when institutional change outruns the change agent: the...
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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 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 America178% increase in per capita income over 15 years
High level of unequal dispersion of income 51% of population live below poverty levelIndigenous population 78% live below poverty level
Nation of small and informal businesses
Who are the competitors…
Commercial Banks14 of the 18 banks are involved in microfinanceApproximately 187,000 clients$200 millions in loansAverage loan amount: $1,070Top 5 banks 92% of market
MFIs31 MFIs grouped in two associations: Redimif and AgremifApproximately 340,000 clients$190 millions in loans Average loan amount: $558Top 5 MFI 65% of market
Our Method: The Deep Dive
On the ground field work Seek multiple strategic perspectivesWe 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 menGroup and individualsCity 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?
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
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
Increasing
Num
ber 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
MicrofinancingField
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
MicrofinancingOrganizations Engaging with Banks
Microfinancing
Organizations
Competing with Banks.
Banks Committing to
Microfinance Business
Process Model of Institutional Change in Microfinance: Inter‐organizational field dynamics
Time late ‘80s ‘96
Timeline of critical events in the process of institutional change in Guatemala
‘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 Drafted
Redefinition Struggle(2001‐2002)
MFI Enters
90s: MFI Established
MFIAssoc.Formed
GenesisPetition to Become a Bank
GrameenEnters
90s: Expansioninto ConsumerCredit
BanCafeEntersMicrofinance
BancaSol
EntersMicrofinance
BanCafe
Fails
CompartamosMexico IPO
PromeriaBuysBancaSol
Microfinance
Banks
Regulatory
SKS IndiaIPO
AztecaGyT
Enter Microfinance
BancoInternacionalEnters
CompartamosMexico Convertsto a Bank
CompartamosMexico Enters Guatemanla
Banrural/GrameenPartnership
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 fieldBut over time the MFI and banks collideThe logic of the banking field ultimately change and the organizational field of the banks and in turn microfinance changeThere 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 generatedCompetition 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 PracticeRegulation 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 InclusionEven 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 MicrolendingThat 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
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