The Contested Terrain . of . Entrepreneurial . Microfinance . for the Poor. Susanna Khavul, University of Texas Arlington, USA . Helmuth. Chavez, Universidad Francisco . Marroquin. , Guatemala. Garry . ID: 494119
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When Institutional Change Outruns the Change Agent:The Contested Terrain of Entrepreneurial Microfinance for the Poor
Susanna Khavul, University of Texas Arlington, USA
Chavez, Universidad Francisco
, Texas Christian University, USA
IE Business School – January 2012
Presented at Strategic Management Society
Journal of Business Venturing
Increasingly we understand more about the lives of the poor including their need to access financing.
(Collins et al., 2009;
, 2009; Beck et al., 2008).
The provision of microfinancing is transforming into big international business as commercial lenders enter.
, Khavul, and Chavez, 2011; Khavul, 2010;
and Dorado, 2010).
As a result, entrepreneurial microlending for the poor has become a contested terrain to which multiple competitors are laying strategic claims.Slide3
In our paper…
Through the lens of
theory we examine the dynamics of microlending in Guatemala over a fifteen year period.
Neoinstitutional theory emphasizes not only the
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
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 criticalSlide4
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 industrySlide5
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 (
, et al., 2010)Slide6
Institutional change ….
Organizations seek to align with their institutional environment in order to gain support and legitimacy (DiMaggio &
But it is also recognized that endogenous institutional change occurs (Hardy &
The actors who cause change referred to as institutional entrepreneurs
Institutional entrepreneurs & institutional change now typically seen as synonymous (
, et al., 2002)Slide7
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
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 businessesSlide9
Who are the competitors…
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
31 MFIs grouped in two associations:
Approximately 340,000 clients
$190 millions in loans
Average loan amount: $558
Top 5 MFI 65% of marketSlide10
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.
Women and men
Group and individuals
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
Banking and legislative authorities
Analysts and Commentators (10)Slide11
Who is being served?
Domestic NGOs (MFIs)
Remains underserved under current business practices. Technology may change that in the future.
Domestic Commercial Banks
Regulatory wall: Only Banks Collect Savings
Bank Loans to
Microfinance loans to groups and individuals
30-85% interest year
One year terms
$150-$800 loan size
Customer Drift to Commercial Banks
Bank microfinance loans to individuals
20-60% per year
CoopsCredit Unions(membership based)
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.Slide13
How did we get here?Stages in evolution of microfinance
Increasing Number of Clients
Aid and Development
Financial Sector Engaged
International Microfinance Enters
Alliances and Partnerships
-mid 2000 mid 2000 to 2010 2010---2011----Future
Opportunity Seeking and Blocking
As we mapped the stages and analyzed the relationships, we saw that
As institutional entrepreneurs…
Microlenders successfully challenged the basic “taken-for-granted” (
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.Slide15
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.Slide16
Unregulated Microfinancing Organizations
Regulated Microfinancing Organizations
Banks Active in Microfinancing
Banks Not Active
Banks Engaging and
Experimenting with Microfinance
Engaging with Banks
Microfinancing Organizations Competing with Banks.
Banks Committing to Microfinance Business
Process Model of Institutional Change in Microfinance:
Inter-organizational field dynamics
Timeline of critical events in the process of institutional change in Guatemala
Channels of Experimentation
New Banking Law
Become a Bank
Mexico Convertsto a Bank
Compartamos Mexico Enters Guatemanla
Political & Economic
Study of MicrofinancingCommissioned
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.Slide17
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 moreSlide18
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
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 MexicoSlide19
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.Slide20
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 effectivelySlide21
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.Slide22
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.
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.Slide23
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”