Activity-based costing for microfinance

Principal Researchers: Prof. G. Balasubramanian (IFMR)
Partner Organization: Microcredit Foundation of India (MCFI)

The high transaction costs associated with microfinance services are the primary reason why microfinance interest rates are higher than those on traditional loans. It is therefore important to understand the drivers and the components of these costs. Such documentation will help create an understanding of microfinance interest rates by the public. It would also help organizations understand and analyze the drivers of their costs. This case study of MCFI, an MFI in Tamil Nadu, will help design an activity-based costing (ABC) model to identify cost drivers and measure the sources of the MFI’s transaction costs. It will also help in delineating the total cost and in analyzing the various components of transaction cost, including the risk premium. ABC involves calculating resources used for every activity and allows the organization to pinpoint the profitability of each product and service. The results of this study will help an MFI answer several questions: Why is the organization spending money on indirect and support resources? What capabilities are supplied by these resources? How much is the organization spending on each of its activities? Why is the organization performing these activities? How much of each activity is required for the organization’s output?