FROM THE MARGINS

How do the best microfinance institutions (MFIs) ensure financial sustainability while targeting poor clients?  In my last three columns, I wrote about microfinance best practices in empowering clients and training account officers.  This time, I would like to focus on the best management practices in microfinance, based on my own experiences and the numerous consultancy works that I have done in several countries. Here are the key management practices that successful MFIs adopt to meet both their social and financial objectives: 1. Transformative vision and mission. The best MFIs have a very clear vision of social transformation, targeting the poorest to lift them out of poverty. Ameliorating their clients’ standard of living is not enough; their mission is to eradicate poverty. This is why successful MFIs do not only provide financial services but allied support services like health, education and provision of water, sanitation and housing. They institutionalize social performance management in their operations, using several indicators to track whether their clients are moving out of poverty. They diligently monitor their financial performance to ensure sustainability, but most of them use progress out of poverty index to check if their social objectives are being met. 2. Good governance. The principles of accountability, transparency, participatory, responsiveness and adherence to law are usually embedded in good MFI governance. The best MFIs have a governing Board defined by their passion for the mission, competence, integrity, and with varied expertise in microfinance, social development and other relevant professions like finance, education, and health, among others. Having independent directors ensures check-and-balance, enriches the knowledge base and guarantees complete separation of powers from the day-to-day management of the MFI. 3. Succession planning. Being the founder of one of the largest MFIs in the country, I am aware that there is such a thing as “founder’s syndrome.” This occurs when the founders become resistant to change or have difficulty relinquishing power and authority, thinking that the organization s(he) started is his/her baby and taking a very personal interest in its management. I have observed organizations both here and abroad whose founders refuse to retire, as if considering their organizations as extensions of themselves. This has led to problematic situations, with the founding leaders struggling to change gear even as their organizations have become more complex and needing new strategies. In some cases, organizations floundered because there was no succession plan. Having learned from this, I vowed to give up power and responsibilities at the proper time, and I did retire (happily, at that). I believe that true leaders work their way out to be dispensable, allowing others within the organization to grow. They protect their legacy by strengthening the organization and preparing a succession plan for the next generation of leaders. Founders can still play crucial roles — such as advisers or advocates — but they should no longer interfere in management, allowing their successors to steer the organization in the directions they see fit and to learn from their mistakes so that they become better leaders. 4. Client empowerment and participation. Having been a development practitioner for more than four decades with government, private sector, and international organizations, I can definitively say that giving the poor access to resources is not enough. True empowerment is not just about access, but ownership: the poor must be given a chance to own resources so they can be fully in-charge of their destiny. As the saying goes, “he who has the gold rules.” Thus, to really empower clients, they should be co-owners of the financial institutions to which they belong. We did this with our microfinance bank: our members were allowed to use their savings as payment for shares of stocks, and a lot of good things came from that. We observed that when clients are part-owners and trained about their rights and responsibilities, they become more committed. They pay their loans more diligently since they know that they are also owners and can partake of dividends and other benefits if the organization grows. As part-owners, they are also represented in the board: they participate in policy making, product design and implementation of policies and procedures. 5. External and internal audits. Financial transparency is the heart and soul of an organization especially if members are part-owners. It is important for an MFI to have a strong internal audit that reports directly to the Board so that they will know the lapses and irregularities that are happening in the field. This will allow them to implement remedial measures and improve systems. To ensure that the financial reports are reliable, MFIs should also be externally audited regularly by reputable audit companies. Regulators, banks and lenders value financial statements audited by reputable external auditors. I shall discuss more management practices of successful MFIs in next week’s article. \* \* \* “Wars of nations are fought to change maps. But wars of poverty are fought to map change.” — Muhammad Ali *(Dr. Jaime Aristotle B. Alip is a poverty eradication advocate. He is the founder of the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to eight million economically-disadvantaged Filipinos and insure more than 27 million nationwide.)*