Principle IV: Prioritize Operational Efficiency

If MFIs are to have a sustainable impact on poverty eradication, they must be efficient, financially viable institutions that can develop the financial leverage to expand outreach at a sustainable level. Adequate attention must be given to business practices to make MFIs financially sustainable in a reasonable timeframe. Leaders of African microfinance institutions stressed that practical and efficient operation is essential in achieving self-determined development, as well as accountability to clients as well as donors. This section highlights some of the key principles of operational efficiency underscored in this study:

• Target the Poorest of the Poor: Microfinance is a means to poverty eradication, and not an end in itself. Efforts for operational sustainability must target not only the lesspoor capable of repaying loans, but include the otherwise marginalized poor.

• Mobilize Savings: Savings services not only provide a valuable financial assistance to low-income clients, but they also strengthen institutional self-sufficiency, membership commitment to microfinance initiatives, and build a sense of discipline, self-esteem, and wellbeing. When funds are internally generated rather than borrowed from or granted by external sources, MFI members become more invested and participatory in the prudential administration of savings towards credit and other MFI services. If priced correctly, savings instruments can contribute to capital mobilization and wider market coverage.

• Charge Interest Rates that Cover Operational Costs: Successful microfinance schemes are characterized by non-subsidized interest rates linked to competitive market rates. Interest rates should allow to sustain the MFI operation. The administration of many small loans, including processing and tracking services, is a costly operation. Consequently, MFIs need to charge higher interest rates than what commercial banks charge, yet can continue operations at rates that remain lower than the informal financial sector.

• Market Research: Preliminary and ongoing research is an important investment for microfinance initiatives. Feasibility studies and ongoing research of the target population, geographic scope, and the local economy are vital to propose financial products and services that complement these realities. Market research helps to predict and control for costs (i.e. transportation or training), to better innovate and tailor services to the target population (i.e. develop effective selection, appraisal, and collection processes), and to maintain practical geographic coverage (i.e. ensure that loan officers are not over-extended and can have effective follow-up with clients).

• Streamline and Decentralize Operations: Lean, simple infrastructures utilizing basic design of microfinance products facilitates administrative procedures and increases operational efficiency. Simple and clear savings and loans criteria, preferably based on traditional mechanisms, are also easily understandable by local people. When possible, computerization instead of manual administration of accounts helps to reduce administrative costs. Decentralization reduces costs associated with travel for collection and disbursement of funds, risks associated with transferring funds, and inefficiency associated with delays in communication.

• Utilize Volunteer Staff: Voluntary staff and profit sharing from revenues are effective strategies for reducing operational costs. This is especially true in disadvantaged and rural areas, offsetting the additional costs arising from such constraints. Training can promote the transfer of otherwise costly administrative responsibilities to volunteer staff. This is not only cost effective, but it also reinforces commitment to and sustainability of microfinance initiatives, empowering people to be more self-reliant and take initiative in their development. Furthermore, volunteer staff people are typically intimately familiar with the area serviced, offering valuable knowledge and commitment.

• Target Women: In Africa, women are a better credit-risk than men and more responsible managers of meager resources. Furthermore, they are more committed to using their loans for the benefit of their household rather than self-gratifying consumption (as common among men). The most compelling reason for MFIs to prioritize women is to assist the poorest, who are disproportionately women.

• Develop Monitoring and Assessment Tools: Credible and reliable mechanisms to monitor and evaluate MFI operations improve overall institutional efficiency and effectiveness. Assessment tools allow for the generation of systematic information to identify and address weaknesses in MFI services and management systems, streamline procedures, and improve the user-friendliness of programmes. Reliable monitoring also fosters accountability, raising the investment attractiveness of MFIs.

• Invest in Training: Microfinance training is an investment capable of reducing recurring costs and improving operational efficiency, sustainability, and outreach.

Well-trained staff cultivates a sense of ownership and investment in the MFI mission that transfers to the client base, creating client loyalty (Box III). Financial and business training in savings and credit utilization, basic management, bookkeeping, and marketing ensure that clients effectively invest microfinance funds into productive income-generating initiatives.

• Confront Problems: Problems are inevitable, and when they do escalate, it is imperative to identify them and respond immediately before they become serious.

This entails developing performance standards, monitoring tools, and institutional integrity to identify and address weaknesses and problems in their infancy.

• Utilize Pre-Existing Support Organizations: Utilize pre-existing support organizations, such as the Special Unit for Microfinance (SUM), CGAP, Women's World Banking (WWB), the World Council of Credit Unions (WOCCU), and establish linkages with other NGO networks, bankers' associations, and international groups.

• Avoid External Dependency: Whereas donor funding can play an essential role in the start-up of a microfinance initiative, if MFIs are to make a lasting impact, they cannot remain dependent on donor funding, but must become self-sufficient. Self-reliant MFIs are better able to maintain their identity, autonomy, and mission.

Microfinance in Africa: Combining the Best Practices of Traditional and Modern Microfinance Approaches towards Poverty Eradication To learn more about this author, visit United Nations Economic Commission for Africa's Website.

Like this article? Share it with your friends

E-Mail | Print | More

Related Articles
Workplace Management
	This article describes the Japanese technique of managing the workplace
Overenthused And Undercapitalized
	Your sales and marketing success depends on your business model. There are three main business models and what you sell and how you sell it is dependent on having a plan and process that is alignment with your model...
Creating Success
	Creating success through the Be, Do, Have principle
Principle IV: Prioritize Operational Efficiency
	Key Principles for an African Model of Microfinance
Increase Your Business Luck
	I recently read "The Luck Factor" (Dr. Richard Wiseman), a scientific study of luck. After three years of study, Dr. Wiseman determined that "Luck is something that can be learned". His research boiled down to four ...

---

Related Forum Posts
	MAZE INC NETWORKING GROUP
	What makes a good entrepreneur?
	That Tim Ferriss Again (& Jim Slater Too!)
	Starting a New Business
	The 80/20 Rule
	Net Ready: Strategies for Success in the E-conomy
	Non Commercial Food Service Handbook
	Re: Food Marketing Entrepreneur Assistance