When Institutional Change Outruns the Change Agent:The Contested Terrain of Entrepreneurial Microfinance

for the Poor

Susanna Khavul, University of Texas Arlington, USA Helmuth Chavez, Universidad Francisco Marroquin, Guatemala

Garry Bruton, Texas Christian University, USA

IE Business School – January 2012

Presented at Strategic Management Society CK Prahalad Special Conference

Journal of Business Venturing - forthcoming

Background … Increasingly we understand more about the lives of

the poor including their need to access financing. (Collins et al., 2009; Karlan and Morduch, 2009; Beck et al., 2008).

The provision of microfinancing is transforming into big international business as commercial lenders enter. (Bruton, Khavul, and Chavez, 2011; Khavul, 2010; Battilana and Dorado, 2010).

As a result, entrepreneurial microlending for the poor has become a contested terrain to which multiple competitors are laying strategic claims.

In our paper… Through the lens of neoinstitutional theory we examine the

dynamics of microlending in Guatemala over a fifteen year period. Neoinstitutional theory emphasizes not only the embeddedness of

organizational fields but also how change agents bring innovation to the institutional environment.

There is a tendency to view outcomes at single point & time What remains poorly understood is the process of how firms that are embedded in a given

institutional setting respond to such change.

Tendency to view entrepreneurial change agents in ‘heroic terms” and incumbents as failures but in a process model the responses of institutional incumbents is critical

In our paper… Our research shows that,

Microfinance are change agents and institutional entrepreneurs who demonstrate that financial services can be brought to the poor in an operationally efficient and profitable manner.

But there is a process in microfinance of ebbs and flows of strategic actions and counter actions from the established commercial banking sector

Initially microfinance was a separate field but commercial banks grow to see microfinance as a viable entity and seek to absorb it Thus a stage model of institutional entrepreneurship

The result is that changes driven by commercial banks may ultimately outrun and become the dominant providers of microfinance in the future as they change the logics in the industry

Three contributions from paper… 1. Focus on process of institutional change not outcomes

– a stage model of institutional change

2. Institutional change can bring unintended consequences to those that start the process -- dominant players can respond and ultimately capture future growth

3. Contextualize institutional theory – Latin America and Base of the Pyramid plus help to fill gap of too few studies of institutional theory to understand profit motive (Suddaby, et al., 2010)

Institutional change …. Organizations seek to align with their institutional

environment in order to gain support and legitimacy (DiMaggio & Powerll, 1983)

But it is also recognized that endogenous institutional change occurs (Hardy & Maquire, 2008)

The actors who cause change referred to as institutional entrepreneurs

Institutional entrepreneurs & institutional change now typically seen as synonymous (Garud, et al., 2002)

Microfinance … Provision of loans, savings accounts, health insurance,

retirement plans, funeral insurance to base of pyramid

Half of the world’s population has no access to banking and other financial services (Beck, et al., 2008)

Typically in informal communities, lack of ability to read & write common, information asymmetries, transaction costs

Latin America extensive history of micofinance

Guatemala… 14 million people

Guatemala City closer to DFW area than Washington, DC

Illustrates much of Latin America 178% increase in per capita income over 15 years

High level of unequal dispersion of income 51% of population live below poverty level Indigenous population 78% live below poverty level

Nation of small and informal businesses

Who are the competitors… Commercial Banks

14 of the 18 banks are involved in microfinance Approximately 187,000 clients $200 millions in loans Average loan amount: $1,070 Top 5 banks 92% of market

MFIs 31 MFIs grouped in two associations: Redimif and Agremif Approximately 340,000 clients $190 millions in loans Average loan amount: $558 Top 5 MFI 65% of market

Our Method: The Deep Dive

On the ground field work Seek multiple strategic perspectives We collected first hand primary field data

over multiple years. Understand the deep institutional story. Cross-cutting perspectives and interpolation

between field and theory. We tapped into multiple levels in the

financial ecosystem. Recognize multiple strategic actors.

Contextualize the findings geographically, socially, and temporally. Over 57 interviewees some at multiple

periods of time. Thousands of pages of transcripts analyzed

and coded.

Borrowers (22) Women and men Group and individuals City and rural

Microfinacing Institutions (9) Large and small (4 of top 5) For profit and non-profit

Commercial Banks (7) Major and minor lenders (3 of

top 5) Non-players and observers

Regulators (2) Banking and legislative

authorities Analysts and Commentators

(10)

Who is being served?

Isolated Rural Communities

Rural

Small Towns

Urban InternationalNGOs

Domestic NGOs (MFIs)

Commercial Banks

Remains underserved under current business practices. Technology may change that in the future.

primary secondary

Domestic Commercial

Banks

Microfinance Organizations

Regulatory wall: Only Banks Collect Savings

Bank Loans to Microfinance Organizations

14-17% interest

Microfinance loans to groups and individuals

30-85% interest yearOne year terms $150-$800 loan size(Grameen at 20%)

Customer Drift to Commercial Banks

Microfinance Organization’sCustomer Savings

Bank’sCustomer Savings

Bank microfinance loans to individuals

20-60% per year1-10 years$250-$5,000 Coops

Credit Unions

(membership based)

International

Loans to members

Savings from members

International Funders and Donors

Up to 3600%

per year

Informal Money Lenders

International Funders, Agencies, Capital Markets

Khavul, Chavez, Bruton (2011)

Financial Flows in Microfinance

Notes: Interest rates are indicated as estimated APR conversions from “flat rates” quoted.

How did we get here?Stages in evolution of microfinance

Incr

easi

ng N

umbe

r of C

lient

s

Status Quo

Aid and Development

Financial Sector Engaged

International Microfinance Enters

Alliances and Partnerships

Crowding Out

1945-early 1990s 1990s-mid 2000 mid 2000 to 2010 2010---2011----Future

Redefining Regulation

Opportunity Seeking and

Blocking

© 2011

Engagement

Establishment

Redefinition

Restructuring

As we mapped the stages and analyzed the relationships, we saw that

As institutional entrepreneurs… Microlenders successfully challenged the basic “taken-for-granted” (i.e.“dominant logic”)

that the poor cannot be profitably banked.

But in doing so, they also create a window of opportunity for commercial banks. These established central actors in the financial sector to became dominant competitors

in providing microfinance to the poor.

As a result, the financial lives of the rural poor took on strategic importance in the competitive dynamics of the banking industry. The institutional changes rapidly outrun the microlenders as commercial banks, the

incumbents, usurped, modified, and improved the innovation.

We developed a process model to capture what we observed in the field. Our paper developed a set of propositions across the stages.

Further we saw…

From a strategic perspective, the data suggest that the response of the banking sector may potentially have greater impact on the poor than the pioneering efforts of the original institutional entrepreneurs.

Consider the strategic consequences of a contested terrain.

1 2

Microfinancing Field

Banking Field

RedefinitionStruggle

RedefinitionStruggle

RedefinitionStruggle

3

Status Quo

Establishment Engagement Competition Restructuring

Unregulated Microfinancing Organizations

Regulated Microfinancing Organizations

Banks Active in Microfinancing

Banks Not Active in Microfinancing

Banks Engaging and Experimenting with Microfinance

Microfinancing Organizations Engaging with Banks

Microfinancing Organizations Competing with Banks.

Banks Committing to Microfinance Business

Process Model of Institutional Change in Microfinance: Inter-organizational field dynamics

Chan

nels

of

Enga

gem

ent

Time late ‘80s ‘96

Timeline of critical events in the process of institutional change in Guatemala

Chan

nels

of

Obs

erva

tion

Chan

nels

of

Expe

rimen

tatio

n

‘00‘97 20021945 2007 2011200620052003 2004 2008 2009 2010‘98 ‘99early’90s ‘01

Redefinition Struggle(2005-2007)

Redefinition Struggle(2009-2011)

OldBanking Law

Liberalization of i and ex-rates

New Banking Law

NGO Law

Risk Mgt. Reg. MFI Defined

MFI Law DraftedRedefinition Struggle

(2001-2002)

MFI Enters

90s: MFI Established

MFIAssoc.Formed

GenesisPetition to Become a Bank

GrameenEnters

90s: Expansioninto ConsumerCredit

BanCafeEntersMicrofinance

BancaSol EntersMicrofinance

BanCafe Fails

Compartamos Mexico IPO

PromeriaBuys

BancaSol

Microfinance

Banks

Regulatory

SKS IndiaIPO

AztecaGyT Enter Microfinance

BancoInternacionalEnters

Compartamos Mexico Convertsto a Bank

Compartamos Mexico Enters Guatemanla

Banrural/Grameen Partnership

End of Civil War

1999GeneralElection

2003GeneralElection

2007GeneralElection

2011General Election

LA Fin.Crisis

9/11Financial CreditCrisis

Political & Economic

Study of MicrofinancingCommissioned

31 2

Khavul, Chavez, Bruton (2011)Notes: Dashed lines indicate microfinancing field; solid lines indicate banking field. Increasing thickness of the line indicates a larger number of field participants.

Looking at the process model… Microfinance organizations create a new field along side

the banks

But ultimately there is conflict in the two fields – this conflict is not in a single step but over various rounds

Round 1 (2001) – banks seek to have MFI regulated and MFI want to be able to collect interest bearing accounts First round a draw but regulators commit to study and eventually act

Banks increasingly engage those at the base of the pyramid and begin to learn about this sector more

Process model … Round 2 (2005) – MFIs still unregulated but still cannot gather

interest bearing accounts

New law proposed that would limit the size of the loans and who the MFIs could lend to and introduced greater regulation without the ability to gather interest bearing accounts

Nation’s largest bank enters the contested area of micoloans

Grameen Bank (one of world’s largest MFIs) enters the market and partners with a large local commercial bank

Movement to for profit status of large MFI in Mexico

Process model … Round 3 (2009) – the MFIs continue to be largely

unregulated but unable to gather interest bearing accounts but at this stage banks are clearly embedded in the microfinance industry

New regulations that further constrict the MFIs and create technology barriers that only banks could conduct

Only banks could conduct cell phone banking, etc.

Process model … Initially MFIs enter and establish a new field But over time the MFI and banks collide The logic of the banking field ultimately change and the

organizational field of the banks and in turn microfinance change

There is a competition among logics and those that start the process of institutional change will not always be the ones that long term are able to capture the benefits generated

Competition between MFIs and banks concerns human capital and regulations

But this is terrain that banks can compete more effectively

Implications for theory Looking across time in neoinstitutional theory.

The story does not end when the institutional entrepreneur enters When viewed over time the interplay between institutional

entrepreneurs and the established organizational fields is richer and more nuanced than previous research has suggested.

The co-creation process in the evolution of microfinance This is evident in Guatemala Consumers have increased interactions among participants, that

through the incorporation of best practices into new products and services have enhanced price performance. The spillover effects of this improvements have benefited those in the upper sections of the pyramid.

Implications for Practice Regulation and Competition

The prevailing regulatory framework imposes restrictions in terms of strategic flexibility among participants (e.g. restrictions to collect savings by MFIs and to lend to the poorest by Commercial Banks), that lead to the seek of alliances to exploit synergies.

A more flexible regulatory framework can exploit the full potential of the coexistent business models.

Service Inclusion Even though microfinance has delivered opportunities to poor people, there are

still isolated communities that could not be served in a profitable way by the prevailing models.

Technology as the Future of Microlending That strategic gap could be filled with technology, such as mobile banking, but is

important to address the potential consequences of adapting a model that has worked (for example in mobile banking based micro credits, the role of the loan officer is minimized).

New interactions between organizational fields will emerge.

Conclusion… The main contribution of the change agent we focused on (i.e. MFIs) has

been to give, for the first time in centuries, a viable way for the poor to exercise choice.

Choice that in most cases has being directed to entrepreneurial initiatives. Such initiatives that are generating spillover effects trough the entire

pyramid.

“We have to start with respect for individuals irrespective of their current condition. Deciding ‘what is good for them’ is against the very spirit of co-creation. Yes, we can educate them on the risks and benefits of choices. But they must exercise their choice”

“Large-scale and wide-spread entrepreneurship is at the heart of the solution to poverty”

CK Prahalad