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Teaching Note: Case 27 – Microfinance: Going Global … and Going Public?
Case Objectives
1. To encourage discussion of the importance of stakeholder management and the
implications of a firm’s vision, mission and goals for coherence in values and direction of
2. To demonstrate the effect of industry or product life cycles on competitive strategies.
3. To help students understand how strategic leadership is a key factor in organizational
4. To help students understand the role of strategic control, especially governance control
See the table below to determine where to use this case:
NOTE: There are both PRIMARY and Secondary chapters that can be used for this case. The
PRIMARY Chapter
Use
Key Concepts Additional Readings or Exercises
1: Strategy Concept Leadership for strategic
NOTE – see optional EXERCISE,
5: Business-Level
Generic strategies; industry or
11: Strategic
Leadership; integrative thinking;
SECONDARY
Chapter Use
9: Strategic Control &
Strategic control; corporate
NOTE – see optional news stories,
Case Synopsis
More than 2.5 billion people live on less than $2.50 a day. Traditional banking does not provide
an adequate means for serving this “bottom of the pyramid.” Microfinance is a non-traditional
banking system designed to help the extremely poor. Dr. Muhammad Yunus’s training at
Vanderbilt did not prepare him for the destitution he observed outside Chittagong University in
Microfinance involves small loans ($20 – 750) with high interest rates (up to 200 percent), with
short payback periods (1 day to 2 months), and without physical collateral. However, many
microfinance lenders give loans to groups, creating a very effective type of “social collateral”—
when one person is unable to pay back the loan, the group is held accountable. Interest rates are
There are two general models for modern microfinance banks. There are three major differences
between these models: (1) how the margins are split, (2) how the bank funds growth and lending,
and (3) whose interests are paramount for the bank’s decisions. The first model is the Grameen
One of the unanticipated pressures on Banco and other public microfinance banks is non-
governmental organizations (NGOs) pushing for lower interest rates. Banco has successfully
lowered many of its interest rates by improving the efficiency of the loan process (reducing
transaction costs). However, these pressures create a falling interest rate that will cut into the
(currently) large profit margins. The broad question then becomes: how do public microfinance
banks balance growth, returns on deposits (for the poor members), and returns on investment (for
the foreign investors) without undermining its fiduciary duties to stockholders?
Teaching Plan
This case was written to provide a forum for discussing the issues of strategic leadership in an
industry (microfinance) entering a new stage of its life cycle, and what this means for competitive
strategy. However, fundamental to the case is the examination of stakeholders, both internal and
external, and to what extent differing stakeholder claims can affect strategic choice.
Because of the focus on finance, this case can also be used to illustrate alternative models for
funding and handling transaction costs.
Summary of Discussion Questions
Here is a list of the suggested discussion questions. You can decide which questions to assign, and
also which additional readings or exercises to include to augment each discussion. Refer back to
the Case Objectives Table to identify any additional readings and/or exercises so you can
integrate them into your lesson plan if you wish.
1. Who are the major stakeholders in the case? What are these stakeholders’ concerns, and is
one stakeholder group more important than another?
2. The banks need resources to grow. What competitive strategy does microfinance appear
to use, and what options do the banks have for dealing with life cycle issues?
3. What are some of the challenges faced by the leadership of both Grameen and Banco?
4. OPTIONAL: What corporate governance mechanisms may be involved in the case of
microfinance?
Discussion Questions and Responses
1. Who are the major stakeholders in the case? What are these stakeholders’ concerns,
and is one stakeholder group more important than another?
Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1,
Exhibit 01: Strategic management consists of the analyses, decisions, and actions an
organization undertakes in order to create and sustain competitive advantages:
●strategy directs the organization toward overall goals and objectives;
●includes multiple stakeholders in decision making;
Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change
and continually refine changes to their strategies. This requires a certain level of “ambidextrous
An interesting question that the instructor can ask at this point is: what business is Grameen Bank
in? Some students might say finance, some might say community banking, and some might say
the organization approaches social activism. The answers to this question will help students
See Chapter 1, Exhibit 06: The primary role of the organizational leader is to articulate vision,
mission and strategic objectives. Leaders must communicate their initial vision of the
organization’s purpose: what was the original goal that was “massively inspiring, overarching,
Strategy also requires that multiple stakeholders be included in decision-making. Stakeholder
symbiosis implies that stakeholders are dependent upon each other for their success and well-
Multiple stakeholders were dependent on each other in this instance. See if students can identify
An interesting EXERCISE might be to divide the students into groups and ask them to
“champion” their stakeholder. Which group is most important, and why?
The Bank
The bank, in this case, is the most important for at least three reasons. First, the bank must attract
investors to go public. This is challenging because some may see the obligations created by
outside investment as a misappropriation of value from the poor to the investors. However, many
banks suffer from capital flows that allow growth. For instance, the bank may need outside
Bank Members (The Poor)
The banks members are the most important for at least two reasons. First, many of these banks
rely on the deposits of the poor. In the 1990’s and 2000’s the poor bank members enjoyed returns
on deposits between 20 percent and 100 percent per year. That is, if a poor member deposited $1
on Jan 1, 1990 the bank would return an additional $1 by the year’s end. On Jan 1, 1991 the
Investors (The Wealthy)
The investors are the most important for at least three reasons. First, many banks reach a point
where donations, bank member deposits and loans, and government assistance cannot support
steady growth. This, in turn, limits the bank’s ability to serve the poor. Investors provide an
infusion of capital that may allow the bank to continue its growth. Second, the bank may have
During strategic analysis, the leader does “advance work” to anticipate unforeseen environmental
developments, identify unanticipated resource constraints, assess changes in his or her
preferences for how to manage. During strategy formation, depending on the type of organization
The basic question strategic management tries to answer is: How can we create competitive
advantages in the marketplace that are not only unique and valuable but also difficult for
competitors to copy or substitute? Microfinance institutions must assess how functional areas and
NOTE – WEB LINKS, VIDEO, AND ADDITIONAL READING:
Students may be interested to see what Muhammad Yunus is currently up to. See the website of
Grameen Bank’s American operation at http://grameenamerica.org/
Yunus said, at the Grand Opening of Grameen America’s Manhattan branch in May 2010, “New
York City is the world capital of banking. In these skyscrapers that New York built, they control
world finance. What I pointed out is that they do the banking with the world but they don’t do the
For more information on microfinance, or microcredit, see what Grameen Bank’s website has to
say:
http://www.grameen-info.org/index.php?option=com_content&task=view&id=32&Itemid=91
From 2012, see a video interview with microcredit expert David Roodman, who discusses why
providing loans to the world's poor isn't always in their best interest:
http://www.washingtonpost.com/opinions/a-closer-look-at-the-benefits-of-microcredit-
207/2012/03/08/gIQAsHFazR_video.html
For the story that accompanies this video, see
http://www.washingtonpost.com/opinions/microcredit-doesnt-end-poverty-despite-all-the-
hype/2012/01/20/gIQAtrfqzR_story.html
For information on whether microcredit really does “deliver on its promises”, see a report on
research reported in 2013: http://www.npr.org/blogs/money/2013/05/29/187079088/does-
microcredit-deliver-on-its-promises
The paper itself is available at http://nber.org/papers/w18950
2. The banks need resources to grow. What competitive strategy does microfinance
appear to use, and what options do the banks have for dealing with life cycle issues?
Referencing Chapter 5: Business-Level Strategy
In order to achieve a sustainable competitive advantage, microfinance institutions need to assess
their ability to contend with other lenders, especially large, publicly held commercial banks. The
question of how to compete in a given business to attain competitive advantage requires an
assessment of the types of competitive strategies, including the three generic strategies that are
used to overcome the five forces and achieve a competitive advantage:
●Overall cost leadership
oLow-cost-position relative to a firm’s peers
●Differentiation
oCreate products and/or services that are unique and valued
●Focus strategy
oNarrow product lines, buyer segments, or targeted geographic markets
From the case, it appears that microfinance institutions, in general, have adopted a focus strategy.
They have selected a segment of the banking industry – loans – and have differentiated this
service to exploit a particular market niche – the very poor. However, as mentioned in the
textbook, there are pitfalls of the focus strategy. For microfinance, one of the main problems has
become erosion of cost advantages within the narrow segment. As illustrated in the case, the
transaction costs of making these loans are very high, necessitating correspondingly higher
interest rates and repayment terms. And as the microfinance industry matures, there may be
another pitfall: too narrow a service offering. Clients may begin to want more than just loans.
What about savings accounts or access to other investment opportunities? As the “very poor”
migrate to become the “poor” have the organizations within the industry consider who else might
emerge to enter this service segment?
Life cycle issues are important to consider when firms must make decisions about the optimal
business-level strategies and the relative emphasis to place on functional capabilities and value-
Managers must strive to emphasize the key functional areas and value-creating activities that can
help an organization sustain its health. It’s important to note that there can be many cycles of
In the microfinance case, an argument might be made that the industry has reached maturity, and
must focus on refining the process of making loans that are profitable for all parties. This
A key challenge in the case is whether or not microfinance institutions should pursue public
financing. Going public is necessary for three reasons:
1. The bank needs outside capital resources to grow and continue to develop its loan
process. With pressures to reduce interest rates, the margins on the loans are shrinking.
2. The bank may improve transparency in the loan process by going public, which may
attract more philanthropic investment. Transparency is important to the bank because it
3. By continuing its growth strategy, the bank maintains its commitment to the poor, while
providing jobs in areas outside large cities. This could be particularly important for rural
However, going public will force the bank to take what would be returns on deposits and give it
to foreign, wealthy investors. This defeats the purpose of microfinance based on the tenet that it
should serve the poor, not create value for the wealthy. The Grameen Bank example suggests that
many of its members (over time) mature from small depositors and large loan takers to large
depositors and smaller loan takers. In this sense, many poor bank members may have come to
This poses a challenge for leadership’s strategic vision.
3. What are some of the challenges faced by the leadership of both Grameen and Banco?
Referencing Chapter 11: Strategic Leadership: Creating a Learning Organization and an
Ethical Organization
The concept of leadership involves the process of transforming organizations from what they are
to what the leader would have them become. See Chapter 11, Exhibit 11.1. This involves:
●Setting a direction
Leaders need to set the direction for the organization by continually scanning the environment to
develop knowledge of all stakeholders, and knowledge of salient environmental trends and
Muhammad Yunus demonstrated these leadership activities when he first noticed the need in his
home country of Bangladesh. He saw an opportunity to use his training in developmental
Leaders are responsible for designing the organization: a strategic leadership activity of building
Yunus established Grameen Bank. This structure, and the systems and organizational processes
that allow for the delivery of loan services, has been profitable every year since 1976 except three
Difficulties in implementing the leader’s vision and strategies include a lack of understanding of
responsibility and accountability among managers, reward systems that do not motivate
As the case mentions, developmental economists (other than Dr. Yunus) are questioning how
these microfinance institutions can continue to grow their economic base without going public,
and if they DO go public, how will these institutions reward investors?
Leaders, especially those who have responsibility for some degree of public trust, must also
maintain at least the outward appearance of an ethical business culture. See the definition of
The ethical organization is characterized by a conception of ethical values and integrity as a
driving force of the enterprise. Ethical values shape the search for opportunities, the design of
Organizational ethics helps to define what a company is and what it stands for. The ethical
orientation of the leader is a key factor in promoting ethical behavior, promoting an ethical
In the case of microfinance, there appears to be a conflict between stakeholders – especially
between the bank members and the bank itself – about the need and wisdom of seeking public
capital. Which behavior is ethically acceptable, and to whom?
From the bank members’ position, the bank should not go public. Going public will provide a
mechanism for reducing wealth generating activities in poor areas while increasing wealth
From the bank’s position, the main objective for going public is to increase capital for bank
growth. With pressure to reduce loan interest rates, the bank has less resources for growth and
Institutional leaders must somehow develop a more optimal solution. Alone, these two positions
do not appear to provide a solution. If the bank does not have external investment it could slow
growth and reduce returns on deposits. On the other hand, if the bank does have external
investment it would facilitate growth, but could still reduce returns on deposits. In either case, it
appears that the wealth creation will be stymied. To overcome such polarized alternatives while
still supporting both positions leadership could do three things:
1. As the bank, you could make a commitment to attract both philanthropic and return-
oriented investors. Since going public is a new phenomenon for microfinance institutions,
the outcomes and process are unclear. It is certain, however, that going public will
2. Because the primary concern of bank members is returns on deposits and access to loans,
the bank could make a commitment to maintaining (or improving) these. One argument
for raising external capital is that it allows the bank to provide more loans, and increase
overall loan volume. This may be particularly important given recent economic volatility.
3. The bank could aggressively pursue management talent. One of the major sources of
advantage may be the social element of going public, making the bank more attractive for
managerial talent. Attracting and retaining talent is inherently tied to the social and
Whatever strategy is chosen, some method of evaluating results is necessary.
Interesting follow up questions to students might be the following:
1. As an individual, would you invest in a microfinance institution? Why? Would your
answer be the same if you were investing on behalf of your firm?
2. Dr. Yunus has suggested that a separate, social market place is needed for microfinance
institutions to raise external capital. Is this reasonable? Is it necessary?
NOTE – WEB LINKS AND ADDITIONAL READING:
There is growing concern that the claims by microfinance institutions, especially those of
Muhammad Yunus, regarding the benefits of loaning to the poor, may not be fully substantiated.
And in another 2011 report, questioning the government’s role in microfinance, the UK All-
Parliamentary Group on Microfinance said, “The strongest message we want to send with this
report is that in many (though not all) regions the sector is currently unbalanced. While access to
loans has expanded massively, other financial services have lagged. Where the only product
A report mentioned in the above blog is worth reading: Grantmakers Without Borders is a
network of public and private foundations who practice global social change philanthropy. This
group has produced a resource “Microfinance: A Guide for Grantmakers”. In this report,
Grantmakers Without Borders explores the history and evolution of microfinance, prevailing
4. OPTIONAL QUESTION: What corporate governance mechanisms may be involved in
the case of microfinance?
These are Secondary Concepts that might be discussed as well:
NOTE: there are no Powerpoint slides accompanying this part of the discussion.
Referencing Chapter 9: Strategic Control and Corporate Governance
Strategic control involves the process of monitoring and correcting a firm’s strategy and
performance. Corporate governance refers to the need for a firm’s shareholders (the owners) and
Using concepts from the last part of Chapter 9, students should also reference the role of external
governance control mechanisms. External governance control mechanisms ensure that
managerial actions lead to shareholder value maximization and do not harm other stakeholder
groups. These external controls are outside the control of the corporate governance system. What
external control entities might be involved in the microfinance case?
Microfinance institutions regularly solicit support from government and other non-governmental
organizations (NGOs) for legislative and social impact studies. However there appears to be no
worldwide regulatory body to address client complaints about the institution as a whole. And for
those microfinance institutions that are not publicly funded, and that instead rely on grantmaking
and other philanthropic organizations for additional financial support, there is no clear measure of
social performance success. This raises the question of who’s really watching the store?
If the microfinance institution has shareholders, like Banco Compartamos, then the investor
community will be applying profitability measures, such as return on investment, to the
How DO microfinance banks balance growth, returns on deposits (to the poor members), and
returns on investment (to possible foreign investors) without undermining their fiduciary duties to
stockholders, and their social responsibility to clients in the community?
