Performance Measurement and Evaluation of Grameen Bank - Case Study Example

Management Control Systems: performance measurement and evaluation of Grameen Bank Executive Summary Control is the process of ensuring that a firm's activities conform to its plan and that its objectives are achieved. Control systems are measurements and information that assist in determining management control and decision making. It encompasses all the methods and procedures that guide employees towards the achievement of organisational goals and objectives. (Drury, 2001) The aim of management control systems is to influence employee behaviours in desirable ways in order to increase the success of an organisation. Management accounting control systems are needed by organisations in order express and aggregate the results of a wide range of dissimilar business activities. The monetary measure becomes a common measure that is understood by all functions of the organisation. Also, profitability measure is essential to the success of all organisations. Thus, management monitors performance in terms of monetary value. Most especially, financial results provide a mechanism to suggest whether the business strategies implemented by an organisation benefited them. (Kimmel, Weygandt, & Kisco, 2000) This paper focuses on the management control systems established and implemented by a banking institution - Grameen Bank. Grameen Bank is a non-traditional bank that surpasses conventional banking practices of its contemporaries. In view of this, the paper will illustrate the different performance measurements that the organisation established as well as create a performance evaluation of the organisation. Grameen Bank is a micro-credit organisation that had initiated lending to the rural poor and was very successful that they rise above the normal banking conventions. Muhammad Yunus founded the bank in order to help the poor people in his country. He envisioned create an organisation that would alleviate the poor from poverty. He created the bank because no other banks shared his vision. In his speech as a Nobel Peace Prize Awardee, Yunus started the bank as a home-grown project that was run with the help of his students. Now, the Grameen Bank has increased in multitudes and the Grameen idea has spread around the world. Grameen-type programs are being implemented in almost every country. (Yunus, 2006) The target market of Grameen is the poorest of the poor in Bangladesh and most of their customers are responsible women of the poor families. Yunus developed a lending methodology where loans are paid in miniature weekly payments. The purpose of micro-credit lending is to detect problems early and increase borrowers' confidence. The objectives of the Grameen Bank are to extend the banking facilities to the poor people without collaterals but instead of mutual trust, accountability, participation and creativity. The organisation aims to become an enabler for the unutilized and underutilized manpower to create opportunities for self-employment. (Grameen Bank, 2009) Management control systems According to Kaplan & Norton (1996), what an organisation cannot measure, the organisation cannot manage. In order for an organisation to be successful in its business, they must know what to look at or the indicators that show the health of the organisation. It is part of the role of management to create strategies for the organisation in order sustain their existence as well as grow in their business environment. It is the nature of management to have control over the organisation. It is the function of management to define various measures to safeguard its assets; check the reliability and accuracy of accounting information; ensure compliance with management policies; and evaluate operating performance and efficiency. Without control, the people in the organisation will be functioning in chaos and without direction. Management control is one of the reasons that an organisation would look professional, systematic and trustworthy, inside and out. A management control system is also a performance measurement system. These measurement systems focus on improving the business processes and achieving breakthrough performance that are most critical for customers as well as shareholders. (Kaplan & Norton, 1996) Such systems may incorporate financial and non-financial systems. However, the focus of this paper is on the financial performance measurement system. Grameen Bank is a financial institution that provides monetary products and services. Their core competency is in micro-credit lending for the rural poor of Bangladesh. It is but necessary for the organisation to establish management control system that is highly inclined to the financial operations of the bank. Performance management Grameen Bank management is responsible for measuring and managing the performance of the company, most specially, on its finances. They have established performance indicators in order to facilitate their management role and sustain the growth of the company. The performance indicators are measured annually and consolidated in order to help them create business strategies as well as support them in the business decision-making process. The performance indicators are categorised into four major control systems. First of which is the institutional characteristics. This indicator includes the total assets of the company after the end of the year. It also includes the number of offices and the number of employees that the Grameen Bank has already built and employed, respectively. The institutional characteristics show the physical growth of the company over the years. The second category is the outreach indicators. These performance indicators include the number of bank branches and the number of members. Among them, they also measure the number of active borrowers, as a whole and as per branch. The number of loan officers is also measured in the outreach indicators. As one of their target market, the bank also measures the percentage of women members. Furthermore, the outreach indicators include the average loan balance per borrower. The purpose of the outreach indicators is to appraise the network of members of the bank and how they are utilising the products and services of the bank. The indicators will determine how accessible the Grameen Bank to its target market, the rural poor. The third category is the loan portfolio of the bank. This category includes the principal amount of loan disbursed, the number of loans disbursed and the total outstanding loan. With it, the category also gauges the current performing loans and the overdue loans. Most importantly, the category computes the loan portfolio growth rate of the company. The objective of this category is to measure the performance of the core competency of the organisation, which is micro-credit lending. The fourth category of the organisation's performance management is the financial ratios. This includes the sustainability/profitability ratios, asset/liability management ratios, efficiency and productivity ratios and the capital adequacy ratio of the whole Grameen Bank organisation. The sustainability/profitability ratios are the return on equity (ROE), operating self-sufficiency and the financial self-sufficiency of the company. The asset/liability ratios are the yield on gross portfolio and the cost of funds ratio. Efficiency and productivity ratios measures the productivity per loan officer, operating expense ratio, personnel expense per loan portfolio, cost per borrower, and the portfolio per loan officer. Performance evaluation From the humble beginning of lending $27 to 42 stool makers in Jobra, Bangladesh, Yunus has transformed Grameen Bank into a formal banking institution that has catered to over seven million members in over 2,500 branches at the end of 2008. Clearly, the vision of its founder has been achieved. The organisation's aims of reaching the poorest of the poor as well as sustaining growth in order to serve more, have been realized. The success of Grameen Bank is not only rooted on the vision of its founder but also on the successful implementation of their management control system. Taking into account the years 2002-2008, the performance of the company is evaluated as based on their performance indicators. At the end of 2008, the organisation has grown more than 200% in total assets from 2002. Its number of offices has been raised by 117%, while the number of employees has increase more than 100%. Below is the graph summarising the institutional characteristics of the organisation. At the end of 2008, Grameen Bank acquires an increase of more than 200% of poor members from 2002 and it has created 2,539 branches all over Bangladesh. Its active borrowers are 6,21 million. The active borrowers constitute 81% of the total number of 7.67 million members in 2008. In order to serve the increasing number of members, the number of loan officers has increased to 14,000 persons, an 88% increase from 2002. The loan portfolio growth rate of Grameen Bank at the end of 2008 is 22%, which is way up higher than its growth rate on 2002 at 2%. This shows that the organisation has not only reached a lot of poor people but also that the bank has helped the members through their micro-credit lending. The total amount of loans disbursed by 2008 has reached $906 million, which is 231% more than that in 2002. Below is the summary of principal amounts of loans disbursed to its members together with its total gross outstanding loans and current performing loans. Grameen Bank has been sustainable and profitable as seen on its financial performance. The return on equity (ROE) has reached 21% on 2008 as compared to 2.93% on 2002. This means that the organisation has implemented sound business strategies in order to increase its profitability. Furthermore, the operating self-sufficiency (OSS) and the financial self-sufficiency (FSS) of the bank has been above the 98% mark. This means that the bank has been operating very well and no outside finances deemed necessary. Grameen Bank has fairly managed its assets and liabilities. The yield on gross portfolio has been in the range of 18 - 19% while the cost of funds ratio is at a minimal range of 5 - 8% over the years. The yield on gross portfolio at the end of 2008 is 19% while the cost of funds ratio is at 8.56%. The operations of the bank are also efficient and productive. The productivity of a loan officer has increased by 60%, from 291 in 2002 to 465 in 2008. The operating expense ratio has been maintained at an average of 10% and the personnel expense of a loan portfolio is at an average of 7%, over the years. The operating cost per borrower has been decreased by 17%, from $12.33 in 2002 to $10.29 in 2008. In summary, the performance of Grameen Bank has been positive. The management control systems and performance measurement systems implemented by the organisation has facilitated the successes of the non-traditional banking institution. It has answered the challenges of other banks that doubted its sustainability and self-sufficiency in the long run. It has proven to the world that the poor can become responsible borrowers of money as well as creative entrepreneurs. Bibliography Drury, C. (2001). Management Accounting for Business Decisions (2nd ed.). London: Thomson Learning. Grameen Bank. (2009, June 21). Balance Sheet. Retrieved July 27, 2009, from Grameen Bank - Banking for the Poor: http:/www.grameen-info.org Grameen Bank. (2009, July 19). Introduction. Retrieved July 27, 2009, from Grameen Bank - Banking for the Poor: http://www.grameen-info.org Grameen Bank. (2009, June 21). Performance Indicators & Ratio Analysis. Retrieved July 27, 2009, from Grameen Bank - Banking for the Poor: http://www.grameen-info.org Grameen Bank. (2009, June 21). Profit and Loss Account. Retrieved July 27, 2009, from Grameen Bank - Banking for the Poor: http://www.grameen-info.org Kaplan, R. S., & Norton, D. P. (1996). The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press. Kimmel, P., Weygandt, J., & Kisco, D. (2000). Financial Accounting (2nd ed.). New York: Wiley. Yunus, M. (2006, December 10). Nobel Lecture. Retrieved July 27, 2009, from The Nobel Foundation: http://www.nobelprize.org Appendix a GRAMEEN BANK Balance Sheet For the year ended 31 December 2008 2008 Taka 2007 Taka PROPERTY AND ASSETS Cash in hand 3,798,731 6,799,759 Balances with Bangladesh Bank-in local currency 3,351,659 3,593,762 Balances with other Banks and Financial Institutions 1,321,308,057 926,004,259 Investments-at cost 28,730,304,221 24,465,809,686 Loans and advances-without collateral 45,786,957,884 37,546,479,706 Fixed Assets including premises, furniture and fixtures net off accumulated depreciation (Annexure-A) 1,163,268,845 1,114,517,485 Other assets 5,791,712,934 4,890,494,100 82,800,702,331 68,953,698,757 CAPITAL AND LIABILITIES Borrowings from banks and other institutions 1,731,218,532 1,793,276,465 Members Deposit 35,120,925,718 29,604,562,979 Non-Members Deposit 29,481,608,804 22,473,343,451 Other Funds 3,711,787,681 3,562,848,773 Deposits and other funds 68,314,322,203 55,640,755,203 Other liabilities 6,318,724,318 5,653,784,211 Shareholders' fund Paid up Capital 358,000,000 318,000,000 Capital and other reserves 5,969,437,278 5,453,782,878 Retained Surplus 109,000,000 94,100,000 6,436,437,278 5,865,882,878 82,800,702,331 68,953,698,757 CONTINGENT LIABILITIES Guarantee - 5,719,054 Source: (Grameen Bank, 2009) Appendix b GRAMEEN BANK Profit and Loss Account For the year ended 31 December 2008 2008 Taka 2007 Taka OPERATING INCOME INTEREST INCOME 7,831,802,905 6,790,936,211 LESS: INTEREST/PROFIT PAID ON DEPOSITS & BORROWINGS ETC. (5,456,923,644) (4,506,165,656) Net Interest Income 2,374,879,261 2,284,770,555 Income from Investments in fixed deposits 3,242,507,268 2,904,090,130 Income from Investments in Grameen Mutual Fund-One 1,721,542 66,330,090 Other income 923,182,445 878,176,622 Total operating income 6,542,290,516 6,133,367,397 LESS: OPERATING EXPENSES Salaries and other related expenses 2,954,806,568 2,472,022,999 Rent, rates, taxes, vehicle insurance, utilities etc. 93,270,782 83,419,842 Legal and professional expenses 119,985,004 96,117,235 Auditors' fees 1,110,444 1,216,380 Stationery, printing, advertisement etc. 118,396,308 111,236,170 Managing Director's salary & allowances 535,680 531,080 Directors' remuneration 178,000 148,000 Repairs & maintenance of fixed assets 50,414,227 36,491,171 Depreciation of fixed assets (Annex-A) 66,549,640 64,396,885 Other expenses 968,125,906 824,048,427 Total Operating Expenses 4,373,372,559 3,689,628,189 Profit before provision 2,168,917,957 2,443,739,208 Provisions for loans and advances Specific Provision 780,426,028 2,349,698,239 General Provision 83,818,521 (12,873,161) 864,244,549 2,336,825,078 NET PROFIT 1,304,673,408 106,914,130 APPROPRIATIONS NET PROFIT TRASFERRED TO 1,304,673,408 106,914,130 Retained earnings brought forward from previous year 358,000,000 94,100,000 Dividend Equalization fund 30,000,000 Proposed cash dividend @ 20% for the year 2007 107,400,000 63,600,000 General reserve 716,000,000 10,000,000 Employees Welfare fund 14,273,408 3,314,130 1,195,673,408 106,914,130 Retained surplus 109,000,000 94,100,000 Source: (Grameen Bank, 2009) Appendix c Grameen Bank: Performance Indicators & Ratio Analysis 2002 2003 2004 2005 2006 2007 2008 Institutional characteristic: 1 Total assets (In million USD) 391 467 558 678 849 1,005 1,205 2 Number of offices 1,332 1,357 1,525 1,944 2,626 2,813 2,884 Number of employees 11,699 11,846 13,038 16,142 20,885 25,283 24,240 Outreach indicators: 3 Number of branches 1,178 1,195 1,358 1,735 2,319 2,481 2,539 4 Number of members (In millions) 2.48 3.12 4.06 5.58 6.91 7.41 7.67 5 Number of active borrowers (In millions) 2.08 2.87 3.7 5.05 5.96 6.16 6.21 6 Number of active borrowers per branch (year-end) 1,766 2,402 2,722 2,912 2,571 2,482 2,448 7 Number of loan officers 7,448 7,495 7,925 9,166 12,048 14,561 14,000 8 Percent of women members 95.20% 95.44% 95.66% 96.27% 96.70% 96.85% 96.88% 9 Average loan balance per borrower (USD) 106 96 90 85 80 86 104 Loan portfolio 10 Loans (Principal Amount) disbursed (In million USD) 274 369 435 612 727 731 906 11 Number of loans disbursed (In millions) 2.13 3.19 3.81 5.09 6.45 6.37 7.18 12 Total loan outstanding (gross) (In million USD) 220 276 334 427 476 530 646 13 Current (Performing) loans (In million USD) 216 268 324 416 463 509 623 14 Overdue loans (In milion USD) 2 6.35 6.11 7.28 8.51 14.91 17.99 15 Portfolio growth rate 1.99% 26.48% 24.72% 39.66% 18.32% 9.26% 22.22% Sustainability/Profitability ratios: 16 Return on equity (ROE) 2.93% 10.63% 8.98% 21.22% 25.83% 1.79% 21.21% 17 Operating self sufficiency (OSS) 102.00% 111.10% 109.88% 115.65% 117.41% 101.02% 112.20% 18 Financial self sufficiency (FSS) 99.60% 107.88% 105.70% 110.40% 112.28% 94.84% 106.07% Asset / Liability management ratios: 19 Yield on gross portfolio (nominal) 17.98% 18.51% 18.89% 19.24% 20.21% 19.12% 19.03% 20 Cost of funds ratio 5.19% 6.18% 7.15% 7.38% 8.07% 8.43% 8.56% Portfolio Quality: 21 Portfolio at risk ratio (PAR) 1.77% 2.84% 2.94% 2.57% 2.69% 3.88% 3.67% Efficiency and productivity ratios: 22 Productivity per loan officer 291 399 487 579 520 442 465 23 Operating expense ratio 11.19% 10.52% 9.22% 9.87% 9.71% 10.60% 10.83% 24 Personnel expense / Loan portfolio 8.70% 8.12% 6.88% 6.92% 6.60% 7.11% 7.32% 25 Cost per borrower (In USD) 12.33 10.5 8.44 8.27 7.78 8.87 10.29 26 Portfolio per loan officer (in million USD) 0.031 0.038 0.044 0.049 0.039 0.036 0.046 Financing structure: 27 Capital adequacy ratio 9.70% 19.30% 16.51% 13.41% 14.38% 12.43% 12.02% Source: (Grameen Bank, 2009) Read More