How Ownership Structures Affect Profitability - A Lesson from Microfinance by Talanton

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A few years ago, while working for an international microfinance organization I had the privilege of undertaking an Executive MBA at the University of Oxford.  I was able to combine working for a forward-thinking organization with living in a university town. My time at Oxford presented a great opportunity to step back and review the dynamics of the markets my organization played in.

I was particularly interested in the structures of microfinance organizations – understanding whether or not ownership structures had any impact on performance.  At the time, our microfinance organization partnered with entities varying significantly in ownership structure. Some partners were registered charities connected to us “relationally”, others (such as many of our regulated banks) were wholly owned by us, while still others (such as our Indian investments) were privately held and in whom we took a minority shareholding.

During my research I came across a paper titled “Ownership and technical efficiency of microfinance institutions: Empirical evidence from Latin America”[1]. In the author’s view there was clear empirical evidence that ownership structure had causal impact on performance.

“…. the analyses suggest that MFIs with different ownership types use different technologies and have difference efficiencies.  Specifically, NGOs and cooperatives have a lower technology level than banks and NBFIs, because of their stronger focus on social goals and their more severe funding constraints.  Unclear objectives and the associated difficulty of developing appropriate incentive structures also cause non-shareholder MFIs to suffer from lesser efficiency with respect to their own frontier.  The economic implication of these outcomes is that NGOs and cooperatives are wasting resources in the production process and incur higher inefficiencies than their peers, NBFIs and banks”.

There are myriad reasons why MFIs around the world achieve different levels of organizational performance, so it would be naïve to suggest that ownership alone was the key indicator of performance.   Clearly internal factors such as leadership, funding and operational excellence have a material impact.  Other external factors such as GDP per capita and population density also make a difference[2].

Notwithstanding other influences however, it was hard to look past the performance of our MFI program in India.  Most (but not all) of our Indian investments were made into privately held microfinance companies, with strong social agendas. Not all these investments are success story worthy, but as a general rule the performance of these businesses (and thus the impact in the lives of people trapped in poverty achieved through the MFI’s investments) was very positive.  A ringing endorsement for the possibility of investing in privately held companies to achieve a positive social outcome.

As we launch Talanton’s Impact Investing Fund we are taking onboard this learning.  Talanton will make investments into Small Medium Enterprises that are – typically – privately held.  Talanton is of course not focused on Microfinance – and thus the empirical evidence may not be entirely relevant.  However, it seems a reasonable assumption to make that this principle will apply for SMEs in the majority/developing world also.  Focusing on investment in privately held businesses that are not constrained by artificial donor demands (such as percentage of funds spent on administration) that results in lower levels of investment in technology and thus lower levels of efficiency seems likely to produce the greatest prospect of high performance, high growth and thus high impact.


 By Harry Turner


[1] Servin, Lensink, Van den Berg, Ownership & technical efficiency of microfinance institutions: Empirical evidence from Latin America, Journal of Banking & Finance, Issue 36, 2012.

[2] Faz & Mozer, Advancing Financial Inclusion through Use of Market Archetypes, CGAP Focus Note No.86, April 2013