challenges and solutions

53

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Challenges to the Field and Solutions:Overindebtedness,Client Dropouts,Unethical Collection Practices,Exorbitant Interest Rates,Mission Drift,Poor Governance Structures, and More

Anton Simanowitz

When years turn our vision dim and grey, we shall still see the beautyin the tired wrinkles of our face; we will find comfort in the wisdom andknowledge of the fact that we did all that we could in our power toachieve our goals.

Equity Bank, Kenya—Part of internal inspiration statement,used to give direction and mission to employees.

At the core of microfinance is a concern for people. About 1 billion people starttheir day uncertain about whether they will get enough food that day to satisfytheir hunger, while a further 1.5 billion people have the basics, but struggle toimprove their conditions, and are always aware that they are one crisis awayfrom the daily battle that faces the poorest people.1

My starting point is the needs of clients and potential clients—a perspectivethat is unfortunately heard less and less as microfinance focuses on buildingsustainable institutions rather than sustainable clients. I argue that the startingpoint needs to be an understanding of the experiences, challenges, and needs ofthe different groups of people an MFI serves. This approach allows for prod-ucts and services to be designed and delivered that are appropriate to theirneeds, and for processes and systems to be refined so that they are efficient andeffective from the client’s point of view.

This chapter looks at how the ideals of microfinance can be achieved, andthe factors that inhibit it from achieving its potential. In writing this I have con-sulted with many people,2 and almost without exception, the social value ofmicrofinance is highlighted as the foundation. Even where delivered throughfor-profit, commercially focused institutions, ultimately microfinance is seen asa means to an end. Few would see profit as their sole reason for working inmicrofinance.

The first section of the chapter addresses some of the more visible and prac-tical challenges highlighted by crises in some markets. Clients experience thesechallenges directly in the quality and scope of services they receive, how they aretreated by the MFIs’ staff, and ultimately in what value or harm is created byusing the services.

While some people see the recent crises as isolated incidents, the majorityfeel that fundamental lessons need to be learned. Overall, a broad range ofmicrofinance actors reject media suggestions that perhaps microfinance itself isa flawed idea, but highlight the need for the microfinance community to reex-amine assumptions and find ways to increase effectiveness. Central to this stanceis increasing focus on clients, to achieve a more conscious and transparent bal-ance between the social and commercial goals in all aspects of strategy and man-agement (see also the chapter by Frances Sinha on the seal of excellence inmicrofinance).

I focus primarily on so-called credit-led microfinance, an approach that cre-ates large, financially sustainable institutions that build a physical infrastructureto deliver financial services, and fund these services primarily through interestcharged on loans (as well as fees and other charges). I also consider alternativeapproaches to microfinance, and examine the extent to which the challengesare common.

The second section of the chapter focuses on solutions and presents a man-ifesto for client-focused microfinance. This section focuses on four areas:

• Deepening financial inclusion: overcoming exclusion of poor, vulnerable,and marginalized groups.

• Creating value for clients: starting with clients and their needs, and build-ing sustainable institutions that deliver value.

• Protecting clients from harm: recognizing client risk and vulnerability inregulation, governance, and systems to protect clients.

• Ensuring quality of microfinance services: developing effective manage-ment systems to deliver on these objectives.

54 NEW PATHWAYS OUT OF POVERTY

STATE OF PRACTICE—CHALLENGESTO MICROFINANCE

I think we have done great harm in excessively hyping microfinance.The reality and [myth] are so far apart that it creates unrealistic expec-tations for industry.

Asad Mahmood, Deutsche Bank3

Microfinance is recognized as an important development intervention. Accessto financial services can both protect and promote poor people’s livelihoods,helping them better plan for anticipated financial needs, cope with crises andemergencies, and invest in economic opportunities such as a microenterprise toimprove their income. Financial access in turn can lead to improved access tobasic necessities such as food, clothing, shelter, health, and education. Comple-mentary nonfinancial services and the positive support of staff or group mem-bers can help to facilitate these outcomes.Microfinance also provides a platformfor integrating or linking to a range of other developmental services.

Microfinance is also an industry that is coming of age, with impressivegrowth in numbers of clients, exceeding 50% per annum in many countries.4

The Microcredit Summit 2011 Campaign reports an increase in credit cus-tomers from 23.5 million to 190.1 million between 2000 and 2010, and an in-crease from 1,567 to 3,589 microfinance institutions (MFIs) reporting to thecampaign.5 Microfinance has grown to become big business, with more thanUS$4 billion now invested through 78 microfinance investment vehicles, mak-ing up a worldwide industry valued at more than US$65 billion.6

Yet the potential market for microfinance remains vast, with some 3 billionadults lacking access to even basic formal financial services.7 The challenge ofscale has been the driving concern over the past decade. Rapid growth demandsaccess to increasing amounts of capital. Commercialization—which allowsMFIs either to access capital through savings mobilization or through the cap-ital markets—is a key aspect of this approach.

For many, the successful initial public offering (IPO) of Compartamos inMexico in 2007 and SKS in 2010 validate this approach, with ACCION, for ex-ample, commenting, “The financial markets have shown the true value createdby high-performance, double bottom line–oriented microfinance institutions.”8

But the win-win vision of a business approach to solving social problems isunder attack. The IPOs in Mexico and India highlight the potential for micro-finance to attract investment driven predominantly by profit. The success of theseIPOs (not least for the MFI directors and investors) has led to moral outrage in

Challenges to the Field and Solutions 55

some quarters, and a sense of disquiet in others. There is particular concern whenhigh interest rates are perceived to drive high financial returns for the investorsin microfinance, rather than efficiency gains being translated into lower costsfor clients. Although Compartamos enjoyed high levels of client satisfaction, itsinterest rates were relatively high for theMexican market (and at around 100%APR very high internationally). These rates were justified as generating capitalfor growth, but following the commercialization of the bank, interest rates weremaintained, generating returns of 100% annually, and fueling the huge interestin the IPO. Rich Rosenberg writing for CGAP9 asks, “To what extent do theprofits come out of the pockets of poor customers? And are the profits used forfurther service to more poor people, or do private investors capture them?”

Meanwhile the erosion of client livelihoods through increasing energy andfood prices, recession, and retrenchment is leading to client overindebtednessand delinquency, and exposing weaknesses in MFI systems overstretched byrapid growth.10 There are reports of increasing unethical practices by field staffchasing high productivity targets. The Centre for the Study of Financial Inno-vation (CSFI) Banana Skins report for 2011 concluded that credit risk is nowthe number-one challenge for MFIs, demonstrating the challenges to the veryfoundation of microcredit—the ability of clients to repay their loans.

Although commercialization allows microfinance to achieve scale, increasingthe number of clients is, by itself, an indicator neither of positive impact nor thestrength of an institution. Although some believe that providing access to financialservices is by definition a socially useful activity, experience has shown that socialoutcomes ofmicrofinance are not automatic but rather the result of prudent strat-egy, design, management, and governance. As the recent global financial crisisdemonstrates, social performance in financial services cannot be taken for granted.

The benefits ofmicrofinance are being questioned, too. Academic studies overmany years have reported generally positive but inconsistent impacts of micro-finance,11 and recent studies have failed to findwidespread and consistent povertyreduction impact.12 The lack of generalizable results has been picked up by an in-ternational media quick to highlight the shortcomings of microfinance. In part,microfinance has been overhyped, characterized bymany as the silver bullet in thefight against poverty. Although most practitioners would recognize this as a hugeexaggeration, the claim is seldom challenged by those inside the industry and in-deed perpetuated by glossy promotional stories of client successes. It is time is re-focus on how to achieve and demonstrate positive outcomes for clients.

Crisis in Some Competitive Markets

There is a consensus from my conversations that in overheated markets thereare real challenges that have the potential to both harm clients and prevent


microfinance from fulfilling its potential for positive impact, as well as damag-ing the financial performance of the sector. “We have moved beyond anec-dotes,” says Jean-Pierre Klump from Blue Orchard, a microfinance investmentvehicle. “The microfinance industry, although still young, has reached a level ofmaturity [such] that recent events can be seen as systematic and need to be takenseriously.”13

While competition and commercialization can stimulate improvements inclient service and improved efficiency, MFIs can compete equally by simplifyingtheir products or pushing credit, insurance, and other products to increase prof-its. In some cases, concentrated competition has clearly led to negative conse-quences, particularly in India where there is the added pressure of investorexpectations and the lack of balance created by regulatory prohibitions on deposittaking. Many people highlight the particular danger of the combination of rapidgrowth and competition, combinedwith weak regulation. Citing the examples ofcountries such as Nicaragua, Bosnia, Morocco, and Pakistan, a CGAP reportconcludes, “Microfinance grew remarkably rapidly but the repayment problemsnow evident in these four countries suggest that growth came at a cost.”14

In rapidly growing organizations, developing and retaining the necessarystaff capacity to effectively deliver quality services is a challenge. High rates ofgrowth put huge pressures on management systems, challenging the ability toensure consistency in service delivery. This has been the experience of manyMFIs—in both competitive and less competitive markets. Reille highlights theloss of quality and efficiency of staff, the focus and effectiveness of middle man-agement, and the inadequacy of internal controls: “The drive towards scale alsobrings with it a preoccupation with rapid expansion that can easily erode goodbanking principles, to the detriment of the institution (in the form of deterio-rating portfolio quality) and of clients (in the form of over-indebtedness).”15

For the first time, most of the money in microfinance comes from privateinvestors. There is a sense that the growth of commercial investors leads to achange of focus with more emphasis on short-term returns and a concern thatinvestors will push MFIs to maintain relatively high interest rates in order togenerate high rates of return. Importantly, publicly listed companies have a legalobligation to maximize return for their shareholders. Chen et al. highlight theconcern that “excessive commercialisation will tilt the gains heavily toward in-vestors at the expense of the poor.”16 Maya Prabhu, head of philanthropy atCoutts, a private UK bank, advises wealthy clients on investments in micro-finance. She concurs and feels that “there is definitely a risk of new sharehold-ers switching MFIs’ missions from alleviating poverty to chasing volumes andprofits.”17

One particular example highlighted by the experience in India is the moveto generate loan capital through the capital markets rather than through deposit


taking. This is seen by many to encourage people who may not understandsome of the fundamentals of microfinance to prioritize short-term financial re-turns: “There is a lot of greed coming into microfinance. A lot of people wishto make a lot of money out of it, and that worries me.”18

Challenges of a Focus on Growth and Efficiency

Quality must come first. We try to grow as fast as we can in a way thatwe protect the quality of what we do and products that we give to theclients.

Carlos Danel, Compartamos19

In most regions of the world, competitive microfinance markets are a long wayoff, yet growth in client numbers, portfolio size, and efficiency remain the dom-inant benchmarks of success. There is a strong sense from my conversationsthat the highly competitive markets are extreme examples of issues that applymore generally to credit-focused microfinance that pursues institutional growthand sustainability without an equal focus on client growth and sustainability.“In a heated marketplace all of the systemic issues that were present rise to thefore and get out of control,” states Frank DeGiovanni.20 These challenges arepresent from day one.

Decisions made in the name of growth and efficiency often directly under-mine some of the core aspects of an MFI’s methodology and systems key to en-suring outreach, value, and protection for target clients. Often changes are madewithout a full understanding of what they imply for social as well as financialperformance. There are challenges in a number of areas.

Mission Drift

Mission drift is not an exclusive risk of commercial MFIs. It’s a risk inall MFIs.

Kimanthi Matua, K-Rep21

A focus on growth and efficiency leads MFIs to focus on clients who are easyto reach and who have a secure existing income with which to repay a loan.Poorer, more vulnerable people with insecure incomes or living in remote areasare not an obvious choice of client. Evidence from a study by Women’s WorldBanking (WWB)22 and others suggests that organizations that strongly focus ongrowth in client numbers, portfolio, and efficiency are likely to move away fromhard-to-reach areas, and from women and poorer clients to more profitableand easier-to-reach clients. Matua states, “Many of us have witnessed mission


drift happen from pressure from donors, regulators, managers, staff, and evenclients themselves.”23 This is particularly the case where anMFI transforms intoa for-profit institution where greater pressure may exist to generate financialreturns for investors. Transformation also leads to an expansion of the MFI’sclient base to include savers outside the traditional target group. Matua alsoreports, “When you transform you begin to attract depositors from all segmentsof market, as that is the only way you can grow. But depositors demand thingsbecause they give you something, they demand certain services, so they influencepolicy. They influence you to move somewhere away from your original micro-finance customers. It is a continuous process to make sure you balance this cre-ative tension.”

MFI Systems

A combination of fast growth and efficiency has the potential to undermineMFI systems and internal control. Growth puts a strain on management systemsas relatively inexperienced people are promoted and new staff are trainedquickly. Efficiency has often been achieved through simplifying processes suchas internal control, loan appraisal, hiring practices, and increasing staff pro-ductivity. MicroSave, for example, outlined concerns about the ability of In-dian MFIs to manage their exponential growth: “There was a marked absenceof control systems over the maintenance of cash and cheques; many brancheswhere the entire staff had less than one year of experience and branch man-agers being transferred and replaced in less than a month; lack of properly doc-umented policies in HR, Operations and Accounts . . . the list goes on.”24

Relationships

Excessive growth and competition result in organizational systems beingstretched or streamlined in order to reduce costs, leading to reduced staff-clienttime and a deterioration in relationships. In India, for example, staff produc-tivity has been increased to very high levels, with caseloads increasing fromfewer than 400 clients per loan officer in 2007 to more than 500, and in onecase over 900,25 a point at which staff members can have very little knowledgeof their clients.

Pressure on field staff to grow their portfolios and ensure high repaymentrates, despite problems experienced by clients, often leads to short-cuts beingtaken (as in assessments of capacity to repay) and sometimes harsh collectionpractices (discussed later in the chapter). In group lending situations, it puts fullreliance on repayment assessments on the groups. Malcolm Harper highlightsthe importance of this reduction of time with clients: “What matters is good


personal service. MFI staff with the ability and time to think, to take a view onwhether the household can afford the repayments, on their other debts and soon. . . . I think it’s called ‘relationship banking.’”26

ClientValue

Where efficiency leads to simplified processes and a small number of standard-ized products and services, the MFI likely becomes less effective at meeting theneeds of clients. Linked to this is the WWB’s finding that MFIs often make cutsto program aspects important for deepening outreach and creating value forclients. Activities such as cash-flow-based credit analysis, client training, busi-ness development services, and client assessment are often the first to go. JulieSlama of the WWB explains, “These are the very programs that would allowMFIs to profitably serve poor women, and without which, women will eitherchoose not to take loans or will fail as borrowers.”27 Often cuts may have agreater impact on the needs of women who may benefit most from nonfinan-cial services or have smaller businesses.

Interestingly, even some of the most commercially focused organizations,such as Compartamos, recognize that a push for short-term growth is a riskystrategy, and that microfinance needs to be focused on long-term value for clients:through delivering products and services responsive to client needs and ensuringquality in the delivery of these services. Vikram Akula of SKS similarly believesthere is no intrinsic tension between profit and impact: “[Good business] is notabout extracting from the poor, but doing what is right for customers.”28

Overindebtedness

A key experience in competitive markets has been the phenomenon of increas-ing clients’ access to credit through more relaxed lending policies and multiplelending. Beth Rhyne describes how, prior to the crisis in microfinance in Bo-livia in the 1990s, “Suddenly, women who had had limited access to credit werespoilt for choice; many borrowed from multiple lenders.”29 Similarly, prior tothe collapse of Banex in Nicaragua in 2010, MFIs competed by increasing loansizes. According to BarbaraMagnoni of EA Consultants, “Microentrepreneurswere being offered Mother’s Day loans, Christmas loans, loans for the begin-ning of school, housing loans, home improvement loans, educational loans, mo-torcycle loans and more.”30

Even where some MFIs are strict about their lending criteria, this does notstop other institutions lending to the same clients. Multiple lending is seen to bea significant issue in competitive markets. For example, in Andhra Pradesh,India, there are loans outstanding to more than 20 million microfinance clients,


while the number of households is about 16 million, demonstrating a high levelof multiple borrowing.31 Many people are careful not to overindebt themselvesand may have genuine need for multiple loans, but experience clearly demon-strates that easy access to credit, particularly at times of financial stress or in thecontext of pressure for consumption, can lead to clients making bad decisions.The CSFI Banana Skins report for 2011 identifies overindebtedness as the majorcause for credit risk: “The problem is so severe that it could lead to a possibleimplosion of some of the key players. . . . Increased delinquencies, program de-terioration, damage to clients’ well-being . . . we’re seeing this issue crop up intoo many markets.”32

Toward Improved “Relationship Banking”

These challenges get to the very heart of microfinance as a business approachto solving social problems. There is a sense that a refocus is needed on under-standing and responding to clients, and improving the quality, management,governance, and regulation of services to create value for clients. For micro-finance to deliver on its double bottom line, increasing scale and commercialfocus must combine with renewed attention to clients and innovation to ensurethat services are designed and delivered in the most effective as well as efficientway. Clearer standards and transparency are also essential to ensure that clientsare empowered to make informed decisions about the services they purchase,and that they are protected from bad practice.

DEEPENING FINANCIAL INCLUSION:OVERCOMING EXCLUSION OF POOR,

VULNERABLE, AND MARGINALIZED PEOPLE

I thought I was too poor to join, but now I’m very proud to be part ofmy Credit Association.33

One of the most appealing aspects of microfinance is its potential to extend fi-nancial services to the 2.7 billion people without access to them. But there is un-evenness of outreach, a trend of moving upmarket, and a number of groups ofpotential clients that tend to be excluded.Women. Although microfinance has traditionally targeted women, recent

data from a study by Women’s World Banking shows that this trend is chang-ing. The study shows a clear trend toward a declining focus on women clientsonce an MFI becomes a regulated, for-profit financial institution. In a sampleof 27MFIs that had made the transition fromNGOs, the percentage of women


clients served fell from an average of 88.5% in the year prior to the transitionto 68.5% within four years of that transformation.34 Women generally ownbusinesses that are smaller in size than those of men; they have smaller cashflows and hence a lower capacity to absorb higher debt amounts than that ofmen, and women are therefore seen as less desirable clients. MFIs also maymove away from women clients due to the need for higher profitability result-ing from increased average loan sizes.Remote and rural areas.MFIs that deliver financial services directly need to

build up a large and costly infrastructure, which puts pressure on the organi-zation to grow to scale and to drive down costs of delivery. The tension be-tween the cost of the MFI’s infrastructure and the capacity of clients to reliablypay for services lies at the heart of the challenge of outreach. It also pushesMFIsto focus on provision of credit that can generate an income, rather than savings,which requires a larger infrastructure to mediate very small transactions fromlarge numbers of people. It is therefore unsurprising that MFIs find it hard toreach remote areas, and tend to focus on clients with a good existing capacityto absorb credit.

Community-based models provide a lower-cost alternative to building upthe institutional infrastructure of credit-led microfinance, allowing for accessto more remote and rural areas. Groups are facilitated to mobilize and on-lendtheir own savings. The groups are trained and then can become sustainable, re-quiring minimal ongoing external support. Groups can often replicate withoutexternal involvement. A significant subsidy is needed to facilitate the capacitybuilding of these groups, but proponents of this approach argue that this sub-sidy is far less than the millions of dollars that go into building a sustainableMFI, and that this is a lower risk approach where ultimately all the benefitscome back to the clients. Jeffrey Ashe of Oxfam-America argues that “savings-led microfinance could provide access for much less than credit-led. The modeloffers great potential to have millions of member-owned, member-managed andmember-used organizations of the poor.”35

Poor, vulnerable, and marginalized people.Most microfinance—includingcommunity-based models—tends to exclude a significant number of the poorerand more vulnerable population. Although the Microcredit Summit has cam-paigned since 1997 to increase the poverty focus of microfinance, broadly inmost countries and most types of microfinance organizations, clients are pre-dominantly those people just below and just above the poverty line. Servicesrarely extend to the very poor.

For microcredit to be appropriate, the clients must have the capacity torepay the loan under the terms by which it is provided. Where there is little tono access to markets and very little cash in the community to support local busi-nesses, there may be little value in credit, or it may be seasonal. Vulnerable


clients may also fear the risk of credit or just not having the confidence to join:“It is very likely that we would spend the loan (to pay for food) and that wewould be incapable of repaying it properly. So, that could create problems thatwe would rather avoid.”36 In other cases, even very poor people have beenshown to value and productively use credit. There is also broad acceptance thataccess to savings is a critical need for even the poorest people. Decisions needto be made on the basis of understanding rather than assuming that certain ser-vices are suitable or unsuitable.

FactorsToward Exclusion

Most MFIs serve a relatively small proportion of their total potential market,deliberately or inadvertently excluding certain groups. A number of factors leadto the exclusion of the groups mentioned previously.Enterprise credit. Numerous MFIs only lend to people who have an exist-

ing microenterprise rather than supporting start-ups, which are riskier and oftenrequire training and support in addition to credit. These organizations effec-tively exclude the vast majority of people who lack access to financial services.MFIs’ policies and procedures.Many MFIs set eligibility criteria that serve

to exclude more vulnerable and poorer clients—for example, registration fees,minimum loan sizes, or minimum savings balances. Gender biases are oftenpresent, such as discrimination against women that occurs when clients are re-quired to show title deeds for their land or house. In addition to these policies,MFIs often inadvertently exclude people through inappropriate products andservices, or make changes in pursuit of efficiency that may have the side effectof removing aspects of the methodology that favor weaker clients—for exam-ple, removing client training or home visits.

In addition, staff actions and decisions respond to organizational culture,personal biases, or incentives, and have considerable influence over whom theorganization serves. Many MFIs have a culture that rewards growth in clientnumbers and portfolio size. The organization thus tends to focus on moreeasy-to-reach areas and clients. Management responds by selecting opera-tional areas in urban and peri-urban locations, or in the market center closeto the main road in rural areas. Field staff respond by targeting easy-to-reachpeople, and those who are able to take a relatively large loan and grow it overtime (see Box 2.1).

There are norms in society that lead to the poorest people and other groups,such as the disabled, being regarded as inadequate and incapable of achieving.These norms are reflected in self-perceptions as well as perceptions among thewider community, MFI field staff and management, and the microfinance indus-try. Poorer people are commonly viewed as potentially problematic by field staff


Box 2.1 Staff Response to Exclusion in Malawia

During a workshop at Microloan Foundation, Malawi, staff made a com-mitment to try to deepen their outreach by addressing exclusion factors suchas the bias of serving clients close to the branch office.Subsequently, a managerreturned to her branch and approved two groups that she had been intendingto reject because of their location in a more remote rural area.

Note: a. Personal correspondence.

and avoided. In Latin America, for example, the term “poor” implies laziness,drunkenness, and lack of judgment. Without addressing these issues explicitly,MFIs tend to reflect these patterns that lead to marginalization.Exclusion by group members. Microfinance groups are normally self-

selecting in terms of membership and play a role in setting loan size. A commonexperience in groups—of all methodologies—is that they are dominated bystronger members, who may exclude weaker individuals from joining or limittheir ability to participate. This is particularly the case in groups for which ac-cess to credit is dependent on the level of saving in the group, or in solidaritylending where clients must guarantee each other’s loans.Exclusion through external factors. Regulation may also serve to exclude

and can be a driver of mission drift by inadvertently making it more costly orcomplex for an MFI to serve its target clients. Examples include requiring allclients of MFIs to have national identification cards; classifying all loans to in-formal business as consumer rather than enterprise loans, thus requiring higherprovisioning for portfolio at risk; or a requirement to make credit bureau checksbefore lending, where this may cost 10% to 15% of the loan, and prove im-practical when trying to get groups in remote rural areas to make decisionsabout their loans.

Overcoming Exclusion

Organizations that seek to reach certain groups do so. It’s a questionof will.

Anonymous survey respondent37

If a goal of microfinance is financial inclusion, then the challenge is to reachout to those people who could benefit from financial services who are currentlyexcluded. Where anMFI defines particular target clients, products and services


should be designed to meet their needs, and that outreach is monitored andmanaged. In addition, many MFIs have the potential to deepen their outreachby understanding factors that lead to exclusion of potential clients, and makingadjustments in response.

While poorer, vulnerable, and more remote clients may be more costly orrisky to serve, considerable evidence exists that these trade-offs are not auto-matic.38 When MFIs put effort into designing their programs to serve thesegroups, the difference can be dramatic, and can be accomplished sustainably.For example, often with targeted communication and an appropriate organi-zational culture, services can be made more conducive to these potential clientgroups. A focus on savings rather than credit—at least initially—may often bemore appropriate. Guy Vanmeenen describes the approach of Catholic ReliefServices (CRS) in working with savings and credit groups. CRS began by form-ing a group with those who are less risk adverse and not the poorest. Afterabout eight to 10 months, once the group has shared out their savings, a demon-stration effect takes place and others see the benefits. Effort is then needed toform subsequent groups within the same community, and to include groups witha lower minimum savings balance to ensure the inclusion of the poorer people.More savings groups continue to be formed until the market is saturated.39 Thefollowing two examples illustrate approaches to deepening financial inclusion.

AMK,CambodiaAMK demonstrates the practical steps an MFI can take to overcome exclusionand deepen financial inclusion. AMK has been ranked number 17 in the world’stop 100 MFIs, serving 250,930 clients with 108% operational self-sufficiencyas of December 2010. It is also notable for its focus on serving poor women inrural areas, with around 90% of its clients rural, 86% female, and 56% belowthe national poverty line. Plus AMK has Cambodia’s lowest average loan out-standing at US$115, compared to a national average of US$411. It has deepenedits outreach through a series of steps.

Segmenting its client market and adapting services to their specific needs.AMK does not directly target women or the poor; instead it attracts its chosentarget group through maintaining relatively low loan ceilings on products, andselecting rural operational areas with higher than average poverty rates. AMKhas also adapted its savings and loans products to the specific needs of ruralagricultural households, with flexibility of loan terms and timing, and the op-tion of installment or end-of-term loans.

Creating appropriate organizational culture and staff incentives. AMK hasbeen particularly successful in building and maintaining a social performanceculture in a context of rapid growth, and retaining this as personnel, manage-ment, and board members change. Regular reports on social performance serve


60%

50%

40%

30%

20%

10%

0%Poorest Less Poor Least Poor

Non client

TCP client

MCP client

Figure 2.1 Comparing Poverty-Targeted (TCP) and Non-Targeted (MCP)Microfinance Programs of the Small Enterprise Foundation, South Africa

to keep attention focused on the social aspects of the mission, and have led tointegrating related reporting into other departments—for example:

• Making social performance a core element of formal staff training.

• Incorporating a social dimension into staff appraisal throughHR and an in-ternal audit.

• Including in staff incentives a difficulty rating that takes into account morechallenging rural environments.

Small Enterprise Foundation (SEF), SouthAfricaIn the case of SEF in South Africa, some relatively simple steps—including start-up businesses and poverty targeting—successfully transformed a program thatwas serving predominantly women above the poverty line, MCP (formerlyMicrocredit Programme), into one that serves predominantly very poor women,TCP (formerly Tshomisano Credit Programme). Figure 2.1, illustrating resultsfrom the CGAP poverty assessment of SEF, shows a huge difference in povertyoutreach.40 WhileMCP predominantly reaches clients from the least poor groupand has few clients from among the poorest third, TCP is biased toward poorerpeople. What is more, despite smaller initial loans and the costs associated withpoverty targeting, lower arrears and higher client retention in TCP mean that,in the long term, the programs are roughly comparable in terms of their finan-cial performance.


CREATINGVALUE FOR CLIENTS

I guess fundamentally financial services are about clients, they are aboutpeople, because at root they are about helping people manage theirlives. The financial services are designed to help the clients build assetsand help clients move towards financial security or economic security.

Frank DeGiovanni, Ford Foundation41

As a social business, microfinance has at its core an intention to create benefitor value for its clients. This section examines in more detail how this intent canbe put into practice.

Adapting Financial Services to Clients’ Needs

In recent years there has been a move away from seeing microfinance as creditfor self-employment to recognizing the wide-ranging use and value of financialservices—savings, credit, insurance, and remittances. Access to relatively largesums of money compared to a client’s regular income gives that person themeans to better manage her or his finances, which can help in planning for andmeeting expected household needs such as paying for school fees or buying riceor maize in bulk. It also helps increase resilience and reduce vulnerability to themany risks that poor people face. In addition, financial services can help poorpeople take advantage of economic opportunities or invest in productive as-sets—for example, starting or growing a micro enterprise—and generate in-creased income that in turn increases access to basic necessities such as food,education, health, and shelter, and a general improvement in living standards.

The availability of financial services in a market, though, does not neces-sarily mean that the services are well suited to the needs of clients or even thatthey are used. Provision of microfinance in agricultural communities is a goodexample of where the traditional product of weekly repayments does not meetthe needs of a rural producer for a big lump-sum loan at the beginning ofthe agricultural production cycle and repayment only after harvest time. AsdeGiovanni of the Ford Foundation states, “So if you were measuring it froma financial inclusion paradigm you would say, well, the services are there. Fromour point of view that product is not meeting the needs of that population. Theproduct needs to be retooled so that it’s adapted to the economic needs of arural producer.”42

A client focus reveals opportunities for improvements for most (if not all)organizations. Often small adjustments can have a big impact. At a recent micro-finance innovation conference,43 several studies suggested that small tweaks to


Box 2.2 AMKAdaptations to Fit Rural Livelihoods

AMK caters primarily to rural agricultural households, a market that ischaracterized by poor infrastructure and regular floods and droughts.An un-derstanding of client vulnerability and seasonality is therefore central to thedesign of products and services.AMK identified that many clients have nonfarmincomes, and that clients’ financial needs change throughout their lives as theirlifestyles and income sources change.To address these needsAMK provides:

Group loan products with complete flexibility of repayment: De-pending on their income stream, clients can choose between installment orend-of-term loans.

Individual loan product that caters more to nonfarm opportunities:Individual loan products are also available for stronger clients.These includeregular, business expansion, and seasonal loan products.

Disaster mitigation products: These are emergency loans without col-lateral, which provides a flexible end-of-term repayment option. A microinsur-ance product is also under development.

A range of savings products:These allow for readily accessible depositsand withdrawals or fixed deposits for clients who want to save their money fora specific purpose.

Source: Adapted fromManaging Social Performance:AMK (Cambodia), Imp-ActConsortium,and www.akmcambodia.com.

the products offered by MFIs—such as allowing a grace period before repay-ment of a loan, offering loans in-kind rather than in cash, or providing very basicfinancial training—can dramatically improve outcomes for borrowers. Otherchanges to the delivering of financial services might include fitting in with theseasonality of client livelihoods, making services more accessible through mo-bile services, or building support between clients with the use of groups (see Box2.2): “Up to now, no one has progressed because of the repayment schedule ofone week. At least with one month (as a deadline) I could have gone all the wayto Bamako to buy merchandise and made a profit. It becomes harder during therainy season” (MFI client).44

While understanding of clients’ needs for diverse and flexible financial ser-vices has greatly improved, why is the industry still relatively undifferentiated,with the majority ofMFIs providing a very limited range of services? One of thestrongest messages I hear repeatedly is the weakness of many MFIs in under-standing and responding to the needs of their clients (and potential clients). AsChris Dunford from Freedom From Hunger states, “A famous business adageis ‘know your customers’: the irony is that many MFIs, which try so hard to be


Box 2.3 Examples of PoorlyAdapted Credit

• All members of a group take loans at the same time and for the same du-ration, meaning that loans are not available at the time when they areneeded and may not fit with the business cycle of the clients’ enterprise.

• Repayments must commence a week or two after disbursement,mean-ing that clients have not had a chance to invest the loan and generate aprofit; clients often hold back part of the loan disbursed to make theirearly repayments.

businesses, aren’t following this adage and often neglect the needs and interestsof their clients.”45

In part, running an MFI is tough, and the margins are small. Much of theearly development of microfinance centered on replication of successful mod-els rather than seeking to understand client needs in each context. Lending tinyamounts of money is costly, so standardization of products and processes wasviewed as the only way to get the products to the population at a reasonablecost. Jeffrey Ashe of Oxfam America describes his experience in Bolivia in the1980s: “We assumed—a strange assumption—that the poor needed to save bytaking on debt. The mantra for us as institutions was to keep it simple, offer oneproduct, drive down cost, and expand the market. That had its own internallogic, but it didn’t meet the needs of clients.”46

From the late 1990s there was an increasing awareness of the need for amore client-led approach, and increasing focus on adaptation and diversifica-tion of products and services to fit a much more segmented client market. Al-though there are many examples of organizations that have a strong focus onunderstanding their clients and which continually seek new ways to create ad-ditional value, these organizations are a minority. Many MFIs, for example,continue to provide credit that is poorly adapted to the business needs of itsclients (see Box 2.3). One of the key messages of this chapter is the need for amuch greater application of what we know about how microfinance servicescan be tailored to the needs of different client segments.

Key Areas for Developmentof Responsive Financial Services

Improving credit products: Moving beyond credit for enterprise. Althoughmicrofinance has diversified significantly, many MFIs still implement a rigidcredit-for-enterprise approach that fails to adequately take into consideration


the complexity and needs of poor people’s financial portfolios, and does notallow flexibility where it is needed.

While providing credit for investment in a business is an important mech-anism for raising the income and productive assets of clients, other unaddressedfinancial needs will lead to “misuse” of the loan—for example, paying schoolfees or coping with illness. In addition to enterprise investment, credit has an im-portant role to play in enabling improved financial management and respond-ing to crises—particularly where insufficient savings have been mobilized.

The response of many that money is fungible and that loans should not betied to any purpose—the client knows best—is equally problematic, risking los-ing the opportunity to support clients in building a viable business and, if notcarefully managed, creating a risk of overindebtedness.Designing loan products. A central message is that the way in which loan

products are designed is as important (if not more so) than the products avail-able. For example, Freedom From Hunger has been working on a more flexi-ble group lending product that allows clients to save in the group when they donot need to borrow and to borrow for the term, amount, and repayment sched-ule that makes sense for them. Not everyone in the group needs to borrow andpay back on the same schedule. Approximately 30% of group members at anyone time do not have a loan, but continue to save. These features are very muchappreciated by the clients, but, of course, it comes at the cost of increasing com-plexity of transactions and thus transaction costs for the MFI. The success ofthis approach is also reliant on strong group processes and ensuring that clientsare really empowered in decision-making processes. This again requires invest-ment of time by the MFI.

Perhaps the most notable change in methodology toward greater respon-siveness to client needs is the experience of the Grameen Bank in its move toGrameen II methodology. Box 2.4 outlines how the organization has reengi-neered itself to better take account of the realities of the lives of its clients andtheir needs, with a much greater degree of flexibility and greatly improved sav-ings services.Improving access to savings and other financial services. Much of the em-

phasis in microfinance has been on credit. Yet credit is debt and creates addi-tional risk for the clients and increases their vulnerability. We need to be realisticabout recognizing that microfinance cannot create benefits all the time, andwith credit in particular negative outcomes are inevitable some of the time.Credit can provide additional capital for larger demands, allowing expenditureto be brought forward or to make a productive investment, and therefore maybe worth the risk. Credit may also be important in responding to a need whereit would take too long to save sufficiently, or where cash is urgently needed.However, in many cases where the real need is for expenditure smoothing or to



Box 2.4 From Grameen I to Grameen II

“The way I look at Grameen II, even more so than when it was launched, isit’s trying to make it kind of client-friendly, or as Dr. Yunus said at the time,‘take the tension out of microfinance’ and yet have a clear accountability, sothat you can bear with the fact that sometimes things don’t go as planned.”

—Alex Counts,Grameen Foundationa

Grameen IThis system of delivering credit was one that involved poor women taking loansfrom Grameen and undertaking the responsibility of other group members incase of a default or delay. All group members took their loans at the same time,and repaid over a period of 52 weeks with a fixed weekly sum for repayment.However, the 1998 floods in Bangladesh made amply clear the “internal weak-nesses in the system,” asYunus says.The main weakness was the rigidity in thelending scheme.The repayment for a fixed schedule was the same for everyoneand could not be altered: “Once a borrower fell from the track, she found it dif-ficult to move back on,” and this meant that opportunity for future loans wasendangered.Repayments began to decline sharply in 1998, and Grameen II wasin response to this, with its main “weapon” being greater flexibility.

Grameen IIIn 2000 Grameen Bank initiated a major revamp of products and services withthe understanding that customers’ credit needs have been evolving and thatcredit alone is not sufficient to meet the needs of the poor. Among the mostimportant changes were those made to the products:

• Mobilizing savings from the general public and not only Grameen customers.

• Increased flexibility in savings products—no group savings products, flex-ible personal savings, commitment-based pension product, and so on.

• Loan contracts were flexible with a wider range of products, variableterms, and repayment schedules. [Also included were] larger loans forbusiness, a top-up loan facility, and introduction of rescheduling of loansin case clients are in difficulty.

While the Centre Managers work closely with the clients and determine theproducts that they should have, as product knowledge is spreading Grameenmembers are increasingly gaining control of this aspect.The role of the manageris evolving from being a “teacher” to an “officer who supplies information andfinancial advice to clients who themselves determine the products and servicesthey require.”

Source: Adapted from MicroSave Briefing Notes #1 and #8 on Grameen IINote: a. Personal correspondence.

Box 2.5 The Experience of Cashpor, India inMobilizing Savings

In India, MFIs are not allowed to raise public deposits, so in order for en-tities like Cashpor to facilitate saving services they have to be listed as a “busi-ness correspondent” of a bank, whereby the MFI acts as the bank’s agent,representing the bank’s products and services to the customers in exchange fora small fee.

Cashpor is strongly of the view (corroborated by the market research thatGrameen Foundation has undertaken) that there will be a good demand for“commitment” saving products with doorstep service, given customer prefer-ences and their income flow patterns. As of now,Cashpor has not started of-fering the saving service but is in discussion with various banks. However, as abanking correspondent,Cashpor does not have the freedom to independentlydevelop its products, except that it can influence decisions of the bank.

Source: Santosh Daniel, Grameen Foundation (working with Cashpor to support development of sav-ings products)a


cope with an unanticipated problem, other financial services may be more ap-propriate or complementary to credit.

Savings are a low-risk way to better manage the resources that you have.While the appropriate balance between credit and other financial services maybe debated, clearly savings have an important role in meeting day-to-day fi-nancial needs and for coping with emergencies. Yet most institutional micro-finance focuses primarily on credit, with savings mostly confined to compulsorysavings that act as a substitute for collateral rather than serving a useful func-tion for clients. While the need for savings is understood, a tension exists be-tween our understanding of client needs and the services MFIs are able to offer.Savings are more tightly regulated and less profitable for MFIs, so significantchallenges arise when providing access to this service (see Box 2.5).

In addition to savings and credit, other financial services such as insuranceand remittances are also important tools for poor people’s financial manage-ment. Insurance when well structured can help clients cope with emergencieswithout damaging their livelihoods, and remittances are a crucial lifeline formillions of the world’s poor. Again, access to these services alone is insufficient,and attention needs to turn to their design and delivery to create value. Women’sWorld Banking, for example, highlights how microinsurance can be designedwith the specific needs of poor women in mind. Poor women have traditionally


managed risk in very risky ways: by relying on their husbands, pulling childrenout of school to work, or selling productive assets such as livestock or equip-ment. Gender-sensitive microinsurance might cover ill heath due to maternityor childbirth, or give women the choice of selecting another beneficiary if theydo not think their husbands will protect the children properly after the woman’sdeath. In Colombia, one company’s life insurance pays monthly benefits thatcan be used for the purpose of educating the children for two years after thedeath of a parent, in order to reduce the pressure on the surviving parent topull children out of school.47

Community-based savings and loans. In most communities, informal savingsand credit groups exist that serve as an important tool for financial manage-ment. Groups focus on building up relatively small amounts of savings that canbe lent out to the group, and help people manage anticipated and emergencyneeds for money. A number of organizations have developed community-basedmodels of microfinance that build on traditional savings and credit groups. Thegroups, when they are properly trained, build in flexibility; the loans are smallenough for the clients not to get into trouble, and all the profits return to themembers as each member builds his or her own savings account.

While savings groups are generally supportive and loan terms are flexible,savings are locked in for a predetermined cycle, rather than accessible whenneeded. Interest is paid back to members (rather than covering the costs of anMFI), but stronger members often become net savers (and, on balance, benefit)and weaker members become net borrowers (and, on balance, pay interest). Inaddition, as the money is shared out among the group annually, the groups donot build up money over time, and thus are not terribly good at building upsufficient capital for investment in enterprises or longer-term needs for life cycleevents such as weddings or funerals. Lauren Hendricks of CARE reports, “Inmy experience, mature VSLA groups frequently start to request additional, moreformal financial services in order to meet some of the shortcomings of savings-led groups.”48 This creates an opportunity to build linkages between thesegroups and other financial institutions. For example, in India the self-help grouplinkage program provides capital from banks to self-help groups that meet cri-teria demonstrating the viability of their financial systems.

The strengths of community-based microfinance in mobilizing savings andproviding an institutional model that does not push credit clearly represent oneaspect of the solution to the challenges in microfinance. Somehow, we have tocapitalize on the good of encouraging savings and self-management while in-creasing flexible access to these savings. Thus, it would seem that both the creditand savings-led approaches have strengths and weaknesses when analyzed froma client perspective, and lessons result from both models.


Box 2.6 TheValue of the Internal Savings Fund (Finca Peru)

Finca Peru includes compulsory savings,which act as security for the MFI.There is also an internal group savings account.As of February 28,2011, Finca’sloan portfolio was US$3,920,804, while member savings were US$4,064,987.From the savings around 70% is lent as internal account loans. Iris Lanao Flores,executive director,describes the internal account as a complement to the Fincabusiness loans. Internal fund loans are flexible,with members choosing the num-ber and regularity of installments, and can be used for any purpose, allowingmembers to better overcome emergencies, improve housing conditions,and ed-ucate their children. Interest rates for internal and Finca loans are the same, al-though at the end of their loan cycle internal interest is paid as dividends relativeto the amount of savings each member has.

There are financial pressures on Finca Peru in maintaining the internal fund,however.The institution’s staff track the groups’ internal savings and loans, acostly undertaking for around 16,000 clients.Field staff manage their own port-folios as well as supporting the solidarity groups to manage their internal funds,and as Flores says,having both Finca Peru loans and group loans available means“we don’t need outside competition,we have it within.”

Flores does not see this as a disadvantage—quite the opposite:“The costsare very high but . . . we have been self-sufficient both operationally and finan-cially since 1998. ROE is more than 10% so we can invest on expansion in themost remote rural areas in the poorest areas of the country. During our life-time, we have stubbornly maintained our methodology for empowerment,usingmicrofinance as a tool.”

Source: Iris Lanao Flores, executive director, Finca Peru

Some models seem to fuse the strengths of each approach. The originalmethodology for Village Banking, for example, used extensively in Latin America,included the establishment of an internal savings fund that could be used tomeet anticipated and unanticipated needs through loans to group members.This approach complemented the larger working capital loans that the micro-finance organization provided. While this plan seems to provide an ideal com-bination of financial services, the internal fund was gradually withdrawn bymost MFIs as it was seen to be costly to facilitate and competed with the MFI’sexternal loans and therefore undermined theMFI’s financial sustainability. SomeMFIs such as Finca Peru have retained this internal fund (see Box 2.6).

Guy Vanmeenen of CRS cautions, however, against overoptimism in theselinkages, and highlights the value of giving people access to a range of different


services, rather than trying to provide for all needs in one model: “Financial in-clusion is about having as many different types of products and services as pos-sible to everyone in rural areas, to the poor. One of the dangers is that . . . peoplesay, can we do more, can we add on more, can we make it more than it is? Wehave to be humble and be clear on what the limitations of this are. You don’tnecessarily have to address the limitations.”49

AddingValueThrough Nonfinancial Services

The basic spirit of microfinance is to search for possibilities based onknowledge, understanding, and perspectives that start at the groundlevel. We understand our clients and their needs. There is no reasonwhy we cannot use those same skills to address the other constraintsour clients face.

Fazle Abed, BRAC50

There is much debate about whether MFIs should or should not provide non-financial services. SomeMFIs recognize the true potential of microfinance as onlybeing realizedwhen the opportunities to link or integrate a wider range of servicesare taken. BRAC, one of the world’s largest NGOs, typifies this logic: “In BRACwe saw that many women were stuck in low-return activities. We saw that manywere involved in poultry but were not making much money because of diseases.So we trained a person in each village organization to do vaccinations, treat basicdiseases, and train in proper feeding and hygiene. These people get paid for theservices they provide to the women who raise chickens” (Fazel Abed, BRAC).51

Others argue that MFIs should focus on the things they do best—deliver-ing financial services—and concentrate on improving them. Carlos Danel ex-plains the approach of Compartamos: “As an institution, we realize that otherservices are important and that microfinance is not a panacea. Other services areneeded to drastically change lives of people below the poverty line. But these wecannot do.”52 Clearly there will always be opportunities to do more to createsocial value for clients, and there must be a balance struck between undertak-ing additional activities for social reasons and the viability of the business. Yet,it is not a question of whether anMFI chooses to provide financial services, buta practical question of their capacity to respond to clients’ needs. There may beopportunities or limitations to providing both financial and nonfinancial services.

The infrastructure of microfinance with outreach to millions of people,often with regular meetings, creates a huge potential to add value: integratingor partnering to create access to nonfinancial services such as financial educa-tion, business training, health education, or legal and rights-based services. By


starting with an understanding of the client and her needs it becomes clear hownonfinancial services can complement financial services and create benefits forclients and MFIs:

• Investment in an economic opportunity and productive assets.While anappropriate loan might be important for a microenterprise, it may be thatbusiness training, marketing, or access to high-value products would in-crease the likelihood of success in terms of growth and profitability. Asupportive group might also be an important contributor.

•Managing for anticipated financial needs. A range of affordable and ac-cessible savings and credit products may assist clients in meeting theirneeds, but financial literacy training might enhance outcomes.

• Coping with emergencies. Similarly, while savings, insurance, or emer-gency loans may help reduce client vulnerability to emergencies, other in-puts could also reduce the likelihood of problems, such as facilitatingaccess to health services and establishing well-formed and facilitatedgroups that are likely to support one another in times of crisis.

•Other social benefits. Other outcomes pursued by many MFIs—such aswomen’s empowerment and improvements in health, housing, or educa-tion—are all much more likely to be achieved through a combination offinancial and nonfinancial services. Groups, for example, have the po-tential to create benefits such as increased confidence, strengthening ofsocial relationships (in the family and community), and empowerment.These outcomes are mediated by the nature of specific groups, and de-pend to a large degree on the relationship with MFI field staff. Micro-finance can also help right power inequalities between women and men,but not without “a clear commitment and strategic approach to ensuringthat it does.”53 These might include awareness, literacy, and related skillsdevelopment or strategies to affect men’s behavior toward women withinthe household and local community.

Business Models for CombiningFinancial and Nonfinancial Services

In some cases—such as the BRAC example—a social business model may beable to sustainably deliver nonfinancial services. In others, some nonfinancialservices may be integrated into financial services. Many organizations, for ex-ample, provide support such as business skills training, marketing, or provision ofhigh-value products. In Tunisia enda inter-arabe, for example, includes business


Box 2.7 Freedom From Hunger:Meeting Client Needs toAvoid Loan Dispersion

In giving loans intended for businesses which are in fact used by clients ona variety of other pressing needs, MFIs risk potentially overindebting theirclients.The issue,however, is not one of clients using the loans“incorrectly,” butof MFIs not adequately meeting client needs. Freedom From Hunger has beenworking with a number of MFIs to address this issue, particularly in relation touse of loans for health needs.

Though there are a large number of reasons for clients to default or dropout, one of the most common is ill health, either of the client or family mem-bers. Sickness impacts those living in poverty particularly hard.A recent studyin Ghana indicated that the cost of malaria treatment represented just 1% ofwealthy families’ income but 34% of poor households’.a The natural responseone would think when faced with such pressures is for households to divertloans intended for other uses—microenterprise, for example—to urgent healthexpenses. This is corroborated by research carried out by Freedom FromHunger at five MFIs,which revealed that large proportions of clients resort tousing business loans for health-care expenses, ranging from 11% of clients atRCPB in Burkina Faso to 48% at Bandham in India.b

Freedom From Hunger has shown that providing clients with appropriate“microfinance plus” health services potentially allows clients to meet theirhealth needs as required, enabling clients to be more successful—less likely todefault and drop out—and the MFI to benefit not only from meeting its socialmission, but from improvements to its bottom line.

In addition to“impressive net social value creation,” the research concludedthat the combined products make good business sense.Health protection prod-ucts tested included health education, health savings, health loans, health microinsurance, linkages to health providers, and the sale of health products in ruralcommunities. Some of these products are expected to break even and evenbegin earning net profits in coming years, and other non-revenue-generatingproducts (such as education) may soon cost less due to economies of scale.

Notes: a. M. Reinsch, C. Dunford, and M.Metcalfe,“The Business Case for Adding Health Protection toMicrofinance,” Freedom From Hunger, June 2010, 3.b.A. Kobishyn, “Opening the Black Box: How the Poor Use Credit in India,” Microfinance Insights 12(May/June 2009).

development services as a core product: “We have information and discussion‘circles’ (on a wide range of subjects about business and social matters). . . .This contributes to an atmosphere of confidence among the clients and assiststhem in using their loans wisely.”54


Box 2.8 Integrating Client Feedbacka

Over the last decade,Opportunity International has conducted more than50,000 face-to-face surveys with clients inAfrica,Asia,Eastern Europe,and LatinAmerica.The research showed that clients want savings as much as they wantsmall business loans, and their input has aided the development of a wide arrayof financial tools—including agricultural finance and rural savings, crop andhealth insurance, school fee loans, and savings accounts—to improve the stan-dard of their lives while they work their way out of poverty.

Note: a. Personal correspondence from Opportunity Director

Other MFIs may decide that they do not have the capacity to diversify be-yond financial services, and they seek partnerships or linkages with other or-ganizations to deliver services that create synergies with their financial services.TRIAS, a Belgium MFI, works in this way: “We start at the level of organizedfarmers, and we analyze their needs with them, then we look for a partner mixwho can guarantee these services. This can be the MFI itself or another actor”(John Blieck, TRIAS).55

Listening to Clients

What separates legitimate microfinance is our interest in continuousimprovement to meet client needs. We sometimes err, but we should al-ways learn and improve. Being honest about our mistakes and openingourselves to criticism is part of the process.

Davis Broach, Relief International56

A characteristic of successful client-focused organizations is regular feedbackfrom and dialogue with clients (see Boxes 2.8 and 2.9). For example, enda inter-arabe integrates discussion circles into its methodology, holding regular groupdiscussions on a wide range of subjects about business but also about social mat-ters, as well as client and exit surveys: “For us, listening to clients and improvingour products, as well as introducing new products, comes naturally” (MichaelCracknell, enda inter-arabe).57

MicroSave has been a strong advocate for client-led microfinance and pro-vides numerous case studies of how learning from clients drives improvementsthat benefit the clients and the financial performance of the organization. Ser-vices better meet clients’ needs, and clients are less likely to take inappropriate


Box 2.9 Compartamos—Adapting Financial Products toClient Needsa

When researching its life insurance product,Compartamos discovered thatwhen a family loses a bread earner, negative family cash flow typically takesabout 1.8 years to recover.This included not only loss of income, but also theexpense associated with the funeral.There are limited possibilities to raise fundsquickly so an immediate loan is usually sourced from a moneylender or pawnshop, making the cost even higher. Compartamos designed a low-cost life in-surance product, but it was difficult to sell because of people’s unwillingness topay for a future event. So in focus groups they asked clients what would bemore appealing: lower the interest rate on their loan or build in life insurance(for US$1,250—an amount identified in the initial research to cushion theshock) and overwhelmingly they chose the life insurance option, and some vol-untarily paid an increased premium.

Note: a. Personal correspondence from Carlos Danel, Compartamos.

loans and become overindebted. The MFIs also experience increased growth,improved client satisfaction, and fewer problems. The potential market for ser-vices is also increased as MFIs are able to reach people in the agricultural sec-tor, more remote areas, or simply those who do not need an enterprise loan.

When listening to clients, organizations must be careful to think aboutwhose voices they are hearing. Women and men often have different needs; vul-nerable clients are less likely to participate in focus group discussions.

The point is highlighted by a client feedback survey at AMK in which 11%of clients raised problems with “small loan sizes.” The fact that AMK’s loan sizeis indeed the smallest in the local market led management to wonder whetherthe loans were becoming too small to fit the needs of clients. Segmentation ofthe data by the clients’ poverty level demonstrated that poorer clients were notcomplaining. As a result, group loan sizes were maintained at the same level,with individual larger loans for better-off clients (see Figure 2.2).

Balance and Flexibility

MFIs face constraints in terms of capacity, population density, infrastructure,and regulation, all of which determine what changes are possible for each or-ganization. A balance is important; rapid product diversification, or changes toproducts, can be as dangerous to clients and the institution as rapid growth andexpansion.


10%

5%

0%Small loan size

Poorer (n = 130)

Medium (n = 110)

Better off (n = 49)

Figure 2.2 AMK Client Satisfaction Data Segmented by Client Poverty Level

Source: SPM in Practice: AMK (Cambodia), Imp-Act Consortium,2008,www.Imp-Act.org.


A focus on building clients rather than building institutions enables an or-ganization to identify opportunities for change. It is a journey, a process of con-tinuous learning and improvement, and MFIs can do many relatively smallthings to improve their services and create more value for their clients. As a firststep, it is about ensuring that services are accessible, timed to fit with people’sneeds, and above all do not have negative impacts.

Even where an MFI understands what clients need, there may be internalprejudice and resistance, making change harder to achieve. When GrameenBank changed to a new operating system that allows clients greater flexibilityto reschedule loans, motivated by an understanding of the impact of emergen-cies such as illness and natural disasters on clients’ ability to repay, the changeprovoked strong reactions from staff convinced that this level of flexibilitywould lead to the breakdown of group solidarity and widespread repaymentproblems.58 This sort of resistance may help explain the relative lack of progressin building more client-focused MFIs.

It is perhaps worthwhile to end this section with a note of caution from arespondent to my survey for this chapter: “If MFIs started with the premise ofat least doing what they set out to do well, then perhaps they could explorebroader areas. But currently, given that the vast majority cannot even offer afairly priced and efficient loan to clients for productive purposes in a sustain-able manner, perhaps this should be a priority. Learn to walk before running”(anonymous).


PROTECTING CLIENTS FROM HARM:RECOGNIZING CLIENT RISK ANDVULNERABILITY

IN REGULATION, GOVERNANCE, ANDSYSTEMSTO PROTECT CLIENTS

This is a scary moment for the industry with its root cause being insuf-ficient systems for tracking client indebtedness, unfettered competition,irrational growth expectations, and little analysis and understanding ofthe client’s ability to repay.

Siddhartha Chowdhury,ACCION International country manager, India59

It is important to recognize that, as well as creating value, microfinance also hasthe potential to harm its clients. This section focuses on how MFIs design theirproducts, services, and systems based on a recognition that illness and otheremergencies are commonplace in the lives of poor people. By protecting andhelping clients come through these problems,MFIs can significantly improve thechances of achieving significant positive changes in the lives of their clients.

Responsible Finance

The profits that some microfinance organizations and their investors are mak-ing, combined with the experience of client overindebtedness and coercive col-lection practices, has led to a lot of debate about responsible finance. From aclient perspective, a number of key elements can be defined. These are reflectedin the client protection principles promoted by the SMART Campaign, an in-dustrywide initiative supported by over 1,000MFIs.60 In this section I highlightthe vulnerability of microfinance clients and the risks that credit in particularcreates, and focus on three key elements of responsible finance reflected in theseprinciples:

• Avoiding overindebtedness

• Appropriate collections practices

• Transparent and responsible pricing

Avoiding Overindebtedness

A fewmonths ago I was in Nicaragua visiting a branch office of a localnonprofit MFI. The offices were stuffed with a crazy assortment of

household appliances. Loan officers’ desks were wedged between re-frigerators and stacks of radios and microwave ovens. It turned out thiswas all the stuff the “pro-poor nonprofit” organization had taken fromthe homes of the poor.

Aaron Ausland61

For clients, overindebtedness reflects the risk of credit and relates to an experienceof someone who is “continuously struggling tomeet repayment deadlines and re-peatedly has to make undue sacrifices to meet his obligations.”62 While this def-inition makes intuitive sense it raises a host of questions, such as, “If a clientchooses to take a loan knowing that she will have to make significant sacrificesto make her obligations, should the MFI have not granted her loan?” For exam-ple, microfinance clients I interviewed in Haiti sacrificed food purchases to makeloan repayments, with the knowledge that their investment in a business wouldgenerate future profits and improve their well-being in the longer term.

From an MFI perspective, overindebtedness translates into client delin-quency is measured by portfolio at risk (PAR). But from a client perspectivethere is often great stress that is not translated into repayment problems. PARis a very insensitive indicator, and is also driven by many factors. A high port-folio at risk may help an MFI recognize that it has a problem with overindebt-edness, but it does little to help anMFI recognize in advance when the problemis occurring. For group lending in particular, PAR is usually only captured whena group fails to complete a payment rather than when an individual within thegroup fails; thus, default only rises when clients are very highly stressed. InIndia, for example, low PARs are used to argue against overindebtedness in thecurrent competitive context.

While multiple loans are often seen as an indicator of overindebtednessfrom a client perspective, these loans may be very logical when the clients’ needsare not being served by any one institution. Bobbi Gray of Freedom FromHunger writers, “A client can appear overindebted with the one loan they haveand then there are those who have five loans, and they’ll indicate they are all fordifferent purposes and they are just proud they are not having to borrow fromfriends or family.”63 Access to formal financial services may also lead to unex-pected outcomes, with access to a loan from anMFI increasing people’s credit-worthiness and therefore leading to increased borrowing frommoneylenders.64

This example serves to demonstrate the complexity of informal financial mar-kets and people’s livelihoods.

Overindebtedness is created where responsible lending goes wrong, or by ir-responsible lending where one or moreMFIs provide loans that exceed a client’scapacity to repay without significant sacrifice. Four elements are key in avoid-ing overindebtedness:


• Structuring products and services to ensure that they are appropriate fortheir purpose and cash flow.

• Building in measures to help clients cope with emergencies when theyoccur.

• Responsible lending that assesses capacity to repay and does not pushcredit or mis-sell other products.

• Supporting clients via financial education helps them to understand therisks and obligations related to borrowing.

The first step in avoiding overindebtedness is to ensure that products andservices are well suited to client needs. As discussed in the section on client value,financial services have an important role to play in helping people reduce theirvulnerability and manage risk. Credit needs to be designed with this in mind,and poorly structured it can serve to increase risk and vulnerability rather thanreduce it. Savings, insurance, and remittances are all important managementtools that can be useful when things go wrong.

Good client feedback mechanisms are important practically forMFIs to en-sure that clients receive appropriate loans and that information comes back tothe MFI if problems are encountered. As previously discussed, there is a com-mon mismatch between theory and reality, with MFIs lending on the assump-tion that a loan is productively invested in a business, even when this is notoccurring. The story in Box 2.10 illustrates how easily clients can get into acycle of debt where the availability of repeat loans can create a cycle of bor-rowing that does not necessarily benefit the clients.

Another source of overindebtedness is inappropriate or excessive lending byMFIs. This situation arises when insufficient checks are made on a client’s ca-pacity to pay, or when multiple lending makes these checks ineffective.Assessing capacity to repay.A number of people I interviewed highlighted the

importance of MFIs having some form of assessment of capacity to repay (seeBoxe 2.11). Individual lenders, particularly those lending to businesses, oftenconduct interviews with individual clients to assess their business strength, assets,income sources, or cash flow. However, this approach is time-consuming and re-quires skills on behalf of field staff. These steps are thus more suited to individuallenders working with relatively high-value loans. Similarly the use of credit bu-reaus has significant information requirements andmay be costly for theMFI ordifficult to establish in many markets, due to a lack of client identity documentsand other formal information that may make the system difficult to operate.Group screening.Most group-based lenders rely on peer screening to assess

capacity to repay. Where MFI staff are not able to do effective assessment of


Box 2.10 The Cycle of Debt and Borrowing

“I was visiting an MFI where in addition to their group loans, clients were per-mitted to take complementary loans.Of a group of 20 to 22 women, 14 ofthem had these individual complementary loans and they were all due at themeeting I was attending.The MFI had decided to slow down the comple-mentary loan program because PAR was rising.

“When they were informed that they could not get new loans on thatday, suddenly no one had the money for their payments—even though min-utes before everybody had nodded yes that they have their payments.Aftermuch heated discussion, it became clear that many of the women had sim-ply borrowed the money that they needed for repayment from anothersource,planning to get a new loan and repay the person they borrowed fromon the same day.When they learned there would be no more loans, it wasas if the music had stopped during musical chairs and everyone was leftwithout a seat. It was an extraordinary thing to watch.”

Lisa Khun-Fraioli, Freedom From Hungera


client capacity, then it is important for the MFI to take active measures to buildclient understanding, group control, and responsibility for the lending process.Solidarity groups, for example, must verify that other client loans are affordableand commit to covering their repayments in the case of default. Lisa KuhnFraioli describes the experience of Freedom From Hunger, which emphasizes astrong client-led evaluation process as a critical part of group lending: “Whengroups are formed, clients are taught a simple evaluation methodology to assessinvestment opportunities, capacity to pay, and risks. This is usually comple-mented with ongoing financial education that teaches clients about budgetingand estimating their capacity for indebtedness.”65

However, in reality many organizations have reduced the role of solidarityin their group lending, and effectively are lending to individuals within groups,using security such as high compulsory savings or in some cases collateral inplace of joint liability. Screening by clients is often ineffective, with peer pres-sure affecting loan sizes that are approved. Thus, this area is a particular chal-lenge for group lenders, where detailed individual assessments are not possiblegiven the productivity levels of field staff.Mis-selling.With increasing concern over interest rates, MFIs are seeking

other ways to generate profit. A narrow focus on profitability and limited client


Box 2.11 CreditAssessment at Swadhaar

Swadhaar (India) uses a two-part evaluation to determine whether to lendand the amount to lend a prospective client. First, the loan officer (LO) deter-mines whether to underwrite the loan based on whether a group is willing totake the responsibility of its members. Second, an LO estimates a client’s ca-pacity to pay based on sources of income, by asking a series of questions dur-ing the group meeting itself. For business clients, LOs evaluate and crosschecksales, and for salaried clients, LOs verify the stability and amount of income bydoing an employer reference check. LOs use a loan matrix to determine re-payment capacity based on the client’s income.This loan matrix takes into ac-count a client’s historical repayment behavior, as well as feedback from otherclients and field staff.

To check overindebtedness of its clients, Swadhaar captures data on itsclients’ borrowings and has signed up with a credit bureau to track a client’scredit history with other microfinance institutions.

Swadhaar also conducts financial education, covering topics such as budg-eting, managing cash flows for emergencies, and large planned expenditures.

Source: Shweta Pereira, chief manager, credit and riska


focus can lead to the pushing of inappropriate products and mis-selling of otherfinancial services. Many organizations, for example, bundle credit life insur-ance with their loan products. This purports to be a benefit for clients, but pri-marily serves to protect the MFI from default by paying off the client’s loan totheMFI; premiums are often excessively high. The recently launched Social Per-formance Indicators for micro insurance go some way to address this.66

Responsibility to avoid overindebtedness also lies with clients. Given thelow levels of education and financial literacy of microfinance clients, MFIs havea responsibility to ensure that clients fully understand the risks and obligationsof credit. Clients should also be well informed about the service that they shouldexpect, or field staff can take shortcuts or push inappropriate loans or otherproducts. The following quotes from clients of a Bolivian microfinance institu-tion, CRECER, further underscore this point.

“My children became CRECER borrowers when they moved to town, but[taking out a loan] is not for everyone because some don’t know how to usemoney and so it gets them into trouble,” said Juana, age 53. Julia, age 46, in-dicated that “taking out a larger loan to me means success, but more debt alsodepends on if you manage your money well.” Elsa, age 59, shared, “If you need


money, CRECER is good. But you must also know how to administer themoney well or it can be bad.”67

Opportunity International, for example, an international organizationworking in more than 20 countries, sees investment in financial literacy as acritical component: “Clients are better empowered to make informed financialdecisions and to exercise those decisions with confidence.”68

WhenThings GoWrong

Zero delinquencies have always concerned me because that’s not quitehow the world works. Businesses are sometimes unable to generate thecash flow to make a payment. Given that we know that that’s the case,if people are making payments, how is that happening? Who’s actuallypaying for these businesses? What are they drawing down?What pres-sures are being brought to bear?

Alex Counts, Grameen Foundation69

Even if an MFI takes care not to overindebt its clients, things can go wrong forclients, and their debt can become burdensome. One of the defining features ofpoverty is the inability of poor people to copewith the inevitable problems that lifethrows at them. Increasing emphasis on savings and, to a much more limited ex-tent, insurance and remittances builds client resilience and provides the means torespondwhen things gowrong.However, credit leaves clients in debt, and thewayin whichMFIs respond to this vulnerability in the services they offer and in delin-quency management makes a huge difference to their social outcomes. These is-sues are critical considerations for MFIs that seek to be responsible lenders.

Contractual Obligation or Flexibility?Striking the right balance between a client’s contractual obligation—and the fi-nancial viability of an MFI—and a need to protect clients from harm is a criti-cal point. Many MFIs take a zero-tolerance approach to delinquency, arguing,for example, “The practice of banks and MFIs realizing security in the devel-oping world happens for the same reasons that banks pursue these remedies inthe developed world—to contain credit losses and to maintain a sense of com-mitment and discipline in their borrowers.”70

Microfinance, however, is not the same as formal-sector banking. Clientsare more vulnerable and less financially literate, and the information availableto assess capacity to repay (credit bureau, employer reference, and so on) is farless reliable in the informal sector. In addition, most MFIs work in contextswhere the social safety nets such as those in Europe or the US are not present.


Box 2.12 BranchAccountant in MFI Branch, India

Zero PAR is the most important criterion on which our branch is judged,and thatis why all/most of our branch staff go to any defaulting/potential defaulter’s house onthe same day and try and get the payment.To us, Zero PAR is simply about ensuring100% on-time repayments always, and if we cannot get it from clients, we have tomake over the delinquent payment from our resources and then recover from clients.Our institution will not accept anything less than 100% on-time repayment, and ourincentives are tied to not only loan disbursement but also 100% on-time recovery.

Source: Ramesh S. Arunachalam,Microfinance India blog, December 27, 2010, www.microfinance-in-india.blogspot.com

It is impossible forMFIs to assess risk to the same extent as formal banks; there-fore, it is important that responses to genuine client problems are more flexible.However, many MFIs have rigid systems that do not take into account clients’vulnerability. When things go wrong for clients there is no flexibility on the partof the MFI. Without resources to draw on, clients have to resort to selling as-sets or borrowing money from money lenders to repay.

When I fell seriously ill (due to pregnancy) and the medical bill came upto 25,000 FCFA, I got a loan in the amount of 70,000 FCFA. After thesecond reimbursement, however, I could nomore keep up with those re-imbursements. I therefore asked the program officials to offer me agrace period so that I could pay my debt off. But they refused, arguingthat other women might do the same thing in order to escape theweekly reimbursements. When he heard about the situation, my hus-band managed to find the amount remaining to be paid and then askedme not to participate anymore. He thought that the program is notmeant to protect people from shame; rather the opposite.71

The line is often very fine between a response that resolves issues, helpingclients recover and remain with the MFI, and one that may succeed in achiev-ing repayment but leaves the client worse off. Credit programs that apply zerotolerance with little flexibility risk harming their clients. Most MFIs see delin-quency management as being critical to success, and send out a strong messageto staff that late payment should not be tolerated. This approach is supportedby incentive schemes that often drastically cut payouts to staff should the port-folio at risk rise above quite a low level (see Box 2.12).


Covering Up Problems in GroupsThis issue is particularly common in group lending where group solidaritymasks problems and high repayment rates can be achieved despite severe neg-ative experiences by individual clients.

Clearly, it is important to recognize that the group mechanism is very frag-ile and that manyMFIs quite rightly fear that the whole group or many groupswill stop paying if theMFIs start granting some clients tolerance. This very realrisk has to be managed as anMFI seeks to find a more compassionate solution.CARD in the Philippines, an MFI with over a million clients, has successfullymoved away from a zero-tolerance approach. Annie Alip of CARD explains,“We held dialogues, branch by branch, with those who were having repaymentdifficulties, and came to agreements with the most convenient way for them torepay. Surprisingly, many came to these dialogues, proving that many clientswere not willful defaulters; it was just life happened, they were vulnerable andthey did not have safety nets.”72

Appropriate Collections Practices

The pressures on me are so high and it is impossible to move at thevery fast pace of growth all the time. I worry what will happen if peo-ple do not pay back loans as I know their income stream is weak andunpredictable.

Indian MFI branch manager73

While the need to ensure repayment and low portfolio at risk is core to the suc-cess of microfinance as a business, care needs to be taken not to incentivize staffor clients to use coercive methods to collect repayments. It is also essential torecognize that when things go wrong in the lives of clients, and they are undersevere financial strain with none of the safety nets common in the Westernworld, applying strong pressure to repay can be damaging.

Avoiding Coercive Behavior by StaffThere was strong support among practitioners I consulted for the assertion thatdeterioration of relationships between staff and clients in many organizationsis leading to a mismatch between client needs and services delivered, poor com-munication and transparency, and inappropriate collection practices by staff.

Pressure on staff to ensure high repayment rates often creates an overbear-ing or coercive approach from field staff—often male staff and female clients(see Figure 2.3). In the worst cases we see MFIs that achieve a 100% repay-ment rate through practices such as holding clients in a meeting until all moneyhas been collected; clients with repayment problems leave the meeting to “find”


Figure 2.3 Times of India Account of the Kidnapping of an MFI Customer’s Child

the money and return after an hour or so. Where does the money come from?Perhaps from savings or from a friend, but more likely a money lender or fromselling assets. Organizational incentives do not ask this question, but rather justfocus on whether the money is repaid regardless of how it is repaid.

Concern over perceptions of coercive behavior of staff toward clients isgrowing, and has led to the adoption of appropriate collection practices as oneof the SMART Campaign client protection principles,74 whereby organizationscommit to ensuring that “debt collection practices of providers will be neitherabusive nor coercive.” The principle needs to be interpreted broadly, and callsfor awareness of the experience of clients. For example, in Uganda rural womenwere quite sensitive to the attention the loan application process could drawfrom neighbors. They felt that this was humiliating and a violation of their pri-vacy. “When the photographers come to take pictures and assess what you own,other people sit there commenting that you’ll fail to pay the loan and you be-come the laughingstock,” said one woman respondent.75

Sometime ago I heard about a team of market researchers in Uganda whowere talking to clients of an MFI about what they liked and disliked about theservices. The clients responded angrily about their treatment at the hands offield agents: “They are devils. . . . All they care about is getting their moneyback.” This story from one of the most competitive microfinance markets isextreme but not atypical. In my own work I have seen MFIs in different con-texts where to a greater or lesser degree the focus of the organization on thepracticalities of getting loans out and getting them back has led to a weak rela-tionship between field staff and clients. Now, when I talk to clients I often usea devils-or-angels voting scale (see Figure 2.4)—asking clients to indicate where



Figure 2.4 Devils-or-AngelsVoting Scale

their field agent sits on the scale and then using this to stimulate discussionabout client service and organizational products/services and policies.

A Problem of ImplementationOrganizations that have signed up to the SMART Campaign principle have es-tablished codes of conduct, and may collect information from clients through in-ternal audit department interviews with clients or client satisfaction surveys.However, where the organizational culture and incentives emphasize growth inclient number, productivity, and portfolio at risk, field staff are likely to take short-cuts, and managers concerned with their targets turn a blind eye. A quote from aformer regional manager from anMFI in India aptly sums up the situation: “PostKrishna crisis, the same issues were discussed and many MFIs said that theywould focus on the people; but see what happened? Code of conduct documentswere said to enhance client focus but they hardly got implemented on the ground.In reality, we are doing non-client-oriented things that we were always doing—yet we are claiming to be working on client-focused microfinance.”76

The experience of a number of countries has been that those MFIs that arefocused on their clients, and where there is a positive relationship between staffand clients, do better at times of crisis (see Box 2.13). It seems that the shift inclient focus is often accompanied with a change in client perception of the or-ganization. For example, in the context of recent protests and fire-bombing ofSKS offices in India, a former area manager reflects on the difference betweennow and the early days of SKS: “One time the local communist party threatenedto close our offices because we would not hire their nominees. In response, ourclients surrounded their party office to tell them to leave SKS alone as it was pro-viding a valuable service. . . . Where have those days gone?”77


Changing RelationshipsWith SavingsA number of people have reported an interesting shift occurring in organizationsthat start mobilizing savings. The nature of relations between staff and clientsoften strengthens. Credit creates institutional incentives to focus on repaymentand to keep the client borrowing rather than client needs. Savings, on the otherhand, produces incentives that are more focused on serving the clients. PaulArias Guevara, for example, relating the experience of Credifé in Ecuador, de-scribes how things have changed since they started offering savings two yearsago. More education is needed for clients, and field staff require more salesskills and time to be able to offer savings products; there is a change in philos-ophy that they need to communicate to clients: “When you are training some-one to sell credit you emphasize the fact that you need to see if the person hasthe correct cash flow to pay the credit, but when you train a person to sell sav-ings you need to introduce in them the concept of why savings are importantfor a person, for their future sustainability, perhaps to make them less vulnera-ble. . . . The difference is not about the time that they take in the trainingprocess, but about the sense, the philosophy that you’re educating.”78

Ensuring Supportive RatherThanCoercive Behavior by Group MembersGroup members can be an effective support mechanism at times of crisis: “Theother women in the group are kind and helpful to each other. For instance, oneof our members just lost her husband. We are all contributing a small amount

Box 2.13 Client–Staff Relationships in India

Many seasoned observers would argue that effective and sustainablemicrofinance is built on the relationships between client and institution.Thisencompasses not just the relationship between the front-line credit officersand their groups, but also the depth and diversity of the product relation-ships. In simple terms, if a client is getting a loan that somewhat meets herneeds, she will be somewhat committed to repay it.Whereas if she is able toaccess a range of financial services that meet a broad spectrum of her needs,delivered by staff with whom she has a deep relationship of trust, she willmake all possible efforts to repay any loans outstanding—in order to main-tain that valuable relationship.

Source: “Microfinance in India: Built on SalesTargets or Loyal Clients?” Microsave India Focus Note 42,http://india.microsave.org/briefing_notes/india-focus-note-42-microfinance-in-india-built-on-sales-targets-or-loyal-clients.

Box 2.14 Role of Groups in Mediating Outcomes forClients—Case Study From Malawi

On a recent visit to an MFI in Malawi I visited two groups,one that seemedto be performing well and another that had experienced frequent repaymentproblems. I was keen to understand to what extent the groups supportedclients who faced problems,how their responses in times of client crisis differed,and what this meant for the clients involved.

The first group was the one identified by loan staff as struggling with re-payments on a number of occasions. A client was missing from the meeting,and the client’s payment was missing.Group leaders explained to me that theydid not know the reason that the member had not paid,but they would pay forher and then go to the client’s home, seize assets, and sell them to cover theiradditional repayments.

The second group also had an absent member without payment. Havingspoken to clients it became clear that there had likewise been some problems,but the group had found solutions among themselves and the issue had not es-calated to a point where loan staff needed to be involved. In this case the lead-ership told me that the member was in the hospital, and that they would payfor her,and after the meeting would also visit her house . . .but would offer sup-port and find out how they could help the client to overcome her problems.

to the family to help them” (microfinance client).79 However, joint liability canalso motivate group members to ensure repayment. We cannot assume that justbecause clients repay their loans and come back for more that everything is allright. Negative examples are common, and in my experience talking to fieldstaff, coercion by group members to ensure repayment is widespread. In a re-cent training I gave with East AfricanMFIs, for example, one participant relatedthe experience of clients demolishing then selling the materials of another’shouse to cover her unpaid loan installments. The example in Box 2.14 high-lights the important role that the groups play in mediating the outcomes forclients. This relates both to the process of screening loans to ensure they aregranted on the basis of capacity to repay, and responding to problems in a sup-portive rather than coercive way when they occur. Though the MFI might haveclient protection policies in place at an organizational level, this clearly showsthat what happens at the client level is key to determining outcomes for clients.

These issues are less of a problem in community-based savings groups. Thegroup has the option of taking an outstanding loan amount from a member’s


savings, but the peer pressure to repay and support of the group ensures that thiscourse of action is rare: “Members borrow from their own money. Thereforethe moral pressure to comply with repayment is high and the hazard of not re-paying is drastically reduced to the point where there is virtually 100 percent re-payment of loans made to members from group savings.”80

High levels of group support mean that the negative aspects of peer pres-sure are avoided, and this support is evident already at the group formationstage: “One thing that always comes out of any client satisfaction study . . . isthat this is a group that I can fall back on. . . . [It’s] a support group, a solidar-ity group. It provides me with a security net that I didn’t have before.”81

Transparent and Responsible Pricing

Smart, mature, and successful industries have learned that outrageousmarketplace behavior by the few invites governmental oversight of themany.

Frank deGiovanni, Ford Foundation82

What Is an Excessive Interest Rate?High interest rates in microfinance are generally justified by the high returns ofa loan invested in a petty trading enterprise with a daily or weekly turnover. Aloan taken at an APR of 50% to pay for school fees is another matter (even iftaken from a community organization where the interest paid is shared betweenmembers at the end of the year). It is important to recognize that many so-calledenterprise loans are in effect consumption loans, and are not invested in a busi-ness as intended.

The situation is complex and really needs to be understood in the contextof a particular loan type and the situation of the client’s borrowing. Certainlyhigh rates charged on longer-term loans are likely to be damaging, and the com-pounding of interest of loans for clients who are struggling is likely to exacer-bate their situation.

Transparency Is Clearly NeededWithout question, from a client perspective transparency on the cost of bor-rowing is essential. Clients need to be able to understand the full costs of bor-rowing, including the hidden costs of traveling long distances to branchoffices, mandatory savings, or the opportunity cost of time attending meetings.Transparency is not just about disclosure, but the communication of infor-mation in a way that is appropriate to the specific client group and that leads


to understanding. David Roodman at the Center for Global Developmentcomments,

ManyMFIs impose subtle fees that effectively raise interest rates. Somecharge one-time loan origination fees. Some require borrowers to de-posit a percentage of each loan amount with the MFI in a savings ac-count that pays interest at a rate lower than that on the loan. Someovercharge for credit-life insurance bundled with the loan. . . . MFIsmay also prefer to quote their rates on a monthly basis, hoping to ex-ploit borrowers’ ignorance of how a seemingly modest 6 per cent permonth compounds into 100 per cent per year.83

At a sector level, greater transparency on interest rates will help answer thechallenge of extortionate interest rates. To address these issues, MicrofinanceTransparency (MFT) has made significant progress in collating information ona country-by-country basis, which allows like-for-like comparisions of MFI in-terest rates, and therefore is a step toward defining what is reasonable in eachcontext. MFT also collects information that allows for comparisons of what anMFI provides for its costs—for example, in terms of rural outreach or value-added services such as integrated training. It is important that value-added ser-vices are not used as a way of hiding inefficiencies: “Lots of theMFIs who claimthey are doing value-added services don’t communicate the price of those ser-vices they themselves deem ‘value-added’ and because there is no knowledge ofprice, they often aren’t motivated to watch their internal costs and be as con-cerned about the price they are charging the poor as they should be.”84

In practice, however, the use and interpretation of this information tends tofocus primarily on the costs as presented by the APR. There is a danger that anarrow focus on the costs risks a race to the bottom where lenders that incurhigher costs due to a greater social focus may be penalized, and MFIs respondby targeting lower-cost clients and reducing costly value-added services.

In determining what is reasonable, it is surely important to consider whatis provided for the money paid; a quality service adapted to clients’ needs ismore valuable than an undifferentiated credit product. Quality bundled servicessuch as training cost more to deliver and may justify increased charges. MFI in-efficiencies or high profits for investors clearly do not justify additional interestpayments.

Regulation

The microfinance sector has demonstrated a singular inability to self-regulate, and the only hope is strict, enforced, external regulation,


which will be resisted by the entire sector, as usual, as this would leadto actually having to reduce prices and add value to the clients, twosimple factors which eradicate much of the profitability to the ownersand capital providers of the sector.

Hugh Sinclair, Micro Service Consult, GmbH85

From a client perspective, what is needed is regulation that ensures microfinanceproviders

• Are transparent about all charges including fees and penalty charges.

• Do not bundle services with excessive charges such as credit life insurance.

• Treat their clients fairly.

In most countries, microfinance has been self-regulating and allowed to setits own interest rates and systems—usually provided that savings are not mo-bilized—based on the perception that microfinance is a tool for poverty reduc-tion and development: “Micro loan borrowers operate their businesses in theinformal economy, free from governmental regulation and protection. No en-forceable usury laws, no consumer rights lawyers, no small claims courts, andno Better Business Bureau promotes or monitors ethical lending.”86

While self-regulation has been effective in a few countries where there is astrong national trade association, it has generally been ineffective: “Self-regu-lation does not work on the ground . . . as enforcement is very difficult becauseof conflicts of interest. There is so much of conflicts of interest everywhere—for example, I am the CEO of my MFI, I sit on the board of the MFI associa-tion, I am vice president of the local chapter, and aspire to be its chairperson, Iam on the board of the national banks/international micro-finance bodies andI or my friends are everywhere—so, no one can question me. . . .” (former in-house trainer in an Indian MFI).87

Lack of Regulation Leading to a Government BacklashThe lack of regulation (either self- or government-imposed) has been highlightedas one of the major factors in the failures of microfinance to protect its clients.The lack of focus on client protection or the value created for clients has left theindustry nationally and internationally wide open to criticism and an overreac-tion by government.

In addition to weak regulation, a lack of transparency in social performancehas often left MFIs and the sector much more open to a negative backlash thanit would otherwise have been. Alex Counts from the Grameen Foundation putsthis well:


There is a communications problem on many levels. . . . We had an op-portunity to get out in front and to anticipate some of the issues. If Com-partamos could have said that there is a certain industry standard forreducing and overcoming poverty, and we are better than the industrystandard, that would silence many of the critics. And yet, we haven’t de-fined the industry standards and people aren’t tracking these things, andas a result we’ve left ourselves open and vulnerable to accusations tocreate a major public relations problem, which creates a public policyproblem, which creates operational problems, as we’ve seen in India.88

Inappropriate government regulation has the potential to do enormous dam-age. Without a full understanding of the real costs of microfinance, and the dif-ferences inmethodology and approach, regulations can risk damaging themarket.For example, by setting interest rate caps that push MFIs toward easy-to-reachor profitable clients, or to seek other ways of generating profits, such as in thecase of Ecuador where a government-imposed interest rate cap has resulted inMFIs using compulsory credit life insurance as a way to replace lost revenue.

Often interest rate caps have been set below an economic level, particularlyfor small MFIs that have not achieved economies of scale or have higher costsdue to rural outreach or inclusion of nonfinancial services. An MFI that seeksto serve a mix of clients, and has cross-subsidization of its work with poorer,more remote clients with interest earned in urban areas as its business model,cannot compete on those grounds and eventually loses its ability to cross-sub-sidize. In this case, competition works to get a lower interest rate for the moreprofitable or desirable client, but many other clients lose out or are forced to paythe true higher cost of service. They are often those who are least able to pay.

Another problematic form of regulation is requiring assessment of capac-ity to repay through the use of credit bureaus. In practice, calculating anddemonstrating a client’s capacity to repay may be complex and costly, and leadsto the exclusion of more people because it is too expensive to do the assessmentor they lack the documentation required. For example, CRECER and ProMu-jer in Bolivia have both had to devote significant resources to help their clientsregister for identity cards in advance of this type of regulation.

A more promising approach to regulation is to mandate a “duty of care”—to ensure that lenders are legally obliged to take into account clients’ capacityto repay. In South Africa, for example, there is a legal statute of reckless lend-ing, which does not define the steps that have to be taken; if a lender cannotshow that it has considered a client’s capacity to repay a loan, the client does nothave to repay the loan (see Figure 2.5).

Clearly, the days of microfinance being left alone to get on with its work arepassing, and there is a need for both better transparency and better communication


Figure 2.5 Reckless Lending in South Africa

Source: Saturday Argus (SouthAfrica),May 15,2010Note: This article was first published in Personal Finance,a publication of Independent Newspapers,published in the Saturday Star, theSaturday Argus, the Independent on Saturday, and the Pretoria NewsWeekend.

about what is needed to ensure that clients are protected, that microfinance cancontinue to grow, and that space is left for innovation to deepen outreach andincrease the social value for clients. In particular, reporting on social perform-ance to the Microfinance Information Exchange (MIX) and through social rat-ings and audits will allow for transparency as to the degree to which MFIsprotect and create value for their clients.


Overall what is needed is a shift in incentives. We need to shift the indus-try’s values and measures of success from these short-term concerns and getMFIs to compete for the best social value brought to clients. This process in-cludes not only appropriate regulation but also integrating social concerns andclient protection in management.

ENSURING QUALITY OF MICROFINANCE SERVICES

We’ve got a substantive problem; there’s been growth where we’ve sac-rificed quality and where, in particular, the product offerings are still farfrom optimal.

Alex Counts, Grameen Foundation89

At the root of most of the problems highlighted in this chapter is a pursuitof growth and efficiency that does not adequately take into account the needsand priorities of clients.

Decisions are made, for example, to increase productivity targets, stream-line a process, or change a product without the full consequences of these ac-tions being understood. In my own work I have seen with disappointingregularity the issues of mission drift, products and services poorly adapted toclient needs, harsh staff-client interactions, inappropriate loans leading tooverindebtedness, and management and governance inadequately balancing thesocial and commercial aspects of these operations. This occurs just as much innonprofit organizations with a “socially minded” management and board op-erating as a virtual monopoly in noncompetitive markets, as with for-profit or-ganizations in competitive markets. Thus, these are not just challenges ofcommercialization and competition, but part of the intrinsic tension between thebusiness and social goals of microfinance that need to be managed.

This section brings together the essential elements of quality in microfinanceoutlined in previous sections—financial inclusion, creating value for clients, andprotecting clients from harm—and asks how these objectives can be balancedwith financial sustainability and growth.

Maintaining QualityWhileAchieving Growth and Efficiency

In periods of strong growth, theMFI has to be very careful to avoid thatthe clients become “numbers” and are not seen as individuals.

Johannes Solf, ICCO90


Box 2.15 Adjustments Made in Bolivia Following a Crisisof Client Overindebtedness

First of all, the bad players were weeded out.The consumer lenders whosemethods were irresponsible lost the money they had brought to Bolivia.Theyfled in disgrace. Consumer lending disappeared from the country for most ofthe next decade.

This left the Bolivian MFIs.Their methods were basically sound, but theyneeded to make some crucial adjustments.They revised their loan approvalmethods to focus more on the borrower’s ability to repay, so as not to lend toomuch. Importantly, they realized that the country’s credit bureau needed an over-haul. It would have to include the clients from every kind of lender, and it wouldhave to make its data more complete and timely.Today, the credit bureau in-forms MFIs like BancoSol as soon as a client seeks a loan at another institution.

The microlenders also realized that they needed to give their clients a bet-ter mix of services, and over the next few years they added savings, moneytransfers, and more experimental programs like health insurance.They also re-alized that in a highly charged political environment, interest rates would al-ways provoke public challenges, so they worked hard to bring down rates bycutting costs. Interest rates fell from an average of over 35 percent to just under20 percentAPR.

Source: Excerpt from E. Rhyne,“ATale of Microfinance in Two Cities,” Huffington Post, December 13,2010, http://www.huffingtonpost.com/elisabeth-rhyne/a-tale-of-microfinance-in_b_795840.html.

This chapter has highlighted how there has been an overemphasis on short-term growth and efficiency as the means to achieving rapid financial goals. Thisleads to less focus on whom the organization is reaching and how they benefit.Methodology and systems are simplified, staff productivity is increased, checksand balances are cut, and quality is lost. The experience of adjustment follow-ing a crisis of overindebtedness in Bolivia in 1999 provides some lessons as tohow a focus on clients and improving management systems improves quality(Box 2.15).

Growth and efficiency are not necessarily at odds with a client focus; suc-cessful clients build successful organizations, and what may initially be seen asa cost often pays back in terms of customer loyalty, repayment rates, and word-of-mouth recommendations. What is needed is a more deliberate prioritizationof client needs.

Foude Abdelmouni, former CEO of Al Amana (Morocco), provides an ex-ample of an organization that has successfully managed to combine improved


efficiency with a focus on providing increasing value for clients. When AlAmana began 12 years ago, its interest rate was more than 40%. This has nowbeen reduced to about half that: “We were able to have economies of scale, tomaster the processes. We diminished the price because this is our mission, thisis our choice. I think it works very well if you have people who are committedto their mission, and responsible on their economic ways of realizing their mis-sion and when you have some competition and a lot of transparency and choicefor the clients.”91

Other MFIs may choose to focus on the quality of services. For example, agroup-based lender in Kenya, JCS, recently reported a decision to reduce staffproductivity targets from 450 to 350 per field officer, so as to strengthen client-staff relations. JCS does not envisage that this reduction will negatively affectits financial performance, and has taken the decision to increase its responsive-ness to client needs and ensure the quality of its work. SEF in South Africa fo-cuses its field staff time on supporting weak clients; SEF becomes more efficient,and clients get the support they need to succeed.

A further example comes from K-Rep in Kenya. While many MFIs havecut back or removed their nonfinancial services, K-Rep recognized the win-winpotential and business opportunity of providing these services in partnershipwith international development organizations: “The development perspective isas strong a driver as a business perspective” (Kimanthi Mutua, K-Rep).92

The outcomes of microfinance are not automatic, and performance—bothsocial and financial—needs to be managed. At the core of this performance arethe actions of the MFIs themselves: policies, incentives, management, and gov-ernance. When they work well, there is a focus on clients that creates value andavoids harm. For these internal processes to succeed they need to be supportedby the right external factors: regulation, technology, investors/donors, and theexpectation of what is considered good performance.

Staff Culture and Capacity

Microfinance needs to operate in a less frenetic environment in whichsteady growth is pursued in preference to hectic expansion. This wouldenable MFIs to train their staff better, understand their customers bet-ter, create relationships with clients, and undertake more informed ap-praisals of their credit absorption capacity and broader financial needs.93

The message I hear repeatedly is that staff issues are central to the per-formance of microfinance, particularly in ensuring quality and avoiding the sortof negative experience highlighted in this chapter: “It is very important to get


Box 2.16 Building Staff Capacity

In an effort to address gaps in staff capacity, Freedom From Hunger isdeveloping a series of core competency trainings for field agents thataddress the underlying skills and capacities they need to do their jobswell: time management, conflict resolution, group management, deci-sion-making, facilitation, and so on.Although they were training su-pervisors to detect problems and weaknesses in their staff, they hadnot previously been provided with the resources and tools or capac-ity to address these staff gaps.

Liza Kuhn-Fraioli, Freedom From Hungera


staff with the right ethos and then train them in the values and behaviors of theorganization” (Isebail MacKinnon, Machair Microcredit).94

Staff CapacityIn rapidly growing organizations, developing and retaining the necessary staffcapacity to effectively deliver quality services is a challenge. Microfinance is abusiness very dependent on people (see Box 2.16). Carlos Danel of Comparta-mos highlights the need to grow with quality, emphasizing that the building ofstaff capacity has been one of the major factors in determining the rate ofgrowth. The organization has focused on the need to attract, select, train, andretain people with the right kind of attitude who can also work with clients. Forhim, staff satisfaction is key and leads to satisfaction of clients.

Organizational CultureIn addition to capacity, many organizations also emphasize the need to developthe right organizational culture. This starts with identifying the right sort ofpeople for the organization. Carmen Velasco (ProMujer International) selectsstaff based on the demonstration of their empathy and social values: “We cantrain people on technical skills, but the heart must be there from the start.”95

CRECER has overhauled its recruitment to incorporate a number of tools andindicators to evaluate “social buy-in” of applicants, to hire more socially fo-cused staff. Values such as benevolence, solidarity, and social sensitivity are as-sessed via psychometric tests. Group dynamics and inteviews are used to get asense of social values. Proactive hiring of women has increased the number of


women employees. Further, an effort is made to recruit staff from similar areasas clients as this ensures that employees better understand the conditions ofclients. Once recruited, the induction process of new staff into CRECER’s workculture involves imparting an understanding of the organization’s mission andits values.96 Staff recruitment, induction, and training are critical components,but all will have little impact if the ongoing messages communicated by theleadership and through management systems do not reinforce the social as wellas commercial goals of the organization.

Consideration of gender issues is also important internally to MFIs and inrelation to how staff work with clients. Many organizations focus on gender-aware internal policies and systems—such as working environment, HR poli-cies, and nurturing women in leadership positions. Fewer organizations focuson the way in which staff work with clients and whether there is awareness ofhow social norms can be perpetuated in the way in which field staff work withclients.

Management and Incentives

A key message for this chapter is that MFIs need to do what they intend to dowell; they need to effectively deliver services designed to address clients’ needs,as well as continuously learn and improve. This requires effective systems tomanage staff toward this end, to receive feedback from clients and staff, and tomake adjustments where outcomes are not as intended.

Often the systems, management, and governance of MFIs are not wellaligned to their goals, and there is an assumption that social outcomes will beachieved automatically, rather than by careful management. Furthermore, theemphasis placed by mostMFIs (and their investors and supporters) on efficiencyand growth creates an imbalance that may distort practice on the ground, withstaff taking shortcuts: “Business planning is not just about the ambitious targets,but how to operationalize in a way that keeps clients, and the client relationship,at the center” (Frances Sinha, EDA).97

Staff management is key to ensuring that field staff have the skills requiredto do their job, understand what is expected from them, and receive adequatesupervision and feedback. This relates to recruitment, training, induction, su-pervision, appraisal, and incentives: it is not just about what they do, but how.

Field StaffAre the Front LineField staff are the front line of most MFIs, and much of the translation of theorganization’s intent and design is affected by how field staff interpret and applypolicies, and how they are guided (or incentivized) to do this. They are impor-tant in ensuring that target clients are reached, and that clients are matched


with the appropriate services for their needs—for the delivery of value-addedservices such as training and mentoring, problem solving, or facilitating the de-velopment of client relationships with each other. In addition, weak behavior byfield staff, such as inadequate assessment of capacity to repay or harsh debt col-lection practices, will negatively affect clients and the reputation of the organi-zation. Finally, field staff are often involved in collecting data about clients aspart of client profiling, loan appraisal, and other monitoring of social per-formance. Their behavior—and again, how they are guided (or incentivized)—affects the quality of data collected.

IncentivesFinancial incentives often make up one-third or more of a field agent’s salary.Most incentive schemes in the industry focus squarely on growth, commonly re-warding three things: number of new clients, increase in portfolio outstanding,and a decline in arrears or portfolio at risk. That is to say, staff are incentivizedto bring in as many clients as possible, give out as much money as possible, andmake sure that the money comes back. This leads to a loss of quality in a num-ber of areas discussed in this chapter: not bringing in target clients and thosewho are poorer (who may be more time-consuming to reach), poor attention toassessing capacity to repay, and harsh debt collection methods.

The client-focused vision is just for speaking at conferences and meet-ings. What happens on the ground is totally different, and we the fieldworkers bear the brunt. We are told to disburse, disburse and disburseso that targets are met, week on week, month on month and quarter onquarter—I have had senior branch and regional managers telling (andyelling at) me (during meetings)—“Do whatever you have to but makesure that Y number of clients are enrolled and given loans in this pe-riod.” When this is the case, client relationships will naturally suffer,and we cannot be doing things in client interest as we are minimizingour contact with them to ensure that things get done efficiently andfaster.

Field worker in an MFI, India98

The MIX-Imp-Act Consortium’s “State of Practice Report on Social Per-formance Management” highlights staff incentives as an area where significantprogress has been made.99 Small adjustments in incentives can lead to significantchanges in staff behavior. For example, incentivizing the number of new clientsencourages staff to bring in new clients, but does not emphasize the need tofocus on specific target client groups, or to ensure the quality of clients, for ex-ample, in terms of character or group solidarity. Adjusting the incentive to total



number of clients puts more emphasis on client retention and therefore qualityas well as quantity.

Managing QualityQuality of staff interactions with clients is key, but difficult to manage. Softskills such as assessing cash flow or business analysis, problem solving, or train-ing delivery are hard to monitor quantitatively or through MIS performancedata, and many MFIs struggle to set up the qualitative systems to observe fieldstaff and audit the quality of their work. But these soft aspects are critical toclient protection and delivery of value for clients. It is therefore important forMFIs to identify key elements in their methodology and to set up systems tomonitor and manage the achievement of these; as the adage goes, you valuewhat you measure. A number of MFIs have integrated monitoring of client-staff relationships and other quality measures into their systems of spot-checksand internal audit (see Box 2.17).

Benefits and Risks of Technology

Technology is seen as a key to future efficiency in microfinance, removing someof the costly elements of providing high volumes of small financial transactionsto clients scattered in areas of poor infrastructure. For many, technology bringsa major hope for improvements in outreach and quality of services in micro-finance within the next few years. It has the potential to make access into moreremote areas cost-effective, and to reduce time-consuming routine tasks, al-lowing more space for quality staff–client interactions, focusing on the clientrather than the financial transaction. From a client perspective, technology maymake it easier for MFIs to respond to a diverse range of client needs, by signif-icantly reducing transaction costs and allowing for more complex administra-tive systems. For example:

• Many group-based lenders track information at the level of a group ratherthan individual clients, and therefore cannot provide different loan termsto each member of a group. Tracking individual clients in the MIS willallow for greater opportunity to tailor products to individual needs, aswell as to have more powerful information with which to track and ana-lyze client performance.

• Reduction of transaction costs—for example, through mobile bankingwhere clients are able to save or repay loans by text message, or where anMFI can disperse loans or savings electronically—has the potential to

Box 2.17 SEF’s Quality Management System

SEF recognizes quality of field operations as one of the key elements ofachieving good social performance. Existing performance monitoring indica-tors—portfolio quality, client exit, and number of clients—are fairly blunt in-struments for quality management. SEF recognized that despite achieving therequired standards for these performance indicators, field staff were takingshortcuts in areas that were crucial for the success of the organization in en-suring positive impact on the lives of its clients.Areas suffering related in par-ticular to staff interaction with clients, such as evaluating capacity to repay loans,follow-up on client problems, facilitating client learning and planning, and col-lecting client feedback.Management reacted by reviewing SEF’s processes andlooking into the quality issues. A process was undertaken to identify and definein detail the Key OperationalActivities (KOAs) essential for client success in SEF.From this a series of checklists was developed and integrated into branch man-ager spot checks and internal audits as a system of quality management.

Based on the filled checklists from the branch managers, the R&D depart-ment compiles monthly reports that outline the quality of each KOA on an or-ganizational, zonal, and branch level.The reports are based on a traffic lightsystem,where weak areas are highlighted red, acceptable standards are yellowand areas of no concern are green (shown here, respectively, in black, gray, andwhite).

Source: From KOA report, September 2010:North Zone,Branch H,Center Meeting Checklist.


Box 2.18 Care’sVSLA Using M-Pesa Payments

“We’re interested in mobile space—because the majority of our popula-tion is rural there is still this infrastructure and transaction cost issue.One ofthe issues we’re looking at is how we can use some of the existing mobile pay-ments platforms and link them with bank accounts so our rural clients canmake savings deposits or loan repayments. . . . InTanzania our clients are usingmobile delivery channels to make savings. . . .We’re going at it very gingerly be-cause we want to see how it affects the groups. . . .One of the things that makestheVSLA groups very strong is all transactions have to happen with the group.When you see the box it has three locks and it’s not about security, it’s abouttransparency and that it comes from everyone within the group. One of thethings we are trying to work out with M-Pesa and ZAP is a three-PIN system,so the three key holders would have a separate PIN and they would each enterthe PIN before making transactions.”

Source:Excerpts from interview with Lauren Hendricks, executive director of CARE’sAccessAfrica (C.Conzett, interviewer),April 20, 2010,www.microfinancefocus.com.


greatly reduce the staff time needed to service clients and expand the phys-ical outreach of the services, serving more vulnerable clients or reachingout to more remote areas. This is particularly important for savings wheretransactions are very small and clients cannot afford to travel distances tomake small deposits (see Box 2.18).

• Access to electronic savings and branchless banking offers the possibilityof accessible, low-cost savings services where clients can make small de-posits at times and locations that are more convenient. Branchless bank-ing not only helps solve the problem about how to get loan cash into andout of remote communities, it actually increases the circulation of cash inthe communities with the potential to help commerce further develop.

• Reducing staff time on transactions allows staff to focus more time onactivities that bring the most value for clients. So, for example, it may be-come cost-effective to include financial or business education where thiswas previously prohibitively expensive.

Technology also has the potential to increase the profitability of microfinance.There is a major risk that technology will be used to increase efficiency withoutimproving services for clients. Most notable is the potential to fundamentally


change human relationships. While time savings are beneficial for clients andMFIs alike, there may be a loss in human contact that is a foundation for bank-ing without collateral, and also at the root of much of the empowerment ben-efits of microfinance. Rather than using the efficiency savings to find additionalways to create value for clients, MFIs may choose to increase their profitabilityand financial returns offered to investors.

Ensuring Effective Groups

The transformational impact of microfinance will be a little less if wetake the human interaction element out of it—social intermediation.

Chris Dunford, Freedom From Hunger100

One of the early innovations of microfinance was the use of groups to create ac-countability and support between members—social intermediation. Groupswere widespread in early models of microfinance, but have come under criticismfrom people who ask whether you or I would want to have to join a group inorder to save or get a loan. ManyMFIs have moved away from groups, addingindividual savings or loan products, or shifting entirely to an individual ap-proach. While this may be popular with many clients, groups, where properlymanaged, do have the potential to create benefits in terms of empowerment,self-confidence, and social cohesion—particularly where they are targeted atpoorer or socially excluded women. Not everyone wants to get their financialservices through a group, but microfinance is not just about access to finance.Jeffrey Ashe emphasizes the importance of the groups in the community-basedmodel: “The solidarity of coming together, gaining mutual assistance from oneanother, means for women they get a bit more say in the household and the vil-lage. The most successful groups can become platforms for collective businesses.Other agencies and NGOs can use them as platforms to launch their own ser-vices. There is leverage in that.”101

Groups, however, do not automatically lead to these positive outcomes,and successful groups often require significant facilitation. Guy Vanmeenen ofCRS says, “Initially when the group is formed . . . there is so much time beingspent on group formation, on ownership and on setting up the right gover-nance structure.”102

Groups can also foster tension and conflict, and lead to negative pressurefrom some clients on others. Again, informed choices need to be made aboutwhether groups are appropriate for the clients and the specific goals of anMFI,and where groups are included their facilitation is an important activity to bedesigned and managed.

Governance

Boards need to understand their roles and manage the organizations ina waywhich sets parameters for the leadership to pursue themission andto act in an ethical, responsible way. Setting reasonable growth targetsand compensation standards and making sure that the mission is beingachieved through the various benchmarks of the organization. Also therole of the CEO to make sure that they have a board that does this.

Frank DeGiovanni, Ford Foundation103

Boards set parameters for management, and therefore have a key role in em-bedding the mission and goals in operations. There has been a lot of concernthat where MFIs commercialize, the nature of the board may be changed, witha short-term focus on financial returns taking over from a focus on longer-termvalue for clients. Although this is certainly a risk and has occurred in some cases,it is far from inevitable: “We were afraid this might happen to CARD Bankwhen it transformed, so one safeguard put in place was to have some of theboard members of the NGO, who are steeped in the social mission of CARD,to sit on the board of the bank” (Annie Alip, CARD).104

A number of people in my conversations emphasized the importance ofawareness of these issues and alignment of values when selecting investors orboard members: “The original promoters should retain enough stake and sayin the strategic choices of the institution. Again, it is important that theMFI haslike-minded investors on board who support their mission and understand the‘double bottom line’ nature of this industry” (Geet Goel, Dell Foundation).105

A key role for an MFI’s board is to protect the mission of the organization,and to ensure that the issues raised in this chapter are part of decision making.Toward this end, a number of MFIs have implemented a social performancecommittee at the board level that monitors performance data from the per-spective of outreach, client protection, and client value, and which is able toscrutinize decisions from the perspective of outcomes for clients.

SomeMFIs also recognize the value of client involvement in governance, in-cluding clients on the board and ensuring their effective participation throughtraining and an appropriate structure to the board activities: “I am pleased torepresent our clients and to be part of FundaciónMujer. In the board, we knowthe needs of the micro entrepreneurs because we have also experienced them.At the beginning, I was afraid but with time I gained encouragement and con-fidence. [The three representatives of the clients] have a decisive and participa-tive role in the Board.”106

Relationships with investors are another important role for the board thatcan influence social performance outcomes. For example, a study by Women’sWorld Banking looking at mission drift inMFIs highlights the potential positive



role of investors: “The manner in which investors conduct due diligence, con-struct loan covenants and reporting requirements and maintain the post-in-vestment relationship with an MFI can shape the MFI’s direction, particularlywith regard to maintaining its mission focus. Institutions that choose investorswho are passionate about preserving the mission, while earning a reasonableeconomic return in the process, can help ensure mission-focus.”107

CONCLUSIONS

In conclusion, I summarize how this chapter highlights the practical ways inwhichmicrofinance can apply existing knowledge to bring benefits successfully to poorand vulnerable people, though with a focus that goes beyond access to finance.Action is needed by all those who practice, support, or fund microfinance.

Beyond Access to Finance

We need to move from focusing on the institutions and their quibbles,to focusing on the clients and their needs. Still so much to do.

Carlos Danel, Compartamos108

The microfinance movement grew from a win-win vision of benefits for poorand marginalized people delivered through sustainable institutions, no longerdependent on donor grants. The past 10 years have seen a huge growth ofmicrofinance into a multibillion-dollar industry. In general the benefits havebeen largely assumed, and the focus has been on the institutional challenges ofsustainably growing to scale and securing ever-increasing volumes of capital.The challenge has been seen as predominantly one of access.

But a growing backlash has shown that the benefits of microfinance cannotbe taken for granted. Increasing profits have combined with widespread reportsof client overindebtedness and other negative client experiences, as well as ac-ademic challenges about microfinance’s claimed impact. The commercial pillarmay be strong, but the social pillar is still uncertain.

In this chapter I have argued that successful clients are the foundation ofmicrofinance. Rather than focusing on what works best for theMFI in the shortterm, we need to focus on creating long-term benefits for clients as a way tobuild a sustainable microfinance sector.

Many of the challenges highlighted early in this chapter result from a failureof MFIs to understand and respond to the needs of their clients. These include:

• A failure to reach a significant number of people who need the MFI’s ser-vices but who are excluded for deliberate or unintentional reasons.


• Inappropriate design of loan products that are not meeting client needsand not aligned to their real requirements.

• Structured so that they do not respond well to clients’ enterprise invest-ment needs.

• Inadequate diversification of products to meet nonenterprise needs.

• A lack of diversity in products offered—focus on credit products rather thansavings, insurance, remittances, and so on that canmeet other needs of clients.

• Deterioration in relationships between staff and clients leading to a mis-match between client needs and services delivered, weak communicationand transparency, and inappropriate collection practices by staff.

• Deterioration in relationships and conflicts between members of groupsor within families.

• Lack of understanding or inappropriate use of services by clients leadingto overindebtedness; a decision by clients to exit the program as a resultof a negative experience (although some do, of course, leave for positivereasons), or failure to perceive benefits from the services.

• A failure to deliver potential benefits to clients.

Applying Our Knowledge

It is wonderful to see all the changes that are happening and in the rightdirection. Some people have said that as you grow older you get moreand more pessimistic, but I get more optimistic the older I get.

Fazle Abed, BRAC109

The current crisis creates an opportunity to refocus. This chapter is about mak-ing microfinance work better. The challenges highlight weaknesses and oppor-tunities to do things much better, but the starting point is to improve the currentpractice based on existing knowledge. I have been struck during the writing ofthis chapter that much I have written on how to improve microfinance saysvery little that was not available 10 years ago. For example, in the section ondeepening financial inclusion, I was able to draw on a paper written in 2002.While many organizations have made significant advances in building client-focused services, as an industry too little progress has been made. Most energyis focused on improving administrative efficiency or staff productivity, ratherthan on improving effectiveness of services for clients.

It is an issue of focus, priorities, and capacity, more than a lack of knowledgeof what client-focused services would look like. For most MFIs a number of rel-atively simple things can be done to improve the effectiveness of their services,


based on reviewing their current products, services, and systems. A number ofuseful resources are available to support this:

• The Imp-Act Consortium, a group of 12 practitioner-focused organiza-tions110 working globally has a wealth of practical resources to supportMFIs in “translating their mission into practice,” improving their man-agement of social performance through ensuring a balance between socialand financial perspectives in all aspects of the business (www.Imp-Act.org).

• The SMART Campaign has achieved significant buy-in to their ClientProtection Principles and offers practical resources to support MFIs inimplementing these (www.smartcampaign.org).

• MicroSave is at the forefront of efforts to move microfinance from a prod-uct-led to a market-led approach. The market-led approach focuses onputting the clients at the center of the business. MicroSave provides tech-nical assistance and training to microfinance organizations in Africa andAsia as well as online resources (www.microsave.org).

Pushing the Boundaries of Microfinance

Without innovation human beings are nothing. Innovation is the key towhere we are, [and] is just a change of mind-set. That is why I am frus-trated because I don’t see innovation being prioritized in the industry.I don’t see it as a social or commercial thing, I see it as innovation.

Asad Mahmood (Deutsche Bank)111

Some changes—such as increasing flexibility in loan products, mobilizing sav-ings, or introducing microinsurance—may be challenging, often requiringmajor changes in methodology, systems, or staff skills. Much microfinance suc-ceeds through standardizations and simplification of processes. Therefore,there is a real tension between many current institutional models on the onehand, and microfinance that is more responsive to client needs on the other,calling for a greater diversity of services and flexibility. For example, while agroup-based MFI may recognize the need for flexible loan terms, in practice itmay find that its systems cannot cope with allowing different loan terms withina group.

This chapter sets out an ideal toward which MFIs should aspire. The mes-sage is not that this is what all MFIs should be doing, but to highlight that weare still a long way from realizing the full potential of microfinance.

Progress has been made in recent years as MFIs apply themselves to thechallenges regarding efficiency. If they can apply themselves to effectiveness inthe same way, then a huge amount can be achieved.


As MFIs focus more on improving the effectiveness of their services, thelimitations of current knowledge and the trade-offs between client and institu-tional priorities will become clearer. Currently trade-offs are assumed, or deci-sions are made based on institutional needs without understanding theimplications for clients in terms of outreach, value, or protection. By facingthese trade-offs, by coming up against situations where the needs of clients andthe needs of the institution are in conflict, we can be clearer about the chal-lenges and respond to these by finding a new way to do things that pushes theboundaries of what is possible. Innovation is key. Microfinance can success-fully innovate to bring services to people previously seen as unbankable.

There is, of course, a huge challenge to balance scale (and profitability) withquality. The wealth of experience working in a range of contexts and with dif-ferent approaches, combined with the potential of technology to lower costs andextend the range of what is possible, creates huge opportunities for newways ofreaching areas that are currently too costly to serve, or to provide services thatmight be too complex to deliver with current organizational capacity.

There are also increasingly innovations in approach to microfinance witha number of organizations going beyond adjustments to current ways of doingthings, toward developing instead new approaches to microfinance. For exam-ple, IMFR Trust in India has developed a methodology for its rural finance pro-gram that takes as its starting point sustainability of clients and buildinginstitutions to achieve this, rather than starting with sustainability of the MFI.As well as providing a suite of well-adapted financial services, the organizationrelates to clients through wealth managers who develop a plan with each clientbased on an understanding of the current pattern of cash inflows and outflowsof the household, as well as capturing their financial goals, opportunities to in-crease cash flows through better productivity of the current economic activitiesor reducing the cash, and discussion of how to protect the household’s humanand physical assets—for example, with microinsurance.

BASIX, also in India, is another organization to reevaluate its services basedon an analysis of its clients’ needs and make radical changes in the way it works,putting livelihood promotion at the core of its methodology and integrating aholistic set of livelihood promotion services, while maintaining sustainabilityof the institution.

Next Steps

The microcredit movement . . . is at its heart, at its deepest root notabout money at all. It is about helping each person to achieve his orher fullest potential.

Muhammad Yunus112


The capacity and talent exist to makemicrofinance a success for clients as well ascommercial investors and staff. It is now a matter of will and commitment.

Financial performance and efficiency are vital, but they are means to anend, and microfinance will not succeed without a focus on its social and finan-cial pillars. Microfinance that puts as much energy into being as effective as itis efficient will achieve success in all areas.

In the future my hope is that people engage with the issues discussed in thischapter with as much effort and investment of time and money as has gone intobuilding a sustainable and profitable microfinance industry.

For microfinance to meet its full potential there is a need for change at alllevels. With the right motivation in MFI management, board, and investors,change will start to happen.

Social investors need to build on their current interest in social performanceand give tangible weight to financial inclusion, value for clients, and clientprotection in their investment decisions. This will provide an incentive forMFIs to focus their efforts on improving effectiveness. However, there arelikely to be tensions between short-term profit and social concerns, and thereis therefore a challenge to ensure that new investors in microfinance under-stand the key relationship in microfinance between client and institutionalsuccess.

Boards have a key role in setting the direction of MFIs and setting the pa-rameters within which management works. Ensuring that boards have an un-derstanding of the issues raised in this chapter is therefore critical. To meet thechallenges, they need to move beyond the current norms in microfinance.

MFI management must ensure that the organization’s products, services,and strategy are continually informed by an understanding of the needs of itsclients (and potential clients), and that its culture and information and man-agement systems are aligned with its goals. Where there are gaps in the abilityto do this, management needs to find solutions to address these gaps.

Over the past 15 years I have supported many MFIs in working throughthese issues. The process is gradual and works best when approached step-by-step over time—first building the understanding of senior management and theboard; identifying immediate priorities that address current and perceived needsfor the organization and its staff; building understanding and buy-in of staff;and then later tackling more technical issues such as improving information andmanagement systems, or piloting new products, services, and alliances. Box 2.19presents a series of questions that address the four key areas that MFIs need tofocus on to improve their effectiveness and address the challenges highlighted inthis chapter. These may help us move toward services that truly respond to thediverse needs of low-income people around the world, and truly make a posi-tive difference in their lives.

Box 2.19 Questions for Improving MFI Effectiveness

1.Deepening financial inclusion: overcoming exclusion of poor,vulnerable, and marginalized people

Most MFIs serve a relatively small proportion of their total potential market,anddeliberately or inadvertently exclude certain groups.Where an MFI has definedparticular target clients, it is important that products and services are designedto meet their needs, and that outreach is monitored and managed. In addition,many MFIs have the potential to deepen their outreach by understandingfactors that lead to exclusion of potential clients and making adjustments inresponse.

Key questions:

Who are your target clients?An MFI may define its target clients in its documentation, but how well is thisunderstood in practice by staff? Staff understanding and buy-in is core to theMFI succeeding on the ground in attracting and retaining target clients.

What is your strategy for reaching them?Without a strategy, MFIs are unlikely to reach large numbers of their targetclients (especially poor people). Even those MFIs with a clear strategy do notnecessarily effectively communicate this to staff and manage it.

What factors may be excluding certain people?Are the existing clients those explicitly targeted by the MFI?There are a num-ber of factors that might be excluding clients, including staff attitude and biases,branch and group locations, systems for reaching clients, and other exclusion-ary factors by the MFI and/or clients themselves.

MFI systemsAppropriate MFI systems need to be designed to ensure outreach to targetclients and avoid unnecessary exclusion.This includes organizational cultureand messages; staff recruited who care about the organization’s mission; staff in-centives; appraisal and routine management; spot-checks to ensure that policiesare appropriately applied and that the systems incorporate quality information;and strategies to mitigate staff bias toward nonpoor clients.

Information and managementWhat information do staff have about the profile of their clients, and if they arereaching their target clients,what systems are in place to ensure information isreliable, and how is it used to manage outreach?

(continues)


Box 2.19 Cont.

2.Creating value for clients

These questions focus on products and services: how they are delivered, if theytake into account clients’ needs and help create value for clients.They also lookat whether the MFI does what it says it does.Despite good intentions and design,many MFIs fail to be effective due to their implementation and management.

Key questions:

What value does the MFI seek to create for clients?What do clients/staff understand as the goals of the organization and the valuethat is being created for clients?

How are the products and services designed to achieve these goals?How well are products and services adapted to client needs (e.g., seasonality,life-cycle needs, flexibility to respond to clients’ uncertainty)? If the MFI hasgroups, are they designed to serve as collateral, or does the MFI seek to em-power or create supportive networks through the groups? Are nonfinancialservices integrated or linkages made, and how do these support the achieve-ment of the goals? Does the MFI take advantage of its microfinance infrastruc-ture to deliver other value-added services?

Gender issuesTo what extent does the MFI reach women clients? Do gender-aware policiesand product/service design demonstrate an awareness of women’s constraints(e.g., timing of meetings around women’s work, not requiring husband to signloan application, supporting women’s asset ownership, having insurance coverhusband and client)? Are there measures designed to achieve women’s em-powerment or gender equity where this is a goal?

Information systemsWhat information does the MFI collect about whether its services are adaptedto clients’ needs/creating social value and about the quality of the services? Isit accurate and reliable,and have clients been asked for their input on products/services/processes—and were they given any feedback?What does the col-lected information tell us, and is it used to improve the products and servicesand their quality?

(continues)


Box 2.19 Cont.

3.Protecting clients from harm: recognizing client risk andvulnerability

One of the most powerful things an MFI can do is to help its clients to be bet-ter able to cope with emergencies when they happen.Yet many MFIs designtheir services with little understanding of the reality of their clients’ lives andapply zero-tolerance policies that leave clients with no space to cope whenthings go wrong.

Key questions:

Design of products and servicesAre the products, services,and delivery mechanisms designed to build client as-sets and resilience, and to be flexible enough to respond to unexpected eventsin clients’ lives?

What happens when things go wrong?Is the MFI able to respond in an understanding and caring way that supportsclients through their problems, or does it have rigid systems that focus on en-suring the MFI does not suffer any negative consequences?

Client protectionIs the MFI effective in ensuring that it does not harm its clients, especially in re-lation to the Smart Campaign principles—avoiding client overindebtedness,transparent and responsible pricing, appropriate collections practices, ethicalstaff behavior,providing mechanisms for redress of grievances, and ensuring pri-vacy of client data?

4.Ensuring quality of microfinance services

The extent to which quality is emphasized,monitored,managed,and rewarded.

Key questions:

• The extent to which organizational culture and incentives support a clientfocus—for example, do staff incentives promote numbers of clients andportfolio outstanding at the expense of quality?

(continues)


Box 2.19 Cont.

• Consistency of delivery—are there any obvious contradictions betweenpolicies,methodology, and design?

• What indicators of quality of the services are apparent (accessible, af-fordable, reliable)?

• When the chips are down and the organization is under pressure (e.g., ar-rears, lack of growth, competition), are quality and a focus on the socialgoals maintained?

• What is the board oversight of the social performance of the organiza-tion? Does the board make decisions on the basis of consideration ofboth financial and social performance information?


Notes

1. World Bank data from PovCalNet.2. I conducted in-depth interviewswith 15 leaders in the field, selected to reflect a broad rangeof perspectives. In addition, I conducted an online survey that received 70 responses, andgathered follow-up information from many of these, plus other recommended contacts.

3. Personal correspondence.4. India achieved growth rates averaging 94% between 2003 and 2010.5. Microcredit Summit Campaign, “State of the Microcredit Summit Campaign Report2011,” 2011. There are also a large number of smaller MFIs that do not report; UNCDFreports 7,000 to 10,000 MFIs worldwide. If community-based and formal providerssuch as rural banks are included, the number is far higher.

6. This is the gross loan portfolio of 1,931MFIs that have registered their information withthe Microfinance Information Exchange.

7. O. P. Ardic, M. Heimann, and N. Mylenk, “Access to Financial Services and the Finan-cial Inclusion Agenda around the World: A Cross-Country Analysis with a New DataSet,” World Bank Policy Research Working Paper 5537, 2011.

8. Accion Media Centre, “Mexico Compartamos IPO Raises Tough Issues for Micro-finance,” June 1, 2007.

9. Richard Rosenberg, “CGAP Reflections on the Compartamos Initial Public Offering: ACase Study on Microfinance Interest Rates and Profits,” CGAP Focus Note 42, June2007, 4.

10. Greg Chen, Stephen Rasmussen, and Xavier Reille, “Growth and Vulnerabilities inMicrofinance,” CGAP Focus Note 61 February 2010.

11. Literature is reviewed in J. Morduch and B. Haley, “Analysis of the Effects of Micro-finance on Poverty Reduction,” New York University Wagner School of Business Work-ing Paper 1014, 2002; K. Odell, “Measuring the Impact ofMicrofinance: Taking AnotherLook,” Grameen Foundation USA Publication Series, 2010.

12. See, for example, M. Bateman, “Microfinance as a Development and Poverty ReductionPolicy: Is It Everything It’s Cracked Up to Be?” Overseas Development Institute Back-ground Note, 2011.


13. Personal correspondence.14. Growth and Vulnerabilities in Microfinance author Xavier Reille quoted in TheMarket,

April 26, April, www.themarketmagazine.com.15. Ibid.16. Chen, Rasmussen, and Reille, “Growth and Vulnerabilities in Microfinance,” 11.17. Personal correspondence.18. Fazle Abed, BRAC founder, speaking in “State of the Microcredit Summit Campaign

Report 2011.”19. Personal correspondence.20. Personal correspondence.21. Personal communication. K-Rep is a microfinance organization.22. C. Frank, E. Lynch, and L. Schneider-Moretto, “Stemming the Tide of Mission Drift:

Microfinance Transformations and the Double Bottom Line,”Women’s World Banking,2008.

23. Personal correspondence.24. MicroSave India Focus Note 55, December 2010.25. Ramesh S. Arunachalam, “Candid Unheard Voice of IndianMicrofinance,” www.micro-

finance-in-india.blogspot.com.26. Malcolm Harper, “Unbalanced Emphasis,” November 14, 2010, from Development Fi-

nance Network Discussion List, http://ag.ohio-state.edu/Lists/devfinance/Message/6730.html.

27. Personal correspondence.28. From a debate between Muhammad Yunus and Akula at the Clinton Global Initiative

Conference, September 21, 2010.29. Elisabeth Rhyne, quoted in Amy Kazim, ”Microfinance: Small Loan, Big Snag,” Finan-

cial Times, December 1, 2010.30. B.Magnoni, “Eight Causes of a Crash:What Happened to Banex?” 2010, retrieved from

Financial Access Initiative, http://financialaccess.org/node/3550.31. N. Srinivasan, “Microfinance India: State of the Sector Report,” 2009, 4.32. Centre for the Study of Financial Innovation, “Microfinance Banana Skins 2011,” 2011,

21.33. B. MkNelly and M. McCord, “Credit with Education Impact Review No. 1: Women’s

Empowerment,” October 2001, 8.34. Frank, Lynch, and Schneider-Moretto, “Stemming the Tide of Mission Drift.”35. Personal correspondence.36. Woman nonmember quoted in A. Nteziyaremye and B. MkNelly, “Mali Poverty Out-

reach Study of the Kafo Jiginew and Nyèsigiso Credit and Savings with Education Pro-grams,” Freedom From Hunger Research Paper No. 7, May 2001, 53.

37. Unpublished online survey of microfinance industry professionals undertaken for thispaper.

38. B. Balkenhol, Microfinance and Public Policy: Outreach, Performance and Efficiency(Geneva: International Labour Organization and Palgrave Macmillan, 2007).

39. Personal correspondence.40. C. Van de Ruit, J. May, and B. Roberts, A Poverty Assessment of the Small Enterprise

Foundation on Behalf of the Consultative Group to Assist the Poorest, Poverty and Pop-ulation Studies Programme, University of Natal (Washington DC: CGAP, 2001).

41. Personal correspondence.42. Personal correspondence.43. Microfinance Impact and Innovation Conference 2010 presentations, http://www.moodys

.com/microsites/miic2010/agenda.html.


44. Womanmember quoted in Nteziyaremye andMkNelly,Mali PovertyOutreach Study, 56.45. Personal correspondence.46. Personal correspondence.47. Mary-Ellen Iskenderian, Women’s World Banking, personal correspondence.48. Posting on Microfinance Practice listserv, November 7, 2010.49. Personal correspondence.50. Interview with Fazel Abed, “Microfinance” podcast no. 26.51. Ibid.52. Personal correspondence.53. Susan Johnson, “Gender and Microfinance: Guidelines for Good Practice,” www

.gdrc.org.54. Carlos Danel, Compartamos, personal correspondence.55. Personal correspondence.56. Personal correspondence.57. Personal correspondence.58. Alex Counts, Grameen Foundation (personal correspondence).59. Personal correspondence.60. See www.smartcampaign.org.61. From “Profits & Perverse Initiatives: The New Face of Microfinance,” www.stayingfor

tea.org, August 3, 2010.62. J. Schicks, “Microfinance Over-Indebtedness: Understanding Its Drivers and Challeng-

ing the Common Myths,” CEB Working Paper 10(048), 2010, 6.63. Personal communication.64. Graham Wright, MicroSave (personal correspondence).65. Personal correspondence.66. Anton Simanowitz and Therese Sandmark, Social Performance Indicators for Microin-

surance, BRS/ADA/Microinsurance Network, 2010.67. B. Gray, J. Sebstad, M. Cohen, and K. Stack, “Can Financial Education Change Behav-

ior? Lessons from Bolivia and Sri Lanka. Global Financial Education Program FinancialEducation Outcomes Assessment,” Microfinance Opportunities and Freedom FromHunger, Working Paper 4, December 21, 2009, 15–17.

68. Opportunity International director, personal correspondence.69. Personal correspondence.70. Member of Opportunity International management team, Africa, personal communication.71. Woman member quoted in Nteziyaremye and MkNelly, Mali Poverty Outreach Study,

60.72. Personal correspondence.73. Quoted by Ramesh S. Arunachalam, www.microfinance-in-india.blogspot.com, Decem-

ber 27, 2010.74. www.smartcampaign.org.75. A. Banthia, J. Greene, and C. Kawas, “(Uganda) Solutions for Financial Inclusion: Serv-

ing Rural Women, 2011,” Women’s World Banking focus note, 2011, 9.76. Quoted by Arunachalam, www.microfinance-in-india.blogspot.com, December 27,

2010.77. MicroSave India Focus Note 55, December 2010.78. Personal correspondence, translated by Liza Guzman.79. Barbara MkNelly and Mona McCord, “Credit with Education Impact Review No. 1:

Women’s Empowerment,” Freedom From Hunger, October 2001, 8.80. Guy Vanmeenen, “Savings and Internal Lending Communities (SILC): A Basis for Inte-

gral Human Development (IHD),” Catholic Relief Services, October 2006, 2.


81. Ibid.82. Personal correspondence.83. David Roodman, Microfinance Open Book blog, “Reflections on Transparency,” July

7, 2009.84. Chuck Waterfield, Microfinance Transparency, personal correspondence.85. Personal correspondence.86. Jonathan Lewis, “Microloan Sharks,” Stanford Social Innovation Review (Summer

2008): 57.87. Arunachalam, “Candid Unheard Voice of Indian Microfinance,” www.microfinance-

in-india.blogspot.com, December 27, 2010.88. Personal correspondence.89. Personal correspondence.90. Personal correspondence.91. Interview with Fouad Abdelmouni by J. Thomas, www.cgap.org, February 9, 2010.92. Personal correspondence.93. Micro-Credit Ratings International Limited, Submission to the RBI Sub Committee of

the Central Board of Directors to Study Issues and Concerns in the MFI Sector (NewDelhi: M-CRIL, 2011), 2.

94. Personal correspondence.95. Personal correspondence.96. CRECER (Bolivia), Imp-Act Consortium, “Managing Social Performance,” 2010.97. Personal correspondence.98. Quoted by Arunachalam, “Candid Unheard Voice of Indian Microfinance.”99. MIX (forthcoming).100. Personal correspondence.101. Personal correspondence.102. Personal correspondence103. Personal correspondence.104. Personal correspondence.105. “Towards an IPO—Reaction to SKS IPO from Geeta Goel, Portfolio Director, Micro-

finance, Michael & Susan Dell Foundation,” www.microfinanceinsights.com blog,April 22, 2010.

106. Maria Eugenia Benavides, board member since 2007 and a client of Fundación Mujerfor 13 years, quoted in Social Performance of FundaciónMujer, from a Cerise-conductedsocial audit of Mujer, Costa Rica, 2009, 2.

107. Frank, Lynch, and Schneider-Moretto, “Stemming the Tide of Mission Drift.”108. Personal correspondence.109. Personal correspondence.110. AZMJ, CARDMRI, CRS-MISION, EDA, Freedom From Hunger, Grameen Founda-

tion, Institute of Development Studies, Microfinance Centre for Eastern Europe,Micro-finance Council of the Philippines, Oikocredit, ProMujer International, and Sanabel.

111. Personal correspondence.112. Banker to the Poor (New York: Public Affairs, 1999).

challenges and solutions

Documents

needs of clients

microfinance community

hyping microfinance

core of microfinance

ideals of microfinance

sustainable clients

clientfocused microfinance

numbers of clients