A microfinance institution is a business. Like any business, MFIs are competitive with one another. While MFIs currently serve only a portion of the poverty pie, they compete for existing clients. It is important to create a product that appeals to the client and offer high levels of service in order to keep your clients. This is particularly true in the Philippines, where things are relationship-driven and the people are emotional. For example, NWTF has an issue with client attrition because it sometimes has difficulty distributing new loans immediately after the old one has termed out. The women feel hurt and slighted when this happens, and drop out of the program as a result. In turn, they will join another MFI. That was a tangential anecdote to emphasize the competitive nature of this business. Yet this past week I attended a conference in Manila on “Operationalizing Social Performance Monitoring,” which highlighted the cooperative nature of microfinance institutions. It was hosted by the Microfinance Council of the Philippines and attended by MFIs from all across the country.
But first, I will explain the ways MFIs compete. When the first microfinance institution moves into a region, it is competing against the local moneylenders. These moneylenders charge exorbitant interest rates; the plans are known as 5-6 (I give you $5 in the morning, you give me $6 at night, for an effective 20% daily interest rate). Once it is established, other MFIs might also open branches in the region. The available clientele is large enough so that the first MFIs can bring on clients new to microfinance, but it is only a matter of time before clients begin defecting from one to another. This creates an issue for repayments, since a client knows that if she has a poor repayment history, she can always get a loan from another MFI. After all, credit bureaus do not yet exist for the poor. In any case, there are areas with five or six active MFIs, all competing for business. But these institutions make a point to remember the reason for their existence, which is to serve the poor. And, to that end, representatives from across the country come together to share what works and what doesn’t.
The Microfinance Council of the Philippines is like a trade organization, but it is designed to further mission of the industry, rather than lobby for issues, like a traditional organization. It still works with the Central Bank of the Philippines and other funders on behalf of its members, but also has social goals. Here is the mission statement of the organization:
We are a national network of microfinance practitioners and allied service institutions committed to the reduction of poverty in the Philippines through equitable access to financial and non-financial services.
We shall help build the capacity of members to serve poor households in a sustainable, innovative, and client-responsive manner.
We pursue the highest global standards of excellence in governance, stewardship, and service towards staff, clients, and poor communities served.
In other words, it is a large organization dedicated to alleviating poverty in the Philippines through knowledge sharing, training, and cooperation. During the afternoon session of the first day, we had a workshop moderated by Professor Ron Chua, a very smart and respected academic in the microfinance community. He asked each of the MFIs to come up with a tangible objective for bringing their clients out of poverty. Here is what each came up with:
- Move 30% of clients out of poverty by 2011 (based on the PPI)
- 30% of clients cross the poverty line after three years of membership
- 10% of the 250,000 clients grow their business in order to graduate to an individual loan (I will explain the difference between individual and group loans in a later post)
- 50% of clients without toilets to adopt proper human waste disposal practices.
- Attain a savings generation to 200 MM Philippine pesos from target clients by 2010.
- 30% of clients convert their business to an SME over five years time
These are lofty goals. Representatives from each MFI presented a case for how they planned to achieve these goals. Then, the floor was opened to questions. People from different MFIs would offer suggestions, criticisms, and ideas. Each MFI benefits from alternative perspectives, maybe seeing a flaw in their approach that they hadn’t noticed before.
All of this is to say that microfinance institutions are perhaps unique in the way they compete. The organizations compete for clients, for territory, and for money. But everyone remains aware of the mission – of why microfinance exists. This was a conference focused on the social component of the double bottom line. It showed that, despite the fact that there is a zero sum component to the businesses, many microfinance institutions will still work together toward the common goal of poverty alleviation.