Chris Dunford – Motives Matter in Microfinance Management
Is there a real dichotomy in the microfinance industry between those who are profit-driven and those who are value-driven?
Probably not, at least in the sense of a sharp divide between two types. Almost all microfinanciers are seeking to make a profit, even if they plow it back into the business or return it to clients in a non-profit or cooperative legal structure. And aside from a few “bad actors” (notably predatory consumer lenders who purposefully masquerade as microfinanciers), almost all got into this line of work because of their values, specifically their social values, or objectives, even if these are only implicit in their business operations.
Microfinance practitioners (and those who support them) have a variety of social objectives, ranging from financial inclusion (yes, this is a social objective) to poverty alleviation (many would say “reduction” or “elimination,” rather than tepid “alleviation” of the burdens of poverty) to women’s empowerment to enterprise development to employment generation for the very poor, and so on. As often as microfinance practitioners are motivated by a single objective, others have multiple objectives.
The performance differences between actors in the microfinance world are mostly due to differences in the balance or relative importance they attach to their social objectives vs. financial objectives – the double bottom line. This comes out in their strategic decisions and even more in their management decisions regarding the market segments they pursue and the products they offer. The more they assume that social objectives will take care of themselves, as long as they reach lots of people with products that make a good profit, the more they have tilted away from their social objectives and relegated social performance to an incidental result of their work rather than an intentional result.
It is a management axiom that you manage toward what you measure, so it is relatively easy to assess the commitment to social objectives in a microfinance institution by looking just at what it is measured and reported up the line of managers to the CEO and the board of directors. Motives matter, but management’s measurement matters even more. What you pay attention to will be what you succeed in accomplishing.
It is encouraging that even those tilting strongly toward financial objectives are increasingly concerned about social performance. Not for “corporate social responsibility” reasons (though there is a lot of that thinking, too), but because of competition for clients. An impish relative once assured me that I don’t need to brush all my teeth, just the ones I want to keep! Same for clients. So everyone is paying more attention to their clients – what a concept for business! Long ago, a self-described “stony-hearted” banker listed for me the three principles of good banking: 1. Know your customer; 2. Know your customer; 3. Know your customer.
For those microfinanciers who wisely choose to really know their customers, the main differences due to motives are in whom they choose to know – only some are motivated to do the extra work of knowing the very poor – and what they are willing to do with the knowledge – only some will stretch the traditional limits of banking to really engage in helping people help themselves.
Blog by Chris Dunford, Senior Research Fellow, Freedom from Hunger.