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Ask a Microfinance Expert: Developing a Cost-Benefit Analysis Tool

By Sonja Egeland Kelly

Microfinance practitioners and microfinance enthusiasts alike agree that the sustainability of microfinance institutions hinges on the success of cost-benefit analysis. Opportunity’s Director of Knowledge Management Estelle Berger recently produced a report on this very topic. She worked with the SEEP Network and USAID to capture and record Opportunity’s experience with developing a cost-benefit analysis tool in both Mozambique and Malawi.

Estelle took an in-depth look at the tool’s design and analysis features, the challenges faced by Opportunity Mozambique and Malawi, and offered practical advice to other microfinance institutions looking to develop similar tools.

“Developing the cost-benefit analysis tool turned out to be beneficial in both intended and unexpected ways,” she writes. “As Opportunity had planned, the tool helped to bring to light issues such as return on investment and client transaction patterns, and aided new investment decisions based on that information.”

Here are a few of Estelle’s suggestions to other microfinance institutions as they consider their own cost-benefit analysis tools:

1. Establish separate cost centers. From the very start of operations, establish all delivery channels as separate cost centers. This will make it easier to analyze different delivery channels when a cost-benefit tool is eventually implemented. If operations have already begun and delivery channels are not set up as separate cost centers, make this adjustment as soon as possible, and understand that analysis can only start from that point.

2. Integrate the tool with MIS. Invest time setting up the MIS to make sure that it captures all factors that management might wish to analyze or compare (for example, number of transactions, total cost, number of clients, number of staff, etc.). If the MIS is already established and the MFI is not considering reconfiguring it (an expensive and time-consuming process), then limit the cost-benefit analysis tool as much as possible to only those ratios and indicators that can be calculated from data that the MIS is already capturing.

3. Address transfer pricing. MFIs and banks that mobilize deposits will need to decide on an approach to transfer pricing and build this into management accounting. This will result in more accurate comparison between outlets that tend to have more credit business and outlets that capture large amounts of deposits.

4. Account for the cost of management time. Be aware of the often hidden amount (and hence cost) of management time devoted to the supervision of remote outlets and development of innovative delivery channels. Identify a consistent and accurate way to quantify, or at least estimate, these costs. If this is not possible, understand the limitations of the tool and the fact that new, smaller or satellite outlets will look artificially “cheap” from an operating cost standpoint and therefore will appear to have a higher operating efficiency ratio than is really the case. Be sure to note these factors in any accompanying explanatory narrative.

5. Use both calendar month and month of operation as bases for trend analysis. Recognize the benefits and limitations of analysis by calendar month and by “age” or number of months of operation, and build both approaches into the charts that your tool generates. Remember that analysis by calendar month is useful for showing seasonal trends, but does not take into account differences in channel maturity. The latter approach helps you to understand and forecast financial returns and customer behavior patterns over time after a new channel is established. Both approaches can provide valuable information for planning and resource deployment.

Read more of the paper HERE, and feel free to post questions and comments below.

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