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PRACTICAL EXERCISES

Exercise 1.

Outreach and Sustainability

As you have seen in this lesson, MFIs aim to extend their outreach to those excluded by
traditional financial service providers. As one aspect of outreach, depth of service measures the
extent to which an MFI reaches down to the poorest within a population. Analysts often use loan
size as a proxy indicator for measuring depth of service. In order to compare across countries,
we can measure this by assessing the average loan balance as a percentage of GNP per capita:
the lower the percentage, the deeper the outreach of the institution, and therefore the greater its
potential outreach to unserved markets of poor people. In order to achieve significant outreach
and offer services on a permanent basis, MFIs strive for institutional and financial viability.
Two terms are often associated with two different levels of financial viability, namely
operational and financial self-sufficiency (OSS and FSS). These are sometimes referred to as
Levels II and III of financial viability. OSS is the percentage of all operational cash expenses,
including depreciation, covered by operating income. FSS is calculated the same way as OSS
but includes financial adjustments (for inflation etc) to reflect the full cost of lending for an MFI.
In both cases the higher the percentage, the greater the coverage.
The attached excel document compares data from the MicroBanking Bulletin no. 6 (April 2001).
These data represent the depth, OSS and FSS of 124 MFIs around the world that have submitted
financial information to the Bulletin. The MFIs are broken down into several categories and
explanations for these categories, as used by the Bulletin, are included with the data table. The
table shows the average depth, OSS and FSS within each category.
Take a look at the data in the table and the difference of depth, OSS and FSS within each
category. Consider depth across each of these categories.

QUESTIONS
1.1. Which types of institutions have the greatest depth within each category? Have any
of these also achieved full financial self-sufficiency? (2 points)
1.2. Do you see any evidence to support the idea that outreach and sustainability are
complementary? Please substantiate your response. (2 points)
1.3. What pattern do you notice in depth of service in the ‘size’ category? What do you
think might explain this? (2 points)
1.4. Is average loan balance a good measure of depth of service and reaching down to the
poor? Why or why not? (2 points)
1.5. Assess the situation in your own country or in countries on which you work. How far
down the income scale do formal financial services reach? (4 points)
1.6. What trade-offs, if any, do you see between outreach and offering sustainable
financial services? (4 points)
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1.7. What do you think the goals of an MFI should be, and how does sustainability fit into
these goals? (4 points)

Table 1.1: Explanation

Methodology § Individual: institutions making loans to a single person without

group liability
§ Solidarity: institutions using groups of 3 to 9 borrowers
§ Village: institutions using groups of 10 or more borrowers
Age § New: 1 – 2 years of operations
§ Young: 3 – 6 years of operations
§ Mature: over 6 years of operations
Size Size refers to the scale of lending in terms of loan portfolio outstanding.
The paramenters for the various degrees of scale (small, medium, large)
vary according to geographic location.
Target market § Low-end: average loan balances < 20% of GNP or <$150 US
§ Broad: averages loan balances >20% and <150% of GNP
§ High-end: average loan balances >150% of GNP

Table 2: Data table

Operational Self-
Loan as % of GNP Sufficiency Financial Self-Sufficiency

operating income / operating income / interest,

avg loan balance / interest, loan loss and adjustment, loan loss and
GNP per capita administrative expense admin expense
(%) (%) (%)
TYPE DEPTH OSS FSS

Methodology
Individual 103% 118% 101%
Solidarity 39% 94% 84%
Village 18% 103% 88%

Age
Mature 47% 115% 100%
New 70% 93% 76%
Young 81% 102% 88%

Size
Large 99% 126% 114%
Medium 65% 106% 91%
Small 31% 94% 79%
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Target
market
Broad 65% 106% 93%
High End 310% 118% 102%
Low End 17% 103% 88%

Exercise 2:

Financial Decisions and Services

The cases below sketch a portrait of two microentrepreneurs and their households. Read these
cases and answer the questions about the financial decisions that each one makes and the
services that they could use.
Khadija Mefrioui
Khadija lives in a small market town in Morocco, where she embroiders caftans and other
traditional women’s wear. A long time resident of the community, she has embroidered for local
clients for over 15 years, training young girl apprentices in her shop, as she teaches them hand-
sewing and machine techniques. During the day, Khadija converts one room in her three-room
house into a workspace for her and her apprentices. Here, she sets up her only machine for
embroidery. Khadija and her apprentices work the gowns that her client’s bring her, but her
business experiences many slack periods. She knows that with a little capital she could continue
work during these periods, and that a second machine would allow her apprentices to finish more
quickly some of the basic stitches currently done by hand. Khadija has one unmarried daughter
and one son living at home. Her son often demands money of her to go out to cafes and into the
city with friends. Khadija’s other son, an emigrant to Europe, sends periodic remittances to help
out with the household expenses. The money earned from her now deceased husband’s military
stipend helped build their house, though they do not own the land. Their squatter’s rights
tenancy has never been titled, as the process is expensive, and the house has fallen into disrepair
since her husband’s death.
Sita Das
Every morning Sita arrives at a spot outside a suburban train station near Calcutta, where she
lays out her jute sack on the ground and spreads out the potatoes, onions and cabbage that she
has brought for sale. Her fresh vegetables sell quickly, and Sita rarely carries produce over to
the next day. Sita’s vegetable stock is limited to what is sold on the local wholesale market in
her area, and varies little. She would like to diversify her produce, as other vegetables, such as
tomatoes would attract more customers and yield a higher margin than the potatoes and onions,
but this requires trips to another neighborhood where the local market carries a greater variety of
vegetables and greater discounts at bulk. Her husband Lalu works a small roadside tea stand not
far from where Sita peddles her vegetables. They have three young children, two girls and a boy
of early school age. Together they live in a two-room shack that they constructed on the
periphery of this neighborhood with limited communal access to running water. Sita and Lalu do
not have enough money for the deposit required by the local water company for installing water
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service, and their cooking gas often runs out as they cannot afford the deposit on a second
cooking gas tank.
2.1. From these brief portraits, what do you think are potential financial decisions that
Khadija and Sita must make?
2.2. If you were in their places, what kinds of financial services would you want?
2.3. What characteristics must appropriate financial services have to attract these women
as customers?
2.4. How might access to such services affect the way that they operate their businesses
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