Microfinance helps people fight poverty on their own terms, in a sustainable way. Poor people use loans, deposits, and other financial services to reduce their vulnerability, seize opportunities, and increase their earnings. Indirectly, microfinance improves schooling, health, and women’s empowerment. In most settings, however, microfinance does not reach the people at the very bottom of the socio-economic scale—the “poorest.”
Traditionally, a large percentage of people have been ignored by the banking sector and are deprived of organized services such as loans, insurance, remittance and saving instruments. The availability of a range of financial institutions offering a range of products and services at reasonable costs supported by legal and regulatory infrastructure will help to address this issue. In most scenarios, the poor are not seen to be “bankable” by the formal financial sector and are un-insurable for the wide variety of risks that they face. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.
Microfinance offers a mechanism by which financial services (loans, savings, money transfer services and micro insurance) can reach the poor. In Ghana microfinance schemes has emerge as an alternative to ensuring access to financial services for small borrowers.
Microfinance institutions have dual mission;
1. To ensure financial sustainability; Making sure they have enough funds to augment their business operations by ensuring healthy and the appropriate loans can be met, client withdrawals can also be dealt with peaceably whilst ensuring their liquidity position as required by their regulator, Bank of Ghana is always intact. For a financial company or institution as microfinance, financial sustainability in operations and liquidity in monetary terms is their stock. (Kwasi Kyere, 2016). This financial mission is seen in profitability and maximization of shareholders’ wealth.
2. To strengthen the oversight or ensure social performance or a social mission; Microfinance institutions are as part of their mission to assist, help or empower the productive poor. It is not only about its own financial needs but assessing the needs of the productive and helping them develop or grow out the situation. For example Star Alliance Microfinance can assist rural folks who are much more into farming yet lacks the necessary tools to improve their farming activities example irrigation, access to water etc by ensuring that farmers can be support financially to go into methods tools that can supply them water through either mechanized irrigation or other forms that will improve their work.
Social Performance is commonly defined as the ability of a financial institution to “effectively translate its mission into practice in line with accepted social values”. As a first step, the mission is translated into social goals and smart objectives. Social goals are the non-financial goals set by an organization which fulfill the organization’s commitment towards its employees, clients, community and environment. Effective translation means having the systems, processes, operations and people management – all align with the intent. In simple words this means implementing the stated vision / mission in both letter and in spirit. Accepted social values are the values which are generally agreed upon by various stakeholders as common values that MFIs should fulfill. For example, reaching out to poor clients with financial services, reducing clients’ vulnerability and poverty levels etc.
However, microfinance institutions have put their total focus on only the financial sustainability aspect of their mission and have neglected their social mission entirely. Shareholders have contributed to this anomaly by demanding fat returns on their investment, so the focus is always geared towards Loans, investment and savings without tackling the very important mission of changing the lives of the productive poor. This situation has led to extremely higher interest rates that goes a long way over-burden the productive poor and rather take the little they have and deprive them of business opportunities. The sector has rather become ‘Lending shacks’, only focusing Loans, and have therefore failed to tackle poverty and other important social needs.
Again the very lack of corporate governance principles at the heart of many microfinance institutions have led to limited access to funds. Most companies can only attracts funds from individuals and certain institutions at a very high and exorbitant cost, thereby transferring it to the next customer. This has also diverted the attention of many MFI’s from their social mission of also alleviating poverty into rather serving individuals and organizations in the medium and large enterprises in order to meet their expectation.
In spite of the growing number of MFIs and active borrowers in Ghana, there is genuine concern regarding whether the sector is serving its purpose and mandate. One of the main reasons for the slow and effective growth of this sector is due to some of the unfortunate experiences of microfinance institutions, practicing dangerous schemes, such as ponzi scheme and offered a monthly interest rate of over 16 percent on investments. These have however further undermined the Sector.
The Social Protection serves a dual purpose – one is of assisting the poor to survive in adverse conditions, and the other is that of promoting a better lifestyle for these consumers. To forestall the sector and ensure patronage and also move into alleviating poverty whilst also meeting shareholders’ objectives of profitability, Corporate governance practices must be enhanced. The board must take the following practical steps to strengthen social performance in the microfinance sector;
1). Commitment to social goals should be a requirement for board membership and should be taken into account during member vetting and orientation.
Despite the fact that most microfinance institutions (MFIs) were established to reduce poverty and pursue other social missions, many are beginning to resemble traditional financial institutions. To expand their outreach and loan portfolios, they tap into commercial and quasi-commercial sources of finance, which require them to demonstrate consistent profitability to their investors – sometimes at the expense of clients (for example in terms of fair product pricing, over-lending without considering the clients’ capacity to repay). Given this reality, and the risk of mission drift, a Board has to make sure Further, board of directors should consider Social Protection Mission:
A. To position itself publicly as a socially responsible organization. This will also help link with the local communities and increase their support.
B. To help attract socially-minded investors which will help in funds mobilization at reasonable or less expensive rates
C. To balance financial & social goals for a sustainable performance. Too much focus on the financial goals may make the institution drift from its mission and away from the needs of its clients
D. To mitigate political risks where the local governments or regulators or communities can bring down the MFI’s presence or activities, e.g. community backlash, by increasing transparency, protecting clients better, etc.
E. To assess if the institution is achieving its mission and measure, track and improve its overall social performance
F. To align & improve systems, e.g. HR, credit operations, etc. which can bring in greater efficiencies and profitability for the organization re that there is consistency between various aspects of its social mission and its activities.
2). A board may wish to form a social performance committee, or to assign individual board members to act as “champions” for social performance, tasked with ensuring that mission fulfillment receives adequate weight and attention.
Getting the right skill set and experience to drive the organization is very crucial. In the composition of the board, the right skill set in needed to create balance within the board, so that issues pertaining to the microfinance institution dealings with all parties related and unrelated can be addressed. The board, to ensure efficiency must create committees that will undertake specific duties and task to inure to the benefit of the MFI. The board should ideally have people with a mix of backgrounds and who are committed to both financial and social missions within their subcommittees or assign individuals to undertake such tasks.
This subcommittee or the individual assigned to undertake social performance issues will be empowered to participate and contribute towards the guidance, development and safeguarding of the organization’s mission as well as its financial and social assets. Social performance committee will be responsible for designing and overseeing social performance-related activities. This committee can report directly to the board Chairman or the board in general. To ensure effective delivery of work and the meeting of social goals, there must be periodic reviews of ‘achievement of mission’ as far as social mission is concern and taking of corrective steps to deal with the problems. There should also be work to involve and motivate staff to put time and efforts into the delivery of the social targets, including appropriate performance reviews and incentives.
3). Boards must invest time to develop a shared understanding about social goals and how to achieve them.
Social Performance Mission is a cross-cutting issue that requires management and the board to be more intentional about achieving mission-driven social objectives by ensuring a social focus is woven in throughout operations, where appropriate. This requires time being dedicated to the subject and understanding that should cut across the board and ways to achieve them. This also requires strong leadership, effective communication and patience – and does pay dividends. Understanding social goals throughout an organization will help the board and/or management:
(a) to assess and ensure achievement of mission, and
(b) to improve overall performance through knowing its clients, improving products and customer service, ensuring client/staff satisfaction and retention, and fostering a stronger alignment of systems and values.
Developing shared understanding can involve the appointment of an independent consultant to aid this direction or the board themselves deciding and putting into practice how to achieve the social goal. Assessment of whether an MFI has achieved or working towards achieving its social goals, must have appropriate design and systems to enable it to achieve the desired social outcomes, the focus is on the social objectives of the MFI, their clarity, the MFI’s systems, and its services and delivery mechanisms. Institutional audits or assessments provide this type of information. Without the board coming into this consensus it will be challenge to achieve the social goals.
4). Explicit social goals and targets should be set through the strategic planning process and approved by the board.
As MFIs try to unravel industry expectations on social performance, there is often a missing piece in MFIs’ internal functioning. Lack of clarity in their own expectations can lead them to pursue ‘standards’ that might not reflect their reality, or worse, create further ambiguity amongst the staff and management on what exactly should be done to achieve the social objectives. Shareholders and directors can help set the right expectations at all levels.
For example, whilst a microfinance company want to be financially viable, the adherence to its ‘social’ objectives must much more important. In Board meetings the question of social impact should raised often by members of the board. Every new initiative, like the opening of new branches or introducing a new loan or a savings product must scrutinize from this ‘social’ lens. By giving loans to the informal sector which say lacks electricity, will the giving of loans to acquire a simple solar system be of help to their businesses? Will it help them to grow their businesses in terms of profitability? These expectation nevertheless will help establish a value system within the MFI where every management decision required an assessment of both the financial impact on the institution as well as the likely impact on clients. The board should be seen to championing this course in order for such goals and targets to be attained. The board is supposing to chart a strategic direction by leading, and so by approving such targets and pursuing its implementation will help the MFI make a significant headway.
5). MFIs should have, and the board should monitor (at each meeting), indicators demonstrating the achievement of social targets and goals.
Social goals drive the strategies of many microfinance institutions, yet many of these institutions are judged primarily on their financial performance. Measuring and reporting on social performance is a key way for double bottom line institutions to define the social value they create, while holding themselves accountable for the goals articulated in their mission. Every microfinance institution must have social goals and targets with they should be govern with. It is the responsibility of the board to ensure that these goals and targets are well document, explained and well implemented. Having these goals and targets are not end in themselves but part of a process. The board must assess the indicators that suggest that the social goals and targets set are being met or the MFI is deviating from it.
People excluded from mainstream financial markets, women, ethnic minorities and the productive poor or the small enterprises are the most common target groups. It must be noted that targeting policy has proven to have a significant impact on MFIs efficiency while it appears to have no impact on productivity. Client-specific targeting policies in general restrict potential borrowers and thus worsen MFIs cost efficiency. More explicitly, targeting poor or disadvantaged groups of clients is more expensive (in terms of cost per borrower) and worsens operating efficiency by limiting the scope of diversification and the possibility of disbursing larger loans with respect to more relaxed forms of targeting. That notwithstanding the board of MFI’s must ensure that their social goals and targets are achieved or being achieved through;
A. Reports submitted to it through management or sub-committee handling social performance issues. This can be assessed through feedback from the public.
B. The practical impact can be felt in the community where the MFI operate.
Microfinance institutions with strong Social goals and targets design products that help clients cope with emergencies, invest in economic opportunities, build assets, and manage their daily and life cycle financial needs. Such MFI’s also treat employees responsibly and carefully balance the institution’s financial and social goals.
In addition to above mentioned social performance goals, the following are also worth considering;
A. Transparent information
Transparent pricing becomes a moral (and, in many cases, legal) responsibility of the MFIs to disclose the rates and all the costs explicitly since Microfinance is devised to protect the poor and vulnerable. For instance, the cost of loan forms, the interest rate charged, processing fees, daily, weekly and monthly repayments of micro loans must be displayed for the client’s knowledge. Most microfinance institutions hide behind the illiteracy nature of the productive poor who are the most in the informal sector and charge higher rates without their knowledge and however take undue advantage. Transparent pricing and information must be well spelt out and appropriately explained to the client where the need be. The board must ensure this is well documented and implemented.
B) Mechanisms for the redress of grievances
As part of its social performance and responsibilities, MFI’S should ensure that grievances of clients can be addressed. It is imperative that MFIs have in place timely and responsive mechanisms for complaints and problem resolution for their clients. Since the poor consumers have limited access or options for redressing grievances, there should be a protective approach on the part of supervisory authorities to establish and enforce fair standards. The absence of simple and practical means of redressing their issues leaves the inexperienced MFI consumer vulnerable to a balance of power that unduly favours the MFIs.
C) Privacy of client data
There is a need to respect the privacy of client data and a need to require the permission of the consumer before using the data for any other purposes. Data Privacy is key when dealing with policymakers, regulators, banks, specialized financial institutions targeting low-income customers, mobile network operators, technology companies, other knowledgeable parties, and donors, all of whom are often engaged in long-term advisory relationships with the host country. The new techniques such as branchless banking and technologies such as mobile banking in microfinance pose a major threat to the data privacy of MFI consumers.
As seen earlier, in the last few years, there has been significant growth in the Microfinance sector. This sector growth attracted many of the commercial entities, which further increased the outreach of the services. However, this shift in focus of microfinance landscape gives the issue of Social Protection even more importance in the sector to safeguard the consumers’ interests. At least three factors have a major impact on the effect of microfinance regulations on social protection.
The first is the cost of implementation; The cost of implementing the regulations affects the way in which MFIs move ahead in terms of their outreach and the segments of society served. The cost can also have implication on the average loan size of the MFIs. Reduced outreach, targeting specific consumer segments (in other words, avoiding the rest of the segments) and concentrating on increased average loan-size means a smaller number of people being served. This also results in the extreme poor people being neglected, one of the main concerns of the existing microfinance operations.
As explained earlier, microfinance regulations are directed towards the protection of MFI consumers and the financial system. But recent studies show that, in practice, microfinance regulations tend to have a somewhat negative correlation with the outreach and profitability (Cull et al., 2009). This effect when further investigated indicated that the outcome of such regulations depends on the motivation of the MFIs. Implementing the regulations is a cost to the MFIs. The profit-oriented MFIs adjust this cost by reducing and limiting their outreach to the market segments which are the most profitable (secured, high value, etc.). Thus, the impact on SP is limited to certain segments only. On the other hand, MFIs which are not motivated by profit (usually, funded by non-commercial vehicles such as donors) do not compromise on this, but the downside is that their profitability goes down and their survival ability is tested.
This higher cost can be attributed to the following reasons:
• Scale of economies: the banks or financial institutions in the developed world operate on a large scale with their consumer base and average deposits or loans being much larger than those of MFIs. When the costs are seen as a cost per account/loan, they are much smaller for the banks and is much larger for the MFIs.
• Start up costs: in the developed countries, the banks are well versed with the implementation costs and have their own teams for this. In contrast, the MFIs which are new to implementing regulations do not have such infrastructure and thus the start-up costs for the MFIs are significantly higher (CLR, 2003).
• Labour cost: most of the implementation costs include labour costs (managerial and legal expenses). Skilled labour is likely to be in short supply in developing and poor countries, and hence the costs for such people tends to be very high
It is also worth noting that, since implementation and supervision of prudential regulations need government/financial expert intervention, the costs would be higher than that of implementing a non-prudential regulation.
The second main factor relates to sources of funds: This factor influences the MFIs’ performance especially in cases where the MFIs operate a lend-only model. The more capital available, the better the outreach is. In addition to the outreach, adequate capital influences the attitude of the MFIs and they become not selective in the segments of the markets served. Adequate capital also empowers the MFIs to allocate funds for the implementation of prudential regulations, which motivates them to provide additional services such as accepting voluntary deposits. Thus, adequacy of capital can lead to MFIs thriving and, in turn, results in better social protection.
The third factor relates to the general perception of the MFI: A regulated MFI is perceived as more secure and trustworthy than a non-regulated one. This is true for the both the consumers and the investing stakeholders. The consumers feel secure when they deposit their already scarce and hard-earned money with a MFI that is regulated by government regulations. This helps the MFI to extend more credit to people who desperately need it and thus provide the means for a better life. On the other hand, a regulated MFI, which regularly publishes its activities and financial performance, attracts more funders. A regulated MFI is more likely to get funders from the commercialized investors since they show their accountability through proper and systematic reporting, often carried out by capable, authorized personnel.
The basic purpose of the MFIs is to provide financial services to the poor and non-bankable population. By providing such services, the MFIs aid in helping the poor to sustain day-to-day living, create income-generation opportunities, provide for education for their children and care for the sick and elderly. The higher the outreach of the MFIs, the more households and micro businesses benefit from it. Thus, efficient MFIs help the poor to sustain livelihoods and to improve the quality of life of not only individual households and businesses, but also that of society as whole. Thus, for the social protection to be effective, MFI performance and outreach has to improve, which depends on the nature of regulations in the sector. The regulations in the microfinance sector needs to be seen as a set of required “public actions to address vulnerability, risk and deprivation” which clearly provides an argument for government to develop the regulations in a broader social protection framework.
Author: Kwasi Kyere
CEO, Star Alliance Microfinance Ltd
LOCATION; 73/6B Ayikai Street, Abossey Okai