Efficiency and Sustainability of Formal and Quasi-formal Microfinance Programmes—An Analysis of Grameen Bank and ASA

The Bangladesh microcredit market comprises of formal and quasi-formal microfinance institutions. The present paper examines and evaluates efficiency and sustainability of two microfinance programmes— formal and quasi-formal. Grameen Bank is formal and ASA is quasi-formal in nature, status and programme. The Efficiency and Subsidy Intensity Index (ESII), as developed by the authors, was used to examine the sustainability and efficiency of the two programmes. The analysis shows that both Grameen Bank and ASA have been operating with high degree of cost and financial efficiency. ASA being a quasi-formal organization is more cost-effective and sustainable than Grameen Bank, a formal organization. This is attributed to low salary base and high lending interest rate. GB is relatively costly because of higher salary, based on national pay scale, and relatively low lending interest rate. If ASA had to operate with the average salary of Grameen, given the present level of operation, it would be very worse-off. This was evident from a simulation of increase in wage rate. In contrary, Grameen Bank would be much better-off at a low salary base of ASA. During the period 1993-97, the degree of ESII has declined for both GB and ASA. The positive subsidy intensity of ASA is contrary to the traditional belief that it is a self-sufficient organization with no subsidy dependency. Consequently, social costs are associated with these two programmes. Grameen Bank will be able to reduce social cost and improve sustainability by improving cost efficiency, increasing loan size and lending interest rate, and changing portfolio mix without incurring any operating cost. Grameen Bank is close to achieving sustainability after its fifteen years of experience. Similarly ASA has attained higher degree of sustainability within seven years of its microcredit operation. This implies that it takes longer time for a formal organization like Grameen Bank to be sustainable than quasi-formal organizations like ASA. However, some proxy measures suggest positive net social gains of both the programmes. The findings have implications for developing microcredit market and designing regulatory framework for MFIs in Bangladesh.