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The Cross-Border Transfer of Low-Income Business Models. Institutions and the Global Growth of Microfinance. Joshua K. Ault University of South Carolina. Dissertation.

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the cross border transfer of low income business models

The Cross-Border Transfer of Low-Income Business Models

Institutions and the Global Growth of Microfinance

Joshua K. Ault

University of South Carolina

  • Applies concepts from the “cross-border transfer” literature to the study of business models in low-income and subsistence markets
  • Uses microfinance business model to test and extend those ideas
    • Quantitative study of the global growth of microfinance across 139 countries
    • Qualitative study of model adaptation in 3 countries (Ethiopia, Uganda and US)
  • This presentation provides preliminary results for the quantitative study
  • Theory
    • Emergent research stream on business models in low-income markets
    • Cross-border transfer literature
  • Phenomenon
    • Microfinance as widespread, innovative business model
    • How well does microfinance travel?
  • Hypotheses
    • Microfinance will grow best in countries similar to Bangladesh (informality, moderate stability)
  • Methodology and Results
    • Found that institutions matter in the global growth of microfinance
  • Next Steps
    • Qualitative analysis of adaptation and change of microfinance model
emergent research stream into low income business models
Emergent Research Stream into Low-income Business Models
  • Untapped market of 4 billion (Prahalad, 2005)
    • Potential of $13 trillion in spending power
    • Reaching these markets improves economic and social conditions
  • Adaptation of business model is needed
    • Need to understand local environment (London and Hart, 2004)
  • Can you adapt and still reach 4 billion people?
    • Some argue that social & business cases overstated (Karnani, 2007)
    • Issue of scalability rarely addressed, but critical to further knowledge and practice
    • Little empirical research to test competing claims
the cross border transfer question
The Cross-Border Transfer Question
  • Literature often formulates the question as whether there is a business case for low-income business model
  • This study focuses on the question: under what conditions does a business case hold?
    • Goes beyond identifying models that work to understanding their diffusion
    • What works in one society may not work in another
    • Questions of scalability, adaptation and strategy
implications for the transfer of low income business models
Implications for the Transfer of Low-Income Business Models
  • How does institutional “fit” affect the transfer of low-income business models across national boundaries?
    • Will the microfinance business model “fit” in every low-income society?
  • How does adaptation affect transferability?
    • Will the microfinance business model adapt to “fit” different environments?
    • What adaptations will occur?
    • What are the microprocesses by which this occurs?

Quantitative study focuses primarily on the first question

the case of the microfinance business model
The Case of the Microfinance Business Model
  • Microfinance “provides very poor families with very small loans to help them engage in productive activities or grow their tiny businesses” (Microfinance Gateway, 2008).
  • Microfinance presents a unique empirical setting to address these questions
    • Business model has been developed over 30 years of experimentation
    • Transferred across multiple countries
    • Transitioning from non-profit to for profit
development of the grameen model
Development of the Grameen Model
  • Began in 1976 as an academic research project in the village of Jobra, Bangladesh
    • Yunus, an economics professor found the western theories he was teaching “maddeningly irrelevant” for Bangladesh (Bruck, 2006)
  • Three years of observation of the environment, experimentation, and trial and error to match the model to the institutional conditions in Jobra
  • Expanded out of Jobra in 1979 with the sponsorship and support and of the Bangladeshi Central Bank and national banks
  • In just 30 years, has transferred to numerous countries across the globe
grameen business model 2008
Grameen Business Model (2008)

Governance Mechanisms

  • Group lending
  • Borrower homogeneity
  • Compulsory savings
  • Weekly repayment schedule
  • Progressive lending
  • Decentralization of authority and decision making (low-level staff)
  • Borrower training program
  • Complete transparency in all transactions

Organizational Characteristics

  • Legally registered
  • Financially sustainable
  • Private sector
  • Broader social agenda


  • Exclusive focus on the very poor
  • Exclusive focus on rural population
  • Emphasis on women

Loan Characteristics

  • Small (~$75 on average)
  • Relatively high interest rates (~20%)
  • Non-collateralized/ undocumented
  • Intended for income generation
  • Usage is self-determined
  • Insistence on repayment (no charity)

Sources: Grameen Foundation (2008); Grameen Bank (2008)

general group lending model beyond just grameen
General Group-Lending Model (Beyond Just Grameen)

Governance Mechanisms

  • Group lending
  • Savings
  • Frequent repayment schedule
  • Progressive lending
  • Decentralization of authority and decision making (low-level staff)

Organizational Characteristics

  • Legally registered
  • Focus on profitability
  • Private sector


  • Focus on the poor
  • Emphasis on women

Loan Characteristics

  • Small (< $1,500)
  • Relatively high interest rates
  • Non-collateralized/ undocumented
  • Usage is self-determined
  • Insistence on repayment

Sources: Westley (2007), Center for Global Development (2006), Robinson (2001), CGAP (2008); MiX (2008)

microfinance designed and tied to the institutional environment
Microfinance Designed and Tied to the Institutional Environment
  • Designed for institutions different from those in developed countries
    • A model specifically designed to work in environments with poor “institutional quality”
    • Institutional environments differ across emerging and developing countries as well
  • Comparative Institutional Advantage -- “The institutional structures of a particular political economy provide firms with advantages for engaging in specific types of activities there” (Hall & Soskice, 2001: 37)
    • Does the microfinance model have a comparative advantage in certain types of institutional environments?
informal economic systems
Informal Economic Systems
  • Informality:
    • “Those actions of economic agents that fail to adhere to the established institutional rules or are denied their protection” (Feige, 1990)
  • Literature suggests microfinance is designed as an informal lending model (Servon, 2002)
    • However, microfinance institutions embrace certain forms of informality, but not others
    • E.g., Group lending and no collateral, but legally registered
    • Need to understand differences in types of informality to understand the transfer of microfinance across borders
  • Transfer not just about market size, but also institutional conditions
literature has developed around types of informality
Literature Has Developed Around Types of Informality
  • Horizontal informality (North, 1981; Acemoglu & Johnson, 2005)
    • E.g., Informal housing contracts in Peru (De Soto, 1989)
  • Vertical informality (North, 1981; Acemoglu & Johnson, 2005)
    • E.g., Bribing officials in Zaire (Portes, 1994; Evans, 1995)
horizontal informality
Horizontal Informality
  • Use of informal means of contracting between actors
    • Likely to be high in institutional contexts where the state is ineffective in facilitating economic exchange
    • In formal systems, state acts as arbiter of contracts (North, 1981; Acemoglu & Johnson, 2005)
  • Microfinance most suited for contexts where the state does not enable formal contracting
    • While informal mechanisms are viable, they have a cost relative to formal mechanisms
    • These costs limit the advantages of informal mechanisms in formal systems
hypothesis 1
Hypothesis 1


The greater the strength of contract enforcement at the national level, the weaker the growth of national-level commercial microfinance lending.

Contract Enforcement

  • Informal Lending
  • Poor customers
  • Lack of collateral
  • Small loan sizes


political stability as moderator of horizontal informality type
Political Stability as Moderator of Horizontal Informality Type
  • Literature identifies at least three types of horizontal informal contracting (Portes, 1994)
    • Growth (ex: Italy)
      • Often legal enterprises working in stable communities
      • Gain advantages in flexibility through networks
      • Often subcontract to, and competes with, the formal sector
    • Survival (Ex: Bangladesh)
      • Some uncertainty, less stability
      • Very small enterprises with few ties to formal sector
      • Actors rely on reputation-based social arrangements
    • Violent and criminal (Ex: Zaire)
      • High uncertainty
      • Power and connections create high returns (i.e. wealth redistribution)
      • Truck and barter transactions
best institutional fit for microfinance is survival informality
Best Institutional “Fit” for Microfinance is “Survival” Informality
  • Absence of formal state regulation will not necessarily lead to the type of informal contracting most suitable for microfinance
    • Ability of communities to either confer status on individuals or ostracize them is the key governance mechanism in the microfinance model
    • Presence of pre-existing social pressure in economic relations acts as a source of institutional advantage for microfinance
  • Survival informality most likely to provide this resource
    • Not just lack of formal enforcement, but also some degree of stability in the state
hypothesis 2
Hypothesis 2

National-level political stability will moderate the relationship between contract enforcement and microfinance lending such that the effect will be greatest at medium levels of stability. That is, the moderating effect of stability will be curvilinear.

vertical informality
Vertical Informality
  • Informality that is designed to hide or avoid state intervention
    • Determined by the degree to which the state provides checks against abuse by political elites (North, 1981; Acemoglu & Johnson, 2005)
    • Unlike with horizontal informality, there are few alternative mechanisms to circumvent abuse by elites
    • Actors forced underground (Portes, Castells, & Benton, 1989)
  • Microfinance:
    • Not like loansharking, which is conducted without reference or recourse to legal system
    • Whereas loansharking derives from bottom-up demand, microfinance derives from top-down supply (Schreiner, 2001)
hypothesis 3
(Hypothesis 3)


  • Legal Registration
  • Access to formal capital
  • Licenses for savings

The greater the constraints on abuse by political elites at the national level, the greater the growth of national-level commercial microfinance lending

Constraints on Elites


preliminary analysis
Preliminary Analysis
  • 9-year longitudinal, cross-sectional study of 139 countries using random-coefficients modeling (RCM)
    • RCM is “an extremely powerful tool of comparative analysis”
    • Controls for causal heterogeneity (Beck, 2006)
  • Variables
    • Dependent variable: number of commercial microfinance borrowers per capita (MiX)
    • Independent variables:
      • Contract Enforcement: World Bank’s “Doing Business Project” “Enforcing Contracts
      • Political Stability: Kaufman, Kraay, and Mastruzzi (2006) “Political Stability and Absence of Violence”
      • Covariates: Per-capita GDP, Literacy
countries plotted by informality and stability with number of microfinance borrowers indicated
Countries Plotted by Informality and Stability with Number of Microfinance Borrowers Indicated

Number of microfinance borrowers > 25 per thousand citizens

Number of microfinance borrowers < 25 per thousand citizens

results hypothesis 1
Results: Hypothesis 1
  • Microfinance most likely at high levels of informality
  • Coefficient for Informality = 0.46
    • F = 3.73
    • P < 0.05
results hypothesis 2
Results: Hypothesis 2
  • Tests the interaction between informality and the squared term for political stability
    • Microfinance most likely at high levels of informality and medium levels of political stability
    • Hypothesized sign is for coefficient is negative (interaction is with an inverted-U shape)
  • Coefficient for Informality X Stability2= -0.22
    • F = 4.11
    • P < 0.05
Predicted borrowers per thousand population for each year as a function of the Informality (I)/Stability (S) interaction.
  • Fully-pooled longitudinal models
    • Panel-corrected standard errors with AR(1) disturbance
    • Heteroscedasticity-consistent standard errors
  • Additional covariates
    • Regime type
    • Openness to trade
    • Population
  • Alternate measure for stability
    • State Fragility Index (Polity IV)
  • Results similar
next steps
Next Steps
  • Extensions to the quantitative model
    • Vertical Informality
    • Distance measures
  • Study 2: Adaptation of the microfinance model
    • Uganda, Ethiopia, USA
  • Informality framework
  • Non-profit vs. for-profit models
    • Answer not yes/no, but when and how
  • Reverse transfer of models from developing to developed countries
general implications for sustainability research
General Implications for Sustainability Research
  • IB literatures are clear that transferring “best practices” across national boundaries is highly complex
    • E.g., Bringing European best practices on environmentalism to the U.S. will likely have similar issues
    • Cross-cultural differences in conceptualizing sustainability
    • These cross-national differences have implications for the scalability, growth, and profitability of sustainable initiatives
  • Ultimate goal is to eradicate poverty, protect the environment, achieve peace, eliminate disease, etc.
    • Need to break broad goals into component parts
    • Social case, business case, and sub-issues
  • My research focus is on middle range theory about what works, when, and under what conditions
    • Poverty eradication
    • Business case for poverty eradication
    • Transferability of business models across societies