FROM THE MARGINS

While attending a meeting of the microfinance credit bureau, I was touched when a long-time colleague in the industry told me that he was following my column. He told me, “Aris, you know that we are one of the pioneering MFIs in the country, but over the years, as we expanded, we have been experiencing repayment problems and frequent staff resignation. As I was reading your articles, I realized that we have forgotten some of the best practices, especially on building the capacities of staff and ensuring that our products are client-responsive.” His words inspired me to write this piece, which is a continuation of last week’s article on key management practices that successful microfinance institutions (MFIs) have adopted through the years. Advocates and practitioners of financial inclusion would appreciate that the best MFIs employ these strategies: 1. Long-term commitment. Breaking inter-generational poverty cycles may seem like an elusive dream, but I have seen first-hand how microfinance can transform peoples’ lives.  I have written before about MFIs whose interventions provided livelihood to many; those which helped poor clients send their children to school; those now employing their clients’ children as managers and staff; those whose clients became community leaders. The impact could be dramatic, but a few years’ engagement is not enough. From my experience, it takes at least five to eight years to bring people out of poverty; five years to stabilize their microenterprises; and, another five years to bring their businesses to the next level of expansion (small-and-medium-enterprises). They also need microinsurance as risk protection in case of calamities and other unforeseen events. Serving the poor is a lifetime goal. 2. Client-centricity and product innovation. Many MFIs adopt Social Performance Management (SPM), an approach that puts clients at the center of all strategic and operational decisions. They treat their employees responsibly and carefully balance their financial and social objectives. They listen to their clients, designing products to help them cope with emergencies, invest in economic opportunities and build assets.  This has led to new and better product offerings — microinsurance, training, remittance, health, education, housing, among others. MFIs move with the times and continuously innovate, especially with the advent of digital technology. The Millennials and Gen Z are replacing baby boomers as clients and service providers, disrupting old ways of doing things. Technology is revolutionizing microfinance, digitalizing operations, from accounting systems to loan processing and credit scoring. Even the approach to clients is now different; social media is a must, with people now using GCash, Facebook, and other platforms. Digitalization is the wave of the future and the next challenge for MFIs is addressing the digital divide. 3. Continuous capacity-building. Good MFIs invest in their people. Staff strengthening and capacity-building at all levels of the organization – from head office to field staff – is given importance. In the MFI that I founded, substantial budget is allocated to capacity-building. We also established a Center for Leadership so that there is a clear growth pattern, especially for those with leadership potential. We invested in not only short-courses but masteral degree programs for our staff, enrolling them in business administration, accounting, community development, IT and other relevant programs in reputable educational institutions both here and abroad. 4. Multi-stakeholder engagement and working with regulators. I am proud to be part of the Philippine microfinance industry whose pioneers have espoused mutual support and sharing of best practices. Our advocacy for financial inclusion has led to the adoption of performance standards that help ensure sustainability and protect clients, as well as a policy environment that is conducive to growth. 5. Balancing social and financial goals. There is no conflict in pursuing financial sustainability and social objectives in microfinance. MFIs are in the business of poverty eradication. They cater to poor clients: facilitating their financial inclusion, providing them financial and other services. MFIs need to attain financial viability to support their operations. The relatively higher interest rate on microfinance loans is justified by the high overhead cost of serving poor clients in hard-to-reach areas and providing them with training, community development and other services in a manner suited to their vulnerabilities. These rates are subject to government regulation, lower than those imposed by informal lenders, and with safeguards against over-indebtedness and credit pollution. Returns on investment are not wrong, for as long as the goal is financial sustainability and not commercial profitability. After all, MFIs must be financially sustainable so they can increase outreach, lower their operating costs while serving more clients, offer better products and services, and have the desired social impact. Microfinance necessarily pursues both financial and social objectives, as these are built into the performance standards for MFIs based on international best practices and industry benchmarks. In the words of Nancy Samy, former deputy executive director, Sanabel Egypt: “Microfinance stands on two pillars – one is financial, the other is social – and without both, the industry will never have the impact we want.” *(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.)*