Developing a Model of a Successful Microfinance Enterprise - Research Proposal Example

Research Proposal: Developing a Model of a Successful Microfinance Enterprise The Study Area: Microfinance describes a variety of financial services for “unbankable”, generally poor customers and is usually practised in developing countries. Other related terms are microcredit, which specifically refers to small-scale lending programs, microsavings, microinsurance, and money transfer vehicles. One of the best-known and most-successful examples of a microfinance enterprise is the Grameen Bank of Bangladesh, the core of whose business are savings and loan programs to small entrepreneurs and farmers, the majority of whom are women. Background & Academic Context: Microfinance institutions (MFIs) are considered an important part of poverty alleviation programs, and a good alternative to direct humanitarian aid, which often does not reach individuals or is used instead for larger public works that have little real impact on poverty conditions. Where the comparison has been specifically studied, the likely beneficiaries of either of these modes of assistance prefer the ‘social entrepreneurship’ model of MFIs, perceiving more tangible improvements in their day-to-day lives and an eventual path out of poverty. (Smith & Nemetz, 2009) MFIs, however, are not immune to criticism, which Hartungi (2007) summarises in his case study of the generally-successful program of the Bank Rakyat Indonesia in South Sulawesi: MFIs are unable to help the most desperately poor, i.e. those unable to work, are generally still modelled on failed past programs directed at small agriculture, and are limited in their ability to address large-scale poverty. Nevertheless, MFIs are considered to be a more viable solution to traditional social services provided by non-profit organisations, which often have difficulty remaining solvent. (Smith & Nemetz, 2009) The very fact that MFIs are able to flourish in some parts of the world is an indication that “poverty” in its most direct meaning is not entirely the problem. The concept of “extralegality” is examined in great detail in Hernando de Soto’s The Mystery of Capital (2000). In it, he asserts that in most countries the supposedly “poor” segment of the population actually has a sufficient amount of capital, but it is not efficiently used because it exists at the “extralegal,” subsistence level outside of the formal economy. In a 2007 essay for the IFC, Matthew Bird identified three basic reasons why an extralegal (and therefore functionally near or at poverty-level) economy exists: Fear of detection, lack of property rights, and lack of formalised and consistent contract enforcement. The second factor, lack of property rights, prevents small entrepreneurs from accessing credit and discourages investment on their part because of the lack of security. (Bird, 2007) This economic handicap, at least in financial terms, is what is addressed by the MFI concept. One of the world’s best-known and largest MFIs is the Grameen Bank, founded in 1976 by Professor Muhammad Yunus of the University of Chittagong, and chartered in 1983 to operate as a national bank in Bangladesh. (Hassan & Renterio-Guerrero, 1997) Grameen Bank is one of the world’s first large-scale social enterprises, an example of business principles applied to what was once the exclusive province of non-profit and charitable organisations. There are two principle management theories or concepts at work in the operation of an MFI: social entrepreneurship and relationship management. Social entrepreneurship addresses charitable or social concerns – which in a regular business would probably be considered CSR issues – from a revenue- and profit-generating perspective, with the concurrent objectives to provide a needed social service and be financially successful. (Thompson, Alvy, & Lees, 2000; Pitta & Kucher, 2009) Principles of relationship management apply to social enterprises such as MFIs in much the same way as they do to the connection of charities to donors. (Waters, 2008) In the case of MFIs, however, the role of the donor is filled by the same person who will be the beneficiary of the social service; the customers are also the contributors, who are being asked to invest – either through a debt obligation, a deposit of savings, or perhaps an insurance policy – in a social initiative. MFIs that have become successful, however, particularly ones approaching the scale of Grameen Bank, seem to suffer from a critical paradox. An MFI are supposed to be financially-successful and grow so that they can offer their services to more people, but if the MFI becomes too successful, it risks losing its social enterprise character and the public goodwill that earns. Throughout India, for example, several MFIs have reached a point where they are considered attractive to corporate investors and are planning IPOs on the open market. This has caused many of them to sacrifice much of their socially-directed work in favour of more traditional customers that generate the kind of revenue expected by potential stockholders. (Chopra, 2010) In the particular example above, the criticism is that government regulators should ensure that MFIs stick to their original mission. But from the MFI’s point of view, successful growth into “mainstream” banking might be a very desirable objective. Another more fundamental criticism of MFIs is that in areas that are subject to sudden economic shocks – such as Bangladesh, which is prone to frequent typhoons and dangerous flooding – microfinance actually produces a sort of “poverty trap” for already-poor people. Because borrowing has become easier, less effort and resources are dedicated to mitigation or recovery initiatives. (Gehlich-Shillabeer, 2008) For example, farmers in a flood-prone area might not work as carefully to protect their fields or save up some money against the possibility of a destroyed harvest in the assumption that recovery funds could easily be borrowed later if needed. The government, on the other hand, might not expend as much effort on flood control projects or disaster relief, because the people appear to be recovering fairly well – although in reality, they are only doing so by increasing their debts. Research Question & Objectives: A preliminary review of the existing literature reveals a couple areas of inquiry. While the literature is extensive, it is not generalised. Previous researchers have focused on individual institutions or areas. In addition to the studies already cited, other examples include research on transaction costs in microcredit groups in India (Shankar, 2007); a case study of MFIs in Guatemala (Brau, Hiatt, & Woodworth, 2009); several studies of MFIs in Islamic communities (Dusuki, 2008, and Ahmad & Ahmad, 2009); and numerous studies of the Grameen Bank. The various problems and potential pitfalls of microfinance that are described in the literature indicate that developing a universal model of an effective MFI is a challenge, and perhaps explains the selectivity of the existing research; different problems are manifested in different areas, making it difficult to devise a prescription that could be applied anywhere. Consequently, this proposed research will attempt to fill that gap in the existing knowledge by developing A General Model of an Effective Microfinance Institution. This will require the gathering of information in several areas: A complete description of the objectives of microfinance. These objectives may not be the same in every area where MFIs operate. Along with that, a profile of the people whom MFIs are intended to serve. Again, these may be different from one area to another, such as the Islamic communities mentioned above. The different governance, management, and operations structures that are used by MFIs. Regulatory frameworks that apply to MFIs. These will be partly general, such as guidelines from the IMF, World Bank, or the Basel II accord, and partly specific, i.e. banking regulations of individual countries. Assessments of the success of MFIs according to some common measures, such as loan repayment or default rates, growth statistics, savings rates and amounts, and insurance policies written and/or paid. The expected output of this research will take one of two forms. The main hypothesis is that a single model can be developed for an MFI that will be successful wherever it is applied: It may not be possible, however, to describe a single population or regulatory environment common to all MFIs, so the secondary hypothesis is that n models which differ in their organisational frameworks can be developed, dependent on which of n types of populations and regulatory environments exist together: Methods: The primary research for this study will require the gathering of statistical and financial data from independent research, service, and regulatory agencies such as the World Bank, International Monetary Fund, International Finance Corporation, UN Development Programme, OECD, and national bank regulatory authorities. In addition, data will be obtained from annual and other required periodic reports presented to regulators and shareholders by MFIs. The secondary research will be an extensive literature review. This will include case studies of MFIs, research into economic conditions in areas served or potentially serviceable by MFIs, studies of applicable management principles, and assessments of MFI performance in different areas. In both the primary and secondary research, the necessary material will in all likelihood be published and readily accessible through the Internet and libraries. It may be necessary to obtain clarification or additional information from individual MFIs, which can be done by contacting their public relations, media, or information departments. Setting & Strategy: The setting is intended to be global, but in order to keep the work organised and manageable within the prescribed time limit for the study the focus will be on a reasonable number of examples of MFIs – ideally 2 or 3 at a minimum – in each of the following areas: Europe, primarily Southern and Eastern Europe and among specific population groups (such as women, Islamic communities, ethnic minorities). North America, primarily among specific population groups. Central and South America. Southeast and East Asia, Australia/New Zealand, and the Pacific. South Asia, primarily India, Bangladesh, Pakistan, and Sri Lanka. The Middle East. Africa. This should provide a broad spectrum of data without being unmanageable, and by selecting at least 2 or 3 MFIs to study in each area, it will be possible to study different approaches to the same local or regional conditions, since those MFIs will be competitors in many instances. The overall strategy for the research will be a case study, but on two different levels. The data obtained from the primary research, being largely statistical in nature, will be the basis for a case study of microfinance on a global scale. The results of individual case studies of the example MFIs in different parts of the world will serve to illustrate the conclusions of the global case. This strategy has been selected because of the gap in the existing research explained above, wherein the focus has been on limited areas. Research Ethics: This proposed research should not present any ethical difficulties or concerns. Because the data will be obtained, at least as far as foreseeable, from already-published information there should be no need for confidentiality. Interviews or experiments involving individual participants will not be required. In circumstances where information must be obtained by direct contact with MFIs, information that would ordinarily be considered confidential by a financial institution, such as individual account information, will not be required in any case. Any request for other information will be made with a clear disclosure of its intended use – i.e. for non-commercial, academic research purposes only – and any terms of use required by the contacted organisations will be strictly followed. Time Scale & Resources: After the submission and acceptance of this research proposal, the research project will have five key steps, culminating with the submission of the final dissertation on 30 September: Secondary Research/Literature Review – This will be started before the primary research mainly because the work of previous studies will provide guidance as to which sources and databases to access for the statistical and financial data to be gathered. Primary Research. Data organisation, sorting, and preparation of a rough draft – The statistical and financial data gathered in the primary research will need to be managed, and since it will be used to describe sets of characteristics or conditions such as population descriptions, processing with a statistical program such as SPSS or Excel will likely be necessary. At this early stage, however, the exact nature of that work is not known, and will only become clear through the research process. Feedback and revisions – Ample time will be allocated for review of the initial draft by the dissertation supervisor and preparation of a revised draft. Prepare final draft – Likewise, sufficient time will be allotted for making additional revisions to the final version, plus preparation of the required copies of the document. The Gantt chart summarises the anticipated schedule for the work. This is subject to change, however, pending discussion with the dissertation supervisor. In terms of financial or other resources, no significant expenses beyond the ordinary costs associated with preparing an academic paper are expected. It is possible that some research materials such as reports may need to be purchased, but most information seems to be available through the usual resources provided by the university at no additional cost. In the event that fees for publications must be paid, these are expected to be minimal and well within the researcher’s means. References: The brief list of references below is simply a limited sample of the literature reviewed in choosing the subject and preparing this research proposal. The researcher is quite confident that more than sufficient information is available to successfully complete this study. References Ahmad, A.U.F., and Ahmad, A.B.R. (2009) “Islamic Microfinance: the Evidence from Australia”. Humanomics, 25(3): 217-235. Available from Emerald: . Bird, Matthew. (2007) “Traveling Down the Other Path: Learning to See Extralegality as an Investment Opportunity”. International Finance Corporation/World Bank Group. Brau, J.C., Hiatt, S., and Woodworth, W. (2009) “Evaluating Impacts of Microfinance Institutions Using Guatemalan Data”. Managerial Finance, 35(12): 953-974. Available from Emerald: . Chopra, Manav. (2010) “Microfin In Macro Mess?” Tehelka Magazine [Internet], 2 February 2010. Available from: . De Soto, Hernando. (2000) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books. Dusuki, Asyraf W. (2008) “Banking for the Poor: the Role of Islamic Banking in Microfinance Initiatives”. Humanomics, 24(1): 49-66. Available from Emerald: . Gehlich-Shillabeer, Mareen. (2008) “Poverty Alleviation or Poverty Traps? Microcredits and Vulnerability in Bangladesh”. Disaster Prevention and Management, 17(3): 396-409. Available from Emerald: . Hartungi, Rusdy. (2007) “Understanding the Success Factors of Micro-finance Institution in a Developing Country”. International Journal of Social Economics, 34(6): 388-401. Available from Emerald: . Hassan, M.K., and Renteria-Guerrero, Luis. (1997) “The Experience of the Grameen Bank of Bangladesh in Community Development”. International Journal of Social Economics, 24(12): 1488-1523. Available from Emerald: . Pitta, D.A., and Kucher, J.H. (2009) “Social Enterprises as Consumer Products: The Case of Vehicles for Change”. Journal of Product & Brand Management, 18(2): 154-158. Available from Emerald: . Shankar, Savita. (2007) “Transaction Costs in Group Microcredit in India”. Management Decision, 45(8): 1331-1342. Available from Emerald: . Smith, Teresa C., and Nemetz, Patrick L. (2009) “Social Entrepreneurship Compared to Government Foreign Aid”. Journal of Research in Marketing and Entrepreneurship, 11(1): 49-65. Available from Emerald: . Thompson, A., Alvy, G., and Lees, A. (2000) “Social Entrepreneurship – A New Look at the People and the Potential”. Management Decision, 38(5): 328-338. Available from Emerald: . Waters, Richard D. (2008) “Applying Relationship Management Theory to the Fundraising Process for Individual Donors”. Journal of Communication Management, 12(1): 73-87. Available from Emerald: . Read More