Microfinance Product Costing Tools

Topic :

This paper begins by suggesting that microfinance institutions (MFIs) rarely cost their individual products to determine whether they are viable, even though each product contributes to the bottom line (positive or negative). Yet, it argues, this type of information can help MFI managers streamline processes and reduce costs.

This paper notes that costing can be a powerful tool to help managers discover the true costs of products. Better management information on products helps managers make key decisions about product design, delivery mechanisms, and pricing. A costing exercise can also raise awareness of the cost components of different products, reveal hidden costs, instill cost-consciousness in staff, and uncover excess capacity and other operational problems.

The preferred methodology in this paper is activity-based costing (ABC), which traces indirect costs in microfinance to core operational activities. The paper notes that in addition to individual product costs, ABC helps employees and management understand the processes and activities they perform, as well as the costs of each process. The paper also describes it as a potent tool for identifying opportunities to improve business process effectiveness and efficiency.

The tool itself outlines two methods for determining the administrative cost structure of individual microfinance products. Once product costs are determined, the tool suggests methods for understanding how and why costs are incurred for a specific for a specific product, and how the product contributes (or not) to the overall financial viability of the MFI. The design of the tool also facilitates customer segment analysis within particular product groups.

The authors also point out that although the tool applies equally to credit and savings products, the viability analysis focuses on savings products because this topic has been largely neglected in microfinance literature.

The tool is aimed at managers of MFIs with multiple products and managers of banks that have begun downscaling and want to understand the costs of their new microfinance product(s).

The topics covered in the tool are:

  • Production costing
  • Traditional cost allocation
  • Activity-based costing
  • Comparing traditional cost allocation with ABC
  • Analysing product costs
  • Analysing savings products
  • Additional applications of ABC

The appendices also include useful information on:

  • Examples of activities dictionaries and cost drivers
  • Detailed activity costs of attractive rural banks
  • Microfinance institutions that have tested the Microfinance Product Costing Tool

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