European Microfinance Week 2018

INTRODUCTION

Paul DILEO raised the question are NGOs really more client-centric? In recent years, there has been discussion on changes in the mission of MFIs following the transformation by many MFIs into more regulated, more privately funded, more professionally managed institutions. Some are saying that the focus on the initial target population by MFIs is diminishing. 

PRESENTATIONS

A study by Calmeadow, presented by Alex SILVA, on changes at 40 MFIs in Latin America over a period of 25 years aimed to find out if mission drift is taking place or not, and if certain types of organisations provide a better service to their clients than others. The 40 MFIs included regulated MFIs (banks, private finance companies, credit unions and government owned MFIs) and unregulated MFIs (NGOs and private companies).

The research measured on six indicators and some of the most remarkable conclusions per indicator are: 1) Depth of outreach - many MFIs reach out to women and farmers. However, reaching out to challenging groups like migrants and indigenous populations was a challenge for MFIs; 2) Variety of services - practically all MFIs provided credit and insurance services and a growing number of MFIs offer savings services. A lot of institutions also offer non-financial services, such as financial education, which are valued by their clients and can improve their competitiveness; 3) Credit technology - client retention is remarkably high; 4) Loan conditions - regulated MFIs had lower interest rates, because of economies of scale; 5) Distribution channels - physical offices prevail and digital finance remains limited, but mobile apps are emerging; 6) Customer protection - most MFIs had policies to protect clients. 

In conclusion, the study found no differences in the mission of MFIs based on their legal structure. 

In addition to the main conclusion on mission drift, the study showed that MFIs use different approaches for getting closer to their clients. The secret of success regarding client relationships is to have a coherent strategy in terms of target population and corporate culture. This includes a long time horizon by shareholders (governance) to support the emphasis on client relationships. Another success factor is to scale matters so as to offer lower rates, diversify their services and overcome organisational challenges (human resources). Client centricity leads to more profit and improved financial sustainability which more than compensates for the costs of conversion to a ‘for profit’ MFI. Thirdly, non-repressive regulation can create an enabling environment for MFIs to offer a wider range of services and build more trust between MFIs and clients through customer protection. Fourth, flexibility and innovation are needed to adjust to changing times without sacrificing mission. And lastly, MFIs must be resilient to survive shocks and assist clients during difficult times.

After the presentation of the above research findings, CANALDA DE BERAS-GOICO told the audience about the story of Banco Adopem, a Dominican Republic microfinance bank that was created as a NGO. Before transforming into a bank, they asked their clients how they feel when they go to a bank, because they were not sure if their clients wanted them to become a bank. Their clients responded that they felt important when they receive a service from a bank, but at the same time felt more afraid than when they deal with an NGO. They were afraid that a bank would punish them more severely when they would, for example, not repay their loan on time.

Based on these results, the NGO determined that they needed to develop good communication with their client to remain close to them and understand their rapidly changing needs. The NGO bought into a small bank in order to get a bank license and used the platform of the bank to deliver financial services. The bank held on to their original mission and focused on relational banking instead of consumer banking. Later on, the bank also supported three to four other institutions with their transformation.

Challenges for the bank include digitalisation (both internal and external) and compliance with the regulation. They had underestimated how much work is involved in compliance to regulation, including reporting to authorities and the increase in risk management (not only credit risk). The government of the Dominican Republic just introduced a new money laundering law. This requires extra inspections by banks and additional reporting to authorities. 

Antonique KONING of CGAP argued that the benefits of transformation are often clear, but MFIs also need to be aware of the costs involved and understand how they can implement the customer-centric model. They must preserve the relation with their clients and not lose the essential character of their institution.

CGAP offers a systematic instrument to help organisations with their transformation. They first help organisations define customer centricity, as this is often misunderstood. In dealing with several organisations, CGAP noticed that some organisations that thought were customer-centric were not and some that were concerned about how they could become more customer-centric were actually most customer-centric.

Customer-centricity does not only mean that an organisation offers customer service. Customer-centricity is a business model that has to be embedded in the organisation. The organisation must understand its customers and design solutions for them.

Many MFIs and microcredit institutions consider their target group as one homogenous group. To become customer-centric, differences between segments must be understood and organisations must identify their target segments and then go through a customer journey for each of these segments to develop solutions to serve that market segment. While leadership is important to manage the transformation process, staff must be empowered to equip themselves to deliver valuable services.

Three highlights from the experiences by CGAP: 1) Strategy - customer-centricity requires a shift in strategy, from pushing products to the market to offering customer solutions; 2) Culture - staff must not only be rewarded for achieving sales targets, but also for solving customer problems; 3) Structure - organisations must not be structured into individual departments, but into partnerships around customer segments, such as segments of smallholders or small traders, to improve understanding of the customers.

DISCUSSION

DILEO kicked off by asking SILVA where the discussion on mission drift is coming from if his research shows no relation between the transformation of organisations and changes to their mission. Silva confirmed again that while many people seem to be assuming mission drift, none of the variables studied by Calmeadow show any difference. Based on this study, there is no commercialisation-induced (or regulation-induced) mission drift. It seems to be the people behind the organisation who influence an MFI’s mission and not the typology of the organisation (structure, size, etc.).

An audience member argued that people in Bangladesh prefer MFIs over banks, because they value their good relationship with the MFIs. Koning was keen to confirm that clients value trust and the non-
financial services offered by MFIs. After her presentation on Banco Adopem, Canalda answered a related question on current complementarities between the NGO that started Banco Adopem and the bank. She explained that the NGO currently has a 15% share in the bank and implements social projects, such as training credit officers and research projects. The NGO can also develop social impact projects for companies. These services are complementary to the services of the bank.

In response to the story about the experiences by Banco Adopem with adapting to banking regulations, Koning argued that such examples show that regulators do not always properly understand how regulations can benefit clients. More proportionate regulation is needed instead of prudential regulation which is limiting.