9. re$ulated MFIs in nine <atin +meri-
can countries with ma>or microfinance mar3ets! To$ether% these 9. MFIs had BSL .%8MM million in total
lia)ilities at the end of 200/% includin$ deposits of BSL .!27 )illion '9I percent of total lia)ilities(% )or-
rowin$s 'from $overnments% donors% )an3s% social investors% and others( of BSL I.6 million '26 percent
of lia)ilities( and )onds outstandin$ of BSL // million '.!6 percent of lia)ilities(! In addition% the net
worth of the 9. MFIs came to L/69 million '20 percent of total lia)ilities% for a levera$e ratio of IG.(!
+fter eFaminin$ these and other important st#lized facts associated with the fundin$ of re$ulated MFIs%
the stud# $oes on to eFamine the relative costs of the four ma>or fundin$ sourcesG deposits%
)orrowin$s and stoc3 and )ond issue! +s one important aspect of this anal#sis% it eFamines the operatin$
costs associated with deposit mo)ilization% )ased on detailed costin$ studies of .0 <atin +merican
MFIs 'siF of which are new studies and are underta3en for this anal#sis(! +vera$e annual operatin$
costs are found to )e relativel# hi$h for savin$s deposits '..!7 percent of the amount mo)ilized( )ut much
lower for time deposits '2!7 percent(% which helps eFplain wh# most of the deposits mo)ilized )# MFIs
consist of time deposits '67 percent of the total(!
The stud# also eFamines rather comprehensivel# the other advanta$es and disadvanta$es of each of the
four fundin$ sources! It recommends a fundin$ structure for )oth maturin$ and mature MFIs in )oth sta-
)le and unsta)le macroeconomic environments!
Finall#% the stud# provides numerous )est practice recommendations for usin$ each of the four ma>or
fundin$ sources! The recommendations are particularl# detailed in the area of deposit mo)ilization% eFam-
inin$% for eFample% overall strate$#% client se$mentation% or$anization and mana$ement% strate$ies for
competin$ and increasin$ mar3et share% mar3etin$% and controllin$ the ma>or mar3et ris3s 'li;uidit#% term
mismatch% interest rate and currenc# mismatch(! The stud# ends with a series of su$$estions for how do-
nors and $overnments can )est support the fundin$ side of MFI operations!
lvaro =! =amCrez
&hief
Micro% Small and Medium 4nterprise ivision
+))reviations
+FP +dministrator of Private Pension Funds
+TM +utomated Teller Machine
&+F +ndean evelopment &orporation
&4T4 MeFican treasur# )ill
&F&
&ommercial Financin$ &ompan# 'a t#pe of re$ulated financial institution in
&olom)ia(
&G+P &onsultative Group to +ssist the Poor
&I4S
&onsorcio de Investi$aciNn 4conNmica # Social O&onsortium for 4conomic and
Social =esearchP 'Peru(
&M+& Municipal Savin$s Q <oan 'a t#pe of re$ulated microfinance institution in
Peru( &EB5 Eational Securities 4Fchan$e and Ban3in$ &ommission 'MeFico(
&KFI4 &orporaciNn Financiera de esarrollo% S!+! 'a second-tier institution in Peru(
&KE+S45 Eational Supervisor# &ommission for &ompanies and Securities 'Peru(
&=+& =ural Savin$s Q <oan 'a t#pe of re$ulated microfinance institution in Peru(
IF eposit Insurance Fund
4PHM4
Institution for the evelopment of Micro and Small 4nterprises
'a t#pe of re$ulated microfinance institution in Peru(
F& Forei$n currenc#
F4P&M+& Peruvian Federation of Municipal Savin$s Q <oans
FFP Private Financial Fund 'a t#pe of re$ulated microfinance institution in Bolivia(
FI4 Fomento a Iniciativas 4conNmicas 'an MFI in Bolivia(
FKE4SIF
Financial S#stem evelopment Fund to Support the Productive Sector
'a $overnment institution supportin$ the microfinance sector in Bolivia(
FBE+-P=K FundaciNn para la ProducciNn 'a second-tier institution in Bolivia(
GTR German Technical &ooperation
IB Inter-+merican evelopment Ban3
I4P Instituto de 4studios Peruanos OInstitute of Peruvian StudiesP
IF& International Finance &orporation
IFI International Financial Institution
ITF Financial transaction taF 'Bolivia(
<& <ocal currenc#
MFI Microfinance institution
E+FIBK Eacional Financiera Boliviana 'a second-tier institution in Bolivia(
EGK Eon$overnmental or$anization
=K4 =eturn on e;uit#
S+ Savin$s account
SB4F Superintendenc# of Ban3s and Financial Institutions 'in Bolivia(
SBS Superintendenc# of Ban3in$ and Insurance 'in Peru(
SKFK<
<imited purpose finance compan# 'a t#pe of re$ulated financial institution in
MeFico(
T Time deposit
TI44 MeFican e;uili)rium inter)an3 interest rate
BEP Bnited Eations evelopment Pro$ramme
BS+I Bnited States +$enc# for International evelopment
"+ "or3ersS accountsG Pa#ment for Time in Service 'Peru(
&ontents
!"ecutive Summary i
#$ Current %rends in &FI Funding #
Kverview .
Introduction .
MFI Fundin$ in <atin +merica 2
MFI eposits 7
Factors )ehind Successful eposit Mo)ilization 8
'$ Characteristics o( the Four %ypes o( Funding )
eposits M
Borrowin$ 26
Bond Issue 2M
Stoc3 Issue /.
*$ Financial and +perating Costs o( the Di((erent Funding Sources *,
Total &osts of Mo)ilizin$ epositsG Introduction /I
Total &osts of Mo)ilizin$ epositsG Principal Findin$s /6
Total &osts of the ifferent Fundin$ Sources I0
-$ %he +ptimal &i" o( Funding Sources (or &FIs ,-
The Financial 4nvironment and its Impact on Fundin$ ecisions II
MFI Size and <ia)ilit# Structure I6
Kptimal MiF of Fundin$ Sources IM
,$ Best Practices .'
eposits 92
Borrowin$ 98
Bonds 98
Stoc3 9M
Best Practices in Times of &risis 60
Implications of Best Practices for onors and Governments 60
Bibliography /*
Anne" A$ Step-by-Step Description o( Stock and Bond Issuance //
Introduction 66
Step .G The &apitalization Plan 66
Step 2G &hoosin$ e)t vs! 4;uit# 80
Step /+G Issuin$ 4;uit# 80
Step /BG Issuin$ e)t 8M
<oo3in$ Forward M/
Anne" B$ iabilities Structure and Capital (or .# atin American &FIs0 '111-'11* )-
Anne" C$ &icro2ate Data on &FI Borro3ing #11
Anne" D$ Cost Allocation Studies (or Si" &FIs #1.
The Methodolo$# of &ost +llocation )# +ssi$nment .09
&ost Stud# =esults .0M
i
4Fecutive Summar#
C422!5% %2!5DS I5 &FI F45DI56
7CHAP%!2 #8
In recent #ears% with the maturin$ of the micro-
finance industr# in <atin +merica% lar$e num-
)ers of microfinance institutions 'MFIs( have
$reatl# increased their outreach and sustaina)il-
it#! Their capital structure has also )een matur-
in$ and is pro$ressivel# approachin$ the struc-
ture that predominates in )an3s!
"hile man# MFIs initiall# depended on domes-
tic and international )orrowin$% their main
source of funds is now )# far deposits! Thus% an
important milestone in the fundin$ of MFIs has
)een reached! This o)servation is )ased on the
anal#sis of a data)ase we have constructed cov-
erin$ 9. MFIs that specialize in microfinance
and are su)>ect to prudential re$ulation! These
9. MFIs are located in nine <atin +merican
countries with ma>or microfinance mar3etsG Bo-
livia% &olom)ia% 4cuador% 4l Salvador% Hondu-
ras% MeFico% Eicara$ua% Para$ua# and Peru! +t
the end of 200/% the 9. MFIs had attracted BSL
.!27 )illion in deposits% which represented 9I
percent of their total lia)ilities! The deposit*loan
ratio had reached 69 percent )# the end of 200/%
indicatin$ that the amount of deposits was al-
most e;ual to the size of the loan portfolio!
Thus% it is now fair to sa# that deposits are no
lon$er the for$otten half of microfinance!
+t the same time% )orrowin$ has $enerall#
de- creased in importance in the MFI capital
structure! The issuance of )onds% while
promisin$% continues to )e little used! +lthou$h
precise estimates are not availa)le% issuin$
stoc3 to add new shareholders is a mechanism
rarel# used )# MFIs in <atin +merica! Instead%
the capital )ase of the MFIs has )een increased
mostl# )# reinvestin$ a lar$e share of the
siza)le profits that the MFIs have $enerated!
'MFI profita)ilit# is eFamined in &hapter /!( +t
the end of 200/% the
9. MFIs had BSL I.6 million in )orrowin$s '26
percent of their total lia)ilities of BSL .!M )il-
lion(% BSL /2!M million in )onds '.!6 percent of
total lia)ilities( and BSL /69 million in e;uit#
'20 percent of total lia)ilities% for a levera$e ra-
tio of IG.(!
Peru and Bolivia have )een clear leaders in at-
tractin$ depositsG the# have mo)ilized 68 per-
cent of the total deposits captured )# the 9.
MFIs in the nine countries% or approFimatel#
BSL M97 million of the BSL .!27 )illion total!
The Peruvian MFIs alone mo)ilized 92 percent
of the nine countr# total 'BSL 662 million(% with
the Bolivian MFIs mo)ilizin$ the remainin$ .9
percent 'BSL .M/ million(! In terms of )orrow-
in$% total lia)ilities and e;uit#% the dominance of
the MFIs in these two countries is onl# sli$ htl#
less% with 99% 6/ and 6. percent% respectivel#% of
the totals!
The 9. MFIs have attracted funds from the $en-
eral pu)lic into time deposits '67 percent of their
total deposits at the end of 200/(% savin$s ac-
counts '29 percent(% and chec3in$ accounts%
which have )een little used to date '0!. percent(!
Time deposits offer customers $reater returns%
and hi$h MFI time deposit interest rates have
enticed man# )an3 clients to transfer their time
deposits to MFIs! Time deposits are the most
sta)le t#pe of deposit% at least in the short run%
and have the lowest operatin$ costs% advanta$es
that must )e set a$ainst their $reater financial
cost and the depositorsS sensitivit# to the interest
rates paid! 5er# few of the 9. MFIs are author-
ized to offer chec3in$ accounts! Those that do
have such authorization $ive these accounts little
priorit# due to their hi$h operatin$ costs% the
powerful 'and interconnected( information s#s-
tems the# re;uire and the limited demand for
this product )# microentrepreneurs!
+ closer eFamination of MFI depositors shows
thatG 'i( MFIs have attracted a lar$e num)er of
depositors% thus eFpandin$ and diversif#in$ their
principal lia)ilit#% 'ii( the vast ma>orit# of clients
are small depositors% who provide onl# a small
share of total deposits% and 'iii( )oth the inter-
mediate and lar$e size depositors provide su)-
stancial shares of total deposits!
ii
CHA2AC%!2IS%ICS +F %H! F+42
%9P!S +F F45DI56 7CHAP%!2 '8
This chapter eFplores in $reater detail the four
t#pes of fundin$ used )# MFIs!
Deposits
MFI depositors are ver# hetero$eneous! It is im-
portant to se$ment these clients and develop
specific strate$ies for each $roup with respect toG
the t#pe of service the# are offered% adaptation
of eFistin$ products to the re;uirements of each
$roup% creation of new products and $rowth o)-
>ectives! It is important to se$ment clients )#
deposit size and also )# such criteria as a$e and
$ender! It is useful for MFIs to anal#ze their
own client data)ases in $reater depth in order to
more effectivel# orient mar3etin$ and cross-
sellin$ efforts! Most MFIs have not done this
#et% in some cases )ecause of limited data)ases%
)ut in most cases )ecause the# have not reco$-
nized the importance of this wor3!
Ban3s and other MFIs usuall# constitute the
principal competition for microfinance institu-
tions in attractin$ savin$s! The main stren$ths of
MFIs in capturin$ deposits are their relativel#
hi$h interest rates% personalized and efficient
service% an ima$e of financial solidit#% the fact
that no commissions or account maintenance
fees are normall# char$ed% low minimum
amounts for openin$ accounts% and the local
roots of re$ionall#-)ased MFIs! MFI wea3nesses
in mo)ilizin$ deposits includeG the lac3 of na-
tional networ3s similar to those of )an3s% which
facilitate pa#ments and transfers, their relativel#
low net worth, the lac3 of automated teller ma-
chines '+TMs(, and the limited ran$e of services
offered!
+ttractin$ deposits creates additional operational
ris3s and si$nificantl# affects the mar3et ris3s
that MFIs faceG li;uidit# ris3% term mismatch
ris3% interest rate ris3 and eFchan$e rate ris3!
eposit mo)ilization has important impacts on
MFIs in $eneratin$ and miti$atin$ each of these
ris3s!
+ttractin$ deposits creates new challen$es for
MFI mar3etin$ activities since MFIs must com-
pete in the mar3et with all of the esta)lished in-
termediaries! + mar3etin$ department or unit is
needed to plan advertisin$ campai$ns% anal#ze
clients and client satisfaction levels% and plan
and direct the use of communications media!
Borro3ing
+n anal#sis of Micro=ateSs data)ase on the
amount and composition of )orrowin$ )# 2/
re$ulated MFIs in seven <atin +merican coun-
tries shows that at the end of 200/% the pu)lic
sector was the sin$le most important source%
providin$ 76 percent of the funds lent to MFIs,
donors held second place with 2. percent, local
commercial )an3s and other internal sources
were neFt with .8 percent, and last% international
social investors and other eFternal sources pro-
vided onl# .7 percent of total fundin$!
The importance of )orrowin$ from pu)lic -sector
institutions and donors is that it allows MFIs to
en>o# interest rates and maturities that would )e
difficult to o)tain from domestic or international
commercial lenders! Borrowin$ from these for-
mer sources allows MFIs to reduce li;uidit# and
term mismatch ris3s! +t the same time% the in-
terest rates char$ed )# these sources are clearl#
positive in real terms and are trendin$ up toward
commercial rates! This avoids the creation of
serious distortions in the financial s#stem and at
the same time prepares MFIs to increasin$l#
access commercial financin$!
Borrowin$ also affects the ris3s faced )# MFIs
in several wa#s! First% when MFIs have credit
lines that have not )een full# utilized% li;uidit#
mana$ement is $reatl# facilitated since these
funds can )e mo)ilized ;uic3l# to deal with
short-term difficulties! Second% eFchan$e rate
ris3 is normall# increased% $iven that a su)stan-
tial part of MFI )orrowin$ is in forei$n currenc#
'F&(% while most MFI loans are in local currenc#
'<&(! Third% interest rate ris3s are also increased%
$iven that most MFI )orrowin$ is at varia)le
rates 'especiall# )orrowin$ from $overnment
second tier facilities% donors and social invest-
iii
ors( and most MFI loans are at fiFed rates! Fi-
nall#% )orrowin$ ma# increase concentration
ris3% )# leadin$ MFIs to depend on a small
num)er of creditors!
Bond Issue
Kf the <atin +merican MFIs% the onl# ones in
recent #ears to issue )onds on a s#stematic )asis
have )een Mi)anco in Peru and &ompartamos in
MeFico! +s a result% at the end of 200/% )onds
represented onl# .!6 percent of the total lia)ili-
ties of the 9. <atin +merican MFIs!
The various Mi)anco and &ompartamos )ond
issues have several characteristics in commonG
terms primaril# )etween .8 months and five
#ears% all )onds issued in local currenc#% and the
use of an investment )an3 with )road eFperience
and an eFcellent reputation to facilitate place-
ment! If the )ond issue was aimed at institutional
investors% the first issues used a credit enhance-
ment to facilitate their sale!
Stock Issue
Stoc3 issues )# <atin +merican MFIs have es-
sentiall# )een limited to pro$rams of reinvestin$
profits and the incorporation of new sharehold-
ers throu$h the private placement of shares! +
pu)lic offerin$ of shares throu$h the stoc3 mar-
3et has not #et )een made! +s underscored in
+nneF +% )efore )e$innin$ to loo3 for new
shareholders% an MFI should prepare a capitali-
zation plan% that is% a medium-term strate$# for
fundin$ the asset side of the MFISs )alance
sheet! There are three main scenarios for incor-
poratin$ new MFI shareholders!
The first scenario is the option that has )een se-
lected )# most non$overnmental or$anizations
'EGKs( that have )ecome re$ulated! The EGK
retains control of the entit#% )ut throu$h a pr i-
vate placement% it invites donors and social in-
vestors to >oin as shareholders! This is a wa# to
o)tain additional capital resources% improve the
MFISs ima$e throu$h the presence of hi$hl#
creditworth# shareholders% and )rin$ in technical
assistance! +t the same time% the EGK mana$ers
$et an additional )enefit since the# maintain
control of the MFI! The inclusion of private
shareholders is normall# deferred% althou$h
some MFIs have alread# )e$un to incorporate
them!
The second scenario occurs in entities% such as
the rural savin$s Q loan institutions '&=+&s( of
Peru% in which the shares are primaril# owned )#
private investors% rather than )# an EGK! These
private-sector investors ma# want to add donors
or social investors as shareholders )ecause of the
advanta$es cited in the previous para$raph!
The third scenario involves privatizin$ MFIs
that are owned )# the pu)lic sector% for eFample%
the municipal savin$s Q loan institutions
'&M+&s( of Peru! But privatization processes
are compleF and often have unpredicta)le re-
sults!
FI5A5CIA A5D +P!2A%I56 C+S%S
+F %H! DIFF!2!5% F45DI56
S+42C!S 7CHAP%!2 *8
This chapter eFamines the total costs of different
MFI fundin$ sources1includin$ )oth their fi-
nancial and operatin$ costs1)ased on cost stud-
ies of .0 MFIs! The institutions eFamined
cover a wide ran$e of sizes and fundin$ miFes%
factors that influence their financial and
operatin$ costs!
These cost data show that capital is $enerall# the
most eFpensive fundin$ source% while the cost
orderin$ of the remainin$ sources varies accord-
in$ to the size of the MFI! This ran3in$% from
lowest to hi$hest cost% is $iven in the ta)le
)e- low! The de$ree to which )orrowin$ is
su)sidized is found to have su)stantial impact
on whether deposit-ta3in$ or )orrowin$ is
cheaper for the MFI! This is particularl# the case
for the lar$e MFIs% $iven that these institutions
t#picall# have achieved si$nificant scale
economies in attractin$ deposits! Thus% the cost
order in$ of fundin$ sources $iven in the ta)le
)e low ma# )e affected )# chan$es that
$overnments and donors ma3e in their su)sid#
policies!
The MFIs eFamined here capture deposits
throu$h two )asic productsG savin$s accounts
'S+( and time deposits 'T(% in )oth local cur-
renc# and dollars! &onsiderin$ our sample of
nine MFIs that offer )oth products% the avera$e
iv
total cost of savin$s accounts is .I percent% ver-
sus .2!2 percent for time deposits! The operatin$
costs for savin$s accounts are much hi$her than
those for time deposits% avera$in$ ..!7 and 2!7
percent per annum% respectivel#% of the avera$e
account )alances! The interest rates paid on the
deposits constitute the difference )etween total
costs and operatin$ costs% and e;ual /!9 percent
for savin$s accounts and M!8 percent for time
deposits! These costs demonstrate that for time
deposits% the ma>or cost component is the inter-
est rate paid and not operatin$ costs% while the
reverse is true for savin$s accounts! In view of
the hi$h financial costs of time deposits% it is
important to set their interest rates carefull#G
hi$h enou$h to attract the needed funds% )ut oth-
erwise at the lowest possi)le rates! Man# MFIs
still do not $ive this tas3 the priorit# it deserves
despite pa#in$ out su)stantial sums in time de-
posit interest! Their still-wide financial mar$ins
allow them to a)sor) without $reat difficult# the
hi$h interest rates that the# currentl# pa# on
Ts!
Given the lower total cost of mo)ilizin$ time
deposits compared to savin$s accounts% MFIs
should $enerall# $ive priorit# to the former! Ts
have other advanta$es as wellG the# are easier to
mana$e and are more sta)le and predicta)le in
the short and medium term 'until the Ts
mature(! Ts ma# well permit a )etter
matchin$ )etween assets and lia)ilities durin$
this same time period ')ut not necessaril# in
the lon$er term% after the current Ts mature(!
The $reat operatin$ cost advanta$e of Ts is
mainl# due to the lar$er )alances maintained in
these accounts% which are on avera$e nearl# 20
times the size of savin$s accounts 'BSL 6%/M9
compared to BSL /MM(! Surprisin$l#% the cost
advanta$e of Ts is not primaril# due to the fact
that savin$s accounts have more transactions per
acount than do time deposits '.!I9 per month for
savin$s accounts vs! 0!/M per month for time
deposits(! This last assertion can )e deduced
from the fact that at all MFIs monthl# operatin$
costs per account are hi$her for Ts than for
S+s% avera$in$ three times hi$her overall 'BSL
.2!70 per month for Ts vs! BSL /!I0 per
month for S+s(! It appears that this hi$her per-
account cost for Ts is mainl# the result of the
service that lar$er clients receive from )ranch
mana$ers and other relativel# hi$h-ran3in$ per-
sonnel! 4ven thou$h savin$s accounts $enerate
more monthl# transactions per account% the# are
lar$el# attended to )# tellers and other personnel
with much lower salar# le vels! For this reason%
the costs per account are much lower for S+s
than Ts!
ata from the .0 studies on the cost of mo)iliz-
in$ deposits show miFed results on the eFistence
'or non-eFistence( of economies of scale! The .0
MFIs are ran3ed accordin$ to their total num)er
of accounts 'S+s T Ts(% from .%9.9 at Fi-
namArica to .00%.M7 at &M+& +re;uipa! The
concept of economies of scale is that the lar$er
MFIs 'those with more accounts( can spread
their overhead costs over a $reater num)er of
accounts!
+ comparison of the two smallest MFIs with the
two lar$est provides evidence in support of
economies of scale! In the case of savin$s depos-
its% the two smallest MFIs have an avera$e
monthl# unit cost 'operatin$ cost per account( of
BSL I!MI% compared to BSL /!20 for the two
lar$est MFIs! "ith respect to time deposits% the
avera$e monthl# unit cost for the two smallest
MFIs is BSL ./!60% vs! BSL 7!70 for the two
2anking o( Funding Sources by %otal Cost 7(rom least to most e"pensive8
arge &FIs Small and &edium-Si:e &FIs
.! Bonds .! Borrowin$
2! eposits and )orrowin$ 2! eposits
/! &apital U shares /! &apital U shares
Note: B# definition% the lar$e MFIs have more than BSL I0 million in deposits% the small MFIs have less than
BSL I million% and the medium-size MFIs have )etween BSL I and I0 million! It is assumed that the small and most
mediu m-size MFIs would not issue )onds since the# would not meet the minimum volumes needed to underta3e
an issue and the capital mar3ets would have little or no appetite for their paper!
lar$est MFIs! &learl#% there is evidence of
economies of scale% $iven the si$nificant drops
in unit costs when comparin$ the smallest and
lar$est MFIs!
The other siF MFIs provide evidence a$ainst
economies of scale! These siF medium-size
MFIs have the lowest avera$e unit cost for sav-
in$s deposits 'BSL 2!20 per month( and the
hi$hest avera$e unit cost for time deposits 'BSL
.7!I6 per month(% instead of havin$ intermediate
unit cost values in )oth cases! However% it ma#
)e difficult to detect economies of scale in data
such as these% eFcept )etween eFtreme cases
such as the smallest and the lar$est MFIs! This is
due to difficulties in assi$nin$ a num)er of im-
portant operatin$ costs to each product and to
differences in mana$ement efficienc# amon$
MFIs!
Microsavin$s% which consist of savin$s accounts
with )alances of less than BSL .00% account for
67 percent of the total num)er of savin$s
accounts at small MFIs% and 69 percent at
lar$e ones! These small accounts provide
onl# 2!I percent and / percent of total savin$s
deposits% respectivel#! The# also $enerate /0
and IM percent of total account transactions%
respectivel#! +s a result% annual operatin$ costs
eFceed 200 percent of the amount deposited in
microsavin$s accounts% leadin$ us to conclude
that microsavin$s $enerate eFtremel# hi$h
operatin$ costs for MFIs of all sizes! This
means that clients with small )alances are )ein$
su)s idized )# the rest!
In dealin$ with microsavin$s% MFIs have at least
the followin$ three optionsG
Subsidies for small savers! This option is the
most commonl# used )# <atin +merican
microfinance institutions! MFIs >ustif# su)-
sidies for small savers )# pointin$ out that
servin$ these savers is part of the MFISs so-
cial mission% and that even small deposits of-
fer economies of scope and other si$nif icant
)enefits! However% MFIs hardl# ever esti-
mate the cost of this su)sid# or eFplore the
possi)ilities for rationalizin$ it! It is possi)le
that in the medium term $rowin$ competi-
tive pressures in the microfinance mar3et-
place will lead to a chan$e in this orienta-
tion!
Adoption of a more selective policy toward
serving microdepositors, throu$h a series of
measures! These measures ma# inc lude
esta)lishin$ hi$her minimum deposit sizes%
pa#in$ interest on account )alances onl#
a)ove a certain level% char$in$ commissions
for each transaction% and imposin$ monthl#
account fees!
Massifying the microdepositor client base,
in order to reach a critical mass that can )e
served more economicall# throu$h techno-
lo$ical and or$anizational innovations 'in-
cludin$ +TMs(% as well as )# offerin$ a
ran$e of financial products to small savers1
to )oth facilitate transactions and full# re-
cover the costs $enerated!
%H! B!S% &I; +F F45DI56
S+42C!S 7CHAP%!2 -8
In the first chapter% it was esta)lished that de-
posit mo)ilization is )# far the ma>or source of
fundin$ for MFIs in <atin +merica! The total
cost of the different fundin$ sources was then
eFamined in &hapter /! It was found that for
lar$e MFIs% mo)ilizin$ deposits can )e the most
economical alternative% $iven that ver# few
MFIs can issue )onds! For small MFIs% )orrow-
in$ is $enerall# the least cost source of funds!
Mo)ilizin$ deposits has also made a new finan-
cial service availa)le to lar$e num)ers of clients
and allowed MFIs to move )e#ond their previ-
ous focus on microcredit! eposit mo)ilization
has reduced financial costs for man# MFIs%
$reatl# diversified their fundin$ sources and fa-
cilitated su)stantia l increases in levera$e! The
diversification of lia)ilities achieved throu$h
deposit mo)ilization has made fundin$ more
sta)le% as it no lon$er depends so heavil# on the
sometimes unpredicta)le decisions of $overn-
ments and donors! The mana$ement of MFIs has
thus )ecome much more autonomous!
"hile deposits have displaced )orrowin$ as the
main source of lia)ilities for MFIs in <atin
+merica% deposits and )orrowin$ are $enerall#
complementar# sources of fundin$! Because of
the lon$er terms of much of the )orrowed funds%
the# help solve pro)lems of term mismatch and
facilitate medium-term financial plannin$! Knl#
in situations of eFcess li;uidit# are deposits and
)orrowin$ su)stitutes instead of complements!
4ven at small MFIs% the fact that )orrowin$ can
)e done at lower cost than deposit mo)ilization
should not lead these institutions to prioritize
)orrowin$ and de-emphasize deposit mo)iliza-
tion! That is )ecause in choosin$ )etween these
two fundin$ sources% it is important to consider a
num)er of other factorsG
The amount an MFI can )orrow from each
lender is t#picall# restricted )# loan limits
these lenders place on the amount of credit
the# are willin$ to eFtend to an# sin$le )or-
rower% includin$ to MFIs!
+ si$nificant amount of )orrowin$ concen-
trates fundin$ ris3s and ma# ma3e the MFI
overl# reliant on $overnments and donors%
which are the main sources of )orrowed
funds for the microfinance industr#! +s a re-
sult% li;uidit# mana$ement and the a)ilit# to
do medium-term plannin$ would t#picall#
)e adversel# impacted!
eposits $reatl# diversif# an MFISs fundin$
sources and thus offer much $reater sta)ilit#
to its overall lia)ilities!
Increasin$ the volume of deposits mo)ilized
can help reduce their avera$e operatin$ costs
since it is possi)le to spread fiFed costs over
a $reater volume of funds and $enerate
economies of scale!
Finall#% attractin$ deposits has other si$nif
i- cant advanta$es% includin$G 'i( 3nowin$ the
clientele )etter )# eFaminin$ their deposit
histor#% there)# reducin$ the cost of ana-
l#zn$ loan applications 'economies of
scope(% 'ii( achievin$ $reater inte$ration into
the local and re$ional economies% which
helps to )uild lo#alt# amon$ the MFISs cli-
ents% 'iii( supportin$ $reater prudence in
MFI $overnance and mana$ement since
MFI eFecutives are held accounta)le )# lo-
cal depositors who continuall# monitor the
MFISs performance% and 'iv( facilitatin$ the
development and*or cross-sellin$ of other
financial products1such as loans% mone#
transfers% de)it and credit cards and micro-
insurance1thus $eneratin$ revenues that
ma# )e used to offset the operatin$ costs of
deposits% while also providin$ the client with
)etter service!
For these reasons% then% the relationship )etween
)orrowin$ and deposits is more one of comple-
mentarit# than of su)stitution! In the medium
term% it is desira)le for the most important
source of fundin$ to )e deposits% supplemented
)# )orrowin$ in order to len$then the avera$e
maturit# of the MFISs lia)ilities and reduce av-
era$e fundin$ costs! Su)se;uentl#% these two
sources could )e supplemented )# access to the
local capital mar3ets% with the MFI issuin$
)onds!
The best mix of funding sources depends on the
MFISs maturit# level 'how solidl# sustaina)le
the MFI is and how developed its deposit-ta3in$
and loan operations are( and the characteristics
of the countr# where the MFI is located! These
latter characteristics mainl# include the coun-
tr#Ss macroeconomic and political sta)ilit#% as
well as the level of development of its financial
and capital mar3ets! &om)inin$ )oth criteria% we
consider five scenarios% which are summarized
in the ta)le )elow!
Characteristics o( the &FI
Characteristics o( the !conomic
and Political !n vironment
&aturing &FIs &ature &FIs
Stable in the medium term Scenario . Scenario 7 eventuall# devel-
opin$ into Scenario I in the
lon$ term
4nstable Scenario 2 Scenario /
vii
In Scenario % the MFI operates within a sta)le
macroeconomic and political environment%
which it eFpects to last over the medium term! It
has achieved at least some level of sustaina)il-
it#% thou$h it is not amon$ the industr# leaders!
"hile the MFI is well alon$ in developin$ its
lendin$ operations% its efforts at deposit mo)ili-
zation are much more incipient! Some of the
4PHM4s in Peru are $ood eFamples of MFIs
in scenario .!
The )est fundin$ strate$# in this case is to
maFimize the diversification of fundin$ sources%
supplementin$ the MFISs loans from second-tier
facilities with )orrowin$ from donors and other
domestic and forei$n lenders% provided that the
costs are reasona)le! MFIs that o)tain authoriza-
tion to mo)ilize deposits should underta3e this
tas3 pro$ressivel#! In the initial phase% the#
should $ive hi$hest priorit# to time deposits )e-
cause of their lower operatin$ costs and limited
re;uirements for information technolo$# infra-
structure and operatin$ s#stems! Issuin$ )onds
would t#picall# )e advisa)le onl# in the medium
term% after the MFI has matured and its financial
via)ilit# has )een full# esta)lished! The MFI
should pro$ressivel# increase its levera$e and
eFpand its capital )ase throu$h a consistent pol-
ic# of reinvestin$ a lar$e portion of profits and
addin$ new shareholders throu$h private place-
ments% especiall# if these shareholders can pro-
vide technical assistance and facilitate access to
fundin$!
In Scenario ! % the maturin$ MFI operates
within an unsta)le macroeconomic*political
environment! In this scenario% it is advisa)le for
the MFI to reduce the terms of its loans% limit its
currenc# and term mismatches% reduce its
levera$e and see3 eFternall#- )orrowed funds %
which are not so affected )# domestic
li;uidit# constraints! MFIs that o)tain
authorization to mo)ilize deposits should
underta3e this tas3 with even more caution than
the MFIs in scenario .! The remainin$ aspects
of the MFISs fundin$ strate$# are simila r to
those discussed in scenario .!
In Scenario "% the MFI is clearl# sustaina)le and
has efficient lendin$ and deposit-ta3in$ opera-
tions! However% it operates in an unsta)le mac-
roeconomic*political environment over the me-
dium term! The MFISs fundin$ strate$# should
include the followin$ pointsG
"hile deposits 'includin$ institutional de-
posits( should )e used as the MFISs )asic
fundin$ source% the# should not represent
more than 9I-6I percent of total lia)ilities!
The use of deposits should )e limited )e-
cause the unsta)le environment ma# result
inG 'i( important fluctuations over time in the
availa)ilit# of deposits 'increasin$ li;uidit#
and other ris3s for the MFI( and 'ii( deposits
)ein$ a less relia)le source of fundin$
$rowth% $iven the ne$ative impact of insta-
)ilit# on the $rowth of depos its!
Borrowin$ operations should )e stren$th-
ened and diversified as much as possi)le in
order to improve term matchin$ and prepare
for potential li;uidit# pro)lems created )#
the withdrawal of deposits!
T#picall# % it would not )e advisa)le to issue
)onds in the local mar3et due to the hi$h in-
terest rates and limited terms that accom-
pan# macroeconomic insta)ilit#!
The institutionSs levera$e should )e reduced
)ecause of the much $reater ris3s inherent in
an unsta)le econom#! It would also )e ap-
propriate to stren$then the MFISs capital ac-
counts throu$h a consistent polic# of rein-
vestin$ profits and )# addin$ new share-
holders throu$h private placements! Forei$n
shareholders ma# )e especiall# advanta-
$eous since the# can ma3e additional capital
contri)utions without the constraints im-
posed )# unsta)le local conditions!
In Scenario #% the MFI shows clear sustaina)il-
it# and operates in a sta)le macroeconomic and
political environment that is eFpected to last
throu$h the medium term! The followin$ points
should $uide its fundin$ strate$#G
The MFI should adopt deposits as its )asic
source of fundin$! eposits ma# come to
represent as much as M0 percent or more of
the MFISs lia)ilities if the financial and op-
viii
eratin$ costs associated with deposit mo)ili-
zation can )e reduced sufficientl#! +t the
same time% the MFI should see3 to diversif#
its depositor )ase% limitin$ the share of total
deposits provided )# institutional clients1
such as mutual funds% pension funds and in-
surance companies1in order to control the
ris3s associated with lar$e withdrawals!
The MFI should also increase and diversif#
its )orrowin$s and consider issuin$ )onds in
order toG have availa)le sufficient li;uidit#
reserves% improve term matchin$% and )e
a)le to launch new products that re;uire fi-
nancin$ over the medium term! The MFI
should choose )etween )orrowin$ and )ond
issue considerin$ the advanta$es of each
source in terms of costs% terms and diversif i-
cation! Some eFperts )elieve that )onds
should not represent more than .I percent of
a deposit- mo)ilizin$ MFISs total lia)ilities!
This limit would prevent the MFI from an
overdependence on small and shallow capi-
tal mar3ets% which could eFpose it to eFces-
sive refinancin$ ris3!
The MFI should )oost its levera$e to ta3e
advanta$e of the opportunities availa)le in
this environment! To support its $rowth% the
MFI should also increase its capital throu$h
an active reinvestment polic#% incorporation
of new shareholders throu$h private place-
ments of new shares and% su)se;uentl# per-
haps% throu$h pu)lic offerin$s of shares!
Scenario $ ta3es scenario 7 to a much hi$her
level of development! Here% the MFI )ecomes
ver# successful and diversified and has a su)-
stantial mar3et share% all in the conteFt of $reat
macroeconomic sta)ilit#! The MFISs fundin$
)ase is hi$hl# diversified% with several 3inds of
deposits 'includin$ chec3in$ accounts(! In man#
cases% total deposits eFceed loans! Such institu-
tions develop )road relationships with the capi-
tal mar3ets% )oth placin$ and purchasin$ securi-
ties of various t#pes )ased on their
investment and fundin$ needs! +n eFample of
this scenario is the Spanish savin$s )an3s in
recent decades!
B!S% P2AC%IC!S
7CHAP%!2 ,8
This section provides )est practice recommenda-
tions for MFIs in the use of the different fundin$
instruments! Guidance is also offered on actions
MFIs can ta3e to deal with economic crises and
on how donors and $overnments can help MFIs
to )est develop the fundin$ side of their )alance
sheet!
Deposits
In the area of deposit mo)ilization% MFIs shouldG
'i( $ive priorit# to attractin$ time deposits
)e- cause of their lower operatin$ and total costs
and their contri)ution to the matchin$ of assets
and lia)ilities% 'ii( deal with the pro)lem of mi-
crosavin$s% a pro)lem that is created )# servin$
a lar$e num)er of clients with low )alances% re-
sultin$ in hi$h MFI operatin$ costs% and 'iii(
anal#ze their own depositor data)ases and se$-
ment the clientele! In the area of or$anization
and mana$ement% the MFI should develop de-
tailed annual deposit-mo)ilization plans and re-
view them periodicall#% should set interest rates
that are differentiated )# re$ion and client se$-
ment and should consider creatin$ incentive pa#
schemes for personnel in the savin$s area! MFIs
should attempt to increase their share of the de-
posit mar3et throu$hG efficient and personalized
service% attractive and transparent rates and
terms% convenient )ranch locations% efficient
information s#stems with lin3s to the )ranches%
and effective mar3etin$ campai$ns!
eposit mo)ilization has important repercus-
sions for the ma>or mar3et ris3s faced )# MFIs%
namel# li;uidit#% term mismatch% interest rate
and eFchan$e rate ris3s! Best practices in man-
a$in$ these ris3s include settin$ up an asset-
lia)ilit# committee made up of the MFISs princi-
pal mana$ers% and creatin$ an annual mana$e-
ment plan that includes a primar# cash flow
anal#sis that is updated at least monthl#! The
MFI should also use $ap models% li;uidit# ratios
and stress tests to help control these mar3et
ris3s! It should have contin$enc# plans to deal
with situations of impaired li;uidit#% as well as
sufficient li;uidit# reserves! More sophisticated
iF
MFIs ma# use duration anal#sis instead of $ap
models to control interest rate ris3!
To minimize eFchan$e rate ris3% MFIs should
ma3e loans in local currenc# '<&( to clients that
produce nontraded $oods and ma3e loans in for-
ei$n currenc# 'F&( to clients that produce traded
$oods! The currenc# composition of the MFISs
lia)ilities should then )e matched to that of the
resultin$ loan portfolio and other assets! =e$ard-
in$ this last condition% if there is an oversuppl#
of deposits in F&% the MFI ma# stimulate depos-
its in <& with hi$her rates and )etter conditions%
use deposits 'and )orrowed funds( in F& as col-
lateral to o)tain <& )an3 loans ')ac3-to-)ac3
operations( and emplo# hed$in$ transactions in
the local swap mar3ets!
In order to successfull# attract deposits% an MFI
must esta)lish a mar3etin$ department that per-
forms a num)er of functions% includin$ carr#in$
out mar3etin$ studies% )oth prior to the openin$
of new )ranches and for the MFI as a whole!
This department should periodicall# underta3e
client satisfaction and service ;ualit# anal#ses
and implement pro$rams to maintain the lo#alt#
of its )est clients! It should also esta)lish a clear
and effective strate$# for the use of the commu-
nications media and savin$s promotion person-
nel in helpin$ to attract deposits! Finall#% this
department should carefull# evaluate its own
mar3etin$ campai$ns% includin$ the use of raf-
fle s to stimulate deposit mo)ilization% perhaps
)# means of cost*)enefit anal#sis!
Borro3ing
"ith respect to )orrowin$% MFIs should $ive
priorit# to increasin$ the diversification of their
sources% while simultaneousl# ta3in$ account of
)orrowin$ costs and of the need to avoid eFces-
sive dependenc# on the $overnmentSs second-
tier institutions! Forei$n and second-tier )orrow-
in$ should )e used to len$then the avera$e term
of the MFISs lia)ilities and )rin$ $reater sta)ilit#
to its fundin$! <ocal commercial )an3 )orrow-
in$ should )e used to deal with short-term li-
;uidit# needs and to convert deposits collected
in F& into loana)le funds in <& throu$h )ac3-
to-)ac3 operations! Finall#% MFIs should use as
a li;uidit# reserve the portion of )orrowin$s that
have )een approved )ut not drawn down1
especiall# funds from second-tier institutions%
donors and other forei$n sources1all of whose
correlations with the domestic li;uidit# c#cle is
low!
Bonds
The MFI should issue )onds onl# when it has
clearl# achieved sustaina)ilit# and operates in a
sta)le macroeconomic and political environment
that is eFpected to last throu$h the medium term!
Generall#% the first )onds should )e issued for
periods of .8 months to three #ears% so that the
mar3et can )ecome familiar with the MFI and its
ris3 profile! If the MFI see3s to attract institu-
tional investors% it ma# )e important to include a
credit enhancement! This provides a partial
$uarantee of principal and serves to raise the
)ondSs ratin$ and facilitate its purchase! In an#
event% the MFI should o)tain the services of an
investment )an3 with a solid reputation and eF-
tensive relationships with potential purchasers!
In order to diversif# fundin$ sources and avoid
dependin$ eFcessivel# on capital mar3ets that
often lac3 depth% some eFperts su$$est that de-
posit-ta3in$ MFIs in <atin +merica should limit
their )ond fundin$ to no more than .I percent of
their total lia)ilities!
Stock
It is important to define the role of profit rein-
vestment and new share issue within the frame-
wor3 of a medium-term strate$ic plan! The fa-
vora)le aspects of these capital investments are
that the# provide the most sta)le funds availa)le
to a financial institution% that the# a)sor) the
$reatest ris3s of an# fundin$ instrument and that
the# permit the MFI to levera$e lia)ilities! Their
unfavora)le characteristics are the hi$h cost of
the capital attracted% owin$ to the ris3 premium
demanded )# capital investors% and the hi$h cost
of $eneratin$ the information that must )e pro-
vided to these investors!
MFIs that are considerin$ addin$ new share-
holders should thorou$hl# evaluate the different
t#pes of possi)le investors and the advanta$es
and disadvanta$es of each! In addition to the
$eneral advanta$es and disadvanta$es noted in
F
the precedin$ para$raph% this evaluation should
consider such positive aspects as the capacit# of
new shareholders to ma3e additional capital con-
tri)utions in the future% their potential contri)u-
tions to the $overnance and mana$ement of the
MFI% the possi)ilit# that the# ma# improve the
institutionSs credit ratin$ and reputation% and the
potential for new shareholders to facilitate
access to technical assistance resources and
credit lines! The MFI must also wei$h the
possi)le disadvanta$es of incorporatin$ new
shareholders% such as the fact that the investment
horizons and profit eFpectations of the new
investors ma# differ from those of the eFistin$
shareholders% possi)le discrepancies )etween
the two $roups in the definition of the
institutionSs mission% and conflicts that ma# arise
amon$ shareholders due to these and other
factors!
!conomic Crises
urin$ times of economic crisis% MFIs should
increase primar# and secondar# reserves% reduce
levera$e ratios% update and reinforce contin-
$enc# plans desi$ned to miti$ate li;uidit# ris3%
stren$then the functionin$ of the asset-lia)ilit#
committee% and reduce term and currenc# mis-
matches in view of the econom#Ss $reater vola-
tilit# durin$ crisis periods! The MFI should also
review its plans and pro>ections for deposit
$rowth% modif#in$ them to ta3e account of cur-
rent economic realities and ad>ustin$ deposit
interest rates in line with the mar3et! Finall#% the
MFI should adopt a more restrictive polic# on
loans% with lower $rowth rates% shorter terms and
hi$her interest rates!
2ole o( 6overnments and Donors
Governments and donors should foster condi-
tions favora)le to the MFIs effectivel# develop-
in$ their own fundin$ strate$ies and% more $en-
erall#% should promote an environment suita)le
to the development of the overall financial s#s-
tem! 4Fperience also shows that it is inadvisa)le
to favor MFIs with special treatment!
In order to support the MFIs in attractin$ sav-
in$s% $overnments and donors shouldG 'i( pro-
vide technical assistance to the MFIs to help
them )uild their capacit# to mo)ilize deposits%
'ii( encoura$e MFIs that mo)ilize deposits to use
)orrowin$ onl# as a supplement to deposits% in
order to avoid eFcessive dependence on pu)lic
and international lenders and the displacement
of deposits as the primar# fundin$ source and as
an important financial service to )e provided in
its own ri$ht% 'iii( support the development of a
well desi$ned deposit insurance fund once effec-
tive prudential supervision has )een esta)lished%
and 'iv( encoura$e the pro$ressive inte$ration of
the MFIs into domestic and forei$n capital mar-
3ets!
.
.! &urrent Trends in MFI Fundin$
+<!2<I!=
Microfinance institutions 'MFIs( face an arra#
of options in their fundin$ strate$ies! Should
the# rel# on deposits as their )asic source of
fundin$ and tr# to attain a fundin$ structure
similar to that of )an3s? "hat should )e the role
of )orrowin$? Should these institutions issue
stoc3 or )onds? To )e a)le to ma3e appropriate
decisions on these matters% MFIs should con-
sider the financial and operatin$ costs of each
fundin$ source! The# should also ta3e account
of other factors that are important in developin$
a medium-term fundin$ strate$# such as the
ris3s associated with each source% the influence
of the macroeconomic environment and the
MFISs level of maturit#! The purpose of this pa-
per is to eFplore this set of pro)lems for MFIs in
<atin +merica!
The present stud# consists of five chapters and
four anneFes! &hapter . anal#zes current fund-
in$ trends for MFIs in <atin +merica% with par-
ticular attention to deposits! &hapter 2 eFamines
the characteristics of the four ma>or fundin$
sources for MFIsG deposits% )orrowin$% )onds
and stoc3! &hapter / ;uantifies and compares
the financial and operatin$ costs of each of the
four ma>or fundin$ sources! &hapter 7 discusses
the )est fundin$ miF for MFIs and &hapter I
presents )est practices! Four anneFes provide a
detailed $uide on how to issue )onds and stoc3
in <atin +merica '+nneF +(% data on trends in
lia)ilit# structure and capital for 9. re$ulated
MFIs '+nneF B(% $reater detail on )orrowin$ for
2/ MFIs '+nneF &( and a description of the
costin$ stud# data for siF MFIs '+nneF (!
I5%2+D4C%I+5
In the first half of the .MM0s% MFIs in <atin
+merica were mainl# concerned with achievin$
sustaina)ilit#! In particular% the# aimed to im-
plement an appropriate lendin$ technolo$#%
which would #ield them a hi$h-;ualit# microen-
terprise loan portfolio with returns capa)le of
coverin$ all costs!
B# the mid .MM0s% it was clear that the most ad-
vanced MFIs could achieve sustaina)ilit#! This
led to a de)ate on how to finance further MFI
$rowth! Two opposin$ positions emer$edG
The classical view of MFI development held
that mo)ilizin $ deposits should )e the linch-
pin of MFI fundin$ 'for eFample% see =o)in-
son% .MM7(! Thus it was proposed that MFIs
should o)tain most of their new fundin$ )#
eFpandin$ deposits! In this wa#% MFIs
would diversif# their clientele and reduce
the ris3s associated with reliance on >ust a
few creditors! The historical eFperience of
the industrial countries and IndonesiaSs eF-
perience with microfinance provide eFam-
ples of this strate$#!
The financial s#stems approach held that
MFIs should specialize in providin$ micro-
credit! MFIs would attract the funds the#
needed to $row )# )orrowin$ 'see% for eF-
ample% Schmidt and Reitin$er% .MM7% pp! /-7
and .02-I(! This approach maintained that
deposit mo)ilization should )e carried out
cautiousl# and pro$ressivel#% $iven the hi$h
financial and operatin$ costs of this fundin$
alternative and the complications of provid-
in$ $ood service to two lar$e client $roups%
depositors and )orrowers!
+ decade after this de)ate )e$an% the present
stud# eFplores the state of MFI fundin$ in order
to anal#ze its main characteristics and trends in
the conteFt of the rapid $rowth of the microfi-
nance industr# in <atin +merica!
The first section of this chapter evaluates the
importance of each of the four ma>or fundin$
sources for 9. re$ulated MFIs in nine <atin
+merican countries with ma>or microfinance
mar3ets durin$ the period 2000- 200/! The
second section anal#zes deposits in $reater
detail since it is the most important fundin$
source! The final section eFamines the main
factors that contri)uted to the successful
mo)ilization of savin$s )# MFIs in <atin
+merica!
&FI F45DI56
I5 A%I5 A&!2ICA
This stud# of MFI fundin$ eFamines a sample of
the leadin$ MFIs in <atin +merica for the period
2000- 200/! In particular% it anal#zes the 9.
MFIs that are su)>ect to prudential re$ulation in
nine countries with ma>or microfinance mar3etsG
Bo- livia% &olom)ia% 4cuador% 4l Salvador%
Hondu- ras% MeFico% Eicara$ua% Para$ua# and
Peru! In addition% in selectin$ the 9. MFIs% onl#
institutions with most of their operations in
microf i- nance were included!
.
Thus% )an3s
that have onl# a small part of their overall loan
portfolio in microcredit were eFcluded since the
fundin$ structure of such )an3s is t#pical of that
found in commercial )an3s% rather than that
found in MFIs! Kf the 9. MFIs anal#zed here%
79 mo)i- lize deposits, onl# PeruSs .7
4PHM4s and MeFicoSs &ompartamos do not
capture savin$s! The complete MFI fundin$
data)ase is found in +nneF B!
The main st#lized facts of MFI fundin$ that
emer$e from these data are 'see Ta)les . and
2(G
%eposits are no longer the forgotten half of
microfinance&
!
eposits represented 9. per-
cent of lia)ilities in 2000 and 9I percent in
200/% and thus constitute the dominant fund-
in$ source for MFIs! Total deposits in-
creased from BSL I20 million to BSL .!27
)illion durin$ the period% providin$ the ma-
>orit# of the funds re;uired to finance the
rapid $rowth of microcredit portfolios! The
deposit*loan ratio fluctuated around 6I per-
cent% indicatin$ that the total amount of
deposits was almost e;ual to the size of
the loan portfolio! For this reason we sa# that
deposits are no lon$er the for$otten half of
microfinance!
/
The neFt section and &hap-
.
The ominican =epu)lic was not included in the
sample owin$ to a lac3 of data! &hile and Guatemala
also have si$nificant microfinance mar3ets )ut no
re$ulated MFIs specializin$ in microfinance!
2
See 5o$el '.M87( for a discussion of the Vfor$otten
half!W
/
If the .I MFIs that are not permitted to capture sav-
in$s are eFcluded% the deposit*loan ratio is increased
)# approFimatel# seven percenta$e points% fluctuat-
in$ around 82 percent durin$ the four-#ear period!
ters 2 and / provide a more detailed anal#sis
of the characteristics of MFI deposits!
'orrowing is still important but less so than
in the past& The relative importance of )or-
rowin$ has fallen from 2M percent of total li-
a)ilities in 2000 to 26 percent in 200/!
However% the amount of )orrowin$ has ac-
tuall# increased in a)solute terms% risin$
from BSL 27I million to BSL I.6 million!
Thus% )orrowin$ is still the second most im-
portant fundin$ source in terms of the
amount of funds supplied to MFIs 'less than
deposits )ut $reater than e;uit#(!
'onds are still incipient& Bond issues repre-
sent onl# a small share of overall MFI fund-
in$% with .!6 percent of total MFI lia)ilities
at the end of 200/! Knl# two MFIs have a
si$nificant amount of outstandin$ )ond is-
suesG &ompartamos 'MeFico% 2M percent of
its total lia)ilities in 200/( and Mi)anco
'Peru% ./ percent of its total lia)ilities in
200/(! Bonds outstandin$ increased from
BSL 0!8 million at the end of 2000 to
BSL
/2!M million at the end of
200/!
()uity and the issuance of shares& +lthou$h
precise estimates are unavaila)le% MFIs in
<atin +merica rarel# issue stoc3 to add new
shareholders! Instead% the capital )ase of the
MFIs has )een increased mostl# )# reinvest-
in$ a lar$e portion of the siza)le profits the#
have $enerated! 'MFI profita)ilit# is eFam-
ined in &hapter /!( MFI capital increased
from BSL .66 million in 2000 to BSL /69
million at the end of 200/! The latter fi$ure
is approFimatel# /0 percent less than the
amount the MFIs o)tained )# )orrowin$
'BSL I.6 million(!
*onstant leverage& The levera$e ratio 'the
ratio of total lia)ilities to e;uit#( fluctuated
in the narrow ran$e from 7!8 to I!2 in the
2000- 200/ period! This constanc#
reflects two offsettin$ trendsG the MFIsS
$rowin$ capacit# to ta3e on and
intermediate lia)ilities and the
aforementioned trend of the MFIs
reinvestin$ their su)stantial profits% which
has 3ept this ratio from risin$ si$nif icantl#!
The predominance of 'olivia and especially
+eru in funding& These two countries lead
the field in attractin$ deposits! In 200/% the#
captured 68 percent of the total deposits
mo)ilized in the nine countriesG BSL M97
million out of the total of BSL .!27 )illion!
Peru mo)ilized 92 percent of the nine-
countr# total 'BSL 662 million( and Bolivia
the remainin$ .9 percent 'BSL .M/ million(!
Peru and Bolivia were almost as dominant in
other fundin$ areas! Kf the totals recorded
for the nine countries% Peru and Bolivia had
99 percent of )orrowin$% 6/ percent of over-
all lia)ilities and 6. percent of e;uit#!
Comparison 3ith the Banking System
Ta)le / compares the lia)ilit# structure of the
MFIs in Bolivia and Peru with the lia)ilit# struc-
ture of the )an3in$ s#stems in these two coun-
tries! The ta)le illustrates that% in $eneral% the
MFI lia)ilit# structure in )oth countries is mov-
in$ toward the pattern seen in )an3s! This trend
is characterized )# a stron$ and $rowin$ deposit
share and a declinin$ reliance on )orrowin$!
These two trends are clearl# evident in )oth
countries and are even more mar3ed in Peru than
Bolivia!
The structure of deposits is more diversified in
)an3s than MFIs in the sense that )an3s can
offer chec3in$ accounts in addition to savin$s
accounts and time deposits% whereas MFIs
$ene r- all# can offer onl# savin$s accounts
and time deposits! 4ven MFIs such as Bancosol
and Mi- )anco% which are permitted to offer
chec3in$ accounts% have done so to onl# a
ver# limited
%able #
&FI Funding %rends in atin Ame rica0 '111-
'11* 74S> millions0 at end o( year8
Deposits Borro3ings iabilities Capital
'111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11*
Bolivia .06!M .29!6 .I7!. .M2!9 9M!M 60!2 66!0 M2!2 .8/!I 20I!2 272!7 /0I!0 /2!8 /2!2 /I!2 7/!9
Colombia M!6 ./!6 .I!6 .8!. .0!0 .0!I 8!7 .2!9 2.!9 26!2 2I!6 /2!M 8!7 8!7 8!. M!2
!cuador 77!9 69!I .09!/ .2M!. .0!8 20!7 /9!2 76!I 9.!0 .0.!7 .I0!9 .87!2 M!I ..!0 .I!8 2/!I
!l Salvador 0!0 .7!M 22!8 /I!/ 0!0 ./!9 .M!2 /7!2 0!0 2M!6 78!M 6.!9 0!0 6!M 8!I ./!6
Honduras 2!. 2!8 .!I 2!0 0!8 .!6 .!8 .!8 I!0 I!0 7!2 7!8 .!M /!I /!6 7!M
&e"ico 0!0 0!0 0!9 0!8 0!0 .8!. //!/ 79!9 0!0 2/!. I7!M 67!8 0!0 ..!2 22!/ /I!0
5icaragua .7!. .I!2 ..!/ .2!I .!6 2!9 .9!M /.!9 .6!I .8!M /0!. 79!/ 2!2 2!2 7!M 6!8
Paraguay 92!. I6!6 77!/ 80!I 2!. .!8 0!/ 7!0 6I!/ 60!7 I/!. M0!7 .6!I .I!2 .0!I .7!9
Peru 26M!I 70I!9 I90!. 66.!8 .7M!M .8/!8 2/8!. 279!I 78I!8 927!8 87I!I .%08M!0 .07!9 ./.!0 .6.!2 22/!M
%otal ,'1$1 /#*$# )#.$/ #0'-'$/ '-,$* *''$. -*#$- ,#.$) ?-)$? #0#1,$/ #0-,?$- #0?))$# #//$1 '''$? '?1$' */.$*
Source: Superintendenc# of each countr#!
%able '
&FI Funding Structure in atin America0 '111-
'11* 7percent0 at end o( ye ar8
Deposits @ iabilities Borro3ings @ iabilities Deposits @ oans iabilities @ !Auity
'111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11*
Bolivia IMX 92X 97X 9/X /8X /7X /2X /0X 92X 96X 6.X 60X I!9 9!7 9!M 6!0
Colombia 7IX I0X 9.X IIX 79X /MX //X /8X /8X 79X I8X I0X 2!9 /!2 /!2 /!9
!cuador 6/X 69X 6.X 60X .8X 20X 27X 29X .2/X ..9X .0.X M0X 9!7 M!2 M!I 6!8
!l Salvador I0X 76X 7MX 79X /MX 78X I0X I/X I7X /!8 I!8 I!2
Honduras 7.X I9X /9X 72X .9X /7X 77X /6X /MX 7/X 2/X 2IX 2!9 .!7 .!. .!0
&e"ico 0X .X .X 6MX 9.X 92X 0X .X .X 2!. 2!I 2!.
5icaragua 8.X 80X /6X 26X .0X .7X I9X 98X ..0X ..6X 7IX 2MX 6!M 8!I 9!2 I!M
Paraguay 82X 82X 87X 8MX /X /X .X 7X M0X M/X .09X ..2X 7!/ 7!9 I!0 9!2
Peru I8X 9IX 99X 6.X /.X 2MX 28X 2/X 69X 8/X 80X 87X 7!9 7!8 I!0 7!M
%otal .#B .-B .*B .,B ')B ')B *1B '/B /,B /?B /*B /.B -$? ,$1 ,$' ,$1
&icro(inance Institutions #@ Banking System '@
'111 '11# '11' '11* '111 '11# '11' '11*
Bonds 1$1B 1$1B 1$1B 1$1B 1$1B 1$1B 1$1B 1$1B
Deposits ,?$?B .#$/B .*$.B .*$#B //$'B /?$.B /?$.B ?#$#B
&hec3in$ +ccounts .!0X 0!2X 0!2X 0!/X .7!9X .8!.X 20!9X 2/!9X
Savin$s +ccounts 6!9X M!8X .7!0X .6!9X .I!9X .M!8X .8!2X 2/!0X
Time eposits I0!.X I.!6X 7M!/X 7I!/X 76!0X 70!6X /M!8X /7!IX
Borro3ings *?$#B *-$'B *#$?B *1$'B #?$1B #-$)B #,$*B #'$,B
+ther iabilities *$#B -$#B -$/B .$.B -$?B .$,B .$'B .$-B
%otal iabilities #11$1B #11$1B #11$1B #11$1B #11$1B #11$1B #11$1B #11$1B
&icro(inance Institutions #@ Banking System '@
'111 '11# '11' '11* '111 '11# '11' '11*
Bonds 1$1B 1$1B 1$/B #$*B 1$1B *$#B #$,B #$)B
Deposits ,/$,B .-$)B ..$1B /1$)B .)$#B /)$)B ?*$)B ?-$?B
&hec3in$ +ccounts 0!.X 0!.X 0!.X 0!.X .2!9X .7!.X .7!.X .I!MX
Savin$s +ccounts .8!MX .M!IX 20!9X 20!/X .8!6X 20!IX 20!IX 20!8X
Time eposits /8!IX 7I!/X 7I!/X I0!IX /6!8X 7I!/X 7M!/X 78!.X
Borro3ings *1$)B ')$-B '?$#B ''$.B #.$.B .$,B .$,B .$/B
+ther iabilities ##$.B ,$/B ,$*B ,$'B #-$*B ?$1B ?$1B .$,B
%otal iabilities #11$1B #11$1B #11$1B #11$1B #11$1B #11$1B #11$1B #11$1B
de$ree )ecause of the compleFit# and cost of
this product!
&FI D!P+SI%S
Given that deposits are the primar# source of
fundin$ for MFIs% we eFplore their structure in
$reater detail! +t the end of 200/% the )rea3-
down of total deposits )# t#pe at the 9. MFIs
wasG 9!6 percent ne$otia)le certificates of depo-
sit% 96!/ percent other time deposits% 2I!8 per-
cent savin$s accounts% and 0!. percent chec3in$
accounts 'Ta)le 7(!
+s will )e seen in &hapter /% time deposits
'Ts( have lower operatin$ costs and in man#
cases lower total costs 'operatin$ costs plus fi-
nancial costs( than savin$s accounts 'S+s(!
Moreover% $iven that their maturities are prees-
ta)lished% matchin$ the maturities of Ts with
those of the loan portfolio is less complicated
than matchin$ the maturities of S+s with those
of the loan portfolio! Therefore% MFIs $enerall#
$ive priorit# to mo)ilizin$ Ts! In addition% the
avera$e size of a T is $enerall# much $reater
than that of an S+ 'almost 20 times $reater for
the .0 MFIs eFamined in &hapter /(! Thus% Ts
are a)le to $enerate $reater ;uantities of loan-
a)le funds!
Few of the 9. MFIs are permitted to offer chec3-
in$ accounts! Those that are authorized have
minimal chec3in$ account operations )ecause of
the hi$h operatin$ costs associated with these
accounts and the need for powerful information
s#stems that are connected to all of their )ran-
%able *
iability Structure o( &FIs and the Banking System in Bolivia and Peru0 '111-'11*
B+I<IA
.* The MFIs are Bancosol% Prodem% &a>a <os +ndes% FI4 and 4cofuturo!
2* The )an3in$ s#stem eFcludes Bancosol!
Source: Superintendenc# of Bolivia 'SB4F(!
P!24
.* The MFIs consist of the &M+&s% &=+&s% 4PHM4s% Mi)anco and Banco del Tra)a>o!
2* The )an3in$ s#stem eFcludes Mi)anco and Banco del Tra)a>o!
SourceG Superintendenc# of Peru 'SBS(!
Moreover% few microenterprises demand this
%able -
Deposits by %ype at .# &FIs
74S> million0 December *#0 '11*8
&FI Country %otal
De posits
Checking
Accounts
5egotiable
Certi(icates
o( Deposit
Savings
De posits
+ther %ime
Depos its
Bancosol
Prodem
&a>a <os +ndes
FI4 4cofuturo
%+%A Bolivia
Bolivia
Bolivia
Bolivia
Bolivia
Bolivia
9M!M
78!6
76!0
.M!M
6!.
#)'$.
0!.
0!8
0!0
0!0
0!0
1$)
0!0
0!0
0!0
0!0
0!0
1$1
20!9
.9!2
.0!2
I!7
.!2
,*$.
7M!2
/.!6
/9!8
.7!I
I!8
#*?$1
FinamArica
&ompartir
%+%A Colombia
&olom)ia
&olom)ia
.2!8
I!/
#?$#
0!0
0!0
1$1
.2!8
I!2
#?$#
0!0
0!0
1$1
0!0
0!0
1$1
Banco Solidario
Financiera 4cuatorial
%+%A !cuador
4cuador
4cuador
.29!9
2!I
#')$#
0!0
0!0
1$1
0!0
0!0
1$1
26!7
0!0
'/$-
MM!2
2!I
#1#$/
Financiera &alpiY
%+%A !l Salvador
4l Salvador /I!/
*,$*
0!0
1$1
0!0
1$1
/!8
*$?
/.!/
*#$*
Finsol
%+%A Honduras
Honduras 2!0
'$1
0!0
1$1
0!0
1$1
0!0
1$1
2!0
'$1
&ompartamos
FincomZn
%+%A &e"ico
MeFico
MeFico
0!0
0!8
1$?
0!0
0!0
1$1
0!0
0!0
1$1
0!0
0!8
1$?
0!0
0!0
1$1
Findesa
Procredit '&onfCa(
%+%A 5icaragua
Eicara$ua
Eicara$ua
0!7
.2!I
#'$)
0!0
0!0
1$1
0!0
0!0
1$1
0!/
7!0
-$*
0!.
8!.
?$'
5isiNn
4l &omercio Financiera
Financiera Familiar
Interfisa
%+%A Paraguay
Para$ua#
Para$ua#
Para$ua#
Para$ua#
29!6
8!M
29!8
.8!2
?1$,
0!0
0!0
0!0
0!0
1$1
20!6
9!0
2/!8
.I!.
.,$/
7!M
.!I
.!6
2!2
#1$-
.!.
.!/
.!2
0!8
-$,
Banco del Tra)a>o
Mi)anco
&M+&s '.7 MFIs(
&=+&s '.2 MFIs(
4PHM4s '.7 MFIs( .*
%+%A Peru
Peru
Peru
Peru
Peru
Peru
.6I!6
99!.
7/M!0
M0!7
0!9
//#$?
0!9
0!2
0!0
0!0
0!0
1$)
0!0
0!0
0!0
0!0
0!0
1$1
2.!2
.7!6
.77!0
70!.
0!9
''1$/
.I/!8
I.!2
2M7!8
I0!7
0!0
,,1$'
%+%A .# &FIs #0'-'$/ #$/ ?*$/ *'#$1 ?*.$'
B o( %otal Deposits
7(or the .# &FIs8
#11B 1$#B .$/B ',$?B ./$*B
.* .* 4PHM4 4d#ficar has a small amount of deposits, th e# are le$al% representin$ deposits of their emplo#ees!
%able ,
&FI Deposits by Currency
7percent0 December *#0 '11*8
Savings
Deposits
+ther %ime
Deposits
5egotiable
Certi(icates o( Deposit
%otal
Deposits
Country C FC %otal C FC %otal C FC %otal C FC %otal
Paraguay 6.!M 28!. .00 9M!I /0!I .00 87!2 .I!8 .00 8.!/ .8!6 .00
Peru I.!/ 78!6 .00 IM!6 70!/ .00 I6!. 72!M .00
5icaragua .7!7 8I!9 .00 I!I M7!I .00 8!7 M.!9 .00
Honduras .00 0 .00 .00 0 .00
Note: Blan3 )oFes indicate that the product is n ot offered )# the MFIs!
<&G local currenc#!
F&G forei$n currenc#!
ches! Moreover% few microenterprises demand
this product% and so it is not ver# important for
the MFIs to offer it unless the# are tr#in$ to
serve a su)stantial num)er of small and me-
dium-size )usinesses% man# of which do re;uire
chec3in$ accounts!
The difference )etween ne$otia)le certificates of
deposit '&s( and other time deposits is that the
&s can )e sold to third parties while the other
time deposits cannot! Issuance of ne$otia)le
&s is important in onl# siF of the 9. MFIsG two
in &olom)ia 'FinamArica and &ompartir( and
four finance companies in Para$ua#! +t the end
of 200/% ne$otia)le &s represented .00 and 82
percent of the total deposits of these MFIs in
&olom)ia and Para$ua#% respectivel#! The em-
phasis placed on these products reflects the
strate$# of these siF MFIs to attract institutional
depositors and access capital mar3ets throu$h
the sale of ne$otia)le &s% althou$h the# also
sell a su)stantial part of their ne$otia)le &s
directl# to the $eneral pu)lic!
Currency &i" o( Deposits
The currenc# miF of deposits varies $reatl# with
the countr# 'Ta)le I(! In countries such as 4cua-
dor and 4l Sa lvador that have adopted the
dollar%
.00 percent of deposits are in forei$n currenc#
'F&(! The situation in Eicara$ua is similar% with
F& deposits representin$ M.!9 percent of the to-
tal! eposits in local currenc# '<&( ta3e on
$reater importance at MFIs in Peru 'I6!. percent
of total deposits(% Para$ua# '8.!/ percent( and
Honduras '.00 percent(!
%he Si:e Distribution o( &FI Deposits
This section eFamines the size distri)ution of
MFI deposits in Bolivia and Peru! These two
countries are selected )ecause the re;uired data
are availa)le and )ecause 68 percent of the total
deposits mo)ilized )# our sample of 9. MFIs
are mo)ilized )# the MFIs in these two coun-
tries!
7
The followin$ o)servations and conclu-
sions are derived from Ta)le 9% and refer to the
end of 200/G
First% the lar$e num)er of deposit accounts is
stri3in$G .8I%0.6 in Bolivia and 98/%.96 in Peru!
Second% in Bolivia% deposits under BSL I00 rep-
resented 8I!8 percent of the accounts )ut con-
tri)uted onl# /!. percent of the amount mo)i-
lized% with an avera$e )alance of BSL 7/ per
account! +t the other eFtreme% accounts $reater
than BSL .00%000 represented onl# 0!2 percent
of the accounts )ut #ielded /7!M percent of the
amount mo)ilized% with an avera$e )alance of
BSL 260%8./! +nother important se$ment is that
7
Ta)le 9 provides data for all five MFIs in Bolivia
and for the &M+&s and &=+&s in Peru! Thus% for
Peru% the ta)le omits the 4PHM4s 'which do not
mo)ilize deposits(% Banco del Tra)a>o and Mi)anco
'which mo)ilize one-third of all deposits collected )#
the Peruvian MFIs(!
%+%A C&ACs and C2ACs in Peru
Segment
5umber o(
Accounts
B
Balance
74S> 1118
B
Average Deposit
74S>8
ess than or eAual to 4S> #0)/* 9/6%I/2 M/!/X ...%/7M 2.!7X .6I
4S> #0)/* to 4S> -0)** 26%87I 7!.X 8/%7I0 .9!0X 2%MM6
4S> -0)** to 4S> )0?./ M%MI6 .!IX 99%9.7 .2!8X 9%9M0
4S> )0?./ to 4S> #)0/** I%06M 0!6X 98%6.I ./!2X ./%I2M
4S> #)0/** to 4S> /?0)** 2%//0 0!/X 69%M67 .7!8X //%0/9
+ver 4S> /?0)** 727 0!.X ..7%2M0 2.!MX 29M%II2
%otal .?*0#./ #11$1B ,'#0*)' #11$1B /.*
)etween BSL .0%00. and BSL .00%000% which
represented onl# .!/ percent of the accounts )ut
provided /6 percent of the funds mo)ilized% with
an avera$e )alance of BSL /7%/7/! Finall#% the
deposits )etween BSL I0. and BSL .0%000 rep-
resented .2!8 percent of the accounts and 2I
percent of the total amount mo)ilized% with an
avera$e )alance of BSL 2%/.2!
%able .
Si:e Distribution o( Savings Deposits and %ime Deposits
7December *#0 '11*8
%+%A &FIs in Bolivia
Segment
5umber o(
Accounts
B
Balance
74S> 1118
B
Average Deposit
74S>8
ess than or eAual to 4S>,11 .I8%9I6 8I!8X 9%82/ /!.X 7/
4S> ,1# to 4S> #0111 8%2M7 7!IX I%M0/ 2!6X 6.2
4S> #011# to 4S> ,0111 .2%820 9!MX 2M%M0/ ./!9X 2%///
4S> ,011# to 4S> #10111 2%902 .!7X .M%0.M 8!6X 6%/0M
4S> #1011# to 4S> *10111 .%I06 0!8X 29%2M9 .2!0X .6%77M
4S> *1011# to 4S> ,10111 799 0!/X 20%2M7 M!/X 7/%I7M
4S> ,1011# to 4S> #110111 /88 0!2X /7%7M7 .I!6X 88%M02
+ver 4S> #110111 28/ 0!2X 69%970 /7!MX 260%8./
%otal #?,01#/ #11$1B '#)0*/' #11$1B #0#?.
Source: Superintendenc# of Peru 'SBS(!
%+%A Banking System in Peru
Segment
5umber o(
Accounts
B
Balance
74S> 1118
B
Average Deposit
74S>8
ess than or eAual to 4S> #0)/*
I%0M/%9/8 88!IX 872%I7/ 9!7X .9I
4S> #0)/* to 4S> -0)** /20%878 I!9X M8.%.9I 6!7X /%0I8
4S> -0)** to 4S> )0?./ .62%7MM /!0X .%./6%M87 8!9X 9%IM6
4S> )0?./ to 4S> #)0/** .00%.29 .!6X .%/7I%788 .0!2X ./%7/8
4S> #)0/** to 4S> /?0)** I6%929 .!0X .%M6.%9M9 .7!MX /7%2.I
+ver 4S> /?0)** ..%M86 0!2X 9%M2.%2I9 I2!7X I66%/M6
%otal ,0/,.0/'- #11$1B #*0'110#*' #11$1B '0')*
Source: Superintendenc# of Peru 'SBS(!
Third% MFI deposits in Peru are also heavil#
concentrated% with most of the accounts small
)ut most of the mo)ilized deposits comin$ from
lar$er accounts! eposits less than BSL .%M6/
represented M/!/ percent of total accounts )ut
contri)uted onl# 2.!7 percent of the total amount
mo)ilized% with an avera$e )alance of BSL .6I!
B# contrast% ma>or depositors% with )alances
over BSL 68%M//% represented onl# 0!. percent
of total accounts )ut contri)uted 2.!M percent of
total deposits% with an avera$e )alance of BSL
29M%II2! Finall#% the intermediate se$ment )e-
tween BSL .%M6/ and BSL .M%6// is also ;uite
important% with 9!/ percent of the accounts and
72!0 percent of total deposits!
Fourth% comparin$ the size distri)ution of depos-
its at MFIs versus )an3s in Peru% deposits are
even more concentrated at )an3s than at MFIs!
For eFample% clients in the hi$hest stratum 'over
BSL 68%M//( provided I2 percent of the total
amount mo)ilized at the )an3s and onl# 22 per-
cent at the MFIs! The $reater deposit concentra-
tion at )an3s is li3el# due to the )an3sS a)ilit# to
attract more hi$h- income and institutional
depositors% which% in turn% is due to the fact
that these clients re;uire )an3in$ services that
MFIs are not permitted to offer!
The main conclusions derived from the preced-
in$ anal#sis areG
In these two countries% in which the microf i-
nance sector is relativel# mature% MFIs have
attracted a lar$e num)er of depositors! Thus%
the# have provided a valua)le service to
man# thousands of their clients and $reatl#
diversified their lia)ilities!
There is mar3ed hetero$eneit# amon$ de-
positors in the two countries! Most of the
savers are small and contri)ute onl# a tin#
fraction of the total funds mo)ilized! +n eF-
ploration of the operatin$ costs of servin$
this $roup is underta3en in &hapter /!
The intermediate- and lar$e-size savers are
important client se$ments in )oth countries!
+lthou$h most MFI lendin$ consists of
loans to low- income clients% most of the
savin$s comes from the intermediate- and
lar$e- size savers!
In Peru% deposits are even more concentrated
at )an3s than at MFIs!
FAC%+2S B!HI5D S4CC!SSF4
D!P+SI% &+BIICA%I+5
The recent success of MFIs in mo)ilizin$ sav-
in$s in <atin +merica can )e attri)uted to sev-
eral factors!
I
First% the favora)le influence of
macroeconomic sta)ilit# and financial reform
are 3e#% since the# have made it possi)le to re-
munerate deposits with interest rates that are
positive in real terms! Second% MFIs are inspir-
in$ $reater confidence in savers in recent #ears
)ecause these institutions have si$nificantl#
stren$thened their )alance sheets and operations!
In addition% in some countries such as Peru%
MFIs are )ac3ed )# a deposit insurance fund%
which has su)stantiall# reduced depositor ris3!
Third% MFIs $enerall# pa# hi$her deposit rates
than )an3s! MFIs can do this )ecause of the hi$h
interest rates the# char$e on their loans! Fourth%
MFIs provide $ood service to depositors )#
3eepin$ wait times short% avoidin$ or minimiz-
in$ fees% and maintainin$ low minimum deposit
sizes! Finall#% man# MFIs hold raffle s with
valua)le prizes to attract depositors!
I
For a more in -depth anal#sis of this issue in the spe-
cific case of Peru% see Portocarrero and B#rne <a-
)arthe '2002(!
MM
2! &haracteristics of the Four T#pes of Fundin$
This chapter eFplores the four t#pes of fundin$
instruments availa)le to microfinance institu-
tions 'MFIs(! The first section eFamines several
aspects of MFI deposit mo)ilization% includin$
products offered% client se$mentation% or$aniza-
tion and mana$ement% competition% ris3s and
mar3etin$! The second section eFplores MFI
)orrowin$% eFaminin$ the characteristics of dif-
ferent )orrowin$ sources and the impact of )or-
rowin$ on MFI ris3 mana$ement! The third and
fourth sections anal#ze the limited MFI eFperi-
ence in issuin$ )onds and stoc3% respectivel#!
D!P+SI%S
&FI Deposit Products and Clients
In $eneral% <atin +merican MFIs that capture
savin$s from the $eneral pu)lic use savin$s ac-
counts 'S+s( and time deposits 'Ts( as their
main deposit products! +t the end of 200/% the
)rea3down of total depos its for the 9. MFIs we
have surve#ed wasG S+s 29 percent% Ts 67 per-
cent% and chec3in$ accounts 0!. percent!
Savin$s accounts are interest )earin$ deposits
that lac3 an# preset term and that $enerall# per-
mit savers to ma3e deposit and withdrawal
transactions at will! Because of these features%
savers often use S+s as a li;uidit# reserve and
$enerall# value their li;uidit#% securit#% ease of
access and low maintenance cost more than the
interest rate the# pa#! S+s are often emplo#ed as
transaction accounts 'in lieu of a chec3in$ ac-
count(% with limited avera$e )alances!
Time deposits are interest )earin$ deposits that
have a preset term and often char$e a penalt# for
withdrawals prior to maturit#! Ts are of two
t#pesG those that can )e sold to third parties 'ne-
$otia)le certificates of deposit( and those that
cannot! &lients use Ts to earn hi$h returns on
eFcess li;uidit# that can )e committed for the
term of the time deposit! The interest rate paid
on the T is a 3e# factor in determinin$ whether
savers will purchase this product!
Number of Accounts and Average Si,e
To compare the two main deposit instruments%
S+s and Ts% it is useful to focus on Bolivia%
which has disa$$re$ated data on the num)er of
accounts! Ta)le 6 shows that total deposits mo-
)ilized )# the five re$ulated MFIs in Bolivia as
of ?une /0% 2007 was BSL 2.2 million% of which
S+s comprised 20 percent and Ts 80 percent!
However% savin$s accounts represented M7 per-
cent of the total num)er of accounts 'and carried
an avera$e )alance of BSL 2.0(% while time de-
posits represented onl# 9 percent of the total
num)er of accounts 'and carried an avera$e )al-
ance of BSL .2%0I9(! The hetero$eneit# of the
savers is stri3in$! + limited $roup of institu-
tional investors and middle - and upper-income
households provide the )ul3 of the funds mo)i-
lized% primaril# throu$h time deposits% while the
vast ma>orit# of savers provide onl# a limited
share of the funds!
9
%istribution of Time %eposits by Maturity
Ta)le 8 shows the distri)ution of time
deposits )# maturit# for the case of &M+&
+re;uipa in Peru! The &M+& +re;uipa data
reflect the $eneral trend in Peru toward
len$thenin$ T terms! In the case of &M+&
+re;uipa% there are si$- nificant differences in
the eFtent of this phenomenon dependin$ on the
currenc#! &M+& +re;uipa has achieved a
len$thenin$ of deposit terms particularl# in
local currenc# '<&( time deposits )# followin$
a conscious polic# of offerin$ hi$her rates for
such deposits! +s a result%
/0 percent of their <& time deposits have terms
9
+lso see Ta)le 9 in &hapter . and the related dis-
cussion for more evidence on this phenomenon )ased
on the same five MFIs in Bolivia and 29 MFIs in
Peru
!
Balance
74S> million8
B
5umber o(
Accounts
B
Average
Balance 4S>8
Savings Accounts 7/!. 20X 20I%029 M7X 2.0
%ime Deposits .98!M 80X .7%00M 9X .2%0I9
%otal 2.2!0 .00X 2.M%0/I .00X M98
%able /
Deposits in the Five 2egulated &FIs o( Bolivia
#@
7Dune '11-8
.* The five MFIs are Bancosol% Prodem% &a>a <os +ndes% FI4 and 4cofuturo! Given that the
data are from ?une 2007% the# do not a$ree with the data in +nneF B% which refer to ecem)er
2000-200/!
%able ?
2ange o( %ime Deposit %erms at C&AC AreAuipa
7Dune '11-8
2ange o( %erms
7days8
%ime Deposits in ocal Currency
5umber o(
Accounts B Balance 74S>8 B
Average
Balance 74S>8
Average 2ate
7 B 8
From 0 to .80 da#s 2%087 7IX I%M.6%M26 22X 2%870 M!M
From .8. to /90 da#s .%9/2 /IX 8%6I9%M8. /2X I%/99 8!6
From /9. to 620 da#s I6/ .2X 7%9/9%I67 .6X 8%0M2 ..!7
More than 620 da#s /.0 6X 8%.99%27M /0X 29%/7/ ./!9
%otal -0,)) #11B '/0-//0/*# #11B ,0)/, #1$1
2ange o( %erms
7days8
%ime Deposits in Foreign Currency
5umber o(
Accounts B Balance 74S>8 B
Average
Balance 74S>8
Average 2ate
7B8
From 0 to .80 da#s /%728 IMX ..%/I9%287 7IX /%/./ 7!6
From .8. to /90 da#s .%8I9 /2X 8%/7/%90. //X 7%7MI 7!7
From /9. to 620 da#s 77M 8X /%6M9%M/M .IX 8%7I9 7!6
More than 620 da#s 66 .X .%768%/MI 9X .M%200 I!7
%otal ,0?#1 #11B '-0)/,0'#) #11B -0')) -$/
Source: &M+& +re;uipa!
of over 620 da#s and .6 percent of <& time de-
posits have terms of /9.- 620 da#s! The interest
rates paid increase from M!M percent per annum
for <& time deposits with terms less than or
e;ual to .80 da#s up to ./!9 percent for <& time
deposits with terms over 620 da#s! +lso impor-
them to len$then the terms of their <& time de-
posits!
6
PeruSs macroeconomic sta)ilit# and ap-
preciatin$ eFchan$e rate in recent #ears have
also helped &M+& +re;uipa to attract such de-
posits!
tant to note is the fact that the avera$e size of the
over-620-da# <& time deposits is BSL 29%/7/%
compared to an overall avera$e size of BSL
I%M6I for all <& time deposits! These data reflect
&M+& +re;uipaSs promotional efforts to attract
middle - and hi$h- income clients and persuade
6
These clients have si$nificant assets and thus ma#
more easil# allocate a portion of these assets to me-
dium-term investments such as time deposits for
terms over two #ears! However% the# will do this onl#
if the T #ield s are hi$h enou$h to compensate them
for the li;uidit# the# have sacrificed!
Time deposits in forei$n currenc# 'F&( present a
rather different situation% with the preponderance
of these funds havin$ shorter maturitiesG 7I per-
cent of these funds have terms of up to .80 da#s
and // percent have terms of .8.-/90 da#s! This
reflects &M+& +re;uipaSs much lower level of
interest in len$thenin$ the terms of its F& time
deposits! This% in turn% stems from the fact that
&M+& +re;uipa has an a)undance of medium-
term credit lines in dollars which can )e
matched to the medium-term microloans that it
ma3es in dollars! Thus% &M+& +re;uipa does
not need much medium-term F& time deposits to
avoid asset-lia)ilit# matchin$ pro)lems! =ather%
&M+& +re;uipa encoura$es rollovers of matur-
in$ F& time deposits into new F& time deposits
with similar maturities in order to have a sta)le
source of fundin$ and lower financial costs!
Thus% active mana$ement of time deposits pro-
vides an opportunit# for MFIs to miti$ate asset-
lia)ilit # matchin$ pro)lems in )oth term and
currenc#! MFIs can reduce these pro)lems )#
offerin$ favora)le interest rates and other incen-
tives to depositors who allocate their eFcess li-
;uidit# in line with the MFISs prior ities!
Institutional %epositors
Institutional depositors can also )e ;uite impor-
tant% althou$h their involvement varies with the
conditions in each countr#! This $roup of de-
positors includes mutual funds% pension funds
'+FPs(% insurance companies% )an3s% credit un-
ions% non$overnmental or$anizations and social
pro$rams% all of which can and sometimes do
ma3e su)stantial time deposits! Because Bo-
liviaSs capital mar3ets are less developed% insti-
tutional depositors hold a $reater share of their
assets in the form of financial institution time
deposits% as is illustrated )# Bancosol and &a>a
<os +ndes% where I0 and /0 percent of time de-
posits% respectivel#% are from institutional de-
positors! Kn the other hand% in Peru% where capi-
tal mar3ets are more hi$hl# developed% institu-
tions hold a smaller share of total MFI time de-
posits! For eFample% at &M+&s +re;uipa and
Piura% as of ?une /0% 2007% the time deposits of
re$istered companies 'for the most part held )#
institutional depositors( accounted for 27 and .M
percent of overall time deposits% respectivel#! +t
&=+& Se:or de <uren% the time deposits of re$-
istered companies are even less important% repre-
sentin$ onl# 9 percent of overall time deposits as
of +pril /0% 2007!
It is interestin$ to eFamine a more detailed data
set on the time deposits of re$istered companies
'which% a$ain% are mostl# held )# institutional
depositors(% from FI4 in Bolivia! These deposits
have an avera$e )alance of BSL M9%0/7 per ac-
count 'Ta)le M( and represent /M percent of all
deposits mo)ilized )# FI4! These deposits are
hi$hl# concentrated% with those over BSL
.00%000 comprisin$ 96 percent of the total! 5ir-
tuall# the entire remainder is held in accounts
from BSL .0%000 to BSL .00%000% while smaller
strata are insi$nif icant!
Institutional depositors in Bolivia are attracted to
time deposits at the MFIs )ecause of the com-
petitive interest rates the# pa#% the possi)ilit# of
ne$otiatin$ the terms and conditions of each in-
dividual deposit% and the ima$e of financ ial
stren$th and professionalism of these entities%
which is reflected in their $ood ris3 ratin$s!
8
However% havin$ a si$nificant share of institu-
tional deposits increases li;uidit#% term mis-
match and currenc# ris3s for an MFI% since
asset-lia)ilit# mismatches ma# )e created
)# a small $roup of depositors that tend to use
similar assessment criteria! This is especiall#
true in times of $eneralized li;uidit# shorta$es%
durin$ which institutional investors ma# not
roll over their deposits or ma# si$nificantl#
reduce their terms!
-overnment %eposits and *hec.ing
Accounts
Generall# spea3in$% $overnment deposits are not
a ver# si$nificant source of funds for MFIs!
These deposits tend to )e concentrated in )an3s
and their placement su)>ected to constraints! For
eFample% in Peru% pu)lic funds must )e placed in
financial institutions accordin$ to an auction
mechanism! Thus% at &M+& +re;uipa% $overn-
ment deposits represented onl# /!M percent of
8
Bancosol% &a>a <os +ndes% FI4 and Prodem have a
ris3 ratin$ of + or )etter!
%able )
%ime Deposits o( 2egistered Companies at FI!
7Dune *10 '11-8
Segment %ime Deposits o( 2egistered Companies
5umber o(
Accounts
B Balance 74S> 8 B
Average Balance
74S>8
0 to BSL I00 . .X .29 0X .29
BSL I0. to BSL.%000 . .X I69 0X I69
BSL .%00. to BSL I%000 7 7X 8%8I/ 0X 2%2./
BSL I%00. to BSL .0%000 7 7X 22%862 0X I%6.8
BSL .0%00. to BSL I0%000 /8 72X .%2.6%292 .7X /2%0//
BSL I0%00. to BSL .00%000 22 27X .%9/0%/.9 .MX 67%.0I
More than BSL .00%000 2. 2/X I%8IM%.0/ 96X 26M%00I
%otal )# #11B ?0/*)0#1) #11B ).01*-
Source: FFP FI4!
overall deposits as of ?une /0% 2007! These $ov-
ernment deposits consisted of seven time depos-
its% with an avera$e )alance of BSL I70%000 per
account! In $eneral% $overnment deposits have
two important advanta$es! First% the# ma# have
low financial costs! For eFample% in Peru% the
interest rate paid on $overnment deposits is
esta)lished at the auction! =ecentl#% the
interest rate on local currenc# deposits has
fluctuated )etween 7!I and 9 percent% while the
interest rate on dollar deposits has )een 2!6I
percent! These levels are si$nificantl# lower
than those that &M+& +re;uipa pa#s its other
depositors! Sec- ond% the lar$e avera$e size of
$overnment deposits )rin$s operatin$ costs
down considera)l#! Kn the other hand%
$overnment deposits have at least three clear
draw)ac3s! First% the# $enerall# have short
terms 'mostl# )etween MI and .8M da#s in the
case of Peru% for eFample(! Second% the# are
potentiall# unsta)le )ecause the MFI cannot )e
sure of winnin$ the neFt auction and )ecause
$overnment a$encies ma# need the funds and
thus ma# not renew their deposits at maturit#
or ma# reduce their size! Finall#% in times of
$eneralized li;uidit# shorta$es% this source of
funds ma# )e costl#!
In turn% the insi$nificance of chec3in$ accounts
as an MFI fundin$ source can )e attri)uted to
two main factors! First% most of the MFIs are
non)an3 financial intermediaries% which are not
permitted to offer chec3in$ accounts! Second%
the MFIs that are )an3s still do not offer chec3-
in$ accounts or do so onl# in a limited wa# )e-
cause ofG 'i( the compleFit# of this product and
its hi$h operatin$ costs% 'ii( the lar$e advanta$es
of commercial )an3s in this )usiness area% which
in turn $enerate su)stantial scale economies for
the )an3s% and 'iii( the limited interest of micro-
enterprise clients in such accounts!
M
Kn this last
point% the use of chec3s is not widespread amon$
low- income households, instead% a culture
of cash pa#ments prevails! Finall#% the recent
introduction of a financial transaction taF in
Bo- livia and Peru has further reduced the appeal
of usin$ chec3s in those countries!
Client Segmentation
+s seen in )oth this chapter and the last% the de-
positors of MFIs are ver# hetero$eneous! Be-
cause of this% it can )e ver# useful for MFIs to
se$ment depositors and then develop se$ment-
specific strate$ies in such areas as products
of-
M
+n interestin$ case of this is Mi)anco% an MFI that
does offer chec3in$ accounts! "hile onl# a small
num)er of Mi)anco clients have opened such ac-
counts% Mi)anco still offers this product as a prepara-
tion for the medium term% when some of toda#Ss mi-
croenterprise clients will turn into small or medium-
size )usinesses% which often will )e interested in
chec3in$ accounts!
fered 'includin$ new products(% level of service
and $rowth tar$ets!
For eFample% &M+& +re;uipa has se$mented
its depositors )# size% settin$ the followin$ ser-
vice levelsG
&lients with )alances over BSL .77%000 are
the responsi)ilit# of the +ssistant Mana$er
for Savin$s and Finance!
&lients with )alances )etween BSL 89%000
and BSL .77%000 are the responsi)ilit# of
the re$ional mana$er!
&lients with )alances )etween BSL 7/%000
and BSL 89%000 are attended to )# the
)ranch mana$er!
&lients with )alances )etween BSL .7%000
and BSL 7/%000 are attended to )# an opera-
tions assistant!
&lients with )alances )elow BSL .7%000 are
handled )# lower level staff or at a teller
window!
Thus% different se$ments are handled differentl#!
<ar$e clients are provided with personalized
service! The# do not have to stand in line and are
$iven the option to carr# out transactions )#
telephone or email! The# are also invited to spe-
cial events sponsored )# &M+& +re;uipa% are
visited in their offices or homes in order to
maintain an on$oin$ relationship and are $iven
small $ifts on their )irthda#s or &hristmas!
This personalized service is ver# much appreci-
ated )# &M+& +re;uipaSs lar$e depositors% who
tend to )e older and have a stron$ re$ionalist
spirit! +t the )an3s in the +re;uipa re$ion% these
clients are often served in a much more stan-
dardized% anon#mous wa#% at teller windows or
)# lower level staff! This eFplains the preference
of this clientele for &M+& +re;uipa! B# se$-
mentin$ its depositors% &M+& +re;uipa has
created pro$rams to maintain the lo#alt# of 3e#
clients!
Similarl#% Bancosol has studied the demo$raphic
and socioeconomic characteristics of its clients
and anal#zed their patterns of financial product
use! +s a result% it has esta)lished cate$ories of
clients that receive special treatment% )ased on
their profita)ilit#% len$th of time as clients and
other factors! These depositors are $iven rapid
service and are not re;uired to stand in line!
The# also receive hi$her interest rates on their
savin$s% more fleFi)le approval of loans and of-
fers of credit and de)it cards and of other prod-
ucts tailored to their needs!
&M+& Tru>illo has anal#zed the $ender compo-
sition of its clients! In ?ul# 200/% at its two most
important )ranches1the main office and the
)ranch on +venida 4spa:a1women provided
7. percent and 7/ percent of total deposits% re-
spectivel#! Men provided 28 and 2M percent%
respectivel#% and re$istered companies% /. and
28 percent% respectivel#! Several factors eFplain
the importance of women depositorsG the fact
that women ma3e most of the household invest-
ment decisions in Tru>illo% &M+& Tru>illoSs
stron$ re$ional roots and the institutionSs polic#
of not char$in$ monthl# fees for its savin$s ac-
counts! Interestin$l#% at )ranches in small cities
in the hi$hlands 'the sierra(% the situation is re-
versedG men account for )etween I. and I9 per-
cent of the deposits mo)ilized!
Ta)le .0 shows the results of &M+& Tru>illoSs
stud# of the distri)ution of deposit )alances )#
deposit t#pe and a$e of the client! Individuals
over a$e I0 hold I0 percent of total time depos-
its and /6 percent of total savin$s deposits! The
distri)ution of savin$s )# a$e $roup fits the life-
c#cle h#pothesis ;uite well!
.0
Klder persons
have more si$nificant savin$s )ecause the# have
had a lon$er accumulation period and )ecause
the# need to )uild up assets for old a$e! The sur-
ve# also shows the importance of those under
.8% especiall# in savin$s deposits! It is important
to )uild and maintain the lo#alt# of these clients%
not onl# )ecause of the siza)le savin$s accounts
the# have now% )ut also )ecause the# ma# )e a
source of even lar$er deposits in the future!
.0
See +ndo and Modi$liani '.M9/(!
%able #1
Distribution o( Deposit Balances by %ype o( Deposit and
Age o( Client at C&AC %ruEillo
7&ay *#0 '11-8
Age 7years8 Savings Deposits 7B8 %ime Deposits 7B8
Bnder .8 .I!IX M!MX
.8-27 /!IX 7!MX
2I-/0 8X 8!8X
/.-70 .8!9X ..X
7.-I0 .6!7X .I!/X
I.-9I 2M!6X /0!/X
Kver 9I 6!/X .M!MX
%otal #11B
7 4S> '1$? million8
#11B
74S> -*$- million8
Source: &M+& Tru>illo!
&M+& Tru>illoSs anal#sis of its clients )#
$ender and a$e has proven ver# useful! +s a re-
sult% &M+& Tru>illo has )een a)le to $ear its
mar3etin$ campai$ns and structure its services
)ased on the needs of the 3e# client se$ments it
has identified!
In $eneral% MFIs need to anal#ze their client da-
ta)ases in $reater depth in order to )e a)le to
orient mar3etin$ and cross-sellin$ efforts more
effectivel# and )etter adapt products to the needs
of different client se$ments! MFIs often do little
or none of this anal#sis% in some cases )ecause
of the limitations of their data)ases )ut% in most
cases% )ecause the# have not reco$nized its im-
portance!
+rgani:ation and &anagement
Kversi$ht of the deposit-ta3in$ operations of an
MFI falls either to the MFISs savin$s and f i-
nance department or% alternativel#% to its opera-
tions department! In $eneral% MFIs set deposit
mo)ilization tar$ets as part of an overall set of
consistent financial pro>ections made durin$ the
annual )usiness plannin$ eFercise!
MFIs )rea3 down their overall deposit-
mo)ilization tar$ets )# )ranch in consultation
with )ranch mana$ers and after considerin$ the
current and li3el# future state of financial mar-
3ets! The# evaluate the eFtent to which these
tar$ets are )ein$ met on a monthl# )asis and
anal#ze the possi)le reasons for discrepancies in
order to implement corrective measures!
In most MFIs% either mana$ement or the )oard
of directors sets interest rates centrall#% )ased on
an evaluation of financial mar3et trends% the
rates offered )# competitors% and the MFISs pri-
orities! +s an eFample of this last consideration%
to help rectif# currenc# mismatch pro)lems%
man# MFIs in Peru offer si$nificantl# hi$her
interest rates on local currenc# deposits than on
B!S! dollar deposits.
..
In some cases% )ranch
mana$ers are $iven fleFi)ilit# to modif# deposit
..
This is true despite the fact that Peruvian and B!S!
inflation levels have )een similar in recent #ears!
Branch %ype 9ears
5umber o(
Depositors
Deposit Balance
74S> million8
Average Deposit
74S>8
+utstanding oans
74S> million8
a &erced
7C&AC AreAuipa8
Main 9
Savin$sG .0%800
Time ep!G .%I00
Savin$sG 2!67
Time ep!G .8!M6
Savin$sG 2I7
Time ep!G .2%978
..!2
&ercaderes
7C&AC AreAuipa8
eposit
Mo)ilizer
.I
Savin$sG 2I%9I9
Time ep!G 7%I09
"+G /% /67
Savin$sG .0!.0
Time ep!G .9!/0
"+G 7!08
Savin$sG /M7
Time ep! G /%9.6
"+G .%20M
..!I
!l Porvenir
7C&AC %ruEillo8
<ender .7
Savin$sG I%I00
Time ep!G I70
Savin$sG 0!67
Time ep!G .!/8
Savin$sG ./I
Time ep!G 2%I2M
/!8
!l Prado
7CaEa os Andes8
Main .
Savin$sG 8.I
Time ep!G 29M
Savin$sG 0!IM
Time ep!G 2!2I
Savin$sG 62M
Time ep! G 8%/97
TotalG 9!2
MicrocreditG 2!/
SM4 creditG /!M
6ran Poder
7Prodem8
<ender 6
Savin$sG .%9I6
Time ep!G M/
Savin$sG 0!..
Time ep!G .!/2
Savin$sG 9M
Time ep!G .7%.6/
2!I
Bo" #F Ho3 Branches Handl e Deposits
MFIs are decentralized institutions% and so it is hardl# surprisin$ that MFI ) ranches pla# a 3e# role in their operations! +t four
MFIs we visited in Peru and Bolivia% three t#pes of )ranches were o)servedG 'i( main offices% which carr# out the lar$est and
most compleF transactions % )oth for loans and deposits, 'ii( deposit -mo)ilizin$ )ranches% where deposits eFceed loans )# a
lar$e mar$in, and 'iii( lendin$ )ranches% where the reverse is true! In all cases% the )ranchSs location is of central importance,
each )ranch is $enerall# located near its tar$et mar3et! Thus% main offices are usuall# located in cit# centers% where financial
activ ities are concentrated! In re$ards to deposit mo)ilization% the main offices offer more favora)le conditions for servicin$
ma>or depositors% such as the a)ilit# to provide more personalized service and to ne$otiate rates more efficientl# )ecause of the
near)# presence of the MFISs eFecutives! eposit -mo)ilizin$ )ranches are located in cit# centers or in middle - and upper-
income areas% thus facilitatin$ the transactions of savers who wor3 or live in those areas! <endin$ )ranches are located near the
main microenterprise activit# centers! "hile these )ranches $ive priorit# to $rantin$ loans% the# also provide services to savers!
Man# MFIs tr# to stri3e a )etter )alance )etween the lendin$ and deposit -ta3in$ operations of the lendin$ )ranches% thou$h the
ma3eup of their clientele limits these efforts! In addition% lendin$ )ranches are often located in areas with safet# pro)lems% and
so man# savers prefer to carr# out their transactions at the MFISs main office or its cit# center )ranches!
.2
These t hree t#pes of )ranches are clearl# reflected in the followin$ dataG
Characteristics o( Selected Branches (or Four &FIs in Peru and Bolivia
Note: "+ indicates wor3ersS accounts% that is % p a#ment for time in service!
Source: &M+& +re;uipa% &M+& Tru>illo% &a>a <os +ndes and Prodem!
Branch mana$ers pla# an important role in deposit mo)ilization! The# participate in settin$ deposit -mo)ilization tar$ets and
evaluatin$ their fulfillment% desi$n action plans% hold periodic meetin$s with staff mem)ers to solve pro)lems% and deal with
su$$estions for improvin$ )ranch operations!
The )ranch mana$er is also char$ed with ensurin$ $ood client service 'for eFample% or$anizin$ the )ranch to avoid lines and
provid e rapid attention to all clients(% promotin$ deposit products in order to attract new clients% and ma3in$ sure services are
personalized! The mana$er visit s the lar$est depositors and often ne$otiates )etter rates for them% within the parameters set )#
the MFI!
.2
This is what happens in 4l +lto% Bolivia% where ma>or clients often prefer to ma3e deposits at the MFIsS main o f-
fices in <a Paz!
rates% as lon$ as the# sta# within a previousl#-
approved ran$e! Prodem and &M+& Tru>illo
var# their deposit rates )# )ranch1)ased on
local mar3et considerations% includin$ the de-
posit rates paid )# local competitors1in an at-
tempt to minimize the overall financial costs of
mo)ilizin$ a $iven amount of deposits! How-
ever% MFIs $enerall# do not use anal#ses of the
operating costs of different deposit products to
$uide them in settin$ their deposit rates 'for eF-
ample% to help them minimize the total costs of
mo)ilizin$ a $iven amount of deposits% where
total costs are the sum of financial and operatin$
costs(!
Some MFIs use incentive pa# s#stems to reward
)ranch mana$ers and emplo#ees involved in
deposit-ta3in$ for meetin$ their assi$ned de-
posit-mo)ilization tar$ets! However% this is
much less common than the use of pa# incen-
tives for loan officers! This is )ecause most
MFIs still pla ce $reater emphasis on credit and
)ecause it is easier to evaluate loan officer per-
formance! MFIs that do not use incentive pa#
s#stems for emplo#ees involved in deposit-
ta3in$ and for )ranch mana$ers should consider
introducin$ such s#stems as a wa# to motivate
these personnel to reach the deposit tar$ets that
the MFI has set!
%he Competition
In ma3in$ loans to microenterprises% MFIs $en-
erall# face onl# limited competition from com-
mercial )an3s% which are often not interested in
this mar3et se$ment! However% man# )an3s
compete with MFIs for the deposits of microen-
terprises! Ban3s can $enerall# offer their clients
an ima$e of financial stren$th and securit#% a
siza)le )ranch networ3% )etter facilities for ma3-
in$ transfers and pa#ments% +TMs% credit cards
and some products such as chec3in$ accounts
and forei$n trade finance that are mainl# impor-
tant to lar$er )usinesses and middle - and
upper-
Kftentimes% MFIs face tou$h competition from
other MFIs for microenterprise deposits since
man# of these other MFIs offer similar products
at compara)le interest rates and have a similar
tar$et clientele! Mutual savin$s Q loan institu-
tions and credit unions ma# provide additional
competition% the importance of which varies
$reatl# from mar3et to mar3et!
The main stren$ths of MFIs in depos it mo)iliza-
tion include the followin$G
Hi$h interest rates
4fficient% personalized service
Ima$e of financial stren$th and securit#
')etter in some MFIs than in others(
+)sence of fees! eposit rates clearl# indi-
cate the return on savin$s% and are a more
transparent indicator than deposit rates at
)an3s!
<ow minimum amount for openin$ an ac-
count
For re$ional institutions% re$ional presti$e
ma# confer a powerful competitive advan-
ta$e on the MFI% as it does in the cases of
the &M+&s in +re;uipa% Piura and Tru>illo!
The wea3nesses of MFIs in mo)ilizin$ deposits
include the followin$G
<ac3 of a national networ3 compara)le to
that of )an3s% which facilitates pa#ments
and transfers
<imited capital )ase compared with that of
)an3s
<ac3 of +TMs and of informatio n s#stems
that facilitate the anal#sis of client data)ases
<ac3 of variet# amon$ services offered% for
eFample% a)sence of chec3in$ accounts and
forei$n trade financin$
The success of MFIs in mo)ilizin$ deposits in
recent #ears can )e credited to )oth eFternal and
income clients! The disadvanta$es of )an3s in-
internal factors! Important eFternal factors ni -
clude the lower interest rates the# pa# on depos-
its% the hi$her fees the# char$e% the hi$her min i-
mum deposit sizes the# re;uire and the less per-
sonalized service the# offer compared to MFIs!
clude the relative macroeconomic sta)ilit# that
has prevailed in man# countries and is reflected
in low inflation levels and positive real deposit
Country and &FI 9es 5o
Peru
&M+& +re;uipa [
&M+& &hincha [
&M+& Tru>illo [
&=+& Se:or de <uren [
Bolivia
Bancosol [
FI4 [
&a>a <os +ndes [
Prodem [
%able ##
4se o( 2a((les to Stimulate Deposit &obili:ation
7Dune '11-8
Source: The MFIs!
rates! +t the same time% in man# countries%
)an3s have under$one a c#cle of low deposit
rates and eFcess li;uidit# since 2000! This has
led the )an3s to sharpl# reduce deposit rates and
to concentrate on cuttin$ financial costs instead
of attemptin$ to eFpand deposits! +ll of this has
facilitated MFI mar3et penetration! Finall#% in
some countries% such as Peru% deposit insurance
funds have )een set up to cover all re$ulated
financial institutions% si$nificantl# reducin$ the
ris3 for savers! PeruSs deposit insurance fund
covers deposits of up to BSL .M%000!
The success of MFIs in mo)ilizin$ deposits is
also )ased on important internal factors such as
efficient and personalized service% suita)le loca-
tions for )ranches% hi$h interest rates and favor-
a)le conditions% an effective information s#stem
that interconnects with all )ranches and facili-
tates transactions% and effective advertisin$
campai$ns that in some cases include raffles!
/affles to +romote Savings
There is much de)ate a)out the merits of usin$
raffles to promote savin$s! It is hardl# surpris-
in$% then% that there are ma>or differences in their
use% as illustrated )# the Ta)le .. comparison of
MFIs in Peru and Bolivia! This ta)le shows that
Bolivian MFIs do not favor the use of raffles!
There are at least two reasons for this G
+s noted in a stud# done )# Bancosol% raf-
fles are unpopular in Bolivia )ecause few
people win and man# )elieve that the raffles
are sometimes ri$$ed! &lients prefer that all
depositors receive small $ifts as incentives!
=affles also have a )ad reputation in Bolivia
)ecause the# have often )een used )# inter-
mediaries facin$ a crisis as a part of a des-
perate attempt to procure li;uidit#!
B# contrast% in Peru% the ma>orit# of &M+&s
and &=+&s have used raffles to attract savers%
and have had ver# positive results!
./
This can )e
eFplained )# the followin$G
=affles en>o# a $enerall# unsullied reputa-
tion in Peru% with man# ma>or )an3s con-
tinuin$ to emplo# them!
MFI raffles are normall# limited to the de-
positors of a sin$le re$ion% and are held at
pu)lic events with a)undant pu)licit# and
./
=affles have also pla#ed a role in the successful
savin$s mo)ilization eFperience of B=I in Indonesia
'see =o)inson% .MM7% pp! 7. -72(!
transparenc#% all of which contri)ute to their
$ood ima$e!
"hether an MFI should use raffles to stimulate
deposits depends on the reputation of raffles in
the countr# and on the de$ree to which the MFI
needs additional deposits! For eFample% &M+&
+re;uipa alread# has the second lar$est share of
the deposit mar3et in the cit# of +re;uipa! It is
surpassed onl# )# Banco de &rAdito% the leadin$
financial institution in Peru% which has /9 per-
cent of the countr#Ss deposits! For this reason%
&M+& +re;uipa has decided not to use raffles!
Kn the other hand% raffles ma# )e useful when
the# en>o# a $ood reputation in the countr# and
the MFI would li3e to increase its deposits! To
maFimize the )enefits of the raffle% the MFI
should carefull# desi$n its incentives! For eFam-
ple% at man# Peruvian MFIs% more chances to
win are $iven to those with lon$er-term time
deposits in local currenc# )ecause these charac-
teristics help the MFI to improve the matchin$
of its assets and lia)ilities in )oth term and cur-
renc#! MFIs should also carr# out an eF post
evaluation to determine whether the profits $en-
erated )# the raffle eFceeded the costs% as illus-
trated in BoF 2!
Principal 2isks
Mo)ilizin$ deposits has clear impacts on the
four mar3et ris3s faced )# MFIsG li;uidit#% term
mismatch% interest rate and eFchan$e rate ris3!
+ttractin$ deposits also $ives rise to additional
operational ris3s!
0i)uidity /is.
<i;uidit# ris3 arises especiall# from the need for
funds to meet depositorsS withdrawals% which
sometimes cannot )e anticipated! This is espe-
ciall# true for savin$s accounts% which have no
set term! Periods of political or financial insta-
)ilit# ma# )rin$ uneFpected withdrawals and% in
some cases% conta$ion effects! To measure this
ris3% anal#sts use the li;uidit# ratio 'the ratio of
li;uid assets to short-term lia)ilities( and the
$aps )etween assets and lia)ilities ordered )#
maturit# date!
The Superintendenc# of Ban3in$ and Insurance
'SBS( of Peru has set minimum li;uidit# ratios
of 8 percent for local currenc# '<&(
lia)ilities and 20 percent for forei$n currenc#
'F&( lia)ilities% which all intermediaries
must o)serve!
.7
&ertain institutions% such as &M+&s +re;uipa
and Tru>illo% have an internal polic# that re;uires
hi$her li;uidit# ratios% .0 percent in <& and 2I
percent in F& for )oth of these &M+&s! In an#
event% when an MFI approaches its minimum
ratio% a contin$enc# plan should )e activated! +t
&M+& +re;uipa% the main elements of this plan
includeG
Bsin$ the undis)ursed )alances of approved
credit lines
Improvin$ loan recover# in the short term
=educin$ loan terms and limitin$ lar$er
loans
4Ftendin$ the maturit# of )orrowin$
Fosterin$ time deposits with lon$er terms )#
offerin$ hi$her rates
If there is no other alternative% li;uidatin$
reserves 'includin$ deposits at )an3s and
other assets that can )e ;uic3l# converted to
cash(
In $eneral% there is no si$nificant seasonalit# in
the deposits received )# MFIs in Peru and
Bo- livia in their ur)an )ranches! This is not true
for their rural )ranches% however! For eFample%
ProdemSs rural )ranches eFperience a si$nificant
drop in savin$s durin$ carnival and at the start of
the school #ear 'Fe)ruar# and March(!
The $ap model is useful for ;uantif#in$ li;uidit#
ris3 'BoF /(! Generall#% the model assumes that
time deposits will not )e withdrawn )efore ma-
turit#% and it also ma3es an assumption a)out the
timin$ of withdrawals from savin$s accounts!
For eFample% &M+& +re;uipa accepts the sce-
nario su$$ested )# SBSG it assumes that 2I per-
cent of savin$s account )alances will )e with-
drawn in the neFt /0 da#s and 6I percent in the
followin$ .. months!
Man# MFIs create a primar# cash flow ta)le
'showin$ the cash flows of the entire MFI( as
.7
See SBS% =esolution no! 762 -0.!
Costs o( Deposits 7annual8
Percentage o( Deposit
%arget 2eached
Interest
Costs
2a((le
Costs
%otal
Costs
Increase (rom
2a((le
,1B 9!0MX M!78X .I!I9X .I9X
#11B 9!0MX 7!67X .0!8/X 68X
#,1B 9!0MX /!.9X M!2IX I2X
Bo" 'F %he 4se o( 2a((les at C2AC SeGor de uren
The recent eFperience of &=+& Se:or de <uren 'S<(% in Ica% Peru% reflects the costs and ris3s of usin$ raffles to
increase deposit mo)ilization! The followin$ are the results of the campai$n V+horra # Gana con Eosotro sW OSave
and 4arn with BsP% carried out in the M-month period )etween Kcto)er 2002 and ?ul# 200/! The prizes consisted of
a furnished house% computers and a num)er of household appliances!
The participants in the raffle were all individuals or re$istered companies that had ta3en out a new time deposit
'T( or else had increased their eFistin$ )alance )# S*! .00 for Ts in local currenc# 'e;uivalent to approFimatel#
BSL 2M( or )# BSL I0 for Ts in dollars! Thus% the raffle reflected S<Ss preference for Ts in local currenc#!
Those ;ualif#in$ for the raffle received the followin$ num)er of tic3ets for the drawin$sG
M0-da# T U . tic3et
.80-da# T U 2 tic3ets
260-da# T U / tic3ets
/90-da# T U 7 tic3ets
Kur a)ilit# to evaluate the raffleSs results is limit ed )# the a)sence of a control $roup that could help us to estimate
the amount of deposits that would have )een mo)ilized without the raffle! For the sa3e of simplicit#% it was assumed
that an# increase in deposits that occurred durin$ the M-month raffle p eriod was attri)uta)le to the ra ffle !
.I
+ll costs of the raffle 'BSL MI%07/( were ta3en into accountG advertisin$ '/I percent of the total(% prizes '/9!8 per-
cent(% promotion './!2 percent(% filmin$% modelin$ and show eFpenses '.2!/ percent( and operatin$ and mainte-
nance eFpenses '2!9 percent(!
Financial costs $enerated )# the deposits were also considered! In the M-month period under anal#sis% the avera$e
financial cost of the Ts was 9!0M percent per annum! The costs of the raffle itself represented an avera$e additional
annual outla# of 7!67 percent% calculated )# ta3in$ the BSL MI%07/ in raffle eFpenses as a percenta$e of the amount
of deposits mo)ilized )# the raffle! These eFpenses increased the cost of the new deposits )# 68 percent% to an an-
nual avera$e of .0!8/ percent% where this last fi$ure still does not include the other 'VnormalW( operatin$ costs asso-
ciated with mo)ilizin$ deposits!
=affles carr# a clear ris3 since the MFI must ma3e an up-front investment in prizes and advertisin$% which it hopes
will allow it to reach its deposit -mo)ilization tar$et and thus reduce the raffle costs per dollar mo)ilized to a reason-
a)le level! The followin$ ta)le illustrates the fact that raffle costs per dollar mo)ilized var# $reatl# dependin$ on the
eFtent t o which the deposit -mo)ilization tar$et is met! For eFample% if &=+& Se:or de <uren were to have mo)i-
lized I0 percent less than what we have estimated% the cost of the raffle would have dou)led to M!78 percent and
would )e ;uite a )urden, on the other hand% if this MFI were to have mo)ilized I0 percent more than what we have
estimated% the cost would drop to /!.9 percent!
2a((le Costs at C2AC SeGor de uren
Source: &=+& Se:or de <uren!
Thus% raffles entail si$nificant costs for an MFI% which is wh# the# should )e used with care and should )e well
planned and evaluated!
.I
Kn the other hand% the conservative assumption was made that the deposits attracted durin$ the campai$n would
sta# in the institution for onl# one #ear!
# &onth
or ess
#-'
&onths
'-*
&onths
*-.
&onths
.-#'
&onths
&ore
%han #'
&onths
%otal
Assets 72!M 9!M I!2 .I!2 2/!7 /7!0 #'/$.
iabilities 2.!7 .2!2 ..!0 ./!2 .9!I /.!8 #1.$1
6ap 2.!I -I!2 -I!8 2!0 9!M 2!/ '#$.
Cumulative
gap
'#$, #.$' #1$- #'$- #)$- '#$.
part of their annual )usiness plannin$ eFercise!
This ta)le is fre;uentl# updated and used to
mana$e li;uidit#! urin$ times of political or
financial insta)ilit#% such as the 200/-2007 crisis
in Bolivia% it is important to increase li;uidit#
reserves in preparation for possi)le future con-
tin$encies% even at the cost of slowin$ the
$rowth of the loan portfolio! If a countr#Ss f i-
nancial s#stem is shallow% ris3s can )e $reatl#
increased% as occurred in Bolivia durin$ the
200/- 2007 crisis! This is )ecause pro)lems
in
one sector can a)sor) most of the availa)le li-
;uidit# in the econom#% so that li;uidit# short-
a$es spread rapidl# to all intermediaries and sec-
tors% pressurin$ the entire econom#!
Stress tests can help evaluate li;uidit# ris3s! For
eFample% &M+& Tru>illo simulates the impact
of earl# withdrawals of time deposits simultane-
ousl# with withdrawals from savin$s accounts
and dela#s in loan repa#ments! The institution
compares the resultin$ im)alances with its pr i-
mar# and secondar# li;uidit# reserves and pre-
pares a contin$enc# plan! In this wa# the MFI
can evaluate its response to stress!
Bo" *F %he 6ap &odel in an & FI
<oan repa#ments 'and other cash inflows into the MFI( and deposit withdrawls 'and other cash outflows
out of the MFI( form the )asis of the $ap model!
In $eneral% MFIs do less term transformation than )an3s since MFIs offer shorter-term loans on avera$e
than )an3s! Hence% in MFIs% the distri)ution of assets and lia)ilities )# time to maturit# often shows onl#
fairl# small im)alances% as is the case for &M+& +re;uipa in the ta)le )elow! &M+& +re;uipa has a
comforta)le li;uidit# position% which is in no small measure due to the siza)le positive $ap for terms of
. month or less% the result of the li;uidit# reserves &M+& +re;uipa has esta)lished! Because of these re-
serves and the relativel# small im)alances )etween assets and lia)ilities in other time intervals% the cumu-
lative $ap is alwa#s positive! In fact% ne$ative $aps arise onl# in the .-2 and 2-/ month periods! These
ne$ative $aps are also offset in the su)se;uent time intervals% due to the predominance of shorter term
loans 'especiall# ur)an microenterprise wor3in$ capital loans with terms of under one #ear( and monthl#
repa#ments of principal and interest!
.9
The monthl# inflow of loan repa#ments provides an important
source of funds to address an MFISs li;uidit# needs% especiall# if the MFI is careful a)out $rantin$ new
loans!
Distribution o( Assets and iabilities by %ime to &aturity in C&AC AreAuipa
74S> millions0 &ay *#0 '11-8
Source: &M+& +re;uipa!
.9
+s of Ma# 2007% approFimatel# 2I percent of the local currenc# microenterprise loan portfolio matured in /. to
90 da#s 'and $enerall# consisted of parallel loans desi$ned to meet preferred clientsS immediate li;uidit# needs%
repaid with a sin$le installment of principal and interest at the end of the loan(% while 70 percent consisted of 9-.2
month loans% with monthl# repa#ments of principal and interest!
eposit mo)ilization can also lead to certain
concentration ris3s if a small num)er of deposi-
tors hold a si$nificant share of total savin$s% a
dan$er that is more li3el# to occur when there
are institutional depos itors! Thus% it is important
to periodicall# evaluate the share of total depos-
its held )# the lar$est .0 or 20 depositors and
esta)lish maFimum limits! For eFample% &M+&
+re;uipa limits its .0 lar$est depositors to hold-
in$ a total of no more than 20 percent of &M+&
+re;uipaSs net worth! To reduce concentration
ris3s% an MFI should diversif# its clientele% es-
ta)lish ade;uate li;uidit# reserves and develop
contin$enc# plans!
Term Mismatch
/is.
To understand this ris3% one can )e$in )#
eF- tendin$ the $ap model to assets and
lia)ilities ordered )# time intervals $reater than
one #ear! For eFample% time intervals of .-2
#ears% 2-/ #ears% /-7 #ears% 7-I #ears% and
$reater than I #ears can )e used! +ll assets
and lia)ilities are placed in the interval that
corresponds to their maturit#! The aim is to
match the amount of assets and lia)ilities that
mature in each interval to avoid li;uidit#
pro)lems in the future!
eposit mo)ilization can hei$hten term mis-
match ris3 for MFIs )# financin$ lon$-term
loans with short-term lia)ilitiesG savin$s ac-
counts and short-term time deposits! The pre-
dominance of short-term wor3in$ capital loans
'$enerall# for terms less than one #ear( means
that this ris3 is not so si$nificant for most MFIs!
However% two recent trends are increasin$ term
mismatch ris3s! First% MFIs are increasin$ loan
terms due to $reater competition! Second% MFIs
are increasin$l# lendin$ to small and medium-
size enterprises% and these loans are normall#
lon$er term 'up to three #ears( )oth for e;uip-
ment purchases and wor3in$ capital!
+s a response to term mismatch ris3% some MFIs
encoura$e lon$er-term deposits% offerin$ clients
hi$her interest rates for time deposits of .-2
#ears or more! This measure can )e adopted in
sta)le macroeconomic situations! Kther options
include lon$er-term )orrowin$ and stoc3 and
)ond issue! Finall#% some MFIs can match a por-
tion of their savin$s account deposits 'the sta)le
portion( with medium-term loans! In these MFIs%
a si$nificant share of savin$s deposits 'up to 2I
percent or more( is ver# sta)le% even thou$h the
depositors have the ri$ht to withdraw their
mone# at an# time! Man# small depositors use
MFIs )ecause the# are convenientl# located or
re;uire a low minimum deposit! These deposi-
tors tend not to withdraw all their savin$s unless
the# fear that the MFI ma# )ecome
insolvent% which could >eopardize their
deposits! In such cases% MFIs can match their
medium-term loans a$ainst the sta)le portion of
their savin$s deposits with little or no ris3%
as lon$ as the MFI maintains its financial
solidit#!
Interest /ate /is.
The other conse;uence of assets and lia)ilities
that are not matched )# term ')esides future li-
;uidit# ris3( is interest rate ris3! To understand
interest rate ris3% suppose that an MFI ma3es a
su)stantial amount of 2-#ear loans at an interest
rate of /I percent and that all of these loans are
financed with .-#ear time depos its pa#in$ .2
percent! +lso assume that the MFI re;uires a
mar$in of .8 percent to cover its operatin$ costs
and eFpected loan losses! The MFI loo3s to
ma3e a health# profit of I percent on these loans
'\/IX - .2X - .8X(! But what happens if in
one #earSs time the countr# enters a period of
ti$ht mone# or inflation that pushes time deposit
rates up )# .0 percenta$e points% from .2 to 22
percent? "hen the MFI rolls over those depos-
its% its I percent profit turns into a I percent loss!
This is an eFample of interest rate ris3% which is
the ris3 that chan$es in mar3et interest rates will
affect the MFISs profita)ilit#!
Four important caveats should )e attached to the
rule that MFIs should match the amount of
assets and lia)ilities that mature in each time
interval! The first is that for purposes of
interest rate ris3% assets and lia)ilities should )e
classified not )ased on their maturit# )ut on the
time until the neFt updatin$ of the ir interest
rate! For eFample% consider the case of a /-#ear
loan that the MFI has >ust made with a
varia)le interest rate indeFed to a reference rate
that is ad>usted ;uarterl#! For interest rate ris3
purposes% this asset should )e classified in the /-
9 month interval% not in the 2-/ #ear interval!
Thus% the anal#-
sis measures the $ap )etween the amount of as-
sets sensitive to variations in interest rates and
the amount of lia)ilities sensitive to variations in
interest rates in each time interval 'for eFample%
up to . month% .-2 months% 2-/ months% /-9
months% 9-.2 months% .-2 #ears% 2-/ #ears% etc!(!
The second caveat is that li;uidit# ris3 and term
mismatch ris3 are )oth avoided when lia)ilities
have a lon$er maturit# than the assets the# fund!
Interest rate ris3 is also avoided under this con-
dition as lon$ as the lia)ilities are prepa#a)le
without su)stantial penalt# and can )e replaced
)# new and similar lia)ilities! To understand this
last statement% suppose that an MFI ma3es
2- #ear loans to its clients us in$ mone# it
)orrows for three #ears! If interest rates have
fallen su)- stantiall# )# the time the 2-#ear
loans mature% the MFI can prepa# its /- #ear
loan and o)tain cheaper fundin$% thus avoidin$
interest rate ris3!
The third caveat is that% in fact% MFIs ma# often
want to use lia)ilities that have somewhat
shorter terms than the assets the# fund! This is
)ecause lia)ilities normall# )ecome cheaper as
their term is shortened% so that the MFI ma# ac-
cept a certain amount of interest rate ris3% term
mismatch ris3 and li;uidit# ris3 in eFchan$e for
cost savin$s% especiall# if the these cost savin$s
are si$nificant! The $oal of the MFISs fundin$
strate$# is not necessaril# to eliminate all ris3%
)ut to maFimize profita)ilit# at accepta)le levels
of ris3!
The fourth caveat is that for purposes of measur-
in$ and miti$atin$ interest rate ris3 ')ut not li-
;uidit# ris3 or term mismatch ris3(% it is )etter to
use duration anal#sis than the $ap model! The
idea of duration anal#sis is to set the duration of
a financial institutionSs total assets e;ual to the
duration of its total lia)ilities!
.6
uration
anal#-
sis is an ideal tool for anal#zin$ interest rate ris3
)ecause of the fact that the chan$e in present
.6
uration measures the effective or avera$e matur-
it# of a stream of cash flows! For eFample% the dura-
tion of a I -#ear loan% repaid in 90 e;ual monthl#
pa#ments of principal and interest% ma# )e a)out two
#ears% which means that in terms of their present
value% the pa#ments are received on avera$e in two
#ears!
value of a stream of cash flows that is $enerated
)# a chan$e in the interest rate is proportional to
the duration of the stream of cash flows! Be-
cause duration anal#sis is a compleF tool% its use
is su$$ested mainl# for more sophisticated
MFIs!
To reduce or eliminate interest rate ris3% the MFI
must match its assets and lia)ilities )# time in-
tervals 'usin$ a series of intervals from less than
one month up to more than five #ears(% or even
)etter% )# duration! For man# MFIs% interest rate
ris3 is created )# capturin$ short-term savin$s or
o)tainin$ short-term loans on the one hand% and
offerin$ lon$er-term loans on the other!
+ll of the measures discussed a)ove for reduc-
in$ term mismatch ris3 can also )e used to
reduce interest rate ris3! In addition% MFIs
can char$e varia)le interest rates on their
loans% so that their loan rates rise or fall with the
deposit rates the MFI is pa#in$! However% such
varia)le loan rates can )e ;uite unpopular with
clients )ecause of the additional ris3s the clients
must )ear as hi$her interest rates on their loans
are translated% for eFample% into hi$her monthl#
pa#ments or lon$er loan terms! B# settin$ the
initial interest rates char$ed for varia)le -rate
loans )elow those char$ed for fiFed-rate loans
and )# also cappin$ an# interest rate increases
over the life of the varia)le -rate loan% MFIs can
reduce client ris3s and overcome some of the
client resistance! However% cappin$ loan rate
increases returns some of the interest rate ris3 to
the MFI! Moreover% while char$in$ varia)le in-
terest rates on loans can reduce or eliminate in-
terest rate ris3 for the MFI% it does so at the cost
of inducin$ additional credit ris3! This is )e-
cause% if loan rates rise% client default rates can
)e eFpected to increase under the strain of lar$er
repa#ment )urdens!
1oreign *urrency /is.
MFIs that mo)ilize deposits or )orrow in forei$n
currenc# 'for eFample% in dollars( in order to
fund loans in local currenc# 'for eFample% in
pesos( run the ris3 that a devaluation will $reatl#
increase the size of the MFISs de)t% eFpressed in
local currenc# '<&(! For eFample% a de)t of BSL
. million could $row from .0 million to 20
mil-
lion pesos if the pesoGdollar eFchan$e rate
increases from .0G. to 20G.! Such a de)t would
)e much more difficult to service and repa# if
the MFI and its clients primaril# earn pesos!
Some )elieve that to avoid forei$n currenc# ris3
an MFI need onl# match the currenc# of its as-
sets with that of its lia)ilities! For eFample% this
would mean that if an MFI has )orrowed BSL .
million% all it needs to do is to lend these funds
out in dollars in order to avoid forei$n currenc#
ris3! This is correct if the MFISs clients produce
traded $oods 'meanin$ $oods that are eFported
or that compete directl# with imported $oods(
and is not correct if the clients produce non-
traded $oods 'meanin$ $oods that are neither
eFported nor compete directl# with imported
$oods(!
Man# a$ricultural% minin$% and manufacturin$
products are traded $oods% while most commer-
cial sector activities and services are normall#
nontraded! Since MFI clients are mostl# in the
commerce and services sector% most produce
nontraded outputs! 4ven those MFI clients who
are in the manufacturin$ and a$r icultural
sectors sometimes produce $oods that are rustic
or oth- erwise onl# consumed locall#% and are not
close su)stitutes for $oods traded
internationall#! These clients also produce
nontraded outputs!
The importance of this distinction is that if there
is a devaluation of% sa#% 2G.% the prices of traded
$oods t#picall# rise )# 2G. also% in proportion to
the devaluation! The prices of nontraded $oods
t#picall# rise )# much less than 2G.! This means
that if the MFI $ives a dollar loan to a client who
produces nontraded outputs% that client could
easil# )e ruined )# a sharp devaluation since the
pric e of what the client produces 'in the
local currenc# the client earns( will not 3eep up
with the clientSs loan service pa#ments 'also eF-
pressed in local currenc#(! For eFample% with a
2G. devaluation% the loan service pa#ments will
dou)le in local currenc# terms% while the value
of what the client sells will t#picall# rise )#
much less!
urin$ the +sian financial crisis of the late
.MM0s% man# financial institutions learned this
lesson the hard wa# when their clients who had
dollar loans and nontraded outputs could not
repa# and the financial institutions were faced
with hu$e defaults in their credit portfolios!
To minimize forei$n currenc# ris3% MFIs should
lend in local currenc# to clients producin$ non-
traded outputs and lend in forei$n currenc# to
clients producin$ traded outputs! The currenc#
composition of the MFISs lia)ilities should then
)e matched to that of the resultin$ loan portfolio!
To match the currenc# of the MFISs lia)ilities to
that of its loan portfolio and other assets% it is
useful to estimate a $ap model of assets and li-
a)ilities )# currenc# at least once a month! <im-
its should )e set on the net eFchan$e position
'the net amount of the $ap( in relation to the
MFISs net worth! The more volatile the eF-
chan$e rate% the more conservative the limits
should )e and the more fre;uentl# the $ap model
should )e updated!
T#picall#% most MFI loans are $ranted in <& in
order to match the nontraded nature of the )or-
rowersS products and perhaps )ecause of the
hi$her interest rates that can often )e char$ed on
<& loans! However% in at least some countries%
man# MFI clients ma# want to ma3e forei$n
currenc# 'F&( deposits to protect the purchasin$
power of their savin$s% and the loans availa)le to
the MFI ma# also )e primaril# in F&! To suc-
cessfull# match currencies in this situation%
MFIs can do the followin$G
4ncoura$e deposits in <& with hi$her inter-
est rates and )etter terms and conditions
Search for loans in <& from )an3s and other
sources
Issue )onds and stoc3 in <&
Bse funds )orrowed from a)road in F& 'or
time deposits in F& o)tained from the MFISs
depositors( as collateral to o)tain loans in
<& from local commercial )an3s! These are
called )ac3-to-)ac3 operations! In these op-
erations% the MFI deposits the F& funds in
an account in the commercial )an3% where
the# serve as collateral for the )an3 to ma3e
a <& loan to the MFI!
Bse hed$in$ transactions in local swap mar-
3ets! For eFample% the Peruvian 4PHM4
4d#ficar calculated that swap transactions
would )e .00 )asis points '. percenta$e
point( cheaper than )ac3-to-)ac3 operations
for coverin$ its currenc# mismatch pro)-
lems% if the Superintendenc# of Ban3s and
Insurance allowed 4d#ficar to use them!
This last )ullet refers to the possi)ilit# of usin$
local 'not international( swap mar3ets% which
eFist in a num)er of <atin +merican countries!
T#picall#% the MFI contacts a local commercial
)an3 with which it has esta)lished a solid credit
histor#! For a fee% this )an3 ma# a$ree to sell
one million B!S! dollars in two #ears to the MFI%
in eFchan$e for a predetermined amount of pe-
sos% to cover the repa#ment of a loan that the
MFI has contracted in dollars! For the )an3% this
will )e >ust one more future dollar lia)ilit# and
one future peso asset in its off )alance sheet ac-
counts% which it will )alance off alon$ with all
of its other future dollar and peso commitments!
The )an3 re;uires that the MFI )e creditworth#
in order to limit its counterpart# ris3% that is% the
ris3 that the MFI will not come forward with the
predetermined amount of pesos in two #ears
time! For this purpose% the )an3 ma# insist that
the MFI have a line of credit availa)le to it! In
principle% the swap transaction should provide a
cheaper method of coverin$ forei$n eFchan$e
ris3 for the MFI than )ac3-to-)ac3 operations!
This is )ecause )ac3-to-)ac3 operations include
the loss 'for the MFI and participatin$ )an3( of
the interest that could have )een earned on the
reserve re;uirement associated with the dollar
deposit!
2perational /is.
Mo)ilizin$ deposits can also lead to operational
ris3s for MFIs due to the lar$e num)er of trans-
actions and clients involved! To reduce these
ris3s% MFIs should have or$anizational% operat-
in$ and procedural manuals% as well as internal
re$ulations and properl# trained personnel! The
information s#stem should include well-
desi$ned securit#% confidentialit# and )ac3up
features! It is useful to develop contin$enc#
plans to handle natural disasters 'such as earth-
;ua3es and floods( and periods of social up-
heaval% such as the lootin$ of )an3 and MFI
)ranches that occurred durin$ the conflicts in 4l
+lto% Bolivia in Kcto)er 200/!
&arketing
eposit mo)ilization creates new mar3etin$
challen$es! "hile new MFI )orrowers are often
Bo" -F C&AC AreAuipaHs &arketing Campaigns and 4se o( Promoters
To promote &M+& +re;uipaSs deposit products% its mar3etin$ unit has developed an effective
strat- e$#G
Mana$ement selects a $roup of promoters with eFperience and s3ills in sellin$ intan$i)le $oods!
Promoters are paid a relativel# low )ase salar#, the# earn performance )onuses that var# with
the amount and composition of savin$s captured% $ivin$ priorit# to time deposits!
Knce a #ear% the MFI conducts an in-depth anal#sis of the competitionSs deposit products%
comparin$ them to its own products in such areas as interest rates% other fees and char$es%
pu)licit# and ;ualit# of client service!
Based on this anal#sis% the MFI esta)lishes its sales strate$#% ta3in$ into consideration the advan-
ta$es of its products and the wea3nesses of the competitorsS offerin$s!
Based on the selected sales strate$#% the mar3etin$ unit desi$ns the needed pu)licit# material%
tests it and incorporates improvements!
+ sales plan is esta)lished with $oals for promoters!
The institution monitors the implementation of the plan as well as its results!
4Fperience has shown that the strate$# of usin$ promoters to capture time deposits is often more
effective and economical than advertisin$ in the mass media!
recruited directl# )# loan officers and throu$h
referrals )# other MFI )orrowers% all in the con-
teFt of limited competition )# traditional )an3s%
attractin$ depositors entails the MFIs competin$
with all esta)lished intermediaries for mar3et
share! For this reason% MFIs need a mar3etin$
department or unit!
To attract savin$s% the mar3etin$ unit should do
the followin$G
Plan and launch promotional campai$ns
&onduct anal#ses of clients and their level
of satisfaction with the MFISs financial ser-
vices
Pro$ram and supervise the use of communi-
cations media
It is also important to eFamine the financial
needs of the clients in the different mar3ets in
which the MFI operates! For eFample% )efore
openin$ a new )ranch% &M+& Tru>illo conducts
a mar3et stud#% eFplorin$ the characteristics of
the new mar3et and its clients in order to define
a mar3et penetration strate$# and esta)lish ap-
propriate $rowth $oals! To improve its savin$s
account and time deposit products% &a>a <os
+ndes has conducted focus $roup studies that
have eFplored the needs and perceptions of vari-
ous se$ments of its current and potential clients%
includin$ lar$e and small depositors from differ-
ent re$ions as well as nondepositors! The stud#
has provided eFtremel# useful data for improv-
in$ the features of products and su$$estin$ sales
strate$ies!
The level of client satisfaction with MFI services
should also )e eFplored! Bnfortunatel#% this is
not done on a s#stematic )asis in man# MFIs!
+lthou$h it is ;uite common for an MFI to re-
view the contents of its su$$estion )oF% it is less
common to do a s#stematic evaluation of client
satisfaction! In this area% we note two interestin$
eFperiences! In one% Bancosol hired a specia l-
ized consultin$ firm to conduct a detailed stud#
at the national le vel% surve#in$ .%I00 people in
different re$ions of Bolivia annuall#! The stud#
eFplored the issues of ima$e and positionin$ of
Bancosol and its main competitors% as well as
the level of client satisfaction! This anal#sis was
supplemented )# information $athered in focus
$roups ever# siF months% in order to carr# out a
;ualitative assessment of BancosolSs products
and client satisfaction! In another eFample%
Prodem used phantom clients who% without re-
vealin$ their purpose% evaluated service ;ualit#
in ProdemSs )ranches! The# used a detailed
scorin$ $uide to rate different aspects of service
;ualit#! This #ielded detailed ratin$s of each
)ranch% which are useful in assurin$ that rapidl#
$rowin$ MFIs such as Prodem maintain ;ualit#
services!
"ith increasin$ competition and $reater MFI
participation in the savin$s mar3ets% MFIs need
to develop methods to maintain the lo#alt# of
their depositors% especiall# in 3e# depositor
se$ments! The most common strate$# consists of
offerin$ preferential rates and personalized ser-
vice to the most important depositors! "hile
MFIs have #et to esta)lish )roader pro$rams to
promote depositor lo#alt#% several MFIs are
evaluatin$ this possi)ilit#! For eFample% Prodem
has conducted a pilot test in one )ranch in which
it identifies certain customers as Vstar clients!W
These clients accumulate points 'Vmilea$eW(
)ased on the total amount and num)er of trans-
actions the# have conducted% thus ;ualif#in$
them for )etter rates and prices for all services!
The limitations of ProdemSs information s#s-
tems have 3ept this pro$ram from )ein$ used on
a much wider scale within the institution!
The development of a mar3etin$ campai$n also
includes a strate$# for the use of communic a-
tions media and the preparation of content!
"hile a detailed anal#sis of such campai$ns is
)e#ond the scope of this paper% a few important
points are noted here!
First% su)stantial resources are often devoted to
mar3etin$ campai$ns! In 200/% for eFample%
&M+& Tru>illo spent BSL I69%000% &M+&
+re;uipa spent BSL /6/%000% Bancosol spent
BSL 900%000% Prodem spent BSL /80%000 and
&a>a <os +ndes spent BSL 280%000! These
amounts are not strictl# compara)le to each
other )ecause some MFIs are re$ional in scope
while others serve the national mar3et and also
)ecause of the different costs and characteristics
of the respective mass media mar3ets! In an#
case% it is clear that mar3etin$ campai$n )ud$ets
%able #'
!stimated Distribution o( Spending on Advertising at Four &FIs
7(irst hal( o( '11-8
C2AC SeGor
de uren
C&AC
%ruEillo
C&AC
AreAuipa
Bancosol
T5 8IX 7IX 70X 70X
=adio .IX 2IX /IX .2X
Eewspapers na .IX .IX .0X
Pamphlets% sponsor-
ships and promotions
na .IX .0X /8X
%otal #11B #11B #11B #11B
Note: VnaW indicates information not availa)le!
Source: The MFIs!
are su)stantial! Moreover% a si$nificant share of
these total campai$n )ud$ets are )ein$ used to
promote deposit products% for eFample% 9I per-
cent in &M+& Tru>illo and 7I percent in &=+&
Se:or de <uren! Thus% it is ver# important that
the resources devoted to deposit mo)ilization
'and other( campai$ns )e used effectivel#!
Second% use of the various communications me-
dia varies% as shown in Ta)le .2! Television is
important not onl# to promote the MFISs ima$e
)ut also to help it mo)ilize deposits! However%
television is eFpensive% especiall# for MFIs that
operate at the national level! Since television ads
are su)stantiall# cheaper when the# are limited
to re$ional or local )roadcasts% $reater use has
)een made of television )# Peruvian MFIs%
whic h operate mostl# at the re$ional level!
=a- dio advertisements are also popular% due to
their lower costs and the lar$e audiences the#
attract amon$ microentrepreneurs! Man# MFIs
use newspapers to promote time deposits with
advertisements that show current interest rates
and ma3e comparisons with the competition!
Such advertisements are especiall# useful in
reachin$ middle and upper class savers% who
are more financiall# sophisticated and tr# to
maFimize the earnin$s of their surplus funds!
Finall#% sponsorin$ and promotin$ fol3lore%
nei$h)orhood% school% communit# and
associa- tion events has proven to )e a ver#
effective mar3etin$ tool% which fosters client
identific a- tion with the MFI and enhances the
MFISs im-
a$e! &oordinatin$ with micro)usiness associa-
tions to advertise at fairs and mar3ets can also )e
a ver# effective and economical mar3etin$ tool!
To successfull# mo)ilize deposits% an MFI needs
an ima$e of financial stren$th% which $ives cli-
ents a sense of safet# and securit#! Therefore% it
is important to develop a )rand name! The im-
portance of doin$ this will $row as competitive
pressures continue to rise in microfinance! Man#
MFIs% however% have not s#stematicall# ad-
dressed this issue! 4Famples of )rand name de-
velopment include the followin$G
+fter conductin$ a mar3et stud# usin$ focus
$roups in 2002% &M+& Tru>illo )e$an
wor3in$ to chan$e its ima$e and differenti-
ate itself from competitors% includin$ from
the other &M+&s! It chan$ed its name 'from
&M+& Tru>illo to &a>a Tru>illo(% adopted a
new and more modern lo$o and a new slo-
$an 'VGrow "ith BsW(% $enerall# made over
its corporate ima$e% and emplo#ed this new
ima$e in its )ranches and products!
+s part of its transformation into a )an3%
&a>a <os +ndes developed a strate$# to dis-
tance itself from the term V&a>aW
.8
and )uild
the )rand name Procredit 'the )an3Ss future
name(! +s part of this process% its lo$o has
.8
In Bolivia% the word Vca>aW is associated with the
insurance )usiness!
)een modified and a campai$n to esta)lish a
new corporate ima$e has )een launched!
Bancosol has launched a successful cam-
pai$n to stren$then its )rand ima$e and po-
sition itself with the $eneral pu)lic as a mi-
crocredit )an3 offerin$ $ood service!
+s part of its )rand identit#% Prodem has
adopted the slo$an VKportunidad%W which in
Spanish means )oth Vopportunit#W and
Vtimeliness!W Its lo$o reflects the three 3e#
components of the compan#G shareholders%
emplo#ees and clients! 5illa$e cloc3s have
)een installed outside ProdemSs rural
)ranches1as a communit# service and also
to associate its name with timeliness!
+s has )een discussed% mar3etin$ activities are
ver# important for MFIs as part of a lar$er effort
to capture savin$s! For this reason% the results of
these activities should )e s#stematicall# evalu-
ated! In most MFIs% these evaluations have )een
limited to a comparison )etween the pro>ected
results and those actuall# achieved! However%
&M+& Tru>illoSs eFperience has demonstrated
that it can )e ver# useful to carr# out a
cost*)enefit anal#sis of each mar3etin$ cam-
pai$n to determine lessons learned and improve
future campai$ns!
B+22+=I56
Current Sources o( Borro3ingF
Characteristics and Conditions
"hen man# of toda#Ss MFIs )e$an operations%
their main source of fundin$ was loans from do-
nors and $overnments! However% )# the end of
200/% )orrowin$ represented onl# 26 percent of
the total lia)ilities of <atin +merican MFIs!
Thus% MFIs have diversified their fundin$
sources% with deposits )ecomin$ the main source
of MFI lia)ilities! +t the same time% the num)er
and t#pe of institutions offerin$ loans to MFIs
have increased si$nificantl#% and so the follow-
in$ t#polo$# of MFI loan sources is helpful in
understandin$ the t#pes of institutions from
which MFIs are )orrowin$!
The criteria used for cate$orizin$ MFI loan
sources are the $eo$raphical locatio n of the
source 'domestic or forei$n( and the nature of
the provider '$overnment% donor or commer-
ciall#-oriented(! Based on these criteria% four
cate$ories of MFI lenders were created! Two are
domesticG 'i( local commercial )an3s and 'ii( the
$overnment and other domestic sources! +nd
two are forei$nG 'iii( donors and 'iv( social in-
vestors and other forei$n sources!
These sources have different characteristics!
First% $overnment sources include second-tier
facilities% which have pla#ed an important role in
providin$ loans to MFIs! These second-tier fa-
cilities $enerall# offer medium- and lon$-term
loans with interest rates that do not var# with the
MFISs ris3 and are sometimes )elow mar3et!
&redit allocation can )e influenced )# the prior i-
ties of the pu)lic sector and )# political factors!
Second% local commercial )an3s $enerall# pro-
vide short-term financin$ and re;uire that the
MFI pled$e specific collateral to help ensure
repa#ment! Third% donors offer medium- and
lon$-term loans% usuall# at varia)le rates% )ac3ed
onl# )# the net worth of the )orrower! Finall#%
forei$n social investors provide medium-term
loans in forei$n currenc# also )ac3ed onl# )#
the net worth of the )orrower!
The transactions costs associated with )orrowin$
for the first time from these different sources are
often ;uite su)stantial for an MFI! Financial and
ris3 anal#ses of the MFI must )e carried out%
contractual conditions must )e a$reed upon and
collateral ma# have to )e esta)lished! For su)se-
;uent loans these costs drop si$nificantl#!
The lines of demarcation amon$ the four loan
cate$ories are sometimes )lurr#! For eFample%
second-tier $overnment facilities often o)tain
much of their funds from donors% such as in the
case of the IBSs Glo)al Microenterprise &redit
Pro$ram offered durin$ the last .I #ears in
man# <atin +merican countries! +lso% the div i-
sion )etween the two forei$n sources is some-
times fuzz#G private social investors have prolif-
erated% )ut often use a $reat deal of donor re-
sources% at least in itiall#!
%able #*
2elative Importance and Cost o( Di((erent Sources o( Borro3ed Funds
in a Sample o( '* 2egulated &FIs in atin America
74S> thousands0 December *#0 '11*8
ocal Commerical
Banks
6overnment and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal %+%A
X
C FC C FC C FC C FC C FC
Short term
Cost
70%0/6 I%.M0
M!/X 8!/X
20%..9 M%006
..!/X I!6X
992 8%/9.
.0!2X 9!/X
/6 .7%886
.0!0X 8!/X
.10?,# */0--,
#1$1B /$'B
)?0').
?$)B
/6X
ong term
Cost
69M /%/78
6!6X ..!7X
2M%M0. 99%/.7
M!IX I!7X
I%7.7 72%.60
8!0X I!MX
.%9.0 .8%7I7
.7!2X 6!6X
*/0.)- #*10'?.
)$-B .$#B
#./0)?1
.$?B
9/X
%+%A
Cost
-10?1, ?0,*?
)$*B )$,B
,101#/ /,0*'#
#1$'B ,$-B
.01/. ,10,*#
?$'B .$1B
#0.-/ **0*-#
#-$#B ?$1B
)?0,-, #./0/*#
)$?B .$*B
'..0'/.
/$.B
.00X
B
.IX /X .MX 28X 2X .MX .X ./X /6X 9/X .00X
SourceG Micro=ate!
B# anal#zin$ data made availa)le to us )# Mi-
cro=ate coverin$ 2/ re$ulated MFIs in <atin
+merica%
.M
the authors have calculated the rela-
tive share and financial costs of each of the four
loan sources 'usin$ data as of ecem)er /.%
200/(! Ta)le ./ presents these calculations for
all 2/ MFIs ta3en to$ether% while +nneF & pro-
vides data for the individual MFIs! Based on the
totals for the 2/ MFIs% $overnments are the most
important loan source% representin$ 76 percent
of total )orrowin$ )# the MFIs% donors hold
second place with 2. percent% local commercial
)an3s are in third place with .8 percent% and for-
ei$n social investors hold last place with .7 per-
cent!
+s eFpected% forei$n sources 'donors and social
investors( offer loans primaril# in forei$n cur-
renc# 'F&(% while local commercial )an3 loans
are primaril# in local currenc# '<&(! The cur-
renc# composition of $overnment loans is more
)alanced% with 90 percent of this lendin$ de-
.M
The 2/ MFIs covered )# the Micro=ate data con-
sist of ./ in Peru% three in Bolivia% two in MeFico%
two in Eicara$ua% one in &olom)ia% one in 4l Salv a-
dor and one in Para$ua#! Special than3s to amian
von Stauffen)er$ and Todd Farrin$ton of Micro=ate
for ma3in$ these data availa)le to us! For reasons of
confidentialit#% the financial cost data for the individ-
ual MFIs are not included in +nneF &!
nominated in F& and 70 percent in <&!
20
Kver- all% for all four sources com)ined% F&
lendin$ predominates% with a 9/ percent share!
&lear differences are evident in the terms offered
)# the four sourcesG M2 percent of the fundin$
provided to MFIs )# local commercial )an3s is
short-term% while 87% 66 and I6 percent of fund-
in$ from donors% $overnments and social inves-
tors is lon$-term% respectivel#!
2.
Kverall%
lon$- term lendin$ predominates% with a 9/
percent share!
In the case of )orrowin$ in F&% the cost of funds
varies si$nificantl# )# sourceG I!7 percent per
annum for $overnment% 9!0 percent for donors%
8!0 percent for international social investors and
M!I percent for local commercial )an3s! Thus we
see that $overnments and donors are still provid-
in$ loans at )elow-mar3et interest rates% al-
thou$h the su)sidies are not that $reat! <oans in
<& are important onl# for domestic sources% and
here the costs are similar to one anotherG M!/
20
Hi$hl# dollarized countries% such as Bolivia and
Eicara$ua% as well as countries that have adopted the
dollar as their currenc#% such as 4l Salvador% have a
lar$e impact on these results! In these countries% sec-
ond-tier institutions ma3e loans lar$el# or even eF-
clusivel# in F&!
2.
Short -term loans are those with terms of less than
one #ear% while lon$-term loans have terms of one
#ear or more!
percent for local )an3s and .0!2 percent for $ov-
ernments!
In summar#% the si$nificance of $overnment and
donor loans is that MFIs can o)tain terms and
rates that would )e difficult to secure from do-
mestic or international commercial sources!
Thus% an MFI can reduce its li;uidit# and term
mismatch ris3s )# )orrow in$ from
those sources! The interest rates char$ed )# these
sources are clearl# positive in real terms and are
approachin$ mar3et rates! This prevents the $en-
eration of serious distortions in the financial s#s-
tem and prepares the MFIs to access more com-
mercial fundin$!
2isks
Borrowin$ affects ris3 mana$ement in MFIs in
several wa#s! First% when MFIs have credit lines
that have not )een full# utilized% li;uidit# man-
a$ement is $reatl# facilitated since these funds
can )e mo)ilized ;uic3l# to deal with short-term
difficulties! Short-term credit lines from local
)an3s can )e used for this purpose% althou$h
illi;uidit# often spreads ;uic3l# throu$h shallow
financial mar3ets% limitin$ the use of these credit
lines for this purpose! Man# MFIs tr# to main-
tain an unused portion of their loans from sec-
ond-tier institutions and donors as a li;uidit#
reserve% since the availa)ilit# of these funds is
not closel# correlated with the li;uid-
it#*illi;uidit# c#cles of the local financial mar-
3ets! =efinancin$ ris3 alwa#s eFists% since the
renewal of loans upon maturit# is not $uaran-
teed! espite these draw)ac3s% loans% partic u-
larl# those with lon$er terms% are valua)le in
miti$atin$ )oth li;uidit# ris3s in the short run
and term mismatch ris3s in the medium run!
Second% eFchan$e rate ris3 is normall# in-
creased% $iven that a su)stantial part of MFI )or-
rowin$ is in forei$n currenc#% while most MFI
loans are denominated in local currenc# and fi-
nance mostl# nontraded $oods and services!
Third% interest rate ris3s increase% $iven that
most MFI )orrowin$ is at varia)le rates 'espe-
ciall# )orrow in$ from $overnment second tier
facilities% donors and social investors( and most
MFI loans carr# fiFed rates! This ris3% however%
is $reatl# reduced )# the fact that most MFI
lendin$ consists of short-term wor3in$ capital
loans with terms under one #ear! Thus% MFIs can
offset increases in their )orrowin$ costs )# in-
creasin$ their loan rates% the effect of which will
)e seen in their portfolio #ield within a few
months! MFIs that offer lon$er-term loans to
small and medium-size enterprises are in a dif-
ferent situation! To counteract their $reater eF-
posure to interest rate ris3% the# offer varia)le
- rate loans!
Finall#% )orrowin$ can increase concentration
ris3s )# le adin$ MFIs to depend on a
small num)er of creditors! This ris3 often arises
with respect to $overnment institutions! In
recent #ears% man# MFIs have made si$nificant
efforts to diversif# their )orrowin$ sources%
turnin$ to the local )an3in$ s#stem% donors
and international social investors! evelopment
of closer relations with these creditors is often
a multi- #ear tas3% )ut it is well worth $ettin$
started on in order to move )e#ond the initiall#
hi$h transactions costs associated with
)orrowin$ from a new source!
B+5D ISS4!
+mon$ <atin +merican MFIs% onl# Mi)anco in
Peru and &ompartamos in MeFico have s#stem-
aticall# issued )onds in recent #ears! BancosolSs
pioneerin$ )ond issue in .MM6 was for a limited
amount 'BSL / million(% had a partial credit
$uarantee 'from BS+I( and was not followed
up )ecause of its hi$h cost! B# the end of 200/%
)onds represented onl# .!6 percent of the total
lia)ilities of <atin +merican MFIs!
There are several reasons that MFIs have relied
so little on issusin$ )onds!
22
First% re$ulations
impede the access of some MFIs to capital mar-
3ets, for eFample% in Peru% &=+&s% &M+&s and
4PHM4s are not authorized to issue )onds!
Second% capital mar3ets are often unfamiliar
with MFIs% which ma# )e viewed as new and
hi$h-ris3 intermediaries% thus limitin$ the MFIsS
opportunities to place de)t! Third% the fiFed costs
22
See +nneF + for a review of the steps re;uired to
issue )onds and the pros and cons of )ond 'versus
stoc3( issue!
of issuin$ )onds are relativel# hi$h% and an
MFISs financin$ needs ma# not >ustif# such
costs! Finall#% the rapid $rowth of deposits in
MFIs has covered a lar$e part of their fundin$
needs!
It is important to note that to a certain eFtent
time deposits can su)stitute for )onds% especiall#
in countries with limited capital mar3ets! MFIs
can mo)ilize medium-term deposits from institu-
tional and private investors% ta3in$ advanta$e of
the current macroeconomic sta)ilit# and the
MFIsS $ood financial performance and ris3 rat-
in$s!
2/
Mo)ilizin$ these deposits is simpler than
issuin$ )onds and does not involve hi$h fiFed
costs! Therefore% smaller amounts of fundin$ can
)e economicall# o)tained! Time deposits are
also more fleFi)le than )onds )ecause their
terms can )e ne$otiated case )# case% accordin$
to the MFISs needs and the investorsS priorities!
The main characteristics of the )onds issued )#
Mi)anco and &ompartamos are shown in Ta)le
.7! &ommon characte ristics includeG
+ll of the )onds issued have terms )etween
.8 months and five #ears% which is t#pical of
issuers that have recentl# entered the capital
mar3ets and must esta)lish a trac3 record
)efore o)tainin$ lon$er terms! These terms
are $enerall# sufficient for MFIs% whose
portfolios mainl# consist of short-term loans
and rarel# include loans with terms eFceed-
in$ five #ears!
In all cases% the )onds have )een issued in
local currenc# '<&( and have had fiFed in-
terest rates in the case of Mi)anco and vari-
a)le interest rates in the case of &omparta-
mos!
27
Thus% MFIs have responded to the
need to $enerate medium-term fundin$ in
2/
In man# MFIs% .-2 #ear time deposits are common!
&M+& +re;uipa has )een a)le to mo)ilize I -#ear
time depos its from private sector clients! Some of the
Bolivian MFIs have captured lar$e time deposits
from pension funds and other institutional investors!
27
This difference reflects the fact that most <& )onds
in Peru have fiFed rates 'at least for terms up to five
#ears(% while most )onds in MeFico have varia)le
rates!
<&% since most of their loans to microenter-
prises finance nontraded $oods and services
and are denominated in <&!
In all cases% &iti)an3*&iti$roup% an impor-
tant financial $roup in man# <atin +merican
mar3ets% has )een used as the investment
)an3! It is important for MFIs to utilize a
hi$hl# reputa)le institution such as &iti)an3%
which has su)stantial eFperience in capital
mar3ets! This $reatl# facilitates placin$ the
MFISs )onds with )oth institutional and pri-
vate investors!
Mi)anco and &ompartamos have pursued differ-
ent strate$ies in their )ond issues! Mi)ancoSs
first two issues each had a credit enhancement%
with repa#ment of I0 percent of the principal
$uaranteed )# BS+I and the +ndean evel-
opment &orporation% respectivel#! +s a result%
the )ondsS ratin$s were much hi$her than that of
the MFI% which facilitated ac;uisition )# institu-
tional investors% a $enerall# ver# ris3-averse
$roup of )u#ers! "ith these two )ond issues
successfull# placed% Mi)anco then made a third
)ond issue without an# credit enhancements%
thou$h for a smaller amount and a shorter term1
thus pavin$ the wa# for additional )ond issues in
the future )ased solel# on the MFISs net worth!
&ompartamos adopted the opposite strate$#! Its
first three issues had no credit enhancements )ut
did have $ood ris3 ratin$s! These three issues
were directed mainl# at private clients who were
contacted with the help of the investment )an3
and other )an3s! The placement of these issues
was facilitated )# the fact that the# were of lim-
ited size and term and were directed at a less
ris3-averse clientele! Knce &ompartamos esta)-
lished its presence in the MeFican capital mar-
3ets% it made a fourth )ond issue1with a lon$er
term% for a lar$er amount% and aimed at institu-
tional investors! The International Finance &or-
poration 'IF&( $uaranteed /7 percent of the
principal of these )onds% facilitatin$ their place-
ment!
2I
2I
The IF& has )een a &ompartamos shareholder
since 200.!
/.
/.
%able #-
Characteristics o( the Bonds Issued by &ibanco and Compartamos
Date Amount %erm
Interest
2ate
Investment
Bank
6uarantee@
Collateral
&ain Buyers
&ibanco
#st issue
.0-ec-02 BSL I!6 million
'20 million soles(
2 #ears .2!00X &iti)an3 BS+I I0X
of principal
Pension
funds '+FPs( 82X,
other investors .8X
&ibanco
'nd issue
.M-Sep-0/ BSL I!6 million
'20 million soles(
26 months I!6IX &iti)an3 &+F I0X
of principal
Mutual funds /2!IX,
$overnment 28!8X,
+FPs 29!2X, )an3s
.0X, insurance
companies 2!IX
&ibanco
*rd Issue
2/-Kct-0/ BSL 2!86 million
'.0 million soles(
.8 months I!6IX &iti)an3 Eet worth of
)orrower
Government IM!7X,
mutual funds 2.!.IX,
+FPs .M!7IX
Compartamos
#st issue
I-?ul-02 BSL .0!7 million
'.00 million pesos(
/ #ears &4T4 'M.
da#s( T 2!IX
&iti)an3 Eet worth of
)orrower
Individual investors
contacted )# &iti)an3
and other )an3s
Compartamos
'nd issue
8-Eov-02 BSL 7!M2 million
'I0 million pesos(
/M months &4T4 'M.
da#s( T 2!IX
&iti)an3 Eet worth of
)orrower
and other )an3s
Compartamos
*rd issue
2M-+pr-0/ BSL 7!67 million
'I0 millon pesos(
/ #ears &4T4 'M.
da#s( T 2!MX
&iti)an3 Eew worth of
)orrower
and other )an3s
Compartamos
-th issue
/0-?ul-07 BSL .9!9 million
'.M0 million pesos(
I #ears TII4 '28 da#s(
T .!IX
&iti$roup *
BanameF
IF& /7X
of principal
Institutional investors
'mutual funds% pension
funds and insurance
companies( 86!68X,
private investors .2!22X
Note: &4T4 is the MeFican $overnmentSs Treasur# )ill rate, TI44 is the e;uili)rium inter)an3 interest rate!
For u pdates on rates seeG www!)anFico! o r$!mF !
Source: Mi)ancoSs VMemoria 200/W '200/ + nnual =eport( and data provided )# &ompartamos!
For an MFI to decide whether to issue )onds%
it should evaluate not onl# the direct financial
costs that would )e incurred% )ut also the operat-
in$ costs% as will )e eFamined in detail in &hap-
ter /!
S%+CI ISS4!
Stoc3 issue )# <atin +merican MFIs has essen-
tiall# )een limited to the reinvestment of profits
and to )rin$in$ in new investors throu$h the pr
i- vate placement of shares! So far% no MFI
has made a pu)lic offerin$ of shares in an#
stoc3 eFchan$e!
The issuance of new stoc3 )ased on the capitali-
zation of profits is a relativel# simple process!
The shareholders must come to an a$reement%
which is notarized! Then% new shares are issued
and distri)uted pro rata% in proportion to each
investorSs share of capital! Generall#% such share
issue does not re;uire authorization )# the )an3-
in$ superintendenc#!
Private stoc3 placements to add new sharehold-
ers are a different matter!
29
These re;uire
au-
29
+nneF + includes a step-)#-step description of the
process of stoc3 issue!
thorization from the superintendenc# of )an3s to
ensure that the new shareholders meet the usual
re;uirements of moral fitness% technical capacit#
and financial solvenc#% which are re;uired of all
owners of financial institutions! It must also )e
decided whether the new shareholders will ac-
;uire a portion of the alread#- issued shares or
whether a capital increase will )e used to incor-
porate them! In the first case% the foundin$ EGK
has t#picall# sold some of its shares to the new
investors! In )oth cases% the MFI must face the
pro)lem of valuin$ the shares sold to the new
investors and of possi)l# char$in$ a premium
over )oo3 value!
26
It is not eas# to >ustif# such a
premium or set its amount since no stoc3 mar3et
valuations of MFIs eFist to serve as reference
points! So% approFimate methods must )e used
to o)tain a ran$e of estimates for the MFISs
value% which can serve as the )asis for ne$otia-
tions with new investors!
28
Government and donor underwritin$ pro$rams
provide another source of e;uit# fundin$ for
MFIs! These pro$rams temporaril# in>ect funds
from a $overnment or forei$n shareholder% with
the proviso that the MFI )u# )ac3 these shares
within a preesta)lished time period! Generall#%
the new shareholder does not ta3e an active role
in mana$in$ the MFI!
2M
The additional capital
from the underwritin$ pro$ram reduces the
MFISs levera$e and thus ma# permit it to $row
more rapidl#!
Bnderwritin$ pro$rams must )e well desi$ned to
ensure that the# offer incentives compati)le with
health# and prudent mana$ement of the MFIs!
Bnderwritin$ operations should )e used onl# in
the )est MFIs% which adhere to strict criteria
such as committin$ to reinvest a hi$h percenta$e
'6I percent or more( of their profits durin$ the
underwritin$ period 'often /-I #ears(! In addi-
tion% eFit rules should )e clearl# esta)lished so
26
For eFample% in the case of one of the Bolivian
MFIs% new investors were char$ed a premium of 80
percent over )oo3 value!
28
Kne such method would )e to use the present dis-
counted value of the future flow of dividends!
2M
For eFample% in &KFI4Ss underwritin$ pro$rams
for the Peruvian &=+&s% &KFI4Ss directors al-
wa#s vote with the ma>orit#!
that the $overnment or international shareholder
is treated fairl# in the distri)ution of profits!
Bnderwritin$ pro$rams that do not meet these
criteria should not )e approved! B# rewardin$
poor mana$ement% such pro$rams could dela#
chan$es in mana$ement and in the ownership
structure that are needed to improve perform-
ance!
+s discussed in +nneF +% it is important for an
MFI to create a capitalization plan )efore )e$in-
nin$ to loo3 for new shareholders! It is interest-
in$ to eFamine three scenarios for incorporatin$
new shareholders into an MFI!
The first scenario pertains to most EGKs that
have )ecome re$ulated! In this scenario% the
EGK retains control of the institution% )ut%
throu$h a private stoc3 placement% invites do-
nors and other international investors 'social
investors% )roadl# defined( to >oin as sharehold-
ers!
/0
In this wa#% the MFI o)tains additional
capital% improves its ima$e throu$h the presence
of hi$hl# creditworth# shareholders and perhaps
)rin$s in technical assistance! +t the same time%
the EGK mana$ers have the )enefit of retain in$
control of the MFI! The inclusion of private% for-
profit shareholders is onl# at the )e$innin$
sta$es!
The second scenario occurs in institutions such
as PeruSs 4PHM4s and rural savin$s Q loan
institutions '&=+&s(% in which the shareholders
are primaril# private investors% rather than
EGKs!
/.
These private investors ma# want to
add donors or social investors as shareholders
)ecause of the advanta$es cited in the previous
para$raph! These advanta$es ma# offset the hi$h
costs of this fundin$ source% which is $iven
)# the new shareholdersS claims on the MFISs
profits 'whether these profits )e distri)uted or
rein- vested(! In man# MFIs% #earl# profits ma#
eF- ceed 2I percent of capital% a ver# hi$h cost of
fundin$! However% the private shareholders
re-
/0
See Daddaras and =h#ne '2007( for a review of the
characteristics of MFI shareholders!
/.
+ num)er of &=+&s and 4PHM4s are mainl#
owned )# )usinessmen with enterprises that are re-
$ional in scope!
%able #,
Pros and Cons o( !ach %ype o( Shareholder
%ype o(
Shar eholder
Pros Cons
onors and
social investors
- <on$-term social vision
- Dnowled$e of microfinance
- +mple e;uit# support
- Solid creditworthiness
- &an provide access to technical assis-
tance and loans
- Most investments are for a limited time period%
and so the# are temporar# investors
- 4Fit strate$# ma# )e re;uired
- <ittle fleFi)ilit# t o offer short -term support to the
MFI with fresh capital in times of crisis
Private
shareholders
- &learl# motivated )# profits
- 5alue efficienc#% the rationalization of
operations and cost cuttin$
- &an )ecome lon$-term partners
- Tendenc# to favor s hort-term o)>ectives
- Pressure to distri)ute profits
- Possi)le conflicts of interest with their other in-
vestments
Government
shareholders
- Identif# with MFISs social mis sion - Politics ma# interfere with the prudent and effi-
cient mana$ement of the MFI
- <ittle capacit# to support the MFI with fresh capi-
tal contri)utions
- &an create delin;uenc# pro)lems for the MFI as
)orrowers ma# )elieve that the $overnment will not
enforce or will for$ive their de)t
tain the ma>orit# of the stoc3 and do not
allow the new investors to control the MFI!
The third scenario involves privatizin$ $overn-
ment-owned MFIs% for eFample% the municipal
savin$s Q loan institutions '&M+&s( of Peru!
But privatization processes are compleF and
of
ten have unpredicta)le results% as discussed in
BoF I!
The various t#pes of shareholders that can part-
ner with an MFI have widel# different characte r-
istics! 4ach MFI should determine what 3ind of
partners it would li3e to have )ased on their pros
and cons 'see Ta)le .I(!
Bo" ,F Privati:ation o( the C&ACs in Peru
Privatizin$ the &M+&s is advanta$eous in order toG i( increase their e;uit# )ase% ii( avoid the dan-
$ers of politicized mana$ement and clientelism and iii( achieve $reater efficienc# throu$h )etter
use of technolo$# and the control s#stems that are characteristic of private enterprise! The General
Financial S#stems <aw has opened up the possi)ilit# of incorporatin$ private shareholders as
owners of the municipal savin$s Q loan institutions '&M+&s(% with the privatization decision to
)e made )# each munic ipalit#!
/2
To date% some steps have )een ta3en to advance the privatization process! The &M+&s have
chan$ed their )#laws and have converted themselves into corporations! The# have carried out
valuation studies and proposed strate$ies to incorporate new shareholders! +nd the municipal
councils have de)ated a$reements that would )e$in the privatization process! So far% however% no
municipalit# has adopted all of the decisions re;uired to initiate privatization!
Several 3e# factors eFplain this situation! First% a political climate unfavora)le to privatization has
$ained momentum since the )e$innin$ of the popular uprisin$s that led to the failure to privatize
the re$ional electric companies in southern Peru in ?une 2002! Municipal leaders are hesitant to
ma3e unpopular decisions% althou$h the# ma# eventuall# consider them to )e technicall# neces-
sar#! Second% the &M+&s have )ecome important companies% which influence the re$ional econ-
om# and are si$nificant sources of funds for the local $overnmentsS investment )ud$ets!
//
This is
wh# man# defenders of pu)lic ownership cons ider municipal control indispensa)le to
maintainin$ the &M+&sS social mission and re$ional orientation! Third% some of &M+&sS
directors and emplo#ees fear that privatization could mean the loss of their influence and
emplo#ment!
/7
The various alternatives for privatizin$ the &M+&s have all met with resistance! Kn the one hand%
disa$reements amon$ the municipalities have )loc3ed the inte$rated approach% in which the ma>or-
it# of shares in all the &M+&s would )e pu)licl# auctioned as a sin$le )loc% in order to create one
financial institution that would )e national in scope% perhaps even with operations in <ima! Kn the
other hand% some municipalit ies could privatize their &M+&s individuall# or as a $roup with a
common orientation! However% the political difficulties of even these alternatives should not )e
underestimated in the current environment! For the moment% no municipalit# has made the decision
to start the process! There is also discussion of such alternatives as the incorporation of private in-
vestors as minorit# shareholders in the &M+&s or the esta)lishment of >oint ventures with pr i-
vatel# held companies as a wa# to enter the <ima mar3et! However% it is unli3el# that private
investors would want to )e the minorit# partners of a local $overnment under current conditions,
at the ver# least% municipalities will have to spell out the shareholdin$ arran$ements with $reater
preci- sion!
In conclusion% privatization of the &M+&s will depend on $eneratin$ a political consensus in
the muncipalities% and on the results of the first &M+& privatizations% should these come to
pass!
/2
See <aw 29602 of ecem)er M% .MM9% Transitor# Provision [I5!
//
In +re;uipa in 200/% the dividends p rovided )# the &M+& to the municipalit# represented // percent of the total
munic ipal )ud$et and financed most of the municipalit#Ss capital eFpenditures!
/7
It must )e pointed out that most of the emplo#ees interviewed have a positive attitude towa rd privatization% as a
wa# of ensurin$ the presence of a more technicall# -oriented and sta)le mana$ement and the lon$-term development
of their institution!
/! Financial and Kperatin$ &osts of the ifferent
Fundin$ Sources
This chapter eFamines the total costs of the four
MFI fundin$ sources% includin$ )oth financial
and operatin$ costs! The first two sections
anal#ze the total costs of mo)ilizin$ deposits%
and then )rea3s down the operatin$ cost part of
these total costs into fiFed and varia)le compo-
nents and eFamines more closel# the operatin$
costs related to microsavin$s! The third section
compares the total costs of deposits% )orrowin$%
)ond issue and stoc3 issue!
%+%A C+S%S +F &+BIICI56
D!P+SI%SF I5%2+D4C%I+5
Bnli3e other fundin$ sources% mo)ilizin$ depos-
its involves si$nificant operatin$ costs related to
settin$ up a )ranch networ3% emplo#in$ teller
and other front-line personnel and esta)lishin$
)ac3-office support s#stems to process the trans-
actions! These operatin$ costs must )e consid-
ered to$ether with financial costs in order to
ma3e the )est fundin$ decisions! Therefore% op-
eratin$ costs must )e measured in a s#stematic
wa#!
Case StudiesF %he &FIs Selected and the
&ethodology 4sed
"e carried out studies of the costs of mo)ilizin$
deposits in siF MFIs in Peru and Bolivia! Peru
and Bolivia were selected )ecause 68 percent of
the savin$s mo)ilized )# MFIs in the nine ma>or
<atin +merican microfinance mar3ets as of e-
cem)er 200/ were mo)ilized in these two coun-
tries 'see &hapter .(! The siF MFIs were selected
in such a wa# that the# constituted a sample of
microfinance institutions stratified )# size of
total depositsG two small MFIs 'with deposits
less than or e;ual to BSL I million(% two me-
dium-size MFIs 'with deposits )etween BSL I
million and BSL I0 million( and two lar$e MFIs
'with deposits over BSL I0 million(! "e also
made use of costin$ studies that were recentl#
carried out for four other medium-size MFIs in
Bolivia% &olom)ia% Eicara$ua and Peru! The
first siF studies allocated costs )# assi$nment
and the last four used activit#-)ased costin$
'+B&(! + )rief eFplanation of these two meth-
odolo$ies is presented )elow and in +nneF !
Kf the 9. MFIs included in the data)ase of
&hapter . 'that is% all re$ulated MFIs specializ-
in$ in microfinance in the nine countries(% 79
mo)ilize deposits! Ta)le .9 $ives the distri)u-
tions of these 79 MFIs )# the size of their total
deposits!
This ta)le shows that 9. percent of the MFIs are
of medium size, these MFIs have avera$e depos-
its of BSL .M!/ million and mo)ilize 7/!I per-
cent of the total deposits captured )# the 79
MFIs! The seven lar$e MFIs have avera$e de-
posits of BSL M6 million and account for I7!9
percent of total deposits! The .. small MFIs are
of more limited importance% with avera$e depos-
its of BSL 2!. million and onl# .!M percent of
total deposits!
Ta)le .6 presents characteristics of the .0 MFIs
with a costin$ anal#sis% includin$ countr#% cost
anal#sis method and total amount of deposits!
B# desi$n% the total amount of deposits covers a
wide ran$e! Therefore% the results of the costin$
studies presented in this chapter are useful for
eFaminin$ variations in the financial and operat-
in$ costs of deposit-ta3in$ for MFIs of different
sizes!
+ )rief description of the difference )etween the
two costin$ methodolo$ies is in order! &ost as-
si$nment distri)utes indirect eFpenses1that is%
those that cannot )e directl# attr i)uted to a
specific product1amon$ products )ased on
specific criteria such as num)er of transactions%
num)er of accounts or the value of the
accounts! "ith this method% it is assumed that
the products are the ultimate cost drivers of
eFpenses!
+B&% or activit#-)ased costin$% first performs an
anal#sis of the activities carried out )# an MFI
and then assi$ns operatin$ costs to these activi-
ties! These costs are then transferred to the
%able #.
Distribution o( &FIs by %otal Deposits &obili:ed
7December '11*8
&FI
Deposit 2ange
74S> millions8
5umber B
Average Deposit
74S> millions8
%otal Deposits
74S> millions8
B
Small <ess than or e;ual to I .. 2/!M 2!. 2/!7 .!M
&edium Between I and I0 28 90!M .M!/ I/M!M 7/!I
arge More than I0 6 .I!2 M6!0 968!6 I7!9
%otal -. #11$1 '/$1 #0'-'$1 #11$1
Source: The superintendencies!
%able #/
%he #1 &FIs 3ith Costing Analyses
&FI %ype Country
Costing
&ethod
&onth o(
Study
Deposits 74S>
millions8 #@
C&AC Pisco Small Peru +ssi$nment Ma#-07 /!0
C&AC Chincha Small Peru +ssi$nment Ma#-07 /!M
C2AC SeGor de
uren
Medium Peru +ssi$nment +pr-07 ..!I
Procredit 7Con(Ja8 Medium Eicara$ua +B& ?an-07 .2!I
C2AC 5orPerK Medium Peru +B& Sep-0/ .7!7
FinamLrica Medium &olom)ia +B& ?ul-07 .I!I
FFP FI! Medium Bolivia +ssi$nment ?un-07 22!2
FFP CaEa os Andes Medium Bolivia +B& ?un-07 78!/
C&AC AreAuipa <ar$e Peru +ssi$nment ?un-07 M.!6
C&AC Piura <ar$e Peru +ssi$nment ?un-07 M9!I
Note: The information for each MFI in the su)se;uent ta)les of this chapter is for the month the stud # was
carried out!
.* +vera$e of the deposits in the month the stud# was carried out and ecem)er of the previous #ear!
Source: The MFIs!
products throu$h cost drivers! This methodolo$#
assumes that the actual operatin$ cost drivers are
the activities carried out )# the MFI in order to
offer the products!
The cost assi$nment methodolo$# has )een
adopted for our siF case studies! This methodol-
o$# has two main advanta$es! First% it considers
the num)er of teller transactions associated with
different t#pes of deposits! This ma3es the re-
sults more accurate )ecause teller transactions
account for a hi$h percenta$e of the operatin$
costs of deposits!
/I
Second% it facilitates a
detailed eFamination of operatin$ costs )#
deposit size stratum% which reveals the influence
of each client stratum on total operatin$ costs!
The principal advanta$e of the +B& method is
that it is usuall# more accurate than the cost
assi$nment method!
/I
For $reater detail on the methodolo$# used% see
+nneF !
However% )oth methods have limitations! First%
costin$ is a static eFercise% which means that it
must )e applied periodicall# in order to appreci-
ate chan$es and trends! Second% onl# deposit and
loan services have )een considered% not other
MFI services such as )illpa#in$ and mone#
transfers! This ma# lead to a sli$ht overestimate
of the operatin$ costs of deposits!
/9
%+%A C+S%S +F &+BIICI56
D!P+SI%SF P2I5CIPA FI5DI56S
The .0 MFIs studied here have su)stantial dif-
ferences in their lia)ilit# structures% which influ-
ences )oth their financial and operatin$ costs!
Thus it is important to anal#ze the differences in
fundin$ miF% which are presented in Ta)le .8!
Kn the one hand% &M+& +re;uipa and Piura
mo)ilize the lar$est deposit volumes! In these
two MFIs% deposits represent a ma>or share of
total lia)ilities and )orrowin$ a ver# small share!
Kn the other hand% the medium-size MFIs fi-
nance themselves to a much $reater eFtent )#
)orrowin$% with deposits representin$ a smaller
fraction of total lia)ilities!
"hen deposits are the predominant source of
fundin$% the# account for a si$nificant share of
the MFISs operatin$ costs! However% as we will
see later% it is also important to ta3e into account
which of two main deposit products is primaril#
used )# the MFI since the two products have
ver# different operatin$ costs!
The two )asic products used )# MFIs eFa
mined here to attract deposits are savin$s
accounts 'S+s( and time deposits 'Ts(% )oth in
local currenc# and in dollars! The differences
)etween these two deposit products are clearl#
reflected in their different operatin$ costs% as will
)e seen )e- low! Ta)le .M presents the deposit
composition of the MFIs anal#zed in this stud#
and demonstrates that there is no stron$
correlation )etween this composition and the size
of the MFI!
In order to determine the total costs of mo)iliz-
in$ deposits for the .0 MFIs% the stud# neFt
/9
Knl# FI4 in Bolivia had the data needed to include
these other services in the costin$ stud#!
turns to the financial and operatin$ costs of each
deposit product!
Financial Costs o( &obili:ing Deposits
The MFIs anal#zed have different deposit struc-
tures% )oth in terms of products and currencies!
These differences directl# influence the avera$e
interest rate paid to depositors in two main wa#s
'see Ta)le 20(! First% as would )e eFpected of a
deposit product that is availa)le on demand and
that has a $reater num)er of transactions con-
nected with it% savin$s accounts pa# a lower in-
terest rate than time deposits! Second% interest
rates are hi$her on local currenc# than on dollar
deposits! In addition% the two small MFIs $ener-
all# pa# more for deposits than the lar$er MFIs
)ecause the# have #et to attain a compara)le
positionin$ in their local and re$ional mar3ets!
It is useful to calculate deposit rates in real terms
in order to eliminate the effect of different rates
of inflation in different countries and thus $ive
$reater cross-countr# compara)ilit# to the de-
posit rate data! Ta)le 2. shows that% on avera$e%
savin$s deposits compensate savers for inflation
)ut $enerall# provide little )e#ond this! In fact%
real deposit rates are mildl# ne$ative in the ma-
>orit# of cases! Kn the other hand% time deposits
offer attractive returns in real terms% especiall#
local currenc# time deposits!
+perating Costs o( &obili:ing Deposits
Before anal#zin$ the operatin$ costs of deposits%
it is useful to eFamine some of the characteristics
of the savin$s accounts and time deposits of-
fered )# the .0 MFIs! +s eFpected% total operat-
in$ costs as a percenta$e of the total amount de-
posited is inversel# related to avera$e deposit
size and directl# related to the num)er of trans-
actions performed! Moreover% operatin$ costs
also depend on the MFISs $eneral level of effi-
cienc#!
&FI %ype
Deposits
74S>
thousands8
Savings
Accounts
%ime Deposits
C&AC Pisco Small 2%M6M 70X 90X
C&AC Chincha Small /%M/9 27X 69X
C2AC SeGor de uren Medium ..%I.. 7IX IIX
Procredit Medium .2%I72 /9X 97X
C2AC 5orPerK Medium .7%7/7 72X I8X
FinamLrica Medium .I%I20 0X .00X
FFP FI! Medium 22%.99 27X 69X
FFP CaEa os Andes Medium 78%/7M .6X 8/X
C&AC AreAuipa <ar$e M.%6.I /2X 98X
C&AC Piura <ar$e M9%I.0 .8X 82X
Average #@ *#0).. *#B .)B
%able #?
&FI Funding Structure
74S> thousands8
&FI %ype Deposits Borro3ing 5et =orth
Deposits @
iabilities
7B8
Borro3ing @
iabilities
7B8
C&AC Pisco Small 2%M6M M6. 8/8
98X 22X
C&AC Chincha Small /%M/9 900 9..
6IX ..X
C2AC SeGor de uren Medium ..%I.. 6%978 2%768
I9X /8X
Procredit Medium .2%I72 .7%.8I /%697
79X I2X
C2AC 5orPerK Medium .7%7/7 /%8/2 2%IMI
68X 2.X
FinamLrica Medium .I%I20 I%908 I%./I
62X 29X
FFP FI! Medium 22%.99 .I%7II 9%2I0
I2X /9X
FFP CaEa os Andes Medium 78%/7M /6%II0 .2%667
I2X 70X
C&AC AreAuipa <ar$e M.%6.I 7%/97 27%.8.
8IX 7X
C&AC Piura <ar$e M9%I.0 9%286 22%98.
68X IX
Average *#0).. )0.,1 ?0#*# .)B '#B
Source: The MFIs!
%able #)
Structure o( &FI Deposits
7percent8
.* The last two avera$es eFclude FinamArica )ecause it does not offer savin$s accounts!
Source: The MFIs!
%able '1
Financial Costs by Product and Currency
7percentage o( average balance8
&FI
Savings Accounts %ime Deposits %otal Deposits
%otal
ocal
Currency
Foreign
Currency
ocal
Currency
Foreign
Currency
ocal
Currency
Foreign
Currency
C&AC Pisco 7!IX 7!0X .M!0X M!0X ./!2X 6!.X
##$.B
C&AC Chincha I!8X I!2X .M!.X .0!MX .9!0X M!2X
#-$/B
C2AC SeGor de uren /!.X 2!MX .7!8X I!0X 8!6X 7!2X
.$.B
Procredit I!MX I!MX 8!2X 6!7X 9!MX 9!MX
.$)B
C2AC 5orPerK 7!.X 2!/X M!2X 7!9X 9!7X /!8X
-$?B
FinamLrica .2!IX .2!IX
#'$,B
FFP FI! 2!MX I!MX I!2X
,$'B
FFP CaEa os Andes 9!8X .!IX ..!6X 7!/X na na
*$)B
C&AC AreAuipa 2!0X .!/X ./!7X 9!MX .0!9X 7!6X
/$/B
C&AC Piura .!MX .!MX ..!6X 6!2X M!IX 9!IX
?$#B
Average -$*B *$#B #*$*B .$?B #1$,B .$1B ?$'B
Notes: VnaW indicates information not availa )le! Blan3 cells indicate the a)sence of a product of that t#pe!
Source: The MFIs!
%able '#
2eal Financial Costs by Product and Curre ncy
&FI
Savings Accounts %ime Deposits %otal Deposits
%otal ocal
Currency
Foreign
Currency
ocal
Currency
Foreign
Currency
ocal
Currency
Foreign
Currency
C&AC Pisco 0!2X 0!8X .7!6X I!MX 8!MX 7!0X
/$.B
C&AC Chincha .!IX 2!0X .7!8X 6!6X ..!6X 9!0X
#1$*B
C2AC SeGor de uren -.!.X -0!/X .0!IX .!MX 7!IX .!.X
*$#B
Procredit -.!.X 2!6X .!2X 7!2X -0!.X /!6X
*$-B
C2AC 5orPerK 2!.X -0!MX 6!2X .!7X 7!7X 0!6X
'$#B
FinamLrica 9!7X 9!7X
.$-B
FFP FI! -0!/X 2!6X 2!0X
'$1B
FFP CaEa os Andes I!.X -.!6X M!MX .!2X na na
1$?B
C&AC AreAuipa -2!/X -.!MX M!.X /!6X 9!/X .!IX
*$?B
C&AC Piura -2!/X -.!2X 6!7X 7!.X I!2X /!7X -$'B
Average 1$*B -1$#B )$1B *$/B ,$)B '$?B -$-B
Notes: VnaW indicates information not availa)le! Blan3 cells indicate the a)sence of a product of that t#pe!
Interest rates in local currenc# were ad>usted for inflation in the .2 months prior to the stud# date in the
respective countr#! Interest rates in BSL were ad>usted for inflation from ?une 200/ to ?une 2007 in the
Bnited States% which was /!2 percent!
Source: The MFIs!
%able ''
5umber o( Accounts and Average Deposit Si:e by Product
&FI
Savings Accounts %ime Deposits
5umber o(
Accounts
%otal
Balance
74S>
thousands8
Average
Balance
74S>8
5umber o(
Accounts
%otal
Balance
74S>
thousands8
Average
Balance
74S>8
C&AC Pisco /%M92 .%.68
')/
.%/M0 .%80.
#0').
C&AC Chincha 2%0/I M80
-?'
I6. 2%MI9
,0#//
C2AC SeGor de uren ..%7M9 I%.88
-,#
2%I0. 9%/2/
'0,'?
Procredit I%.67 7%I/I
?/.
7.9 8%008
#)0'-)
C2AC 5orPerK .9%880 9%006
*,.
I%9M2 8%728
#0-?#
FinamLrica .%9.9 .I%I20
)0.1-
FFP FI!
2.%62M I%2I6
'-'
.%09I .9%M0M
#,0?//
FFP CaEa os Andes
70%/6I 8%.66
'1*
/%22. 70%.62
#'0-/'
C&AC AreAuipa
87%9M6 2M%068
*-*
.I%7M6 92%9/9
-01-'
C&AC Piura
7M%M20 .6%.M8 *-, /I%I/I 6M%/.2 '0'*'
Average '.0',' ?0.'' *)) .0/,1 '-0'1. /0*).
Source: The MFIs!
Ta)le 22 presents the num)er of accounts% total
)alance and avera$e )alance for )oth deposit
products for the .0 MFIs! Savin$s accounts have
a relativel# small avera$e )alance of BSL /MM%
versus BSL 6%/M9 for time deposits! In addition%
savin$s accounts have a much lar$er volume of
transactions 'Ta)le 2/(!
The total operatin$ costs of each deposit product
are determined in $ood measure )# the num)er
of transactions that are carried out for the pro-
duct! Transactions involve costs related to per-
sonnel 'teller services(% communications% secu-
rit#% use of e;uipment and electricit#% and other
eFpenses! The num)er of transactions per ac-
count and the total num)er of transactions for
the MFI var# from one MFI to another% )ut it is
clear that S+s have much hi$her volumes of
transactions than Ts )# )oth measures! This is
eFpected $iven the nature of the two products!
Ta)le 27 shows operatin$ costs as a percenta$e
of the avera$e deposit )alance for the .0 MFIs!
For all MFIs% compared with Ts% S+s $enerate
$reater operatin$ costs as a percenta$e of the
amount deposited! This is primaril# )ecause
time deposit accounts are on avera$e almost 20
times lar$er than savin$s accounts 'Ta)le 22(!
Interestin$l#% the main reason for the hi$her
costs of S+s is not the fact that savin$s accounts
involve man# more transactions per account
than time deposits 'on avera$e four times more
accordin$ to Ta)le 2/(! Ta)le 2I shows that
monthl# operatin$ costs per account are much
$reater for Ts than S+s at all MFIs% avera$in$
more than three times as much! It appears that
the attention that lar$er clients receive from
)ranch mana$ers and other relativel# hi$h-
ran3in$ personnel $enerates hi$her unit costs
'costs per account( for Ts compared to S+s!
+lthou$h savin$s accounts $enerate more
monthl# transactions per account% these accounts
are lar$el# attended to )# tellers and other per-
sonnel with much lower salar# levels! Therefore%
costs per account are much lower for S+s than
Ts!
%able '*
5umber o( &onthly %ransactions0 by Product
&FI Savings Accounts %ime Deposits
%otal
%ransactions
%ransactions
per Account
%otal
%ransactions
%ransactions
Per Account
C&AC Pisco /96 0!.0 2I 0!02
C&AC Chincha 6%./2 /!I0 /27 0!90
C2AC SeGor de uren //%276 2!M0 8M2 0!70
Procredit /I. 0!06 7I 0!..
C2AC 5orPerK 22%7 76 .!// 980 0!.2
FinMmerica na na
FFP FI! /2%709 .!I0 I8/ 0!I0
FFP CaEa os A ndes /9%/72 0!M0 .%979 0!I.
C&AC AreAuipa 27.%/.I 2!80 .7%7MM 0!M0
C&AC Piura 76%.M2 0!MI ..%.0/ 0!/.
Average -.0/,, #$,. *0*## 1$*)
NoteG VnaW indicates information not availa)le! Blan3 cells indicate the a)sence of a product of that t#pe!
SourceG The MFIs!
%able '-
Annual +perating Cost as a Percentage o( Average Deposit Balance
&FI Savings Accounts %ime Deposits %otal Deposits
C&AC Pisco
./!MX /!MX /$)B
C&AC Chincha
2.!2X /!.X /$.B
C2AC SeGor de uren
.2!0X /!.X /$#B
ProcreditN
2!9X 0!MX #$,B
C2AC 5orPerKN
8!/X 2!9X ,$1B
FinamLricaN
.!8X #$?B
FFP FI!
.9!.X .!IX ,$1B
FFP CaEa os AndesN
I!8X /!6X -$#B
C&AC AreAuipa
.0!IX .!9X -$-B
C&AC Piura ..!8X .!MX *$.B
Average ##$-B '$-B -$?B
] +B& costin$ is used instead of cost assi$nment!
Source: The MFIs!
&FI # @
%otal
5umbe r o(
Account s
+perati ng Cost per Account
Savi ngs Account s %i me Deposi t s %otal Deposi t s
Fi namLri caN
.% 9.9 .7! 0 #-$ 1
C&AC Chi ncha
2% 909 8! I ./! 7 )$.
C&AC Pi s c o
I% /I2 /! 7 7! 2 *$.
Procredi t N
I% IM0 .! M .7! 7 '$?
C2AC SeGor de uren
./% MM6 7! I 9! I -$)
C2AC 5orPerKN
22% I62 2! I /! 2 '$.
FFP FI!
22% 6M7 /! / 20! / -$1
FFP CaEa os AndesN
7/% IM9 .! 0 /8! 8 *$?
C&AC Pi ur a
8I% 7II /! 7 /! I *$-
C&AC AreAui pa .00% .M7 /! 0 I! / *$-
Average *10 *// *$ , #'$ - ,$'
%able ',
+perating Cost per Account
74S> per month8
] +B& costin$ is used instead of cost assi$nment!
.* The MFIs are shown in increasin$ order of their total num)er of accounts!
Source: The MFIs!
The data in Ta)le 2I show miFed results on the
eFistence 'or noneFistence( of economies of
scale! The ta)le ran3s MFIs accordin$ to their
total num)er of accounts 'S+s T Ts(% from
.%9.9 at FinamArica to .00%.M7 at &M+& +re-
;uipa! The idea )ehind economies of scale is
that lar$er MFIs 'in the sense of those with more
accounts( can spread their overhead costs more
thinl# over this $reater num)er of accounts!
+ comparison of the two smallest MFIs with the
two lar$est provides evidence in support of
economies of scale! In the case of savin$s ac-
counts% the two smallest MFIs '&M+&s &hincha
and Pisco% $iven that FinamArica cannot offer
this t#pe of account( have an avera$e unit cost of
BSL I!MI% compared with BSL /!20 for &M+&s
Piura and +re;uipa% the two lar$est MFIs! "ith
respect to time deposits% the avera$e unit cost for
the two smallest MFIs is BSL ./!60% versus BSL
7!70 for the two lar$est MFIs! "ith )oth t#pes
of deposits there is clear evidence of economies
of scale% $iven the si$nificant drops in unit costs
when comparin$ the smallest MFIs to the lar$-
est!
The other siF MFIs provide evidence a$ainst
economies of scale! These siF medium-size
MFIs have the lowest avera$e unit cost for sav-
in$s accounts 'BSL 2!20( and the hi$hest aver-
a$e unit cost for time deposits 'BSL .7!I6(% in-
stead of havin$ intermediate avera$e unit cost
values in )oth cases!
The wide fluctuations in unit costs% especiall# in
the case of time deposits% lead us to two ;ues-
tions G 'i( +re there in fact economies of scale
? and 'ii( o cost studies reall# provide
accurate and relia)le cost estimates? =e$ardin$
the second ;uestion% the si$nal wea3ness of
costin$ studies is their use of ar)itrar# rules to
assi$n indirect eFpenses to products 'or to
activities and then to products(! This wea3ness is
an important one since these indirect eFpenses
often account for the ma>orit# of total operatin$
costs!
/6
Per- haps with another set of rules% the
unit costs calculated for the medium-size MFIs
would have )een lower for Ts and hi$her for
S+s% and thus
/6
+nneF lists the indirect eFpenses and the as-
si$nment rules used to allocate them in siF of the
MFI costin$ stu dies!
more in line with what the eFistence of scale
economies would lead us to eFpect! +t least%
perhaps% the a)rupt swin$s in unit costs would
have )een less pronounced! For a definitive
resolution of these ;uestions% we need more evi-
dence% hopefull# usin$ the same methodolo$#
for all of the costin$ studies!
/8
It is important to separate savin$s accounts from
time deposits and loo3 for evidence for or
a$ainst economies of scale at the level of each
individual product! The alternative is to estimate
the operatin$ costs per account for all deposits
ta3en to$ether% and to anal#ze whether this ratio
)ecomes smaller for lar$er MFIs! The pro)lem
with this latter strate$# is that the avera$e unit
cost of Ts is more than three times the avera$e
unit cost of S+s 'Ta)le 2I(! Moreover% the share
of Ts in total deposits varies su)stantiall# from
one MFI to another 'Ta)le .M(! Because of these
two factors% variations in the unit cost of total
deposits ma# )e the result either of economies of
scale or of variations in the share of each t#pe of
account in total deposits! Therefore% this anal#sis
would not offer clear evidence on the eFistence
of economies of scale!
%otal Costs o( &obili:ing Deposits
Fi$ure . shows the )rea3down of total costs into
Procredit pa#s 0!2 percenta$e points more for
Ts than S+s! In the other seven MFIs% S+s
have the hi$her total cost% usuall# )# a wide
mar$in! Therefore% )ased on this sample% we can
sa# that S+s tend to )e more eFpensive than
Ts for MFIs! Moreover% reducin$ the operatin$
costs of S+s presents su)stantial pro)lems )e-
cause it re;uires a si$nificant streamlinin$ of
processes or other such measures! &onversel#% it
is onl# necessar# for an MFI to lower the inter-
est rates it pa#s on its Ts in order for it to real-
ize su)stancial savin$s in the total cost of offer-
in$ that product!
/M
In conclusion% it would appear advisa)le for
MFIs to $ive priorit# to mo)ilizin$ time deposits
)ecause of their lower total costs! In addition%
Ts offer several other advanta$esG the# are eas-
ier to mana$e% provide $reater fundin$ sta)ilit#
and predicta)ilit# in the short and medium term
'until their maturit#( and $enerall# permit )etter
term matchin$ )etween assets and lia)ilities dur-
in$ this same time horizon!
70
Since the main cost
of Ts is the interest rate paid 'and not their op-
eratin$ costs(% it is eFtremel# important to prop-
erl# set the interest rate for Ts at a level that
will attract the re;uired funds at the lowest pos-
si)le cost! Eonetheless% this tas3 has not re-
ceived the priorit# it should at man# MFIs )e-
cause their still wide financial mar$ins allow
financial and operatin$ costs )# t#pe of deposit
product for the MFIs! Eote that financial costs
are low and operatin$ costs are hi$h for S+s!
The situation is reversed for Ts% where interest
pa#ments are the ma>or component of total
costs!
In $eneral% savin$s accounts have $reater total
costs than time deposits! &onsiderin$ the nine
MFIs that offer )oth products 'all MFIs studie d
here eFcept FinamArica% which is permitted to
offer Ts )ut not S+s(% the avera$e total cost of
savin$s accounts is .I percent and the avera$e
total cost of time deposits is .2!2 percent! Knl#
&a>a <os +ndes pa#s su)stantia ll# more for Ts
than S+s '..!6 percent vs! M!M percent(% while
/8
In siF of the studies presented here% the same team
of professionals used the same methodolo$# 'cost
assi$nment(% while in the other four studies another
methodolo$# was used '+B&(!
/M
Eaturall#% the advisi)ilit# of reducin$ deposit rates
depends on the specific conditions of each mar3et%
includin$ the de$ree of competition from other finan-
cial instit utions!
70
However% Ts are not necessaril# more sta)le than
S+s in the lon$er term 'after maturit# of the current
Ts(! This is true fo r two reasons! First% the much
$reater num)er of savin$s accounts $ives them a cer-
tain sta)ilit# ) ecause the deposits and withdrawls
from so man# accounts tend to cancel each other out
to a $reater de$ree than is the case for time deposits!
Second% credit unions and other MFIs that mo)ilize
su)stantial savin$s from a lar$e num)er of small d e-
positors fre;uentl# find that a si$nificant share '2I
percent or more( of these funds is ver# sta)le! This is
so despite the fact that depositors have the ri$ ht to
withdraw their mone# at an# time! Man# small d e-
positors use an MFI )ecause of its convenient loca-
tion or low minimum deposit re;uirements! The#
tend to 3eep their savin$s there unless the# fear that
the MFI ma# )ecome insolvent% in which case their
deposits would )e in dan$er!
Figure #
Financial and +perating Costs o( Deposit Products
a$ Savings Accounts
30.0%
25.0%
20.0%
15.0%
21. 2%
10.0%
5.0%
13. 9%
4 . 2 %
5. 5%
12. 0%
2 . 6 %
8 . 3 %
5. 9%
16.1%
11. 8%
5. 8% 10. 5%
0.0%
3 . 0 % 3 . 2 % 2 . 9 %
4.1%
1.7%
1. 9%
CMAC Pisco CMAC
Chincha
CRAC Seor
de Luren
Procredit* CRAC
NorPer*
P !" P Ca#a Los
Andes*
CMAC
Are$ui%a
CMAC Piura
inancia& Cost '%eratin( Cost
b$ %ime Deposits
20.0%
1).0%
1*.0% 3.9%
3.1%
1+.0%
1.8%
12.0%
10.0%
3.1%
3.7%
1.6%
1.9%
).0%
*.0%
+.0%
2.0%
14.0%
15.0%
9.9%
0.9% 2.6%
7.8%
6.9%
12.5%
1.5%
5.9%
8.0%
10.2%
9.4%
0.0%
CMAC Pisco CMAC Chincha CRAC Seor de
Luren
Procredit* CRAC NorPer* ina,-rica* P !" P Ca#a Los
Andes*
CMAC Are$ui%a CMAC Piura
inancia& Cost '%eratin( Cost
them to a)sor) the hi$h rates paid on time
deposits without much difficult#!
A &ore Detailed !"amination o( the
+perating Costs o( Deposits
The anal#sis thus far has focused on the operat-
in$ costs of deposits )ut has not resolved
whether $rowth in the num)er of accounts at
MFIs leads to economies of scale! In order to
)etter understand this su)>ect% this section )rea3s
down the operatin$ costs of deposits into fiFed
and varia)le components! It also tac3le s the
su)- >ect of microsavin$s!
1ixed and 3ariable 2perating *osts
Kperatin$ costs ma# )e classified as either fiFed
or varia)le! Since fiFed costs are spread over an
increasin$ num)er of accounts as the num)er of
accounts $rows% the presence of fiFed costs
tends to reduce operatin$ costs per account!
7.
Fi$ure 2 )rea3s down operatin$ costs for savin$s
accounts and time deposits into fiFed and vari-
a)le cost components! It reco$nizes as fiFed and
varia)le the same t#pes of eFpenses for )oth de-
posit products! "e can see from this fi$ure that
at the lar$er MFIs the share of fiFed costs in to-
tal costs is lower% reflectin$ the fact that fiFed
costs are spread over more accounts as the num-
)er of accounts increases! This assertion can )e
verified more formall# )# calculatin$ the corre-
lation coefficient )etween deposit volume and
the share of fiFed costs in total costs! These cal-
culations #ield hi$h ne$ative correlations of
-0!87 for savin$s accounts and -0!8I for time
deposits!
This demonstrates that as the volume of deposits
increases% fiFed mana$ement and )ac3-office
costs are spread ever more thinl#! For eFample%
small and medium-size MFIs% which have fiFed
costs that avera$e 2/ percent of their total oper-
atin$ costs% can decrease their operatin$ costs at
least in that percenta$e simpl# )# increasin$
their deposit volumes! It is also important to note
that the share of fiFed costs in total costs is
hi$her for Ts than for S+s )ecause of the
$reater involvement of mana$ers and other hi$h-
level personnel in ne$otiations with T clients
'which% in turn% is due to the much lar$er size of
Ts compared to S+s(!
Be#ond these considerations of fiFed costs% the
varia)le costs per deposit account could also fall
as the num)er of accounts rises! For eFample%
7.
It could )e ar$ued that all costs are varia)le in the
lon$ run! However% we have assumed that certain
costs 'namel#% the fiFed costs( remain constant or
nearl# constant as the MFI $rows! FiFed costs in-
clude% for eFample% the cost of the )oard of directors%
the $eneral mana$er and the mana$ers of such d e-
partments as credit% savin$s% finance% ris3% operations
and maintenance% auditin$% treasur# and accountin$!
See +nneF for more d etail!
this mi$ht occur if staff productivit# increases
with the num)er of accounts! In this wa#% MFIs
ma# reduce )oth their fiFed and varia)le costs
per deposit account as a result of the economies
made possi)le )# a $reater num)er of accounts!
2perating *osts of Microsavings
+ num)er of pu)lications have anal#zed the su)-
>ect of microsavin$s at MFIs and the social mis-
sion of these institutions in promotin$ savin$s
amon$ low-income individuals! Increasin$ ac-
cess to the financial s#stem and promotin$ a cul-
ture of savin$ amon$ poor people are undou)t-
edl# worthwhile $oals! However% elevatin$ the
importance of this social mission has often led
MFIs to ne$lect anal#zin$ the costs that mi-
crosavin$s $enerate for the MFI! Studies such as
that of =ichardson '200/( conclude that this cost
is not prohi)itive )ecause MFIs also have lar$er
clients that offset the $reater operatin$ costs of
microsavin$s!
This section anal#zes the operatin$ costs of mi-
crosavin$s and the implications of these costs
for MFIs% where microsavin$s are defined as
savin$s accounts with )alances less than or
e;ual to BSL .00! The su)>ect of the operatin$
costs of time deposits is not eFplored here )e-
cause small savers rarel# use this product! Ta)le
29 shows that S+s are responsi)le for an ave
r- a$e of M/ percent of the total transactions and
82 percent of the total deposit accounts at MFIs%
)ut )rin$ in onl# /. percent of total deposits!
Thus% savin$s accounts are a product with hi$h
operatin$ costs!
Havin$ loo3ed )riefl# at the overall characteris-
tics of savin$s accounts% we now eFamine the
num)er of clients and amount mo)ilized )# ac-
count size strata% which are presented in Ta)le
26! This ta)le shows that microsavin$s repre-
sent% on avera$e% three-;uarters of all the ac-
counts% )ut provide less than / percent of the
%able '.
Characteristics o( Savings Accounts
MFI
5olume
'BSL
thousands(
X of
Total
5olume
Eum)er of
+ccounts
X of
Total
+ccounts
Eum)er of
Transactions
X of Total
Transactions
Kperatin$ &ost
of S+s 'X(
Total
Kperatin$
&ost 'X(
C&AC Pisco .%.68 70X /%M92 67X /96 M7X ./!MX 6!MX
C&AC Chincha M80 2IX 2%0/I 80X 6%./2 M9X 2.!2X 6!9X
C2AC SeGor de uren I%.88 7IX ..%7M9 82X //%276 M6X .2!0X 6!.X
Procredit 7%I/I /9X I%.67 M/X /I. 8MX 2!9X .!IX
C2AC 5orPerK 9%006 72X .9%880 6IX 22%776 M6X 8!/X I!0X
FFP FI! I%2I6 27X 2.%62M MIX /2%709 M8X .9!.X I!0X
FFP CaEa os Andes 8%.66 .6X 70%/6I M/X /9%/72 M9X I!8X 7!.X
C&AC AreAuipa 2M%068 /2X 87%9M6 8IX 27.%/.I M7X .0!IX 7!7X
C&AC Piura .6%.M8 .8X 7M%M20 I8X 76%.M2 8.X ..!8X /!9X
Average ?0.'' *#B '.0',' ?'B -.0/,, )*B ##$-B ,$#B
SourceG The MFIs!
Figure '
Fi"ed and <ariable +perating Costs o( Deposits
Fixed and Variable Costs of SAs %!
Fixed and Variable Costs of "#s %!
25.0%
+.5%
+.0%
20.0% 3.5%
15.0%
15. 9%
2.5%
2.0%
2. 3%
0. 8%
2. 1%
5.0%
4. 1%
5. 3%
9. 6%
8. 9% 11. 2%
1.5%
1.0%
0.5%
1. 6%
2. 3%
1. 0%
0. 4%
1. 1%
1. 1%
1. 6%
0.0% 2. 4% 2. 9%
1. 6%
0. 6% 0.0%
0. 4%
0. 3%
CMAC Pisco CMAC
Chincha
CRAC
Seor de
Luren
P !" CMAC
Are$ui%a
CMAC Piura CMAC Pisco CMAC
Chincha
CRAC
Seor de
Luren
P !" CMAC
Are$ui%a
CMAC Piura
i.ed /aria0&e
i.ed /aria0&e
total amount mo)ilized in S+s at )oth small and
lar$e MFIs!
It is also interestin$ that in )oth small and lar$e
MFIs% a se$ment that contains one of the $reatest
percenta$es of total savin$s is that )etween BSL
.%00. and BSL I%000, this se$ment is especiall#
important in the case of the lar$e MFIs! "hile
the lar$e MFIs have a $reat num)er of microsav-
in$s clients% the# mo)ilize most of their deposits
from the middle -size accounts! B# contrast% the
small MFIs are more dependent for their depos-
its on lar$e clients% especiall# those with )al-
ances $reater than BSL I0%000! +t small MFIs
these clients provide .8!8 percent of total depos-
its% versus 9!2 percent at lar$e MFIs!
%able '/
Savings Account Clients at &FIs0 Averages by Strata #@
Stratum
Small &FIs arge &FIs
5umber o(
Accounts
B
%otal
Balance
74S>
thousands8
B
Average
Balance
74S>8
5umber
o(
Accounts
B
%otal
Balance
74S>
thousands8
B
Average
Balance
74S>8
From 4S> 1 to 4S> #11 2%2.M 67!0 /0 2!I .7 7M%M99 69!. IM/ /!0 .2
From 4S> #1# to 4S> ,11 76I .I!8 ..2 M!2 2/I 8%6M/ ./!7 2%069 .0!9 2/9
From 4S> ,1# to 4S> #0111 .7. 7!6 MM 8!. 600 2%69M 7!2 .%MI0 .0!0 607
From 4S> #011# to 4S> ,0111 ./I 7!I 260 22!2 2%009 /%798 I!/ 6%..2 /9!7 2%0I.
From 4S> ,011# to 4S> #10111 .I 0!I MM 8!2 9%8I0 7/8 0!6 2%M9. .I!2 9%69.
From 4S> #1011# to 4S> ,10111 ./ 0!/ 26M /.!0 2.%8I9 2.2 0!/ /%970 .8!9 .6%.6.
From 4S> ,1011# to 4S> #110111 2 0!. .70 .0!7 9M%867 M 0!0 I29 2!6 I8%702
&ore than 4S> #110111 . 0!0 I. 8!7 .0.%7/. I 0!0 98I /!I ./6%08I
%otal '0))) #11$1 #01/) #11$1 *.1 .,0..1 #11$1 #)0,-* #11$1 ')?
.* +vera$e num)er of savin$s accounts and avera$e account )alances )# t#pe of MFI! The small MFIs are &M+&s Pisco and
&hincha and the lar$e MFIs are &M+&s +re;uipa and Piura!
Source: The MFIs!
Before anal#zin$ operatin$ costs )# account size
strata% it is important to eFamine a )rea3down of
the num)er of transactions )# these strata since
most of the operatin$ costs associated with sav-
in$s accounts involve transactions that are car-
ried out )# clients at teller windows! Ta)le 28
shows the num)er of transactions )# account
size strata! The microsavin$s stratum stands out
as havin$ the $reatest num)er of transactions%
especiall# at the lar$e MFIs! +nother salient
point is the lar$e num)er of transactions per ac-
count in the upper strata% which arise from these
MFIs handlin$ compan# savin$s accounts that
use drafts 'which are similar to chec3s in that
the# allow savin$s account holders to draw
a$ainst their savin$s )alances(! This results in a
$reatl# increased num)er of transactions per ac-
count! Eonetheless% the lar$e amounts of depos-
its mo)ilized in these se$ments $enerall# offsets
the $reater num)er of transactions % as will )e
seen in the anal#sis of operatin$ costs )# strata!
The characteristics that have )een discussed here
are all reflected in the operatin$ costs shown in
Ta)le 2M! In all five MFIs that were a)le to pro-
vide data% annual operatin$ costs for the mi-
crosavin$s stratum are more than 200 percent of
the microsavin$s )alances! This means that for
each dollar mo)ilized from this se$ment% it costs
on avera$e more than two dollars in operatin$
costs per #ear% without ta3in$ account of the in-
terest paid to these clients! It is also important to
note that startin$ with the BSL I0.- .%000
stratum% there is a reduction in operatin$
costs to lower-than-avera$e levels! +t the same
time% the fact that more than three-;uarters of all
savin$s deposits are mo)ilized from savin$s
accounts lar$er than BSL .%00. si$nif icantl#
reduces the avera$e operatin$ costs of savin$s
accounts! Thus% there eFists an important cross-
su)sid# )etween lar$e and small savers!
In conclusion% microsavin$s $enerate ver# hi$h
operatin$ costs at MFIs of all sizes! epositors
with low )alances are thus su)sidized )# those
with lar$er )alances! However% the lon$-term
sustaina)ilit# of these cross-su)sidies should )e
reviewed% partic ularl# in mar3ets with increasin$
levels of competition!
Alternative Strategies to %eal with Microsavings
"e now consider three alternative strate$ies that
MFIs could adopt to deal with the issue of mi-
crosavin$sG
.! Subsidies for small savers, who often re-
ceive interest on their savin$s accounts and
pa# little or nothin$ in fees to the MFI
despite the hi$h operatin$ costs $enerated
)#
these accounts! This strate$# particularl#
serves the interests of low-income individu-
als with small )alances who are loo3in$ for
a safe% economical and easil# accessi)le
place in which to hold their eFcess li;uidit#!
This option is the one most commonl# used
)# <atin +merican microfinance institu-
tions! MFIs >ustif# su)sidizin$ small savers
)# notin$ that servin$ these savers is part of
the MFISs social mission and that even
small deposits offer economies of scope and
other si$nificant )enefits% which are discuss-
ed in the neFt point! However% MFIs rarel#
estimate the costs of this su)sid# or eFplore
the possi)ilities of rationalizin$ it! It is pos-
si)le that in the medium term% $rowin$
competitive pressures in the microfinance
mar3etplace will lead to a chan$e in this or i-
entation!
2! Adoption of a more selective service policy
for microsavers, throu$h a series of meas-
%able '?
&onthly %ransactions by Strata (or Savings Accounts
#@
Stratum
Smal l &FIs arge &FIs
5umber o(
%ransactions
B
%ransactions
per Account
5umber o(
%ransactions
B
%ransactions
per Account
From 4S> 1 to 4S> #11 .%069 /0!0 0!I 82% 667 I8!9 .!6
From 4S> #1# to 4S> ,11 MI0 29!I 2!0 2I% 62M .8!2 2!M
From 4S> ,1# to 4S> #0111 26. 6!9 .!M M% 96/ 9!M /!I
From 4S> #0 11# to 4S> ,0111 60. .M!9 I!2 .I% 200 .0!8 7!7
From 4S> ,0 11# to 4S> #10 111 78M ./!9 //!6 /% I09 2!I 8!0
From 4S> #10 11# to 4S> ,10111 9M .!M 6!. 2% M27 2!. ./!8
From 4S> ,10 11# to 4S> #110111 I 0!. .!0 80I 0!9 M7!9
&ore than 4S> #110 111 2. 0!9 2.!7 I2I 0!7 ..9!9
%otal *0,?' #11$1 #$' #-#0 #*- #11$ 1 '$#
.* +vera$e transactions for savin$s accounts )# t#pe of MFI! The small MFIs are &M+&s Pisco and &hincha and the lar$e MFIs
are &M+&s +re;uipa and Piura!
Source: The MFIs!
%able ')
+perating Costs by Strata (or Savings Accounts
7annuali:ed percentage o( the average stratum balance8
#@
Stratum
C&AC
Chincha
C&AC
Pisco
C2AC SeGor
de uren
C&AC
AreAuipa
C&AC
Piura
Small Small &edium arge arge
From 4S> 1 to 4S> #11 IM9!6X 2/8!/X 2/I!/X 2I7!MX 2M8!0X
From 4S> #1# to 4S> ,11 I6!8X .M!6X .9!.X .9!/X 22!IX
From 4S> ,1# to 4S> #0111 .8!.X 8!0X 9!8X 9!/X 8!0X
From 4S> #011# to 4S> ,0111 ..!9X 7!0X 7!8X 2!8X /!7X
From 4S> ,011# to 4S> #10111 .8!.X 2!MX 7!/X .!9X .!6X
From 4S> #1011# to 4S> ,10111 .!IX .!8X M!7X .!2X .!.X
From 4S> ,1011# to 4S> #110111 0!MX .!9X /!9X .!9X 0!MX
&ore than 4S> #110111 .!2X 7!IX .!.X 0!MX
%otal '#$'B #*$)B #'$1B #1$,B ##$?B
Note: The hi$h costs in stratum I at &M+& &hincha% as well as in stratum 9 at &=+& Se:or de <uren% are due
to the presence of a su)tantial num)er of savin$s accounts in each stratum that are used )# companies for pa#ment and
collection services and thus have a lar$e num)er of transactions per account!
.* FI4 is not included )ecause it had no data for accounts from BSL 0 to .00!
Source: The MFIs!
ures that could )e introduced separatel# or
to$ether! These measures includeG 'i( pa#in$
interest onl# on accounts with )alances
a)ove a certain level% 'ii( esta)lishin$ hi$her
minimum deposit sizes and 'iii( char$in$
monthl# or per-transaction fees on accounts
with low )alances! 4mplo#in$ the first of
these measures% an MFI could% for eFample%
eliminate interest on accounts of less than
BSL .00! This would not create a ma>or
fundin$ pro)lem for the MFI nor would it )e
particularl# )urdensome for clients% )ecause%
as numerous studies have shown% S+ de-
positors value safet#% convenience and li-
;uidit# ahead of the interest rate paid!
72
However% the MFI would save little )# in-
troducin$ this measure )ecause of the small
amount deposited )# these savers! For
eF- ample% the total annual savin$s would
)e onl# BSL .M%.20 at the four MFIs in
Ta)le
28!
7/
<i3ewise% it would )e possi)le to introduce a
minimum deposit re;uirement on savin$s
accounts% for eFample% of BSL .00! Man#
MFIs mi$ht resist this measure )ecause the#
identif# with the social mission of providin$
access to the financial s#stem for low-
income savers! To evaluate this alternative%
it would )e useful to underta3e a mar$inal
anal#sis that compares the costs of all prod-
ucts with and without microsavin$s!
77
&ost
72
This is true for savin$s account s )ut n ot for time
deposits since the interest rate paid is much more
important to T clients!
7/
The amount each MFI would save depends on how
much is mo)ilized in these small accounts and the
interest rate that is paid!
77
Some MFIs ma# have si$nificant unused capacit#%
for eFample% in their computer s#stems or other parts
of their infrastructure% or in )ranches where tellers
perform few transactions! In these cases% microsav-
in$s ma# not increase operatin$ costs ver# much and
could help to productivel# emplo# this unused capac-
it#! Such considerations can )e eFplored in detail
throu$h mar$inal anal#sis! Eevertheless% it must also
)e 3ept in mind that at some point small savers could
taF the MFISs infrastructure or cause con$estion
pro )lems at the )ranches! MFIs mi$ht then have to
ma3e new investments and incur additional operatin$
eFpenses to 3eep clients satisfied!
reductions would )e seen especiall# in the
medium and lon$ term as additional funds
would )e mo)ilized from other client
se$- ments% without the need for as much
personnel and infrastructure at the MFISs
)ranches!
Finall#% MFIs could introduce monthl# fees
and*or char$es for each transaction per-
formed for accounts with )alances of less
than BSL .00! For eFample % the two lar$est
MFIs in our sample could cover the costs of
servin$ their microsavers with a char$e BSL
.!/0 per transaction or a monthl# fee of BSL
2!90 per account! +lthou$h these char$es are
;uite hi$h% the fees needed to cover mi-
crosaver operatin$ costs at the two smallest
MFIs are even hi$her!
MFIs cite the followin$ reasons for not
char$in$ fees on microsavin$sG 'i( the MFI
ma# assess the profita)ilit# of mo)ilizin$
deposits overall% rather than from a specific
client se$ment, 'ii( additional services% such
as loans% ma# )e sold to the microsavers at
the same time 'economies of scope(, 'iii( the
income from introducin$ fees would not )e
su)stantial, and 'iv( the MFI ma# consider
the life c#cle of microsavers% whose small
deposits ma# $row over time and who ma#
also re;uire other services in the future such
as loans!
Ta3en as a $roup% the proposed measures
see3 to reduce the su)sid# $iven to mi-
crosavers% either )# eliminatin$ service or
recoverin$ additional costs! Most )an3s in
<atin +merica have ta3en one or )oth of
these routes! The advanta$es of this strate$#
for MFIs lie in rationa lizin$ operatin$ costs
and reducin$ con$estion at )ranches% thus
providin$ )etter service to the remainin$ cli-
ents! The draw)ac3s of this strate$# are that
it a)andons or reduces service to an entire
mar3et se$ment and loses the )enefits
descri)ed in the precedin$ para$raph!
/! (nlarging the microsaver client base, in or-
der to reach a critical mass that can )e
served more economicall# throu$h techno-
lo$ical and or$anizational innovations% as
well as )# offerin$ a ran$e of financial
products to small savers to )oth facilitate
transactions and full# recover the costs $en-
erated! FFP Prodem is followin$ this strat-
e$# )# introducin$ the followin$G a smart
card with fin$erprint identification% the
widespread use of automated teller machines
especiall# desi$ned for low- income
clients% a lar$e networ3 of )ranches in rural
and ur- )an areas% and a ran$e of services to
facilitate pa#ments and transfers )etween
accounts!
7I
In order to recover some of the
cost of these services% Prodem char$es its
clients an annual fee of BSL 6! This
eFperience needs an in-depth evaluation in
order to determine if it offers a profita)le
wa# to serve microsavers!
%+%A C+S%S +F %H! DIFF!2!5%
F45DI56 S+42C!S
+s alread# mentioned% MFIs can choose from a
variet# of sources to meet their fundin$ needs!
The principal criteria that MFIs should use to
$uide their selection of the )est miF of fundin$
sources include the total cost of each source 'fi-
nancial plus operatin$ cost(% the ris3s associated
with the use of each source and the MFISs me-
dium-term strate$#! This section eFamines the
total cost of each fundin$ source! &hapters 2 and
7 respectivel# anal#ze the ris3s associated with
each source and the most appropriate medium-
term strate$# for an MFI!
The calculation of the total cost of each fundin$
source ta3es account of the followin$ considera-
tions! First% su)stantial personnel and infrastruc-
ture are re;uired to mo)ilize deposits! Hence%
account must )e ta3en of these si$nificant oper-
atin$ costs as well as the also si$nificant finan-
cial costs of deposit mo)ilization in calculatin$
total deposit costs! Second% the operatin$ costs
involved in )orrowin$ are relativel# small com-
pared to the financial cost% particularl# when an
7I
For a discussion of ProdemSs eFperience% see Ba-
zo)err# '200/(!
MFI )orrows more than once from the same
source! Therefore% in order to simplif# the anal#-
sis% it is assumed that )orrowin$ involves onl#
financial costs! Third% issuin$ )onds involves
apprecia)le operatin$ costs% includin$ the fees
paid to the investment )an3% attorne#s% ratin$
a$enc#% stoc3 eFchan$e% capital mar3ets re$ula-
tor# authorit# and )ro3era$e houses! Thus% the
total cost of )ond issues includes operatin$ as
well as financial costs! Finall#% while <atin
+merica has no eFperience with pu)lic offerin$s
of MFI stoc3% there have )een numerous private
placements! The operatin$ costs associated with
these private stoc3 placements have )een hi$hl#
varia)le% )ut sometimes ver# low! MFIs have
also issued stoc3 as a means to reinvest profits% a
transaction that has relativel# insi$nificant oper-
atin$ costs! +s a result of these considerations%
we assume that the total cost to the MFI of issu-
in$ stoc3 can )e reasona)l# approFimated )# the
MFISs return on e;uit# '=K4(!
79
Bsin$ the assumptions $iven in the previous
para$raph% Ta)le /0 compares the total costs of
the four fundin$ sources! This comparison #ields
the followin$ conclusionsG
79
The followin$ eFample illustrates wh# =K4 ma#
)e reasonaa)l# ta3en as the cost of stoc3 issue! &on-
sider an MFI which has an =K4 of 20 percent and
whose stoc3 is entirel# owned )# a sin$le individual!
This person would li3e to increase the MFISs capital
'e;uit#( )# .0 percent with a new issue of shares!
+ssume that this new capital is e;uall# as productive
as the eFistin$ capital% so that the =K4 will remain at
20 percent! Solel# for purposes of simplif#in$ the
eFposition% also assume that each #ear all profits are
distri)uted to the shareholders! If the current owner
sells the new shares to another person instead of in-
vestin$ his own mone# to )u# them% that other person
will earn 20 percent on his investment! That is% the
cost of issuin$ shares is e;ual to the =K4% )ecause
the earnin$s are distri)uted amon$ all the sharehold-
ers and each shareholder earns L!20 for each L. in-
vested! The $reat un3nown in this calculation is
whether the =K4 will remain unchan$ed in the me-
dium term! It ma# )e that in some competitive ma r-
3ets the =K4 will tend to fall with increasin$ co m-
petitive pressures! In other cases% the MFI ma#
achieve su)stantial productivit# increases 'as man#
MFIs have done in the past(% which will tend to in-
crease the =K4 and therefore the cost of stoc3 issue!
%able *1
%otal Costs o( the Four &FI Funding Sources
7percent per annum8
&FI %ype Date
Deposits Borro3ing Capital Bonds
Financial
Cost
+perating
Cost
%otal
Cost
Financial
Cost #@ 2+! '@
%otal
Cost
&M+& Pisco Small Ma#-07 ..!9X 6!MX .M!IX ./!0X 7!.X
&M+& &hincha Small Ma#-07 .7!6X 6!9X 22!/X .2!.X /.!IX
&=+& Se:or de <uren Medium +pr-07 9!9X 6!.X ./!6X 9!IX .6!8X
Procredit] Medium ?an-07 9!MX .!IX 8!7X
&=+& Eor PerZ] Medium Sep-0/ 7!8X I!0X M!6X I!6X 2.!.X
FinamArica] Medium ?ul-07 .2!IX .!8X .7!/X I!6X 7!9X
FPP FI4 Medium ?un-07 I!2X I!0X .0!2X I!.X 2/!9X
FFP &a>a <os +ndes] Medium ?un-07 /!MX 7!.X 8!0X 7!/X .7!/X
&M+& +re;uipa <ar$e ?un-07 6!6X 7!7X .2!.X ./!0X 2M!.X
&M+& Piura <ar$e ?un-07 8!.X /!9X ..!6X .0!9X /2!9X
&ompartamos /* <ar$e ?ul-07 M!7X
Mi)anco 7* <ar$e M!.X
Average ?$'B -$?B #*$1B ?$-B #)$?B )$'B
Note: Blan3 cells indicate info rmation not availa)le!
]+B& costin$ is used instead of cost assi$nment!
.* It is assumed that )orrowin$ has ne$li$i)le operatin$ costs!
2* =K4 is used as the cost of capital of an MFI since this is what would )e paid if all profits were distri)uted!
/* &ost of ?ul# 2007 )ond issue% which consists of annual financial costs of 8!9. percent plus annual operatin$ costs of 0!8.
percent!
7* "ei$hted avera$e annual financial cost of 8!2I percent for the three Mi)anco )ond issues plus 0!8 percent annual operatin$
costs% estimated )ased on information supplied )# the capital mar3ets!
Source: The MFIs!
%eposits& &omparin$ small and lar$e MFIs%
there is an inverse relationship )etween total
cost and MFI size! The small MFIs1&M+&s
Pisco and &hincha1have hi$h total costs '.M!I
and 22!/ percent% respectivel#( as a result of the
hi$h interest rates the# must pa# to attract clients
and the elevated operatin$ costs the# face as a
result of their small scale of operations! B# con-
trast% the lar$e MFIs1&M+&s +re;uipa and
Piura1have lower total costsG .2!. and ..!6
percent% respectivel#! These lower total costs are
the result of the lower deposit rates that these
lar$e MFIs can pa# and still attract savin$s since
the# are more esta)lished in the mar3et! The#
are also the result of economies of scale and
other factors that reduce the operatin$ costs of
the lar$e MFIs! Between these two eFtremes% the
total costs for the siF medium-size MFIs are
rather hetero$eneous, some have hi$her total
costs than the lar$e MFIs and some have lower
total costs! Bltimatel#% the total cost paid )# an
MFI for its deposits depends% amon$ other
thin$s% on the com)ination of S+s and Ts at-
tracted 'time deposits )ein$ $enerall# less
eF- pensive than savin$s depos its(% the
percenta$e of deposits in forei$n currenc#
'since forei$n currenc# deposits $enerall#
have lower interest rates than local currenc#
deposits% as shown in Ta)le 20(% the avera$e
account size ')ecause there are clear
economies in mana$in$ lar$er accounts( and
the size of the MFI 'on account of scale
economies and possi)l# economies )ased on a
more esta)lished presence in the mar3et(!
Given that an MFISs size is onl# one of these
factors% it should not )e surprisin$ that the total
cost of deposits is not stron$l# correlated with
the size of the MFI!
Stoc. issue& "ith capital costs avera$in$ .M!8
percent% capital is easil# the most eFpensive
source of funds! &apital has a si$nificantl#
hi$her cost than the other three alternatives )e-
cause shareholders demand a hi$h ris3 premium
as compensation for their su)ordinated position
vis-^-vis the MFISs other funders 'see also "is-
niws3i% .MMM)% p! /( and )ecause the MFIs are
earnin$ hi$h =K4s!
'ond issue& Since none of the .0 MFIs with de-
posit costin$ studies has issued )onds% we turn
to two MFIs with recent )ond issues% Mi)anco
and &ompartamos% to o)tain data on the cost of
this fundin$ source! Ta)le /0 shows the avera$e
annual cost of the three Mi)anco )ond issues
and of &ompartamosS fourth )ond issue! The
avera$e annual total cost of Mi)ancoSs three
)ond issues is M!. percent% consistin$ of a finan-
cial cost of 8!2I percent and operatin$ costs of
0!8 percent! The annual total cost of &omparta-
mosS fourth )ond issue is M!7 percent% with a
financial cost of 8!9. percent and operatin$ costs
of 0!8. percent! Mi)ancoSs eFperience could
serve as a $uide to the costs that &M+&s +re-
;uipa and Piura mi$ht eFpect should the# decide
to issue )onds% )ecause the three MFIs are simi-
lar in size and ris3 ratin$!
+ )rea3down of the operatin$ costs of &ompar-
tamosSs fourth )ond issue is shown in Ta)le /.!
Kn this BSL .9!9 million )ond issue% total oper-
atin$ costs were BSL 96.%000! These costs e;ual
7!0I percent of the total amount issued% for an
avera$e annual cost of 0!8. percent over the I-
#ear term of the )ond! + su)stantial portion of
these costs are fiFed, therefore% a minimum size
issue is needed in order to reasona)l# spread the
costs!
'orrowing vs& deposits at small M1Is& +t the
small MFIs% such as &M+&s &hincha and Pisco%
)orrowin$ is si$nificantl# less eFpensive than
deposits! This reflects the hi$h deposit rates that
these MFIs must pa# to attract savin$s and the-
hi$h operatin$ costs associated with deposit mo-
)ilization due to the lac3 of economies of scale!
'orrowing vs& deposits at medium4si,e M1Is&
Borrowin$ at the medium-size MFIs is less eF-
pensive than mo)ilizin$ deposits% primaril# )e-
cause of the lar$e amount of su)sidized credit
availa)le to these MFIs! For eFample% FI4
re-
ceives 79 percent of its )orrowed funds from
E+FIBK 'a second-tier lender in Bolivia(% for a
term of five #ears and at an avera$e annual in-
terest rate of 7!7 percent! &=+& Se:or de <uren
o)tains 76 percent of its )orrowed funds from
+$ro)anco 'a second-tier a$ricultural lender in
Peru(% for a term of .8 months and at an avera$e
annual interest rate of .!M percent!
'orrowing vs& deposits at large M1Is& The re-
sults are miFed for the lar$e MFIs! Kn the one
hand% deposits at &M+& +re;uipa cost less
overall '.2!. percent( than )orrowin$ './ per-
cent(% in part )ecause of the economies of scale
$enerated )# the lar$e volume of deposits! Kn
the other hand% at &M+& Piura% )orrowin$ is
less costl# '.0!9 percent( than deposits '..!8
percent(! This situation is pro)a)l# the result of
a si$nif icant amount of short-term )orrowin$
from )an3s in local currenc# usin$ li;uid forei$n
currenc# collateral that the MFI has deposited in
the )an3 ')ac3-to-)ac3 operations(! The MFI
o)tains this forei$n currenc# collateral from the
forei$n currenc# deposits of local savers!
In conclusion% the evidence anal#zed here con-
firms that% $enerall# spea3in$% capital is the most
eFpensive source of funds! The total costs of the
remainin$ sources var# accordin$ to the size of
the MFI! +ll fundin$ sources are ran3ed )# their
total cost from least eFpensive to most eFpensive
in Ta)le /2!
The relationship )etween the cost of deposits
and the cost of )orrowin$ depends to a lar$e
eFtent on the amount of su)sidized credit that is
availa)le to the MFI! This is particularl# true for
lar$e MFIs since the# usuall# achieve si$nificant
scale economies when attractin$ deposits!
Therefore% chan$es in the policies of $overn-
ments and donors with re$ard to su)sidized )or-
rowin$ ma# affect the ran3in$ shown in Ta)le
/2!
However% fundin$ sources are not chosen solel#
)ased on their costs! Kther factors pla# an im-
portant role% such as the macroeconomic conteFt%
the MFISs maturit# and the strate$ies it adopts to
mana$e its ris3s% as will )e seen in the neFt
chapter!
%able *#
+perating Costs o( CompartamosH Fourth Bond Issue
+perating Cost Component Amount
74S>8
Percentage o( %otal
+perating Costs
.! Investment )an3 '&iti$roup*BanameF( fees% e;ual to .!IX of
the BSL .9!9 mi llion issued% plus .IX value added taF 28I%MMI 7/X
2! IF& $uarantee fee .79%96I 22X
/! <e$al eFpenses 69%29I ..X
7! =atin$ a$enc# eFpenses I7%0.7 8X
I! =e$istration in national securities re$istr# /I%9 02 IX
9! Fees to )ondholdersS representatives /.%.08 IX
6! MeFican Stoc3 4Fchan$e listin$ and maintenance fees 2.%8IM /X
8! +uditin$ eFpenses ./%08M 2X
M! Kther eFpenses '&EB5 stud# and processin$% notices of pu)-
lic offerin$% promotion( 9%9/6 .X
%otal ./#0'-- #11B
Source: &ompartamos!
%able *'
2anking o( Funding Sources by %otal Cost
7(rom least to most e"pensive8
arge &FIs Small and &edium-Si:e &FIs
.! Bonds .! Borrowin$
2! eposits and )orrowin$ 2! eposits
/! &apital U shares /! &apital U shares
Note: It is assumed that small and man# medium-size MFIs cannot issue )onds )ecause
the# do have the minimum volume re;uired to underta3e an issue and )ecause the mar3et
would not )e receptive to )ond issues from these MFIs!
7! The Kptimal MiF of Fundin$ Sources for MFIs
&hapter . showed that deposit mo)ilization is
currentl# the dominant fundin$ source for
re$ulated MFIs in <atin +merica! &hapter / eF-
amined the total costs of the different fundin$
sources and found that for lar$e MFIs% mo)iliz-
in$ deposits and )orrowin$ are $enerall# the
most economical alternatives $iven that few
MFIs can issue )onds! For small MFIs% )orrow-
in$ is the least costl# source of funds! &hapter 2
anal#zed the characteristics and ris3s of the dif-
ferent MFI fundin$ sources!
"ithin this conteFt% it is important to reco$nize
that mo)ilizin$ deposits has allowed man# MFIs
to offer a new financial service to their clients
and move )e#ond their previous focus on micro-
credit! eposit mo)ilization has also reduced
financial costs% diversified MFI f undin$ sources
and facilitated increases in levera$e! Moreover%
increasin$ reliance on deposit mo)ilization has
made MFI fundin$ more sta)le )ecause deposits
)oth atomize the MFISs lia)ilities and reduce the
MFISs dependence on the sometimes unpredic t-
a)le decisions of $overnments and donors! "ith
the influence of second-tier institutions and do-
nors reduced% the mana$ement of MFIs has also
)ecome more autonomous!
"hile deposits have )ecome the principal source
of lia)ilities for MFIs in <atin +merica durin$
the last several #ears% deposits and )orrowin$
are oftentimes complementar# fundin$ sources
at man# institutions! Because of the lon$er terms
of much of the )orrowed funds% the# help solve
pro)lems of term mismatch and facilitate
medium-term financia l plannin$! Knl# in
situations of eFcess li;uidit# do deposits and
)orrowin$ )ecome su)stitutes for one another
instead of complements!
In addition to these tan$i)le )enefits% mo)ilizin$
deposits creates other )enefits for MFIs! These
)enefits include an enhanced pu)lic ima$e% the
$reater willin$ness of )orrowers to repa# loans
to an institution that o)tains its funds from the
local communit#% and the $reater levels of re-
sponsi)ilit# and prudence which are li3el# to )e
eFercised in the mana$ement of an intermediar#
that depends on pu)lic confidence!
+s anal#zed in $reater detail in &hapter /% mo)i-
lizin$ deposits results in hi$h operatin$ costs%
particularl# when deposits ta3e the form of small
savin$s accounts! Therefore% man# MFIs focus
most of their efforts on attractin$ time deposits%
even thou$h the# have hi$her financial costs! Kn
the other hand% time deposits have si$nificantl#
lower operatin$ costs% help to miti$ate term
mismatch ris3s% ma3e financial mana$ement
more predicta)le and facilitate li;uidit# man-
a$ement!
However% dependin$ primaril# on deposits for
fundin$ also carries ris3s! First% it increases li-
;uidit# ris3s% particularl# in <atin +merica
where financial mar3ets are not ver# deep! Sec-
ond% an eFcessive reliance on lar$e% institutional
depositors ma# produce concentration ris3s and
wea3en incentives to attract smaller deposits
from the $eneral pu)lic! Finall#% mo)ilizin$ de-
posits has inte$rated MFIs more closel# into the
local financial s#stem% which in times of crisis
and*or eFternal shoc3s ma# increase uncertaint#
and volatilit#! This happened to the MFIs in Bo-
livia durin$ the crises there in 200/-2007!
Eevertheless% even at small MFIs% the fact that
)orrowin$ can )e done at a lower total cost
should not lead the institutions to prioritize )or-
rowin$ and de-emphasize deposit mo)ilization!
In choosin$ )etween these two fundin$ sources%
it is important to consider a num)er of other fac-
torsG
The amount an MFI can )orrow from each
lender is t#picall# restricted )# loan limits
these lenders place on the amount of credit
the# are willin$ to eFtend to an# sin$le )or-
rower! This ma3es it more difficult for MFIs
to increase their overall lia)ilities! Man#
second-tier institutions set limits of one to
three times the MFISs capital! &ommercial
)an3s often impose strin$ent collateral re-
;uirements in addition to settin$ loan limits!
+ si$nificant amount of )orrowin$ concen-
trates fundin$ ris3s and ma# ma3e the MFI
overl# reliant on $overnments and donors%
which are the main sources of )orrowed
funds for the microfinance industr#! +s a re-
sult% li;uidit# mana$ement and the a)ilit# to
do medium-ran$e plannin$ ma# )e ad-
versel# affected! Moreover% )orrowin$ from
$overnments and donors ma# create at least
two other t#pes of ne$ative impacts for the
MFI! First% a culture and eFpertise ma# )e
)uilt within the MFI of courtin$ donors and
second-tier institutions rather than providin$
$ood service to depositors% undercuttin$ ef-
ficie nt% client-oriented mana$ement! Second%
in some cases% the MFI ma# )e forced to
serve clients or sectors that are unprofita)le
for the institution as a condition for receiv-
in$ the loan!
eposits atomize lia)ilit# ris3s and provide
the MFI with $reater sta)ilit#!
Increasin$ the volume of deposits ma#
reduce their operatin$ costs )ecause it is
possi)le to spread fiFed costs over a $reater
volume of funds and $enerate economies of
scale!
76
+ttractin$ deposits has several other si$nif i-
cant advanta$es! First% it permits the MFI to
3now its clients )etter )# eFamin in$ their
deposit histor#% thus reducin$ the cost of
anal#zin$ loan applications 'economies of
scope(! Second% $reater inte$ration into the
local and re$ional econom# helps to )uild
lo#alt# amon$ the MFISs clients! Third% de-
posit mo)ilization promotes $reater pru-
dence in MFI $overnance and mana$ement
since MFI eFecutives are held accounta)le
)# local depositors who continuall# monitor
performance! Fourth% havin$ a si$nificant
clientele of savers facilitates the develop-
ment and*or cross-sellin$ of other financial
products1such as loans% mone# transfers%
de)it and credit cards and microinsurance1
76
+ similar evolution toward lower operatin$ costs is
also seen in )orrowin$ and )ond issues% thou$h less
intensel#% $iven that the operatin$ costs of these latter
fundin$ sources are much lower to )e$in with!
thus $eneratin$ revenues that ma# )e used to
offset the operatin$ costs of deposits while
also providin$ clients with )etter service!
For these reasons% the relationship )etween )or-
rowin$ and deposits is characterized more )#
complementarit# than su)stitution! In the me-
dium term% it is desira)le for the most important
source of fundin$ to )e deposits% supplemented
)# )orrowin$ in order to len$then the avera$e
maturit# of the MFISs lia)ilities and perhaps re-
duce avera$e fundin$ costs! Su)se;uentl#% these
two sources could )e supplemented )# access to
local capital mar3ets% with the MFI issuin$
)onds! Ta)le // summarizes the advanta$es and
disadvanta$es of MFI )ond issues!
The final source of MFI finance% stoc3 shares%
have the advanta$e of )ein$ the most sta)le
fundin$ source% of a)sor)in$ ris3s )etter than
an# other fundin$ source and of offerin$ the
possi)ilit# of )ein$ levera$ed with lia)ilitie s!
Moreover% new shareholders ma# provide eFper-
tise% contri)ute funds in moments of crisis% im-
prove the reputation and credit ratin$ of the MFI
and facilitate access to technical assistance and
lines of credit! The disadvanta$es of stoc3 issue
include the hi$h cost of the capital attracted and
the si$nificant cost of $eneratin$ the information
that must )e provided to investors! Moreover%
new shareholders ma# $enerate conflicts over
$overnance of the MFI% particularl# if the# do
not share the MFISs social mission or if the# re-
;uire special eFit strate$ies!
Ta)le /7 presents the ma>or pros and cons of the
different fundin$ sources!
%H! FI5A5CIA !5<I2+5&!5% A5D
I%S I&PAC% +5 F45DI56 D!CISI+5S
"hen choosin$ its fundin$ miF% it is
important for an MFI to consider the financial
and economic environment within which it
operates! The MFI should tr# to ta3e advanta$e
of opportunities and avoid or miti$ate
potential pro)- lems!
%able **
Favorable and 4n(avorable Aspects o( &FI Bond Issues
Favorable Aspects 4n(avorable Aspects
4Ftends terms of lia)ilities
"hen issued in local currenc#% the result is a )etter
currenc# match with the MFI loan portfolio
=educes the cost of lia)ilities in the lon$er run
4na)les construction of a #ield curve for the
MFISs lia)ilities% which provides $uidance for set-
tin$ interest rates on the MFISs time deposits
Improves the MFISs ima$e
Generates refinancin$ ris3% $iven that when the )ond
matures% mone# ma# )e ti$ht in the national mar3et!
In this case% the MFI ma# have to pa# much hi$her
interest rates or ma# )e completel# una)le to place
new )onds!
Tendenc# of investors to follow herd )ehavior
%able *-
&aEor Advantages and Disadvantages o( the Di((ere nt Funding Sources
Funding Source Advantages Disadvantages
Savin$s accounts - +tomize lia)ilit# ris3s and provide
$reater sta)ilit#
- <ower financial costs
- Hi$her operatin$ costs% especiall# for microsavin$s
- Greater demands on li;uidit# mana$ement and
internal controls
Time deposits - 4na)le the MFI to mo)ilize si$nif i-
cant volumes of funds
- <ower operatin$ costs than savin$s
accounts
- &an ena)le )etter matchin$ of
terms and currencies
- Hi$h financial costs
- <i;uidit# ris3 due to $reater concentration
- =enewal ris3
Institutional deposits - &an )e a si$nificant source of funds
- <ow operatin$ costs
- Hi$h financial costs
- <i;uidit# ris3 due to $reater concentration
- =enewal ris3
- Tendenc# of investors to follow herd )ehavior
Su)sidized
)orro win$
- <ow financial cost
- Ma# have lon$er terms
- MFI ma# )e re;uired to serve clients or sectors
that are unprofita)le for it, potential for interest rate
ceilin$s to )e imposed on these loans
- Insta)ilit# and political influence
- MFI mana$ement ma# focus on pleasin$ donors
and $overnments instead of providin$ $ood service
to d epositors
- =ationin$ of funds
- Hi$h information and reportin$ costs
&ommercial
)orrowin$
- Ma# )e a si$nificant source of
funds
- <ow operatin$ costs
- Hi$her financial costs
- Strin$ent collateral re;uirements
- &lear lendin$ limits% overall and )# lender
Bonds - 4Ftend terms of lia)ilities
- Ma# reduce financial costs
- Si$nificant refinancin$ ris3
- Tendenc# of investors to follow herd )ehavior
Stoc3 - Provides the most sta)le funds%
oriented towards coverin$ ris3s
- &an )e levera$ed with lia)ilities
- Eew shareholders ma# provide
eFpertise% contri)ute funds in mo-
ments of crisis% improve the reputa-
tion and credit ratin$ of the MFI and
facilitate access t o technical assis-
tance and lines of credit
- Hi$h cost of the capital attracted
- Si$nificant cost of $eneratin$ information that
must )e provided to inves tors
- Eew shareholders ma# create conflicts in MFI
$overnance if the# do not share the MFISs socia l
mission or if the# re;uire special eFit strate$ies
Financial li)eralization and macroeconomic sta-
)ilit# create favora)le conditions for MFIs to
attract deposits and access capital mar3ets! &on-
versel#% financial repression% macroeconomic
insta)ilit# and hi$h inflation rates ne$ativel#
impact MFI efforts to attract deposits and access
capital mar3ets!
Pu)lic sector interventions in the financial s#s-
tem ma# create si$nificant distortions that affect
the development of microfinance! For eFample%
+$ro)anco% a pu)lic institution in Peru that
com)ines first tier and second tier functions%
directs su)sidized credit to MFIs for onlendin$
to the a$ricultural sector! In this wa#% it attempts
to compensate for the impact of the $overn-
mentSs financial recover# pro$ram for a$ricul-
ture! More $enerall#% the entr# of pu)lic devel-
opment )an3s into microfinance ma# adversel#
affect MFI development )ecause not all mar3et
participants face the same conditions! For eFam-
ple% development )an3s t#picall# have priv i-
le$ed access to pu)lic sector )ud$etar# re-
sources and can often operate without re$ard to
man# of the commercial realities faced )# MFIs!
The availa)ilit# of su)sidized lines of credit
from the $overnment should not lead to )lind
acceptance of these funds )# MFIs! +lthou$h
such funds ma# carr# low interest rates% it is im-
portant to ta3e account of the o)li$ations mi
- posed )# their use! For eFample% these o)li$a-
tions ma# include havin$ to provide loans to
certain re$ions or t#pes of clients that are not
necessaril# profita)le for the MFI to serve! In
addition% interest rate ceilin$s and other condi-
tions favora)le to the MFISs )orrowers ma# )e
esta)lished% which ma# have ne$ative impacts
on the rest of the MFISs loan portfolio! If su)si-
dized credit is used% the MFI should ma3e sure
that these funds are not an important share of its
overall lia)ilities! Ktherwise% the MFI could )e-
come overl# dependent on unsta)le funds and )e
su)>ect to political influence% )oth of which ma#
limit the MFISs a)ilit# to properl# mana$e its
operations!
&FI SIC! A5D
IABII%9 S%24C%42!
It is often assumed that the lia)ilities of lar$er
and more mature MFIs are more diversified and
that these institutions fund themselves primaril#
with deposits! It is often further assumed that
smaller MFIs rel# mostl# on )orrowin$% partic u-
larl# from donors and $overnments!
=ecent data on the 79 MFIs that mo)ilize depos-
its in the nine countries eFamined in &hapter .
clearl# show that MFI size is not stron$l# corre-
lated with lia)ilit# structure in these wa#s 'Ta)le
/I(! Eumerous small MFIs 'with assets of less
than BSL .0 million( have a hi$h share of de-
posits in overall lia)ilities% as shown )# the cases
of &=+&s &a>amarca '62!I percent(% <os +ndes
'66!/ percent(% &havCn '8/!I percent(% &ruz de
&halpNn '8I!. percent( and <i)ertadores '86!7
percent(% as well as &M+&s Pisco '98!0 percent(
and &hincha '67!M percent(! +t the same time%
lar$e MFIs 'with assets over BSL .00 million(
have similar ratios of deposits to lia)ilities 'with
a similar ran$e of variation(% as shown )# the
cases of Mi)anco '9.!8 percent(% Bancosol '6.!I
percent(% &M+& Piura '6/!/ percent(% Banco
Solidario '69!M percent(% Banco del Tra)a>o
'6M!I percent( and &M+& +re;uipa 'M0!I per-
cent(!
Further anal#sis of the Ta)le /I data shows a
wea3 positive correlation 'r \ 0!.0( )etween
MFI assets and the share of deposits in lia)ili-
ties% instead of the stron$ positive correlation
su$$ested )# the h#pothesized relationship! In
addition% there is a wea3 ne$ative correlation 'r
\ -0!.7( )etween MFI assets and the share of
)orrowin$ in lia)ilities% instead of a stron$ ne$a-
tive correlation!
<e$al% re$ulator# and institutional factors are
ver# important in determinin$ the structure of
lia)ilities at man# MFIs% as shown )# the fol-
lowin$ eFamplesG
%able *,
iability Structure o( -. atin American &FIs 7December *#0 '11*8
&FI Country Assets
74S> millions8
Deposits @ iabilities
7percent8
Borro3ing @ iabilities
7percent8
Banco del Tra)a>o Peru 2I0!7 6M!I ./!/
Banco Solidario 4cuador .8.!9 69!M .8!M
&M+& Piura Peru .72!2 6/!/ 27!.
Mi)anco Peru ./M!0 9.!8 .9!0
&M+& +re;uipa Peru .22!7 M0!I 7!6
Bancosol Bolivia ..7!9 6.!I 2/!6
&a>a <os +ndes Bolivia M8!9 I7!. /9!6
&M+& Tru>illo Peru M7!8 60!7 29!.
Financiera &alpiY 4l Salvador 8I!/ 7M!/ 76!6
Prodem Bolivia 66!8 98!M 27!8
&M+& &usco Peru I7!2 M2!9 /!6
&M+& Sullana Peru I2!9 98!2 26!/
&M+& Huanca#o Peru 79!6 88!8 I!I
FI4 Bolivia 79!0 I0!. 72!9
&M+& Tacna Peru /6!2 6/!. 27!2
5isiNn Para$ua# /9!8 80!2 ..!.
Financiera Familiar Para$ua# /7!I MI!. .!2
&M&P <ima Peru /.!7 7.!2 I0!2
&onfCa Eicara$ua /.!0 77!2 I2!2
&=+& San MartCn Peru /0!7 66!/ 22!0
Financiera 4cuatorial 4cuador 29!. .2!8 8/!8
&=+& Eor PerZ Peru 2/!6 68!/ .M!I
Findesa Eicara$ua 2/!2 2!/ M.!0
&M+& Ica Peru 22!I 87!/ M!9
FinamArica &olom)ia 22!7 60!8 20!2
Interfisa Para$ua# 2.!8 M/!M 0!0
&=+& &a>asur Peru 20!8 IM!2 /8!0
&=+& Se:or de <uren Peru 20!6 9.!0 /9!/
&M+& Ma#nas Peru 20!9 66!8 .9!M
&M+& Paita Peru 20!0 96!8 28!2
&ompartir &olom)ia .M!6 /I!9 90!/
&M+& el Santa Peru .8!M 62!. 2.!6
FincomZn MeFico .9!7 9!0 89!9
4l &omercio Financiera Para$ua# .2!0 M.!7 0!0
4cofuturo Bolivia ..!9 6.!9 29!M
&=+& @uilla)am)a Peru .0!/ 8.!I .9!2
Finsol Honduras M!6 72!. /6!7
&=+& &ruz de &halpNn Peru 6!8 8I!. .2!0
&=+& Profinanzas Peru 6!I 92!2 /9!I
&=+& <i)ertadores Peru 6!/ 86!7 6!6
&M+& &hincha Peru I!2 67!M .M!M
&=+& &a>amarca Peru I!. 62!I 2.!6
&M+& Pisco Peru I!0 98!0 2I!I
&=+& Pr#mera Peru 7!M /9!2 90!I
&=+& &havCn Peru /!0 8/!I .2!9
&=+& <os +ndes Peru .!M 66!/ .6!9
Average -,$# ..$, '/$-
Source: The )an3in $ superintendencies!
In MeFico% SKFK<s 'limited purpose fi-
nance companies(% such as &ompartamos%
are not permitted to mo)ilize deposits% )ut
can )orrow and issue )onds! This eFplains
&ompartamosS interest in developin$ an ac-
tive )ond issue pro$ram!
In Peru% the General Financial S#stem <aw
does not permit 4PHM4s to mo)ilize de-
posits or issue )onds% which means that
these MFIs must fund themselves lar$el#
throu$h )orrowin$! In the case of the
&M+&s and &=+&s% neither of these t#pes
of MFIs is permitted to issue )onds! In order
to diversif # their fundin$ sources% all three
t#pes of MFI are attemptin$ to chan$e the
law!
In &olom)ia% the &F&s 'commercial financ-
in$ companies(% such as FinamArica and
&ompartir% are not permitted to offer savin$s
accounts 'onl# time deposits(% which limits
their a)ilit# to mo)ilize deposits!
The a$e of the deposit mo)ilization pro$ram
ma# also pla# an important role in
eFplain- in$ an MFISs lia)ilit# structure!
Kf the 79
MFIs in Ta)le /I% four were capturin$
de-
posits in 200/ )ut not in 2000! The four
MFIs with new savin$s pro$rams are Finde-
sa 'Eicara$ua(% FincomZn 'MeFico(% Finan-
ciera 4cuatorial '4cuador( and Financiera
&alpiY '4l Salvador(! +t the end of 200/%
their deposits*lia)ilities ratios were 2% 9% ./
and 7M percent% respectivel#% well )elow the
avera$e for the 79 MFIs '99!I percent(!
+P%I&A &I; +F
F45DI56 S+42C!S
For MFIs% as for other financial institutions% the
principle of diversification1with due considera-
tion $iven to diversificationSs impact on costs1
is the aFis around which the institutionSs fundin$
strate$# should )e )uilt! +dherence to this prin-
ciple not onl# means that a variet# of different
fundin$ sources should )e used% within the le$al
and mar3et constraints faced )# each MFI% )ut
also that within each fundin$ source a variet# of
different se$ments of depositors and other pro-
viders of funds should )e accessed as well!
+lthou$h the evidence in &hapter / was incon-
clusive% there are li3el# to )e economies of scale
in deposit mo)ilization% which would ena)le
MFIs to reduce unit operatin$ costs as the# serve
$reater num)ers of savers! Further cost econo-
mies would )e possi)le if microsavin$s were to
)e rationalized! +t the same time% it is li3el# that
su)stantial further $rowth would permit MFIs to
reduce the interest rate premium the# must pa#
on deposits in order to attract savers from )an3s!
If MFIs can continue to reduce the operatin$ and
financial costs of attractin$ deposits in some or
all of these wa#s% the# should stron$l# consider
ma3in$ a fundamental decisionG to ma3e depos-
its their ma>or fundin$ source% aimin$ to lower
the costs of deposit mo)ilization over time and
reinforce their competitive advanta$e! +s will )e
seen )elow% in choosin$ a fundin$ strate$#% an
MFI must also consider its de$ree of maturit#
and the financial and economic environment in
which it operates!
Ma3in$ deposits the central fundin$ source does
not mean that MFIs should overloo3 the impor-
tant complementar# role of )orrowin$ or access
to capital mar3ets! The )est miF of fundin$
sources depends on the MFISs maturit# level
'how solidl# sustaina)le the MFI is and how
well-developed its deposit-ta3in$ and loan op-
erations are( and the characteristics of the coun-
tr# where the MFI is located! These characteris-
tics consist primaril# of the countr#Ss macroeco-
nomic and political sta)ilit#% as well as the level
of development of its financial and capital mar-
3ets! Ta)le /9 com)ines )oth criteria and pre-
sents five scenarios% each of which calls for a
different fundin$ strate$#! These five strate$ies
are intended to provide $eneral $uidelines for
MFIs on the )est miF of fundin$ sources! The
five scenarios are as follows!
In scenario % the MFI operates within a sta)le
macroeconomic and political environment%
which it eFpects to last over the medium term!
The MFI has achieved at least some level of sus-
taina)ilit# )ut is not amon$ the industr# leaders!
%able *.$ Funding Strategies
Characteristics o( the &FI
Characteristics o( the
!conomic and Political
!nvironment
&aturing &FIs &ature &FIs
Stable in the
medium term
Scenario . Scenario 7 eventuall# developin$ into
Scenario I in the lon$ run
4nstable
Scenario 2 Scenario /
+lthou$h the MFI is well alon$ in developin$ its
lendin$ operations% its efforts to mo)ilize depos-
its are much more incipient! The 4PHM4s of
Peru are $ood eFamples of MFIs in this scenario!
The )est fundin$ strate$# for scenario . is to tr#
to maFimize the diversification of fundin$
sources% supplementin$ the MFISs loans from
second-tier facilities with )orrowin$ from do-
nors and domestic and forei$n commercial lend-
ers% provided that the costs are reasona)le! MFIs
that o)tain authorizatio n to mo)ilize deposits
should underta3e this tas3 pro$ressivel#! 4spe-
ciall# at the )e$innin$% the# should $ive hi$hest
priorit# to time deposits )ecause of their lower
operatin$ costs and the more limited demands
the# ma3e on the MFISs information s#stems
and other infrastructure! Issuin$ )onds would
onl# )e possi)le in the medium term% after the
MFI has matured and full# esta)lished its finan-
cial via)ilit#! The MFI should pro$ressivel# in-
crease its levera$e and eFpand its capital )ase
throu$h a continuous polic# of reinvestin$ most
or all of its profits and addin$ new shareholders
throu$h private placements% especiall# if these
shareholders can provide technical assistance
and facilitate access to fundin$!
In scenario !% the maturin$ MFI operates within
an unsta)le macroeconomic and*or political en-
vironment! In this scenario% it is advisa)le for the
MFI to reduce the term of its lendin$% limit its
currenc# and term mismatches% reduce its lever-
a$e and see3 eFternall# )orrowed funds since
these are not so affected )# domestic li;uidit#
constraints! MFIs that o)tain authorization to
mo)ilize deposits should underta3e this tas3
with even more caution than in scenario .% at
least until the level of macroeconomic insta)ilit#
is reduced! The remainin$ aspects of the MFISs
fundin$ strate$# are similar to those discussed in
scenario .!
In scenario "% the MFI is clearl# sustaina)le and
has efficient lendin$ and deposit-ta3in$ opera-
tions! However% the macroeconomic and*or po-
litical environment is eFpected to remain unsta-
)le over the medium term! The MFISs fundin$
strate$# should include the followin$ pointsG
"hile deposits 'includin$ institutional de-
posits( should )e used as the MFISs )asic
fundin$ source% the# should not represent
more than 9I-6I percent of total lia)ilities!
The use of deposits should )e limited
)e- cause the unsta)le environment ma#
result inG 'i( important fluctuations over time
in the availa)ilit# of deposits 'increasin$
li;uidit# and other ris3s for the MFI( and 'ii(
deposits )ein$ a less relia)le source of
fundin$ $rowth% $iven the ne$ative impact of
macroeconomic insta)ilit# on the $rowth of
deposits!
Borrowin$ operations should )e stren$th-
ened and diversified as much as possi)le in
order to improve term matchin$ and prepare
for potential li;uidit# pro)lems created )#
the withdrawal of deposits!
It would not )e advisa)le to issue )onds in
the local mar3et due to the hi$h interest rates
and limited terms that accompan# insta)il-
it#!
The MFISs levera$e should )e reduced )e-
cause of the much $reater ris3s )rou$ht on
)# the insta)ilit#! The MFI should also
stren$then its capital accounts throu$h a
consistent polic# of reinvestin$ profits and
)# addin$ new shareholders throu$h private
placements! Forei$n shareholders ma# )e
especiall# advanta$eous since the# can
ma3e additional capital contri)utions with-
out the constraints imposed )# unsta)le local
conditions!
In scenario #% the MFI is clearl# sustaina)le and
operates in a sta)le macroeconomic and political
environment that is eFpected to last throu$h the
medium term! The followin$ points should
$uide its fundin$ strate$#G
The MFI should adopt deposits as its )asic
source of fundin$! eposits ma# come to
represent as much as M0 percent or more of
the MFISs lia)ilit ies if the financial and
operatin$ costs associated with deposit
mo)ilization can )e reduced sufficientl#!
+t the same time% the MFI should see3 to
atomize its deposit )ase% limitin$ the share of
total deposits provided )# institutional
clients1 such as mutual funds% pension
funds and insurance companies1in order
to control the ris3s associated with lar$e
withdrawals! &ompanies ma# not provide
a si$nificant share of MFI deposits% $iven
that these clients often re;uire financial
services 'includin$ chec3in$ accounts and
forei$n trade transactions( that MFIs
t#picall# do not provide!
The MFI should increase and diversif# its
)orrowin$ and consider issuin$ )onds1
in order to have sufficient li;uidit# reserves%
improve term matchin$ and )e a)le to
launch new products that re;uire financin$
over the medium term! The MFI should
choose )etween )orrowin$ and )ond issu-
ance considerin$ the advanta$es of each
source in terms of cost% maturit# and diversi-
fication! Some eFperts )elieve that )onds
should not represent more than .I percent of
a deposit- mo)ilizin$ MFISs total lia)ilities!
This limit would prevent the MFI from an
overdependence on small and shallow capi-
tal mar3ets% which could eFpose it to eFces-
sive refinancin$ ris3s!
The MFI should increase its levera$e to ta3e
advanta$e of the opportunities availa)le in
this environment! To support its $rowth% the
MFI should also increase its capital throu$h
an active reinvestment polic#% incorporation
of new shareholders throu$h private place-
ments of new shares and% su)se;uentl# per-
haps% throu$h pu)lic offerin$s of shares! The
possi)ilit# that more intense competition
will reduce financial mar$ins and% therefore%
the MFISs profita)ilit# has to )e considered!
This would ma3e it necessar# for the MFI to
rel# more on new share issues% rather than
the reinvestment of profits% in order to in-
crease capital!
Scenario $ ta3es scenario 7 to a much hi$her
level of development! Here% the MFI )ecomes
ver# successful and diversified and has a si$nif i-
cant mar3et share% all in the conteFt of continued
macroeconomic and political sta)ilit#! +n eF-
ample of this scenario is the Spanish savin$s
)an3s in recent decades! Hi$hl# atomized depos-
its of several 3inds 'includin$ chec3in$ ac-
counts( constitute the fundin$ )ase of these
)an3s! In man# cases% total deposits eFceed
loans! The Spanish savin$s )an3s have also de-
veloped )road relationships with the capital
mar3ets% )oth placin$ and purchasin$ securities
of various t#pes )ased on their investment and
fundin$ needs!
I! Best Practices
The last section of &hapter 7 made recommen-
dations on the )est miF of fundin$ sources% con-
siderin$ )oth the characteristics of the MFI and
the environment in which it operates!
This chapter presents )est practices in usin$
each of the fundin$ sources! In particular% the
first four sections discuss )est practices in mo)i-
lizin$ deposits% )orrowin$% issuin$ )onds and
issuin$ stoc3% respectivel#! The fifth section
$oes on to eFamine )est fundin$ practices in
times of crisis! Finall#% the siFth section presents
implications of all these )est practices for donors
and $overnments!
&hapter 2 of this stud# eFamines the different
MFI fundin$ sources in detail! Those discus-
sions are the primar# 'thou$h not onl#( source
for the )est practice recommendations made in
the neFt four sections!
D!P+SI%S
MFIs can use a variety o( products to mo)ilize
deposits! +s discussed in $reater detail in &hap-
ters 2 and /% the followin$ can )e esta)lished as
)est practices in choosin$ amon$ these productsG
Best Practices Comments
Give priorit# to mo)ilizin$ time de-
posits 'Ts(!
- Ts $enerall# have lower total costs and $reater short-term sta-
)ilit#!
- Ts facilitate matchin$ of assets and lia)ilities% and ma# attract
si$nificant num)ers of middle -class depositors!
- It is important to atomize time deposits )# mo)ilizin$ a critical
mass of them% thus avoidin$ over-reliance on a small num)er of
institutional or other lar$e depositors!
o not $ive priorit# to chec3in$ ac-
counts!
- &hec3in$ accounts have hi$h operatin$ costs!
- The# re;uire a powerful% interconnected information s#stem!
- Microenterprises do not demand the product ')ut small and me-
dium-size enterprises do demand it(!
+n MFI that has >ust started to mo)i-
lize deposits should $ive priorit# to
time deposits and later introduce sav-
in$s accounts!
- Time deposits are a much simpler product that $enerates fewer
transactions and has lower operatin$ costs per peso mo)ilized!
- Time deposits have $reater short-term sta)ilit#, once this client
)ase has )een developed% the MFI can pro$ressivel# introduce
savin$s accounts% which will attract far more clients!
Stud# in $reater depth the issue of mi-
crosavin$s% which is created )# a lar$e
num)er of depositors with low )al-
ances 'e!$!% BSL .00 or less( who pro-
vide onl# a small fraction of the funds
mo)ilized )ut carr# out man# transac-
tions% thus $eneratin$ hi$h operatin$
costs!
&onsider adoptin$ one of the followin$ alternativesG
- &ollect fees and*or increase the minimum account size in order
to fully cover the cost of services provided!
- evelop a pro$ressive polic# to reduce microsavin$s throu$h
fees and*or hi$her minimum account sizes!
- Massif# the num)er of microsavers in order to $enerate scale
economies!
Savers have widel# differin$ characteristics% ma3in$ client segmentation ver# important! MFI eFperience
leads to the followin$ recommendationsG
+nal#ze savin$s clients and determine
the most important se$ments% consid-
erin$ varia)les such as amount and
purpose of the deposit% a$e and $ender
of the depositors% and other factors!
Se$mentation allows the MFI to differentiate service levels and
mar3etin$ activities% adaptin$ them to the re;uirements of each
$roup!
+nal#ze depositor data)ases! Man# MFIs do not s#stematicall# eFamine their own data)ases%
thus losin$ opportunities to improve their savin$s products and
cross-sell other products!
MFIs that mo)ilize deposits must adopt a series of measures in the areas of organi:ation and
management$ Best practices in these areas include the followin$G
evelop detailed annual savin$s mo)i-
lization plans% with specific $oals )#
)ranch and product, provide the )ud$-
etar# resources re;uired to reach these
$oals!
- These savin$s mo)ilization plans should )e drawn up with the
involvement of central mana$ement and the )ranches!
- The creation of savin$s mo)ilization plans should )e part of
the MFISs strate$ic plannin$ eFercise% within which the MFI
should also esta)lish a medium-term fundin$ plan!
- 4valuate the implementation of the
savin$s mo)ilization plan at least once
ever# month and ta3e corrective ac-
tions as re;uired!
- 4sta)lish s#stematic comparisons
amon$ )ranches!
4ncoura$e staff to identif# with the MFISs $oals and contri)ute
to their achievement!
Periodicall# review interest rates% ta3-
in$ account of mar3et trends and the
MFISs needs! Give some fleFi)ilit# to
)ranch mana$ers to chan$e rates
within pre-approved ran$es!
To provide the MFI $reater fleFi)ilit# to respond to chan$in$
mar3et conditions% it ma# )e useful for mana$ement or an eF-
ecutive committee of the )oard to have the authorit# to modif#
interest rates% dul# reportin$ all chan$es to the full )oard of
directors!
ifferentiate interest rates )# re$ion
and client se$ment!
This allows the MFI to fine-tune its strate$# for penetratin$
different mar3ets and se$ments% ta3in$ account of variations in
competitive conditions!
&onsider creatin$ pa# incentives for
)ranch mana$ers and officers who deal
with depositors!
Pa# incentives ma# reinforce the motivation of 3e# personnel
to reach the MFISs $oals!
=einforce internal controls! Internal controls help avoid fraud lin3ed to deposits 'such as
occurred% for eFample% at one MFI where staff created phantom
loans usin$ time deposits as collateral% and then appropriated
these deposits without authorization from the affected clients(!
&hapter . provided ample evidence that MFIs can meet the competition from )an3s and increase their
share o( the deposit market$ Internal factors that eFplain their success include the followin$G
4fficient and personalized service to
clients!
In man# cases% )an3s provide their depositers% especiall# those
with small and medium-size accounts% with service that is slow
and impersonal!
Hi$h interest rates and attractive con-
ditions% transparentl# offered!
- MFIs often pa# hi$her deposit rates than )an3s and do not
char$e fees!
- Ban3 char$es often lac3 transparenc#!
Suita)le location of )ranches! It is ver# important for an MFI to set up a )ranch networ3 that
meets the needs of its diverse $roup of savers!
+n effective information s#stem lin3ed
to the )ranches!
4ffective information s#stems facilitate $ood client service and
mana$ement controls% and help to reduce operatin$ costs!
4ffective advertisin$ campai$ns% in-
cludin$ the >udicious use of raffles!
+dvertisin$ campai$ns allow MFIs to stren$then their ima$e
and disseminate information a)out the advanta$es of their de-
posit products!
For MFIs% deposit mo)ilization $enerates li;uidit#% term mismatch% interest rate and eFchan$e rate
'also called forei$n currenc#( ris3s! These mar3et ris3s should )e appropriatel# identified and mana$ed!
iAuidity and %erm &ismatch 2isks
Set up an asset-lia)ilit# committee%
made up of the principal mana$ers of
the MFI!
- This committee should identif# li;uidit # and term mismatch
ris3s and desi$n measures to miti$ate them!
- It should carr# out a similar process for interest rate and eF-
chan$e rate ris3s!
raw up an annual ris3 mana$ement
plan% includin$ a primar# cash flow
anal#sis that is updated at least
monthl#!
+n annual ris3 mana$ement plan ma3es it easier to anticipate
the need for different 3inds of fundin$ 'differentiated% for eF-
ample% )# term and currenc#( and pro$ram their ac;uisition!
4sta)lish and fre;uentl# update a $ap
model of assets and lia)ilities )# ma-
turit#!
+ $ap model allows MFIs to identif# those time periods when
there ma# )e asset*lia)ilit# im)alances and desi$n wa#s to deal
with them!
&ompute li;uidit# ratios dail#, these
ratios ma# )e stricter than those set )#
the )an3in$ superintendenc#!
Such ratios serve as an earl# warnin$ s#stem that the MFISs
li;uidit# is )ecomin$ impaired!
esi$n contin$enc# plans to deal with
situations of deterioratin$ li;uidit#% as
indicated )# the earl# warnin$ s#stem!
"ith such contin $enc# plans % an MFI can implement a well-
considered set of measures to improve its li;uidit# situation!
Maintain ade;uate li;uidit# reserves! These reserves should ta3e into account current economic con-
ditions and the seasonal and re$ional needs of the areas served
)# the MFI!
Perform stress tests! - These tests often assume the simultaneous occurence of earl#
withdrawals of time deposits% heavier-than-normal withdrawals
from savin$s accounts and a deterioration in the rate of loan
recoveries!
- The results are compared with li;uidit# reserves and the con-
tin$enc# plan!
- These tests allow MFIs to identif# their main points of vul-
nera)ilit# and develop preventive measures to deal with them!
+im to structure the maturit# distri) u-
tion of time deposits to )est suit the
MFISs needs, create incentives for cli-
ents to len$then time deposit matur i-
ties if needed!
If the macroeconomic situation so allows% an effective wa# to
reduce term mismatch ris3 ma# )e )# promotin$ time deposits
for terms $reater than one #ear!
Interest 2ate 2isk
Bse the $ap model to assess this ris3
and update it often!
- The $ap model allows an MFI to determine the ma$nitude of
the mismatch )etween its lia)ilities with varia)le interest rates
'such as savin$s accounts and short-term Ts( and its fiFed-
rate assets 'such as loans(!
- "hen the de$ree of mismatch is relativel# low% the ris3 ma#
)e a)sor)ed )# the MFI!
"hen the MFI depends on a si$nif i-
cant amount of varia)le -rate lia)ilities
'such as savin$s accounts and short-
term Ts(% it ma# )e useful to tr# to
match them a$ainst varia)le -rate loans
and*or short-term% fiFed-rate loans!
- 5aria)le -rate loans are often $ranted to small and medium-
size enterprises% t#picall# with medium-term maturities!
- Short-term loans create a si$nificant inflow of monthl# pa#-
ments to the MFI% which can )e relent at new interest rates!
More sophisticated MFIs ma# use du-
ration anal#sis instead of the $ap
model!
uration is the avera$e 'or effective( maturit# of a stream of
cash flows! uration anal#sis is an ideal tool for evaluatin$
interest rate ris3 )ecause of the fact that the chan$e in the pre-
sent value of a stream of cash flows produced )# a chan$e in
the interest rate is proportional to the duration of the stream of
cash flows!
!"change 2ate 2isk
To minimize eFchan$e rate ris3% MFIs
should lend in local currenc# to clients
producin$ nontraded outputs and lend
in forei$n currenc# to clients produc-
in$ traded outputs! The currenc# com-
position of the MFISs lia)ilities should
then )e matched to that of the resultin$
loan portfolio and other assets!
It is not sufficient to simpl# match the currenc# composition of
lia)ilities and assets, see &hapter 2!
4stimate a $ap model of assets and
lia)ilities )# currenc# at least once a
month% and set limits on the ratio of
the net forei$n eFchan$e position to
the MFISs capital!
MFIs should set limits on their net forei$n eFchan$e position
)ased on the forei$n eFchan$e mar3et outloo3! The more vola-
tile the eFchan$e rate% the more conservative those limits
should )e and the more fre;uentl# the $ap model should )e
updated!
If there is an eFcess suppl# of forei$n
currenc# deposits% the MFI ma# stimu-
late local currenc# deposits throu$h
hi$her rates and )etter conditions!
Kn the other hand% when economic sta)ilit# permits% MFIs ma#
opt for a deli)erate polic# of transformin$ forei$n currenc#
deposits into local currenc# loans!
Time deposits 'and )orrowed funds( in
forei$n currenc# ma# )e used as col-
lateral to o)tain )an3 loans in local
currenc#!
Such )ac3-to-)ac3 operations allow eFchan$e rate ris3 to )e
reduced!
+nother wa# to reduce eFchan$e rate
ris3 is throu$h hed$in$ operations!
Here% the MFI accesses the local swap mar3ets!
Mo)ilizin$ deposits means that MFIs must underta3e mar3etin$ activities in order to understand clientsS
characteristics and needs% assess their level of satisfaction with the services provided% )uild client lo#alt#%
use the communications media effectivel# and efficientl#% and develop a )rand name! The followin$ is a
)rief summar# of )est practices in these areas!
&arketing
Set up a mar3etin$ department or unit! The mar3etin$ unitSs main tas3s include anal#zin$ clients and
carr#in$ out mar3etin$ campai$ns% includin$ the use of the
communic ations media!
Perform mar3etin$ studies% )oth prior
to the openin$ of a )ranch and at the
overall MFI level!
These studies allow the MFI to )etter position itself in the mar-
3etplace% fine-tune its mar3et penetration strate$# and set ap-
propriate $rowth tar$ets!
Periodicall# carr# out client satisfac-
tion and ;ua lit#-of-service studies!
- Hire specialized companies% which use ;uestionnaires% focus
$roups and phantom clients!
- S#stematicall# anal#ze the comments in the MFISs su$$estion
)oF!
Implement pro$rams to promote lo #-
alt# amon$ the MFISs )est clients!
Such pro$rams should provide special services to these clients
and offer them the )est product terms and conditions possi)le!
Have a clear and efficient strate$# for
usin$ the communications media!
The ma$nitude of the resources committed to the communic a-
tions media ma3es it indispensa)le to periodicall# evaluate
these campai$ns!
Bse promoters to help mo)ilize depos-
its!
+ well-trained sales force ma# )e an effective and economical
means for promotin$ the MFISs time deposits!
Si$n)oards and sponsorships are an
efficient and economical alternative!
These stren$then the institutionSs ima$e and disseminate its
products amon$ 3e# client se$ments!
&arefull# evaluate the use of raffles as
a means to stimulate deposit mo)iliza-
tion!
This evaluation should consider the $eneral environment in
which raffles ta3e place% the positionin$ of the MFI in its mar-
3et and the need for funds% as well as the $oals% costs and ris3s
of the raffle pro$rams!
Stimulate the development of a )rand
name!
Brand name development stren$thens the MFISs ima$e and
clientsS identification with the institution!
S#stematicall# evaluate mar3etin$
campai$ns!
4valuations should include a cost*)enefit anal#sis of mar3etin$
activities!
B+22+=I56
4ven thou$h )orrowin$ is no lon$er the primar#
means )# which <atin +merican MFIs fund
themselves% it often still pla#s a si$nificant role
in li;uidit# mana$ement and in helpin$ to avoid
term and currenc# mismatches! In man# cases%
)orrowin$ is a means to o)tain lon$er-term
funds than deposits can provide! Moreover% the
availa)ilit# of $overnment and donor credit lines
is not closel# associated with local li;uidit# c#-
cles! Thus% )orrowed funds provide increased
fleFi)ilit# in the mana$ement of MFIs!
Best practices in the use of )orrowed funds in-
clude the followin$G
Borrowin$ from an increasin$l# diversified
set of lenders% particularl# to avoid eFces-
sive dependence on pu)lic second-tier insti-
tutions! Such institutions ma# reduce an
MFISs mana$erial fleFi)ilit# and su)>ect it to
political pressures that ne$ativel# impact its
sustaina)ilit#! MFIs should% and often do%
a$ree to pa# hi$her interest rates% at least in
the short run% in order to esta)lish relation-
ships with new lenders!
+voidin$ $overnment funds with conditions
that place the sustaina)ilit# of the MFI at
ris3% such as interest rate ceilin$s and di-
rected credit schemes!
Borrowin$ from donors% second-tier institu-
tions and forei$n commercial sources in or-
der to eFtend the term of the MFISs lia)ili-
ties and )rin$ $reater sta)ilit# to its fundin$!
Borrowin$ from domestic commercial
sources in order to meet short-term fundin$
needs and transform forei$n currenc# depos-
its into loana)le local currenc# funds
throu$h )ac3-to-)ac3 operations!
Bsin$% as a li;uidit# reserve% )alances not
#et drawn down from alread#-approved )or-
rowin$ as well as an# other funds the MFI
can o)tain% especiall# from second-tier insti-
tutions% donors and other eFternal sources
since these have have low correlations with
domestic li;uidit# c#cles!
Much medium- and lon$-term )orrowin$
can onl# )e done at varia)le interest rates!
This varia)le -rate )orrowin$ needs to )e
matched in some fashion on the asset side of
the MFISs )alance sheet! To do this% the MFI
ma#% for eFample% choose to ma3e varia)le
interest rate loans% especiall# to small and
medium-size )usinesses! Kr% the MFI ma#
sta# with fiFed-rate loans )ut shorten loan
maturities% especiall# for its microenterprise
clients! B# shortenin$ maturities% the MFI
$enerates a lar$e flow of loan repa#ments
each month that can )e relent at new interest
rates!
B+5DS
<atin +merican MFIs have limited eFperience
with )onds as a source of fundin$% with onl#
Mi)anco and &ompartamos havin$ re$ularl#
issued them!
The MFI )ond issues that have ta3en place so far
permit us to identif# some )est practices! + cen-
tral theme of man# of these )est practices is that
MFIs should develop a strate$# that is pro$res-
sive in its approach to the )ond mar3ets and fos-
ters the MFISs access to these mar3ets in the
medium term! The )est practices pertainin$ to
)ond issues are as followsG
In situations of macroeconomic insta)ilit#% it
is inadvisa)le to issue )onds )ecause of the
lac3 of li;uidit# in the econom# and the re-
sultin$ difficult# and cost of accessin$ the
capital mar3ets!
+n MFI t#picall# would issue its first )onds
for terms of .8 months to three #ears% in or-
der to familiarize the mar3et with the MFISs
characteristics and ris3 profile! Knce the MFI
has esta)lished itself in the capital mar3ets%
terms ma# )e eFtended to I-6 #ears!
If the aim is to attract institutional investors%
a credit enhancement ma# )e useful! This
provides a partial $uarantee of the principal
of the issue% which raises the )ondSs ratin$
and facilitates its sale!
If the first issues are directed at private cli-
ents% the involvement of a well-connected
investment )an3 and a $ood ris3 ratin$ ma#
o)viate the need for an eFternal $uarantee!
The MFI should evaluate the merits of o)-
tainin$ a hi$her ris3 ratin$ for the )ond to )e
issued% comparin$ the costs $enerated )# a
$uarantee or securitization with the )enefits
of pa#in$ a lower interest rate!
To facilitate )ond placements% MFIs should
en$a$e an investment )an3 with a solid
reputation and eFtensive relationships!
The MFI should ade;uatel# diversif# its
fundin$ sources% so as not to depend eFces-
sivel# on capital mar3ets that are often shal-
low and ma# create si$nificant refinancin$
ris3s for the MFI% particularl# at times when
there is little li;uidit# in domestic financial
mar3ets! omestic li;uidit# shorta$es ma#
stem from various causes such as ti$ht
monetar# polic#% recession or an eFternal
crisis! In view of all these considerations%
some eFperts su$$est that <atin +merican
MFIs that can mo)ilize deposits should limit
their )ond fundin$ to no more than .I per-
cent of their total lia)ilities!
Bond issues should )e preceded )# two ac-
tions! First% MFIs should develop a medium-
term strate$ic plan to define their total fund-
in$ needs for the neFt several #ears and the
contri)ution of each fundin$ source to meet-
in$ those needs! If )onds are to )e issued%
the plan should $ive the main characteristics
of the )onds and the optimum time to )e$in
their placement! Second% all )ond offerin$s
should )e carefull# prepared% in order to
minimize their financial and operatin$ costs!
S%+CI
In the area of stoc3 issuance% the MFIs have lim-
ited themselves to issuin$ new stoc3 in order to
formalize the reinvestment of profits and% to a
lesser eFtent% to carr#in$ out private placements
in order to add new shareholders! It is important
to note that the decision to capitalize profits
'transfer profits to the capital account( is irre-
versi)le% whereas retained earnin$s not #et capi-
talized can )e distri)uted at an# time! Thus% the
decision to capitalize represents a ma>or com-
mitment )# the current shareholders to the future
of the MFI!
"e derive the followin$ )est practices from the
precedin$ discussions of stoc3 issueG
It is important to define the role of profit
reinvestment and new share issuance within
the framewor3 of a medium-term strate$ic
plan! =einvestin$ profits and issuin$ new
shares have the advanta$e of providin$ the
most sta)le t#pe of funds to the MFI% which
are oriented towards coverin$ ris3s and can
)e levera$ed with lia)ilities! The disadvan-
ta$es of issuin$ additional shares include the
hi$h cost of the capital there)# o)tained and
the si$nificant costs of $eneratin$ the infor-
mation that must )e provided to investors!
MFIs that are considerin$ addin$ new
shareholders should thorou$hl# evaluate the
different t#pes of potential investors and the
advanta$es and disadvanta$es of each! In
addition to the pros and cons noted in the
precedin$ para$raph% this evaluation should
consider such positive aspects as the capac-
it# of new shareholders to ma3e additional
capital contri)utions% their potential contri-
)utions to the $overnance and mana$ement
of the MFI% the possi)ilit# that the# ma# im-
prove the institutionSs credit ratin$ and repu-
tation% and the potential for new sharehold-
ers to facilitate access to technical assistance
and credit lines! The MFI must also wei$h
the possi)le draw)ac3s of incorporatin$ new
shareholders% such as the possi)ilit# that
the# ma# have different investment horizons
and profit eFpectations% ma# not share the
same vision of the MFISs mission% and ma#
create conflicts in $overnance due to these
and other factors!
In $eneral% MFIs shouldG 'i( increase their
levera$e in $ood economic times and reduce
it in times of economic crisis and 'ii(
increase their levera$e as the# mature!
B!S% P2AC%IC!S I5
%I&!S +F C2ISIS
Microfinance has onl# )ecome a si$nificant
presence in <atin +merica since the .MM0s! The
recessions and )an3in$ crises eFperienced )#
man# <atin +merican countries at the end of the
.MM0s% in addition to the recession and social and
political insta)ilit# eFperienced )# Bolivia in
200/- 2007% presented MFIs with serious
challen$es! The lessons learned from these
events in the area of fundin$ ma# prove useful to
MFIs durin$ future crises! Best practices
includeG
Stren$then primar# and secondar# li;uidit#
reserves in order to prepare for possi)le re-
ductions in the amount of deposits held in
the MFI!
=educe the MFISs levera$e )# increasin$
capital or reducin$ de)t!
Bpdate and stren$then contin$enc# plans
desi$ned to miti$ate li;uidit# ris3s!
Stren$then the functionin$ of the as-
set*lia)ilit# committee!
If inflation is acceleratin$ and there are fre-
;uent chan$es in )orrow in$ and lendin$
rates% it is advisa)le for the )oard of direc-
tors to appoint an eFecutive committee that
is authorized to ad>ust interest rates! The
committee then reports )ac3 to the full
)oard!
=educe term and currenc# mismatches%
$iven the $reater volatilit# of the econom#
in times of crisis!
Increase the amount of )orrowin$ from sec-
ond-tier institutions% donors and eFternal
sources since these funds are t#picall# not
affected )# domestic li;uidit# constraints!
=evise $rowth plans for deposits to adapt
them to the new economic situation and
)rin$ interest rates in line with the mar3et!
+dopt a more restrictive loan polic#% with
lower portfolio $rowth rates% shorter loan
terms and hi$her interest rates!
Stren$then internal controls to counter
hi$her credit ris3 and ensure prudent li;uid-
it# mana$ement!
I&PICA%I+5S +F B!S% P2AC%IC!S
F+2 D+5+2S A5D 6+<!25&!5%S
It is increasin$l# reco$nized that the central role
of $overnments and donors in the development
of the microfinance industr# should not )e the
provision of funds to MFIs! =ather% $overnments
and donors should focus on fosterin$ conditions
in which MFIs can o)tain their own fundin$%
especiall# from depos its! In this wa#% MFIs
will )e a)le to access the funds needed for
their $rowth and the frontiers of the financial
s#stem will )e eFpanded in a sustaina)le wa#!
+n important part of fosterin$ conditions favor-
a)le to MFIsS o)tainin$ their own fundin$ is the
creation of an environment that is conducive to
the development of the entire financial s#stem!
This includes the promotion of macroeconomic
sta)ilit#% fleFi)le and open financial and capital
mar3ets% and a re$ulator# and supervisor#
framewor3 that esta)lishes appropriate and simi-
lar conditions for all financial intermediaries! It
is inadvisa)le to sin$le out MFIs for favora)le
treatment 'for eFample% )# lowerin$ their re-
serve re;uirements or $rantin$ them eFemptions
from certain taFes% such as the financial transac-
tion taF(% since this would $ive the MFIs a spu-
rious advanta$e vis-^-vis the )an3s and other
intermediaries! =ather% eFperience has shown
that well-mana$ed MFIs can compete on an
e;ual footin$ with )an3s in mo)ilizin$ depos its!
To help MFIs attract deposits% $overnments and
donors can ta3e the followin$ in itiativesG
Provide technical assistance in such areas asG
the desi$n and implementation of new prod-
ucts% se$mentation of clients% anal#sis and
use of the MFISs depositor data)ases%
stren$thenin$ mar3etin$ activities% and im-
provin$ information s#stems! The technical
assistance operation should )e desi$ned for
the medium-term since si$nificant results in
this area are $enerall# achieved onl# after a
len$th# effort!
For MFIs that capture savin$s% encoura$e
)orrowin$ onl# as a supplement to deposit
mo)ilization! This prevents an eFcessive de-
pendence on $overnments and donors as
well as the displacement of deposits as the
primar# fundin$ source and an important
service to )e provided in and of itself! MFIs
should esta)lish overall )orrowin$ ceilin$s
for themselves and set these at a relativel#
low percenta$e of deposits 'for eFample% 2I
percent(! MFIs that are not authorized to
capture savin$s are a different case! Gov-
ernments and donors can provide such MFIs
with fundin$ while also providin$ technical
assistance to prepare them for deposit mo)i-
lization!
Help to esta)lish deposit insurance funds
'IFs(% which ma# provide a more orderl#
resolution of )an3in$ crises while at the
same time stimulatin$ deposits% especiall#
from small savers! Such funds miti$ate or
eliminate depositor ris3s associated with
as#mmetric information and increase de-
positor confidence% which helps all partic i-
patin$ financial institutions% includin$ MFIs%
to mo)ilize deposits! IFs should )e $uided
)# the followin$ princ iplesG
The maFimum loss covered for
each person )# the IF should not )e
unlim- ited!
The IF premiums paid )# financ ial
institutions should var# with the ris3
level of each intermediar#% thus
providin$ an incentive for less ris3#
)ehavior!
eposit insurance should not )e
offered if prudential supervision is wea3!
This is )ecause IFs cause depositors to
reduce their oversi$ht of financial
institutions%
and therefore% prudential supervision
must )e read# to replace it!
Provide incentives to add new shareholders
to MFIs in order to improve their $overn-
ance% particularl# in MFIs with diffuse own-
ership structures% as occurs% for eFample%
when an EGK is the ma>orit# shareholder of
the MFI!
Governments and donors can also pla# an im-
portant role in helpin$ MFIs to access domestic
and international )ond mar3ets! This allows
MFIs to diversif# their fundin$ sources and o)-
tain lon$er-term finance in order to ma3e loans
to small and medium-scale enterprises as well as
to eFtend housin$ and fiFed-asset loans! MFI
)ond issues ma# )e stimulated )#G
Greater use )# donors and $overnments of
credit enhancements for MFI )ond issues!
onors and $overnments have a compara-
tive advanta$e over the capital mar3ets in
ta3in$ on this role )ecause of their 3nowl-
ed$e of the microfinance mar3et and the
MFIs! &redit enhancements should onl# )e
$iven to MFIs that meet strict eli$i)ilit# re-
;uirements% and support should onl# )e
temporar#! Such pro$rams ena)le MFIs to
esta)lish their reputation in the mar3et and
su)se;uentl# issue )onds )ac3ed onl# )#
their own reputation and colla teral!
Technical support for securitized )ond is-
sues )# MFIs% since securitization $enerall#
increases a )ondSs ratin$ ;uite si$nificantl#
and thus helps in its placement!
"hen eFistin$ re$ulations do not permit
MFIs to issue )onds% $overnments and do-
nors should wor3 to chan$e these re$ula-
tions!
In the lon$er run% MFIs must open up their capi-
tal structure to include new shareholders% )oth
international and domestic% in order to o)tain the
additional capital needed to fuel $rowth! To fa-
cilitate this process and provide a more transpar-
ent mechanism for transferrin$ shares% it is
advisa)le for MFIs to list themselves on the
stoc3
eFchan$e! Government and donor underwritin$
pro$rams can support this process!
It is also important to )riefl# note what $overn-
ments and donors should avoid doin$% so as to
help encoura$e MFIs to use appropriate fundin$
strate$ies! First% su)sidized credit from a donor
or second-tier institution ma# considera)l#
wea3en the MFISs incentives to mo)ilize savin$s
and use more commercial fundin$ sources! o-
nors and $overnments should avoid providin$
su)sidized credit% particularl# lar$e amounts of
it% for these reasons and also )ecause it also dis-
torts resource allocation! Second% $overnments
and donors should avoid distortin$ financial
mar3ets in other wa#s! For eFample% financial
transactions taFes% such as those recentl# intro-
duced )# the $overnments of Bolivia and Peru%
reduce the use and )enefits of the financial s#s-
tem% dama$in$ economic efficienc# and $rowth
and limitin$ the eFpansion possi)ilities of finan-
cial institutions1and thus should )e avoided!
Bi)lio$raph#
+ndo% +l)ert and Franco Modi$liani! .M9/! The V<ife &#cleW H#pothesis of Savin$G +$$re$ate Implic a-
tions and Tests! American (conomic /eview I/'.(GII-87!
+rshadi% Easser and Gordon 5! Darels! .MM6! Modern 1inancial Intermediaries 5 Mar.ets& Eew ?erse#G
Prentice-Hall!
Bazo)err#% 4duardo! 200/! The Bolivian 4Fperience of FFP Prodem! Presented at the conference% VPav-
in$ the "a# Forward for =ural Finance!W "ashin$ton% !&!G BS+I!
Branch% Brian and ?anette Dlaehn% editors! 2002! Stri.ing the 'alance in Microfinance: A +ractical
-uide to Mobili,ing Savings& "ashin$ton% !&!G P+&T Pu)lications!
Buchenau% ?uan! 2007! Innovations in MicrofinanceG <on$ Term <oans% =emittances% &ostin$! "ashin$-
ton% !&!G Frontier Finance International!
! 200/! Innovative Products and +daptations for =ural Finance! "ashin$ton% !&!G Frontier
Finance International!
&arter% Michael and 4liza "aters! 2007! =ethin3in$ =ural FinanceG + S#nthesis of the Pavin$ the "a#
Forward for =ural Finance &onference! "ashin$ton% !&!G BS+I!
&G+P! 2002! Savin$s +re as Important as &reditG eposit Services for the Poor! onor Brief 7!
"ashin$- ton% !&!G &onsultative Group to +ssist the Poorest!
! 2000! The Microfinance 4Fperience with Savin$s Mo)ilization! Technical Eote /!
4sch)orn% German#G "or3in$ Group on Savin$s Mo)ilization!
! .MM8! Savin$s Mo)ilization Strate$iesG <essons <earned from Four 4Fperiences! Focus
Eote ./! "ashin$ton% !&!G &onsultative Group to +ssist the Poorest!
&hao-Beroff% =eneA! .MMM! Self =eliance 5illa$e Ban3s% Mali! &ase Stud#! "ashin$ton% !&!G &G+P!
&harinoten3o% Stephanie% +nita &ampion and Eimal +! Fernando! 2007! &ommercialization of Microfi-
nanceG Perspectives from South and Southeast +sia! ManilaG +sian evelopment Ban3!
&rac3nell% avid% Henr# Sempan$i and Graham +!E! "ri$ht! 2007! &ostin$ and Pricin$ of Financial
ServicesG + Tool3it for MFIs! Eairo)i% Den#aG MicroSave!
4lser% <aura% +lfred Hanni$ and S#lvia "isniws3#! .MMM! &omparative +nal#sis of Savin$s Movilization
Strate$ies! "or3in$ Group on Savin$s Mo)ilization! 4sch)orn% German#G &G+P!
Farrin$ton% Todd and ?ulie +)rams! 2002! The 4volvin$ &apital Structure of Microfinance Institutions!
Microenterprise %evelopment /eview& "ashin$ton% !&!G Inter-+merican evelopment Ban3! e-
cem)er!
Fernando% Eimal +! 2007! Micro Success Stor#? Transformation of Eon$overnment Kr$anizations into
=e$ulated Financial Institutions! =e$ional and Sustaina)le evelopment epartment! ManilaG +sian
evelopment Ban3!
Fie)i$% Michael% +lfred Hanni$ and S#lvia "isniws3i! .MMM! Savin$s in the &onteFt of Microf inance
U State of Dnowled$e! "or3in$ Group on Savin$s Mo)ilization! 4sch)orn% German#G GTR and
&G+P!
Fitchett% el)ert! .MMM! Ban3 for +$riculture and +$ricultural &ooperatives 'B++&(% Thailand '&ase
Stud#(! "or3in$ Group on Savin$s Mo)ilization! 4sch)orn% German#G GTR and &G+P!
GNmez Soto% Franz! 200/! (voluci6n de los dep6sitos en los fondos financieros privados de microfinan4
,as en 'olivia: Tendencias y volatilidad! S4FI= Pro>ect% BS+I! <a Paz% BoliviaG evelopment +l-
ternatives% Inc!
GonzYlez-5e$a% &laudio! 200/! 4volution of Microfinance in Bolivia! =ural Finance Pro$ram! &olum)us%
KhioG The Khio State Bniversit#!
GonzYlez-5e$a% &laudio and ?or$e =odrC$uez Meza! 200/! Importancia de la macroeconomCa para las
microfinanzas en Bolivia! S4FI= pro>ect% BS+I! <a Paz% BoliviaG evelopment +lternatives% Inc!
Goodwin-Groen% =uth! 200/! Success in =ural Savin$sG How Kne onor <ed the "a#! onor Informa-
tion =esource &enter! "ashin$ton % !&!G &G+P!
Gorton% Gar# and +ndrew "inton! 2002! 1inancial Intermediation& &am)rid$e% MassachusettsG Eational
Bureau of 4conomic =esearch 'EB4=(!
Helms% Bri$it and <orna Grace! 2007! Microfinance +roduct *osting Tool& Technical Tools Series Eo! 9!
"ashin$ton% !&!G &G+P!
Hempel% Geor$e% onald Simonson and +lan B! &oleman! .MM7! 'an. Management: Text and *ases&
Fourth edition! Eew Hor3G ?ohn "ile# Q Sons!
Hirschland% Madeline! 200/! Servin$ Small epositorsG Kvercomin$ the K)stacles% =eco$nizin$ the
Tradeoffs! Microban.ing 'ulletin MG/-8! "ashin$ton% !&!G The Microfinance Information e[chan$e
'The MI[(!
?ansson% Tor! 200/! Financin$ Microfinance! The Micro% Small and Medium 4nterprise ivision! "ash-
in$ton% !&!G Inter-+merican evelopment Ban3!
Daddaras% ?ames and 4lisa)eth =h#ne! 2007! &haracteristics of 4;uit# Investment in Microfinance!
"ashin$ton% !&!G &ouncil of Microfinance 4;uit# Funds!
Maurer% Dlaus! .MMM! Ban3 =a3#at Indonesia 'B=I(% Indonesia '&ase Stud#(! "or3in$ Group on Savin$s
Mo)ilization! 4sch)orn% German#G &G+P!
Moore% +manda et al! 2000! Savin$ and +sset-+ccumulation Strate$ies Bsed )# <ow-Income
Individu- als! &enter for Social evelopment! St! <ouisG "ashin$ton Bniversit#!
Mo#o% Si)usiso et al! 2002! Bse and Impact of Savin$s Services amon$ <ow Income People in South +f-
rica! Eairo)i% Den#aG MicroSave!
Mutesasira% <eonard! .MMM! Savin$s and Eeeds in 4ast +fricaG +n Infinite 5ariet#! Eairo)i% Den#aG Mi-
croSave!
Ealela% =ichard! =ural Financial InstitutionsG Savin$s Mo)ilization! Dampala% B$andaG &entenar# =ural
evelopment Ban3!
Pi3holz% <#nn and Pamela &hampa$ne! Proactive =is3 Mana$ementG <essons for Microfinance Institu-
tions! Briefin$ Eote 22! Eairo)i% Den#aG MicroSave!
Portocarrero M!% Felipe and +lvaro Tarazona! 200/a! *osteo basado en actividades 7A'*8 en */A* Nor
+er9, resultados finales& Tru>illo! "e)siteG
httpG**www!c$ap!or$*productcostin$*eFperiences!html
! 200/)! eterminantes de la renta)ilidad en las ca>as rurales de ahorro # crAdito! In &arolina
Trivelli% et al!% Mercado y gesti6n del microcr:dito en el +eru! <ima% PeruG &I4S!
Portocarrero M!% Felipe and Guillermo B#rne <a)arthe! 2002! <as microfinanzas # la movilizaciNn de
depNsitos! +unto de ()uilibrio 66G22- 2/! <ima% PeruG Bniversidad del PacCfico!
=avicz% =! Marisol! Searchin$ for Sustaina)le MicrofinanceG + =eview of Five Indonesian Initiatives!
=ural &luster% evelopment 4conomics =esearch Group!
=h#ne% 4lisa)eth! 200/! Towards a Pac3a$e of Savin$s Indicators! Microban.ing 'ulletin MG.M-2/! "ash-
in$ton% !&!G The Microf inance Information e[chan$e 'The MI[(!
=ichardson% avid! 200/! Goin$ to the Barricades for Microsavin$s Mo)ilizationG + 5iew of the =eal
&osts from the Trenches! Microban.ing 'ulletin MGM-./! "ashin$ton% !&!G The Microfinance Infor-
mation e[chan$e 'The MI[(!
=o)inson% Mar$uerite S! .MM7! Savin$s Mo)ilization and Microenterprise FinanceG The Indonesian 4F-
perience! In The New ;orld of Microenterprise 1inance, eds! MarCa Ktero and 4lisa)eth =h#ne!
Bloomfield% &onnecticutG Dumarian Press!
=o)inson% Mar$uerite and Graham "ri$ht! 200.! Mo)ilizin$ Savin$s! Briefin$ Eote /! Eairo)i% Den#aG
MicroSave!
=utherford% Stuart! .MMM! Mone# Mana$ersG The Poor and Their Savin$s! Briefin$ Eote ./! Eairo)i%
Den#aG MicroSave!
Schmidt% =einhard H! and &!-P! Reitin$er! .MM7! *ritical Issues in Small and Microbusiness 1inance&
Fran3furt% German#G IP&!
5illafani I)erne$ara#% Marcelo! 200/! 4voluciNn de la cartera de los fondos privados # BancosolG Miran-
do las cifras desde una nueva perspectiva! Pro>ect S4FI=% BS+I! <a Paz% BoliviaG evelopment +l-
ternatives% Inc!
5ittas% imitri! .MMI! Thrift eposit Institutions in 4urope and the Bnited States! "ashin$ton% !&!G
"orld Ban3!
5o$el% =o)ert &! .M87! Savin$s Mo)ilizationG The For$otten Half of =ural Finance! In <ndermining
/u4 ral %evelopment with *heap *redit% eds! ale "! +dams% ou$las H! Graham and ?!! von
Pisch3e! Boulder% &oloradoG "estview Press!
5o$el$esan$% Blri3e! 200.! Investi$atin$ MicrofinanceG &a>a <os +ndes% Bolivia! Mannheim% German#G
Bniversit# of Mannheim!
"ehnert% Blrico! .MMM! =ural Ban3 of Pana)o '=BP(% Philippines '&ase Stud#(! "or3in$ Group on Sav-
in$s Mo)ilization! 4sch)orn% German#G &G+P!
"estercamp% &hristine! .MMM! Federation of the +$ricultural Savin$s and &redit Bnions% Benin '&ase
Stud#(! "or3in$ Group on Savin$s Mo)ilization! 4sch)orn% German#G &G+P!
"estle#% Glenn! 200/! 4;uipment <easin$ and <endin$G + Guide for Microfinance! "ashin$ton% !&!G
Inter-+merican evelopment Ban3!
"isniws3i% S#lvia! .MMMa! Banco &a>a Socia l 'B&S(% &olom)ia '&ase Stud#(! "or3in$ Group on Savin$s
! .MMM)! Microsavin$s &ompared to Kther Sources of Funds! "or3in$ Group on Savin$s
"ri$ht% Graham +!E! 2000! Two Perspectives on Savin$s Services! Briefin$ Eote .2! Eairo)i% Den#aG
MicroSave!
! .MMMa! + &ritical =eview of Savin$s Services in +frica and 4lsewhere! Eairo)i% Den#aG
MicroSave!
! .MMM)! Be#ond Basic &redit and Savin$sG evelopin$ Eew Financial Service Products
for the Poor! 4sch)orn% German#G &G+P!
! .MM8! Be#ond Basic &redit and Savin$sG evelopin$ Eew Financial Service Products
for the Poor! Eairo)i% Den#aG MicroSave!
"ri$ht% Graham +!E! and <eonard Mutesasira! 200.! The =elative =is3s to the Savin$s of Poor People!
Briefin$ Eote 9! Eairo)i% Den#aG MicroSave!
"ri$ht% Graham +!E!% avid &rac3nell% <eonard Mutesasira and =o) Hudson! 200/! Strate$ic Mar3etin$
for MicroFinance Institutions! Briefin$ Eote 22! Eairo)i% Den#aG MicroSave!
"ri$ht% Graham +!E!% =o)ert Pec3 &hristen and Imran Matin! 2000! Introducin$ Savin$s into a Micro-
&redit Institution U <essons from +S+! Briefin$ Eote 2! Eairo)i% Den#aG MicroSave!
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Eovem)er /0% 200 9
66
Anne" AF Step-by-Step Description o( Stock and Bond Issuance
-?
I5%2+D4C%I+5
Issuin$ de)t or e;uit# in domestic capital mar3ets is neither a ;uic3 nor simple process! This anneF
reviews the procedures% documentation% mar3etin$ and pricin$ eFercises that are necessar# for such
transactions in <atin +merica in $eneral! It does not provide detailed re;uirements and restrictions on a
countr#-)#-countr# )asis )e#ond some illustrative eFamples!
The structure of this anneF is as follows! "e )e$in )# discussin$ the need for MFIs to create a medium-
term strate$# for the fundin$ of all of its )alance sheet assets! The creation of this capitalization plan is
step one in the process of issuin$ de)t or e;uit#! "e then eFamine the pros and cons of de)t vs! e;uit#
issue% which sets the sta$e for step two of the issuance processG the choice )etween de)t and e;uit#! The
neFt two sections provide specific $uidance on how to $o a)out issuin$ e;uit# and de)t% respectivel#%
)rea3in$ the process down into three phases in each caseG preparator# phase% structurin$*ne$otiation phase
and closin$ the transaction! + final section loo3s forward to possi)le future developments that could
promote $reater access )# MFIs to stoc3 and )ond mar3ets!
S%!P #F %H! CAPI%AICA%I+5 PA5
+s microfinance institutions move toward formalization
and commercialization% the# are inevita)l# faced with the
decision of whether to raise de)t or e;uit# financin$% or
some com)ination of the two! This decision pla#s a
si$nificant role in the $overnance% mana$ement and ris3
profile of the MFI! +s a result% the first step MFIs should
ta3e when considerin$ eFternal sources of fundin$ is to
develop a capitalization plan or strate$# that is
appropriate to its individual circumstances! The
capitalization plan needs to consider the MFISs culture% its
approach to formalization% the re;uirements of its
)usiness plan% the MFISs ris3 tolerance% competitive
factors% as well as local re$ulator# and environmental
factors! +t its simplest% the capitalization plan answers a
)asic ;uestionG how will the )alance sheet assets )e
funded? +t a more compleF level% it determines the
compan#Ss levera$e% impacts profita)ilit#% creates
$overnance issues% and can chan$e the cultural values of
the institution! If well done% the MFI is assured of
sufficient fundin$ to meet its $rowth and profita)ilit#
o)>ectives and to maintain its desired ris3 profile!
However% if poorl# done% the MFI can run into difficult#
accessin$ fundin$ or it can find its $rowth constrained% its
profita)ilit# eroded% its ris3 profile deterioratin$% and its
competitive position undermined! + surprisin$ num)er of
MFIs lac3 a medium-term capitalization plan!
Prerequisites for a capitalization plan
edicated mana$ement team
+ stron$ and proven )usiness plannin$ process
+ strate$ic plan in place
+de;uatel# staffed treasur#*finance function
Institutional
preparation + ris3
mana$ement unit Creating a
capitalization plan
Identif# factors influencin$ capitalization
strate$#
@uantif# I-#ear fundin$ needs
4valuate different t#pes of de)t*e;uit# structures
etermine de)t*e;uit# structure
etermine )alance sheet structure
&reate a plan to mana$e new financial ris3s
Implementing a capitalization plan
edicate ade;uate resources to implementation
Sta# in touch with industr# sta3eholders
&onstantl# evaluate mar3et conditions
and alternative availa)le structures
etermine financial ris3 and cost of fundin$
Ma3e recommendations to mana$ement and
)oard
68
78
This anneF is )ased on a document prepared )# Greta Greathouse% GMI% <<&!
Creating a Capitali:ation Plan
There are several prere;uisites for the development of a capitalization plan! The first is that the MFI must
have a dedicated mana$ement team assi$ned to the pro>ect! Given that the development and
implementation of a plan will a)sor) considera)le amounts of mana$ement time% the tas3 should )e
formall# assi$ned to the MFISs finance team% with periodic pro$ress reportin$ to the &4K and )oard to
3eep the process on trac3 and provide a forum for discussin$ issues that arise! The responsi)ilit# should
not )e ta3en on solel# )# the &4K or a mana$in$ director!
7M
The second prere;uisite is that the MFI must
have a stron$ and proven )usiness plannin$ process% one that has produced a realit#-)ased )usiness plan
and strate$#! The capitalization plan does not eFist in isolationG it must relate to and support the fundin$
needs that are identified in the )usiness plan! Third% the MFI needs to have an ade;uatel# staffed
treasur#*finance function! 4arl# on in the formalization process% the MFI should identif# 3e# personnel
and functions that need to )e stren$thened and up$raded! +de;uate capa cit# in the treasur#*finance team
is critical to development and implementation of a capitalization plan! Finall#% the MFI must )e well
prepared institutionall# to meet the demands for information% eFplanations% >ustification and clarification
that are an intrinsic part of stoc3 and )ond issuance! This includes ade;uate forethou$ht and preparation
in such areas as ris3 mana$ement% credit ris3 and other policies and procedures!
In creatin$ a capitalization plan% an MFI must s#stematicall# identif# and understand the factors that can
have an impact on its capitalization strate$#! These include environmental% institutional and )usiness
factors% and are presented in Ta)le +.! The MFI should ;uantif# its current and future fundin$ needs
)ased on I-#ear )usiness plan pro>ections and mar3et conditions! +dditionall#% it should determine an
appropriate 'and evolvin$( de)t*e;uit# structure $iven the re$ulator# and mar3et constraints% the MFISs
own ris3 preferences and prudent shareholder protection! The treasur#*finance team must also )e
prepared to understand the relevant t#pes and sources of de)t and e;uit# that can )e used to fund the
MFI! The team must then select amon$ the different options considerin$ the chosen de)t*e;uit#
structure% pricin$ and other pros and cons!
Implementing a Capitali:ation Plan
The su)stantial commitment of time re;uired to develop and implement a capitalization plan ma3es it
criticall# important that the team responsi)le for the process is ade;uatel# staffed and has had the
necessar# trainin$! The implementation of a capitalization plan re;uires coordinated wor3% detailed
follow-up% communication with senior eFecutives and the )oard% and the participation of a num)er of
sta3eholders! The team responsi)le for the capitalization plan should consult on a re$ular )asis with its
donors% advisors% networ3s% other MFIs and individual )oard mem)ers! It should meet re$ularl# with
)an3ers% investment )an3ers% insurance companies% stoc3)ro3ers% pension funds% investors% re$ulators and
ratin$ a$encie s!
For )oth private and pu)lic issuances% the team will evaluate the mar3et conditions% includin$ the
availa)le t#pes of investors% their size re;uirements and other needs and eFpectations% maturit# options
and ris3 spreads! This should include a thorou$h stud# of transactions that have occurred in the mar3et
and the terms and conditions that have )een $ranted to compara)le ;ualit# institutions! The evaluation
should consider the anticipated mar3et reception of proposed financin$s and should include plans to
miti$ate identified issues or concerns! The team will eFamine alternative de)t and e;uit# structures for
7M
It is fairl# common for &4Ks or mana$in$ directors to tr# to ta3e sole responsi)ilit# for the $rowin$ fundin$
needs of an MFI! Given the su)stantial amount of time re;uired to properl# develop and implement a capitalization
plan% the responsi)ilit# should )e shared with a team!
%able A#
Factors In(luencing the Capitali:ation Strategy o( an &FI
!nvironmental Factors Institutional Factors Business Factors
2egulatory
&apital ade;uac# ratio 'Basel II(
&entral )an3 minimum capital
re;uirement for licensin$ and for
on$oin$ re$ulator# review
4Fistence of interest rate ceilin$
<imitations on t#pes of le$al
structures permitted to MFIs
<imitations on t#pes of
shareholders 'e!$!% limitation on
percent of forei$n ownership(
Issuance re;uirements
Structural Issues
=ole of EGK% past and future
4Fistin$ ownership structureG some
MFI le$al forms are more
pro )lematic for new investors% such
as credit unions% MFIs with lar$e
shares of $overnment ownership%
and housin$ mutuals 'mutuales(
4Fistence of appropriate ris3
mana$ement structures
4Fistence of ade;uate s#stems and
mana$erial reportin$
+dherence to )est p ractices%
particularl# in ris3 mana$ement and
transparenc#
Split of EGK investment into de)t
and e;uit# of the MFI
Transfer of assets 'move clients or
portfolio to new entit#(
&icro(inance Sector
<evel of mar3et penetration
&ompetition from other MFIs
&omp etition from other non)an3
financial institutions
&ommercial )an3 en$a$ement in
the sector
Sta)ilit#*volatilit# of clientsS
economic activities
4Fistence and level of covariant ris3
amon$ client activities 'e!$!% client
concentrations in monocrop
activitie s(
Financial &arket Development
Breadth and depth of local
capital*financial mar3ets
Investor li;uidit# preferences and
availa)ilit# of lon$er-term fundin$
<i;uidit# level of commercial )an3s
&apital mar3ets instruments
availa)le
Hields on local treas ur# )ill
instruments
Mar3et comfort with levera$e
=atin$ a$encies
Cultural Issues
Social mission vs! profita)ilit#
Kutreach am)itions
Mana$ement*)oard comfort level
with mana$in$ financial ris3
Kpenness to chan$e
Business Strategy
Pro>ected $rowth
Tar$et mar3et
&redit ris3 concentrations
&ompetition constraints to
profita)ilit#
Eew product introductions
&acroeconomic Conditions
General level of economic sta)ilit#
4vent ris3
&ountr# ris3 'for international
investors(
6overnance Issues
=ole of )oard of directors
Fiduciar# responsi)ilities
+llocation of )oard seatsG
shareholder representatives vs!
independent directors
Potential for mission drift*conflict
5otin$ ri$hts
&onflict-of-interest policies
+ppropriate structure for ris3
mana$ement reportin$
Senior mana$ement and )oard
performance evaluations
ividend polic#
Board terms
&ommittees
Financial Strategy
4Fistin$ cost of funds
Impact of choices on pro>ected
fundin$ costs
Sustaina)le interest rate
re;uirements
Financial ris3 mana$ement capacit#
rele vance and availa)ilit#! Finall#% it will determine the financial ris3s associated with alternative
fundin$ structures and how )est to mana$e these ris3s! This includes an anal#sis of appropriate
asset*lia)ilit# mismatch ran$es% li;uidit# ris3s% forei$n eFchan$e eFposure accepta)ilit#% fundin$
concentration issues% counter-part# ris3% )an3 relationship policies and the impact of alternative fundin$
choices on the cost of fundin$!
The impact of the proposed capitalization plan on the ris3 profile of the MFI should )e discussed at all
points of the process! The finalized plan and its recommendations should )e approved )# )oth the )oard
and the ris3 mana$ement structure of the MFI! The ris3 mana$ement structures of MFIs var#
considera)l#! +s the MFISs financial sophistication increases the treasur# and finance functions need to
)e eFpanded and reinforced! +dditionall#% the )oard of directors ma# create a ris3 mana$ement
committee to which the finance% audit and other departments must report! There ma# )e an +sset-<ia)ilit#
&ommittee '+<&K( as part of the ris3 mana$ement structure to deal with specific financial and other
ris3s!
I0
This committee has the responsi)ilit# for definin$ the institutionSs ris3 mana$ement policies and
procedures as well as monitorin$ )oth the results of and compliance with these policies! In some mar3ets%
such as Bolivia and Peru% the supervisor# a$encies have mandated that a ris3 mana$ement unit eFist in
re$ulated MFIs!
Finall#% a capitalization plan is not a static document! It chan$es to reflect an# alterations in the )usiness
plan% mar3et conditions% or other factors which could su)stantiall# alter the ris3 profile of the MFI% its
mar3et access% and the cost of fundin$!
S%!P 'F CH++SI56 D!B % <S$ !O4I%9
Pros and Cons o( Debt vs$ !Auity
The )alance )etween de)t and e;uit# financin$ can )e critical to the development and $rowth of an MFI!
+s an MFI prepares its capitalization plan% it should consider the pros and cons $iven in Ta)le +2 to help
$uide it in this choice!
Debt vs$ !AuityF An InvestorHs Perspective
From an investorSs perspective% an MFI with a hi$h $rowth potential over the neFt /-I #ears and with
a stron$ $ross mar$in to maintain its cash flow represents a stron$ e;uit# investment candidate! MFIs
that do not meet those criteria ma# still )e desira)le e;uit# investment candidates% )ut with an investment
structured to have lower ris3!
Fi$ure +. provides a $eneral overview of fundin$ instruments that span the ris3*return ran$e from senior
and securitized de)t 'least ris3# for investors( to common stoc3 'most ris3# for investors(! +lthou$h
man# of these de)t and e;uit# instruments are commonl# used in the Bnited States% their use in <atin
+merican capital mar3ets is much more em)r#onic!
S%!P *AF ISS4I56 !O4I%9
The steps re;uired to find and to o)tain e;uit# investments from private sources can )e or$anized
into three phasesG the preliminar# phase% the placement process and the closin$ phase! The de$ree of
formalit#
I0
+mon$ the t#pes of ris3s for which such committees would )e responsi)le would )e credit% li;uidit#% term
mismatch% interest rate% forei$n eFchan$e% capital ade;uac#% operational and $overnance!
%able A'
Advantages and Disadvantages o( Debt vs$ !Auity
Debt
Advantages Disadvantages
Kften% there is $reater local demand for de)t than
e;uit#
Greater administrative efficienc# for the MFI
4asier to ne$otiate
Shorter ne$otiation time
<ess intensive relationship with lenders than with
e;uit# holders
Interes t pa#ments ma# )e deducti)le as eFpense for taF
purposes
MFI does not lose control of the enterprise
=e$ulator# constraints to levera$e
Increased financial ris3 attached to mana$in$ hi$her
levera$e! e)t a$reements can limit the MFISs
alternatives when pro)lems arise!
!Auity
Advantages Disadvantages
<on$er-term commitment of funds 'althou$h some
investors ma# re;uire eFit strate$#(
Shareholders can )rin$ additional )enefits to the MFIG
Financial and )usiness eFpertise of shareholders
can help develop MFI capacit#
Some shareholders ma# )e a)le to respond to
emer$encies with additional capital
Some international and other shareholders can
)rin$ presti$e% which can improve the reputation
and ris3 ratin$ of the MFI% facilitate access to
credit lines and help with re$ulators
&onservative dividend polic# can facilitate capital
accumulation
ifficulties in identif#in$ e;uit# partners who are
full# dedicated to the MFISs social mission
isputes ma# arise with new investors in numerous
areas% such as eFit strate$#% personnel appointments%
)oard control and dividend polic#
The ne$otiation process can )e lon$er% re;uire
$reater mana$ement involvement% and result in a
lon$er documentation process
of the processes% the de$ree to which the phases overlap or are separated in time% the time re;uired to
complete the phases and the overall pro>ect and the use of outside intermediaries 'consultants% financial
advisors% investment )an3ers% and underwriters( will var# considera)l# amon$ MFIs! Factors that affect
the len$th and compleFit# of the process include the de$ree of preparation )# the MFI and its
capitalization team% the local re$ulator# and )usiness environments% the capacit# of sta3eholders and the
)oard of directors to assist the process% the clarit# and unanimit# of eFistin$ sta3eholders and the num)er
and t#pe of shareholders sou$ht!
!Auity Issue Phase #F Preliminary Phase
The activities of the preliminar# phase consist of the preparator# wor3 that is re;uired of the MFI prior to
initiatin$ the placement process! This wor3 should )e the responsi)ilit# of the capitalization team! Its
recommendations should )e communicated re$ularl# to senior mana$ement% the )oard of directors% and
the eFistin$ sta3eholders such as networ3s% donors% lenders and others as appropriate! The preliminar#
phase has three main componentsG
%evelopment of the *apitali,ation +lan
Step . a)ove outlines the process of developin$ a capitalization plan! This is an essential and often
overloo3ed step in )oth de)t and e;uit# issuance! +s noted earlier% the development of the capitalization
plan should include for either private or pu)lic stoc3 issuances an identification of availa)le t#pes of
$
e
t
%
r
n
Figure A#
2isk@2eturn Pro(ile o( Debt and !Auity Instruments
&ommon Stoc3
Preferred Stoc3
&onverti)le Preferred Stoc3
&onverti)le Su)ordinated
e)t
Su)ordinated e)t with
"arrants
Su)ordinated e)t with
=evenue Participation
Su)ordinated e)t
Securitized e)t
Senior e)t
$is&
investors% their size and return re;uirements and eFpectations and an# eFit strate$ies or other needs the#
ma# have!
More %etailed Analysis of +otential Types of Investors, Including Their +ros and *ons
Gainin$ $reater access to financial and capital mar3ets will re;uire that MFIs have a $ood understandin$
of investor needs% and how the# var# )# t#pe of investor! The differences in concerns% eFpectations and
strate$ies amon$ the various t#pes of investors mean that there ma# )e uni;ue stren$ths and wea3nesses
associated with each t#pe of investor for an# $iven MFI 'Ta)le +/(! The t#pes of e;uit# investors can )e
cate$orized in a num)er of wa#s and sometimes overlapG local vs! international% social vs! commercial%
pu)lic vs! private and MFI-specialized vs! $eneral! ifferent investors will have distinctl# different views
on a num)er of issues! These include dividend policies% social mission% votin$ ri$hts and control!
<nderstanding any *entral 'an., Securities or 2ther /egulatory /estrictions
5arious re$ulator# restrictions ma# )e applica)le to an e;uit# issuance! It is critical to ensure that the
MFISs le$al structure is compliant with these share issuance re$ulations! &ountries often re$ulate the size
of total share capital! =e;uirements such as the num)er of #ears an MFI has )een in )usiness and the
num)er of #ears of audited financial statements ma# also )e in place! Kwnership participation ma# )e
su)>ect to restrictions on forei$n ownership and ownership concentration% and restrictions on and approval
of ownership of more than a stated percenta$e of total shares! &ountries $enerall# also re;uire approval of
individuals proposed for )oard mem)ership!
Bo" A#F Descriptions o( Debt and !Auity Instruments
Senior debt is )orrowed mone# that is repaid ahead of )oth su)ordinated de)t and the compan#Ss shareholders in the
event the compan# is li;uidated!
Securiti,ed debt is created )# issuin$ )onds usin$ future cash flows as collateral! For eFample% the future cash flows
ma# )e the repa#ments of loans that microentrepreneurs ma3e to an MFI! Securitized de)t ma# )e more or less ris3#
than senior de)t! Securitized de)tholders have first claim on the future cash flows that have )een pled$ed as
collateral in the securitization 'for eFample% the proceeds of the MFISs entire loan portfolio or the housin$ loan
component of its portfolio(! Senior de)tholders have first claim on all assets that have not )een specificall# pled$ed
as collateral! Thus% securitized de)t ma# )e more or less ris3# than senior de)t depend in$ on which claim offers
investors )etter protection!
Subordinated debt is )orrowed mone# that is repaid after other de)ts )ut )efore the compan#Ss shareholders in the
event the compan# is li;uidated! Su)ordinated de)t often has a lon$ maturit# and thus ma# )e considered a form of
;uasi-e;uit#! Sometimes su)ordinated de)t contains a converti)ilit# feature such as the followin$G
Subordinated debt with revenue participation& This t#pe of su)ordinated de)t is fre;uentl# used in venture
capital finance or in the financial structurin$ of relativel# #oun$ companies! B# providin$ a wa# for the de)t
investor to have a defined participation in the revenue of the compan#% the investor can en>o# potentiall#
enhanced earnin$s on its investments without the compan# havin$ to $ive up an# ownership interest!
Subordinated debt with warrants&
$
This t#pe of su)ordinated de)t is issued to investors with a warrant attached!
The warrant holder is entitled to purchase a specified num)er of shares at a fiFed price )efore a specified future
date!
*onvertible securities are de)t or e;uit# investments that can )e eFchan$ed for somethin$ else of value! The most
common forms of converti)le securities are converti)le su)ordinated de)t and converti)le preferred stoc3% )oth of
which are converti)le into common stoc3! &onverti)le securities are viewed as a $ood wa# for investors to hed$e
their investments )ecause the# permit the investor to have a chance to participate in the compan#Ss e;uit#
appreciation!
*onvertible subordinated debt is a form of converti)le de)t in which the principal and*or interest due from the
de)t instrument is converti)le at the election of the holder into common stoc3 of the )orrowin$ compan# at an
a$reed upon conversion rate! Because it is a form of de)t% converti)le su)ordinated de)t has preference over
common and preferred stoc3 in the event of a compan#Ss li;uidation!
*onvertible preferred stoc. can )e converted into common stoc3 accordin$ to a predetermined formula! It is
often used )# venture capital investors! +s lon$ as the preferred stoc3 is held 'and not converted(% owners
)enefit from the preferences eFplained in the neFt para$raph!
+referred stoc. is a form of e;uit# ownership in a corporation that contains preferences over common stoc3! These
pre ferences normall# include the ri$hts to receive dividends )efore an# pa#ments to the holders of common stoc3!
Preferences could also include preferences in votin$ ri$hts% certain defined veto ri$hts% and ri$hts to redeem their
shares! In li;uidation% prefe rence shareholders are paid )efore common shareholders )ut after all creditors!
*ommon stoc. is the securit# most fre;uentl# issued )# companies% representin$ an ownership interest in a
compan#! In most cases% common stoc3 carries the ri$ht to vote for directors and on other matters affectin$ the
compan#! Holders of common stoc3 participate last in an# proceeds from the compan#Ss li;uidation!
I.
"arrants are a form of stoc3 option! In addition to )ein$ issued in con>unction with certain de)t or e;uit# instruments% the# are
also fre;uentl# included in the compensation paid to a )ro3er or investment )an3er for successfull# completin$ a capital-raisin$
transaction! The# are commonl# referred to as Ve;uit# 3ic3ers!W
%able A*
Attributes o( Social vs$ Commercial InvestorsF Pros and Cons (rom the &FIHs Perspective
I$ Social and Ouas i-Commercial Investors
a$ Donors
Pros Cons
Interest in demonstratin$ activit# in sector
&an easil# contri)ute si$nificant percenta$e of
total e;uit# of an MFI% as the re;uired funds
are small in comparison to other pro>ects
Political issues and strate$ies ma# chan$e
4Fit strate$# ma# )e re;uired
5iew of social mission ma# or ma# not coincide with other
directors and owners
&ontinued participation and )oard representation can )e
su)>ect to chan$e
b$ 6overnments
Pros Cons
Gives political clout to the or$anization
Interest in demonstratin$ activit# in sector
Political interference ma# put commercial $oals at ris3
Ma# not add value to )oard in terms of commercial or
financial eFpertise
Political issues and strate$ies ma# chan$e
Ma# discoura$e other investors
Polic# emphasis
c$ International 56+s
Pros Cons
<on$-term commitment to investment
&ontri)ution to institutional credi)ilit# and
ima$e
Eeed to satisf# all sta3eholders
d$ Socially 2esponsible Investors 7e$g$0 %riodos0 +iko0 Calvert8
Pros Cons
+re supportive of institutional mission
Ma# have eFperience in other MFIs
<ess emphasis on return on investment )ut
more on preservation of capital
Some have deterioratin$ returns% indicatin$ a wea3 or failed
effort which could impact their future investment capacit#
Ma# or ma# not add value to the )oard within the local
conteFt
II$ Commercial Investors
a$ Institutional Investors 7e$g$0 pension (unds0 insurance companies0 mutual (unds8
Pros Cons
&an )rin$ si$nificant amounts of capital
Sharper interest in detectin$ earl# wa rnin$
si$ns of potential pro)lems
=eturn and other criteria can ma3e it difficult to attract them
<ac3 of familiarit# with MFIs
ocumentation% terms and conditions can )e difficult
b$ Individual Investors 7privately-placed eAuity8
Pros Cons
Ma# have instit utional familiarit#% shared
values and )an3in$ or )usiness eFpertise
<ar$e private investors ma# have diver$ent views on
institutional development and direction
c$ Speciali:ed Investment Funds
Pros Cons
+ccumulated eFpertise across a variet# of
institutions
=apid response in decisionma3in$
Hi$h return eFpectations
Eeed for eFit strate$#
Ma# re;uire si$nificant level of investment
!Auity Issue Phase 'F Placement Phase
The placement phase t#picall# consists of a num)er of distinct activities which are detailed )elow! These
are the same whether the process is that of a formal Vprivate placementW
I2
usin$ outside advisors or
whether it is a process driven )# the MFISs own local and international contacts! +n MFI that is not usin$
an outside advisor )ut is instead contactin$ various investors drawn from its 3nowled$e of local and
international fundin$ sources would still follow the same $eneral procedures and would )enefit from
patternin$ its activities after the more formal model $iven here! This is )ecause few if an# investors are
willin$ to commit si$nificant sums of mone# without receivin$ detailed information and ma3in$ due
dili$ence visits!
+reparation of an 2ffering Memorandum
+n offerin$ memorandum is a detailed document that provides information a)out the MFISs performance
and histor#% placin$ it in the conteFt of the local industr# and hi$hli$htin$ its competitive
differentiation and )usiness strate$#! This document should spea3 to investor needs and sensitivities
and provide answers to the ;uestio ns that would most li3el# )e in the minds of the readers! MFIs
should develop a professional format for presentin$ their financial performance% presentin$ it in the
conteFt of national% <atin +merican and international MFI performance! The offerin$ memorandum
should also provide a clear view of the future direction of the institution% includin$ details from its
I-#ear )usiness plan% financial pro>ections and the strate$# that drives these plans and pro>ections!
+reparation of the =/oad Show> or Investor +resentations
The MFI and its capitalization team should thorou$hl# prepare for individual and $roup meetin$s with
proposed investors! Such meetin$s are fre;uentl# held on a less formal )asis in the MFI sector )ecause of
the potential investorsS familiarit# with the institution! However% the MFI should not ta3e investors for
$ranted and should prepare presentations that are in-depth% up-to-the-minute and professional! Senior
mana$ement and all staff who will )e participatin$ in the presentations should )e well )riefed a)out
the areas of most li3el# concern to the investors% and the# should prepare for and practice respondin$ to
potential ;uestions!
Supportin$ materials to use for the road show should )e developed well in advance and )e availa)le to all
MFI eFecutives in order to help them prepare for the meetin$s! Ta3in$ a )road view of what will )e
needed is )est% and the MFIs should )e particularl# prepared to address such issues as credit ris3
mana$ement% financial ris3 mana$ement% internal control and auditin$! The institution should have polic#
and procedures manuals on these topics! Such preparation is never wasted% as the neFt phase% that of due
dili$ence% will re;uire the eFistence of such documents!
Investors? %ue %iligence
The MFI can eFpect to receive due dili$ence visits from all seriousl# interested investors! Prior to the
visits% the MFI should prepare and send due dili$ence materials% which ma# include copies of financial
statements% the I-#ear )usiness plan% assessments and ratin$s% materials provided to re$ulator# a$encies
I2
In the Bnited States% Vprivate placementW is a specific le$al term referrin$ to the offer and sale of a securit# )# a
)ro3era$e firm! +lthou$h not involvin$ a pu)lic offerin$% it often involves specific re$ulator# compliance
conditions and other re$ulator# restrictions attached to the transaction! Informall#% the term is also used to simpl#
descri)e the process of raisin$ mone# from private sources% with or without the use of a )ro3era$e firm!
and critical polic# and procedures manuals! Individual investors ma# re;uest additional information prior
to or durin$ the on-site visit! =e$ulated MFIs should eFpect potential investors to delve into the issue
of the MFISs level of compliance with prudential norms!
The political and macroeconomic conditions of the countr# can influence the due dili$ence process!
International investors will have concerns a)out countr#% eFchan$e rate and transfer ris3s! <ocal investors
ma# )e hi$hl# 3nowled$ea)le a)out loomin$ factors such as elections% event ris3s% and economic pitfalls%
which could seriousl# impact the financial sector and therefore ma# $enerate re;uests for additional
sensitivit# anal#ses! +n MFI that has ris3 mana$ement s#stems and procedures in place will )e a)le to
respond to man# of these concerns! Investors will feel more comforta)le ta3in$ on a certain level of ris3
if the MFI has a solid and transparent s#stem for mana$in$ its ris3s!
Kn-site visits can )e time consumin$ for mana$ement! The# t#picall# ran$e from two to five da#s and
re;uire the availa)ilit# of a conference room for the use of the visitors% a heav# schedule of meetin$s with
each department% site inspections and meetin$s with senior eFecutives! If possi)le% and if there are
interested investors who a$ree% the MFI will )enefit from havin$ due dili$ence processes occurrin$
simultaneousl# for some if not all of the visitin$ investors!
The mana$ement of the due dili$ence process is difficult% )ut advance preparation will help the MFI
emer$e from the process more efficientl#! T#pical due dili$ence does not end when the visitors leave,
there ma# )e on$oin$ re;uests for information and clarifications! The efficienc# of the due dili$ence
process will )e affected )# such issues as the investorsS eFperience with MFIs and their own internal due
dili$ence re;uirements! 4Fperienced investors have their own due dili$ence formats which are )ased on
their re;uirements for the initial approval of the investment! +lthou$h their processes ma# )e more hi$hl#
detailed% their or$anized structure ma3e it ;uite clear to the MFI what is re;uired! Traditional MFI
investors will )e more familiar with the nature of the MFISs )usiness and how to measure its performance%
which will facilitate the due dili$ence process! <ocal and international investors ma# have widel#
differin$ processes and re;uirements!
Structuring the Transaction
EeFt% the MFI must structure its shareholdin$, that is% it must decide on the overall composition of
shareholders 'the percenta$e of shares $oin$ to the EGK% donors% private investors% and others( and the
terms and conditions of shareholdin$! This structurin$ should )e )ased on conditions in the private e;uit#
mar3ets and in the financial and microfinance sectors% as well as a complete evaluation of the compan#Ss
)usiness and financial re;uirements! The MFI must match its needs a$ainst investor sensitivities and
re;uirements!
Some of the most difficult points for ne$otiation are t#picall#G
5aluin$ the compan# and pricin$ its shares! In developed mar3ets% privatel# placed shares are usuall#
priced )elow mar3et valuation )ecause the# are less li;uid!
+s#mmetrical terms for different sta3eholders% in which insiders such as eFecutives and emplo#ees
receive preferential pricin$% can lead to conflict with new investors!
&onversion of eFistin$ loans from donors or social investors to e;uit#! This ma# or ma# not )e
feasi)le )ecause of policies% restrictions% countr# eFposure and other factors!
=e;uirement for eFit strate$ies )# some investors!
+llocation of shares and the issue of who will control the MFI% for eFample% the EGK% outsiders% or a
loose confederation of shareholders!
How to allocate )oard seats fairl# while incorporatin$ needed independent directors!
=eturn eFpectationsG dividend polic# and the issue of mission conflict!
=i$hts of minorit# shareholders% particularl# when an EGK intends to retain ma>orit# control! These
ri$hts mi$ht include% for eFample% the need for a superma>orit# to a$ree to certain chan$es% so that
someone with I. percent of the shares will not control ever# vote!
Some investors ma# re;uire anti-dilution clauses in their a$reements! These clauses ensure investors
of their relative price advanta$e or percenta$e of ownership!
The concerns of different t#pes of investors fre;uentl# manifest themselves in the t#pes of issues that are
critical to them durin$ the ne$otiations! The concerns of international investors ma# )e more specific and
at times more demandin$ than those of local investors! International investors often see3G $uarantee of
certain minorit# shareholder ri$hts% pa#ments for )oard participation and travel% pa#ments of le$al fees%
restrictions on the ri$ht of the MFI to sell additional shares and the price re;uired ')oo3 or )etter(% forei$n
eFchan$e covera$e on the value of their e;uit#% appropriate local and international co- investors%
a documented eFit strate$# and a redesi$n of the eFecutive structure to include additional positions such
as chief operatin$ offic er or chief financial officer! <ocal investors ma# have different priorities!
<ocal investors are often close to the initial founders of the MFI% who )rin$ them in as investors and )oard
mem)ers hopin$ to develop a shareholder )ase that is supportive of the founders!
Negotiating the Terms
Mana$ement% the )oard mem)ers and the potential investors ne$otiate the terms )ased on institutional
needs% mar3et conditions and other factors! The $reater the num)er of investors that are involved in the
transaction the lon$er and more difficult the process can )e!
Investor Approval and Acceptance of
Terms
4ach investor will have its own internal procedures for investment approval% which ma# include
approvals )# its investment committee and )oard!
!Auity Issue Phase * F Closing the
%ransaction
The closin$ phase consists of )oth internal and eFternal activities! The eFternal activities are partl#
outside the control of the MFI and ma# cause the closin$ phase to ta3e lon$er than anticipated!
+reparation of Timetable
+t this point% the MFI should prepare a timeta)le for closin$% which is communicated to all parties! The
timeta)le will include a detailed list of activities to )e accomplished prior to closin$! This is particularl#
important for MFIs that are )ecomin$ re$ulated since such entities ma# have a phased-in need for capital
in order to meet capital ade;uac# re;uirements as assets are transferred from the old entit# to the new and
as the new entit# )oo3s new )usiness! The MFI will also need to meet minimum capital standards 'e!$!%
BSL . million(! The timeta)le ma# need to allow for the issuance of capital in multiple tranches in order
to efficientl# meet the MFISs capital ade;uac# re;uirements without carr#in$ eFcessive levels of idle
capital!
Issuing *ommitment 0etters
+ll investors will )e re;uired to issue a formal commitment letter statin$ the terms and conditions of their
investment! The timeta)le should esta)lish a deadline for the issuance of these commitments in order to
3eep the transaction on schedule!
'oard of %irectors?s Acceptance of *ommitments and Allocation of Shares
+ll offers should )e reviewed )# the MFISs mana$ement and presented to the )oard with
recommendations! +llocation of shares% aside from re$ulator# constraints% should )e $uided )# the MFISs
capitalization plan!
/egulatory *learance 7as
re)uired8
There will t#picall# )e re$istration and re$ulator# approvals re;uired of the proposed shareholders%
particularl# if the MFI is re$ulated )# the )an3in$ superintendenc#! In some countries% there ma# )e
restrictions on the t#pes of shareholders permitted% includin$ a maFimum percenta$e of forei$n
shareholdin$! In man# countries% shareholders with more than five percent of total shares must )e
reviewed )# the )an3in$ superintendenc#! +dditionall#% man# countries re;uire clearance of all proposed
directors!
%ocumentation
There is little standardization of investment documentation in the microfinance sector! Standards tend to
)e driven )# the lar$er international investors such as the IF& and IP& when the# participate in a
transaction! =educin$ the time and eFpense of documentation can )e facilitated )# tr#in$ to $et the
investors to a$ree to use a sin$le law firm and to conform their documentation processes!
%rawdown of 1unds
The documentation should provide for the timin$ and means )# which the MFI will receive the investorsS
funds! These means can include the use of an escrow account into which the investors place their funds%
with release pendin$ the MFI meetin$ certain prescri)ed terms% such as the deliver# of documents
showin$ all re;uired filin$s and re$ulator# approvals! +lternativel#% the investors ma# retain control of
the funds and release them in tranches upon receivin$ a formal re;uest from the MFI!
*omposition of 'oard of %irectors and 'oard
*ommittees
For MFIs that are )ecomin$ re$ulated% the )oard of directors of the MFI will chan$e as it achieves
re$ulated status! The old EGK )oard will have to )e altered to reflect the interests of all MFI
shareholders! These chan$es can )e difficult since not all of the ori$inal founders*directors ma# )e
included in the new )oard! Similarl#% the $overnance re;uirements for a capital-)ased% re$ulated
institution will )e considera)l# more serious and ma# re;uire su)stantial chan$es to the MFISs
mana$ementSs st#le and culture! These issues should have )een full# discussed with the old )oard well in
advance of the closin$ phase! +ddressin$ these issues is% in fact% a suita)le activit# for inclusion in the
capitalization plan1at the earliest sta$e of the e;uit# issue process!
S%!P *BF ISS4I56 D!B%
Man# of the steps for de)t issuance are similar to those for e;uit# issuance% althou$h there are some
important differences! The steps for issuin$ de)t can also )e or$anized into three phasesG the preliminar#
phase% the structurin$*ne$otiatin$ phase and the closin$ phase!
Bond Issue Phase #F Preparatory Phase
The in- house activities of the preparation phase ena)le the MFI to identif# its financin$ options and
to match them a$ainst its needs and strate$#% identif#in$ in the process the most li3el# sources of
appropriate finance and the time needed to complete the financin$! Thorou$h preparation )# the MFI will
$reatl# facilitate and eFpedite the de)t issuance% and so this first phase of the process is not somethin$ that
should )e minimized!
%evelopment of the *apitali,ation +lan
Step . a)ove outlines the process of developin$ a capitalization plan! This is an essential and often
overloo3ed step in )oth de)t and e;uit# issuance! "hen definin$ the de)t issuance part of the
capitalization plan% an MFI needs to pa# particular attention to its cash flow pro>ections% asset*lia)ilit#
structure and ris3 mana$ement processes! Pro>ection of the funds an MFI needs to support its $rowth and
maturin$ de)t should )e )ased on well- prepared cash flow estimates derived from the )usiness plan
and )ud$et! The capitalization plan should include a realistic timeline for the activities necessar# to have
the proceeds from the de)t issuance availa)le when needed! The MFI should have updated )usiness plans%
)ud$ets% operatin$ histor# and other )ac3$round information availa)le for presentation to investors!
Analysis and <nderstanding of (xisting Mar.et *onditions
+t least a part of the anal#sis and understandin$ needed here is underta3en in creatin$ the capitalization
plan 'step .(! The MFI must evaluate mar3et conditions% includin$ maturit# options% ris3 spreads and the
availa)le t#pes of investors and their size re;uirements and return eFpectations! Because there is a limited
trac3 record of MFI )ond issuance% compara)le local or forei$n issuances in the re$ion should )e
anal#zed and considered as possi)le )enchmar3s! These compara)les could include issuances )# )an3s%
non)an3 financial institutions and new issuers in other industries!
Identification of +otential Types of Investors and Structures
MFIs should consider the size% maturit#% interest rate and structure of the proposed )ond issue and match
these factors a$ainst the availa)le t#pes of investors and their preferences! If there is a role for credit
enhancements 'includin$ partial or total $uarantees(% securitizations or other structures% these should )e
eFplored as well! In identif#in$ potential structures% an MFI shouldG
Identif# the appropriate t#pe of de)t o)li$ation for its needs 'see Fi$ure +.% a)ove(!
etermine a tar$et interest rate% )ased on the anal#sis of other )ond issues and its cost of funds from
other sources 'deposits% loans and stoc3 issue(!
efine an appropriate structure% includin$ the maturit# of the )ond issue and the use of a
credit enhancement! 4ven if a credit enhancement is not re;uired to issue the de)t% its use ma#
permit the MFI to achieve a lon$er maturit#% lower interest rate or lar$er size )ond issue!
Bnderstand the eFpenses of issuance% includin$ the cost of a credit enhancement!
(valuation of *redit (nhancements
+s seen in &hapter 2% )oth &ompartamos and Mi)anco have used credit enhancements to issue )onds
with more favora)le conditions% such as lon$er maturities% lar$er amounts and lower interest rates! In )oth
cases% partial third-part# $uarantees $ave these MFIs access to institutional investors! T#pes of credit
enhancements includeG whole or partial third-part# $uarantees% the use of third- part# deposits or
MFI assets as collateral% the creation of senior*su)ordinated structures to achieve an improved overall
ratin$s structure% and securitized structures! The cost of the credit enhancement must )e calculated to
o)tain the Vall- inW costs of the transaction for the MFI! &redit enhancements should )e studied% not onl#
as the# are used )# MFI )orrowers )ut also )# other t#pes of domestic and international issuers!
<nderstanding the /egulatory /e)uirements for 'ond Issuance
Bond issues must )e sized to ensure that the MFI remains in compliance with the )an3 superintendenc#Ss
capital ade;uac# re;uirements 'or maFimum levera$e limits(! Modern re$ulator# practices increasin$l#
re;uire that all financial institutions have asset*lia)ilit# mana$ement policies and procedures in place and
evidence of compliance with those policies and procedures!
The securities re$ulator t#picall# re;uires that the MFI )e rated )# a ;ualified ratin$ a$enc# prior to
issuin$ a )ond! The definition of a ;ualified ratin$ a$enc# varies from countr# to countr#% with some
re;uirin$ the use of internationall# reco$nized raters and their local affiliates% rather than a local ratin$
a$enc#!
Bond Issue Phase 'F Structuring@5egotiation Phase
The components of this phase of )ond issue have much in common with phase two of e;uit#
issue!
/eassess the Timeline
Based on the information $athered in phase one and a preliminar# eFamination of the steps and options
that will )e considered in phases two and three% the MFI should esta)lish a realistic timeline for the
activitie s involved in completin$ the )ond issue! Ma>or road)loc3s should )e identified and resources
made availa)le to un)loc3 them! =atin$ a$encies% re$ulators% credit enhancements and investors can all )e
sources of frustratin$ dela#s! Mi)anco spent two #ears $ettin$ its first )ond issue to mar3et% )ut its
su)se;uent issues went much more ;uic3l#!
+repare an 2ffering Memorandum
The preparation of this detailed document is ver# similar to what is re;uired for an e;uit# placement%
and it should address the same investor sensitivities! In the case of a )ond issue% an intermediar# is
$enerall# used% that is% an investment )an3 or local commercial )an3% which )rin$s the issue to
mar3et! The presentation of the re;uired information in a professional format will )e mana$ed )# them,
however% the need for the MFI to ma3e the information availa)le in usa)le form is not diminished! The
MFI and its capitalization team will )e thorou$hl# involved in the process! The offerin$ memorandum
for a )ond issue is su)>ect to content re;uirements that var# with local securit# re$ulations!
+repare the =/oad Show> or Investor +resentations
+$ain% this process is ver# similar to that re;uired for e;uit# issuance! If an intermediar# is )ein$ used
for the )ond issue% it arran$es the visits% produces the needed documents and slide shows and
participates in the presentations! In all cases% senior mana$ementSs participation in the presentations is a
vital part of the process% and their preparation and VsalesmanshipW are 3e# in $ivin$ credi)ilit# to the
entire )ond issue!
Investors? %ue %iligence
+s with an e;uit# issuance% interested investors will underta3e a due dili$ence process for de)t issuances!
+ ma>or difference )etween the two cases is that for de)t issuances man# institutional investors rel#
partl# or even entirel# on the ratin$s report issued on the MFI! Therefore% if institutional investors are
important potential )u#ers of the MFISs )ond issue% this step and the neFt should )e reversed, that is% a
ratin$ should )e o)tained )efore the due dili$ence process )e$ins! Man# of the new social investors and
specialized funds have developed detailed due dili$ence processes% often modeled after the IF&Ss ver#
thorou$h procedures! +s in the case of e;uit# issuance% advance preparation and hi$h ;ualit#
documentation facilitate the process!
2btain a /ating
=atin$ a$encies are pla#in$ an increasin$ role in ma3in$ financial mar3ets accessi)le to MFIs! "hile
specialized microfinance ratin$s ma# )e accepta)le to MFI investment funds and social investors%
securities re$ulators usuall# re;uire that )ond issuers have ratin$s from internationall#-reco$nized ratin$
a$encies such as Standard and PoorSs% Fitch or Mood#Ss or their local affiliates! +part from ma3in$ )ond
issues possi)le% ratin$s can )enefit the MFI in several other wa#sG
+ ratin$ allows the MFI to save time )# 3nowin$ in advance what 3inds of instruments% investors and
interest rates it can tar$et!
+ ratin$ can underscore institutional wea3nesses in an MFI% $ivin$ the institution an opportunit# to
address these wea3nesses and improve its creditworthiness )efore issuin$ a )ond!
=atin$s fulfill a 3e# re;uirement of institutional investors who% in $eneral% can onl# invest in rated
de)t instruments or de)t from rated companies% and also have minimum ratin$ re;uirements for the
securities the# )u#!
=atin$s serve to educate institutional and other investors who ma# )e loo3in$ at an MFI for the first
time& Thus% the# serve to )roaden the investor )ase for the MFISs securities and ma# improve
the pricin$% size or maturit# of the )ond issue!
=atin$s can )e $iven on the $eneral creditworthiness 'de)t repa#ment capacit#( of the MFI% )ut the#
can also )e usefull# issued on specific instruments% reflectin$ the ris3 of that instrument and its claims
on pa#ments vis-^-vis the MFISs other o)li$ations!
Select the Appropriate Instrument
Products availa)le to MFIs ma# )e limited )# re$ulator# re;uirements and the level of mar3et
development! The# ma# include short-term notes% similar to B!S! commercia l paper% as well as
medium- and lon$er-term de)t% includin$ securitized de)t! +s MFIs esta)lish a credit histor# and trac3
record in the securities mar3ets% the# can often eFtend the #ield curve on their )onds )# issuin$
lon$er-term
instruments! This allows MFIs to price their instruments more efficientl# while eFtendin$ maturities and
reducin$ interest rates! + more developed #ield curve permits an institution to issue de)t
opportunisticall#% in step with mar3et conditions and accordin$ to its own asset*lia)ilit# structure!
%esign the Appropriate *redit (nhancement, If Any
+s noted earlier% a well-desi$ned credit enhancement can widen the investor )ase and thus allow an
MFI to issue )onds with more favora)le conditions% such as lon$er maturities% lar$er amounts or lower
interest rates! The MFI must evaluate whether these more favora)le conditions are worth the cost of the
credit enhancement!
Bond Issue Phase *F Closing the %ransaction
+reparation of Timetable
The MFI and its intermediar# 'the investment or commercial )an3 that is )rin$in$ the issue to mar3et(
should prepare a timeta)le for closin$% which is communicated to all parties! The detailed list of activities
to )e accomplished prior to closin$ is similar to that for an e;uit# issue! Some fleFi) ilit# is re;uired
since mar3et timin$ can )e an important consideration! Short-term spi3es in interest rates can drive up
the cost of the )ond issue% and so it is not uncommon to have an issue read# to $o )ut to wait until a
favora)le mar3et window opens! Kn the other hand% issuers need to )e aware that some investors in )oth
de)t and e;uit# instruments ma# have time pressures of their own to fill ;uotas for at least minimum
amounts of approved investments for the ;uarter or #ear!
+ricing the Issue
The )ond is priced close to the date at which it is finall# issued! The offerin$ memorandum ma# have
indicated an approFimate price% )ut this is now ad>usted to reflect current mar3et conditions! In some
cases% the price of the )ond will )e determined throu$h an auction mechanism! In Peru% for eFample%
Mi)ancoSs )onds were sold throu$h a utch auction!
I/
Issuing *ommitment 0etters
The intermediar# solicits eFpressions of interest and receives preliminar# indications of interest levels )#
investors% a process 3nown as Vcirclin$W amounts! T#picall#% each investor issues a formal commitment
letter% with the commitment usuall# )ein$ su)>ect to an# issues that are still open or for which processes
are still not completed! If a utch auction process is )ein$ used% the potential investors indicate the
amount that the# would )e willin$ to purchase and at what rates!
%ocumentation
ocumentation of )ond issues is done prior to the sale of the securities! &ovenants are t#picall# included
and ma# )e either administrative or financial in nature! +dministrative covenants include the re;uirement
to maintain proper licensin$% meet other re$ulator# and le$al re;uirements and provide audited financial
statements within specified time periods! Financial covenants ma# include restrictions on additional de)t
issue and compliance with certain financial ratios% such as levera$e% current ratio% ;uic3 ratio and others!
I/
+ utch auction is a competitive )iddin$ techni;ue in which the lowest price necessar# to sell the entire amount
of securities offered )ecomes the price at which all securities are sold!
+lthou$h there is little standardized documentation in the microfinance sector% the increasin$ role of
specialized in vestors is )e$innin$ to result in conformed practices )# $roups of investors! Standards are
also )ein$ driven )# the needs of other lar$e investors, for eFample% institutional investors often have
standardized forms of documentation!
%rawdown of 1unds
Proceeds from the sale of )ond issues are deposited with the desi$nated fiduciar# a$ents or transfer a$ents
and released to the MFI upon completion of the process!
++II56 F+2=A2D
Improvements in certain areas of capital mar3ets VinfrastructureW would he lp to $ive MFIs a $reater
a)ilit# to issue stoc3 and )onds! These improvements would help to assure future li;uidit# of de)t and
e;uit# instruments and would promote the matchin$ of )u#ers and sellers of such instruments!
2ating Agencies
The ratin$ and independent evaluation of MFIs )# ratin$ a$encies must )ecome more widespread! +t the
same time% the ratin$ a$encies themselves need to wor3 more toward re$ional and $lo)al standardization
as well as )uildin$ $reater credi)ilit# with investors and re$ulators! This will re;uire that the specialized
MFI ratin$ a$encies further develop their evaluation eFpertise% for eFample% )# inte$ratin$ a more
thorou$h anal#sis of MFI financial and operational ris3 mana$ement practices into their formal
evaluations and ratin$s! Kver time% there ma# )e si$nificant chan$es in the MFI ratin$s industr#%
includin$ an increase in mer$ers and >oint ventures )etween specialized and traditional ratin$ a$encies!
Credit Bureaus
&redit )ureaus can pla# an important role in assurin $ outside investors that the credit ris3 of an MFISs
loan portfolio is not too lar$e and is under control! For most outside investors who are not familiar with
the microfinance industr#% an inherent wariness a)out the repa#ment capacit# and trac3 record of
micro)orrowers continues to )e a challen$e to MFIs see3in$ $reater access to commercial fundin$!
5ia)le credit )ureaus can pla# an important role in the process of evaluatin$ MFIs and the underl#in$
MFI clients! &redit )ureaus should )e put in place in those countries where the# do not eFist and should
)e eFtended down to cover the smallest loans in those countries that trac3 onl# loans a)ove a certain size
threshold 'such as BSL .0%000 or 20%000(!
!"ecution o( %ransactions
&ustodial mana$ement of e;uit# and de)t instruments must )e improved% particularl# in mar3ets where
there is potential for secondar# mar3et tradin$! + safe custodian can ensure the protection of capital
and the li;uidit# of an instrument!
Settlement Procedures
Standardized settlement conditions are needed throu$hout <atin +merica to ensure the li;uidit# of de)t
instruments% particularl# in secondar# mar3et tradin$! Improved settlement procedures would facilitate
the circulation of documents and the adoption of standardized le$al formats!
Anne" BF iabilities Structure and Capital (or .# atin American &FIs0 '111-'11* 7at end o( year8
Bonds 74S> millions8
Deposits 74S> millions8 Checking Accounts 74S> millions8 5egotiable Certi(icates o( Deposit
74S> millions8
Savings Accounts 74S> millions8 +ther %ime Deposits 74S> millions8
2000 200. 2002 200/ 2000 200. 2002 200/ 2000 200. 2002 200/ 2000 200. 2002 200/ 2000 200. 2002 200/ 2000 200. 2002 200/
B+I<IA
.! Bancosol 0!0 0!0 0!0 0!0 I8!/ 92!6 9/!6 9M!M 0!2 0!2 0!. 0!. 0!0 0!0 0!0 0!0 ..!6 ..!7 .7!M 20!9 79!7 I.!. 78!6 7M!2
2! Prodem 0!0 0!0 0!0 0!0 .8!. 29!2 //!M 78!6 .!9 0!/ 0!7 0!8 0!0 0!0 0!0 0!0 0!. 7!2 M!/ .9!2 .9!7 2.!6 27!2 /.!6
/! &a>a <os +ndes 0!0 0!0 0!0 0!0 .7!7 2.!6 /7!9 76!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 2!. /!6 9!8 .0!2 .2!/ .6!M 26!8 /9!8
7! FI4 0!0 0!0 0!0 0!0 .2!/ ..!/ .6!2 .M!M 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!2 .!8 I!7 .2!2 ..!. .I!7 .7!I
I! 4cofuturo 0!0 0!0 0!0 0!0 7!8 7!6 7!6 6!. 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!. 0!9 .!2 .!2 7!6 7!. /!I I!M
%+%A Bolivia 1$1 1$1 1$1 1$1 #1/$) #'.$/ #,-$# #)'$. #$? 1$, 1$, 1$) 1$1 1$1 1$1 1$1 #-$1 '1$# *-$1 ,*$. )'$1 #1.$1 ##)$. #*?$#
C++&BIA
9! FinamArica 0!8 0!M 0!0 0!/ 6!0 .0!2 ..!9 .2!8 0!0 0!0 0!0 0!0 6!0 .0!2 ..!9 .2!8 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0
6! &ompartir 0!0 0!0 0!0 0!0 2!6 /!9 7!. I!/ 0!0 0!0 0!0 0!0 2!6 /!9 7!. I!2 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0
%+%A Colombia 1$? 1$) 1$1 1$* )$/ #*$/ #,$/ #?$# 1$1 1$1 1$1 1$1 )$/ #*$/ #,$. #?$# 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1
!C4AD+2
8! Banco Solidario 0!0 0!0 0!0 0!0 77!9 69!I .0I!9 .29!9 .!I 7!6 0!0 0!0 0!0 0!0 0!0 0!0 7!. ..!/ 26!I 26!7 /M!0 90!I 68!. MM!2
M! Financiera 4cuatorial 0!0 0!0 0!0 0!0 0!0 0!0 0!6 2!I 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!6 2!I
%+%A !cuador 1$1 1$1 1$1 1$1 --$. /.$, #1.$* #')$# #$, -$/ 1$1 1$1 1$1 1$1 1$1 1$1 -$# ##$* '/$, '/$- *)$1 .1$, /?$/ #1#$/
! SA<AD+2
.0! Financiera &alpiY 0!0 0!0 0!0 0!0 0!0 .7!M 22!8 /I!/ 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 2!0 I!8 /!8 0!0 .2!M .9!M /.!I
%+%A !l Salvador 1$1 1$1 1$1 1$1 1$1 #-$) ''$? *,$* 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 '$1 ,$? *$? 1$1 #'$) #.$) *#$,
H+5D42AS
..! Finsol 0!0 0!0 0!0 0!0 2!. 2!8 .!I 2!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 2!. 2!8 .!I 2!0
%+%A Honduras 1$1 1$1 1$1 1$1 '$# '$? #$, '$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 '$# '$? #$, '$1
&!;IC+
.2! &ompartamos 0!0 0!0 .9!8 .8!. 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0
./! FincomZn 0!0 0!0 0!0 0!0 0!0 0!0 0!9 0!8 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!9 0!8 0!0 0!0 0!0 0!0
%+%A &e"ico 1$1 1$1 #.$? #?$# 1$1 1$1 1$. 1$? 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$. 1$? 1$1 1$1 1$1 1$1
5ICA2A64A
.7! Findesa 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!7 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!/ 0!0 0!0 0!0 0!.
.I! &onfia 0!0 0!0 0!0 0!0 .7!. .I!2 ..!/ .2!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 0!0 /!. /!6 7!0 7!0 ..!0 ..!9 6!/ 8!.
%+%A 5icaragua 1$1 1$1 1$1 1$1 #-$# #,$' ##$* #'$, 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1 *$# *$/ -$1 -$* ##$1 ##$. /$* ?$'
PA2A64A9
.9! 5isiNn 0!0 0!0 0!0 0!0 .6!7 .6!/ .7!6 29!6 0!0 0!0 0!0 0!0 .7!. .7!2 .0!8 20!6 2!0 2!/ /!. 7!M .!/ 0!8 0!8 .!.
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P!24
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Deposits @ iabilities Borro3ing @ iabilities Deposits @ oans 5umber o( Deposit Accounts Average Deposit 74S>8 iabilities @ !Auity
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6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L7MM
L/%7M9 L.%678 L.%78M
>1 >-))
>#0-?) >,0'-*
>-))
>.0/*'
6X
M/X
%+%A >1 >-)) >1 >*0-). >1 >#0/-? >#0-?) >1 >#0-?) >,0/-' >/0'*# .00X
B 0X 6X 0X 78X 0X 27X 2.X 0X 2.X 6MX .00X
*$ FI!0 Bolivia
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term L9%/I9 L7%960 L2%6M8
>1 >1
>1 >#*0?'-
>1
>#*0?'-
0X
.00X
%+%A >1 >1 >1 >.0*,. >1 >-0./1 >1 >'0/)? >1 >#*0?'- >#*0?'- .00X
B 0X 0X 0X 79X 0X /7X 0X 20X 0X .00X .00X
-$ FinamLrica0 Colombia
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L6.M
L/%/8M
>/#) >1
>*0*?) >1
>/#)
>*0*?)
.8X
82X
%+%A >1 >1 >-0#1? >1 >1 >1 >1 >1 >-0#1? >1 >-0#1? .00X
B 0X 0X .00X 0X 0X 0X 0X 0X .00X 0X .00X
.0.
,$ CalpiM0 !l Salvador
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L.%000
L.8%270 L..%978
>1 >#0111
>1 >')0??/
>#0111
>')0??/
/X
M6X
%+%A >1 >#0111 >1 >#?0'-1 >1 >##0.-? >1 >1 >1 >*10??/ >*10??/ .00X
B 0X /X 0X IMX 0X /8X 0X 0X 0X .00X .00X
.$ Compartamos0 &e"ico
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L2/%2/2 L.%000 L8//
L220 LI%7.I L/%MMM
>'*0'*' >#0?**
>''1 >)0-#-
>',01.,
>)0.*-
62X
28X
%+%A >'*0'*' >#0111 >1 >1 >''1 >.0'-? >1 >*0))) >'*0-,' >##0'-/ >*-0.)) .00X
B 96X /X 0X 0X .X .8X 0X .2X 98X /2X .00X
/$ FincomKn0 &e"ico
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term L/%M8. L.00
>1 >1
>*0)?# >#11
>1
>-01?#
0X
.00X
%+%A >1 >1 >*0)?# >1 >1 >1 >1 >#11 >*0)?# >#11 >-01?# .00X
B 0X 0X M8X 0X 0X 0X 0X 2X M8X 2X .00X
?$ Procredit 7Con(Ja80 5icaragua
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L2%000 LII0
L262 L20I
L/0I
L.%009
L8%/6I
L.%76/
>'0111 >)0'')
>'/' >'0.?,
>##0'')
>'0),/
6MX
2.X
%+%A >1 >1 >'0'/' >/,, >1 >#0*## >1 >)0?-? >'0'/' >##0)#- >#-0#?. .00X
B 0X 0X .9X IX 0X MX 0X 9MX .9X 87X .00X
)$ Findesa0 5icaragua
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term L2%80/
L/8.
L8%720
LI00
L2%62M
L700
L2%000
>1 >#0'?#
>1 >#,0),'
>#0'?#
>#,0),'
6X
M/X
%+%A >1 >'0?1* >1 >?0?1# >1 >*0'') >1 >'0-11 >1 >#/0'** >#/0'** .00X
B 0X .9X 0X I.X 0X .MX 0X .7X 0X .00X .00X
.02
#1$ !l Comercio Financiera0 Paraguay
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term L769 L.%/87
>1 >1
>-/. >#0*?-
>1
>#0?.1
0X
.00X
%+%A >1 >1 >-/. >1 >1 >#0*?- >1 >1 >-/. >#0*?- >#0?.1 .00X
B 0X 0X 29X 0X 0X 67X 0X 0X 29X 67X .00X
##$ C&AC AreAuipa0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal %+%A
X
Short term
ong term
LI68 L.%8I2 L.
L.%/9/ L7
L69 L.M
L6I/ L/M
>'0,1. >'1
>'0##. >-*
>'0,'.
>'0#,?
I7X
79X
%+%A >,/? >1 >*0'#, >, >?') >,? >1 >1 >-0.'' >.* >-0.?, .00X
B .2X 0X 9MX 0X .8X .X 0X 0X MMX .X .00X
#'$ C&AC Cusco0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term L.%77I L2I.
>1 >1
>#0--, >',#
>1
>#0.)/
0X
.00X
%+%A >1 >1 >#0--, >',# >1 >1 >1 >1 >#0--, >',# >#0.)/ .00X
B 0X 0X 8IX .IX 0X 0X 0X 0X 8IX .IX .00X
#*$ C&AC Ica0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L.7I L7I0 L72M L.6M
L227
>,/- >.*1
>''- >1
>#0'1-
>''-
87X
.9X
%+%A >#-, >-,1 >-') >#/) >''- >1 >1 >1 >/)? >.*1 >#0-'?
.00X
B .0X /2X /0X ./X .9X 0X 0X 0X I9X 77X .00X
#-$ C&AC Santa0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L.%00/ LMI
L8M7 L270
>#01)/ >1
>#0#*- >1
>#01)/
>#0#*-
7MX
I.X
%+%A >#011* >1 >)?? >1 >'-1 >1 >1 >1 >'0'*# >1 >'0'*# .00X
B 7IX 0X 77X 0X ..X 0X 0X 0X .00X 0X .00X
.0/
#,$ C&AC Sullana0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L/%882 L/%9I2 L8/
L/%.78 L.96 L.%2I.
>/0,*, >?*
>*0#-? >#0-#?
>/0.#?
>-0,..
9/X
/6X
%+%A >*0??' >1 >.0?11 >',1 >1 >1 >1 >#0',# >#10.?* >#0,1# >#'0#?- .00X
B /2X 0X I9X 2X 0X 0X 0X .0X 88X .2X .00X
#.$ C&AC %acna0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L2%/.2 L2I0
L..I
L700
L2%I02 L988 L968 L780 L280
>'0*#' >.,#
>*0'), >#0--)
>'0).*
>-0/--
/8X
92X
%+%A >'0-'/ >',1 >'0,1' >#01?? >./? >-?1 >1 >'?1 >,0.1/ >'01)) >/0/1/
.00X
B /.X /X /2X .7X MX 9X 0X 7X 6/X 26X .00X
#/$ C&AC %ruEillo0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L/%887 L.%.09
L/67
L2%/79 L2%2.6
L/%7M8 L6%27I
L.96
L//7
>.0'') >*0-?)
>*0-)? >/0),*
>)0/#)
>##0-,#
79X
I7X
%+%A >*0??- >#0-?1 >,0?-- >)0-.' >1 >,11 >1 >1 >)0/'/ >##0--' >'#0#/1 .00X
B .8X 6X 28X 7IX 0X 2X 0X 0X 79X I7X .00X
#?$ !dpyme Con(ian:a0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L.%9/0 L2M. L9/9
L97. L2%2.8 L8.7 L.%/7/ L.%709
>'0'.. >')#
>#0-,, >-0).?
>'0,,/
>.0-'*
28X
62X
%+%A >#0.*1 >')# >#0'// >'0'#? >?#- >#0*-* >1 >#0-1. >*0/'# >,0',) >?0)/) .00X
B .8X /X .7X 2IX MX .IX 0X .9X 7.X IMX .00X
#)$ !dpyme Crear AreAuipa0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L/0I
L/%77I L.69 LII/ L68.
LM69
L200
>*1, >)/.
>*0))) >#0#,/
>#0'?#
>,0#,.
20X
80X
%+%A >*1, >1 >*0--, >#/. >,,* >/?# >1 >#0#/. >-0*1- >'0#** >.0-*. .00X
B IX 0X I7X /X MX .2X 0X .8X 96X //X .00X
.07
'1$ !dpyme Crear %acna0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L../ L72I L/.8
L.%2I0 L.%067
L20M
L.00 L.96
>,*) >,'.
>#0*,1 >#0'-1
>#01.,
>'0,)1
2MX
6.X
%+%A >##* >1 >#0./, >#0*)# >#11 >*/, >1 >1 >#0??? >#0/./ >*0.,, .00X
B /X 0X 79X /8X /X .0X 0X 0X I2X 78X .00X
'#$ !dpyme !dy(icar0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L2%8.7 L.0I
L9I7 L.0
L9%I/M L2%887
L.%MMM L9%997
L/0 L.%.M2
L.%IM7
L/6 L/%0/6
L.22
>)0-'1 >/0'#?
>-0*.? >.0./-
>#.0.*?
>##01-'
90X
70X
%+%A >*0-.? >##, >?0,*? >)0,-? >#0.'- >#0#)' >#,? >*01*/ >#*0/?? >#*0?)' >'/0.?1
.00X
B ./X 0X /.X /7X 9X 7X .X ..X I0X I0X .00X
''$ !dpyme 5ueva <isiQn0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L7.2 L.I9
L9/. L.97
L.M7 L.90
L../ L2/M
>.1. >*#.
>/-- >-1-
>)''
>#0#-?
7IX
IIX
%+%A >1 >1 >#01-* >*'1 >*1/ >-11 >1 >1 >#0*,1 >/'1 >'01/1 .00X
B 0X 0X I0X .IX .IX .MX 0X 0X 9IX /IX .00X
'*$ !dpyme Proempresa0 Peru
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal
%+%A X
Short term
ong term
L.70 L7M0
L.90
L.%0.0 L606
LM96 L6I0
L/9. L.%08.
L.2I L.%292
L.%/I0
LII.
>#0,## >*0.'/
>#01)' >'0/'-
>,0#*?
>*0?#/
I6X
7/X
%+%A >#-1 >.,1 >#0)// >#0-,/ >-?. >'0*-* >1 >#0)1' >'0.1* >.0*,# >?0),- .00X
B 2X 6X 22X .9X IX 29X 0X 2.X 2MX 6.X .00X
'-$ PeruN
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal %+%A
X
Short term
&ost
L.9%80I L2%9M.
8!0X 8!0X
L.6%/M9 L9%M77
.2!0X I!IX
L992 L2%828
.0!2X 9!6X
L/6 LI%/9/
.0!0X M!/X
>*-0)11 >#/0?'/
#1$1B /$'B
>,'0/'.
)$#B
78X
ong term
&ost
L69M LI7I
6!6X 8!.X
L2.%68/ L.M%702
.0!/X 9!2X
LI%.M7 L7%97I
8!/X 6!8X
L.22 L/%98M
.0!0X 6!8X
>'/0?./ >'?0'?#
)$?B .$/B
>,.0#-?
?$*B
I2X
%+%A
Cost
>#/0,/- >*0'*.
?$1B ?$1B
>*)0#/) >'.0*-/
##$1B .$1B
>,0?,. >/0-/'
?$,B /$-B
>#,? >)01,'
#1$1B ?$/B
>.'0/./ >-.0#1/
#1$1B .$)B
>#1?0?/-
?$/B
.00X
B .9X /X /9X 27X IX 6X 0X 8X I8X 72X .00X
] Kverall data% includin$ wei$hted financial cost% for all Peru vian MFIs anal#zed!
.0I
',$ BoliviaN
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal %+%A
X
Short term
&ost
L0 L7MM
M!/X
L0 L.%./2
7!0X
L0 L/%8MI
I!9X
L0 L67M
9!6X
>1 >.0'/,
,$?B
>.0'/,
,$?B
.2X
ong term
&ost
L0 L0 L0 L20%076
7!0X
L0 L.I%/7/
9!2X
L.%78M L6%.M2
.7!IX 9!.X
>#0-?) >-'0,?'
#-$,B ,$#B
>--01/#
,$-B
88X
%+%A
Cost
>1 >-))
)$*B
>1 >'#0#/?
-$1B
>1 >#)0'*?
.$#B
>#0-?) >/0)-#
#-$,B .$#B
>#0-?) >-?0?,/
#-$,B ,$'B
>,10*-.
,$,B
.00X
B 0X .X 0X 72X 0X /8X /X .9X /X M6X .00X
] Kverall data% includin$ wei$hted financial cost% for all Bolivian MFIs anal#zed!
'.$ 2est o( &FIs in atin AmericaN
ocal Commercial
Banks
6ovPt and +ther
Domestic Sources
Donors
Social and +ther
Foreign Investors
%otal %+%A
X
Short term
&ost
L2/%2/2 L2%000
.0!/X 8!7X
L2%6.M LM/.
9!6X M!/X
L0 L.%9/8
/!8X
L0 L8%66I
6!8X
>',0),# >#*0*-*
)$)B /$,B
>*)0')-
)$#B
/6X
ong term
&ost
L0 L2%80/
.2!0X
L8%..8 L29%89I
6!9X I!MX
L220 L22%.82
.!0X I!7X
L0 L6%I6/
M!/X
>?0**? >,)0-'*
/$-B .$-B
>./0/.#
.$,B
9/X
%+%A
Cost
>'*0'*' >-0?1*
#1$,B
>#10?*/ >'/0/).
.$1B
>''1 >'*0?'1
,$*B
>1 >#.0*-/
?$,B
>*-0'?) >/'0/..
)$*B .$.B
>#1/01,,
/$,B
.00X
B 22X 7X .0X 29X 0X 22X 0X .IX /2X 98X .00X
] Includes all of the MFIs presented in this +nneF eFcept those in Peru and Bolivia
'that is% all MFIs in &olom)ia% 4l Salvador% MeFico% Eicara$ua and Para$ua#(!
.09
Anne" DF Cost Allocation Studies (or Si" &FIs
%H! &!%H+D++69 +F C+S% A+CA%I+5 B9 ASSI65&!5%
There are various costin$ methodolo$ies that can )e used for MFIs% amon$ which the most commonl#
emplo#ed are cost allocation )# assi$nment and activit#-)ased costin$ '+B&(!
I7
&ost allocation )#
assi$nment consists of distri)utin$ an MFISs costs amon$ its products usin$ different criteria to assi$n
indirect costs, this is the method we have used in the case studies of the siF MFIs! B# contrast%
activit#- )ased costin$ '+B&( )rea3s costs down into a set of component activities! &osts are
distri)uted amon$ the various activities in accordance with the time and other resources used for the
activit#! Finall#% the
costs of all the activities are added up to o)tain the cost of each
product!
In the siF costin$ studies underta3en here% we calculate the total cost of each deposit product% which
consists of financial plus operatin$ costs! Kperatin$ costs are )ro3en down into personnel and
administrative 'non-personnel( costs! "hile there are direct and indirect costs in )oth cate$ories% the $reat
ma>orit# overall is indirect! Therefore% it is ver# important that the cate$ories used for distri)utin$ indirect
costs are the )est ones possi)le% so that indirect costs are allocated to products as precisel# as can )e!
Financial Costs
The financial cost of each product was o)tained directl# from the trial )a lances of the MFIs% and in some
cases% )# eFaminin$ the MFISs deposit data)ase! These financial costs have )een ad>usted for reserve
re;uirements 'in the appropriate currenc#(% )ut do not ta3e account of other financial char$es or possi)le
revenue from fees!
II
=e$ardin$ this last point% all MFIs studied stated that the# did not collect
an# si$nificant amount of fees from depositors!
I9
+perating Costs
The calculation of each deposit productSs operatin$ costs is the heart of the costin$ eFercise! The
o)>ective is to tr# to estimate as precisel# as possi)le the operatin$ costs that are $enerated )# each
deposit product! To that end% it is necessar# to allocate total personnel and administrative costs amon$ the
various loan and deposit products!
In the siF costin$ studies% most costs related to deposits are indirect! Few personnel or administrative cost
cate$ories are eFclusivel# for deposits, therefore% almost all costs must )e allocated to products )# means
of assi$nment rules!
Assignment /ules
Indirect costs are distri)uted amon$ the various loans and deposit products usin$ the assi$nment
cate$ories presented in Ta)le .!
I7
For a more detailed eFplanation of cost allocation )# assi$nment and activit#-)ased costin$% see Helms and Grace
'2007(! For an applic ation of these methodolo$ies to MFIs in Peru% see Portocarrero and Tarazona '200/a, 200/)(!
II
The calculation of financial costs ad>usted for reserve re;uirements does not ta3e account of the remuneration
received )# the MFI for its re;uired reserves since this remuneration is ver# small!
.06
I9
Some of the MFIs collect a small amount of fees% for eFample% from clients with inactive accounts! In $eneral%
however% the MFIs do not collect monthl# fees nor an# fees related to the num)er of transactions!
.08
%able D#
Assignment Categories 4sed in the Costing Studies
Assignment Category 4nit Description
Intermediation 5olume &onsiders the total volume of loans and deposits% )ro3en down )#
product! In $eneral% it is applied to hi$h-ran3in$ emplo#ees at MFIs%
such as department mana$ers!
Intermediation Eum)er Similar to the precedin$ cate$or#% )ut usin$ the num)er of accounts! It
is applied more to operatin$ personnel such as those in accountin$%
auditin$% etc!
Transactions Eum)er Bses the num)er of transactions carried out at teller windows fo r all
products! Bsed for tellers% operatin$ personnel and overhead costs! It
is assumed that one monthSs transactions are representative of the
entire period anal#zed!
eposits 5olume &onsiders onl# the volume of deposits% )# product! +pplied to
treasur# personnel for eFample!
<oans +ssi$ns all costs to loans!
4;ual +ssumes that )oth lendin$ and deposit products derive e;ual V)enefitW
from a certain cost!
"e have also cate$orized all personnel and administrative costs as either fiFed or varia)le! FiFed costs do
not increase as the volume of deposits rises and thus $ive rise to economies of scale ! 4conomies of scale
can also )e $enerated in varia)le costs% for eFample% if the productivit# of personnel increases as the total
volume of deposits rises!
&ate$orization of costs as fiFed or varia)le can )e complicated )ecause all MFI costs tend to )e var
ia)le in the lon$ run! However% in practice% some costs ma# increase much more slowl# than deposit
volumes% $ivin$ rise to economies of scale! In Ta)le 2% costs are cate$orized as fiFed or varia)le%
where fiFed costs are those that rise ver# slowl# or not at all as deposit volumes increase% and varia)le
costs tend to rise at approFimatel# the same rate as deposit volumes!
%able D'
Categori:ation o( +perating Costs as Fi"ed and <ariable
+perating Cost Category Detail
Personnel FiFed Hi$h- level person ne lG $eneral mana$er, mana$ers of such
departments as credit% savin$s% finance% ris3% operations and
maintenance% auditin$% treasur# and accountin$
5aria)le Branch and other personne lG )ranch mana$ers% loan off icers%
tellers and all assistants includin$ those in the main o ffice
+dminis trative FiFed +ll costs associated with the )oard of directors% travel and
eFternal auditors
5aria)le Securit# services% communications% rent% mis cellaneous
supplies% advertisin$% insurance and other overhead costs
.0M
+ersonnel *osts
+ detailed anal#sis was made of the )rea3down )# product of personnel costs since the# represent more
than I0 percent of total MFI operatin$ costs! "e )e$in this anal#sis )# o)tainin$ the monthl# pa#roll
statement% which $ives each wor3erSs name% salar# and position! In accordance with each wor3erSs
position% a cate$or# was chosen that )est approFimates the time spent )# that wor3er on each product! B#
summin$ these costs across all emplo#ees% we o)tained the )rea3down of total personnel costs )#
product!
Administrative *osts
4ach of the MFISs administrative costs was assi$ned individuall# to products% usin$ an assi$nment
cate$or# chosen specificall# for that cost! Ta)le / shows the main administrative costs and the
cate$ories used!
%able D*
Categories (or Assigning the Principal Administrative Costs
Category Administrative Cost
<oans Fuels and lu)ricants
&ourt eFpenses
Eotar# eFpenses
4Fternal auditors
Transport
Intermediation
'Eum)er of accounts(
+dvertisin$
Pu)lic relations and events
Insurance
Intermediation
'5olume(
Studies and plans
Board of directorsS eFpenses
TaFes
eposits eposit insurance
Transactions =ent
&ommunications
epreciation and amortization
4lectricit# and water
Photocopies
&leanin$
=epair and maintenance
4lectronic transfers
Kffice and other supplies
Securit#
*ost by %eposit Si,e Strata
The total operatin$ costs of each deposit product can )e )ro3en down )# account size strata! This is done
usin$ the same assi$nment cate$ories alread# descri)ed )ut with the anal#sis carried out )# strata!
In the transactions data)ase of each MFI it was possi)le to relate each deposit account transaction to the
clientSs end-of-month deposit )a lance! In this wa#% the total num)er of transactions carried out in
each size stratum of each deposit product was o)tained! These data were then used to allocate costs
across strata for each deposit product whenever costs were assi$ned usin$ the transactions cate$or#!
..0
C+S% S%4D9 2!S4%S
The followin$ ta)les present the main results of the deposit costin$ studies carried out at the siF
MFIs! The follow in$ a))reviations are used in these ta)lesG
S+ \ Savin$s +ccount
"+ \ "or3ersS +ccounts% that is% accounts that accumulate pa#ments for time in service
T \ Time eposit
IFI \ Intermediar# Financial Institution
F& \ Forei$n &urrenc#
<& \ <ocal &urrenc#
PK \ Pa#ment Krders 'deposit accounts used )# companies to ma3e pa#ments to third parties )# means
of drafts or to receive pa#ments% t#picall# with a the lar$e num)er of transactions per account
and% as a result% hi$h operatin$ costs(
Transact! \ Transactions
...
Costing in C&AC Pisco0 as o( &ay '11-
6eneral Indicators o( Deposits
Savin$s <& Savin$s F& T <& T F& %+%A
+mount 'BSL( 88/%6I. 2M7%.08 .%/06%..2 7M7%9/0 '0)/)0.1#
Eum)er of accounts /%/M9 I99 .%009 /87 ,0*,'
+vera$e deposit 'BSL( 290 I20 .%2MM .%288 ,,/
+vera$e term '#ears( .!. .!0
Eo! of transact! per month //9 /. 2/ 2 *)'
Transact! per account 0!. 0!. 0!0 0!0 1$#
Cost o( Deposits 7B8 - Financial Costs AdEusted (or 2eserve 2eAuirements
Financial costs 7B8 -$,B -$1B #)$1B )$1B ##$.B
+perating costs 7B8 #,$.B ?$,B *$)B -$#B /$)B
4 1ixed #&@A !&BA &@A &@A 2.6%
4 3ariable &CA $&DA !&"A !&$A 5.3%
%otal costs 7B8 '1$'B #'$,B ''$)B #*$'B #)$-B
Kperatin$ cost per account
'BSL per month(
/!7 /!6 7!2 7!7 *$.
Financial Costs by Strata 7B8 - Financial Costs AdEusted (or 2eserve 2eAuirements
BSL 0 to .00 I!0X 7!.X .M!7X 8!6X .$?B
BSL .0. to I00 7!MX 7!.X .6!IX 8!.X ?$1B
BSL I0. to .000 7!MX 7!.X .8!/X 8!0X )$?B
BSL .00. to I000 7!8X 7!.X .8!7X 8!.X ##$'B
BSL I00. to .0%000 7!6X 7!0X .M!IX M!MX #'$?B
BSL .0%00. to 20%000 7!8X /!0X .M!/X .0!9X #,$.B
BSL 20%00. to I0%000 7!/X 7!.X 20!0X .2!/X #*$'B
More than BSL I0%000 2!2X
%+%A -$,B -$1B #)$1B )$1B ##$.B
Principal +perating Costs 7B8
+perating cost 7B8 #,$.*B ?$,#B *$?.B -$#1B /$?,B
Pa#roll /!I0X .!9/X 0!80X 0!6IX #$./B
Kther services 2!22X .!..X 0!77X 0!7IX #$1-B
TaFes .!I.X 0!6IX 0!/0X 0!/0X 1$/1B
Board of directors 0!I7X 0!I7X 0!I7X 0!I7X 1$,-B
Insurance 0!I2X 0!I2X 0!I2X 0!I2X 1$,'B
Honoraria 0!M2X 0!79X 0!.8X 0!.MX 1$-*B
epreciation .!..X 0!/.X 0!0IX 0!0.X 1$*)B
Pu)licit# 0!/2X 0!M6X 0!22X 0!I8X 1$*?B
Internships 0!/MX 0!20X 0!08X 0!08X 1$#?B
..2
5umber o( Accounts by Strata 7B8
Strata Savin$s <& Savin$s F& T <& T F& %+%A
%+%A *0*). ,.. #011. *?- ,0*,'
BSL 0 to .00 6I!6X II!8X 78!0X 77!/X ..$#B
BSL .0. to I00 .I!6X 22!/X .7!MX ..!9X #.$1B
BSL I0. to .000 /!MX M!MX .0!MX ..!.X .$-B
BSL .00. to I000 7!0X M!MX 20!2X 28!8X )$-B
BSL I00. to .0%000 0!/X .!9X /!.X /!/X #$'B
BSL .0%00. to 20%000 0!.X 0!7X 2!2X 0!8X 1$.B
BSL 20%00. to I0%000 0!2X 0!.X 0!6X 0!/X 1$*B
More than BSL I0%000 0!0X 0!0X 0!0X 0!0X 1$1B
Account Balances by Strata 7B8
%+%A 74S>8 ??*0/,# ')-0#1? #0*1/0##' -)-0.*1 '0)/)0.1#
BSL 0 to .00 /!MX 2!0X 0!2X 0!2X #$,B
BSL .0. to I00 .7!/X .0!6X /!2X 2!8X /$'B
BSL I0. to .000 .0!6X ./!2X 9!.X 9!9X ?$'B
BSL .00. to I000 2M!/X /9!/X //!9X I/!6X *,$)B
BSL I00. to .0%000 8!6X 20!6X .9!9X .M!/X #,$#B
BSL .0%00. to 20%000 9!6X ..!8X 2/!MX 8!6X #,$#B
BSL 20%00. to I0%000 .8!0X I!/X .9!7X 8!6X #-$,B
More than BSL I0%000 8!7X 0!0X 0!0X 0!0X '$,B
+perating Cost by Strata 7B8
BSL 0 to .00 276!.X .89!9X 7M8!/X 986!0X '.,$,B
BSL .0. to I00 20!IX .9!IX ./!IX .7!2X #?$#B
BSL I0. to .000 8!7X 9!8X 9!.X 9!9X /$'B
BSL .00. to I000 7!/X /!/X 2!8X 2!IX *$#B
BSL I00. to .0%000 /!7X 2!2X .!MX .!MX '$'B
BSL .0%00. to 20%000 .!MX 2!IX .!IX 2!2X #$/B
BSL 20%00. to I0%000 .!7X /!8X .!7X 2!.X #$,B
More than BSL I0%000 .!9X #$.B
%+%A #,$.B ?$,B *$)B -$#B /$)B
../
Costing in C&AC Chincha0 as o( &ay '11-
Savin$s <& Savin$s F& T F& T F& %+%A
+mount 'BSL( 6I.%9I/ 228%I96 2%770%287 I.I%M89 *0)*.0-?)
Eo! of accounts .%82. 2.I 792 .0M '0.1.
+vera$e deposit 'BSL( 7./ .%099 I%282 7%6/7 #0,##
+vera$e term '#ears( 0!8 0!9
Eo! of transact! per month 9%828 /07 2M. // /0-,.
Transact! per account /!8 .!7 0!9 0!/ '$)
Financial costs 7B8 ,$?B ,$'B #)$#B #1$)B #-$/B
+perating cost 7B8 ',$-B /$.B *$#B *$#B /$.B
4 1ixed $&EA "&"A !&"A !&"A 3.0%
4 3ariable E&$A #&"A C&DA C&DA 4.6%
%otal cost 7B8 *#$#B #'$)B ''$'B #-$1B ''$*B
'BSL per month( 8!6 9!8 ./!8 .2!/ )$.
0 to BSL .00 I!6X I!6X .6!0X .$)B
BSL .0. to BSL I00 I!8X 9!.X .I!0X 6!7X )$1B
BSL I0. to BSL .%000 I!6X I!8X .I!2X 6!9X )$,B
BSL .%00. to BSL I%000 I!6X 9!2X .I!6X 6!8X #1$,B
BSL I%00. to BSL .0%000 7!MX I!8X .6!.X M!MX #'$?B
BSL .0%00. to I0%000 I!MX I!8X .M!7X .0!9X #/$'B
BSL I0%00. to .00%000 I!MX 2.!.X ./!9X #,$*B
More than BSL .00%000 I!MX
%+%A ,$?B ,$'B #)$#B #1$)B #-$/B
+perating cost 7B8 ',$*,B /$.'B *$#-B *$#'B /$.-B
Pa#roll .0!I.X /!97X .!M0X .!8MX *$.-B
epreciation 2!M7X 0!7/X 0!07X 0!02X 1$.#B
&ommunications 2!89X 0!72X 0!07X 0!02X 1$.1B
Board of directors 0!78X 0!78X 0!78X 0!78X 1$-?B
Insurance 2!09X 0!/0X 0!0/X 0!0.X 1$-*B
General supplies .!.9X 0!7IX 0!0MX 0!.0X 1$*'B
SBS Q F4P&M+& fees 0!MMX 0!/8X 0!08X 0!0MX 1$'/B
eposit insurance 0!29X 0!29X 0!29X 0!29X 1$'.B
Securit# 0!MMX 0!.7X 0!0.X 0!0.X 1$'#B
..7
%+%A #0?'# '#, -.' #1) '0.1.
0 to BSL .00 66!6X 9/!9X ./!.X 0!0X .#$?B
BSL .0. to BSL I00 ./!MX .9!/X 2M!7X 29!.X #/$-B
BSL I0. to BSL .%000 7!.X 6!6X ./!0X .7!2X .$-B
BSL .%00. to BSL I%000 /!2X 8!MX 22!IX 72!6X ?$?B
BSL I%00. to BSL .0%000 0!/X .!2X 7!IX 6!/X #$-B
BSL .0%00. to I0%000 0!IX 2!.X .I!MX 9!MX *$.B
BSL I0%00. to .00%000 0!.X 0!2X .!IX 2!8X 1$,B
More than BSL .00%000 0!.X 0!0X 0!0X 0!0X 1$1B
Strata Savins <& Savin$s F& T <& T F& %+%A
%+%A 74S>8 /,#0.,* ''?0,./ '0--10'?- ,#,0)?. *0)*.0-?)
0 to BSL .00 2!/X .!.X 0!.X 0!0X 1$,B
BSL .0. to BSL I00 6!IX /!8X .!7X .!8X '$/B
BSL I0. to BSL .%000 6!.X 7!8X .!8X 2!IX *$#B
BSL .%00. to BSL I%000 .6!0X 20!7X M!/X 22!0X #*$#B
BSL I%00. to BSL .0%000 I!8X 6!/X 9!2X ..!/X .$)B
BSL .0%00. to I0%000 22!MX I.!.X 9/!8X 2I!7X ,1$'B
BSL I0%00. to .00%000 2/!MX ..!7X .6!IX /6!0X '1$)B
More than BSL .00%000 ./!IX 0!0X 0!0X 0!0X '$.B
0 to BSL .00 9//!6X /78!8X I6I!7X ,),$'B
BSL .0. to BSL I00 90!MX /6!0X I.!2X /7!IX ,*$/B
BSL I0. to BSL .%000 .M!/X .2!0X .8!2X .7!2X #/$/B
BSL .%00. to BSL I%000 .7!7X 7!0X 9!IX I!7X ?$1B
BSL I%00. to BSL .0%000 2/!MX /!0X 2!IX 2!/X .$1B
BSL .0%00. to I0%000 .!MX .!0X .!/X .!7X #$-B
BSL I0%00. to .00%000 0!MX .!.X .!0X 0!MX 1$)B
More than BSL .00%000 .!2X #$'B
%+%A ',$-B /$.B *$#B *$#B /$.B
..I
Costing in C2AC SeGor de uren0 as o( April '11-
S+ <& S+ F& PK <& PK F& T <& T F& %+%A
+mount 'BSL( 2%I66%767 2%0.7%M99 I/7%8/2 9.%292 2%889%/6. /%7/6%2/9 ##0,#'0#-#
Eum)er of accounts 8%6/0 2%I/6 209 27 .%9/7 896 #*0))/
+vera$e deposit 'BSL( 2MI 6M7 2%90/ 2%II/ .%696 /%M9I ?'*
+vera$e term '#ears( 0!9 0!6
Eo! of transact! per month .6%070 2%0MI .7%0./ MM 977 278 *-0#*)
Transact! per account 2!0 0!8 98!2 7!. 0!7 0!/ '$-
S+ <& S+ F& PK <& PK F& T <& T F& %+%A
Financial cost 7B8 *$*B '$?B '$'B ,$'B #-$?B ,$1B .$.B
+perating cost 7B8 #*$#B ,$#B *#$.B #/$*B *$,B '$?B /$#B
4 1ixed "&"A &BA &CA &CA &A C&EA 1.6%
4 3ariable E&EA "&$A "C&$A @&"A !&"A &EA 5.5%
%otal cost 7B8 #.$,B /$)B **$/B ''$,B #?$*B /$?B #*$/B
S+ <& S+ F& PK <& PK F& T <& T F& %+%A
'BSL per month( /!2 /!7 98!I /9!8 I!. M!2 -$)
S+ <& S+ F& PK <& PK F& T <& T F& %+%A
0 to BSL .00 /!/X 2!8X 2!2X I!2X 20!/X I!.X -$*B
BSL .0. to BSL I00 /!/X 2!8X 2!2X I!2X ./!MX /!MX ,$*B
BSL I0. to BSL .%000 /!/X 2!8X 2!2X I!2X .7!2X /!8X ,$)B
BSL .%00. to BSL I%000 /!/X 2!8X 2!2X I!2X ./!6X 7!0X .$-B
BSL I%00. to .0%000 /!/X 2!8X 2!2X I!2X .I!2X I!2X /$-B
BSL .0%00. to BSL I0%000 /!/X 2!8X 2!2X I!2X .9!6X I!MX ?$-B
BSL I0%00. to BSL .00%000 2!8X .M!8X 6!7X )$'B
More than BSL .00%000 2!2X .2!8X 7!9X ,$.B
%+%A *$*B '$?B '$'B ,$'B #-$?B ,$1B .$.B
S+ <& S+ F& PK <& PK F& T <& T F& %+%A
+perating cost 7B8 #*$#,B ,$##B *#$,/B #/$*#B *$-,B '$?1B /$#1B
Pa#roll 2!M8X .!27X /!0MX 0!M0X 0!68X 0!IIX #$*)B
eposit insurance 0!8IX 0!8IX 0!8IX 0!8IX 0!8IX 0!8IX 1$?,B
epreciation .!2.X 0!.MX 7!80X 0!/0X 0!07X 0!0.X 1$,-B
Honoraria .!7IX 0!I7X 0!.9X 0!.6X 0!27X 0!..X 1$,'B
General supplies .!.IX 0!.8X 7!I8X 0!28X 0!07X 0!0.X 1$,'B
&ommunications .!09X 0!.6X 7!.MX 0!29X 0!07X 0!0.X 1$-/B
Securit# 0!80X 0!./X /!MIX 0!/6X 0!..X 0!07X 1$-*B
Pu)licit# 0!/0X 0!/MX .!79X .2!67X 0!26X 0!2/X 1$-#B
Maintenance of accounts 0!6IX 0!.2X 2!M6X 0!.8X 0!0/X 0!0.X 1$*-B
..9
Strata S+ <& S+ F& PK <& PK F& T <& T F& %+%A
%+%A ?0/*1 '0,*/ '1. '- #0.*- ?./ #*0))/
0 to BSL .00 96!7X /6!/X 70!MX 7.!6X .9!2X 7!/X ,#$/B
BSL .0. to BSL I00 .M!0X 29!9X .8!IX .9!6X 2/!9X .0!.X '1$-B
BSL I0. to BSL .%000 9!IX .7!2X 9!9X 8!/X .8!6X 2.!2X #1$'B
BSL .%00. to BSL I%000 9!/X .M!MX 2I!/X .7!9X /7!0X 7I!0X #-$/B
BSL I%00. to .0%000 0!IX .!7X I!9X 8!/X I!0X .2!0X '$1B
BSL .0%00. to BSL I0%000 0!2X 0!IX 2!MX .0!7X 2!7X 9!MX #$1B
BSL I0%00. to BSL .00%000 0!0X 0!0X 0!0X 0!0X 0!.X 0!2X 1$1B
More than BSL .00%000 0!0X 0!0X 0!2X 0!0X 0!.X 0!2X 1$1B
%+%A 74S>8 '0,//0-/- '01#-0).. ,*-0?*' .#0'.' '0??.0*/# *0-*/0'*. ##0,#'0#-#
0 to BSL .00 /!9X .!.X 0!7X 0!/X 0!2X 0!0X #$#B
BSL .0. to BSL I00 .I!IX 8!6X .!MX .!8X 7!.X .!.X .$-B
BSL I0. to BSL .%000 .I!MX .2!MX .!MX 2!6X 6!9X 7!2X )$#B
BSL .%00. to BSL I%000 7/!7X I/!0X 2/!.X .2!2X 70!9X 28!/X *?$?B
BSL I%00. to .0%000 .2!/X .2!.X .I!8X 2.!8X .8!MX 2/!IX #/$,B
BSL .0%00. to BSL I0%000 M!/X M!.X 27!0X 9.!2X 22!IX /.!7X '1$#B
BSL I0%00. to BSL .00%000 0!0X /!2X 0!0X 0!0X 2!.X /!9X '$'B
More than BSL .00%000 0!0X 0!0X /2!MX 0!0X 7!0X 6!8X -$)B
0 to BSL .00 .9.!8X .0I!8X I200!.X M88!9X .20!9X .9/!/X '')$?B
BSL .0. to BSL I00 .9!/X ..!7X 80!0X ./8!0X .0!8X ..!IX #,$#B
BSL I0. to BSL .%000 9!6X I!/X /8!/X 8/!.X I!6X 9!IX .$.B
BSL .%00. to BSL I%000 7!2X /!.X 2/!MX 27!IX /!.X /!.X -$1B
BSL I%00. to .0%000 2!MX 2!8X .2!0X .7!7X 2!7X 2!/X *$1B
BSL .0%00. to BSL I0%000 .9!9X 2!9X 9!MX I!MX 2!.X 2!0X *$)B
BSL I0%00. to BSL .00%000 /!9X /!7X 2!9X *$-B
More than BSL .00%000 7!IX 2!9X 2!2X *$1B
%+%A #*$#B ,$#B *#$.B #/$*B *$,B '$?B /$#B
..6
Costing in FFP FI!0 as o( Dune '11-
Savin$s +ccounts Time eposits
Individuals
Time eposits
&ompanies
%+%A
+mount 'BSL( I%2I9%M6/ 8%.9M%M/0 8%6/M%.0M ''0#..01##
Eum)er of accounts 2.%62M M67 M. ''0/)-
+vera$e deposit 'BSL( 272 8%/88 M9%0/7 )/'
+vera$e term '#ears( .!2 .!2
Eo! of transact! per month /2%709 I7/ 70 *'0)?)
Transact! per account .!I 0!9 0!7 #$-
Individuals
Time eposits
&ompanies
%+%A
Financial cost 7B8 '$)B ,$)B ,$)B ,$'B
+perating cost 7B8 #.$#B #$/B #$-B ,$1B
4 1ixed !&EA &A &A 1.5%
4 3ariable "&!A C&@A C&"A 3.5%
%otal cost 7B8 #)$#B /$.B /$*B #1$'B
Individuals
Time eposits
&ompanies
%+%A
'BSL per month( /!/ ..!6 ...!9 -$1
Financial Cost by Strata 7B8 - Financial Costs AdEusted (or 2eserve 2eAuirements
Individuals
Time eposits
&ompanies
%+%A
0 to BSL I00 2!MX 7!9X /!9X
*$#B
BSL I00 to .%000 2!MX 7!7X 0!0X *$'B
BSL .%00. to I%000 2!MX 7!MX 9!IX *$.B
BSL I%00. to .0%000 2!MX I!8X 9!7X -$)B
BSL .0%00. to BSL I0%000 2!MX I!9X I!9X ,$-B
BSL I0%00. to .00%000 2!MX 9!6X 9!0X .$'B
More than BSL .00%000 2!MX 9!6X 9!0X ,$)B
%+%A '$)B ,$)B ,$)B ,$'B
Savin$s +ccount Time eposits
Individuals
Time eposits
&ompanies
%+%A
+perating cost 7B8 #.$#*B #$.?B #$*)B -$))B
Pa#roll 9!60X 0!MMX 0!89X *$--B
TaFes .!I.X 0!02X 0!00X #$1*B
=ent 0!MIX 0!0.X 0!00X 1$.,B
epreciation 0!M7X 0!0.X 0!00X 1$.-B
&ommunications 2!08X 0!09X 0!0.X 1$,'B
Kffice supplies 0!I9X 0!0.X 0!00X
1$*)B
Maintenance and repairs 0!IIX 0!0.X 0!00X
1$*?B
Securit# 0!/MX 0!02X 0!00X 1$'/B
&omputer services 0!/6X 0!00X 0!00X 1$',B
..8
Strata
Individuals
Time eposits
&ompanies
%+%A
%+%A '#0/') )/- )# ''0/)-
0 to BSL I00 M0!2X .I!8X 0!9X ?.$.B
BSL I0. to .%000 /!MX .7!.X .!.X -$*B
BSL .%00. to I%000 I!/X /6!/X 7!7X
.$/B
BSL I%00. to .0%000 0!IX .I!/X 7!7X
#$#B
BSL .0%00. to BSL I0%000 0!.X .7!9X 72!0X
1$)B
BSL I0%00. to .00%000 0!0X 2!2X 27!/X
1$'B
More than BSL .00%000 0!0X 0!6X 2/!2X 1$#B
Strata
Individuals
Time eposits
&ompanies
%+%A
%+%A 74S>8 ,0',.0)/* ?0#.)0)*1 ?0/*)0#1) ''0#..01##
0 to BSL I00 ./!9X 0!IX 0!0X *$-B
BSL I0. to .%000 ..!6X .!7X 0!0X *$*B
BSL .%00. to I%000 7I!7X .2!0X 0!.X #,$'B
BSL I%00. to .0%000 .2!9X ./!8X 0!/X ?$'B
BSL .0%00. to BSL I0%000 .0!IX /M!2X ./!MX ''$-B
BSL I0%00. to .00%000 2!8X .8!0X .8!6X #-$/B
More than BSL .00%000 /!IX .I!.X 96!0X *'$?B
Strata
Individuals
Time eposits
&ompanies
%+%A
0 to BSL I00 M2!.X /9!6X //I!/X ?)$#B
BSL I0. to .%000 6!MX .2!.X .76!/X ?$/B
BSL .%00. to I%000 /!2X 7!.X /8!6X *$.B
BSL I%00. to .0%000 9!MX .!8X .I!/X *$?B
BSL .0%00. to BSL I0%000 2!MX .!0X /!2X #$/B
BSL I0%00. to .00%000 .!2X 0!6X .!6X #$'B
More than BSL .00%000 0!6X 0!9X 0!8X 1$?B
%+%A #.$#B #$/B #$-B ,$1B
..M
Costing in C&AC AreAuipa0 as o( Dune '11-
S+ <& S+ F& T <& T F& "+ <& "+ F& IFI <& IFI F& %+%A
+mount 'BSL( ..%9IM%72M .6%7.8%M29 26%766%6/2 27%M6I%220 2%I.9%9M8 .%2M0%29/ I%/9/%/0I .%0./%0.0 )#0/#-0,?#
Eo! of accounts I6%70M 26%288 7%IMM I%8.0 /%I29 .%I.6 2I 2. #110#)-
+vera$e deposit 'BSL( 20/ 9/8 I%M6I 7%2MM 6.7 8I. 2.7%I/2 78%2/M )#,
+vera$e term '#ears( 2!0 .!. 0!/ 0!M
Eo! of transact! per month 202%8I2 /8%79/ 2%6II 2%.28 9%826 2%68M /%M76 .%.09 '.10?./
Transact! per account /!I .!7 0!9 0!7 .!M .!8 .I6!M I2!6 '$.
Financial costs 7B8 '$1B #$*B #-$,B /$#B #/$.B .$1B ,$.B '$)B /$/B
+perating costs 7B8 #)$'B -$.B #$*B #$-B -$/B -$#B #$,B #$?B -$-B
4 1ixed !&$A &CA C&#A C&#A C&EA C&DA C&"A C&#A 0.8%
4 3ariable @&@A "&BA C&EA &CA "&DA "&!A &!A &#A 3.6%
%otal costs 7B8 '#$#B .$1B #,$?B ?$,B ''$-B #1$1B /$#B -$/B #'$#B
'BSL per month (
/!2 2!I 9!9 I!0 2!8 2!M 298!6 60!I *$-
0 to BSL .00 2!2X .!7X 6!6X 7!.X .6!9X 9!0X *$*B
BSL .0. to BSL I00 2!.X .!/X 8!6X I!MX .6!9X 9!0X *$.B
BSL I0. to BSL .%000 2!.X .!/X M!0X I!MX .6!9X 9!0X *$/B
BSL .%00. to BSL I%000 2!.X .!/X .0!6X 9!0X .6!9X 9!0X 0!6X -$.B
BSL I%00. to BSL .0%000 .!MX .!/X .2!IX 9!7X .6!9X 9!0X /!8X .!/X ,$?B
BSL .0%00. to BSL I0%000 .!6X .!7X .I!/X 6!.X .6!9X 9!0X .!/X 0!MX )$'B
BSL I0%00. to BSL .00%000 .!7X 0!6X .9!2X 8!2X .6!9X 9!0X .!/X 0!6X #*$#B
More than BSL .00%000 .!IX .I!9X
%+%A '$1B #$*B #-$,B /$#B #/$.B .$1B ,$.B '$)B /$/B
+perating cost 7B8 #)$#/B -$.,B #$*'B #$-1B -$/-B -$1/B #$,1B #$/,B -$*)B
Pa#roll 9!I6X .!6/X 0!I0X 0!I7X .!6/X .!7MX 0!I2X 0!90X #$,/B
Insurance .!88X 0!90X 0!09X 0!0MX 0!I7X 0!7IX 0!00X 0!0.X 1$-'B
epreciation and amortization 2!28X 0!2MX 0!0.X 0!0.X 0!/9X 0!28X 0!.0X 0!.7X 1$*/B
eposit insurance 0!/9X 0!/9X 0!/9X 0!/9X 0!/9X 0!/9X 0!/9X 0!/9X 1$*.B
Future wor3s .!/.X 0!72X 0!07X 0!09X 0!/6X 0!/.X 0!00X 0!0.X 1$')B
Securit# .!70X 0!.8X 0!0.X 0!0.X 0!22X 0!.6X 0!09X 0!0MX 1$'*B
=ent .!20X 0!.IX 0!0.X 0!0.X 0!.MX 0!.IX 0!0IX 0!08X 1$'1B
Kffice supplies 0!8/X 0!..X 0!00X 0!00X 0!./X 0!.0X 0!07X 0!0IX 1$#-B
.20
Strata S+ <& S+ F& T <& T F& "+ <& "+ F& IFI <& IFI F& %+%A
%+%A ,/0-1) '/0'?? -0,)) ,0?#1 *0,'. #0,#/ ', '# #110#)-
0 to BSL .00 6M!MX 92!MX /!/X 0!.X 69!2X I6!.X 0!0X 0!0X ..$.B
BSL .0. to BSL I00 .2!6X .I!IX /0!6X .7!7X ..!0X 20!MX 0!0X 0!0X #-$,B
BSL I0. to BSL .%000 /!7X 6!/X .9!9X .8!8X /!.X 9!IX 0!0X 0!0X .$1B
BSL .%00. to BSL I%000 /!IX ..!9X //!7X 78!6X I!6X .0!MX 0!0X .7!/X )$)B
BSL I%00. to BSL .0%000 0!/X .!8X 9!9X ..!2X 2!2X /!0X 8!0X 7!8X #$?B
BSL .0%00. to BSL I0%000 0!.X 0!MX 6!/X 9!/X .!8X .!9X 28!0X 72!MX #$#B
BSL I0%00. to BSL .00%000 0!0X 0!0X .!.X 0!/X 0!.X 0!.X .9!0X M!IX 1$#B
More than BSL .00%000 0!0X 0!0X .!0X 0!/X 0!0X 0!0X 78!0X 28!9X 1$#B
%+%A 74S>8 ..%9IM%72M .6%7.8%M29 26%766%6/2 27%M6I%220 2%I.9%9M8 .%2M0%29/ I%/9/%/0I .%0./%0.0 )#0/#-0,?#
0 to BSL .00 7!6X .!/X 0!0X 0!0X .!IX .!7X 0!0X 0!0X 1$)B
BSL .0. to BSL I00 .7!9X 9!0X .!7X .!2X /!9X I!8X 0!0X 0!0X *$)B
BSL I0. to BSL .%000 ..!6X 8!0X 2!0X /!/X /!0X I!7X 0!0X 0!0X -$/B
BSL .%00. to BSL I%000 //!6X /M!.X .2!7X 29!2X .M!9X 2M!7X 0!0X .!0X '*$,B
BSL I%00. to BSL .0%000 .0!7X .M!7X 6!IX .6!9X 22!2X 27!/X 0!2X 0!9X #*$1B
BSL .0%00. to BSL I0%000 .2!8X 2/!2X 2I!2X 2I!6X 77!/X 2M!7X 7!2X 20!9X ''$/B
BSL I0%00. to BSL .00%000 2!8X 2!MX .2!.X 7!2X I!8X 7!7X 7!/X M!8X .$'B
More than BSL .00%000 M!/X 0!0X /M!7X 2.!8X 0!0X 0!0X M.!/X 98!0X ',$1B
0 to BSL .00 28.!8X .86!.X 9.!/X 68!2X 20I!MX ./8!6X '-/$?B
BSL .0. to BSL I00 .M!0X ..!MX .I!0X .0!2X ./!/X ./!2X #,$,B
BSL I0. to BSL .%000 8!0X 7!9X 9!/X 7!MX I!.X I!.X .$1B
BSL .%00. to BSL I%000 7!2X 2!0X 2!IX 2!.X 2!0X 2!0X M!MX '$,B
BSL I%00. to BSL .0%000 /!0X .!.X .!/X .!.X .!.X .!.X 2M!8X .0!2X #$-B
BSL .0%00. to BSL I0%000 2!2X 0!MX 0!8X 0!8X 0!8X 0!8X I!6X 2!/X #$1B
BSL I0%00. to BSL .00%000 2!MX 0!8X 0!6X 0!6X 0!6X 0!6X 2!6X .!/X 1$)B
More than BSL .00%000 .!.X 0!6X 0!6X .!2X .!IX 1$?B
%+%A #)$'B -$.B #$*B #$-B -$/B -$#B #$,B #$?B -$-B
.2.
Costing in C&AC Piura0 as o( Dune '11-
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
+mount 'BSL( I%86I%.96 7%./2%97/ I%I/0%.7I .%990%/.8 /8%8/8%.86 /M%.27%268 I8.%782 698%.8/ ).0,#10-1'
Eum)er of accounts /8%96. 6%M76 2%M0M /M/ .6%.99 .2%I6. /%..9 2%98/ ?,0-,,
+vera$e deposit 'BSL( .I2 I20 .%M0. 7%22I 2%29/ /%..2 .86 289 #0#')
+vera$e term '#ears( 0!7 0!/
Eo! of transact! per month 70%M92 7%806 .%/96 I9 9%0II 2%M7. .%/M6 6.0 ,?0'),
Transact! per account .!. 0!9 0!I 0!. 0!7 0!2 0!7 0!/ 1$/
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
Financial costs 7B8 #$)B #$)B #$)B #$)B ##$.B /$'B #?$-B ?$#B ?$#B
+perating costs 7B8 '/$/B .$'B '$*B #$-B #$)B #$.B #'$?B .$/B *$.B
4 1ixed &!A C&$A C&"A C&!A C&"A C&"A C&DA C&@A 0.3%
4 3ariable !@&$A $&BA !&CA &A &@A &"A &EA @&!A 3.3%
%otal costs 7B8 ')$.B ?$#B -$'B *$*B #*$,B ?$/B *#$'B #-$)B ##$/B
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
'BSL per month(
/!I 2!6 /!9 7!8 /!9 7!0 2!0 .!9 *$-
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
0 to BSL .00 .!MX .!MX .!MX .!MX 8!.X 9!.X 29!2X .7!0X .$.B
BSL .0. to BSL I00 .!MX .!MX .!MX .!MX 8!2X 9!/X 22!6X ..!IX ,$)B
BSL I0. to BSL .%000 .!MX .!MX .!MX .!MX 8!9X 9!/X .M!MX 8!IX .$1B
BSL .%00. to BSL I%000 .!MX .!MX .!MX .!MX .0!IX 9!7X .I!9X 9!6X .$/B
BSL I%00. to BSL .0%000 .!MX .!MX .!MX .!MX ..!IX 9!6X .6!0X 9!9X /$*B
BSL .0%00. to BSL I0%000 .!MX .!MX .!MX .!MX .2!6X 6!/X .6!.X 6!0X ?$?B
BSL I0%00. to BSL .00%000 .!MX .!MX .!MX .!MX .9!6X 8!9X ##$,B
More than BSL .00%000 .!MX .!MX .!MX .!MX .0!IX 8!/X ?$?B
%+%A #$)B #$)B #$)B #$)B ##$.B /$'B #?$-B ?$#B ?$#B
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
+perating cost 7B8 '/$./B .$#?B '$',B #$*.B #$)1B #$,.B #'$//B .$/,B *$.*B
Pa#roll .0!06X 2!.IX 0!96X 0!/7X 0!IIX 0!72X 7!98X 2!77X #$#)B
Securit# /!/7X 0!I9X 0!.2X 0!02X 0!06X 0!07X .!.IX 0!77X 1$')B
=ent /!07X 0!I.X 0!..X 0!0.X 0!06X 0!0/X .!0IX 0!70X 1$'.B
&ommunicationsG telephone 2!8MX 0!78X 0!.0X 0!0.X 0!09X 0!0/X .!00X 0!/8X 1$',B
General supplies 2!7/X 0!70X 0!0MX 0!0.X 0!0IX 0!0/X 0!87X 0!/2X 1$'#B
Pu)licit# and pu)lications .!22X 0!/9X 0!.0X 0!07X 0!08X 0!09X 0!MMX 0!9IX 1$#.B
Insurance 0!M/X 0!26X 0!06X 0!0/X 0!09X 0!0IX 0!69X 0!I0X 1$#*B
Kther services 0!6IX 0!22X 0!09X 0!0/X 0!0IX 0!07X 0!9.X 0!70X 1$#1B
.22
Strata
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
%+%A *?0./# /0)-/ '0)1) *)* #/0#.. #'0,/# *0##. '0.?* ?,0-,,
0 to BSL .00 8.!6X 96!.X 97!0X I6!/X 2.!IX 0!2X 8I!IX 6/!2X ,?$.B
BSL .0. to BSL I00 .2!/X .9!/X .I!7X ./!2X /6!7X 28!.X M!6X .6!6X #)$'B
BSL I0. to BSL .%000 /!0X 9!0X 9!.X I!/X ./!8X .6!MX 2!.X /!6X /$#B
BSL .%00. to BSL I%000 2!6X 8!9X M!MX .I!0X .M!7X /I!MX .!8X 7!7X #1$/B
BSL I%00. to BSL .0%000 0!2X .!/X 2!2X /!8X /!7X 8!MX 0!IX 0!6X '$#B
BSL .0%00. to BSL I0%000 0!.X 0!6X .!MX /!8X 7!0X 8!/X 0!7X 0!7X '$1B
BSL I0%00. to BSL .00%000 0!0X 0!0X 0!/X 0!8X 0!7X 0!9X 0!0X 0!0X 1$'B
More than BSL .00%000 0!0X 0!0X 0!/X 0!8X 0!/X 0!/X 0!0X 0!0X 1$#B
Strata
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
%+%A 74S>8 I%86I%.96 7%./2%97/ I%I/0%.7I .%990%/.8 /8%8/8%.86 /M%.27%268 I8.%782 698%.8/ ).0,#10-1'
0 to BSL .00 I!MX .!6X 0!7X 0!2X 0!7X 0!0X 8!6X 8!2X 1$/B
BSL .0. to BSL I00 .8!6X 6!/X 2!0X 0!6X /!/X .!8X ..!MX ./!0X *$?B
BSL I0. to BSL .%000 ./!6X 8!.X 2!/X 0!MX /!IX /!.X 6!/X 8!MX -$#B
BSL .%00. to BSL I%000 /7!2X /I!IX ..!IX 8!.X .7!8X .M!7X 20!6X /2!/X #?$.B
BSL I%00. to BSL .0%000 .0!8X .9!9X 8!2X 9!9X 8!/X .I!0X .M!MX .6!6X ##$.B
BSL .0%00. to BSL I0%000 ./!8X 22!6X .M!MX .I!9X 26!6X /9!8X /.!IX .M!MX ')$.B
BSL I0%00. to BSL .00%000 0!IX 7!9X M!6X .0!9X 8!6X M!2X 0!0X 0!0X ?$'B
More than BSL .00%000 2!7X /!IX 7I!MX I6!/X //!/X .7!6X 0!0X 0!0X '*$*B
Strata
S+ <& S+ F& PK <& PK F& T <& T F& "+ <& "+ F& %+%A
0 to BSL .00 ///!0X .66!9X .96!7X ..8!/X I6!/X 97!/X ..8!0X I/!6X '##$#B
BSL .0. to BSL I00 2I!6X .7!MX ./!9X .0!IX .2!6X .2!/X .0!IX 8!MX #.$,B
BSL I0. to BSL .%000 M!/X 9!0X 7!MX 7!.X I!0X I!0X 7!2X /!/X ,$)B
BSL .%00. to BSL I%000 7!.X 2!MX 2!9X 2!0X 2!2X 2!2X .!MX .!9X '$,B
BSL I%00. to BSL .0%000 2!2X .!9X .!/X .!2X .!/X .!/X .!2X .!.X #$*B
BSL .0%00. to BSL I0%000 .!2X .!.X .!2X .!0X .!0X .!0X .!0X .!0X #$1B
BSL I0%00. to BSL .00%000 0!MX 0!MX 0!MX 0!MX 0!MX 0!MX 1$)B
More than BSL .00%000 0!MX 0!MX 0!MX 0!MX 0!MX 0!MX 1$)B
%+%A '/$/B .$'B '$*B #$-B #$)B #$.B #'$?B .$/B *$.B
MFI Fundin$!BPP FIE+< +nneFes 4EG!doc
Eov! /0% 2009

How Should We Fund Micro Finance

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How Should We Fund Micro Finance

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How Should Microfinance Institutions

Best Fund Themselves?

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