The Art of Selecting Promising MFIs

As stated above, the key question for MicroStart is whether it can equip and motivate those in charge of MFI selection to choose "small and promising" rather than "small and weak."

Much of the work of the evaluation was devoted to consideration of how to identify breakthrough organizations. The evaluators believe TSPs can do this; however, when the organization is small and young it is more an art than a science. When an organization is small and young, indicators associated with unfulfilled promise may not differ all that clearly from indicators associated with unpromising weakness. In fact, picking winners requires a number of subjective judgments about the people involved in the organization. A combination of objective and subjective judgments is needed. During the MicroStart selection processes, there has been a curious reluctance to make judgments about leadership. It is a sensitive area, and TSPs undoubtedly feel more comfortable relying on objective indicators.

The following points have emerged from many hours of talking with participants in MicroStart, trying to figure out how to pick winners. What has emerged is not a formula, but a set of signals that are probably quite useful.

Ownership and Content of Vision. All the MicroStart programs have included content of vision as an important selection criterion, focusing mainly on commitment to reaching the poor and women, to expansion, and to sustainability. It is crucial to find organizations driven by strong internal visions of their own which fit with the MicroStart mandate. Many organizations will endorse MicroStart's vision when the reward for doing so is a grant. That is not good enough. Evidence of internal ownership of that vision is needed. TSPs should assess the depth of the MFI's understanding of what it will mean to embrace this vision. If that understanding is superficial, perhaps educational or exposure activities make sense as a step before selection.

Leaders. As an exercise, we drew up a list of highly successful MFIs from around the world and tried to make generalizations about their origins. Overwhelmingly, a common feature of the successful organizations was that they were launched and nurtured by extraordinary people. One should consider whether the people leading the organization (e.g., founder, board chair, executive director) have skills, position, and personal characteristics that could put them in the same category as the leaders of some of the better or best organizations. This may be perhaps a sensitive judgment for the TSP to make, but it is absolutely necessary. It is a good sign if leaders have placed some of their own funds at risk.

Professionalism. In order to grow substantially, organizations will have to learn to operate professionally. They will have to develop a paid professional staff for basic management functions. Some small organizations, especially grassroots organizations, operate with volunteers. Although volunteers have a role to play (e.g. on the boards of directors or in some cases at the field level), most organizations will not be able to grow substantially if they depend on volunteers for critical, time consuming functions that require professional skills. While an organization need not have filled all key positions, it should be on the path toward professional operations. Some of the key staff in the organization should have experience in business and/or financial management. Nepotism is also clearly a danger signal.

Recent concrete accomplishment. The organization should have taken steps in the recent past that convincingly demonstrate its commitment to progress. For example, Zakoura had worked informally with international microfinance expert Maria Nowak to implement a lending methodology that worked much better than its original experimental methodology. Bayan staff had traveled to ASA in Bangladesh to learn as much as possible and had begun applying ASA's lessons. The organization should be on an upward, not flat, path. A particular danger signal appears to be organizations that persist in poor performance despite repeated donor assistance. On the other hand, organizations that have rebounded after a serious crisis may have a renewed sense of purpose.

Key indicators: control of delinquency, interest rates, and growth. A small, young organization is not expected to score well on all its performance indicators. New organizations may still be struggling to identify an effective lending methodology and are likely to be at a stage where revenues are far from covering costs. However, organizations should score well on the crucial indicators of delinquency, interest rates and client growth. Lack of good scores in these areas are indications of fundamental weaknesses or signals of vision issues that will be difficult to overcome.

In addition to judgment about an organization's potential, the TSP must also make a judgment about prospects that it can work productively with an organization. Key factors in this assessment are:

Compatibility of vision.

Transparency and willingness to share information about the organization's performance, operations and financial condition.

Openness to learning from an external organization.

Confidence in the capability of the key person responsible on a day-to-day basis for the MicroStart program. This person should have basic knowledge of microfinance and should have a hands-on work style.

MicroStart has already placed on its learning agenda the desire to distill lessons on how to assist small, young organizations. It is hoped that the reflections given above constitute some contribution to that agenda, and that MicroStart will refine its understanding as it continues.

Finally, MicroStart may wish to give some consideration to the question of who enters microfinance. In countries where the microfinance is new, most people still hold old-paradigm ideas about credit for the poor. In these settings microfinance programs are most likely to originate as add-on projects to multipurpose charitable organizations, or even government agencies. The people who start them may not realize they are entering an area where important lessons have already been learned. A number of the organizations MicroStart has already selected are of this type -- chosen mainly because of a lack of alternatives. Given the importance for MicroStart of finding dynamic, competent people in organizations with a vision aimed at growth and sustainability, MicroStart may wish to consider what can be done to draw potentially strong social entrepreneurs or organizations into microfinance. This question has never received much attention in microfinance circles. MicroStart is well-positioned to examine it. The following box notes two strategies MicroStart has used to pull interesting parties into microfinance, one in a country with no prior microcredit experience (Mongolia), and the other, with more sophisticated partners, in a country with substantial microcredit background (Zimbabwe).

MicroStart: Finding and Feeding Breakthroughs Midterm Evaluation Prepared for UNCDF/SUM 10 December 1999 Elisabeth Rhyne and Jill Donahue To learn more about this author, visit United Nations Capital Development Fund's Website.

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