The objective of CARE SEAD program managers is to create independent, sustainable microfinance institutions. But how does an institution define independence? CARE is a robust international organization, yet there is continual concern over potential dependence on one or two major donors. The dependency risk is greatest for any MFI that begins life as a project of CARE, but the risk also exists for MFIs that are legally independent of CARE. The risk of dependency can be evaluated at three levels: 1) strategic planning, 2) financial resource mobilization, and 3) operational management. For any given MFI the dependency risk may be focused in one or more of these areas, but a truly independent organization must be the master of all three.
Strategic Dependence
CARE is a multi-sectoral relief and development agency, not a specialized microfinance organization. The decision to pursue microfinance in a given country is based on a Long Range Strategic Plan (LRSP) that matches CARE’s many comparative and competitive advantages within the development context of the host country. Microfinance is never the only activity for a CARE country office (CO). CARE program managers often view microfinance as a component of a larger development strategy. There are certain advantages to this approach at an analytical level, but there are also several risks that MFI and CARE managers must keep in mind.
First, country office program managers may view the MFI strategy as subordinate to the short and medium-term objectives of other programs in the CARE portfolio. For example, an MFI could be pushed into extending credit to farmers in rural areas to meet the needs of participants in a CARE development project even though rural loans could undermine the long-term financial and institutional sustainability of the MFI.
Second, there may be a timing mismatch between CARE’s “long range” strategic planning process and the time it takes for an MFI to achieve financial sustainability. Changes in country office and regional management during and between LRSP periods can add insecurity and inconsistency to the business planning cycle of an MFI that
depends on CARE for financial or technical support.
Finally, when CARE is the actual or effectively the owner of the MFI, local managers and board members can be marginalized by the dominant position of CARE within the governance structure. Board members with little personal stake in the MFI and even less experience in microfinance may be easily persuaded to defer to CARE for strategic and operational decisions.
Responsibilities of an Independent Board of Directors
The board’s responsibilities consist of five categories of activities:
Legal obligations: The board ensures that the MFI fulfills its legal obligations and protects it from unnecessary liability and legal action.
Strategic direction: The board ensures that the institution’s mission is well defined, reviewed periodically, and respected over time. The board works to enhance the image of the institution and ensures that an appropriate planning process takes place.
Fiduciary: The board serves as the institution’s steward. It should ensure that the institution has adequate resources to implement agreed-on plans. The board guarantees the long-term viability of the institution.
Oversight: The board governs, not manages. It appoints and oversees the managing director. The board monitors operations and business performance. The board evaluates the institution’s performance in relation to other MFIs. The board assesses and responds to internal and external risks, and protects the institution in times of crisis.
Self-assessment and renewal: The board should regularly assess its own performance. Board renewal is one of the most important outcomes of the self-assessment process.
Financial Dependence
A CARE country office has a distinctly different strategy for mobilizing financial resources than an independent microfinance institution. The two strategies can find themselves in conflict. This conflict may be hidden by a high degree of apparent consent between CARE and the MFI, yet financial dependence, however agreeable to the MFI, will ultimately undermine the long-term objective of self-sustainability.
CARE generates the bulk of its financial resources by developing project proposals and winning grants from institutional donors. Larger, more complex projects typically win bigger grants and pay for a greater percentage of core costs for the CARE country office. But microfinance projects have the opposite tendency. As a successful MFI grows in scale and profitability, the need for donor subsidies diminishes towards zero. CARE may receive grant funding to continue a technical partnership, but the contribution to core costs quickly becomes negligible. While CARE does not encourage dependency simply to secure grant funding, the lost donor income will have an impact on the viability of the country office. At a minimum it can be said that there is no business incentive for a CARE country office to push a young MFI towards independence.
The MFI may also be reluctant to see a reduction in CARE’s grant funding. Ideally an independent microfinance institution will acquire its financial resources through retained earnings, equity investments, or taking on commercial debt. Yet CARE’s ability to raise money may discourage MFI managers from aggressively pursuing a more sustainable financial management strategy. At worst, CARE financial support may be seen as insurance against losses due to mismanagement or inefficiency and directly inhibit the MFI from achieving optimal levels of performance.
Operational Dependence
Operational dependence has both functional and cultural aspects. A functional dependence occurs when a routine task of the organization is performed or authorized by staff outside the MFI’s management structure. For example, if the CARE finance department manages important treasury functions, a functional dependence exists. Functional dependence is normally easy to spot and efforts should be made to estimate the fair market value of any services provided by CARE to the MFI. But the MFI should have a plan to assume responsibility for all CARE functions within the shortest possible time, preferably from the start of operations.
For MFIs that operate as projects of CARE the functional dependence can be assumed to be nearly complete as all authority for MFI activities is derived from CARE management. However, even in these cases the functional dependence can be reduced if the MFI develops the internal capacity to complete all tasks incumbent on any private business enterprise lacking only the legal authority to do so independently.