Local government investment outreach and sustainability of microfinance institutions: a case study of BURO, Bangladesh.

Hasan, Mostafa Monzur ; Hassan, M. Kabir ; Uddin, Mohammad Riaz 等

1. Introduction

There is a growing tendency among development economists and planners to think that microfinance programs have the potential for equitable and sustainable development with an ultimate goal of eradicating poverty. This received momentum from the award of the Noble Peace Prize to Dr. Muhammad Yunus and the Grameen Bank. Bangladesh has acquired a rich experience of poverty alleviation through a rapid expansion of microfinance in the past one and half decades.

Microfinance programs have a positive effect from different socioeconomic perspectives. They have for decades provided low-income households with considerable economic and non-economic externalities in developing countries. The outreach and sustainability of microfinance programs are highly important to ensuring that these services are available to large numbers of people and to ensuring the programs' long-run contribution.

Knowledge about outreach and sustainability is, however, partial and contested. Although there have been a few works on the outreach and sustainability of reputed top-class microfinance institutions (MFIs) in Bangladesh such as Grameen bank, ASA, etc., no focus has yet been placed on the new generation of microfinance institutions.

In this study, the outreach and sustainability of BURO (the Bangladesh Unemployed Rehabilitation Organization), one of the new generation of MFIs in Bangladesh, is analyzed. Attempts are made here to find the ways by which BURO is operating its business and to what extent it is working toward the achievement of sustainable development.

2. Objectives of the Study

The primary objective of this study is to analyze the outreach and sustainability of BURO. This leads to objectives of greater generality:

(i) To discuss assessment of outreach and sustainability of microfinance institutions.

(ii) To identify the factors affecting the outreach and sustainability of microfinance institutions.

(iii) To make a comparative study, based on economic analysis, of the standard indicators of financial sustainability and the existing indicators for BURO.

(iv) To find out the problems, if any, that MFIs have in attaining outreach and sustainability; and to suggest remedies for the problems encountered.

3. Research Methodology

This paper is mainly based on secondary data received from BURO produced through its financial management and management information systems. It covers the period 2001-2007. Studies previously done by academicians and consulting firms are abundantly used to develop the theoretical framework. For the sustainability analysis, different approaches and tools have been applied. The approaches include a financial approach and an economic approach. The tools include the Subsidy Dependency Index (SDI) of Yaron (1992), Subsidy Dependency Ratio (SDR) of Khandaker and Khalily (1996), and Efficiency and Subsidy Intensity Index (ESII) of Khalily, Imam and Khan (2000).

4. Literature Review

Microfinance is an enabling, empowering, and bottom-up tool for poverty-alleviation that has provided considerable economic and non-economic externalities to low-income households in developing countries. How to achieve viability and yet serve large numbers of poor people is considered one of the greatest challenges for MFIs (Zeller and Meyer, 2002).

Outreach is the ability of an MFI to provide high-quality financial services to a large number of clients (Alam, 1999). As an aspiration, it calls upon MFIs to reach a large public and to have a significant and increasing volume of activities (savings, credit, insurance, etc.). Outreach is measured by a hybrid index comprising several indicators, such as the number of clients, the value of the loan portfolio and its annual growth, the percentage of female clients (where social norms discriminate against women), the average loan size (as a proxy for income level of the clientele), and so on (Yaron et al. 1998). Practice has shown that a successful outreach is also needed to make sustainability possible.

Sustainability, by contrast, is the ability of an MFI to meet its operating and financial costs over the long run. A sustainable institution is one that is viable and depends on its own resources rather than those of donors. A viable institution is able to cover its costs and perhaps make a profit from its business operations (Seibel 1997). The sustainability of MFIs depends, among other things, on elements such as the structure of interest rates, quality of loan portfolio, staff productivity, and financial and administrative costs (Congo 2002). Baumann (2005) states that sustainability is essential for two reasons: first, the goal of microcredit practice should be to extend the reach of commercial financial markets to the poor and the excluded; and, second, sustainability is necessary to prevent MFIs from concealing bad practices with ongoing subsidies.

During the past several years, many studies had been conducted on the sustainability and social cost of MFIs in Bangladesh. Yaron developed the Subsidy Dependency Index (SDI) in 1992. The SDI uses the ratio of loan portfolio and its revenue to total portfolio to determine dependency on subsidy.

Attempts made thereafter to adjust the SDI include the Subsidy Dependence Ratio of Khandker, Khalily, and Khan (1995); the Profitability Gap of Sacay (1996); and the SDI of Hulme and Mosley (1996), Martin and Mommartz (1996), and SEEP (1995). The main concern of these authors is that the SDI compares subsidy only with revenue from lending even though MFIs.

A weakness of the Subsidy Dependence Ratio (SDR) of Khandker et al. is that it ignores the mission of a MFI and that a MFI is a price-taker on non-loan investments. On the other hand, SDR is an improvement over SDI, since it considers total portfolio-mix instead of only the loan portfolio as in Yaron. However, much important information is left out of both the indices. The degree of subsidy dependency is determined by the degree of financial efficiency, operating cost efficiency, opportunity cost of funds, lending and borrowing interest rates. This information is not derived from SDI and SDR. Consequently, policymakers are unable to derive any broad-based policy implications from the estimates of subsidy dependency and its elements in either of the cases. To overcome these problems, a broad-based index named Efficiency and Subsidy Intensity Index (ESII) was developed by Khalily et al. in 2000. ESII is used for evaluating the sustainability and efficiency of MFIs, and is broad-based in terms of number of parameters and policy implications.

Proper institutional design and adherence to appropriate policies pay off handsomely and have the potential to generate substantial achievements in sustainability and outreach (Yaron et al., 1998). Several other authors (Hulme and Mosley, 1996; Conning, 1999; Paxton and Cuevas, 2002; Lapenu and Zeller, 2002) present analysis that supports the notion of a trade-off between improving the depth of the outreach, i.e. reaching relatively poorer people, and achieving financial sustainability.

Alam (1999) in his paper concluded that despite successes in many fronts in fighting poverty, the Grameen Bank is still not in a position to withstand unexpected natural calamities in Bangladesh. Khalily et al. (2000) concluded that Grameen Bank is close to achieving sustainability after its fifteen years of experience. Similarly, ASA has attained an increased degree of sustainability within the seven years of its micro-credit operation.

The present study is an endeavor to determine the sustainability of BURO with the help of SDI, SDR, and ESII along with outreach and productivity.

5. BURO: Serving Low-Income Earners

The Bangladesh Unemployed Rehabilitation Organization (BURO) in Tangail has been operating since 1990 and is dedicated to providing effective, flexible financial service to promote self-reliance among the rural poor in Bangladesh (Rutherford, 2001). As of December 31, 2007, BURO serves close to four hundred thousand low-end clients and provides them with diverse types of credit and voluntary savings products in a sustainable way. As per CDF statistics 2006, BURO has been found to be the fifth-largest NGO-MFI in Bangladesh. Up to December 2007, it has operated in 8,833 villages with over 230 branches. Since its inception in 1990, it has been a pioneer in offering deposit services. The distinct features of BURO's products include flexibility and variety, and unbundling of loans from savings products. Loans and savings deposits are not necessarily tied together when it comes to providing loans to its clients. The poorest of the poor, the poor and the vulnerable non-poor are its target groups.

The management of BURO made conscious efforts to quickly achieve financial viability and manage the organization in a business-like manner. BURO basically follows the Grameen Bank model in managing its savings and credit program, with certain flexibility both in savings and in the credit side of the program.

6. Outreach Analysis of BURO

Since 1995, BURO has been growing significantly in size, client coverage, and products offered, while focusing attention at the low-end of the market. Until 1998, BURO followed a horizontal growth strategy by moving into new areas to increase outreach. In face of increasing competition, however, BURO then resorted to deepening its coverage of existing markets. New products were developed to meet the demand for financial services. The outreach of BURO has been assessed from the following three perspectives:

6.1 Program Outreach

BURO started its operation in the Tangail district and gradually moved to the neighboring districts. Appendix-1 shows the geographical outreach of BURO from 2001-2007, where over the years the coverage of districts, upazilas, unions and villages has been increasing, which is an indication of BURO's outreach. From Appendix-2, it is seen that from 2001-2007 the number of active customers has been increasing. This also is an indication of customer outreach and depth. Further, from Appendix-3, it is observed that the number of active borrowers is increasing at a significant rate over the years. Nevertheless, the increase in borrower/ customer ratios has not been significant and hence it doesn't indicate the depth of the program. Appendix-4 shows the disbursed and outstanding loan balance. It is observed that yearly disbursements, cumulative disbursements and the outstanding loan balance have increased at an accelerating rate. This is an indication of the depth of the loan program. BURO has been successful in maintaining a high (98%) repayment rate (See Appendix-5).

Overall outreach-measures of BURO are summarized in Table--1 (see tables at end of article).

From Table-1 it is observed that the average outstanding balance per borrower is increasing over the years whereas the average loan balance as a percentage of gross national income (GNI) per capita fluctuates. Unsurprisingly, the percentage of women clients is about 100% over the periods, as BURO provides mostly women with loans. It does raise questions in a male-dominated country like Bangladesh whether it is prudent only to target the women clients. But, unlike many other MFIs working in Bangladesh which give loans to both men and women, BURO exclusively gives loans to women. A better policy would have been to provide loans to a family where both husband and wife would be jointly responsible for the loan.

6.2 Institutional Outreach

The number of branches of the organization increases as it achieves institutional outreach. From Appendix-6 we see that the number of branches increased at an accelerating rate for the period from 2001 to 2003, after which the number of branches increased in a fluctuating trend. The increase in number of branches is an indication of institutional depth. An increase in the number of staff is an indication of the institutional outreach of microfinance institutions. As the number of staff of BURO increases continuously, it can be inferred that BURO has achieved more institutional outreach over time (Appendix-7).

6.3 Institutional Efficiency, Profitability and Productivity

Institutional efficiency and profitability is another indicator of outreach. It enables the organization to continue and expand its operations. Appendix-8 depicts the institutional efficiency and profitability of BURO for the period 2001-2007. Table-2 (see tables at end of article). shows that from 2001 to 2005 every expense category (except for financial expense/total assets) decreased. But during 2006-2007 all expense parameters increased. This indicates BURO's deteriorating efficiency in terms of expense.

Table-3 indicates BURO's improved financial efficiency for 20012005, and that this efficiency deteriorated in 2006 and 2007. Table-4 represents productivity of staff members and loan officers of BURO. (see tables at end of article). Here, we see borrowers per staff member and borrowers per loan officer are increasing from 2001-2005. However, this productivity decreases in 2006 and 2007. From the table it is also observed that loan officers as a percentage of personnel are increasing.

Salary Burden:

Christen (2000) develops "salary burden", a useful measure that incorporates the following three factors:

Average staff salary as a multiple of GNI per capita/ (Average no. of clients/staff members) X (Average outstanding balance per client/GNI per capita)

The above measure expresses the proportions of the MFI's portfolio that each employee "represents" in terms of the national economy.

From the table 5, it is observed that the salary burden of BURO shows a declining trend from 2001 to 2005. However, this increases in 2006 and 2007. The low salary burden reflects that a small proportion of portfolio and operating revenue is consumed by personnel costs.

7. Sustainability Analysis of BURO

Sustainability indicates whether a microfinance scheme can remain in operation and provide continuity without outside grants or soft loans. Sustainability makes microfinance institutions more cost-effective and competitive. It is a prerequisite for making microfinance services permanently as well as widely available. Sustainability of MFIs also ensures the viability of microfinance institutions, efficient allocation of resources, provision for various financial services, and product diversification. Finally, sustainability provides a demonstration-effect to encourage other financial institutions, which might otherwise consider microfinance unattractive or too risky to offer similar products.

7.1 Approaches to Sustainability Analysis

Regarding the development process, two primary aspects of sustainability emerge: financial and economic sustainability. Financial sustainability is the ability of an MFI to meet its operating costs by its revenues. Cost and financial efficiency determine the degree of financial sustainability (Khalily et al., 2000). Economic sustainability refers to a continual supply of finance to meet a person/community's needs, usually in the form of secure and accessible loans from a microfinance institution. As most MFIs are heavily subsidized, financial sustainability does not reflect real profit. As such, professionals tend to argue that sustainability should account for the opportunity-cost of cheap funds. This is usually referred to as economic sustainability. Table-6 depicts the sustainability determination criteria for an MFI and Table-7 shows the sustainability condition of BURO (see tables at end of article).

7.2 Models for Assessing Sustainability

To test sustainability through different models, at first an MFI's net subsidy should be measured. For this purpose the methodology shown by Khalily et at. (2000) has been used.

Measuring Net Subsidy: Assume that an MFI provides two major types of financial services to the target households: credit and savings. Assume further that the program is financed by borrowing (B), grants (G) and member savings (MS). It borrows from the banking system at a concessionary interest rate, receives grants from different donor agencies, and mobilizes savings, which is built-in within the system. Most MFI requires its clients to save with the MFI before they are eligible for loans. Hence, total funds (TF) available to the MFI may be specified as:

TF=B + G + MS (1)

Part of these funds is used for financing portfolio, comprising of loan (L) and investment including fixed deposits (I). Assume that loans are extended at an interest rate of [r.sub.l], and investment is made in fixed deposits at an interest rate of [r.sub.i]. Given the portfolio mix, total revenue of the program is given by:

TR =([r.sub.l]*L) + ([r.sub.i]* I) + IG (2)

Where, ([r.sub.l] * L) and ([r.sub.i] * I) refer to income from loans and investment, respectively. Based on the practice of the MFIs, it is assumed that donors do provide income grants for reimbursement of operating expenses. This is represented by IG in equation (2). The MFI has to incur transaction costs for its loan output and investment output in addition to the cost of funds. Given the sources of funds, member savings and borrowed funds and the administrative costs, total expenditure (TE) of the program is specified by:

TE = (w* Emp) + ([b.sub.i] * B) + ([d.sub.i] * MS) + [theta]L + OPE (3)

Where, w refers to wage and [b.sub.i] and [d.sub.i] represent the average borrowing interest rate and interest rate on member savings, respectively and [theta] represents the ratio of loan-loss to loans. The term [theta]L, therefore, measures the amount of loan losses. The term OPE denotes other operating expenses.

Considering equations (2) and (3), profit ([PI]) is denoted by:

[PI] = ([r.sub.i] * L) + ([r.sub.i] * I) + IG - [(w* Emp) + ([b.sub.i] * B) + ([d.sub.i] * MS) + [theta]L + OPE] ... (4)

The reported profit of an MFI does not provide much information about its sustainability because these institutions are largely subsidized by the Central Bank and/or international agencies. An MFI is sustainable if it can pay for the gross subsidy it enjoys. Gross subsidy is a combination of reduced operating expenses, below market interest rates and income grant from the third parties. Given the opportunity cost of subsidized funds, the financial structure gross subsidy of any MFI may be specified as:

S = (G + EQF)* [r.sub.m] + (r.sub.m] - [b.sub.i])* B + IG ... (5)

Where, IG is the direct subsidy received by MFI as reimbursement of some portion of operating expenses, and [r.sub.m] is the market interest rate reflecting the opportunity cost of funds. The first part of the equation (5) represents the gross subsidy from equity (EQF) and grants (G). The second term shows the gross subsidy from cheap borrowed funds from national and international lending agencies. The third part represents income grants. As argued earlier, the MFI is financially sustainable if it can pay for gross subsidy and total operating costs out of its total revenue. Thus, net subsidy (NS) can be defined using equations (4) and (5) as follows:

NS = GS - [PI]

NS = S - [{(r.sub.l] * L) + ([r.sub.i] * I) + IG} - {(w*Emp) + ([b.sub.i] * B) + ([d.sub.i] * MS) + [theta]L + OPE}] ... (6)

The first part of equation (6) refers to the gross subsidy received by the MFIs; the second and last part of the equations indicates total revenue and total cost, respectively. If S is greater than the sum of the second and third parts, then there is a positive net subsidy and vice-versa. Hence, it is necessary to have the ability to pay for the gross subsidy out of its profit for any MFI to be sustainable. Donor organizations can continue subsidizing MFIs for political and other grounds, but such subsidy, while providing a cushion against financial vulnerability, does not help MFIs stand on their own feet in providing microfinance and outreach programs in the long-run.

7.2.1 Subsidy Dependency Index (SDI)

Yaron (1992) developed a measure of sustainability named the Subsidy Dependency Index (SDI) that can be used for quantifying subsidy-dependence (defined as the inverse of self-sustainability), and for tracking progress made by financial institutions in reducing their subsidy dependence over time. The SDI measures the percentage increase in the financial institution's average lending interest rate that would be required to compensate for the elimination of subsidies (Yaron, 1992). Since self-sustainability criteria are emerging in supporting MFIs, one way to find it out is by calculating the SDI (Yaron 1992a, 1992b).

SDI = (GS - [PI])/([r.sub.l] * L)

Here, Portfolio (L) is considered constant when r is considered as a parameter for eliminating subsidy and Lending interest rate (r) is constant when loan is considered as a parameter for eliminating subsidy. Under this method:

* If SDI is positive (SDI > 0), MFI is not sustainable.

* If SDI is zero or negative (SDI [less than or equal to] 0), MFI is sustainable.

* (See Tables 9 at the end of the article).

(See Tables 8 at the end of the article).

Yaron's Subsidy Dependency Index (SDI) from year 2001 to 2007 leads us to conclude that BURO achieved sustainability in 2005 and 2006. Before that, BURO was not sustainable but there were gradual improvements towards sustainability. However, in 2007 BURO has lost its sustainability. A devastating cyclone and flood disrupted microfinance activities of most MFI in Bangladesh and hence their performance, including BURO, worsened.

7.2.2 Subsidy Dependency Ratio (SDR)

In several papers about the performance of MFIs in Bangladesh, Khandker et al. propose the Subsidy Dependence Ratio (SDR) as an alternative to the SDI (Khandker and Khalily, 1996; Khandker et al., 1995; Khandker et al., 1995). The main concern is that the SDI compares only subsidy as against revenue from lending. In principle, an MFI could decrease its subsidy dependence through increased revenues from either loans or investments. Khandker et al. suggest that subsidy can be compared with revenue both from loans and investments. Then the SDR is:

SDR = (GS - [PI})/[([r.sub.l] * L) + ([r.sub.i] * I)]

Like the SDI, the SDR is negative if and only if profit exceeds the Gross Subsidy. Thus, the SDR and the SDI do not differ in their most important aspect in the measurement of subsidy. They do differ, however, in what they compare with subsidy. So, under this model:

* If SDR is positive (SDR > 0), an MFI is not sustainable.

* If SDI is zero or negative (SDR [less than or equal to] 0), an MFI is sustainable.

(See Tables 9 at the end of the article).

Khandker et al. Subsidy Dependency Ratio (SDR) calculations from 2001-2007 point out that until 2004 BURO was not a sustainable institution. In 2005 and 2006, it achieved sustainability. It lost its sustainability again in 2007.

7.2.3 Efficiency and Subsidy Intensity Index (ESII)

By considering all policy parameters, the "Efficiency and Subsidy Intensity Index" (ESII) developed by Khalily et al. (2000) gives a broad-based alternative index for sustainability measurement. ESII enables policymakers to derive information about cost and financial efficiency; gross subsidy and income grant intensity and indicator of portfolio shift. The causes and their effect on sustainability can be derived from the constituents of the index. ESII is calculated as follows:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Explanation of ESII: The degree of ESII is influenced by cost-efficiency, portfolio mix, market interest rate, gross subsidy and income grant intensity. Furthermore, it is inverse of cost and financial efficiency and portfolio mix in relation to output price ratio. Under this model:

* The higher the degree of cost and financial efficiency and portfolio mix and output price ratio, the lower is the degree of efficiency and subsidy intensity index (ESII).

* A zero or negative value of ESII represents no subsidy dependency.

From Table 10 (see tables at the end of the article) we observe that in 2001 the ESII was 61.69% and after that year it decreased sharply with figures of 49.79%, 44.72% & 31.18% and 11.25% from 2002 to 2005, respectively. But in 2006 and 2007 ESII showed an increasing trend. This trend implies the deteriorating sustainability of BURO.

8. Managerial Implications and Conclusion

The study reveals that from 2001 to 2005 BURO was gradually moving toward achieving better outreach and sustainability. But in 2006 and 2007 the sustainability of BURO showed a deteriorating trend. According to SDI and SDR, BURO achieved sustainability in 2005 and 2006. Before that, BURO was not a sustainable MFI. However, in 2007 BURO lost its sustainability. ESII shows that BURO had not yet achieved sustainability. Under this model, although BURO is not a sustainable microfinance institution, it improved its sustainability over the years from 2001 to 2005. But its sustainability deteriorated in 2006 and 2007.

Considering the varied approaches to sustainability, we observe that from the years 2001-2004, BURO was financially sustainable but not economically sustainable. But in 2005 and 2006, BURO was both financially and economically sustainable. However, in 2007 BURO lost its economic sustainability. The deteriorating outreach and sustainability in 2006 and 2007 was due to the Bangladesh economy's vulnerability at that time. The economy was hugely affected during the second half of the year by a massive flood and a deadly cyclone called "SIDR". In the last week of July 2007 the devastating flood occurred, hitting almost all regions of the country. The poor were hit hard, as it caused immense havoc to their houses, livestock and crops. Microfinance activities could not be carried out as usual. The cyclone "SIDR" of November 2007 seriously affected eight districts in the southern belt of Bangladesh. The NGO's programs were totally wiped out. These lead to deteriorating outreach and sustainability of BURO in 2006 and 2007.

These findings have important implications for regulatory bodies, government, donors and international agencies. For new generation MFIs, achieving outreach requires more time and needs cost and financial efficiency, with a lower level of dependency on subsidy. Free donor funds make an MFI inefficient and lead to expense-preference behavior. They divert MFIs' attention toward other things than sustainability. So to ensure sustainability, dependency on donor funds should be reduced. The results indicate that MFIs' outreach performance remains low compared with potential demand, and the factors responsible appear to be both the refusal of most MFIs to mobilize local savings and the high costs of supply of microfinance services. It is suggested that more attention should be placed on savings mobilization and ceilings on interest rates should be removed in order to allow MFIs to charge sustainable interest rates. Less competition arises due to segmented program design and contestability features of the MFI market. To ensure sustainability of MFIs, competition should be increased and the market should be integrated.

Appendix--1: Geographical Outreach

SL. Particulars 2001 2002 2003 2004

1 No. of Districts 9 11 18 20
2 No. of Upazilas 33 35 55 67
3 No. of Unions 183 265 312 440
4 No. of Villages 2,025 2,566 3,588 4,238

SL. Particulars 2005 2006 2007

1 No. of Districts 21 32 38
2 No. of Upazilas 91 148 221
3 No. of Unions 521 707 1123
4 No. of Villages 5,047 7,029 8,833

Appendix--2: Customer Outreach

SL. Particulars 2001 2002 2003

1 Enrollment 41,767 48,710 86,731

2 Dormant 10975 13,281 20,048

3 Dropout 7,520 7,520 6,520

4 Active 96,537 124,446 184,609
 Customers

SL. 2004 2005 2006 2007

1 N/A N/A N/A N/A

2 N/A N/A N/A N/A

3 N/A N/A N/A N/A

4 221,366 273,286 331,329 376,710

Appendix--3: Number of Active Borrowers and Borrower/
Customer Ratio

SL. Particulars 2001 2002 2003 2004

1 No. of Active 69,256 91,866 128,112 155,819
 Borrowers

 % Increase -- 32.65% 39.46% 21.63%

2 Borrower/ 72% 74% 69% 70%
 Customers Ratio
 % Increase -- 2.78% (6.76%) 1.45%

SL. Particulars 2005 2006 2007

1 No. of Active 209,808 263,503 354,020
 Borrowers

 % Increase 34.65% 25.59% 34.35%

2 Borrower/ 77% 79% 94%
 Customers Ratio
 % Increase 9.1% 2.60% 18.99%

Appendix--4: Loan Disbursement and Outstanding Balance

 Yearly Cumulative Outstanding
 Disbursement Disbursement Balance
Year (Million Take) (Million Take) (Million Take)

2001 464.64 1,550.00 289.79
2002 695.70 2,245.66 402.94
2003 1,082.67 3,327.30 547.79
2004 1,528.04 4,855.34 750.60
2005 2,368.41 7,223.75 1,159.04
2006 3,180.27 10,404.02 1,564.85
2007 3,751.65 14,155.67 1,943.84

Appendix--5: Loan Recovery

SL. Particulars 2001 2002 2003 2004

1 Yearly 388.00 582.55 937.82 1,325.23
 loan
 recovered

2 Cumulative 1,260.21 1,842.72 2,779.51 4,104.74
 loan
 recovered

3 On Time 98.17% 98.72% 98.03% 98.19%
 Recovery
 Rate

SL. Particulars 2005 2006 2007

1 Yearly 1,959.97 2,774.45 3,372.66
 loan
 recovered

2 Cumulative 6,064.71 8,839.17 12,211.83
 loan
 recovered

3 On Time 98.07% 98.17% 98.07%
 Recovery
 Rate

Appendix--6: No. of Branches

SL. Particulars 2001 2002 2003

1 No. Of 56 67 83
 Branches

2 % Increase 9.8% 19.64% 23.88%

SL. 2004 2005 2006 2007

1 90 110 173 230

2 8.43% 22.22% 57.27% 32.95%

Appendix--7: No. of Staffs

SL. Particulars 2001 2002 2003 2004

1 No. Of Staffs 660 778 1020 1071

2 % increase 7.67% 17.88% 31.11% 5.00%
 in staffs

SL. Particulars 2005 2006 2007

1 No. Of Staffs 1265 2,069 2,537

2 % increase 18.11% 63.56% 22.62%
 in staffs

Appendix--8: Institutional Efficiency and Profitability

SL. Particulars 2001 2002 2003

1 Return on 4% 6% 9%
 Total
 assets
 (ROA)

2 Return on 7% 13% 19%
 Equity

3 Financial 27% 28% 30%
 Spread

4 Operating 128% 139% 149%
 Self-
 Sufficiency

5 Financial 104% 114% 122%
 Self-
 Sufficiency

6 On Time 98.17% 98.72% 98.03%
 Recover

7 Current 8.34 7.44 4.64
 Ratio
 (Times)

8 Debt - 1:2.88 1:3.70 1:3.98
 Equity
 Ratio

9 Debt -- 3.51 5.90
 Service
 Coverage
 Ratio

10 Cost per 0.12 0.10 0.08
 Unit of
 Money
 lent
 (Taka)

SL. 2004 2005 2006 2007

1 11% 10% 6% 3%
2 25% 25% 18% 9%
3 30% 25% 23% 22%
4 164% 163% 136% 11%
5 135% 136% 122% 107%
6 98.19% 98.07% 98.17% 98.07%
7 6.08 5.20 N/A N/A
8 1:2.79 1:1.73 0.61 1.04
9 2.78 1.59 1.62 1.37
10 0.07 0.05 0.06 0.07

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Seibel, H. D. (1997) "Outreach and Sustainability of Rural Microfinance in Asia: Observations and Recommendations." University of Cologne Development Research Center. Asian and Pacific Development Centre, Kuala Lumpur

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(1992b) "Assessing Development Finance Institutions: A Public Interest Analysis." World Bank Discussion Paper 174. Washington, D.C.

Yaron, J., Benjamin, M. and Charitonenko, S. (1998) "Promoting Efficient Rural Financial Intermediation." The World Bank Research Observer, Vol. 13, No. 2 (August 1998), pp. 147-70

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Mostafa Monzur Hasan *

Daffodil International University

M. Kabir Hassan **

University of New Orleans

Mohammad Riaz Uddin ***

University of Illinois at Urbana-Champaign

* Address for correspondence: Faculty of Business & Economics, Daffodil International University, Dhaka, Bangladesh, Phone: 88-01552356226, Email: monzur_hasan@yahoo.com

** Department of Economics and Finance, University of New Orleans, New Orleans, LA 70148, Phone: 504-280-6163, Email: mhassan@uno.edu

*** College of Business, University of Illinois at Urbana-Champaign, Suite 206 David Kinley Hall, 1407 W. Gregory Drive, Urbana, IL 61801, Phone: 217-359-3570, Email: muddin3@uiuc.edu

Table-1: Outreach Measures of BURO

Particulars 2001 2002 2003 2004

Average 0.0042 0.0044 0.0043 0.0048
Outstanding
Balance per
Borrower
(Million Tk.)

Percentage of 99.99 99.99 99.99 99.99
Women Clients

Average Loan 20.71 20.21 17.99 18.58
Balance as a
Percentage of
GNI per capita

Particulars 2005 2006 2007

Average 0.0055 0.0059 0.0055
Outstanding
Balance per
Borrower
(Million Tk.)

Percentage of 99.99 99.99 99.95
Women Clients

Average Loan 19.42 18.61 15.29
Balance as a
Percentage of
GNI per capita

Table-2: Expense Measures

Item 2001 2002 2003 2004

Total
Expense/ 17.94% 17.96% 17.64% 16.09%
Total Assets

Operating
Expense/ 15.54% 14.75% 14.25% 12.53%
Total Assets

Financial
Expense/ 2.40% 3.21% 3.40% 3.55%
Total Assets

Loan Loss
Provision/ 0.69% 0.60% 0.91% 0.43%
Total Assets

Personnel
Expense/ 11.33% 11.07% 11.22% 9.58%
Total Assets

Item 2005 2006 2007

Total
Expense/ 14.08% 17.00% 18.35%
Total Assets

Operating
Expense/ 10.17% 12.04% 13.26%
Total Assets

Financial
Expense/ 3.91% 4.96% 5.09%
Total Assets

Loan Loss
Provision/ 0.44% 0.64% 1.44%
Total Assets

Personnel
Expense/ 7.89% 9.44% 10.93%
Total Assets

Table-3: Financial Efficiency

Item 2001 2002 2003 2004

Operating
Expense/Loan
Portfolio 20.42% 17.82% 17.36% 15.06%

Operating
Expense Per
Client (Tk.) 612.93 576.98 515.27 510.57

Personnel
Expense/Loan
Portfolio 14.88% 13.38% 13.68% 11.51%

Average
Personnel
Expense as
multiple of
per capital
GNI 3.23 3.19 3.09 3.11

Item 2005 2006 2007

Operating
Expense/Loan
Portfolio 11.57% 13.37% 15.18%

Operating
Expense Per
Client (Tk.) 490.53 631.63 783.30

Personnel
Expense/Loan
Portfolio 8.97% 10.49% 12.51%

Average
Personnel
Expense as
multiple of
per capital
GNI 2.89 2.49 2.67

Table-4: Productivity Measures

Item 2001 2002 2003 2004

Borrowers per 105 118 126 145
staff member

Borrowers per 251 271 294 318
loan officer

Loan officers 41.81 43.57 42.72 45.75
as a Percentage
of Personnel

Item 2005 2006 2007

Borrowers per 166 127 140
staff member

Borrowers per 318 213 206
loan officer

Loan officers 52.16 59.79 67.74
as a Percentage
of Personnel

Table-5: Salary Burden

Item 2001 2002 2003 2004

Average staff salary
as a multiple of GNI 2.81 2.78 2.62 2.74
per Capita

Average number of
clients/staff members 146 160 181 207

Average outstanding 20.71% 20.21% 17.99% 18.58%
balance per/client
GNI per capita

Salary burden 9.28% 8.59% 8.06% 7.13%

Item 2005 2006 2007

Average staff salary
as a multiple of GNI 2.55 2.15 2.26
per Capita

Average number of
clients/staff members 216 160 148

Average outstanding 19.42% 18.61% 15.29%
balance per/client
GNI per capita

Salary burden 6.07% 7.23% 9.94%

Table-6: Sustainability Calculation Formula

If MFI's Net = MFI is Financially
Profit > Zero Sustainable.

If MFI's Net = MFI is NOT Financially
Profit < Zero Sustainable.

If MFI's Net Profit > = MFI is Economically
Direct Subsidy Sustainable.

If MFI's Net Profit < = MFI is NOT Economically
Direct Subsidy Sustainable.

If MFI's Net Profit > = MFI is Financially and
Direct Subsidy Economically Sustainable.
(1) + Indirect
Subsidy (2))

If MFI's Net = MFI is Financially
Profit < (Direct Sustainable, but NOT
Subsidy + Indirect Economically Sustainable
Subsidy)

Table-7: Financial and Economic Sustainability
of BURO (2001--2007)

 Net
 Gross Subsidy =
Year Net Profit Subsidy GS-II

2001 398,483.00 26,519,148.80 26,120,665.80
2002 746,724.00 31,906,980.76 31,160,256.76
2003 8,544,319.00 38,755,218.04 30,210,899.04
2004 29,645,752.00 53,145,036.84 23,499,284.84
2005 111,478,516.00 70,597,965.00 -40,880,551.00
2006 95,899,990.00 85,192,660.00 -10,707,330.00
2007 56,714,141.00 101,545,733.00 44,831,592.00

 Observed
Year Condition Comments

2001 Net Profit > BURO is Financially
 0; Net Sustainable but NOT
 Subsidy >0. Economically
 sustainable

2002 Net Profit > BURO is Financially
 0; Net Sustainable but NOT
 Subsidy >0. Economically
 sustainable

2003 Net Profit > BURO is Financially
 0; Net Sustainable but NOT
 Subsidy >0. Economically
 sustainable

2004 Net Profit > BURO is Financially
 0; Net Sustainable but NOT
 Subsidy >0. Economically
 sustainable

2005 Net Profit > BURO is Financially
 0; Net Sustainable but NOT
 Subsidy >0. Economically
 sustainable

2006 Net Profit > BURO is Financially
 0; Net Sustainable but NOT
 Subsidy >0. Economically
 sustainable

2007 Net Profit > BURO is Financially
 0; Net Sustainable but NOT
 Subsidy >0. Economically
 sustainable

Table-8: Subsidy Dependency Index (SDI) of BURG

SDI 2001 2002 2003 2004

 47.34% 40.39% 28.15% 15.88%

SDI 2005 2006 2007

 -17.87% -3.47% 11.83%

Table-9: Subsidy Depeudeucy Ratio (SDR) of BURO

SDR 2001 2002 2003 2004

 43.35% 38.07% 26.88% 15.32%

SDR 2005 2006 2007

 -17.37% -3.39% 11.58%

Table-10: Empirical analysis of Sustainability of Buro--
Application of ESII

Particulars 2001 2002 2003 2004

S/([r.sub.l] * L) 0.4806 0.4136 0.3611 0.3592

1/[r.sub.l] 1.2853 1.1758 1.1541 1.0066
(w * Emp) +
([b.sup.i] * B) +
([d.sub.i] * MS) +
[theta]L + OPE/L)

(r.sub.i * I)/ 0.0922 0.0611 0.0470 0.0370
(r.sub.l * L)

IG 0.0000 0.0000 0.0000 0.0056
([r.sub.l] * L)

1 + 1.0922 1.0611 1.0470 1.0370
([r.sup.i x I]/
[r.sup.l x L)

ESII 61.69% 49.79% 44.72% 31.18%

Particulars 2005 2006 2007

S/([r.sub.l] * L) 0.3086 0.2763 0.2680

1/[r.sub.l] 0.8360 0.9940 1.1623
(w * Emp) +
([b.sup.i] * B) +
([d.sub.i] * MS) +
[theta]L + OPE/L)

(r.sub.i * I)/ 0.0290 0.0234 0.0220
(r.sub.l * L)

IG 0.0008 0.000 0.000
([r.sub.l] * L)

1 + 1.0290 1.0234 1.0220
([r.sup.i x I]/
[r.sup.l x L)

ESII 11.25% 24.13% 39.95%