When Institutional Change Outruns the Change Agent: PowerPoint Presentation, PPT - DocSlides

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?

International

NGOs

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 year

One year terms

$150-$800 loan size

(

Grameen

at 20%)

Customer Drift to Commercial Banks

Microfinance

Organization’s

Customer

Savings

Bank’s

Customer Savings

Bank microfinance loans to individuals

20-60% per year

1-10 years$250-$5,000

CoopsCredit 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

Increasing Number of Clients

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

Redefinition

Struggle

Redefinition

Struggle

Redefinition

Struggle

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

Channels of

Engagement

Time

late

‘80s

‘96

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

Channels of

Observation

Channels of Experimentation

‘00

‘97

2002

1945

2007

2011

2006

2005

2003

2004

2008

2009

2010

‘98

‘99

early

’90s

‘01

Redefinition Struggle

(2005-2007)

Redefinition Struggle

(2009-2011)

Old

Banking

Law

Liberalization of

i

and ex-rates

New Banking Law

NGO

Law

Risk Mgt.

Reg. MFI

Defined

MFI Law

Drafted

Redefinition Struggle

(2001-2002)

MFI

Enters

90s: MFI

Established

MFI

Assoc.

Formed

Genesis

Petition

to

Become a Bank

Grameen

Enters

90s: Expansion

into Consumer

Credit

BanCafe

Enters

Microfinance

BancaSol

Enters

Microfinance

BanCafe Fails

Compartamos

Mexico IPO

Promeria

BuysBancaSol

Microfinance

Banks

Regulatory

SKS

India

IPO

Azteca

GyT

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

9/11

Financial CreditCrisis

Political & Economic

Study of MicrofinancingCommissioned

3

1

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