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Sometimes seeing is the first obstacle to better outreach to the poorest

17/3/2015

"In my work with microfinance organizations around the world, I have noticed that efforts to serve more poor people can stumble on the very first step: seeing them.

One experience in particular stands out from my work with a very well-meaning MFI whose staff claimed that there were not poorer clients or women to whom they could lend. In order to shed some light, I went out and interviewed people whom I thought were potential clients who were poorer than those currently served and took their pictures. I also interviewed and photographed some people at a slightly higher economic level that I thought resembled the people they were currently serving.

At a staff meeting, I posted pictures around the room and asked staff members to choose the people whom they would approach about a loan. Then, I shared the brief profiles of people interviewed and ask them to again choose. After the selections were made and tallied, we matched profiles with pictures. Many of the people who were chosen based on their profiles were not chosen based on their pictures, revealing an apparent disconnect between the intent to serve poorer clients and the ability to identify them visually. This reflection led to the development of specific strategies to target certain profiles of clients that had previously been overlooked.

For diverse reasons, the poorest members of society can become invisible to us. Perhaps they are so omnipresent that we learn to look past them. Perhaps they are confined to their homes because of mobility problems. In many cases, the poorest serve in roles in which culturally they are not typically acknowledged as 3-dimensional individuals. In some contexts, such as Latin America, being labeled poor has an element of moral judgment and is seen as synonymous with “lazy” or “dissolute”; therefore, the “poor” are not seen as likely or attractive customers. Whatever the reason, sometimes even well-meaning MFI field staff can be afflicted by this “blindness.”

What are some strategies that MFIs can use to help existing staff more successfully identify poor people who could benefit? The best pro-poor MFIs that I have seen have strong orientation programs that help staff to see the poor as human beings in all their complexity. One organization in the Philippines even sent new staff to live with a poor family for a few days to better understand their reality. While it may not be necessary to go to this extreme, structured, reflective interactions with some of the organization’s humblest businesses and families can go a long way toward bringing this population into focus for staff and helping them to see potential in those who were once invisible."

-Lisa Kuhn Frailoli

Lisa Kuhn Fraioli has over 12 years experience in microfinance and 16 in Latin America. She has provided technical assistance and training to microfinance organizations throughout Latin America with Freedom from Hunger, as well as worked as a gender and microfinance specialist for Opportunity International, specializing in product design and research. She is currently the Executive Director of the Foundation for Sustainable Development, which supports asset-based community development through capacity-building, small grants, and international volunteers and interns. Learn more about FSD's work here.

This article originally appeared on the Truelift blog.

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Responding to Needs and Wants in a Market-driven Financial Institution

11/3/2015

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“Customer centricity” is the new buzz in the microfinance industry. More and more financial service providers are recognizing that their success is built on the success of their clients. Customer centricity certainly means recognizing that financial inclusion is not just about more services – it’s about better services. To achieve this, financial service providers need to grapple with the complexity of clients’ financial lives, understand what appropriate design looks like, and empower clients to use those services effectively. But is it always a “win-win”? What if clients express preferences and make choices that are not in their long-term best interests – that is, what happens when what clients need isn’t what they might want or demand? And what if responding to client needs in the most appropriate way appears to be a riskier decision from the point of view of institutional financial performance?

These tension points (and some quite radical decisions in the face of them) can be seen in the work of AMK Cambodia, highlighted in a new book The Business of Doing Good. Witness a conversation we had with a senior manager. “We will never be a leader in client service,” he proudly announced. In the competitive Cambodian market, rapid disbursement of loans that meet customer demand is an important competitive advantage. Yet AMK accepts that its own loan disbursement is slower and more time-consuming for clients, and its loan sizes are much smaller than those of its competitors. Coming from an organization that is proudly “client focused”, this statement struck an odd note.

AMK, serving more than 360,000 people, is now the largest Cambodian MFI in terms of outreach. How can an MFI that invests heavily in understanding and responding to the needs of its clients be “less customer friendly” than others? The simple answer is that a market-led solution (responding to what clients want and are prepared to pay for) might look different from responding to what clients need in order to address the underlying complexities of their lives (i.e. poverty and vulnerability).

So if fast loan disbursement (which clients might prefer, and which AMK’s competitors are prepared to provide) means compromising the rigor of the detailed loan appraisal process that ensures they are not over-indebted and increases the likelihood of the success of a client’s investment, AMK is simply not interested. AMK recognises the importance of matching loans to client capacity to repay – not just whether they have sufficient collateral to cover them if they default. Central to this appraisal process is a visit to the client’s home, which experience has shown is critical to get an accurate understanding of the client’s situation. This visit takes time, is hard work for staff, and inconveniences its clients. Other MFIs have long abandoned this step, but AMK has made this a mandatory part of their lending process, and its “zero-tolerance” policy (with disciplinary action for client officers neglecting this) is verified through its internal audit function.

To understand what clients need, what they want, and what constraints they face, AMK invests in detailed research and client feedback, rather than assuming that it knows best. In fact this research overturned many common perceptions about rural poor people – showing for example that they had mixed economic baskets (rather than being solely reliant on agricultural income). It also highlighted that they were keenly vulnerable to shocks that affected their income (such as floods or health problems). These insights lay at the foundation of AMK’s product design, and have led to some noteworthy innovations.

Take the credit line loan, for example. It matches loan disbursement and repayments to erratic cash flows, and also cuts costs for clients by allowing them to draw down the amount of credit they need (up to a maximum), when they need it, rather than paying interest on capital that is not being used. On paper, the credit line looks like a risky product. Indeed, there were nervous glances around the boardroom table about how the organization would be able to predict its own cash flow, if clients were drawing down and repaying their loans when they chose to. And in fact in hindsight – although this looked like a case of clashing institutional and client needs – AMK has found that the seasonality of credit draw-downs and repayments are largely predictable. Clients are happy with the product – and AMK’s investors are satisfied that it’s worth supporting.

The credit line illustrates the challenge of balancing client needs with institutional risk and performance. Minimizing risk, while recognizing future benefits, has been at the core of AMK’s strategy. Whilst AMK developed a sound understanding of its clients and their needs, it has always sought to find the “sweet spot” between these needs, organizational capacity, and financial performance. As such, strategic decisions have been made about which of those needs to meet at any one point in time. These decisions were driven by the evolving internal and external context (including organizational capacity, market share, regulation, competition). For example, in the past five years, AMK has evolved from largely a credit-only provider to a multi-channel, multi-service provider (including insurance, savings, and remittances). In the case of savings, its early research revealed that clients can and did save (although not in regular amounts in a secure way), and highlighted the role that savings played in helping clients to cope with the unexpected. However, it wasn’t until regulatory barriers dropped that they were able to offer these in a way that made sense both for clients and the organization – by rolling out an agent savings model that took flexible services to where they were needed most (rural areas).

The Business of Doing Good tracks the ongoing conversation around client centricity over the past 11 years within AMK. AMK’s journey is founded upon a clear understanding of its clients’ needs, and clarity about its purpose within the lives of those clients and indeed the marketplace. As such, this book is relevant to all microfinance organizations, and those that support them to be more effective.

This article first appeared on the Centre for Financial Inclusion blog.

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Multiple Lending In Cambodia: Red Flag or Deeper Market Malaise?

9/3/2015

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Credit: Christopher Lay/The Picture Desk

Multiple lending is on the rise in Cambodia. Is this a problem, and if so how can we respond appropriately at an institutional, sector and government level?

For years the world has patted itself on the back about the rapid growth of Cambodia’s microfinance market. Over the past decade, Cambodia’s market has been one of the fastest-growing globally, recording a 127% portfolio increase between 2013 and 2014. Forty-five microfinance institutions (MFIs) now serve some 1.8 million borrowers, out of a total population of 15 million. In a country where the level of formal financial inclusion is negligible, this has looked like a notable success story.

However, as researchers have delved deeper, they have come across figures that cause concern. A study by the Institute of Development in 2013 identified Cambodian clients who have as many as six separate loans, while 51% of clients reported having made a sacrifice (such as eating less or poorer quality food) on at least one occasion in order to make a loan repayment. Competition for clients is intense, and borrowing from multiple sources is commonplace.

After the microfinance crises in India, Bosnia and Nicaragua, practitioners, regulators and investors are on the alert for an overheated microfinance market. But are reckless lenders pushing debt on to poor people who lack the knowledge they need to grasp the real risks?

If that is the case, it makes sense to heed calls for regulatory caps on the number of loans that each client might take out. After all, if multiple borrowing is leading to over-indebtedness – and borrowers are struggling with repayments – lenders are likely to employ harsh collection tactics to cover their liabilities (leaving their clients to default on someone else’s loan).

Tighter regulation can help to avoid the moral quandary of lending money that a client cannot afford to repay, if it takes into account the number of loans taken out by a client, and whether those loans are the right size given a client’s debt capacity.

But most Cambodian MFIs would argue that they already conduct rigorous loan appraisals. While this may not necessarily always be true, certainly many multiple borrowers are able to demonstrate their capacity to repay. In view of this, is multiple borrowing a problem in itself? Or is it symptomatic of a deeper (but different) market malaise? To answer this, first we need to understand what is happening at both the client and lender level.

Let’s consider, for example, that it is market failure that drives multiple lending. Why else would clients borrow from two different providers? Two explanations emerge: the first is over-indebtedness. Borrowers who are experiencing difficulties servicing one loan, might borrow elsewhere to stay afloat.

Equally, however, it could be be a rational response as they patch together financial solutions to meet their varied and unpredictable needs for lump sums. Where individual MFIs are over-cautious and limit risk by lending less than clients require, or where the market isn’t offering the right type of lump sums (which could be delivered through savings or insurance), in Cambodia, overstretched borrowers may default to taking more credit as new demands for cash arise, for example, following a health emergency.

The experience of one organisation, AMK, chronicled in our recent book, The Business of Doing Good, offers important insights. Since 2003, AMK has grown to become Cambodia’s market leader (in terms of client outreach), serving more than 360,000 clients in 80% of villages. Based on a profound understanding of the lives of rural Cambodians, AMK is notable for the uniqueness of its approach – especially when it comes to tackling complex challenge of avoiding over-indebtedness, and thinking what responsible lending means in a crowded marketplace.

For AMK, avoiding over-indebtedness starts with ensuring that it is offering the right product at the right time, so that clients are not left servicing a loan for a failed investment (a loan for fertiliser, for example, must be disbursed in time for the rains). Given the volatility and unpredictability of clients’ finances, a regular repayment schedule inevitably demands sacrifices when seasonal income drops, or unexpected costs arise. So flexibility is key. For AMK, this means a unique credit line product that allows clients to draw down what they need, when they need it, and repay when it makes most sense; as well as dropping penalties for early loan repayments. An emergency loan product is also available, to help clients cope with the unexpected. Lending decisions are always based on careful repayment capacity assessments. But given the reality of illness, accidents, crop failure and other unexpected demands on cash, what happens after a loan is approved also matters — a lot. This is why AMK uses a “soft collections” approach, working with clients who are willing, but unable, to repay, to find a solution to get them back on their feet.

The flip side of the "multiple lending coin" is "multiple borrowing", and of course, clients also bear responsibility for their decisions to take on debt. In the past, AMK sought to protect clients from bad decisions, and banned lending to Cambodians with outstanding loans from another source. Before the national credit bureau was set up, staff had relied on the honesty of borrowers (and their guarantors) to determine whether they had any other loans. When it opened, AMK found that around 20% of its clients were multiple borrowers.

The new data allowed the “one client, one loan” policy to be enforced more effectively. But, with increasing competition and five or six institutions often lending in the same village, the number of loan applications rejected has risen – often from repeat clients.

Now that they are familiar with credit, many Cambodians are more demanding. They are also able to pick and choose from lenders. How could AMK risk losing its clients or failure to grow in the name of avoiding over-indebtedness?

In response to this challenge, AMK has negotiated the difficult balance between institutional and clients’ needs. Instead of relaxing its multiple lending policy, management opted for “internal multiple lending” – reasoning that if a client needs more credit, it is much more preferable that they get it from AMK, with its strong commitment to client protection. This policy allows clients with a good track record to take an additional loan from AMK. Careful debt analysis enables AMK to distinguish between borrowers with a genuine need for additional capital, and those who may be struggling with existing debt.

Successful microfinance carefully balances its commercial and social motivations. Where concern arises around multiple lending and over-indebtedness, it is too simplistic to put it all down to profit-hungry MFIs recklessly lending to vulnerable clients who need regulatory protection.

Successful microfinance carefully balances its social and commercial motivations. Where concern arises around multiple lending and over-indebtedness, blaming profit-hungry MFIs, recklessly lending to vulnerable clients who need regulatory protection, is overly-simplistic. There are three key variables here. First, we need to know whether lenders are offering well-designed, well-managed, responsible products to the right clients. Secondly, in a buyer’s market, we need to respect clients’ right to make informed choices and support their capacity to do so. AMK recognises this as an important part of responsible lending, and is working with others to promote sector-level support for client financial capability. And finally, we need to recognise market imperfections and the risk of over-indebtedness, which is exacerbated by the ready availability of credit from multiple organisations. To balance the risks of short-term commercial interests leading to inappropriate lending, regulation is important. However, this should focus on ensuring that MFIs assess client capacity to repay and utilise credit bureau data on clients’ existing debt, rather than imposing arbitrary caps on numbers of loans.

This is the full version of an article that first appeared (in edited form) on the Guardian Development Professionals Financial Inclusion hub, under the title "Drowning in Debt?"

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We Need Good Organiations, Not Just Good Products

5/3/2015

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What if your social enterprise provides a great product that helps lots of people, but also has some unintended negative consequences?

“From day one, I was in debt. Two years on – I’m still behind on my payments, and really struggling to find my feet with my finances.”

This is what we heard when recently talking to a tenant of a housing association. Taking up a new tenancy had thrown him into unmanageable levels of debt – a direct and unintended consequence of one social enterprise’s failure to see the big picture.

No one can dispute that the housing association delivers social value in its core product – low-cost homes for vulnerable people. But a housing association is also a business; in these days of austerity there’s financial pressure to keep properties filled, in order to avoid lost income.

The man we spoke to had been in private (furnished) rented accommodation; he was on the housing association waiting list; he was newly-married; he had just paid a month’s rent in advance. One day he received a call with the good news that a flat was available, and instructions to come to the housing association office the following day with a deposit to pick up the keys.

If he failed to do so, he was warned, the flat would be offered to the next person on the list. So with only one day’s notice, he paid the deposit for the new (unfurnished) flat and moved in.

With his limited funds, he first bought gas and electricity cards; he then borrowed money (at high interest) to purchase a bed, a fridge, and a cooker. So straight away, this vulnerable individual found himself in debt, all because of an organisation that was trying to help him improve his situation.

So why did this happen? These types of stories about unintended consequences are worryingly common.

Social enterprises seek to create a positive impact on the people they serve and the wider world around them, by tackling the failures of the market (and the public sector) which overlook the needs of poor and excluded people. But in our work over the past 20 years, we see a surprising problem emerging. Organisations too often experience a gap between theory and practice – which either, at best, limits their effectiveness at delivering social value, or, at worst, actually puts their clients at risk.

We all begin with good intentions – but good intentions simply aren’t enough. Fortunately, we have seen in practice that small changes to how these organisations work can lead to dramatic positive changes in their impact.

How difficult, for example, would it be for the housing association to recognise that it’s not simply delivering a product (in this case, a low-cost flat) that matters, and to consider how to support the person through that transition – to provide in this case a pool of white goods or furniture that could be rented or borrowed; to allow more time for a new tenant to move in?

Our proposition is this: delivering on good intentions requires social enterprises to move beyond a focus on delivering good products, and instead build good organisations. Products that meet clients’ needs are important, but we also need to focus on the operations of how we deliver these, all the while learning from what works – and what doesn’t.

This is one insight in our recently published book, The Business of Doing Good, that explores the journey of AMK, a microfinance organisation serving over 370,000 clients – half of whom are below the poverty line – through a network of branches reaching more than 80 percent of villages across Cambodia, making it the national market leader in outreach.

Managing what matters Much like the housing association, AMK has good products that meet clients’ needs (in this case, small loans to help clients invest in farming or micro-enterprises). But its thinking about impact doesn’t end there.

It recognises that when it comes to translating good design into good outcomes, the devil is in the detail about how products are managed and delivered. In the product design phase, there are key elements built into a product to create benefits and protect clients from harm. But where staff don’t understand these elements, don’t see their value, or aren’t motivated or don’t have time to follow through on them, they will be overlooked in the name of simplicity or efficiency.

AMK once ran into problems with how staff dealt with loan appraisals – involving time-consuming process that includes a visit to the clients’ home. This is meant to give staff a window into clients’ lives, and be sure that the client isn’t taking on too much debt. But when staff caseloads went up, they started cutting corners on the home visit to serve ever-greater numbers of clients. A “zero tolerance policy” to missing home visits was quickly introduced, supported by the internal audit department.

Similarly, AMK recognised that reaching poorer clients in more far-flung rural areas is difficult – and while its incentives encourage field staff to achieve high client portfolios, it makes adjustments where staff work in more remote areas, where clients are harder to reach, and where they’ll be able to reach fewer of them as a result.

The end of “command and control” The final point about good intentions is this: we can achieve great product design, and avoid the “reality gaps” wrought by misaligned incentives, or poor quality control – but there’s always space to improve on the work we do.

While it might be nice to think that organisations can be run by pulling levers from the centre, and the lives of our customers or beneficiaries can be changed in a foreseeable, formulaic ways – the world is not ordered and predictable as we might like to think.

In addition to the “hard” side of building the organisational processes and systems to deliver value, the “soft” side of the organisational culture and how staff engage with the purpose of the organisation, reflect on what they are doing, contribute to learning and improving practice is also critical.

AMK learned this: where the reality that staff face on the ground is actually different to the theory enshrined in their training and manuals, this needs to be communicated up to top management, so that AMK can improve what it does.

Building an organisational culture to engage staff in an organisation-wide conversation around what matters for clients is a key part of AMK’s success. Having your staff on your side in terms of their understanding of what you are trying to do, focusing on delivering your intent (and not just the letter of their job description) and learning and improving is key part of being effective.

Connecting with the bigger picture of their work (and actively contributing to the improvement of that work) is hugely motivational – especially when that work is difficult, as it so often is for organisations in the business of doing good.

The insights emerging from AMK’s experience demonstrate how a deeper understanding of “social value” can better harness the force of business for good. Delivering the right products matters: products that people want, and products that meet their needs.

But going beyond the product, we need to think about the systems and processes for delivery, and ensure our staff engage in thinking about where we may be doing harm or where small adjustments in our services (or how they are delivered) may enhance our impact. To us as organisations, those small changes might be “low-hanging fruit” – but to those we serve, they could make all the difference.

This blog post originally appeared on The Pioneers Post. Follow them on @pioneerspost.

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The business of
doing good

Sometimes seeing is the first obstacle to better outreach to the poorest

Responding to Needs and Wants in a Market-driven Financial Institution

Multiple Lending In Cambodia: Red Flag or Deeper Market Malaise?

We Need Good Organiations, Not Just Good Products

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Sometimes seeing is the first obstacle to better outreach to the poorest

Responding to Needs and Wants in a Market-driven Financial Institution

Multiple Lending In Cambodia: Red Flag or Deeper Market Malaise?

We Need Good Organiations, Not Just Good Products

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