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Mind the management gap
– by Oliver Schmidt, N. V. Ramana
Microfinance Institutions (MFIs) differ in many ways. In 2009, over 1,000 MFIs reported to the Microfinance Information Exchange (MixMarket), an international umbrella organisation. They served about 80 million clients (active borrowers and/or depositors). According to the data, they employed an average staff of 391. However, the comparative figures were 1,280 for large MFIs and 47 for small MFIs. By a rough estimate, microfinance today provides employment to about 500,000 people worldwide.
Some MFIs have grown exponentially. Indeed, the lion’s share of microfinance growth is accounted for by only a small number of organisations. These are the MFIs that matter most in the fight against poverty (see box).
As MFIs “widen” their business (reaching more clients) and “deepen” their operations (diversifying their services) they need more and better trained staff. Those that become large organisations, moreover, need specific management skills to steer and control a large workforce and handle greater business volumes. On top of this, regulations are likely to add to the human-resource requirements. The reasons are manifold, including
– that MFIs grow into the supervisory realm of the central bank,
– that governments enact reforms to ensure consumer protection by preventing over-borrowing or over-lending, and
– that MFIs diversify operations into more regulated areas, namely savings deposits, transfer of money and insurance.
In microfinance, there are typically three levels of employment:
– Field staff carry out the day-to-day operations; they are the MFIs’ interface with the customers. Traditionally, credit officers form and train groups, receive loan applications, disburse loans and collect repayments. They also visit customers to check loan-use and to follow up arrears. Under a diversified product portfolio, field staff also collect savings, provide non-financial services like advice on business development or agricultural extension, and train and guide leaders in community-based MFIs. In some cases, field staff also handle money transfers or administer insurance policies.
– Back-office staff process documents and handle the decisions that arise from the field transactions. Tasks include keeping records, handling cash and accounting, tracking productivity, preparing loan decisions, scheduling field staff movements and audits, carrying out internal audits and so forth. As MFIs grow, back-office staff need to build systems to manage liquidity, assets and liabilities. To the extent that MFIs diversify their portfolios, moreover, back-office staff need more sophisticated systems for accounting, tracking productivity and maintaining relations with business partners like insurances or money-transfer companies. The back office must also meet all regulatory requirements. For all these reasons, legal expertise will become more important as an MFI grows.
– Management becomes ever more challenging as an organisations grows. Access to capital is something the management is always responsible for, but in a large organisation, the organisation itself will need to be managed. Among others, management tasks in large MFIs include product development, internal audits, risk management as well as relations with a wide array of stakeholders, such as grassroots communities, politicians, regulators, the media and the general public.
Microfinance is a labour-intensive business. To some extent, technology (hand-held devices, smart phones et cetera) helps to increase productivity. Indeed, the “case load” (ratio of clients to field staff) has been moving up to 400 to 600 from 200 to 300 a few years back. Nonetheless, there is a limit to boosting productivity this way. That has become evident in various cases of improper client handling that have popped up in the media.
Technology is likely to lead to greater productivity gains in the back office. For this purpose, processes must be thoroughly defined, thoughtfully standardised and ultimately computerised. This strategy inevitably requires a strong IT-department, however, and IT-savvy staff is expensive and hard to find even in India, which is known for its IT capacities. The more an MFI leans on IT, moreover, the more robust its management capacity must be.
For most MFIs, capable management is indeed the most serious bottleneck. It is what makes the difference between innovative, successful and productive MFIs and the large number of others. The lack of capable management is particularly painful in community-based MFIs which have a specific need for participative and communicative styles of management.
There are, in principle, two ways to provide MFIs with adequate management capacity. Either, degree holders from management schools are hired – whether as trainees fresh from the alma mater or after some years of business experience. The alternative is to train and groom field staff and branch managers for senior positions.
Experience shows that fresh degree holders normally do not have the skills and knowledge required in MFIs. Most business schools teach students what processes, procedures and business models should look like, but students hardly learn how these were created. This, however, is what matters most because most MFIs are still small or medium-sized not-for-profit entities. Experienced managers, on the other hand, may be capable of leading MFIs, but community-based and medium-size NGOs normally cannot afford their expensive salaries.
It therefore looks more promising to bank on field staff. They have a lot of practical experience, knowledge and skills and are used to working in difficult, ever-changing environments. These people, however, need some formal education if they are supposed to turn their implicit experience-based knowledge into robust explicit business models and standardised processes.
So far, external consultants have served to plug the human-resources gap. In many cases, consultants are deployed as trainers. This approach is chosen by microfinance associations like AMFIU in Uganda and Sa-Dhan in India. Germany’s aid agencies (GTZ, CIM, DED) are traditionally active in the field of microfinance consultancy and training. Increasingly, however, institutions of higher learning have begun to deal with microfinance issues.
Institutions of learning
At the international level, Boulder Microfinance Training (which moved from Colorado to Italy in 2005) and the microfinance academies organised by the Frankfurt School of Finance and Management are flagship summer-schools. Together, they have trained about 3,000 practitioners from over 130 countries, and their model has been replicated in Kenya, India and Sri Lanka.
The Washington-based Microfinance Management Institute, which cooperates with the World Bank-sponsored CGAP and the Open Society Institute of George Soros, counts “55 training and academic institutions in 32 developing countries” among its members. In India alone, 10 universities and colleges are offering relevant courses.
Remarkable African examples include:
– In Uganda, German aid agencies are supporting under- and postgraduate courses at Martyrs’ University and Mountains of the Moon University. Courses have already started at the former and will begin soon at the latter.
– In South Africa, the University of Pretoria has a centre for microfinance which offers under- and postgraduate courses for microfinance careers.
– In the DR Congo, the Protestant University of Congo, in collaboration with the Frankfurt School of Banking and Finance, has formed a centre for microfinance. With support from DAAD (Germany’s Academic Exchange Service), it is launching a microfinance master-degree course this year.
Such higher-learning courses will allow MFIs to increasingly recruit staff with a set of skills and general knowledge geared to managing the deepening and widening of operations. Moreover, they will allow MFIs to benefit more from the rich experience of staff members who have been working at field-, branch- and back-office levels. They will be able to offer more attractive career opportunities to such people and thus strengthen the bond with their staff.
Ultimately, however, it is up to the MFIs to tap into the new opportunities. Unfortunately, many seem to be sticking to bad habits of their NGO past. All too often, staff is poorly paid and otherwise neglected. Most MFIs have so far failed to create up-to-date human-resources departments that would make sure they attract – and keep – high performing staff. The picture is different for some large MFIs which employ thousands of persons. They have gone out of their way to create an infrastructure for training staff, linking performance and pay, and offering career opportunities to field staff.
Regulators would be well advised to place more emphasis on HR formation, rather than meddling with prices and other elements of financial-service-provision. They should back capacity building by using the higher education sectors of their countries. Obviously, this is also a promising field for development cooperation.