FINCA INTERNATIONAL: SMALL LOANS, BIG CHINA

SAHEJ BAKSHI
VERONICA CAMPOS
HAE YOON CHANG
LENA ENCK
JONATHAN GOLDFORD
CLAUDIO KLUG
 Telling the FINCA Story
FINCA International is known as one of the most successful microfinance institutions in the world. A brief background
on its history demonstrates its growth and need to expand in the future.

John Hatch creates first village banking group

1984
●

that allows poor to borrow with no collateral

●
●Year: 1984
Founding: ●
●Founder: John Hatch
●Headquarters: Washington, D.C.
●
John Hatch creates FINCA: Foundation
1985
●

for International Community Assistance

Key ●
●Robert W. Hatch, Chairman FINCA serves 58,000 clients in North
1995
●

America, Africa, and Asia

●Rupert Scofield, President & CEO
Executives
●

1997
●
FINCA sponsors first global Microcredit Summit bringing
together more than 2,000 people to discuss microfinance

Microfinanc ●
●

●
●
Small Loans
Savings Plans
e Products ●Insurance
●

2007
●
FINCA reaches 500,000 clients as it
continues to meet growing demand

Vision:
Vision: The vision
The vision of
of FINCA
FINCA International
International Mission:
Mission: TheThe mission
mission of
of FINCA
FINCA International
International
is
is to be a global microfinance network collectively
to be a global microfinance network collectively is
is to provide financial services to the
to provide financial services to the world's
world's
serving
serving more low-income entrepreneurs than
more low-income entrepreneurs than any
any lowest-income
lowest-income entrepreneurs so they can
entrepreneurs so they can create
create
other
other MFI
MFI while operating
while operating on
on commercial
commercial jobs,
jobs, build
build assets
assets and
and improve
improve their
their standard
standard of
of
principles
principles of
of performance
performance and
and sustainability.
sustainability. living.
living.

FINCA International has reached over 725,000 clients. While this is impactful, its Village Banking Campaign committed to reaching one
million clients in poverty by 2010. The imperative for growth pushes FINCA outside of its already saturated markets well after it reaches its
goals in 2010. One such potential market exists in China with many impoverished, but also a growing amount of wealth.

Source: www.villagebanking.org 2
 Should Growth Be In China?
FINCA must decide how to meet the growth imperative. Should it continue to grow where it currently exists? If not,
should it expand to China and how?

How Should FINCA Grow?

Global Existing
Expansion Locations
FINCA must decide how to grow outside of its current markets. It must decide where to make that expansion and how to enter.
Through this growth the organization must grow long term in order to create the greatest impact.

3
 The Issue: Increasing Clients in China
In its Village Banking Campaign FINCA stated it would have 1,000,000 clients by 2010. After 2012 the organization must
maintain a 10% client growth rate of around 100,000 new clients per year. To do this, FINCA must expand outside of its current
saturated markets.

FINCA Client Growth FINCA China New Client Growth

1,400,000 5000
1,200,000 4500
1,000,000 4000
3500
800,000 Today
3000
600,000 2500
400,000 2000
200,000 1500
1000
-
500
0
2012 2013 2014 2015 2016
FINCA’s move into China provides client growth of 3,246 in its entry year, 2012. As the organization builds a position in China, the number
of new clients per year grows to almost 5,000 new clients in the year 2016 with continued growth after that year. To better understand this
growth, review the slide “Growing Loans and Money in China” and the appendices. As FINCA builds its position, it can count on China to
provide substantial impact in the years to come.

Source: www.villagebanking.org 4
 Building Success Through Small Loans
FINCA’s business model proves the importance of its key competitive advantages, village banking and marketing to potential
donors.

Sources of Success
Donations
& Grants Village Banking

FINCA’s strength lies in its competitive advantage,

village banking. The idea is that small groups of
people come together to take out loans and the group
functions as collateral. If someone is going to default,
the group covers the payment.
Invest with FINCA Market the This idea keeps the interest coming in and default
Free Cash REVENUE Brand rates down. It also allows FINCA to reach more
people or increase Q, finally allowing it to market its
brand and build donations.

Marketing
High
Increasing
Interest and High FINCA excels in its ability to market its services to
Village
Low Impact potential donors. Actress Natalie Portman serves as
Defaults Borrowers FINCA’s Ambassador of Hope traveling around the
world to promote FINCA’s mission. Recently, actress
Gwyneth Paltrow appeared for FINCA at the launch of
FINCA UK.

Other Villagers FINCA’s ability to attract celebrity endorsements

Take Loans furthers its ability to market its brand and increase
and Guarantee donations and grants. This leads to more revenue
Group and greater lending.

This model allowed FINCA International to grow to immense size. Now it has to find a place to use this model to grow for the
future.

Source: www.villagebanking.org 5
 Why Should FINCA Go Global?
How urgent is it for FINCA to expand globally? Initiative
• The organization’s mission is to provide financial services to the
world’s lowest income entrepreneurs. Because FINCA is a non-profit
organization, entering into China can be considered more of an
initiative action.
• Large Number of Potential Customers in Need: FINCA can serve
those who are in need of small loans in China, of which the estimated
number is very large.  more details in the “Market Potential in
China” page.
Imperative
• Efficiency Imperative: In fact, microfinance in China is going through a
hard time achieving scale. By entering China, FINCA can achieve
economies of scale to cover high transaction costs.
Imperativ • Growth Imperatives: Even though FINCA is a non-profit organization,
Initiative the growth imperative still applies. Expanding to China will increase
e the organization’s brand recognition and increase its fundraising
revenue.
• Knowledge Imperatives: FINCA already operates in several
developing countries, but none with as stringent regulations as China.
Development in the country provides the knowledge necessary to
grow in countries with increased barriers.
• Globalization of Competitors: Even though regulation issues made it
hard for international microfinance participants, more financial
institutions as well as NGOs are interested in entering into China for
philanthropic reasons and for microfinance’s profitability (e.g. HSBC,
Citigroup, SKS Micro).

Due to the characteristics of the organization and industry, it would seem that FINCA’s entry into China is more of an
initiative; however, taking into account external issues, FINCA has more imperative reasons to go into China.
FINCA should increase global expansion due to both the initiative and imperative reasons.
Source: http://www.villagebanking.org; “Microfinance in China: Growth and Struggle” 2006, Knowledge @ Wharton; Prof. Voigt’s lecture
notes “WBMH Framework” 6
 Microfinance Market Potential In China
The following analysis aims to determine and quantify the market potential for micro –financing services, especially related to
FINCA’s core competencies and resources.
Sizing the Potential Microcredit Market
Although China has experienced a real GDP growth rate of 9.9% and stands as the second-largest
economy in the world after the US (measured on a purchasing power parity basis), the country is still
lower middle-income on a per capita basis. Despite decreasing poverty rates since the 1970s, 8% of
China’s total population is still under the international poverty line of $1.25 per day. This translates
into a figure of approximately 107 million people . Furthermore, in China, there are approximately:

• 624,000 villages • 249 million rural households

• 4.5 million sub-villages • more than 8 million registered unemployed workers and
• 740 million village dwellers • more than 42 million small to medium enterprises and microenterprises
Projected Growth
• The current financial crisis has created a surge in
unemployment in China with an estimated 10 million • Not one loan in rural China, from a
migrants forced out of jobs and back to rural areas. The
Chinese government is prioritizing the development of small total sample of 524, was from a
businesses (because they create 90% of jobs), which could commercial bank
be candidates for micro-financing services • Informal lending accounted for
80% of all loans in the study
Demand for Microfinance
• Over 89% of rural households expressed interest in
obtaining credit These numbers
• Farm house loan demand did not rely on interest rates; such
households would be prepared to pay high interest rates in
Sources of lending illustrate the large
order to receive loans 4% 16%
• The market share of Rural Credit Cooperatives (RCCs) is potential in the
RCCs
•
still relatively small and the market potential is significant
Based on statistics from the People’s Bank of China (PBOC), Informal
Chinese microfinance
80%
in late 2007, the number of loan clients exceeded 77 million,
representing 33% of the country’s 230 million rural
Other market.
households
Sources: 1.The CIA World Fact Book, www.cia.gov. 2. Asian Development Bank. March, 2009. Asian Development Outlook 2009. 3. Du
7
Xiaoshan. Feb. ’08. The Current Supply of Microfinance in China. 4.CNN. March, 2009.China's premier worried for U.S. investments
 Changing the Market Pyramid in China
Because FINCA targets a very specific and usually untapped portion of the world- the extreme poor- an analysis of China’s
market pyramid is instrumental in assessing China’s strategic importance for FINCA’s microfinance operations. FINCA’s social
aim is to decrease the size of the 5 th tier of the market pyramid. Because “according to U.N. statistics, the poorest 20 percent of
China's 1.3 billion citizens account for only 4.7 percent of total income, while the richest 20 percent account for more than 50
percent of total income."

Tier 1: Tier 1
Global Consumers
• Potential donors

Tier 2: Domestically
focused but Tier 2
upwardly mobile

Tier 3: Locally-focused but with Tier 3

income

Tier 4: Subsistence / Marginal Consumers Larger Tier 4

(contains people formerly
Tier 5: Consumers outside the formal economy Movement from tier
5 to 4 shrinks tier 5
in Tier 5)
• 8 million registered unemployed workers
• 249 million rural households
Tier 5

Because of such a large number of Chinese people falling into the lower tier socioeconomic categories, there is great potential for FINCA
to alter the market pyramid, by making it possible for rural people to climb out of poverty and up to higher tiers. By entering China, FINCA
aims to shift people who are in the lowest tier of the market pyramid up into tier 4.

http://www.washingtonpost.com/wp-dyn/content/article/2005/09/21/AR2005092100727.html 8
 Finding Local Chinese Industry Support
Supporting and related industries must be strong enough to allow FINCA to easily transition into China and successfully
implement its microfinance programs.

support from
philanthropy,
Lending FINCA Borrowers
donors, grants financial sector

Philanthropy, foundations, donations

Financial sector
• Philanthropic giving is generally driven by “guanxi” (personal • Banks:
connections), that is offered to those who share a common identity. • FINCA can receive local loans and
Wealthier Chinese will be willing to aid their poorer counterparts advances in China
• Donations through informal channels (direct giving to service
organizations and vulnerable individuals), is difficult to measure, however • Major Stock Exchanges
• FINCA can invest float into the stock
• The Ministry of Civil Affairs received $140 million in cash donations markets for increased revenue
and $24 million in in-kind donations.
• The Government system of civil affairs, (government departments • Chinese investment options also include:
and their affiliated social organizations), reportedly received about International mutual funds, American
$550 million in both cash and in-kind contributions. Depository Receipts, index funds,
sometimes direct investments into the
• When the tsunami hit Southeast Asia, Beijing's good neighbor policy
Chinese Markets.
meant donations both of cash and resources, (composed of small
individual donations) with private donations following the public ones
(the public donated $18.11 million).

Supporting and Related industries to China are advanced enough to make China a very fitting place to implement a new FINCA
village bank.

Sources: 1. http://www.atimes.com/atimes/China/GE14Ad06.html 2. http://asiapacificphilanthropy.org/profile-ch2

3. http://asiapacificphilanthropy.org/profile-ch1 4. http://www.chinastockdigest.com/articles/Investing-in-China.html 9
 Analyzing Distances
Here we provide a CAGE Analysis for the Chinese market compared to other markets FINCA is operating in.

Cultural Administrative Geographic Economic

• Different Language
• Microfinancing is affected by
different social norms
• Consumers’ primary
financing needs are different
• There is a strong need for
competent local
management with access
and communication with
poor rural populations
• While Western business is
formal and contractual, micro
loans in China are informal
and based on trust, with no
collateral on the loans
• Restrictive Government policies
that prevent scale and scope of
operations
• Lack of regulatory authority for
China Association of Microfinance
• Government bureaucracy makes
expansion difficult
• The China Association of
Microfinance (CAM) has tried to
construct a regulatory framework
for MFIs, however, due to their
unregistered status, the
guidelines have no legal binding
power
• Especially for village banking, the
controlling, or sole shareholder is
obliged to be a banking
institution, and must hold at least
20% of the village bank’s total
equity
• There are legal barriers with
regards to foreign investment.
While foreign loans are possible,
the process is long and
complicated
• Inaccessible rural target
market
• Limited reach and
communication makes
transactions costly and
unreliable
• Political limitations on
geographic expansions
• Current government
regulations prohibit FINCA
from operating outside of
registered areas
• Since Tier 5 consumers are
primarily located in remote
rural regions, geographic
distances call for cohesive
management and efficient
transaction channels
Distances
• Different currencies
• Relatively large number of
local/government microfinance
firms
• Legal restrictions on foreign
funding and ownership
• High loan risk without collateral
• The capital requirement to
establish NGO institutions in
China is not that high (Refer to
Appendix)
• In December 2006, Central
Banking Regulatory
Commission lowered the
capital threshold to three
million Yuan for a county level
bank, and lowered it to one
million Yuan for a town or
village level bank
Impact on
FINCA

The greatest distances in China are Administrative and Geographic, with severe limitations on foreign investment, area of
operation and funding channels. There is a strong element of unpredictability with current fluctuations, no-guarantee loans and
rural business environment.

http://www.ifad.org/evaluation/public_html/eksyst/doc/thematic/pi/cn/cn_1.htm 10
 Considering the Factor Endowments
The importance of China to the microfinance sector will depend heavily on the country’s factor endowments, particularly
certain financial systems. Without basic required factors of production and support, locally adapted village banks will have a
hard time succeeding in complex, isolated rural areas.

Schools, Physical & Banks & Financial Functioning

“Hard” Roads, Rail
Universities, Property Institutions, Independent
Infrastructure & Ports
Training Rights Security Regulators Legal System

Country Factor Capital Political &

Land Labor
Endowments Markets Social Systems

Skilled local managers with • Domestic & international financial • Regulatory agencies exist
knowledge of: institutions are ready to provide • Local and national government support encouraging
• Local customs capital experimentation in the alleviation of poverty with
• Government • However, there are severe microfinance ventures
relationships limitations that prevent most • Most commercial banks are well equipped, but
willing parties from providing reluctant to enter the microfinance market without
full capital receiving collateral

Even though China has a clear advantage in factor endowments such as land, labor, capital and businesses, restrictive
policies prevent these endowments from being used to their full potential.

http://www.microfinanceforum.org/cm_data/A_Glimpse_at_Microfinance_in_China.pdf
Carl Voigt – Lecture Notes 11
 Institutional Voids: No Legal Status
There are two main regulatory issues regarding the microfinance operation:
• Temporary and uncertain legal status of microcredit NGO in China
• Interest ceiling imposed by the Chinese government

Non-Government Organization
Microfinance Institutions (NGO MFI) Borrowers may perceive the
Have No Legal Status organization as temporary
and quasi-illegal

Longevity employment is not a

credible reward for NGOs to offer,
decreasing NGO employees’ In addition, some borrowers
incentives to perform efficiently may justify their late
and provide high quality services payment and even defaults
on the legal status of an
NGO MFI

No incentive exists for

the NGO MFIs to However, NGO MFIs cannot credibly
thoroughly monitor promise future loans since they may
borrowers not be allowed to operate in the future

In order to operate efficiently and perform high-quality service, it is crucial for NGO MFIs to obtain legal status in China
 NGO MFIs should come up with creative ways to operate as legal entities in China
e.g. Strategic Alliance with a government bank, commercial bank, or the Chinese postal service

Sources: Wokai China Microfinance

12
 Institutional Voids: Interest Rate Ceiling
There are two main regulatory issues regarding the microfinance operation:
• Temporary and uncertain legal status of microcredit NGO in China
• Interest ceiling imposed by Chinese government

Issues Description

Recent Heavily 10-12%

Business NGO MFI interest
dependent
Model on donors in China rate ceiling
Donor
Potential Borrowers

1) Interest Rate Ceiling: Interest rates have traditionally been capped at between 10-12%
Interest Rate
annually in China, compared with the 20-40% rates for micro loans in other countries
2) High Transaction Cost per Customer and Monitoring Cost: The screening process of a
formal bank would involve a quick credit history check while informal financing from NGO MFIs
Operations involves seeking personal knowledge of the borrower. Monitoring costs are also higher,
involving personal visits with the borrowers and their projects. A third factor increasing the
transaction costs of lending to the poor is the lack of legal recourse in the event of default
3) Heavily-Dependent-on-Donors Business Model: Since there is an interest rate ceiling,
Financing
NGO MFIs should cover their operational cost by relying heavily on donations.

Because of a low interest rate ceiling, NGO MFIs cannot cover their high transaction costs and have to heavily-depend on
donors for financing  Unsustainable method of financing for the long term
Therefore, NGO MFIs have to develop a sustainable way of financing
Sources: Giant Steps by Jonathan Haagen from Chinese International Business 2009, Wokai Microfinance in China
13
 Assessing the Microfinance Industry’s Attractiveness
A 5 Forces Analysis gives us a better understanding of the microfinance industry and allows us to determine its attractiveness.

Many players- there are over 1000 MFI’s; No dominant firm;

Little differentiation between competitors; Researchers
Rivalry: High estimate that in China alone there are over 100 MFIs.

MFIs would not be able to run without

their donors. Grants and donations
Power of Suppliers: High play a key role in the business. In 2007
FINCA had over $30 million in grants
and donations.
Power of Buyers: Low
High barriers to entry; Low
switching costs; High government
Threat of Entry: Low restrictions or legislation; High
capital investment
There are millions of potential
borrowers for microfinance
institutions all around the world. In
China around 30 million “relatively”
poor people survive on less than a
dollar a day and another 30 million
people live in “absolute poverty” of
less than 25 cents a day. MFI
clients really have no other option
for small loans because they have
no collateral or credit history.

Typical microfinance clients have no access to formal financial

Substitutes: Low institutions. The only possible substitute for microfinance
providers are government lending funds and special purpose
institutions.

Although there is intense rivalry in the industry there is such a large number of potential buyers. FINCA should be able to use its
successful marketing strategies to reach donors to ensure that they receive enough donations to meet the needs of borrowers.
The high barriers to entry will also affect FINCA’s entry strategy if it chooses to enter China.

Sources: 1. Microfinance in China: Growth and Struggle by Knowledge@Wharton; 2. FINCA International Annual Report 2007 14
 Evaluating Chinese Competitors
NGO: FPC ARDPAS CFPA CZWSDA OI China PATRA PATRA
Yanbian Hunchun

Gross Loan 3,350,733 1,282,563 15,687,790 1,222,016 944,451 256,223 373,566

Portfolio

Number of 16,191 1,876 26,878 3,417 318 912 961

Active
Borrowers

Women -- 65% 100% 42.8% -- --

Borrowers

Average Loan 539 584 334 2970 281 389

Balance per
borrower

NGOs Other Competitors

FINCA will face intense competition in China.  Researchers suggest
that China has over 100 NGO microfinance providers.  Funding for the
Poor Cooperative (FPC) is one of the oldest and largest microfinance
programs in China.  It was founded by the “father” of microfinance in
China, Dr. Du Xiaoshan.  The organization has replicated the
Grameen model of microfinance.  Chifeng Zhaowuda (CZWSDA)
began distributing loans in 1999.  It is considered one of the strongest
microfinance programs in China based on performance, management,
and government support.  Association for Rural Development of Poor
Areas in Sichuan (ARDPAS) began its operations in 1998.  ARDPAS
provides low income households in Sichuan province with micro-credit
services, they are working on expanding out to other poor areas in
Sichuan.  The China Foundation for Poverty Alleviation (CFPA) started
its Microfinance program in 1996 and now has 10 microfinance branch
offices in rural China.  authorize Village Banks in December 2006.  They function like normal
Rural Credit Cooperatives (RCCs), established in the 1950s are the
major rural lending organizations in China.  RCCs make up 85% of all
agricultural loans, there currently are about 32,000 RCCs in China. 
The Agricultural Bank of China (ABC) is China’s second largest
provider of agricultural loans.  The ABC began microfinance
operations in 1998 so far they remain financially unsustainable. 
Microcredit Companies only provide loan services.  In December
2006, the People’s Bank of China authorized the launch of seven
microcredit companies making them the first microfinance programs
with legal recognition.  
The Central Banking Regulatory Commission launched a program to
banks, providing loans and collecting savings. 

The China Postal Savings Banks entered the rural financial market
providing retail financial services to rural markets.

Sources: 1. http://www.grameen-info.org/index.php?option=com_content&task=view&id=26&Itemid=175; 2. http://www.grameenfoundation.org/where_we_work/east_and_southeast_asia/

china/chifeng _zhaowuda/; 3. http://mixmarket.org/en/demand/demand.global.results.asp?token=&refreshSearch=demand&s0wrc=CN&seDisc=all; 4. Wokai's China Microfinance Series: China
Microfinance Birdseye View by Geri Mason & Jason Korsmeyer;
15
 Recommending Growth in China
To maximize long term client growth, FINCA must expand significantly outside of their saturated markets. FINCA
International should expand to China through a Joint Venture with commercial bank HSBC.

How Should FINCA Grow?

Global Existing
Expansion Locations
The potential in China allows FINCA to meet the global imperative necessary to enter the market. Now we will describe the
recommendations given above and the implementation strategy necessary for long term growth.

16
 Capitalizing on Global Advantages
FINCA has many opportunities to continue its global advantage in China. An analysis of both location drivers and cost and
volume drivers reveals the tools that FINCA has to create global competitive advantage in China.

Economies of Replication
• FINCA’s business plan is one of replication with adaptation
1. Replication: FINCA always establishes a village bank as wholly owned subsidiaries in the new places it enters
2. Adaptation: FINCA tries to minimize regulation of its Village Banking Groups ("members elect their own leaders, design their own bylaws, keep the
books, manage the funds, and are fully responsible for loan supervision, including enforcing penalties for non-compliance.”)

Non-Market Strategies
National Differences
• Utilize the Chinese government and the removal
•Not a global advantage FINCA can use
of institutional voids as barriers to entry

Global Learning Global Leverage & Flexibility

•FINCA has a presence in 21 countries, and thus has •Uses size to build lending leverage. For every
great knowledge of locally adapting Village Banks dollar in expenses it borrows or lends $5
•The poor and the government in China aren’t very •Because FINCA receives donations from many
developed. By successfully entering China, FINCA sources, it has the flexibility of funding from other
will later be able to enter most regions in the world by sources if one economy is struggling
transferring the knowledge required in China

Economies of Scale Economies of Scope

By implementing its village banking system in multiple FINCA spreads overhead costs including R&D and
worldwide locations it can spread fixed overhead cots of administrative through each of their microfinance products
launching new sights such as: loans, microinsurance, and savings.

FINCA clearly has many talents that are conducive to successfully bringing FINCA to a greater global level. This falls in line with the
organization’s goal of expanding outside of their current markets. Globally, it can most utilize Global Learning, Economies of Scale, and
Global Leverage & Flexibility.
1. http://www.villagebanking.org/site/c.erKPI2PCIoE/b.2394109/k.BEA3/Home.htm#vbank,2. http://www.givewell.net/wiki/index.php?title=Review:_FINCA#endnote_2a2, 3.
http://www.villagebanking.org/site/c.erKPI2PCIoE/b.2603941/k.BBB2/Mission_and_Vision.htm 17
 Partnering with a Bank
Acquisition
Advantages Disadvantages
•Total Control •Difficulty finding a suitable institution to acquire
•Quick entry •Vulnerability to political risk Recommendation:
•Jump-start on developing the portfolio •Expensive FINCA should enter China through a
•Acquire staff, systems, infrastructure •Post acquisition assimilation problems strategic alliance with a bank. During the
•Institutional learning and capacity past decade many banks have been
entering the microfinance market.  A
combination of internal and external
Greenfield Operation factors is driving commercial banks to
Advantages Disadvantages enter microfinance.  Internal factors
•Total Control •Government objections, regulation
include profit, risk diversification, excess
•No loss of core competencies •Large investment required liquidity, image, cross-marketing
•Greater learning about foreign markets •Vulnerability to political risk opportunities, and social responsibility. 
•Lack of partner commitment not a concern •Time required to establish competitive External factors include a large micro
advantage enterprise and low income market, donor
or government initiative and competition. 
It will be difficult for FINCA to find a
Strategic Alliance with a suitable bank to partner with because
Bank
Advantages Disadvantages banks misjudge the risk of microfinance,
•Low cost entry method •Difficulty selecting good partner, negotiating overestimate the costs and underestimate
•Takes advantage of the bank’s assets risk and cost sharing arrangement the profit potential.  The main advantage
(reputation, branch network, systems, •Potential competition for same clients FINCA gains in partnering with a bank is
financing, human resources) •Lack of knowledge of the microfinance market that it increases efficiency and reduces
•Gain ability to achieve massive scale while •Conservative corporate culture contrary to
controlling risks
costs by making use of existing bank
microfinance
•Access to technical expertise •The bank may become a competition for the infrastructure.  This would allow FINCA to
•Access to capital MFI if it offers similar services focus on building strong client
•Gain market presence and brand recognition relationships. 
•Lower operating cost structure

Sources: 1. Banking at the Base of the Pyramid: A Microfinance Primer for Commercial Banks; 2. Banks in Microfinance: Guidelines for Successful
Partnerships; 3. Banking the Underserved: New Opportunities for Commercial Banks; 4. Commercial Banks and Microfinance 5. Global Market Entry 18
Lecture
 Fitting FINCA’s Needs
What kind of criteria are to be applied when selecting a partner for a strategic alliance?
What FINCA DOES have
Expertise in microfinance services
• FINCA operates as a microfinance provider in more than 20
countries around the world, but will have to adapt their business
model in conjunction with the partner
• Will the partner be willing to change its risk-management
techniques and practices to adjust to the requirements of
microfinance risk management?
• Will microfinance eventually be at least as profitable as the
partner’s other lines of business? In terms of financial margin,
return on investment and net income?
Successful business model
• FINCA’s business model, which is mainly village banking, helps
FINCA to have lower default rates and late payment rates
• How different is FINCA’s microfinance from the partner traditional
and major lines of business?
• Are the financial targets and timeframe for reaching profitability
realistic and achievable?
• Will the partner make the investment and take on the additional
costs necessary in a timely manner?
Name value in microfinance industry
• High name value (brand recognition) in microfinance industry
helps to raise more funds to lend to poor rural people
• Will the partner make the investment and take on the additional
costs necessary in a timely manner to match FINCA’s international
quality control standards?
Source: Banking at the Base of the Pyramid the United States Agency for International Development, www.usaid.gov
What FINCA DOESN’T have
Stable Supply of Money (Financing)
• Even though most of NGO MFI are run by donations, FINCA
should come up with the way to supply money from stable
sources in order to have sustainability
• Are the financial targets and timeframe for reaching
profitability realistic and achievable?
•Will microfinance eventually be at least as profitable as the
partner’s other lines of business?
• Will the partner use its own funds and resources to launch
and maintain the program, or will it rely on outside assistance?
Legal Status – Institutional Voids (Local Knowledge)
• FINCA is likely to have no legal status just like any other NGO
MFIs in China, which means it will be difficult to properly run and
sustain its business for a long time
• Do external factors place constraints on interest rates, target
markets, or other critical operational elements?
• Will the microfinance portfolio be significant enough to have an
effect on the partner’s risk diversification?
• Will microfinance eventually be at least as profitable as the
partner’s other lines of business? In terms of financial margin,
return on investment and net income?
Access to the customer
• FINCA has no presence at all in China; no branches or offices
to reach to potential customers, which will mainly be rural
people
• Will the partner try to use existing systems and staff to offer
microfinance?
• Will the partner make the organizational and methodological
changes necessary to service the sector?
19
 Partnering with HSBC
Potential Partners for FINCA when entering China Advantage
• Abundant capital source
• Motivations to cooperate with
Potential Partner MFI
Disadvantage
• No access to rural area
• Difficulty in adapting ideas

• Support from the government • Internal corruption

• Abundant capital source • Bureaucracy

• Easier access to the rural area • Knowledge leakage

• No motivation to cooperate with
FINCA
• Bureaucracy

• Share same vision and mission • Does not help FINCA overcome
difficulties it face in entering
Privatel • Lack of legal status
Govern Postal Other • Insufficient funds
y-
ment Service MFI in • Lack of human resource capacity
owned
Bank s China
Bank

Our Choice : Partner with Privately-owned Bank  HSBC (See Appendix for more information)
• Abundant capital resources from HSBC: With HSBC’s name value and its abundant sources, FINCA will be able to have
stable capital source to microfinance.
• Motivation for HSBC to cooperate with FINCA: HSBC is highly concerned about social responsibility and it helps HSBC to
gain a better reputation of corporate social responsibility if it cooperates with FINCA in microfinance
• Multinational bank that has Chinese local knowledge: HSBC has operated in Hong Kong and Shanghai from 1865; In China
mainland, HSBC has the largest services network among foreign banks
• Good organization fit with FINCA: Since both FINCA and HSBC are multinational operating institutions, it is more likely that
FINCA will have better organizational fit with HSBC than Chinese domestic privately-owned banks
• HSBC Established a Rural Bank: HSBC can provide access to provinces with the highest demand for microfinance services.

20
 Considering FINCA’s Implementation Strategy
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Present Future 2012

Phase
Phase II Phase II (1996 – 2000) Phase III (2000 – 2005) Phase IV (2005 – Present) Phase V (Future)
(1994
(1994 –– 1996)
1996) Replication Phase Expansion Phase
Experimental
Experimental
Phase
Phase Phase V
Phase II Phase III Phase IV
• NGO, local and • Involvement of • Encouragement for Examples of expected changes include:
Phase I national formal rural non-governmental • New MFIs being able to operate outside the
• International government microfinance and overseas funds region in which they are registered
grants and ‘soft support institutions to engage in
loans’
• Commercial banks no longer being obliged
• Practitioner efforts • National experimental MFI
• Almost no activities
to control shareholders of Village Banks
to bring standards government
government in line with interest in • Effort to issue • Microcredit businesses being allowed to
funds international best regulatory regulations to collaborate with microinsurance companies
practices environment facilitate investment

Key Operating Directives:

Defining the Target Market Pricing and Costing Human Resources Legal and Operating Organizational Decentralization
Model Structure

An important consideration is
the capacity of the bank’s
management information
system to identify and track
clients, loans and deposits. If
the bank’s systems cannot
easily meet FINCA’s reporting
requirements, project
resources may be required to
support tracking and
verification of indicators.
Refer to Appendix.
In some countries, The three essential The model must Microfinance is more A key characteristic of
interest rate ceilings elements in terms of establish the autonomy similar to retail than successful microfinance
and usury laws limit human resources are: necessary to uniquely to corporate banking operations is
banks’ ability to set finding the right service the and, therefore, decentralization, particularly
interest rates. leader, selecting and nontraditional client should have a with respect to customer
However, without training loan officers segment. At the same structure that service and credit decisions.
appropriate pricing, and other personnel, time it should take facilitates a Banks are not accustomed to
microfinance will not and crafting advantage of the bank’s decentralized client delegating authority to
be profitable and appropriate assets in terms of service model, individual loan officers, nor
therefore will not compensation and reputation, systems, taking advantage of to holding frequent and
grow within the bank incentive packages financing, and human branch relatively informal meetings
resources infrastructure to approve loans

The China Banking Regulatory Commission is considering loosening the rules governing investing in MFIs. More specifically, these changes will be
made in three particular areas:
• Maximum stake each investor may hold (present limit is 20%), area of operation (beyond the present region), funding channels (allowing local government, initiators and
shareholders to invest

Sources: 1. Microfinance in China: Growth and Struggle by Knowledge@Wharton; Banks in Microfinance: Guidelines for Successful Partnerships,
www.usaid.gov
21
 Establishing Entry Location with Two
Objectives
FINCA must determine where it will establish operations in China. The decision is actually two-fold since FINCA’s operations
include the services it offers to poor people as well as the marketing efforts aimed at attracting new donors.

Where to Service Marketing to Donors

We recommend FINCA FINCA should concentrate
establish an office that its marketing efforts on the
would allow it to initially richest and most
focus on the following east- westernized cities in China,
central provinces: which offer the greatest
•Anhui •Hunan number of potential donors.
•Henan •Hubei
•Shaanxi •Jiangxi The most attractive cities
•Guizhou •Chongoing are:
•Hong Kong •Daqing
Selection Criteria •Guangzhou •Beijing
Lowest GDP per capita – •Shenzhen •Shanghai
provinces with the highest •Dongying •Hangzhou
demand for microfinance.
Infrastructure – provinces They present the highest
with access to HSBC’s GDP per capita in China.
rural banks in/near Hubei. Also, they have the largest
Proximity to markets – number of Tier 1
provinces located near a consumers, who are more
steady source of demand globally inclined and would
for goods produced by be more receptive to
FINCA’s clients. FINCA’s message.

FINCA should enter China by establishing itself in the east-central provinces – where it will find the necessary supporting infrastructure as well as
the highest demand for microfinance – and by positioning itself for future expansion. Contemporarily, FINCA should focus its marketing efforts on
the richest and most westernized cities in China, where it can target the greatest number of potential donors and supporters.

Sources: Dube, Clayton USC U.S.-China Institute. “What are China’s largest and richest cities?”
22
http://www.shanghaienglishteachers.com/images/maps_china
 Creating a Fitting Organizational Structure
What kind of organizational structure will FINCA fit into?
F M
O
in pe a
a
ra
tio
rk
et
Global Strategy & Organization Design
n n
Pr in High
ci od g
n uc
H
t
g R TRANSNATIONAL
GLOBAL

Global Efficiency
Centralized Global Network
Global Efficiency Local Adaptation GBU
Donations and fund Each country has its own FINCA China
raising from all regulation on financial services
around the world that FINCA should comply to
INTERNATIONAL MULTI-DOMESTIC
Int’l Functional Decentralized
Area-Focused
Different Strategy for Different Functions
• FINCA meets different market regulations which Low
Low High
requires FINCA to come up with different financial
Local Responsiveness
services for each market
e.g. FINCA developed Murabaha Financing for Organizational Structure
clients in the Middle-East in order to conform with between a Global Network and a
Recommend
Islamic principles Decentralized Area-Focused
• However, FINCA tries to replicate its core business
model, which is village banking, and raise funds at a Ownership:
global level. FINCA = 51%
HSBC = 49%

We recommend that FINCA establish an organizational structure between Global Network and Decentralized Area-
Focused so that FINCA can conform to Chinese regulations and meet Chinese customers’ needs, achieving global
efficiency in fund-raising at the same time.
Sources: Carl Voigt - Lecture Notes
23
http://www.villagebanking.org
 Growing Loans and Money in China
FINCA International must decide whether entry into China will be able to generate significant client growth and financial
sustainability in the future. It has over $48M in cash to invest in new ventures such as China. Further financial projections and
information are located in the appendices.

FINCA China Five Year Financial Projections

$8,000,000
$6,000,000 Total New Clients After Five Years: 19,819

$4,000,000
$2,000,000
$0
2012 2013 2014 2015 2016

Revenue Expenses Retained Earnings

Assumptions FINCA Growth Rates
FINCA’s average revenue growth in 2007 per country was 14%. Year Revenue Growth RE Growth
Given China’s size, we anticipate 20% growth in each year.
2011 20% 64%
# of New Clients Per Year = Program Expenses per Year / $500
2012 20% 101%
average loan size
2013 20% 2020%
Startup costs estimated for training, marketing, contract
costs, recruitment, and licensing and regulation activities. 2014 20% 124%

While FINCA’s move into China requires significant startup costs of $6.6M, their goal is to have a large impact in China through lending programs.
Based on these assumptions, FINCA will lend to 19,819 clients over the first five years. FINCA’s entrance into China is financially sustainable at
year three and will allow FINCA to impact a large number of the poor in the early years of the project.

FINCA 2007 Annual Report;

http://www.charitynavigator.org
24
FINCA INTERNATIONAL: SMALL LOANS, BIG CHINA
SAHEJ BAKSHI
VERONICA CAMPOS
HAE YOON CHANG
LENA ENCK
JONATHAN GOLDFORD
CLAUDIO KLUG
 Appendix: Defining FINCA’s Target Markets
The potential market for micro-financing in China can be segmented in to a variety of target markets.

Target Market Demand Ideal Methods of Meeting Demand

Government business start-up subsidies, informal

Unemployed Urban Population
Impoverished Rural Households
Living expenses, initial investment credit demand
Small size farming production loan demand, and living
microloans, microcredit (including commercial
microcredit), policy finance, cooperative finance
Informal microlending, microcredit (including
commercial microcredit), government poverty
alleviation funds, policy finance.

Private capital, informal microloans, microcredit

Rural Normal farming Small size farming production loan demand, and living
from cooperative financial institutions, small size
Households rural households expenses
commercial loans.
Normal rural
households
Merchant rural Specialized, large scale production and industrial and Private capital, microcredit, small size commercial
households commercial industry demad loans, cooperative finance.

Private capital, infomal finance, ventrue capital

Micro and small enterprises Start-up and expansion investment, commercial credit (vovernment
guaranteed), policy finance
Private capital, commercial credit, policy financ,
Medium Enterprises Market-oriented production credit demand
Enterprises microcredit
Embryo-stage Commercial credit, government funds, ventrue
Specialized technical production expansion credit demand
Market leading market leaders capital investment, policy finance
enterprises Full-fledged
Specialized technical production expansion credit demand Commercial credit
market leaders

We recommend FINCA should continue doing what it does best and focus on its core competencies and target the highlighted
markets. These represent the lowest tiers of the market, made up of the poorest individuals. FINCA should meet this demand
through its village banking system.
Sources: Prof. He Guangwen, College of Economics & Management Director, Center for Rural Finance & Investment Research China Agricultural
26
University. An Analysis of Microfinance Demand in China.
 Appendix: Regulation on Microfinance in China
Issues Related to Regulation on Microfinance in China
FORMAL: Rural credit cooperatives (RCCs), micro credit companies (MCCs), rural mutual
Formal and Semi- credit cooperatives (RMCCs), village banks (VBs), some rural and urban commercial banks
formal Sources of or cooperative banks, the Post Saving Bank
Microfinance SEMI-FORMAL: NGO-MFIs, national and local government initiatives.

Microfinance is defined only as microcredit, not including savings, insurance, or transfers, or

payments. The definition of microfinance differs between commercial banks and NGO
Definition of microfinance institutions. For NGO-MFIs, microfinance is more a tool of poverty alleviation;
Microfinance or the loan size is very small, generally not more than RMB10,000 in rural areas. For
commercial banks, microfinance is a product for a down-scaling market, and the loan size
Microcredit
can be hundreds of thousands of RMB or more.
* Source: Sun Tongquan: The Policy and Legal Framework of Microfinance in China.

NGO Microfinance NGO-MFIs may transform into MCCs (Guiding Opinions on the Pilot Operation of Micro-
Credit Companies). However, the ownership of the donated funds of NGO-MFIs needs to be
provider clearly identified; and MFIs have to address the issue of finding alternative employment
formalization or opportunities for any existing non-professional managers who may need to be replaced
transformation (otherwise, they may not support the transformation).
issues * Source: The Policy and Legal Framework of Microfinance in China, Sun Tongquan

The People's Bank of China (PBOC) published "Guidelines for MCCs" in 2006. In December
2006, the China Securities Regulatory Commission (CBRC) promulgated a policy entitled
"Opinion Regarding Easing Market Access for Banking Financial Institutions in Rural Areas
Ongoing in order to Better Support the Construction of a Socialist New Countryside", giving
microfinance policy permission to establish three new types of rural financial institutions: VBs, LCs, and
RMCCs. In January 2007, CBRC issued "Provisional Rules Governing Village or Township
development status Banks", "Provisional Rules Governing Lending Companies", and "Provisional Rules
Governing Rural Mutual Credit Cooperatives". In May 2008, CBRC and PBOC jointly issued
"Guidelines on Pilots of Micro-Credit Companies."

sources: http://www.microfinancegateway.com/resource_centers/reg_sup/micro_reg/country/9/
27
 Appendix: Regulation on Microfinance in China
Issues Related to Regulation on NGO Microfinance Provider (Cont’d)
Standards for ownership officers
Licensing The officers of a society shall not
Requirements and have any record of crime.
Standards (Regulation on Administration of
Societies Registration 1998,
Chapter 3, Article 13).
Audit of Proposed Founders,
Owners, Officers
The biodata of the officers
shall be submitted to the civil
affairs authority upon
application.
Prohibited sources of funds
It is prohibited to accept
deposits from the public.
(Law on Banking Regulation
and Supervision 2003,
Chapter 3, Article 18, 19).

Minimum Capital
For Societies at the national level, the minimum capital requirement is RMB100,000; for Societies
Capital and at the local level, the minimum capital requirement is RMB30,000. For a publicly-funded
Reserve foundation at the national level, the minimum initial fund requirement is RMB8 million; for one at
the local level, the minimum initial fund requirement is RMB4 million. For a non-publicly-funded
foundation, the minimum initial fund requirement is RMB2 million.

Guidelines & restrictions on financial services Guidelines & restrictions on interest rates
Risk Management PERMITTED: Microcredit only The lending rate is limited to a maximum of 4
Guideline times the benchmark rate set by the
government

Supervision Methods Disclosure and reporting requirements

Providers are supervised by both the NGOs shall submit annual reports to the
Reporting and agencies in charge of business and the civil agencies in charge of business and civil affairs.
affairs agencies that are in charge of Licenses shall be renewed annually.
Supervision registration. Other supervisory bodies include
tax authorities, auditors, and informal, "social"
supervision from the public.

sources: http://www.microfinancegateway.com/resource_centers/reg_sup/micro_reg/country/9/
28
 Appendix: Chinese Entrance Forecast
China Entry Forecasts           Assumptions  
   
Revenues              
  FYE 2012 FYE 2013 FYE 2014 FYE 2015 FYE 2016
   Primary Revenue $1,427,056 $1,712,468 $2,054,961 $2,465,954 $2,959,144 Revenue  
      Contributions $937,646 $1,125,176 $1,350,211 $1,620,253 $1,944,303
% of Total 59% 59% 59% 59% 59% FYE 2012 40% of average revenue per country in 2007
      Program Services $489,410 $587,292 $704,751 $845,701 $1,014,841
% of Total 31% 31% 31% 31% 31% Revenue Breakdown % based on 2007 revenue breakdown
      Membership $0 $0 $0 $0 $0
% of Total 0% 0% 0% 0% 0%
   Other Revenue $154,254 $185,105 $222,125 $266,551 $319,861 FINCA's growth from 2006 to 2007 was 14%. Since
% of Total 10% 10% 10% 10% 10% China is a new ventue, we increased growth to 20%
   Total Revenue $1,581,310 $1,897,572 $2,277,087 $2,732,504 $3,279,005 Revenue Growth for the each of the four years.
% Change   20% 20% 20% 20%
       
Expenses          
  FYE 2012 FYE 2013 FYE 2014 FYE 2015 FYE 2016 Expenses  
Startup Costs  
Cultural Training $100,000 $0 $0 $0 $0
FINCA Best Practices Training $300,000 $200,000 $0 $0 $0
Marketing $500,000 $500,000 $0 $0 $0 We estimated there would be six substantial startup
Contract Costs $1,500,000 $500,000 $0 $0 $0 costs: Cultural Training, FINCA Training. Marketing,
Recruiting New Management $1,000,000 $0 $0 $0 $0 Contract Costs, Recruiting New Management,
Licensing, Regulatory Acitivies $1,500,000 $500,000 $0 $0 $0 Licensing and Regulatory Activities. All costs are
Total Startup Costs $4,900,000 $1,700,000 $0 $0 $0 Startup Costs estimated.
   
   Program Expenses $1,623,190 $1,785,509 $1,964,060 $2,160,466 $2,376,512 50% of average revenue per country in 2007 plus
% of Total 87% 87% 87% 87% 87%
FYE 2012 startup costs
# of New Clients ($500 Loans) 3246 3571 3928 4321 4753
   Administrative Expenses $129,407 $142,347 $156,582 $172,240 $189,464
Expense Breakdown % based on 2007 expense breakdown
% of Total 7% 7% 7% 7% 7%
   Fundraising Expenses $119,932 $131,925 $145,118 $159,629 $175,592
% of Total 6% 6% 6% 6% 6% Average Loan Size of $500 based on discussions
   Total Expenses $6,772,528 $3,759,781 $2,265,759 $2,492,335 $2,741,569 Average Loan Size with a FINCA employee.
% Change   -44% -40% 10% 10%
   
Retained Earnings           Expenses increase 10% yearly for all general
  FYE 2012 FYE 2013 FYE 2014 FYE 2015 FYE 2016 operating costs. Total operating expenses in the
Retained Earnings ($5,191,218) ($1,862,209) $11,327 $240,169 $537,436 fifth year are roughly $100,000 less than the
% Change   64% 101% 2020% 124%
Expense Growth average per country for FINCA.
Notes: Total Startup Cost = $6.6M Financial Sustainability = Year 3

29
 Appendix: FINCA International Income
 
Revenue
Statements
FINCA International Income Statements

 
 

 
 

 
 
 
 
  FYE 2007 Per Country (/21) FYE 2007 FYE 2006 FYE 2005

   Primary Revenue $3,567,641.24 $74,920,466 $60,797,727 $66,493,644

      Contributions $2,344,115.67 $49,226,429 $45,128,168 $16,039,113 The column for “FYE 2007 Per
% of Total 59% 59% 62% 24%
      Program Services $1,223,525.57 $25,694,037 $15,669,559 $50,454,531
Country (/21)” was used to find the
% of Total 31% 31% 22% 75% initial revenues and costs for
      Membership $0.00 $0 $0 $0 FINCA China. For total revenue in
% of Total 0% 0% 0% 0%
   Other Revenue $385,634.48 $8,098,324 $12,048,799 $476,343
2012 for FINCA China we used the
% of Total 10% 10% 17% 1% following process:
   Total Revenue $3,953,275.71 $83,018,790 $72,846,526 $66,969,987
% Change   14% 9%  
   
• 2007 FINCA International
Functional Expenses         revenue was divided by 21,
  FYE 2007 Per Country (/21) FYE 2007 FYE 2006 FYE 2005 representing the total number of
   Program Expenses $2,496,704 $52,430,794 $37,565,393 $46,239,684 countries FINCA operates. This
% of Total 87% 87% 84% 90% then gives us an average
   Administrative Expenses $199,046 $4,179,972 $4,412,558 $3,374,861
% of Total 7% 7% 10% 7%
revenue per country.
   Fundraising Expenses $184,473 $3,873,928 $2,529,516 $1,488,203
% of Total 6% 6% 6% 3% • That number was multiplied by
   Payments to Affiliates $0 $0 $0 $0
% of Total 0% 0% 0% 0% 40%. This was done because
   Total Functional Expenses $2,880,224 $60,484,694 $44,507,467 $51,102,748 we estimate the new venture in
% Change   36% -13%  
China will make just less than
   
Profit         half of the average country in its
FYE 2007 Per Country (/21) FYE 2007 FYE 2006 FYE 2005 first year in operation.
 
Profit $1,073,052 $22,534,096 $28,339,059 $15,867,239
% Change   -20% 79%  
Source: http://www.charitynavigator.org

30
 Appendix: Potential Partner HSBC
HSBC Background Information
• Established in Hong Kong and Shanghai in 1865, HSBC, one of the
world’s largest banking and financial services organizations with around
9,500 offices in 85 countries and territories – and its flagship in the Asia-
Pacific region. FINCA can expect to obtain global market access through
HSBC worldwide network
• HSBC has had a continuous presence in mainland China for 143 years
and its current network in mainland China comprises 83 outlets including
19 branches across the China; HSBC is likely to have more local
knowledge than any other multinational banks

HSBC Microfinance
• Since 2004 HSBC has been piloting a number of microfinance projects
around the world. HSBC is aiming to create self-sustaining, stable
financial services to help people out of poverty.
• HSBC’s microfinance projects vary from wholesale lending and credit
lines to project support, cash management and foreign exchange
handling.
• HSBC became the first global lender to launch a village bank in China
after winning regulatory approval in a move to tap the country's growing
rural economy on Aug. 2007. HSBC Rural Bank, a wholly owned entity
with a full banking license, will be located in central China’s Hubei
province.

Sources: http://www.hsbc.com.cn/1/2/hsbc-china; http://www.hsbc.com/1/2/microfinance; ‘HSBC gets approval for rural bank in China, Reuter
31