04 May 2010

Implementing professional guidelines in MFIs : an example with the Chi-Em project


During the ALFI-Microfinance conference on the 25th March in Luxembourg, it was stressed on the sophistication of management, as one o the 5 trends in this industry. The management scale-up is often assisted by technical assistance program raised either by DFIs (development financial institutions) or by NGOs, such as those I have launched in collaboration with the French NGO “Entrepreneurs du Monde” on a green field project called “Chi-Em” in Vietnam.

Working session with Binhminh, a leading Microfinance Institution in Hanoï, Vietnam - June 2009
When seeing the program of the Microfinancial Services World – conference 2010 (Amsterdam), I am happy to learn that the MFI industry is moving towards greater focus on some professional guidelines. It is the actual sign of a professionalisation.
Indeed, one conference-workshop conducted by Planet-Rating is going to address sustainability under a 3 angles-approach that perfectly fits with the capacity building plan we have drawn up for Chi-Em.

Our action plan has been broken down in 8 workstreams that basically cover 3 areas mentioned by PlanetRating :

  • organisational sustainability : are all management systems and procedures in place and efficient ? How strong is the institution’s management team ?
  • operational sustainability : has the institution built an efficient portfolio management system ? Are all operational risks well mitigated ?
  • social sustainability : How well do the systems of the MFI align with its social objectives ? What is the MFI’s ability to put its social mission into practice ?

There is a fourth area described by PlanetRating, which is not included in the Chi-Em’s action plan : the financial sustainability (Has the institution a sustainable business model ? How vulnerable is it to external shocks ? How much does it depend on donor funding ? What is the probable evolution of its major performance indicators ?)
This part might be addressed with Chi-Em in a second step. To know more about the Chi-Em action plan, please do not hesitate to contact me.

2 Responses to Implementing professional guidelines in MFIs : an example with the Chi-Em project
  1. This comment is on belahf of who emailed me his comment. He wasn’t able to post the comment himself. (If anyone else has trouble posting a comment, please let us know.) -Ben can probably answer this much better than me, but a few thoughts on the points of concern:A 49% dropout rate sounds high, but I would want a better sense of both context in the field and what it actually means. What’s the average dropout rate among MFIs, especially good MFIs? Is that even a sensible metric to use in evaluating MFIs? I’d want to see some data on this since I’m not an expert. My additional concern is that the reality is probably more complicated than are clients voting with their feet because they’re unhappy vs. are they moving up to access more formal sources of credit. Recent research has made it a lot more clear that the financial lives of the poor (who are LAPO’s clients based on their data) are complicated and involve juggling many financial products to meet their needs, mostly informal. See from the book Portfolios of the Poor. What MFIs offer is just one piece to the puzzle and the book paints a picture that shows how in many ways, informal products serve the needs of the poor much more effectively than what MFIs currently offer (often standardized products that have rigid payment schedules). In that light, it may not be so surprising that half of clients are transitory and it may not be the role or expectation that a good MFI attracts clients and keeps them forever. I think you also miss the nuance of how the poor may be using financial products. Flexible savings products are super useful in some circumstances since they can allow people to deposit and withdraw for daily purposes, but there’s a ton of literature on the value of compulsory savings products (think 401k) which help the poor save money for a lump sum such as school fees, weddings, or holidays. Restrictions may be inconvenient at some points, but they protect savings designated for a specific purpose from the needs of the daily grind. This might be why area managers are investigating the reason for withdrawal (e.g., is there really an emergency such as a health crisis that should override the client’s previously expressed desire to build up to $X to be withdrawn on Y date). Ben can provide more clarity on this, but I’d hesitate before assuming that this is a worrying factor.As always, I’m super appreciative of all the detail you include, making it very easy to follow the thinking. Page numbers for citations are so much better than just linking to a 30 page document!

  2. With MFIs in India the issues are also anruod what qualifies as priority sector lending (so banks can lend MFIs money to meet PSL quotas) and whether MFIs can take deposits (which will negate the need for expensive bank loans for the MFIs)The argument that the MFIs are making high profits is ridiculous, since the alternative is way too high an interest rate. On the other hand, they tend to fund only income generating sources, but we are going to reach a scale where debt will be needed against collateral (which still goes to the moneylenders for say a marriage or education). Still, that’s no reason an investor should not exit the business at a profit just when there are other investors willing to pay much higher prices; that they exit at a profit is not about them looting investors, it’s a function of the greater fool theory. Okay, not politically correct, but Reliance Power did that too, as did many government IPOs recently. In fact, if anyone’s really looted the poor man, it has been the recent PSU IPOs like NTPC and NHPC, where they used public sector money from other PSUs to garner subscription. That money could have been lent to poor people at affordable rates too, for arguably a far greater return. In general I’d ignore the arguments about usury, and focus on the real problems MFIs face overindebted consumers, debt rollovers to hide NPAs, or crisis management. I remember us discussing angel convertible debt at 30% to startups the effective interest rate charged by MFIs is far lesser.

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