Balancing Tension between Financial and Socio-economic Transformation in Microfinance Institutions: Managerial Choices

Debashis Sarker,
Senior Manager, BRAC Microfinance Programme, Bangladesh Email: deb_sarkar30333@yahoo.com

Photo Credit: IFAD

Date: 18.02.2014

The issue of social and financial consolidation of Microfinance Institutions becomes more widespread in the literature and also in practices. With the demand of the time or industry, managers or professionals in this field are more conscious about their efforts and steps how to deal with these two issues together which is obviously very challenging. Tier 1 Microfinance Institutions (MFIs) that represents only 2 to 5% (some says 8%) of total MFIs in the world have the power to balance as they are financially sustainable like BRAC, Grameen Bank etc. but what about others? Now the question comes-how can managers make a choice taking into account these more efficiently? Microfinance managers may possibly think about both-financial and socioeconomic perspectives, gender as well as environmental issues as these are all very powerful tool for changing the lives of poor people. They need to balance all of these to get the positive and expected results. The challenge of consolidation of both issues is not new but this is not an easy task to do as managers need to put more efforts, apply innovative ideas and mostly need financial support. Here ensuring financial sustainability is a major assignment for managers. Managers have to face these two perspectives with creativity and prioritize financial, social and environmental circumstances and contexts at a time. Credit or associated financial services are not only magic bullet to change the worlds poverty; there should be other elements to deal with. The major challenge is to balance between financial and social performance together. Managers become puzzled to consolidate these to make strategic decision. However, they should also think about the long run business success for the responsible finance. There is a trade off and synergies between financial and social objectives. Focusing on both issues, managers have to be prepared to act for achieving financial and social returns. On the other hand, it is also true that profitability, clients focus, social context all can work together to form a successful business model. By involving in the debate of balancing between these - financial and social consideration, problems might be solved if it is commercial microfinance. Social and financial objectives can be met without tradeoffs and here a conventional shareholder corporation could be the best vehicles for Microfinance institutions. One might be confused about the role or mission or drive of NGO MFIs and commercial MFIs. But one of the studies showed that there is no mission drifts for serving poor clients even if it is a

commercial microfinance institution and more specifically it is found that ownership style does not affect mission drift. Official Development Assistance (ODA) or Donor Fund is still blood for the survival of the most NGOs in the world. NGOs industry face tremendous competition for acquiring fund and the fund availability is becoming very limited due to the world recession. Commercial microfinance can use several sources like banks, international investors, ODA and other funders for capital formation and make strategic alliance for tackling emergency necessity. Hence continuity of providing services is possible towards sustainability. Besides that when managers design their microfinance operational policies and procedures, they could even balance their priorities in the policy guidelines to serve both financial and context related concern like social, gender or environmental matter. Managerial choice to deal with social investors might be a good idea for keeping focus on the social performance with the financial outcomes. The partnership with social investors could give managers some flexibility to work on both aspects. When MFIs earn sufficient profit or sometimes what they call surplus, then managers may ultimately cover the expenses of other non-financial activities. Managers could create social value of microfinance operation by taking initiatives, for instance, educating clients, which are related to the improvement of the lives of the poor and excluded clients and ensuring clients families and communities benefits from the intervention. Managers could focus on providing long term loan so that clients can use for longer period, activities or investments. For instance, farmers could use long term loan for agricultural production. Despite the existing belief of getting repayment for long term loan is always challenging but in reality, there are many program exists in Africa and Latin America specifically Nicaragua which provides long term agricultural loan. Upholding a profitable strategic relationship with the customers for an extended time, MFI could be competent to supply bigger loan for the productive purposes in future. By getting long term loan, farmers may perhaps be more resourceful to reduce their vulnerability. A number of regions exist in the world where agricultural productions are vastly affected by lack of regular rain, drought, storm or others. Introducing new index based insurance products can save clients and clients can also save environment by

green production. This is ultimately win-win situation for all stakeholders. Partnership with government or private insurance companies can be constructive. Here strong monitoring of the actions is really significant to bring necessary changes to accomplish these objectives. Managers might offer necessary incentives to their staff to make sure that they are working in align with the mission of financial and social objectives. Regardless gender, managers can give more focus on the clients who need finance. Product diversification and targeting new segment like adolescent people could be another fascinating market for promoting future financial, social and environmental sustainability by providing them loan for doing environment friendly projects. Sanitation loan, by-cycle loan, more agricultural outreach, value chain and partnership are some of the ways mangers can think about the positive outcome for both ways. Managers can initiate green house project loan in some countries based on the context like in Africa. Green house can boost the agricultural production throughout the year. Targeting women, youth and learning institutions can be supportive for sustainable projects. They could utilize horticulture companies for the construction technologies for green house as part of their business with the partnership with local banks in order to reach as many farmers as they can. Managers can also initiate insurance for green house products in case of any fire, heavy winds or any natural calamity. Self help group could work here because many of the poor people dont have enough collateral to be eligible for credit. Balancing both sides, putting both objectives into policies and practicing in the real field, targeting socially motivated investors, introducing more innovative and demand based products, adopting lending technique, targeting new segments of the market, increasing staff efficiency and productivity, generating revenue, strong monitoring as well as positive mindset could help a manager to manage tension.