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Principle IV: Prioritize Operational Efficiency

Guest post by: United Nations Economic Commission for Africa

Article Overview: Key Principles for an African Model of Microfinance

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

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Article Tags: adequate attention, business practices, capital mobilization, charge interest, commercial banks, competitive market, costly operation, external sources, financial assistance, financial leverage, income clients, market coverage, microfinance institutions, operational costs, operational efficiency, poverty eradication, prudential, self sufficiency, sustainable level, target



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