The name of Shafiqual Choudhoury might not ring a bell to the general public’s ears, but it definitely does resonate with any microfinance aficionado. “Shafiq” Choudhoury measures up to Nobel Prize winner Muhammad Yunus and recently-knighted Fazle Hasan Abed, on the much historical and symbolical Bangladeshi Microfinance scene. Actually, he might already be overshadowing his inspiring elders. In 2007, in their first – and last to date – worldwide ranking of MFIs, Forbes Magazine estimated that ASA (Association for Social Advancement – “Asa” also meaning hope in Bengali), the microfinance institution (MFI) founded and presided by Shafiqual Choudhoury, was simply the best microfinance institution in the world, based on a combined assessment of scale, efficiency, portfolio risk and profitability.
ASA is indeed renowned globally for being the most cost-effective and fastest growing MFI. It is currently providing microfinance services to more than 5.5 million people – 85% in rural areas – in Bangladesh. At the beginning of the year, ASA’s portfolio amounted to $460m, among 4 million borrowers. ASA’s Operational Self Sufficiency was over 143%, and Financial rate of loan recovery reached 99.6%.
In 2006, ASA established the company ASA International, which it manages and partially owes to the extent of 15%. In 2008, Catalyst Micro-finance Investment Company (CMIC), a limited liability company created by ASA in 2006, and the first private equity funds dedicated to investing in microfinance institutions on a commercial basis. raised more than $150 million as equity from foreign private investors – the largest collective equity capital commitment to microfinance to have ever been made. ASA International (ASAI) is CMIC’s main investment vehicle and most of these funds will be used to greenfield ASA’s model of microfinance operations in various countries around the world.
ASAI has thus so far established new MFIs in 9 countries in Asia and Africa, such as India, Pakistan, Sri Lanka, Philippines, Nigeria and Ghana, and is planning to begin operations in China and Indonesia.
And each of these MFIs is supposed to stick closely to the original ASA model.
On 31 March, the Microfinance Club invited Shafiqual Choudhoury to speak at a meeting dedicated to this very model, and entitled “Lowering costs and achieving scale”. Indeed the ASA model stands at the heart of ASA’s success and fame – the Asian Development Bank calling it the “Henry Ford Motor Model of Microfinance.”
But it would have been hard to foresee such a turn of events in the early years of Choudhoury and ASA alike:
The organisation was founded one night in March 1978 by seven young left-wingers – Shafiq being one of them – who were planning to educate and empower groups of villagers in order to pave the way to a revolution and the establishment of a Maoist-inspired state run by the former rural poor.
Later on, Choudhoury realised these rural poor needed, above all, access to funds, and he transformed ASA into an MFI in 1991.
Back then, he was already extremely focused on cutting costs to a minimum, in order to become profitable while still keeping interest rates low and achieving outreach.
He thus started to develop several little simple tricks: he organised the offices so that staff could work in one room and live in two other adjacent rooms. This facilitated work-related discussions which according to Choudhoury was a perfect substitute for formal training. It also cut the costs of night security guards. Shafiq uses the comparison between his staff and an army in a recurrent manner.
Also, ASA did not recruit highly-educated staff, and instead made the working guidelines very simple and very strict so that the decision-making process was restricted to a minimum. Again, he used the army comparison at the Microfinance Club event, saying that his officers are like soldiers, and don’t need education, just to follow orders. If it ain’t broken, don’t fix it, so these methods are still appled today.
The key notions of the ASA model are simplicity, standardisation, and decentralisation.
And Shafiq’s one and only “philosophy”, as he repeated, is “to reduce costs”. All the management systems developed come down to this.
ASA uses loan amounts and figures that can easily be understood by clients and staff members of any level of education, for example with a loan of $100 with 2% monthly interest the calculation is made easiest.
It also uses very few basic criteria for assessing potential clients’ qualifications for loans— such as annual income or occupation.
As determined early on, it strives to reduce costs to a minimum and improve efficiency in the workplace at the same time, for instance by setting up one table per four employees (it eliminates time spent on indirect communication). Further efficiencies in ASA operations come from not hiring accountants or cashiers. The officers implement the necessary bookkeeping tasks, thanks to their extreme simplification. Shafiq is also obsessed with getting rid of paper work: staff should write as little as possible, using one line of symbols to describe any operation, the organisation only keeps documentation of business operations during the lifetime of the concerned contract, and even uses the previous application if a customer wants to apply again for a loan.
But the central feature of the model might be the product that ASA has been offering for two decades. It is an extremely basic loan, and its simplicity has been the key to its success.
The loans are offered in small amounts: the first loan is about the equivalent of one month’s household income. It is repaid in equal weekly instalments, and because the loan term is usually one year, the instalments are small enough to be affordable from normal household cash-flow, making the loan easy to repay. ASA staff comes to the village each week to collect the instalments, which enables the organisation to actively enforce its rights (the staff members are expected to sleep in front of the clients’ doors until they get their due).
ASA might embody the best counter-example of mission drift: it has managed to be highly efficient, profitable and to attract massive foreign investment as ASA International, while serving considerable numbers of poor clients. The average loan is a rather low $178, which is usually a good indication of outreach to poor clients. Thanks to his obsession with effectiveness, Shafiq achieves a 15% average return with ASA, even though he charges only 3% more for his loans than Grameen Bank does.
But the evolution of the microfinance market in Bangladesh might lead Choudhoury to consider changing his beloved model. Fierce competition between MFIs has led to overcrowding and since Grameen’s license (it is a bank, while ASA is an NGO) entitles it to offer savings accounts to people other than borrowers, this might start to give Grameen the necessary extra edge.
Indeed Choudhoury has long been advocating for a change in legislation that would allow MFIs in Bangladesh to adopt a for-profit status. Share-holding status would enable MFIs to mobilise general public savings and to borrow from commercial sources. He claims that any not-for-profit body hasn’t the ability to last.
This is what led him to founding ASA International.
Through greenfielding – that is setting up small cost-effective MFIs, then bringing them up to scale – the aim is to disseminate the exact same model in every country and every region – or “photocopies” as Choudhoury referred to them.
But to what extent is this model perfectly and endlessly reproducible?
Even if Choudhoury enjoys repeating that he has achieved within 10 years the scale of development his rivals had taken 20 years to reach, the ASA model was able to develop effortlessly and at a high pace because for at least the 15 years prior to ASA’s birth, MFIs had been showing the way and putting up with all initial issues, such as simply getting the clients and donors used to the idea and methods of microcredit.
But the environment and conditions for the implementation of microfinance operations are still very dissimilar in the different parts of the world. Labour costs, capabilities, infrastructures to cite only a few features, have to be taken into account.
For instance, answering a question yesterday about the new technological innovations in microfinance such as mobile banking, Shafiq, true to his creed, flatly responded that they “won’t work”. He himself has introduced computers in ASA offices not so long ago, and hasn’t noticed any cost reduction or any positive consequence whatsoever in outreach since.
But what mobile banking may not bring to a well-established and over-standardised microcredit scheme in Bangladesh, has the capacity to do wonders in a rural remote African area, and most of all will never be achieved by an ASA photocopied branch for very practical reasons.
Another achievement that might be out of ASA business model’s reach is product diversification and adaptation to the needs of users. Indeed the model can only be implemented in order to deliver this very specific simple loan scheme.
Choudhoury acknowledged yesterday the importance of taking into account the “missing middle”, this segment of entrepreneurs lying in between the micro-businesses and the established middle to large companies, who lack the necessary collateral and track record to secure lending from commercial banks. This category would represent a crucial input to economic growth in developing countries, but need products different from the traditional ASA loan.
Thus ASA has implemented the SEL (Small Entrepreneurship Loan), whose performance so far has not been quite as good as for the standard small loan. Indeed, such a product requires more in-depth analysis and therefore more time and skills from officers.
Choudhoury might be envisioning world domination for his model, but this leaves financial services crucial for the poor, such as microinsurance, out of the picture.
Yet, in spite of his apparent uncompromising certitudes Choudhoury might have realised the limitations of his stand.
The fact that ASA is about to launch some major microinsurance initiative is another sign of this realisation. In this case, major amendments to his model will be all the more required. But if this really marks the dawn of a new era for ASA, the dedication of CMIC’s considerable financial capacity to effective worldwide poverty alleviation could be life-changing for millions.