COST CONTROL IN MICROFINANCE: LESSONS FROM ASA

Microfinance is defined as the provision of financial services to poor people. In microfinance, transaction costs are all costs that are incurred to establish and maintain financial relationships. They include information gathering (including credit and risk assessments); security arrangements to pr...

Full description

Saved in:
Bibliographic Details
Published in:Cost management 2012-01, Vol.26 (1), p.5
Main Authors: Khan, Saleh, Ashta, Arvind
Format: Magazinearticle
Language:English
Subjects:
Competition
Cost reduction
Economies of scale
Innovations
Interest rates
Literature reviews
Loans
Management accounting
Microfinance
Operating costs
Profitability
Profits
Studies
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Microfinance is defined as the provision of financial services to poor people. In microfinance, transaction costs are all costs that are incurred to establish and maintain financial relationships. They include information gathering (including credit and risk assessments); security arrangements to protect cash, documents, and other data; recording systems for transaction processing and control; and queuing and decision-making. Controlling cost in an MFI and adopting a lean operating model is a mindset challenge, rather than an operational challenge and this process of making the business processes more efficient has to be led by senior managers who are willing to lead by example rather than just forcing it onto the lower echelons of staff. Looking specifically at the microfinance market in Bangladesh, we found that operating costs differ significantly for different institutions and can be attributed to achieving economies of scale in operations (in terms of total number of borrowers reached and not in average loan sizes); that the cost to service borrowers increases with loan size; that institutional governance structure does not play a major role in dictating cost efficiencies; and that a lean operation does not mean the portfolio health is weakened.