The social mission of microfinance institutions is to 1) provide appropriate financial services 2) to large volumes 3) of low-income persons 4) to improve their welfare. These four elements are highlighted in the left hand column in Figure 4. The right-hand column lists the controls and monitoring tools that MFIs need to mitigate social mission risk.
Mission Statement
The process of controlling social mission risk begins by identifying the target market. In its mission statement, the governing body of the MFI has to clearly articulate whom the institution wants to serve and why it wants to serve them. The mission statement should also indicate that the organization intends to serve this market for the long term as an independent and self-sufficient institution. This mission statement then serves as a guiding light for managers and employees as they apply it in their daily activities.
In developing the mission statement, it is important to strike a balance between the social and commercial mission. If the organization narrowly defines the target market, then it may have difficulty achieving sufficient scale and efficiencies to fulfill its commercial mission. For example, if the MFI only wants to serve refugees or people with HIV/AIDS, then the potential market for its services may not be large enough to create a sustainable institution, or it may be too expensive to identify and deliver services to a market that is geographically disparate, or the risks of serving a narrowly defined target group may be too high.
The composition of the board of directors can contribute significantly toward ensuring that the institution has a good balance, both in its mission statement and how it goes about fulfilling its mission. It is difficult to find individuals who embody the dual mission of microfinance, so boards are often constructed to be balanced, with roughly half of the directors personifying a social bias and the other half with a commercial bent. This may create some tense board meetings, but it tends to produce appropriate microfinance policy.
Market Research
Once the organization identifies its target market, the next step is to understand the needs of those persons to ensure that it provides them with appropriate services. If the mission is to serve the poor, an MFI must determine what services the poor want and need. Microfinance institutions should have the capacity to conduct quality market research. This will allow them to learn about the needs, opportunities, constraints and aspirations of their intended clients. Market research is not a once-off activity. The needs of an institution’s target market will evolve over time. The MFI needs to keep in touch with those changing needs and to respond accordingly. Microfinance institutions should have an ongoing commitment to improvement.
Figure 5 provides a summary of the tools used by microfinance institutions to gather information from current, former, and prospective clients to determine whether they are providing appropriate financial services, and to solicit suggestions regarding how to continuously improve those services.
Each MFI has to decide which of these tools are appropriate given their scale and stage of development. It is unlikely that all nine will be needed at once, but it is helpful to rely on three or four market research methods to ensure that you are getting consistent and reliable results. Of the nine, exit interviews are probably the most important. Lost customers are a valuable source of information about what is wrong with your products and services, and sometimes by demonstrating an interest in their opinions you can even attract those clients back.
One of the main purposes of conducting market research is to collect sufficient information to tailor an MFI’s products and services to the requirements of the target market. To determine if the financial products and delivery systems are designed appropriately, consider the following questions:
Monitoring Client Composition and Measuring Impact
Management and the board should have some way of determining whether the organization is serving the market that it is intended to serve and whether its services are having the desired effect.
The two most common indicators used to monitor client composition are average loan size and the percent of women clients. It is also useful to track average loan size specifically for first time borrowers, because while the average loan size for all clients often rises as the MFI matures the loans to first-time borrowers should remain fairly steady. If this value is rising—certainly if it is rising faster than inflation—then the MFI may be migrating away from its original target market.
In the process of choosing appropriate indicators, such as from the list in Figure 6, it is important to consider the balance between the social and commercial missions. Some data, such as household income and enterprise asset base, may be easily available because loan officers need that information to conduct the credit analysis. If loan officers are expected to collect information that is not essential to make sound credit decisions, however, they may have difficulty being efficient and carrying large enough case loads to create a sustainable institution.
Managing Growth
While many MFIs are interested in serving large volumes of people, in their efforts to do so, they commonly encounter three types of problems:
1) Capacity Constraints: Some MFIs operate in markets with a large pent up demand for microfinance. To respond to the demand, an organization may grow very quickly, only to realize that it does not have the capacity or the systems to satisfy the demand. These MFIs often experience bottlenecks in the disbursement process and risk losing credibility in the market place. Before expanding, MFIs need to ensure that they have the systems to cope with the projected volume of applications. If the demand exceeds expectations, and it is not possible to expand capacity, then the MFI needs to find a way of tempering demand, perhaps by raising interest rates, lengthening the pre-loan process, or limiting the number of applications a loan officer can submit each month.
2) Premature Expansion: Other organizations operating in similar environments expand before they have fine tuned their lending methodology, only to find out after it is too late that they have large volumes of poor quality loans on the streets. MFIs must ensure that their loan product is well designed and that the lending methodology is working before they step on the gas and expand. It is also important that they resist pressure from donors and others to grow before they are ready.
3) Reaching a Plateau: The opposite growth problem is also prevalent: some MFIs hit a growth plateau where they get stuck. No matter how hard they try, they cannot seem to push their expansion to the next level even though they have not saturated the market. Some get stuck at the 2500 to 3000 active client mark. Others get stuck at the 5000 to 6000 mark. In some cases, these organizations need to improve their marketing efforts. A closer examination, however, will often indicate that the organization has a client retention problem, which will suggest that the product is not designed appropriately for the market.
To monitor for this third risk, MFIs should track their client retention rates on a monthly basis. For the length of the period, annual is most commonly used, even for short-term loans, because a 12-month period neutralizes the affect of seasonal fluctuations. There is no industry benchmark that would be particularly useful with this indicator. It is more important for the institution to monitor its retention rate trend. As with other performance indicators, it is useful to disaggregate the retention rate by type of product, loan cycle and branch to determine if desertion is a bigger problem in certain segments of the institution’s client base.