SymBanc™: A Simulator for Microfinance Institutions

Gary Hirsch, Guy Stuart,

Jay Rosengard, Don Johnston

International System Dynamics Conference

July 20, 2005

Microfinance

• Financial services for the poor• Services

– Savings– Credit– Insurance– Remittances and transfer payments

• Poor = those living in households where the per capita expenditure is less than $1 per day, in developing and transitional economies

• 2005 is the UN’s Year of Microcredit

Microfinance Institutions (MFIs)

• MFIs range in size and type from local savings cooperatives to large (divisions of) commercial banks– E.g. Grameen Bank, Bank Rakyat Indonesia, BancoSol,

Compartamos, Mann Deshi Mahila Sahakari Bank– Largest institutions are in Asia, especially South and

South-East Asia

• Mission can be one or all of:– Financial intermediation– Economic development– Poverty alleviation– Women’s empowerment

Active Clients• Credit

– Active clients = has outstanding loan at time of report– Microcredit Summit in 2004 reports that, as of 12/31/2003, its 2,931

member institutions had just under 81 million active clients -- this is hard to believe

– Good guesstimate: 60m to 70m active clients

• More savers than borrowers– “Big four” Bangladeshi MFIs have over 10m savers (same # as

borrowers)– BRI has 30m savers (10x the # of its borrowers)– Numerous credit unions and cooperatives provide savings services

• No good count of insurance clients – many borrowers pay for life insurance to cover the outstanding balance of their loan in case they die– New medical insurance products being developed-jury is out

Strategic Questions

• Urban/rural

• Women only, men and women

• Group or individual lending

• Credit only, or credit and savings

Operational Issues: Information and Cash Flows

• Large number of small transactions:– Swakrushi Federation of cooperatives in Andhra Pradesh, India

process about 80,000 savings deposits of Rs.20 (40 cents) per month, through 259 coops

– In May 2004 BRI made 211,320 loans with avg. size of just under $1,000, through approx. 4,000 local offices

– ASA in Bangladesh had 264 borrowers and 290 savers per staff member as of 12/31/2003 (mixmarket.org)

• Highly reliant on local, non-formal information, and information feedback from own operations. Results in:– Step lending– Aggressive delinquency management based on good MIS– Great emphasis on maintaining institutional reputation of “fair but

firm”

Overview of MFI Model: Drivers of Borrowing

Applicants BorrowersTarget BorrowerPopulation

Current Loansby Stage

Funds Availablefor Lending

MFIStrategy

Branches, LoanOfficers and Other

Staff

Interest Rateand Terms

Size ofLoans

ProductDesign

AreaDemographics

Overview of MFI Model: Sources of Funds

Applicants BorrowersTarget BorrowerPopulation

Current Loansby Stage

Loan Losses

Funds Availablefor Lending

Repayment

MFIStrategy

Net Income

Branches, LoanOfficers and Other

Staff

Interest and FeeIncome

Interest Rateand Terms

Size ofLoans

External Sourcesof Funds

ProductDesign

Savings

AreaDemographics

MFI Equity

Overview of MFI Model:Borrowing by Stage

Stage 1 Stage 2 Stage 3.

NewBorrowers

Current Loansin Stage NNew to Stage N

Delinquentin Stage NCuring

Delinquency

BecomingDelinquent

Default

RepeatingStage N

Going on toNext Stage

DroppingOut

Overview of MFI Model: Delinquency and Default

Applicants BorrowersTarget BorrowerPopulation

Current Loansby Stage

Delinquent Loansby Stage

CuredDelinquencies

DefaultedLoans

Loan Losses

Funds Availablefor Lending

Repayment

MFIStrategy

Net Income

Branches, LoanOfficers and Other

Staff

Interest and FeeIncome

Interest Rateand Terms

Size ofLoans

Dropout

External Sourcesof Funds

ExpensesProductDesign

Savings

AreaDemographics

Cost ofFunds

MFI Equity

Design Features to Enhance Learning: The Model

• Realistic constraints eliminate easy options, require thoughtful strategies

• Tradeoffs require careful choices--e.g., aggressive marketing or high interest rates may increase revenue, but attract poor credit risks or create repayment problems

• Short-term profitability vs. long-term viability

• Easy to “paint yourself into a corner” and run out of money despite early breakeven

Design Features to Enhance Learning: Interface

• Students can control how often decisions are made, must keep their “eye on the ball”

• They can compare results across strategies to identify relative advantages

• Capability to drill down into detailed results to understand what’s happening

• Dump results to spreadsheet to do more extensive analysis

• Challenging scenarios let students reality-test strategies

Defining Target Market

Loan Product Design Decisions

Staffing and Productivity Decisions

Results: Profit and Loss

In High Growth Strategy, Borrowers Grow Until MFI Runs Out of Cash...

…Even Though MFI is Profitable

Rapid Growth of Branch Network Has Kept MFI from Building Equity Required by Funders

Less Aggressive Growth Strategy Permits MFI to Build Equity...

Capital Adequacy

1

0.75

0.5

0.25

0

0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96Time (Month)

Capital Adequacy : high growthCapital Adequacy : medium growthCapital Adequcy Standard : medium growth

Medium

High

...and Ultimately Attract More Borrowers

Total Borrowers

40,000

30,000

20,000

10,000

0

0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96Time (Month)

Total Borrowers : high growthTotal Borrowers : medium growth

Medium

High

What Students Learn from Using SymBancTM

• There are characteristic ways of failing such as growth outrunning capital or pursuing high volume at the expense of profit and building equity

• There is no single right answer; multiple ways to succeed depending on objectives

• Strategies do require internal consistency--the right combinations of target market, product design, staffing and branch expansion, and funding sources

• Good strategies under some circumstances may not survive economic shocks; need to be resilient

SymBanc™ As A Teaching Tool (1)

• SymBanc™ developed initially for FIPED (Financial Institutions for Private Enterprise Development)– International executive program at KSG/Harvard University– 2-week program offered once a year since 1995– Covers both microfinance and SME finance (MSMEs)– Focuses on the sustainable provision of financial services

for MSMEs and low-income households– Participants senior executives from financial institutions,

non-governmental organizations, and international assistance agencies & high-ranking government officials

– Consists of core lectures, applied case studies, practical exercises, simulated negotiations, participant presentations

SymBanc™ As A Teaching Tool (2)

• SymBanc™ funding from Harvard Provost’s Fund for Instructional Technology – for promoting the innovative use of IT in teaching

• Introduced in stages to facilitate familiarization• Participants divided into three-person teams • Taught as case studies

– Multiple scenarios with different policy objectives– Preparation at home with discussions in class– Interactive, iterative, and competitive– Everything in one small file on rented laptops

SymBanc™ As A Teaching Tool (3)

• More efficient & effective than conventional means to:– Introduce complex policy (strategic) and operational

(tactical) interrelationships– Explore tradeoffs between achievement of institutional

mission and financial sustainability– Confirm or refute assumptions and preconceptions

• Reflects messiness of real world– No single “correct” answer - bundles of viable scenarios– Important to identify and mitigate unanticipated shocks– SymBanc™ simulation is truly a dynamic system