Managing trade-offs

Achieving both profitability and strong social performance is the ultimate promise of microfinance. It is not impossible, but neither is it easy, and relatively few micro-lenders are there yet.

Ten years ago it was hoped that achieving both goals would simply be a matter of raising interest rates on loans. But today micro-lenders see that the key to managing the trade-offs has as much to do with containing expenses as with raising revenues. To a large extent, this means thoughtfully managing human resources. One reason is that salaries make up a large fraction of overall costs for micro-lenders. The July 2003 Microbanking Bulletin, for example, reports that MFIs reaching out mainly to poor clients incurred operational expenses that were, on average, about 60% of the total loan amount given. Personnel expenses made up just under half of that. The proportionately high personnel costs arise because even small loans and deposits require much of the same paperwork and oversight as larger transactions. MFIs focusing on better-off clients gave loans that were four times larger and, as a result, their operational and personnel costs as a fraction of loan size were half that of those lenders who focus on poorer customers. Institutions that specifically seek to provide services to the poor thus face a far greater challenge to control costs.

The other reason to focus on human resource management is that credit officers are the point of interaction with clients. They gather information, shape the experience, provide support and encouragement, and, as needed, enforce rules. Cleverly designed contracts and products can substitute for these human roles only to a limited degree. Who one hires and how one treats them will make a crucial difference to both financial and social performance.

ASA in Bangladesh cut down on personnel costs by simplifying all operations so that they could be performed by less-educated staff members. College degrees that were required earlier then became unnecessary for much of the work, and ASA's wage bill dropped sharply. Motivation for workers was provided mainly by the promise of steady promotion over time, together with the cultivation of an ethic built around contribution to Bangladesh's social development.

Some experts argue that lenders can do even better by adding strong financial incentives to motivate the staff. For example, large bonuses can be tied to loan repayment rates and the development of new clients. But Prodem in rural Bolivia, among others, has found that strong incentive schemes can be problematic as staff members focus on getting bigger bonuses to the exclusion of other, broader goals. After experimenting with a variety of bonus schemes, Prodem ultimately discontinued their strongest incentive programmes, replacing them with a system that resulted in treating the workers equally.

Pro Mujer, also in Bolivia, has achieved impressive levels of efficiency through careful cost accounting. As a result, profitability has been possible. For Pro Mujer, though, microfinance is principally a means for attaining development for women, not for making profit. For that reason they are committed to working in very poor communities and providing health education alongside credit. The real question is not whether they can cut down costs further and make greater profits, but whether their clients, their mission, and the broader social good would be best served by doing so. It is this trade-off that institutions like Pro Mujer struggle with each day.

Jonathan Morduch Associate Professor, Public Policy and Economics, Wagner School of Public Service New York University 295 Lafayette Street New York 3048 USA To learn more about this author, visit id 21's Website.

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