Microfinance and the Swadeshi Movement

With the Microfinance movement tottering due to an unhealthy combination of greed and lack of political will, Gandhiji’s birthday is a good time to take a pause and look at the mess we have created, and the possible way forward.  Rural India, especially needs a good dose of the Gandhian movement today – at a time when inflation has reached an all-time high, rampant urbanization is destroying the ecosystem of our sustenance model, and the Government does not seem to have any cogent plan to resolve either issue.

For Gandhi, the spirit and soul of India rested in the Village communities.  He said “the true India is to be found not in its cities, but in its seven hundred thousand villages”. The spirit of the Swadeshi movement was embodied in his slogan “Production by the masses, not mass production”.   In effect, Swadeshi was to be the corner stone of economic independence – not just for the village communities, but for the entire country.  Somewhere between Self-Help Groups and For-Profit Microfinance companies we seem to have lost this very important message.  What should have become a community of self-reliant people developing a sustainable and growing ecosystem has been hijacked for narrow and pecuniary interests; successful not-for-profit organizations that built a sustainable scalable model lost their way when they converted themselves to for-profit bodies, while the rest of the “social” organizations still leave us wondering whether private enterprise is after all delivering more social good.  In between all this the hapless victim seems to be the microfinance customer.

Even as early as 1999, CGAP had realized the need to introduce an appraisal guide (http://bit.ly/qReGrR) to enable Funders evaluate the performance of Microfinance Institutions on the two counts of Financial Performance and Social Performance.  A key aspect of this is the evaluation of internal processes and orientation towards social performance.  Since then, there have been many tools designed to evaluate the Social Performance aspect of Microfinance Institutions.  It would not be very difficult for the government to mandate social performance audits as part of a regulatory process.  The sustainability of the microfinance institution could also be evaluated from the strength of their internal processes.

I am tempted to believe that a Swadeshi-like model for microfinance would perhaps result in sustainable growth where the true benefactor would be the microfinance client.  For this to happen, the microfinance institution would transform itself into a facilitator of the ecosystem, and not merely remain a provider of credit.  In today’s setting, an urban microfinance group is taught skills such as soft-toy making, agarbathi manufacturing and other similar activities.  However, in most cases, while the NGO involved steps in to provide training, there is no guarantee of a market for such goods.  The gullible client takes a loan to buy the materials required to make the soft  toy, but is ultimately unable to sell it.  It is not very different in the villages, where instead of soft toys, they end up making baskets.

The Swadeshi movement advocated the creation of goods and services that would be consumed internally, and only then export the surplus.  In a sense, every village would be a producer-consumer, with the village community deciding on what goods could be imported, and how much would be exported.  In today’s context, a network of communities could very easily produce goods and services that were complementary and would boost the overall productivity of the villages.  Such a network would be able to realize a better price for their goods, without having to depend on middlemen.  The role of the microfinance institution needs to transform into the facilitator of such a network, where, apart from playing the traditional role of providing access to finance, they could implement best practices, engage agricultural scientists for enhancing crop yields, and ensure training that would really benefit the farmers.  The community could also learn from each other, where lessons learned or innovations in one sector or village can be transplanted in other areas.  The MFI would be a knowledge manager – capturing and sharing knowledge across communities. 

Does this mean that MFIs are necessarily not-for-profit organizations?  It just requires the microfinance institution to look at a larger role and move beyond the role of providing credit only.  They will need to step up and ensure that social performance is top on their agenda – financial performance will automatically follow.  When a need is converted into a demand, then we are bound to see a market at the bottom of the pyramid.    Instead today, we see an exploitation of the BoP, under the mistaken assumption that there is a demand. 

One hopes that Gandhiji’s message does not remain just in the history books or meaningless hyperbole of political speeches, but is transformed into useful action taking into account today’s reality.  I am sure that his messages are applicable in today’s context just as much as they were more than half-a-century ago.  Jai Hind.

The Knowledge Asset - A perspective

Many years ago, when my father was explaining economics to my brother, he used a very interesting analogy, which continues to stick to the mind – “Money is round…so it can roll; money is also flat, so it can be stacked”!  He was explaining the importance of the need for money to flow through the system, while retaining the need to save and keep sufficient reserves.    Looking at it from the perspective of knowledge management, I find that it holds well in the case of knowledge too!  Well, after all it should – Knowledge is wealth!

“Knowledge is sticky.  Without proper processes and enablers, it will not flow” – Carla O’Dell

Research by Kalseth [1] and others have shown that where knowledge management is integrated into the business strategy of the enterprise, and / or is embedded into the core processes of the organization, implementation has been successful, and the organization has been able to realize the benefits of KM.  However, in the absence of this, most efforts have resulted in implementation of huge content management systems with no quantifiable or measurable benefit to the organization.   We see examples of the need to integrate knowledge into the core operational framework everywhere.  In insurance companies for instance, when underwriting a risk, the underwriter applies his prior knowledge about the risk, while determining the type of coverage, and the clauses (or endorsements) to be included.  In order to ensure that the risk is determined correctly, a checklist is essential to capture all the elements of risk.  This checklist is nothing but a list of questions that the underwriter is expected to run through and confirm before deciding to underwrite the risk.  Obviously, this is a list that has been compiled over several years of experience of the organization – knowledge stacked (in a repository).  However, it really begins to work only when, as part of the underwriting process, the underwriter is able to pull out this checklist and verify that all the aspects of the risk have been covered.  Where, the risk is new to the organization (or to the underwriter) he seeks the assistance of experts / colleagues in the organization (knowledge stacked in the heads of people) – which now flows through the organization, as he collaborates with others in the process of discovering the extent of risk.

We clearly see the dual aspects of knowledge too carrying the properties of “being able to be stacked” and “requiring to flow” for organizations to benefit.  Profit from knowledge! Make it part of the core framework of your organization’s processes.  Measure it and manage it, like you do every other process.  Knowledge is everybody’s business.  But, if you intend to treat it like wealth, also make sure you assign a knowledge manager – like you would, a wealth manager.  After all, you do need to make sure, it flows…and it stays!

[1] Kalseth K, Knowledge Management: Development Strategy or Business Strategy. Information Development. 2001, 17:163-172.

Customer Retention - Rationally unpredictable?

Sona, the Customer Service Representative wore an appropriately contrite expression on her face as she helped me fill out the Account Closure form.  Her name was in resonance with my amused reflection of the state of affairs I found myself in - an old Ajit (Hindi villain) joke - "Usko liquid oxygen mein duba dho, taaki liquid usay jeene nahin dega, aur oxygen usay marne nahin dega" (Drown him in liquid oxygen -- the liquid will not let him live, and the oxygen will not let him die)!  The Bank had just sent me their second reminder to pay my credit card dues; but had cleverly blocked me from carrying out any operations on my account! And then charged me interest and late fees for non-payment of credit card dues!!!
Reason for blocking the payment: Err  9999!  (How informative) After calling up a Contact Center and lengthy explanations, I found out that Err 9999 was non-submission of KYC forms!  They can reach me on my mobile, send emails, even letters to my residence...call me at odd hours of the day with cross-sell and up-sell promotions!  Yet, they do not know their customer!!! And the irony of it all -  they have on their records that they did indeed collect that form from me!!!

I was reminded of a recent conversation with a friend about the next big challenge for Financial Services and Telecom companies - how do they predict which customer will stay with them...and who will they lose!  A corollary to this : Do these companies have the intelligence or the knowledge to deal with this.

Would every customer who has gone through the experience that I did, go on to take the extreme action of closing their account with the bank?  Probably not.  At least, not the ones who have a salary account, or someone who has taken a loan.  Nothing in the bank's response to this situation seemed to suggest that they would have acted any differently with any customer.  The responses were pretty standard! A feeble attempt to retain the customer...followed by an attempt to show their concern for customers by making the exit as pleasant as possible.  However, in the present case, even that miserably failed!  Apparently, you cannot close an account even, if the KYC formalities are not completed!  "The case has an identified risk against the account"  - please resolve it the CSR was informed by the teller!  Wow! That's very sensitive - the customer becomes a "case"!  The Bank's got my money...and I become a "Risk" to them!  :-)

I wonder if the bank has any kind of intelligence that alerts them to:
a) Accounts where KYC norms have not been completed
b) Transactions which are likely to fail on account of (a)

Do they have the processes that:
a) Do not permit the transaction to be entered even (why allow it to be entered and then cause it to fail)
b) Allow their systems to generate Error codes that customers can understand

Do they have the knowledge base that:
a) Lets CSRs know that you cannot close an account if it is not KYC compliant
b) Train CSRs identify problem customers and resolve the issue before it escalates.

A customer-oriented bank would have definitely taken the trouble to alert the customer of this situation and quickly stepped in to resolve the situation.  Strangely enough, a PSU bank with which I have an account had the sense to do it...no fancy information systems here...just plain only customer-friendly face-to-face banking!  Rao, the factotum, who has been with the branch for over twenty years, seems to have a mental checklist for all the customers who walk in.  It's not his job, but he seemed to know that there was something pending against my account, and quickly brought me a form, when he saw me walking into the bank.  As he seemed to know that there was a tax form that needed to be given to another customer as she walked in.  I wonder, if this bank will also fall into the same rut, as the more fancy multi-national bank when Rao retires!!! They have already implemented a core banking solution... the first step to losing touch with the customer!

I think it ultimately boils down to a "people" or "process" failure.  If the knowledge systems are wired to identify the information links that can lead them to these "points of failure" early enough, customer satisfaction will go up, revenue generation opportunities will not be lost.  The bank not have had to go with one customer less if their system had not let me schedule a transaction which they would disallow later on; or  kept me informed about it.  They still might have managed to retain a customer, even if this account closure had gone through smoothly! The CSR was not knowledgeable about her own internal processes!  You can be sure I'm going to terminate my credit card account too!

Question: How can you predict customer retention?  Some customers like to be informed of new products.  Others can get pretty upset by these unnecessary interruptions.  Some customers will stay on, if they are just left to themselves, others want to be wooed.  How can marketing intelligence predict what customer needs the kid gloves...and which one needs to be ignored...so as to be able to retain them?

ICOMFI 2011 - Pondicherry University

The International Conference on Microfinance has become a regular fixture of the Pondicherry University calendar.  And it was successfully held for the fourth successive year from 27^th to 29^th of January, 2011, this year.  The conference organizers have been zealously endeavoring to make this truly international in flavor and content. Backed by able support from JAK Tareen, the Vice-Chancellor, the highlight of this year’s conference was the inaugural issue of an International Journal on Microfinance Research.  The Vice Chancellor has also promised support in setting up a Center for Microfinance Research.  Hopefully, these initiatives will make subsequent conferences a lot more useful to researchers, academicians and the industry.

A very curious phenomenon that was witnessed this year was a conspicuous absence of sponsors for the event.  Barring NABARD and Indian Bank who have been loyal supporters of this event year after year, it was quite strange to see that the entire place was bereft of banners and hoardings, one usually associates with conferences.  One wonders whether this was by design or a curious case of a combination of delayed impact of the recession combined with the turmoil this sector has been going through since November, 2010. 

Having organized three editions prior to getting here, perhaps I had set my bar a little too high, from a content-perspective; I was clearly disappointed.  While the thrust of the discussions, Financial Inclusion and Financial Literacy by itself, was a little too broad, the content and the topics discussed were even more unimaginative.  While most panelists were eminent people with several years of experience in the sector, it seemed that they were all from the same school of thought – a recipe guaranteed to kill even a soupcon of debate.  It would have been interesting to have had someone from an opposing school of thought – one that would have provoked a discussion, or even some serious interaction among the audience.   What made the proceedings even more monotonous was the presence of the same set of panelists who came up on stage to speak about practically the same subject, albeit with different headings…if one was titled Self Help Groups and Financial Inclusion, the other Financial Literacy and SHG…the same content got repeated with varying degrees of verbosity…ad nauseum.

Clearly, one area which we will definitely expect to see a quantum improvement in the following years will be the Technical Sessions.  For an international conference in which the accepted papers get published as a book volume (with an ISBN), one might expect a much higher standard of research papers.  Instead, it was quite disappointing to see blatant plagiarism, meaningless surveys, poorly formulated hypotheses and unconvincing data models pass for research.  In a sense this highlights one of the serious flaws of our academic institutions – the poor quality of research.  One hopes that such papers do not get into the International Journal of Microfinance Research.  And one fervently hopes that the setting up of a Center for Microfinance Research will allow for more serious research to take place in this Central University.

Perhaps, the best part of this conference for me was Dr. Detlev Holloh’s inaugural speech.  Dr. Holloh, Director, GIZ, in his speech laced with references to Mahatma Gandhi, Vinobha Bhave and the Sarvodaya movement, showed he was more in touch with agrarian rustic India than several of his Indian peers.  If his dissection of the problem was scientific, the proposed solution seemed almost too obvious.  One sincerely hopes that his fervent plea to strengthen the agricultural sector will be heard by the policy makers and that a more holistic program shall emerge which will allow the resurgence of microfinance as a poverty alleviation device – one that can be truly self-sustainable.

I had a good time. I only wished I had also learned something more.

Microfinance maladies

For the last few weeks, Microfinance Institutions have been a very worried lot. Whereas the Draft Bill seeking regulation of Microfinance Sector as a whole has been awaiting approval, the Andhra Pradesh government quite expeditiously passed an ordinance last week clipping the wings of Microfinance Institutions and their free run on the monies of the poor.

yada yada hi dharmasya
glanir bhavati bharata
abhyutthanam adharmasya
tadatmanam srjamy aham
(http://www.asitis.com/4/7.html)

While this might be quite inappropriate considering that I am referring to the government taking action, it still holds good that you cannot ignore this malaise forever. If the MFIs have not learnt their lesson from the 2006 fiasco  (http://bit.ly/dEOGMG), then they deserve what they are getting now. These organizations have had sufficient warning and time to mend their ways and become organized. However, from the recent debacle it is quite clear that they actually got complacent and dropped their guard once the storm had blown away. While some very genuine companies have also been impacted by the recent legislation, it is quite clear that as a fraternity, they have failed to create sufficient self-regulation to substantiate their bona fides.


Regulation cannot be selectively applied. Unfortunately, it is the Lowest Common Denominator principle that will be applied, and therefore impact evens those with good intentions. Equitas, (http://www.equitas.in/Transparency.html) for example, is one such company that claims to print its all-inclusive interest rate on every member's passbook. I am sure there are other MFIs, especially the larger ones, that have similar fair practices embedded as part of their operational practice. As has been the claim by most of these players, it is probably a few "fly-by-night operators" who have seen this as an opportunity to make a quick buck that have caused everyone to be painted with the same brush.

What has surprised me though, is the extreme reaction that we have been reading in the press in response to the legislation. When one is used to a free run of the place, any kind of regulation is likely to seem quite draconian. And this ordinance has been no exception. What is surprising though is the way the markets and the entire industry have reacted to this. One would imagine that Andhra Pradesh is the only state with a significant number of people who are below the poverty line, or otherwise disadvantaged, and therefore in need of financial assistance. On the other hand, if one were to take a more cynical view, the poor of this region have been the most gullible, waiting-to-be-exploited populace in the country, and for those in the business of exploiting them, it has come as a rude shock to see their wings being clipped. And it may well seem the case, going by NABARD's State of the Sector Report – 2009-10.

One of the short-comings clearly pointed out by the ACCESS State of the Sector Report 2009 has been the unequal growth of microfinance with the southern part of the country being an extremely good marketplace while the rest of the country is relatively under-served. I will probably comment more about this, in another post later. Coming back to the present malaise, this clearly reflects a case for

A) Implementing mechanisms for measuring and reporting Social Performance
B) Implementing effective process and systems to reduce costs and increase productivity of personnel deployed

Here again, while some of the larger MFIs have implemented automation with varying degrees of success, integrating this into the overall business operations for Business Intelligence and Social Performance Management has been something that has been quite low key in these implementations. In the absence of reliable and auditable data based on which regulation and compliance can be monitored, these MFIs are left to the perceived whims of the regulators who will perforce adopt a path that will seem draconian and make it appear quite unviable for the industry as a whole to operate. The sooner these organizations realize this and put mechanisms in place to address this issue, the better. Otherwise, one of the tools that was once touted as the panacea for what ails the unbanked will slip into oblivion. The unbanked and under-banked shall be left to the mercy of the government-run Cooperative Banks, Rural Banks and other credit societies. And those who cannot get credit from there, will go back to the unfriendly-neighborhood moneylenders. The wheel would have turned full circle.

We do hope that the dawn of the new decade will also see some concrete action from the Government, one especially, being passing of a much-delayed Microfinance Bill. We will also likely witness a shake-out and eventual consolidation of the MF sector, which we hope will augur well for all – especially those that were intended to be served in the first place.

Best wishes for a peaceful and prosperous 2011 to one and all.

"Sarve Bhavantu Sukinah"
Let there be happiness with everyone and everywhere.

ICOMF10 – International Conference on Microfinance, Pondicherry, 2010

This year the Third International Conference on Microfinance organized by Pondicherry University was held from the 22nd to 24th January, 2010.  The conference was well attended with several delegates and participants from all over the country landing up in this lovely little coastal town for the three-day jamboree.  The highlight of the event though, was the innovative approach of integrating self-help groups and small local microfinance institutions into the mainstream conference. Not only were site visits organized to enable participants to observe first-hand the activities of the local microfinance institutions, but more importantly, the third day was almost entirely devoted to very close interaction with the local self-help groups and microfinance institutions.  This session was primarily intended to provide academicians with a ringside view of the world of microfinance and give an opportunity to the Self-Help Groups (SHG) to voice their views and opinions on their real issues.



In a sense, the concept of an integrated approach seemed to be the theme around which the entire conference seems to have organized itself.  In fact, during the inaugural session one of the keynote speakers came up with the A+B+C+D+E (Academician + Bureaucrat + Credit Agency + Development Agency + Entrepreneur) formula for successful microfinance;  and quite coincidentally, it was this combination of these five important players throughout the conference that lend the entire proceedings its charm.  This was also quite evident in the academic discussions (paper presentations), panel discussions inter alia on capacity building, skill development, innovation, technology and self-help groups; the icing on the cake was the site visits and the presentations by SHGs and local microfinance institutions.



One recurrent theme that evidenced itself, albeit in different forms, was the need for an integrated approach to dealing with the core objective of financial inclusion and poverty alleviation.  Whether it was with skill development, capacity building, or the status of the SHG-Bank-Linkage program, it occurred to me that Microfinance had reached the next level of maturity, where it was now essential to go beyond the usual rhetoric of recovery rates and outreach, and look at the more fundamental issue of financial inclusion from a perspective of poverty alleviation.



The integrated approach to inclusive growth is a theme I would like to explore. I welcome feedback / inputs from readers on this subject; I hope to be writing a little more about this as my experience with the subject grows.


 

Social Performance and Source of funds

Is " For-profit Microfinance Institution" ethical? A completely new perspective on "What is the morally (read ethically) correct interest rate to be charged" has emerged ever since an increasing number of researchers have started looking at this aspect of Microfinance. However, as a friend recently commented – there are far more people out there looking to make a buck than in trying to make a difference. And more importantly, it seems quite fashionable to be involved in microfinance, in one way or the other. The moot question really is "Are we making a difference to the lives of the poor?" Is that one of the objectives, in the first place!

I just happened upon a document on the CGAP.org website which listed about eleven key principles of microfinance (http://www.cgap.org/gm/document-1.9.2746/donorguidelines.pdf) endorsed by the G8 countries. Key among the principles is one that reads:

Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people. Unless microfinance providers charge enough to cover their costs, they will always be limited by the scarce and uncertain supply of subsidies from donors and governments.

So, this is clearly a very overt statement that it is ethical and in fact very necessary to charge interest rates that will allow MFIs to cover their costs.

However, I think the more fundamental question is "Irrespective of the model, are we in any way alleviating poverty…or at least making progress in that direction". I think there are enough stories to provide evidence that microfinance has made a difference in the lives of many people. I think it is reasonable that given access to financial services (primarily credit), an industrious person will have the means to haul himself out of poverty…and on the road to progress. I don't have the data to suggest that a majority of the people do so. In fact, I think there has been so much emphasis on making this a commercially viable proposition, that there is more data collected on the number of outstanding loans, repayment rates, and amount of loan disbursed and other financial metrics that lends credence to the growth and profitability of microfinance institutions. There is far less data is available on current poverty levels, the extent of poverty alleviation that has actually happened or the number of people for whom this has become a means of sustainable livelihood. We do have recent surveys on Progress-out-of-Poverty Index (PPI), CERISE, and USAID coming up with social performance audits and means for tracking social performance. Nevertheless, I think that funding available to carry out such surveys in a more rigorous manner, as well as the initiative by MFIs to monitor progress of their social missions have been found wanting.

So, is there a role for Donor organizations in the face of increasing commercialization of Microfinance? Or should Microfinance be predominantly a donor-led activity to ensure that we do not drift away from our social missions? I would like to imagine that both can and should co-exist. In fact, the Key Principles of Microfinance lays out the roles very nicely:

Donor funds should complement private capital, not compete with it. Donors should use appropriate grant, loan, and equity instruments on a temporary basis to build the institutional capacity of financial providers, develop support infrastructure, and support experimental services and products.



When this is combined by strong government policy, which brings microfinance into the mainstream of financial policy, then we are likely to see overall development and growth. Donor funds will then be able to find its way into development and infrastructure-related projects – those that are in alignment with the Millennium Development Goals – especially in the area of health, education, low-cost housing and sanitation. When the basic infrastructure is in place, I think we will begin to see quantum leaps in social performance and poverty alleviation. In such a scenario we will see a clear distinction of use of funds based on the source of capital, and a harmonious coexistence of both forms of microfinance.