Challenges And Solutions

2

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 beauty
in the tired wrinkles of our face; we will find comfort in the wisdom and
knowledge of the fact that we did all that we could in our power to
achieve 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 start
their day uncertain about whether they will get enough food that day to satisfy
their hunger, while a further 1.5 billion people have the basics, but struggle to
improve their conditions, and are always aware that they are one crisis away
from the daily battle that faces the poorest people.1
My starting point is the needs of clients and potential clients—a perspective
that is unfortunately heard less and less as microfinance focuses on building
sustainable institutions rather than sustainable clients. I argue that the starting
point needs to be an understanding of the experiences, challenges, and needs of
the different groups of people an MFI serves. This approach allows for prod-
ucts and services to be designed and delivered that are appropriate to their
needs, and for processes and systems to be refined so that they are efficient and
effective from the client’s point of view.

53

54 NEW PATHWAYS OUT OF POVERTY

This chapter looks at how the ideals of microfinance can be achieved, and
the 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 of
microfinance is highlighted as the foundation. Even where delivered through
for-profit, commercially focused institutions, ultimately microfinance is seen as
a means to an end. Few would see profit as their sole reason for working in
microfinance.
The first section of the chapter addresses some of the more visible and prac-
tical challenges highlighted by crises in some markets. Clients experience these
challenges directly in the quality and scope of services they receive, how they are
treated by the MFIs’ staff, and ultimately in what value or harm is created by
using the services.
While some people see the recent crises as isolated incidents, the majority
feel that fundamental lessons need to be learned. Overall, a broad range of
microfinance actors reject media suggestions that perhaps microfinance itself is
a flawed idea, but highlight the need for the microfinance community to reex-
amine assumptions and find ways to increase effectiveness. Central to this stance
is 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 in
microfinance).
I focus primarily on so-called credit-led microfinance, an approach that cre-
ates large, financially sustainable institutions that build a physical infrastructure
to deliver financial services, and fund these services primarily through interest
charged on loans (as well as fees and other charges). I also consider alternative
approaches to microfinance, and examine the extent to which the challenges
are 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 in
regulation, governance, and systems to protect clients.
• Ensuring quality of microfinance services: developing effective manage-
ment systems to deliver on these objectives.

Challenges to the Field and Solutions 55

STATE OF PRACTICE—
CHALLENGES TO 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. Access
to financial services can both protect and promote poor people’s livelihoods,
helping them better plan for anticipated financial needs, cope with crises and
emergencies, and invest in economic opportunities such as a microenterprise to
improve their income. Financial access in turn can lead to improved access to
basic 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 platform
for integrating or linking to a range of other developmental services.
Microfinance is also an industry that is coming of age, with impressive
growth 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 the
campaign.5 Microfinance has grown to become big business, with more than
US$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 billion
adults lacking access to even basic formal financial services.7 The challenge of
scale has been the driving concern over the past decade. Rapid growth demands
access to increasing amounts of capital. Commercialization—which allows
MFIs 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 in
Mexico in 2007 and SKS in 2010 validate this approach, with ACCION, for ex-
ample, commenting, “The financial markets have shown the true value created
by high-performance, double bottom line–oriented microfinance institutions.”8
But the win-win vision of a business approach to solving social problems is
under attack. The IPOs in Mexico and India highlight the potential for micro-
finance to attract investment driven predominantly by profit. The success of these
IPOs (not least for the MFI directors and investors) has led to moral outrage in


some quarters, and a sense of disquiet in others. There is particular concern when
high interest rates are perceived to drive high financial returns for the investors
in microfinance, rather than efficiency gains being translated into lower costs
for clients. Although Compartamos enjoyed high levels of client satisfaction, its
interest rates were relatively high for the Mexican market (and at around 100%
APR very high internationally). These rates were justified as generating capital
for growth, but following the commercialization of the bank, interest rates were
maintained, generating returns of 100% annually, and fueling the huge interest
in the IPO. Rich Rosenberg writing for CGAP9 asks, “To what extent do the
profits come out of the pockets of poor customers? And are the profits used for
further service to more poor people, or do private investors capture them?”
Meanwhile the erosion of client livelihoods through increasing energy and
food prices, recession, and retrenchment is leading to client overindebtedness
and delinquency, and exposing weaknesses in MFI systems overstretched by
rapid growth.10 There are reports of increasing unethical practices by field staff
chasing high productivity targets. The Centre for the Study of Financial Inno-
vation (CSFI) Banana Skins report for 2011 concluded that credit risk is now
the number-one challenge for MFIs, demonstrating the challenges to the very
foundation of microcredit—the ability of clients to repay their loans.
Although commercialization allows microfinance to achieve scale, increasing
the number of clients is, by itself, an indicator neither of positive impact nor the
strength of an institution. Although some believe that providing access to financial
services is by definition a socially useful activity, experience has shown that social
outcomes of microfinance are not automatic but rather the result of prudent strat-
egy, design, management, and governance. As the recent global financial crisis
demonstrates, social performance in financial services cannot be taken for granted.
The benefits of microfinance are being questioned, too. Academic studies over
many years have reported generally positive but inconsistent impacts of micro-
finance,11 and recent studies have failed to find widespread and consistent poverty
reduction 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 by many as the silver bullet in the
fight against poverty. Although most practitioners would recognize this as a huge
exaggeration, 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 there
are 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 investment
vehicle. “The microfinance industry, although still young, has reached a level of
maturity [such] that recent events can be seen as systematic and need to be taken
seriously.”13
While competition and commercialization can stimulate improvements in
client service and improved efficiency, MFIs can compete equally by simplifying
their 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 investor
expectations and the lack of balance created by regulatory prohibitions on deposit
taking. Many people highlight the particular danger of the combination of rapid
growth and competition, combined with weak regulation. Citing the examples of
countries such as Nicaragua, Bosnia, Morocco, and Pakistan, a CGAP report
concludes, “Microfinance grew remarkably rapidly but the repayment problems
now evident in these four countries suggest that growth came at a cost.”14
In rapidly growing organizations, developing and retaining the necessary
staff capacity to effectively deliver quality services is a challenge. High rates of
growth put huge pressures on management systems, challenging the ability to
ensure consistency in service delivery. This has been the experience of many
MFIs—in both competitive and less competitive markets. Reille highlights the
loss of quality and efficiency of staff, the focus and effectiveness of middle man-
agement, and the inadequacy of internal controls: “The drive towards scale also
brings with it a preoccupation with rapid expansion that can easily erode good
banking 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 private
investors. There is a sense that the growth of commercial investors leads to a
change of focus with more emphasis on short-term returns and a concern that
investors will push MFIs to maintain relatively high interest rates in order to
generate high rates of return. Importantly, publicly listed companies have a legal
obligation to maximize return for their shareholders. Chen et al. highlight the
concern that “excessive commercialisation will tilt the gains heavily toward in-
vestors at the expense of the poor.”16 Maya Prabhu, head of philanthropy at
Coutts, 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 and
profits.”17
One particular example highlighted by the experience in India is the move
to generate loan capital through the capital markets rather than through deposit


taking. This is seen by many to encourage people who may not understand
some 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 wish
to 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 that
we protect the quality of what we do and products that we give to the
clients.
Carlos Danel, Compartamos19

In most regions of the world, competitive microfinance markets are a long way
off, yet growth in client numbers, portfolio size, and efficiency remain the dom-
inant benchmarks of success. There is a strong sense from my conversations
that the highly competitive markets are extreme examples of issues that apply
more generally to credit-focused microfinance that pursues institutional growth
and sustainability without an equal focus on client growth and sustainability.
“In a heated marketplace all of the systemic issues that were present rise to the
fore and get out of control,” states Frank DeGiovanni.20 These challenges are
present 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 made
without a full understanding of what they imply for social as well as financial
performance. There are challenges in a number of areas.

Mission Drift
Mission drift is not an exclusive risk of commercial MFIs. It’s a risk in
all MFIs.
Kimanthi Matua, K-Rep21

A focus on growth and efficiency leads MFIs to focus on clients who are easy
to 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 areas
are not an obvious choice of client. Evidence from a study by Women’s World
Banking (WWB)22 and others suggests that organizations that strongly focus on
growth in client numbers, portfolio, and efficiency are likely to move away from
hard-to-reach areas, and from women and poorer clients to more profitable
and easier-to-reach clients. Matua states, “Many of us have witnessed mission


drift happen from pressure from donors, regulators, managers, staff, and even
clients themselves.”23 This is particularly the case where an MFI transforms into
a for-profit institution where greater pressure may exist to generate financial
returns for investors. Transformation also leads to an expansion of the MFI’s
client base to include savers outside the traditional target group. Matua also
reports, “When you transform you begin to attract depositors from all segments
of market, as that is the only way you can grow. But depositors demand things
because they give you something, they demand certain services, so they influence
policy. 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 undermine
MFI systems and internal control. Growth puts a strain on management systems
as relatively inexperienced people are promoted and new staff are trained
quickly. Efficiency has often been achieved through simplifying processes such
as 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 absence
of control systems over the maintenance of cash and cheques; many branches
where 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 being
stretched or streamlined in order to reduce costs, leading to reduced staff-client
time and a deterioration in relationships. In India, for example, staff produc-
tivity has been increased to very high levels, with caseloads increasing from
fewer than 400 clients per loan officer in 2007 to more than 500, and in one
case over 900,25 a point at which staff members can have very little knowledge
of their clients.
Pressure on field staff to grow their portfolios and ensure high repayment
rates, despite problems experienced by clients, often leads to short-cuts being
taken (as in assessments of capacity to repay) and sometimes harsh collection
practices (discussed later in the chapter). In group lending situations, it puts full
reliance on repayment assessments on the groups. Malcolm Harper highlights
the 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 on
whether the household can afford the repayments, on their other debts and so
on. . . . I think it’s called ‘relationship banking.’”26

Client Value
Where efficiency leads to simplified processes and a small number of standard-
ized products and services, the MFI likely becomes less effective at meeting the
needs of clients. Linked to this is the WWB’s finding that MFIs often make cuts
to program aspects important for deepening outreach and creating value for
clients. Activities such as cash-flow-based credit analysis, client training, busi-
ness development services, and client assessment are often the first to go. Julie
Slama of the WWB explains, “These are the very programs that would allow
MFIs to profitably serve poor women, and without which, women will either
choose not to take loans or will fail as borrowers.”27 Often cuts may have a
greater 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 risky
strategy, and that microfinance needs to be focused on long-term value for clients:
through delivering products and services responsive to client needs and ensuring
quality in the delivery of these services. Vikram Akula of SKS similarly believes
there is no intrinsic tension between profit and impact: “[Good business] is not
about 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 multiple
lending. 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 were
spoilt for choice; many borrowed from multiple lenders.”29 Similarly, prior to
the collapse of Banex in Nicaragua in 2010, MFIs competed by increasing loan
sizes. According to Barbara Magnoni of EA Consultants, “Microentrepreneurs
were 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 not
stop other institutions lending to the same clients. Multiple lending is seen to be
a 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 level
of multiple borrowing.31 Many people are careful not to overindebt themselves
and 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 the
context of pressure for consumption, can lead to clients making bad decisions.
The CSFI Banana Skins report for 2011 identifies overindebtedness as the major
cause for credit risk: “The problem is so severe that it could lead to a possible
implosion of some of the key players. . . . Increased delinquencies, program de-
terioration, damage to clients’ well-being . . . we’re seeing this issue crop up in
too many markets.”32

Toward Improved “Relationship Banking”
These challenges get to the very heart of microfinance as a business approach
to 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 commercial
focus must combine with renewed attention to clients and innovation to ensure
that services are designed and delivered in the most effective as well as efficient
way. Clearer standards and transparency are also essential to ensure that clients
are 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 of
my 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 of
potential 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 clients
once an MFI becomes a regulated, for-profit financial institution. In a sample
of 27 MFIs that had made the transition from NGOs, the percentage of women


clients served fell from an average of 88.5% in the year prior to the transition
to 68.5% within four years of that transformation.34 Women generally own
businesses that are smaller in size than those of men; they have smaller cash
flows and hence a lower capacity to absorb higher debt amounts than that of
men, and women are therefore seen as less desirable clients. MFIs also may
move 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 reliably
pay for services lies at the heart of the challenge of outreach. It also pushes MFIs
to focus on provision of credit that can generate an income, rather than savings,
which requires a larger infrastructure to mediate very small transactions from
large numbers of people. It is therefore unsurprising that MFIs find it hard to
reach remote areas, and tend to focus on clients with a good existing capacity
to absorb credit.
Community-based models provide a lower-cost alternative to building up
the institutional infrastructure of credit-led microfinance, allowing for access
to more remote and rural areas. Groups are facilitated to mobilize and on-lend
their own savings. The groups are trained and then can become sustainable, re-
quiring minimal ongoing external support. Groups can often replicate without
external involvement. A significant subsidy is needed to facilitate the capacity
building 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 sustainable
MFI, and that this is a lower risk approach where ultimately all the benefits
come back to the clients. Jeffrey Ashe of Oxfam-America argues that “savings-
led microfinance could provide access for much less than credit-led. The model
offers great potential to have millions of member-owned, member-managed and
member-used organizations of the poor.”35
Poor, vulnerable, and marginalized people. Most microfinance—including
community-based models—tends to exclude a significant number of the poorer
and more vulnerable population. Although the Microcredit Summit has cam-
paigned since 1997 to increase the poverty focus of microfinance, broadly in
most countries and most types of microfinance organizations, clients are pre-
dominantly those people just below and just above the poverty line. Services
rarely extend to the very poor.
For microcredit to be appropriate, the clients must have the capacity to
repay the loan under the terms by which it is provided. Where there is little to
no 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 we
would be incapable of repaying it properly. So, that could create problems that
we would rather avoid.”36 In other cases, even very poor people have been
shown to value and productively use credit. There is also broad acceptance that
access to savings is a critical need for even the poorest people. Decisions need
to be made on the basis of understanding rather than assuming that certain ser-
vices are suitable or unsuitable.

Factors Toward Exclusion
Most MFIs serve a relatively small proportion of their total potential market,
deliberately or inadvertently excluding certain groups. A number of factors lead
to 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 often
require 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 often
present, 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 and
services, or make changes in pursuit of efficiency that may have the side effect
of 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 the
organization serves. Many MFIs have a culture that rewards growth in client
numbers and portfolio size. The organization thus tends to focus on more
easy-to-reach areas and clients. Management responds by selecting opera-
tional areas in urban and peri-urban locations, or in the market center close
to the main road in rural areas. Field staff respond by targeting easy-to-reach
people, and those who are able to take a relatively large loan and grow it over
time (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 the
wider 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 such
as the bias of serving clients close to the branch office. Subsequently, a manager
returned to her branch and approved two groups that she had been intending
to 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 common
experience in groups—of all methodologies—is that they are dominated by
stronger members, who may exclude weaker individuals from joining or limit
their 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 solidarity
lending 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 or
complex for an MFI to serve its target clients. Examples include requiring all
clients of MFIs to have national identification cards; classifying all loans to in-
formal business as consumer rather than enterprise loans, thus requiring higher
provisioning for portfolio at risk; or a requirement to make credit bureau checks
before 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 decisions
about their loans.

Overcoming Exclusion
Organizations that seek to reach certain groups do so. It’s a question
of will.
Anonymous survey respondent37

If a goal of microfinance is financial inclusion, then the challenge is to reach
out to those people who could benefit from financial services who are currently
excluded. Where an MFI defines particular target clients, products and services


should be designed to meet their needs, and that outreach is monitored and
managed. In addition, many MFIs have the potential to deepen their outreach
by understanding factors that lead to exclusion of potential clients, and making
adjustments in response.
While poorer, vulnerable, and more remote clients may be more costly or
risky to serve, considerable evidence exists that these trade-offs are not auto-
matic.38 When MFIs put effort into designing their programs to serve these
groups, 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 client
groups. A focus on savings rather than credit—at least initially—may often be
more appropriate. Guy Vanmeenen describes the approach of Catholic Relief
Services (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. After
about 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 to
form subsequent groups within the same community, and to include groups with
a 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 The
following two examples illustrate approaches to deepening financial inclusion.

AMK, Cambodia
AMK demonstrates the practical steps an MFI can take to overcome exclusion
and deepen financial inclusion. AMK has been ranked number 17 in the world’s
top 100 MFIs, serving 250,930 clients with 108% operational self-sufficiency
as of December 2010. It is also notable for its focus on serving poor women in
rural areas, with around 90% of its clients rural, 86% female, and 56% below
the 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 deepened
its 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 chosen
target group through maintaining relatively low loan ceilings on products, and
selecting rural operational areas with higher than average poverty rates. AMK
has also adapted its savings and loans products to the specific needs of rural
agricultural 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 has
been particularly successful in building and maintaining a social performance
culture in a context of rapid growth, and retaining this as personnel, manage-
ment, and board members change. Regular reports on social performance serve


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

• Making social performance a core element of formal staff training.
• Incorporating a social dimension into staff appraisal through HR and an in-
ternal audit.
• Including in staff incentives a difficulty rating that takes into account more
challenging rural environments.

Small Enterprise Foundation (SEF), South Africa
In the case of SEF in South Africa, some relatively simple steps—including start-
up businesses and poverty targeting—successfully transformed a program that
was serving predominantly women above the poverty line, MCP (formerly
Microcredit Programme), into one that serves predominantly very poor women,
TCP (formerly Tshomisano Credit Programme). Figure 2.1, illustrating results
from the CGAP poverty assessment of SEF, shows a huge difference in poverty
outreach.40 While MCP predominantly reaches clients from the least poor group
and has few clients from among the poorest third, TCP is biased toward poorer
people. What is more, despite smaller initial loans and the costs associated with
poverty 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.

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

60%

50%

40%

Non client
30%
TCP client
20%
MCP client

10%

0%
Poorest Less Poor Least Poor


CREATING VALUE FOR CLIENTS

I guess fundamentally financial services are about clients, they are about
people, because at root they are about helping people manage their
lives. The financial services are designed to help the clients build assets
and 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 benefit
or value for its clients. This section examines in more detail how this intent can
be put into practice.

Adapting Financial Services to Clients’ Needs
In recent years there has been a move away from seeing microfinance as credit
for self-employment to recognizing the wide-ranging use and value of financial
services—savings, credit, insurance, and remittances. Access to relatively large
sums of money compared to a client’s regular income gives that person the
means to better manage her or his finances, which can help in planning for and
meeting expected household needs such as paying for school fees or buying rice
or maize in bulk. It also helps increase resilience and reduce vulnerability to the
many risks that poor people face. In addition, financial services can help poor
people 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 that
they are used. Provision of microfinance in agricultural communities is a good
example of where the traditional product of weekly repayments does not meet
the needs of a rural producer for a big lump-sum loan at the beginning of
the agricultural production cycle and repayment only after harvest time. As
deGiovanni of the Ford Foundation states, “So if you were measuring it from
a financial inclusion paradigm you would say, well, the services are there. From
our point of view that product is not meeting the needs of that population. The
product needs to be retooled so that it’s adapted to the economic needs of a
rural 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


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 basic
financial training—can dramatically improve outcomes for borrowers. Other
changes to the delivering of financial services might include fitting in with the
seasonality of client livelihoods, making services more accessible through mo-
bile services, or building support between clients with the use of groups (see Box
2.2): “Up to now, no one has progressed because of the repayment schedule of
one week. At least with one month (as a deadline) I could have gone all the way
to Bamako to buy merchandise and made a profit. It becomes harder during the
rainy 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 of MFIs providing a very limited range of services? One of the
strongest messages I hear repeatedly is the weakness of many MFIs in under-
standing and responding to the needs of their clients (and potential clients). As
Chris Dunford from Freedom From Hunger states, “A famous business adage
is ‘know your customers’: the irony is that many MFIs, which try so hard to be

Box 2.2 AMK Adaptations to Fit Rural Livelihoods
AMK caters primarily to rural agricultural households, a market that is
characterized by poor infrastructure and regular floods and droughts.An un-
derstanding of client vulnerability and seasonality is therefore central to the
design of products and services.AMK identified that many clients have nonfarm
incomes, and that clients’ financial needs change throughout their lives as their
lifestyles and income sources change.To address these needs AMK provides:
Group loan products with complete flexibility of repayment: De-
pending on their income stream, clients can choose between installment or
end-of-term loans.
Individual loan product that caters more to nonfarm opportunities:
Individual loan products are also available for stronger clients. These include
regular, 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 deposits
and withdrawals or fixed deposits for clients who want to save their money for
a specific purpose.
Source: Adapted from Managing Social Performance:AMK (Cambodia),Imp-Act Consortium,and www.akm
cambodia.com.


businesses, aren’t following this adage and often neglect the needs and interests
of their clients.”45
In part, running an MFI is tough, and the margins are small. Much of the
early development of microfinance centered on replication of successful mod-
els rather than seeking to understand client needs in each context. Lending tiny
amounts of money is costly, so standardization of products and processes was
viewed as the only way to get the products to the population at a reasonable
cost. Jeffrey Ashe of Oxfam America describes his experience in Bolivia in the
1980s: “We assumed—a strange assumption—that the poor needed to save by
taking on debt. The mantra for us as institutions was to keep it simple, offer one
product, drive down cost, and expand the market. That had its own internal
logic, but it didn’t meet the needs of clients.”46
From the late 1990s there was an increasing awareness of the need for a
more 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 on
understanding 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 its
clients (see Box 2.3). One of the key messages of this chapter is the need for a
much greater application of what we know about how microfinance services
can be tailored to the needs of different client segments.

Key Areas for Development
of Responsive Financial Services
Improving credit products: Moving beyond credit for enterprise. Although
microfinance has diversified significantly, many MFIs still implement a rigid
credit-for-enterprise approach that fails to adequately take into consideration

Box 2.3 Examples of Poorly Adapted 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 are
needed 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 a
profit; clients often hold back part of the loan disbursed to make their
early repayments.


the complexity and needs of poor people’s financial portfolios, and does not
allow 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 unaddressed
financial needs will lead to “misuse” of the loan—for example, paying school
fees 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 be
tied 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 not
carefully 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 do
not 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 and
pay back on the same schedule. Approximately 30% of group members at any
one time do not have a loan, but continue to save. These features are very much
appreciated 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 of
this approach is also reliant on strong group processes and ensuring that clients
are 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 to
Grameen 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 and
their 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 realistic
about recognizing that microfinance cannot create benefits all the time, and
with credit in particular negative outcomes are inevitable some of the time.
Credit can provide additional capital for larger demands, allowing expenditure
to be brought forward or to make a productive investment, and therefore may
be worth the risk. Credit may also be important in responding to a need where
it 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, is
it’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, so
that you can bear with the fact that sometimes things don’t go as planned.”
—Alex Counts, Grameen Foundationa

Grameen I
This system of delivering credit was one that involved poor women taking loans
from Grameen and undertaking the responsibility of other group members in
case 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,” as Yunus says.The main weakness was the rigidity in the
lending scheme.The repayment for a fixed schedule was the same for everyone
and 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 was
endangered. Repayments began to decline sharply in 1998, and Grameen II was
in response to this, with its main “weapon” being greater flexibility.

Grameen II
In 2000 Grameen Bank initiated a major revamp of products and services with
the understanding that customers’ credit needs have been evolving and that
credit alone is not sufficient to meet the needs of the poor. Among the most
important 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, variable
terms, and repayment schedules. [Also included were] larger loans for
business, a top-up loan facility, and introduction of rescheduling of loans
in case clients are in difficulty.
While the Centre Managers work closely with the clients and determine the
products that they should have, as product knowledge is spreading Grameen
members are increasingly gaining control of this aspect.The role of the manager
is evolving from being a “teacher” to an “officer who supplies information and
financial advice to clients who themselves determine the products and services
they require.”
Source: Adapted from MicroSave Briefing Notes #1 and #8 on Grameen II


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 may
be 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 compulsory
savings 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 significant
challenges arise when providing access to this service (see Box 2.5).
In addition to savings and credit, other financial services such as insurance
and remittances are also important tools for poor people’s financial manage-
ment. Insurance when well structured can help clients cope with emergencies
without damaging their livelihoods, and remittances are a crucial lifeline for
millions 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’s
World Banking, for example, highlights how microinsurance can be designed
with the specific needs of poor women in mind. Poor women have traditionally

Box 2.5 The Experience of Cashpor, India in
Mobilizing 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 for
a small fee.
Cashpor is strongly of the view (corroborated by the market research that
Grameen 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 a
banking correspondent, Cashpor does not have the freedom to independently
develop 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


managed risk in very risky ways: by relying on their husbands, pulling children
out of school to work, or selling productive assets such as livestock or equip-
ment. Gender-sensitive microinsurance might cover ill heath due to maternity
or childbirth, or give women the choice of selecting another beneficiary if they
do not think their husbands will protect the children properly after the woman’s
death. In Colombia, one company’s life insurance pays monthly benefits that
can be used for the purpose of educating the children for two years after the
death of a parent, in order to reduce the pressure on the surviving parent to
pull children out of school.47
Community-based savings and loans. In most communities, informal savings
and credit groups exist that serve as an important tool for financial manage-
ment. Groups focus on building up relatively small amounts of savings that can
be lent out to the group, and help people manage anticipated and emergency
needs for money. A number of organizations have developed community-based
models of microfinance that build on traditional savings and credit groups. The
groups, when they are properly trained, build in flexibility; the loans are small
enough for the clients not to get into trouble, and all the profits return to the
members 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 when
needed. Interest is paid back to members (rather than covering the costs of an
MFI), but stronger members often become net savers (and, on balance, benefit)
and weaker members become net borrowers (and, on balance, pay interest). In
addition, as the money is shared out among the group annually, the groups do
not build up money over time, and thus are not terribly good at building up
sufficient capital for investment in enterprises or longer-term needs for life cycle
events such as weddings or funerals. Lauren Hendricks of CARE reports, “In
my experience, mature VSLA groups frequently start to request additional, more
formal financial services in order to meet some of the shortcomings of savings-
led groups.”48 This creates an opportunity to build linkages between these
groups and other financial institutions. For example, in India the self-help group
linkage 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 and
providing an institutional model that does not push credit clearly represent one
aspect of the solution to the challenges in microfinance. Somehow, we have to
capitalize on the good of encouraging savings and self-management while in-
creasing flexible access to these savings. Thus, it would seem that both the credit
and savings-led approaches have strengths and weaknesses when analyzed from
a client perspective, and lessons result from both models.


Some models seem to fuse the strengths of each approach. The original
methodology for Village Banking, for example, used extensively in Latin America,
included the establishment of an internal savings fund that could be used to
meet 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 by
most MFIs as it was seen to be costly to facilitate and competed with the MFI’s
external loans and therefore undermined the MFI’s financial sustainability. Some
MFIs such as Finca Peru have retained this internal fund (see Box 2.6).
Guy Vanmeenen of CRS cautions, however, against overoptimism in these
linkages, and highlights the value of giving people access to a range of different

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’s
loan 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 Finca
business loans. Internal fund loans are flexible, with members choosing the num-
ber and regularity of installments, and can be used for any purpose, allowing
members 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 relative
to 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, a
costly 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 costs
are 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 the
most remote rural areas in the poorest areas of the country. During our life-
time, we have stubbornly maintained our methodology for empowerment, using
microfinance as a tool.”
Source: Iris Lanao Flores, executive director, Finca Peru


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 . . . people
say, can we do more, can we add on more, can we make it more than it is? We
have to be humble and be clear on what the limitations of this are. You don’t
necessarily have to address the limitations.”49

Adding Value Through Nonfinancial Services
The basic spirit of microfinance is to search for possibilities based on
knowledge, understanding, and perspectives that start at the ground
level. We understand our clients and their needs. There is no reason
why we cannot use those same skills to address the other constraints
our clients face.
Fazle Abed, BRAC50

There is much debate about whether MFIs should or should not provide non-
financial services. Some MFIs recognize the true potential of microfinance as only
being realized when the opportunities to link or integrate a wider range of services
are taken. BRAC, one of the world’s largest NGOs, typifies this logic: “In BRAC
we saw that many women were stuck in low-return activities. We saw that many
were 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 basic
diseases, and train in proper feeding and hygiene. These people get paid for the
services 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 other
services are important and that microfinance is not a panacea. Other services are
needed to drastically change lives of people below the poverty line. But these we
cannot do.”52 Clearly there will always be opportunities to do more to create
social 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 an MFI chooses to provide financial services, but
a practical question of their capacity to respond to clients’ needs. There may be
opportunities 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: integrating
or 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 how
nonfinancial services can complement financial services and create benefits for
clients and MFIs:

• Investment in an economic opportunity and productive assets. While an
appropriate loan might be important for a microenterprise, it may be that
business training, marketing, or access to high-value products would in-
crease the likelihood of success in terms of growth and profitability. A
supportive 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 their
needs, 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 facilitating
access to health services and establishing well-formed and facilitated
groups that are likely to support one another in times of crisis.
• Other social benefits. Other outcomes pursued by many MFIs—such as
women’s empowerment and improvements in health, housing, or educa-
tion—are all much more likely to be achieved through a combination of
financial and nonfinancial services. Groups, for example, have the po-
tential to create benefits such as increased confidence, strengthening of
social 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 ensuring
that it does.”53 These might include awareness, literacy, and related skills
development or strategies to affect men’s behavior toward women within
the household and local community.

Business Models for Combining
Financial and Nonfinancial Services
In some cases—such as the BRAC example—a social business model may be
able to sustainably deliver nonfinancial services. In others, some nonfinancial
services may be integrated into financial services. Many organizations, for ex-
ample, provide support such as business skills training, marketing, or provision of
high-value products. In Tunisia enda inter-arabe, for example, includes business


Box 2.7 Freedom From Hunger: Meeting Client Needs to
Avoid Loan Dispersion
In giving loans intended for businesses which are in fact used by clients on
a variety of other pressing needs, MFIs risk potentially overindebting their
clients.The issue, however, is not one of clients using the loans “incorrectly,” but
of MFIs not adequately meeting client needs. Freedom From Hunger has been
working with a number of MFIs to address this issue, particularly in relation to
use of loans for health needs.
Though there are a large number of reasons for clients to default or drop
out, 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 study
in Ghana indicated that the cost of malaria treatment represented just 1% of
wealthy families’ income but 34% of poor households’.a The natural response
one would think when faced with such pressures is for households to divert
loans intended for other uses—microenterprise, for example—to urgent health
expenses. This is corroborated by research carried out by Freedom From
Hunger at five MFIs, which revealed that large proportions of clients resort to
using business loans for health-care expenses, ranging from 11% of clients at
RCPB 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 their
health needs as required, enabling clients to be more successful—less likely to
default and drop out—and the MFI to benefit not only from meeting its social
mission, but from improvements to its bottom line.
In addition to “impressive net social value creation,” the research concluded
that the combined products make good business sense. Health protection prod-
ucts tested included health education, health savings, health loans, health micro
insurance, linkages to health providers, and the sale of health products in rural
communities. Some of these products are expected to break even and even
begin earning net profits in coming years, and other non-revenue-generating
products (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 to
Microfinance,” 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 assists
them in using their loans wisely.”54


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 organized
farmers, and we analyze their needs with them, then we look for a partner mix
who 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 continuous
improvement to meet client needs. We sometimes err, but we should al-
ways learn and improve. Being honest about our mistakes and opening
ourselves to criticism is part of the process.
Davis Broach, Relief International56

A characteristic of successful client-focused organizations is regular feedback
from and dialogue with clients (see Boxes 2.8 and 2.9). For example, enda inter-
arabe integrates discussion circles into its methodology, holding regular group
discussions 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 improving
our products, as well as introducing new products, comes naturally” (Michael
Cracknell, 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 improvements
that 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 2.8 Integrating Client Feedbacka
Over the last decade, Opportunity International has conducted more than
50,000 face-to-face surveys with clients in Africa,Asia, Eastern Europe, and Latin
America.The research showed that clients want savings as much as they want
small business loans, and their input has aided the development of a wide array
of financial tools—including agricultural finance and rural savings, crop and
health 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


Box 2.9 Compartamos—Adapting Financial Products to
Client Needsa
When researching its life insurance product, Compartamos discovered that
when a family loses a bread earner, negative family cash flow typically takes
about 1.8 years to recover.This included not only loss of income, but also the
expense associated with the funeral.There are limited possibilities to raise funds
quickly so an immediate loan is usually sourced from a moneylender or pawn
shop, 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 to
pay for a future event. So in focus groups they asked clients what would be
more 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 the
shock) 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 about
whose 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 size
is indeed the smallest in the local market led management to wonder whether
the loans were becoming too small to fit the needs of clients. Segmentation of
the data by the clients’ poverty level demonstrated that poorer clients were not
complaining. 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 to
products, can be as dangerous to clients and the institution as rapid growth and
expansion.


Figure 2.2 AMK Client Satisfaction Data Segmented by Client Poverty Level

10%

Poorer (n = 130)

5% Medium (n = 110)

Better off (n = 49)

0%
Small loan size

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 small
things to improve their services and create more value for their clients. As a first
step, it is about ensuring that services are accessible, timed to fit with people’s
needs, and above all do not have negative impacts.
Even where an MFI understands what clients need, there may be internal
prejudice and resistance, making change harder to achieve. When Grameen
Bank changed to a new operating system that allows clients greater flexibility
to reschedule loans, motivated by an understanding of the impact of emergen-
cies such as illness and natural disasters on clients’ ability to repay, the change
provoked strong reactions from staff convinced that this level of flexibility
would lead to the breakdown of group solidarity and widespread repayment
problems.58 This sort of resistance may help explain the relative lack of progress
in building more client-focused MFIs.
It is perhaps worthwhile to end this section with a note of caution from a
respondent to my survey for this chapter: “If MFIs started with the premise of
at least doing what they set out to do well, then perhaps they could explore
broader areas. But currently, given that the vast majority cannot even offer a
fairly 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 AND VULNERABILITY
IN REGULATION, GOVERNANCE, AND
SYSTEMS TO 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 of
the 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 has
the potential to harm its clients. This section focuses on how MFIs design their
products, services, and systems based on a recognition that illness and other
emergencies are commonplace in the lives of poor people. By protecting and
helping clients come through these problems, MFIs can significantly improve the
chances 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 a
client perspective, a number of key elements can be defined. These are reflected
in the client protection principles promoted by the SMART Campaign, an in-
dustrywide initiative supported by over 1,000 MFIs.60 In this section I highlight
the vulnerability of microfinance clients and the risks that credit in particular
creates, and focus on three key elements of responsible finance reflected in these
principles:

• Avoiding overindebtedness
• Appropriate collections practices
• Transparent and responsible pricing

Avoiding Overindebtedness
A few months ago I was in Nicaragua visiting a branch office of a local
nonprofit 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 this
was all the stuff the “pro-poor nonprofit” organization had taken from
the homes of the poor.
Aaron Ausland61

For clients, overindebtedness reflects the risk of credit and relates to an experience
of someone who is “continuously struggling to meet 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 client
chooses to take a loan knowing that she will have to make significant sacrifices
to make her obligations, should the MFI have not granted her loan?” For exam-
ple, microfinance clients I interviewed in Haiti sacrificed food purchases to make
loan repayments, with the knowledge that their investment in a business would
generate 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 perspective
there is often great stress that is not translated into repayment problems. PAR
is 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 an MFI recognize in advance when the problem
is occurring. For group lending in particular, PAR is usually only captured when
a group fails to complete a payment rather than when an individual within the
group fails; thus, default only rises when clients are very highly stressed. In
India, for example, low PARs are used to argue against overindebtedness in the
current competitive context.
While multiple loans are often seen as an indicator of overindebtedness
from a client perspective, these loans may be very logical when the clients’ needs
are not being served by any one institution. Bobbi Gray of Freedom From
Hunger writers, “A client can appear overindebted with the one loan they have
and then there are those who have five loans, and they’ll indicate they are all for
different purposes and they are just proud they are not having to borrow from
friends or family.”63 Access to formal financial services may also lead to unex-
pected outcomes, with access to a loan from an MFI increasing people’s credit-
worthiness and therefore leading to increased borrowing from moneylenders.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 more MFIs provide loans that exceed a client’s
capacity to repay without significant sacrifice. Four elements are key in avoid-
ing overindebtedness:


• Structuring products and services to ensure that they are appropriate for
their purpose and cash flow.
• Building in measures to help clients cope with emergencies when they
occur.
• Responsible lending that assesses capacity to repay and does not push
credit or mis-sell other products.
• Supporting clients via financial education helps them to understand the
risks and obligations related to borrowing.

The first step in avoiding overindebtedness is to ensure that products and
services 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 their
vulnerability and manage risk. Credit needs to be designed with this in mind,
and poorly structured it can serve to increase risk and vulnerability rather than
reduce it. Savings, insurance, and remittances are all important management
tools that can be useful when things go wrong.
Good client feedback mechanisms are important practically for MFIs to en-
sure that clients receive appropriate loans and that information comes back to
the 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 not
occurring. The story in Box 2.10 illustrates how easily clients can get into a
cycle 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 by
MFIs. 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 (see
Boxe 2.11). Individual lenders, particularly those lending to businesses, often
conduct 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 individual
lenders working with relatively high-value loans. Similarly the use of credit bu-
reaus has significant information requirements and may be costly for the MFI or
difficult to establish in many markets, due to a lack of client identity documents
and 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 of
them had these individual complementary loans and they were all due at the
meeting 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 that
day, suddenly no one had the money for their payments—even though min-
utes before everybody had nodded yes that they have their payments.After
much heated discussion, it became clear that many of the women had sim-
ply borrowed the money that they needed for repayment from another
source, planning to get a new loan and repay the person they borrowed from
on the same day.When they learned there would be no more loans, it was
as if the music had stopped during musical chairs and everyone was left
without 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 build
client understanding, group control, and responsibility for the lending process.
Solidarity groups, for example, must verify that other client loans are affordable
and commit to covering their repayments in the case of default. Lisa Kuhn
Fraioli describes the experience of Freedom From Hunger, which emphasizes a
strong client-led evaluation process as a critical part of group lending: “When
groups are formed, clients are taught a simple evaluation methodology to assess
investment opportunities, capacity to pay, and risks. This is usually comple-
mented with ongoing financial education that teaches clients about budgeting
and estimating their capacity for indebtedness.”65
However, in reality many organizations have reduced the role of solidarity
in their group lending, and effectively are lending to individuals within groups,
using security such as high compulsory savings or in some cases collateral in
place 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 possible
given 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 Credit Assessment at Swadhaar
Swadhaar (India) uses a two-part evaluation to determine whether to lend
and 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 to
take 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 crosscheck
sales, and for salaried clients, LOs verify the stability and amount of income by
doing 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 other
clients and field staff.
To check overindebtedness of its clients, Swadhaar captures data on its
clients’ borrowings and has signed up with a credit bureau to track a client’s
credit 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 other
financial 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 to
the MFI; 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 the
low levels of education and financial literacy of microfinance clients, MFIs have
a responsibility to ensure that clients fully understand the risks and obligations
of credit. Clients should also be well informed about the service that they should
expect, or field staff can take shortcuts or push inappropriate loans or other
products. 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 use
money 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 also
depends 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 the
money well or it can be bad.”67
Opportunity International, for example, an international organization
working in more than 20 countries, sees investment in financial literacy as a
critical component: “Clients are better empowered to make informed financial
decisions and to exercise those decisions with confidence.”68

When Things Go Wrong
Zero delinquencies have always concerned me because that’s not quite
how the world works. Businesses are sometimes unable to generate the
cash 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 actually
paying 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 for
clients, and their debt can become burdensome. One of the defining features of
poverty is the inability of poor people to cope with the inevitable problems that life
throws at them. Increasing emphasis on savings and, to a much more limited ex-
tent, insurance and remittances builds client resilience and provides the means to
respond when things go wrong. However, credit leaves clients in debt, and the way
in which MFIs 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 in
the 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. Clients
are more vulnerable and less financially literate, and the information available
to assess capacity to repay (credit bureau, employer reference, and so on) is far
less reliable in the informal sector. In addition, most MFIs work in contexts
where the social safety nets such as those in Europe or the US are not present.


It is impossible for MFIs 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 part
of 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 up
to 25,000 FCFA, I got a loan in the amount of 70,000 FCFA. After the
second reimbursement, however, I could no more keep up with those re-
imbursements. I therefore asked the program officials to offer me a
grace period so that I could pay my debt off. But they refused, arguing
that other women might do the same thing in order to escape the
weekly reimbursements. When he heard about the situation, my hus-
band managed to find the amount remaining to be paid and then asked
me not to participate anymore. He thought that the program is not
meant to protect people from shame; rather the opposite.71

The line is often very fine between a response that resolves issues, helping
clients 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 zero
tolerance with little flexibility risk harming their clients. Most MFIs see delin-
quency management as being critical to success, and send out a strong message
to staff that late payment should not be tolerated. This approach is supported
by 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).

Box 2.12 Branch Accountant in MFI Branch, India
Zero PAR is the most important criterion on which our branch is judged, and that
is why all/most of our branch staff go to any defaulting/potential defaulter’s house on
the same day and try and get the payment.To us, Zero PAR is simply about ensuring
100% on-time repayments always, and if we cannot get it from clients, we have to
make 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 our
incentives 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


Covering Up Problems in Groups
This issue is particularly common in group lending where group solidarity
masks 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 many MFIs quite rightly fear that the whole group or many groups
will stop paying if the MFIs start granting some clients tolerance. This very real
risk has to be managed as an MFI seeks to find a more compassionate solution.
CARD in the Philippines, an MFI with over a million clients, has successfully
moved away from a zero-tolerance approach. Annie Alip of CARD explains,
“We held dialogues, branch by branch, with those who were having repayment
difficulties, and came to agreements with the most convenient way for them to
repay. Surprisingly, many came to these dialogues, proving that many clients
were not willful defaulters; it was just life happened, they were vulnerable and
they did not have safety nets.”72

Appropriate Collections Practices
The pressures on me are so high and it is impossible to move at the
very 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 and
unpredictable.
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 staff
or clients to use coercive methods to collect repayments. It is also essential to
recognize that when things go wrong in the lives of clients, and they are under
severe financial strain with none of the safety nets common in the Western
world, applying strong pressure to repay can be damaging.

Avoiding Coercive Behavior by Staff
There was strong support among practitioners I consulted for the assertion that
deterioration of relationships between staff and clients in many organizations
is 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 money
has 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 from
selling assets. Organizational incentives do not ask this question, but rather just
focus on whether the money is repaid regardless of how it is repaid.
Concern over perceptions of coercive behavior of staff toward clients is
growing, and has led to the adoption of appropriate collection practices as one
of the SMART Campaign client protection principles,74 whereby organizations
commit to ensuring that “debt collection practices of providers will be neither
abusive nor coercive.” The principle needs to be interpreted broadly, and calls
for awareness of the experience of clients. For example, in Uganda rural women
were quite sensitive to the attention the loan application process could draw
from 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 who
were talking to clients of an MFI about what they liked and disliked about the
services. The clients responded angrily about their treatment at the hands of
field agents: “They are devils. . . . All they care about is getting their money
back.” This story from one of the most competitive microfinance markets is
extreme 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 the
practicalities 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 use
a devils-or-angels voting scale (see Figure 2.4)—asking clients to indicate where


Figure 2.4 Devils-or-Angels Voting Scale

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

A Problem of Implementation
Organizations 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 in
client 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 a
former regional manager from an MFI in India aptly sums up the situation: “Post
Krishna crisis, the same issues were discussed and many MFIs said that they
would focus on the people; but see what happened? Code of conduct documents
were 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 are
focused on their clients, and where there is a positive relationship between staff
and clients, do better at times of crisis (see Box 2.13). It seems that the shift in
client 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 of
SKS offices in India, a former area manager reflects on the difference between
now and the early days of SKS: “One time the local communist party threatened
to close our offices because we would not hire their nominees. In response, our
clients 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


Box 2.13 Client–Staff Relationships in India
Many seasoned observers would argue that effective and sustainable
microfinance is built on the relationships between client and institution.This
encompasses not just the relationship between the front-line credit officers
and 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 her
needs, she will be somewhat committed to repay it.Whereas if she is able to
access 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 will
make all possible efforts to repay any loans outstanding—in order to main-
tain that valuable relationship.
Source: “Microfinance in India: Built on Sales Targets 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.

Changing Relationships With Savings
A number of people have reported an interesting shift occurring in organizations
that start mobilizing savings. The nature of relations between staff and clients
often strengthens. Credit creates institutional incentives to focus on repayment
and to keep the client borrowing rather than client needs. Savings, on the other
hand, produces incentives that are more focused on serving the clients. Paul
Arias Guevara, for example, relating the experience of Credifé in Ecuador, de-
scribes how things have changed since they started offering savings two years
ago. More education is needed for clients, and field staff require more sales
skills 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 has
the 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 important
for 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 training
process, but about the sense, the philosophy that you’re educating.”78

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


to the family to help them” (microfinance client).79 However, joint liability can
also motivate group members to ensure repayment. We cannot assume that just
because clients repay their loans and come back for more that everything is all
right. Negative examples are common, and in my experience talking to field
staff, coercion by group members to ensure repayment is widespread. In a re-
cent training I gave with East African MFIs, for example, one participant related
the experience of clients demolishing then selling the materials of another’s
house 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 for
clients. This relates both to the process of screening loans to ensure they are
granted 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 have
client protection policies in place at an organizational level, this clearly shows
that 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. The
group has the option of taking an outstanding loan amount from a member’s

Box 2.14 Role of Groups in Mediating Outcomes for
Clients—Case Study From Malawi
On a recent visit to an MFI in Malawi I visited two groups, one that seemed
to be performing well and another that had experienced frequent repayment
problems. I was keen to understand to what extent the groups supported
clients 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 they
did not know the reason that the member had not paid, but they would pay for
her and then go to the client’s home, seize assets, and sell them to cover their
additional repayments.
The second group also had an absent member without payment. Having
spoken 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 pay
for 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.


savings, but the peer pressure to repay and support of the group ensures that this
course of action is rare: “Members borrow from their own money. Therefore
the 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 formation
stage: “One thing that always comes out of any client satisfaction study . . . is
that 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 outrageous
marketplace behavior by the few invites governmental oversight of the
many.
Frank deGiovanni, Ford Foundation82

What Is an Excessive Interest Rate?
High interest rates in microfinance are generally justified by the high returns of
a loan invested in a petty trading enterprise with a daily or weekly turnover. A
loan taken at an APR of 50% to pay for school fees is another matter (even if
taken from a community organization where the interest paid is shared between
members at the end of the year). It is important to recognize that many so-called
enterprise 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 context
of a particular loan type and the situation of the client’s borrowing. Certainly
high 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 Needed
Without 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 branch
offices, 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 Development
comments,

Many MFIs impose subtle fees that effectively raise interest rates. Some
charge 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. Some
overcharge for credit-life insurance bundled with the loan. . . . MFIs
may also prefer to quote their rates on a monthly basis, hoping to ex-
ploit borrowers’ ignorance of how a seemingly modest 6 per cent per
month compounds into 100 per cent per year.83

At a sector level, greater transparency on interest rates will help answer the
challenge of extortionate interest rates. To address these issues, Microfinance
Transparency (MFT) has made significant progress in collating information on
a 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 each
context. MFT also collects information that allows for comparisons of what an
MFI 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 the MFIs who claim
they 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 of
price, 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 to
focus primarily on the costs as presented by the APR. There is a danger that a
narrow focus on the costs risks a race to the bottom where lenders that incur
higher costs due to a greater social focus may be penalized, and MFIs respond
by targeting lower-cost clients and reducing costly value-added services.
In determining what is reasonable, it is surely important to consider what
is provided for the money paid; a quality service adapted to clients’ needs is
more valuable than an undifferentiated credit product. Quality bundled services
such as training cost more to deliver and may justify increased charges. MFI in-
efficiencies or high profits for investors clearly do not justify additional interest
payments.

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 lead
to actually having to reduce prices and add value to the clients, two
simple factors which eradicate much of the profitability to the owners
and capital providers of the sector.
Hugh Sinclair, Micro Service Consult, GmbH85

From a client perspective, what is needed is regulation that ensures microfinance
providers

• 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 set
its 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 the
informal economy, free from governmental regulation and protection. No en-
forceable usury laws, no consumer rights lawyers, no small claims courts, and
no Better Business Bureau promotes or monitors ethical lending.”86
While self-regulation has been effective in a few countries where there is a
strong national trade association, it has generally been ineffective: “Self-regu-
lation does not work on the ground . . . as enforcement is very difficult because
of 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, I
am on the board of the national banks/international micro-finance bodies and
I 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 Backlash
The lack of regulation (either self- or government-imposed) has been highlighted
as 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 the
industry nationally and internationally wide open to criticism and an overreac-
tion by government.
In addition to weak regulation, a lack of transparency in social performance
has often left MFIs and the sector much more open to a negative backlash than
it would otherwise have been. Alex Counts from the Grameen Foundation puts
this 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 for
reducing and overcoming poverty, and we are better than the industry
standard, that would silence many of the critics. And yet, we haven’t de-
fined the industry standards and people aren’t tracking these things, and
as a result we’ve left ourselves open and vulnerable to accusations to
create a major public relations problem, which creates a public policy
problem, 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 in methodology and approach, regulations can risk damaging the market.
For example, by setting interest rate caps that push MFIs toward easy-to-reach
or profitable clients, or to seek other ways of generating profits, such as in the
case of Ecuador where a government-imposed interest rate cap has resulted in
MFIs using compulsory credit life insurance as a way to replace lost revenue.
Often interest rate caps have been set below an economic level, particularly
for small MFIs that have not achieved economies of scale or have higher costs
due to rural outreach or inclusion of nonfinancial services. An MFI that seeks
to 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 more
profitable or desirable client, but many other clients lose out or are forced to pay
the 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 and
demonstrating a client’s capacity to repay may be complex and costly, and leads
to the exclusion of more people because it is too expensive to do the assessment
or they lack the documentation required. For example, CRECER and ProMu-
jer in Bolivia have both had to devote significant resources to help their clients
register 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’ capacity
to 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 cannot
show that it has considered a client’s capacity to repay a loan, the client does not
have to repay the loan (see Figure 2.5).
Clearly, the days of microfinance being left alone to get on with its work are
passing, and there is a need for both better transparency and better communication


Figure 2.5 Reckless Lending in South Africa

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

about what is needed to ensure that clients are protected, that microfinance can
continue to grow, and that space is left for innovation to deepen outreach and
increase 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 MFIs
protect 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 get
MFIs to compete for the best social value brought to clients. This process in-
cludes not only appropriate regulation but also integrating social concerns and
client 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 far
from optimal.
Alex Counts, Grameen Foundation89

At the root of most of the problems highlighted in this chapter is a pursuit
of growth and efficiency that does not adequately take into account the needs
and 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 disappointing
regularity the issues of mission drift, products and services poorly adapted to
client needs, harsh staff-client interactions, inappropriate loans leading to
overindebtedness, and management and governance inadequately balancing the
social and commercial aspects of these operations. This occurs just as much in
nonprofit 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 of
commercialization and competition, but part of the intrinsic tension between the
business and social goals of microfinance that need to be managed.
This section brings together the essential elements of quality in microfinance
outlined in previous sections—financial inclusion, creating value for clients, and
protecting clients from harm—and asks how these objectives can be balanced
with financial sustainability and growth.

Maintaining Quality While
Achieving Growth and Efficiency
In periods of strong growth, the MFI has to be very careful to avoid that
the clients become “numbers” and are not seen as individuals.
Johannes Solf, ICCO90


This chapter has highlighted how there has been an overemphasis on short-
term growth and efficiency as the means to achieving rapid financial goals. This
leads to less focus on whom the organization is reaching and how they benefit.
Methodology and systems are simplified, staff productivity is increased, checks
and 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 to
how 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 as
a cost often pays back in terms of customer loyalty, repayment rates, and word-
of-mouth recommendations. What is needed is a more deliberate prioritization
of client needs.
Foude Abdelmouni, former CEO of Al Amana (Morocco), provides an ex-
ample of an organization that has successfully managed to combine improved

Box 2.15 Adjustments Made in Bolivia Following a Crisis
of Client Overindebtedness
First of all, the bad players were weeded out.The consumer lenders whose
methods were irresponsible lost the money they had brought to Bolivia.They
fled in disgrace. Consumer lending disappeared from the country for most of
the next decade.
This left the Bolivian MFIs.Their methods were basically sound, but they
needed to make some crucial adjustments. They revised their loan approval
methods to focus more on the borrower’s ability to repay, so as not to lend too
much.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 would
have 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, money
transfers, 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 by
cutting costs. Interest rates fell from an average of over 35 percent to just under
20 percent APR.
Source: Excerpt from E. Rhyne,“A Tale of Microfinance in Two Cities,” Huffington Post, December 13,
2010, http://www.huffingtonpost.com/elisabeth-rhyne/a-tale-of-microfinance-in_b_795840.html.


efficiency with a focus on providing increasing value for clients. When Al
Amana began 12 years ago, its interest rate was more than 40%. This has now
been reduced to about half that: “We were able to have economies of scale, to
master the processes. We diminished the price because this is our mission, this
is our choice. I think it works very well if you have people who are committed
to 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 choice
for the clients.”91
Other MFIs may choose to focus on the quality of services. For example, a
group-based lender in Kenya, JCS, recently reported a decision to reduce staff
productivity targets from 450 to 350 per field officer, so as to strengthen client-
staff relations. JCS does not envisage that this reduction will negatively affect
its 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 have
cut back or removed their nonfinancial services, K-Rep recognized the win-win
potential and business opportunity of providing these services in partnership
with international development organizations: “The development perspective is
as strong a driver as a business perspective” (Kimanthi Mutua, K-Rep).92
The outcomes of microfinance are not automatic, and performance—both
social and financial—needs to be managed. At the core of this performance are
the actions of the MFIs themselves: policies, incentives, management, and gov-
ernance. When they work well, there is a focus on clients that creates value and
avoids harm. For these internal processes to succeed they need to be supported
by the right external factors: regulation, technology, investors/donors, and the
expectation of what is considered good performance.

Staff Culture and Capacity
Microfinance needs to operate in a less frenetic environment in which
steady growth is pursued in preference to hectic expansion. This would
enable 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 sort
of negative experience highlighted in this chapter: “It is very important to get


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

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

Organizational Culture
In addition to capacity, many organizations also emphasize the need to develop
the right organizational culture. This starts with identifying the right sort of
people for the organization. Carmen Velasco (ProMujer International) selects
staff based on the demonstration of their empathy and social values: “We can
train 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 and
indicators 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 a
sense of social values. Proactive hiring of women has increased the number of

Box 2.16 Building Staff Capacity
In an effort to address gaps in staff capacity, Freedom From Hunger is
developing a series of core competency trainings for field agents that
address the underlying skills and capacities they need to do their jobs
well: 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 had
not previously been provided with the resources and tools or capac-
ity to address these staff gaps.
Liza Kuhn-Fraioli, Freedom From Hungera


women employees. Further, an effort is made to recruit staff from similar areas
as clients as this ensures that employees better understand the conditions of
clients. Once recruited, the induction process of new staff into CRECER’s work
culture involves imparting an understanding of the organization’s mission and
its values.96 Staff recruitment, induction, and training are critical components,
but all will have little impact if the ongoing messages communicated by the
leadership and through management systems do not reinforce the social as well
as commercial goals of the organization.
Consideration of gender issues is also important internally to MFIs and in
relation 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 focus
on the way in which staff work with clients and whether there is awareness of
how social norms can be perpetuated in the way in which field staff work with
clients.

Management and Incentives
A key message for this chapter is that MFIs need to do what they intend to do
well; they need to effectively deliver services designed to address clients’ needs,
as well as continuously learn and improve. This requires effective systems to
manage staff toward this end, to receive feedback from clients and staff, and to
make adjustments where outcomes are not as intended.
Often the systems, management, and governance of MFIs are not well
aligned to their goals, and there is an assumption that social outcomes will be
achieved automatically, rather than by careful management. Furthermore, the
emphasis placed by most MFIs (and their investors and supporters) on efficiency
and growth creates an imbalance that may distort practice on the ground, with
staff 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 required
to do their job, understand what is expected from them, and receive adequate
supervision and feedback. This relates to recruitment, training, induction, su-
pervision, appraisal, and incentives: it is not just about what they do, but how.

Field Staff Are the Front Line
Field staff are the front line of most MFIs, and much of the translation of the
organization’s intent and design is affected by how field staff interpret and apply
policies, 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-added
services such as training and mentoring, problem solving, or facilitating the de-
velopment of client relationships with each other. In addition, weak behavior by
field 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 as
part 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.

Incentives
Financial 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 incentivized
to bring in as many clients as possible, give out as much money as possible, and
make 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 those
who are poorer (who may be more time-consuming to reach), poor attention to
assessing 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 field
workers bear the brunt. We are told to disburse, disburse and disburse
so that targets are met, week on week, month on month and quarter on
quarter—I have had senior branch and regional managers telling (and
yelling at) me (during meetings)—“Do whatever you have to but make
sure 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 minimizing
our contact with them to ensure that things get done efficiently and
faster.
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 significant
progress has been made.99 Small adjustments in incentives can lead to significant
changes in staff behavior. For example, incentivizing the number of new clients
encourages staff to bring in new clients, but does not emphasize the need to
focus 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 quality
as well as quantity.

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

Benefits and Risks of Technology
Technology is seen as a key to future efficiency in microfinance, removing some
of the costly elements of providing high volumes of small financial transactions
to clients scattered in areas of poor infrastructure. For many, technology brings
a 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 more
remote areas cost-effective, and to reduce time-consuming routine tasks, al-
lowing more space for quality staff–client interactions, focusing on the client
rather than the financial transaction. From a client perspective, technology may
make 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 rather
than individual clients, and therefore cannot provide different loan terms
to each member of a group. Tracking individual clients in the MIS will
allow for greater opportunity to tailor products to individual needs, as
well as to have more powerful information with which to track and ana-
lyze client performance.
• Reduction of transaction costs—for example, through mobile banking
where clients are able to save or repay loans by text message, or where an
MFI 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 of
achieving 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 the
required standards for these performance indicators, field staff were taking
shortcuts 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 and
looking into the quality issues. A process was undertaken to identify and define
in detail the Key Operational Activities (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 light
system, where weak areas are highlighted red, acceptable standards are yellow
and areas of no concern are green (shown here, respectively, in black, gray, and
white).

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


greatly reduce the staff time needed to service clients and expand the phys-
ical outreach of the services, serving more vulnerable clients or reaching
out to more remote areas. This is particularly important for savings where
transactions are very small and clients cannot afford to travel distances to
make small deposits (see Box 2.18).
• Access to electronic savings and branchless banking offers the possibility
of 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 and
out of remote communities, it actually increases the circulation of cash in
the communities with the potential to help commerce further develop.
• Reducing staff time on transactions allows staff to focus more time on
activities that bring the most value for clients. So, for example, it may be-
come cost-effective to include financial or business education where this
was 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 without
improving services for clients. Most notable is the potential to fundamentally

Box 2.18 Care’s VSLA 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 of
the 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 can
make savings deposits or loan repayments. . . . In Tanzania our clients are using
mobile 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 makes
theVSLA 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 about
transparency and that it comes from everyone within the group. One of the
things 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 enter
the PIN before making transactions.”
Source: Excerpts from interview with Lauren Hendricks, executive director of CARE’s Access Africa (C.
Conzett, interviewer),April 20, 2010, www.microfinancefocus.com.


change human relationships. While time savings are beneficial for clients and
MFIs 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 additional
ways to create value for clients, MFIs may choose to increase their profitability
and financial returns offered to investors.

Ensuring Effective Groups
The transformational impact of microfinance will be a little less if we
take 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. Groups
were widespread in early models of microfinance, but have come under criticism
from people who ask whether you or I would want to have to join a group in
order to save or get a loan. Many MFIs have moved away from groups, adding
individual savings or loan products, or shifting entirely to an individual ap-
proach. While this may be popular with many clients, groups, where properly
managed, do have the potential to create benefits in terms of empowerment,
self-confidence, and social cohesion—particularly where they are targeted at
poorer or socially excluded women. Not everyone wants to get their financial
services through a group, but microfinance is not just about access to finance.
Jeffrey Ashe emphasizes the importance of the groups in the community-based
model: “The solidarity of coming together, gaining mutual assistance from one
another, 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 of
CRS says, “Initially when the group is formed . . . there is so much time being
spent 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 pressure
from some clients on others. Again, informed choices need to be made about
whether groups are appropriate for the clients and the specific goals of an MFI,
and where groups are included their facilitation is an important activity to be
designed and managed.


Governance
Boards need to understand their roles and manage the organizations in
a way which sets parameters for the leadership to pursue the mission and
to act in an ethical, responsible way. Setting reasonable growth targets
and compensation standards and making sure that the mission is being
achieved through the various benchmarks of the organization. Also the
role 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 concern
that where MFIs commercialize, the nature of the board may be changed, with
a short-term focus on financial returns taking over from a focus on longer-term
value 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 Bank
when it transformed, so one safeguard put in place was to have some of the
board 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 of
awareness of these issues and alignment of values when selecting investors or
board members: “The original promoters should retain enough stake and say
in the strategic choices of the institution. Again, it is important that the MFI has
like-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 performance
committee at the board level that monitors performance data from the per-
spective of outreach, client protection, and client value, and which is able to
scrutinize decisions from the perspective of outcomes for clients.
Some MFIs also recognize the value of client involvement in governance, in-
cluding clients on the board and ensuring their effective participation through
training and an appropriate structure to the board activities: “I am pleased to
represent our clients and to be part of Fundación Mujer. In the board, we know
the 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 that
can influence social performance outcomes. For example, a study by Women’s
World Banking looking at mission drift in MFIs 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, particularly
with regard to maintaining its mission focus. Institutions that choose investors
who are passionate about preserving the mission, while earning a reasonable
economic return in the process, can help ensure mission-focus.”107

CONCLUSIONS

In conclusion, I summarize how this chapter highlights the practical ways in which
microfinance can apply existing knowledge to bring benefits successfully to poor
and 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 poor
and marginalized people delivered through sustainable institutions, no longer
dependent on donor grants. The past 10 years have seen a huge growth of
microfinance into a multibillion-dollar industry. In general the benefits have
been largely assumed, and the focus has been on the institutional challenges of
sustainably 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 cannot
be taken for granted. Increasing profits have combined with widespread reports
of client overindebtedness and other negative client experiences, as well as ac-
ademic challenges about microfinance’s claimed impact. The commercial pillar
may be strong, but the social pillar is still uncertain.
In this chapter I have argued that successful clients are the foundation of
microfinance. Rather than focusing on what works best for the MFI in the short
term, we need to focus on creating long-term benefits for clients as a way to
build a sustainable microfinance sector.
Many of the challenges highlighted early in this chapter result from a failure
of 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 needs
and 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 than
savings, insurance, remittances, and so on that can meet other needs of clients.
• Deterioration in relationships between staff and clients leading to a mis-
match between client needs and services delivered, weak communication
and transparency, and inappropriate collection practices by staff.
• Deterioration in relationships and conflicts between members of groups
or within families.
• Lack of understanding or inappropriate use of services by clients leading
to overindebtedness; a decision by clients to exit the program as a result
of a negative experience (although some do, of course, leave for positive
reasons), 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 right
direction. Some people have said that as you grow older you get more
and 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 current
practice based on existing knowledge. I have been struck during the writing of
this chapter that much I have written on how to improve microfinance says
very little that was not available 10 years ago. For example, in the section on
deepening 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 energy
is focused on improving administrative efficiency or staff productivity, rather
than on improving effectiveness of services for clients.
It is an issue of focus, priorities, and capacity, more than a lack of knowledge
of 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 of
useful 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 support
MFIs in “translating their mission into practice,” improving their man-
agement of social performance through ensuring a balance between social
and financial perspectives in all aspects of the business (www.Imp-Act.org).
• The SMART Campaign has achieved significant buy-in to their Client
Protection Principles and offers practical resources to support MFIs in
implementing 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 on
putting the clients at the center of the business. MicroSave provides tech-
nical assistance and training to microfinance organizations in Africa and
Asia as well as online resources (www.microsave.org).

Pushing the Boundaries of Microfinance
Without innovation human beings are nothing. Innovation is the key to
where 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 requiring
major 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 one
hand, and microfinance that is more responsive to client needs on the other,
calling for a greater diversity of services and flexibility. For example, while a
group-based MFI may recognize the need for flexible loan terms, in practice it
may find that its systems cannot cope with allowing different loan terms within
a 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 we
are still a long way from realizing the full potential of microfinance.
Progress has been made in recent years as MFIs apply themselves to the
challenges regarding efficiency. If they can apply themselves to effectiveness in
the same way, then a huge amount can be achieved.


As MFIs focus more on improving the effectiveness of their services, the
limitations 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 the
implications for clients in terms of outreach, value, or protection. By facing
these trade-offs, by coming up against situations where the needs of clients and
the 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 the
boundaries 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) with
quality. The wealth of experience working in a range of contexts and with dif-
ferent approaches, combined with the potential of technology to lower costs and
extend the range of what is possible, creates huge opportunities for new ways of
reaching areas that are currently too costly to serve, or to provide services that
might be too complex to deliver with current organizational capacity.
There are also increasingly innovations in approach to microfinance with
a number of organizations going beyond adjustments to current ways of doing
things, 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 building
institutions to achieve this, rather than starting with sustainability of the MFI.
As well as providing a suite of well-adapted financial services, the organization
relates to clients through wealth managers who develop a plan with each client
based on an understanding of the current pattern of cash inflows and outflows
of the household, as well as capturing their financial goals, opportunities to in-
crease cash flows through better productivity of the current economic activities
or reducing the cash, and discussion of how to protect the household’s human
and physical assets—for example, with microinsurance.
BASIX, also in India, is another organization to reevaluate its services based
on 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 a
holistic set of livelihood promotion services, while maintaining sustainability
of the institution.

Next Steps
The microcredit movement . . . is at its heart, at its deepest root not
about money at all. It is about helping each person to achieve his or
her fullest potential.
Muhammad Yunus112


The capacity and talent exist to make microfinance a success for clients as well as
commercial investors and staff. It is now a matter of will and commitment.
Financial performance and efficiency are vital, but they are means to an
end, 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 it
is efficient will achieve success in all areas.
In the future my hope is that people engage with the issues discussed in this
chapter with as much effort and investment of time and money as has gone into
building a sustainable and profitable microfinance industry.
For microfinance to meet its full potential there is a need for change at all
levels. 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 performance
and give tangible weight to financial inclusion, value for clients, and client
protection in their investment decisions. This will provide an incentive for
MFIs to focus their efforts on improving effectiveness. However, there are
likely to be tensions between short-term profit and social concerns, and there
is therefore a challenge to ensure that new investors in microfinance under-
stand the key relationship in microfinance between client and institutional
success.
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 the
challenges, 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 its
clients (and potential clients), and that its culture and information and man-
agement systems are aligned with its goals. Where there are gaps in the ability
to do this, management needs to find solutions to address these gaps.
Over the past 15 years I have supported many MFIs in working through
these issues. The process is gradual and works best when approached step-by-
step over time—first building the understanding of senior management and the
board; identifying immediate priorities that address current and perceived needs
for the organization and its staff; building understanding and buy-in of staff;
and then later tackling more technical issues such as improving information and
management systems, or piloting new products, services, and alliances. Box 2.19
presents a series of questions that address the four key areas that MFIs need to
focus on to improve their effectiveness and address the challenges highlighted in
this chapter. These may help us move toward services that truly respond to the
diverse 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, and
deliberately or inadvertently exclude certain groups.Where an MFI has defined
particular target clients, it is important that products and services are designed
to meet their needs, and that outreach is monitored and managed. In addition,
many MFIs have the potential to deepen their outreach by understanding
factors that lead to exclusion of potential clients and making adjustments in
response.

Key questions:
Who are your target clients?
An MFI may define its target clients in its documentation, but how well is this
understood in practice by staff? Staff understanding and buy-in is core to the
MFI 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 target
clients (especially poor people). Even those MFIs with a clear strategy do not
necessarily 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 systems
Appropriate MFI systems need to be designed to ensure outreach to target
clients and avoid unnecessary exclusion. This includes organizational culture
and messages; staff recruited who care about the organization’s mission; staff in-
centives; appraisal and routine management; spot-checks to ensure that policies
are appropriately applied and that the systems incorporate quality information;
and strategies to mitigate staff bias toward nonpoor clients.
Information and management
What information do staff have about the profile of their clients, and if they are
reaching their target clients, what systems are in place to ensure information is
reliable, 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 they
take into account clients’ needs and help create value for clients.They also look
at 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 value
that 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 has
groups, are they designed to serve as collateral, or does the MFI seek to em-
power or create supportive networks through the groups? Are nonfinancial
services 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 issues
To what extent does the MFI reach women clients? Do gender-aware policies
and product/service design demonstrate an awareness of women’s constraints
(e.g., timing of meetings around women’s work, not requiring husband to sign
loan application, supporting women’s asset ownership, having insurance cover
husband and client)? Are there measures designed to achieve women’s em-
powerment or gender equity where this is a goal?
Information systems
What information does the MFI collect about whether its services are adapted
to clients’ needs/creating social value and about the quality of the services? Is
it 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 services
and their quality?
(continues)


Box 2.19 Cont.
3. Protecting clients from harm: recognizing client risk and
vulnerability
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 design
their services with little understanding of the reality of their clients’ lives and
apply zero-tolerance policies that leave clients with no space to cope when
things go wrong.

Key questions:
Design of products and services
Are the products, services, and delivery mechanisms designed to build client as-
sets and resilience, and to be flexible enough to respond to unexpected events
in clients’ lives?
What happens when things go wrong?
Is the MFI able to respond in an understanding and caring way that supports
clients through their problems, or does it have rigid systems that focus on en-
suring the MFI does not suffer any negative consequences?
Client protection
Is 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, ethical
staff 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 client
focus—for example, do staff incentives promote numbers of clients and
portfolio outstanding at the expense of quality?
(continues)


Box 2.19 Cont.
• Consistency of delivery—are there any obvious contradictions between
policies, 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 social
goals maintained?
• What is the board oversight of the social performance of the organiza-
tion? Does the board make decisions on the basis of consideration of
both financial and social performance information?

Notes
1. World Bank data from PovCalNet.
2. I conducted in-depth interviews with 15 leaders in the field, selected to reflect a broad range
of perspectives. In addition, I conducted an online survey that received 70 responses, and
gathered 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 Report
2011,” 2011. There are also a large number of smaller MFIs that do not report; UNCDF
reports 7,000 to 10,000 MFIs worldwide. If community-based and formal providers
such as rural banks are included, the number is far higher.
6. This is the gross loan portfolio of 1,931 MFIs that have registered their information with
the 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 Data
Set,” 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: A
Case Study on Microfinance Interest Rates and Profits,” CGAP Focus Note 42, June
2007, 4.
10. Greg Chen, Stephen Rasmussen, and Xavier Reille, “Growth and Vulnerabilities in
Microfinance,” 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 of Microfinance: Taking Another
Look,” Grameen Foundation USA Publication Series, 2010.
12. See, for example, M. Bateman, “Microfinance as a Development and Poverty Reduction
Policy: Is It Everything It’s Cracked Up to Be?” Overseas Development Institute Back-
ground Note, 2011.


14. Growth and Vulnerabilities in Microfinance author Xavier Reille quoted in The Market,
April 26, April, www.themarketmagazine.com.
15. Ibid.
16. Chen, Rasmussen, and Reille, “Growth and Vulnerabilities in Microfinance,” 11.
18. Fazle Abed, BRAC founder, speaking in “State of the Microcredit Summit Campaign
Report 2011.”
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.
24. MicroSave India Focus Note 55, December 2010.
25. Ramesh S. Arunachalam, “Candid Unheard Voice of Indian Microfinance,” 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.
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.”
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 this
paper.
38. B. Balkenhol, Microfinance and Public Policy: Outreach, Performance and Efficiency
(Geneva: International Labour Organization and Palgrave Macmillan, 2007).
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).
43. Microfinance Impact and Innovation Conference 2010 presentations, http://www.moodys
.com/microsites/miic2010/agenda.html.


44. Woman member quoted in Nteziyaremye and MkNelly, Mali Poverty Outreach Study, 56.
47. Mary-Ellen Iskenderian, Women’s World Banking, personal correspondence.
48. Posting on Microfinance Practice listserv, November 7, 2010.
50. Interview with Fazel Abed, “Microfinance” podcast no. 26.
51. Ibid.
53. Susan Johnson, “Gender and Microfinance: Guidelines for Good Practice,” www
.gdrc.org.
54. Carlos Danel, Compartamos, personal correspondence.
58. Alex Counts, Grameen Foundation (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).
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 Financial
Education Outcomes Assessment,” Microfinance Opportunities and Freedom From
Hunger, Working Paper 4, December 21, 2009, 15–17.
68. Opportunity International director, 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.
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.
83. David Roodman, Microfinance Open Book blog, “Reflections on Transparency,” July
7, 2009.
84. Chuck Waterfield, Microfinance Transparency, 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.
91. Interview with Fouad Abdelmouni by J. Thomas, www.cgap.org, February 9, 2010.
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 (New
Delhi: M-CRIL, 2011), 2.
96. CRECER (Bolivia), Imp-Act Consortium, “Managing Social Performance,” 2010.
98. Quoted by Arunachalam, “Candid Unheard Voice of Indian Microfinance.”
99. MIX (forthcoming).
102. 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 Mujer
for 13 years, quoted in Social Performance of Fundación Mujer, from a Cerise-conducted
social audit of Mujer, Costa Rica, 2009, 2.
107. Frank, Lynch, and Schneider-Moretto, “Stemming the Tide of Mission Drift.”
110. AZMJ, CARD MRI, 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.
112. Banker to the Poor (New York: Public Affairs, 1999).

Challenges And Solutions

More Related Content

What's hot (19)

Viewers also liked (17)

Similar to Challenges And Solutions (20)

Challenges And Solutions