NB Financial Health
‘Maybe It’s Time We Start Behaving Like a Business’: The struggle of one microfinance institution to balance its social impact with its bottom line
Need microfinance be sustainable? Every decision I was making as a leader of La Ceiba, a student-run microfinance organization, seemed to boil down to this question. We believe in microfinance and we were convinced that it was the exception to all the uninformed and ineffective international development initiatives that have failed over the decades. But we also knew that mixing the poor with profit and banking can be a dangerous thing that guides MFIs to focus more on the money than on the client.
We read about the MFIs that visited their clients’ homes to demand their payments, that charged interest rates of over 100 percent, and implemented extreme requirements that excluded the poorest of the poor from financial services. So we committed ourselves as an institution to a model of microfinance that was truly “client-centered”; we designed our loan programs and services with the faces and stories of our original 30 clients in mind, and made sure that we provided them with the most convenient, meaningful and unobtrusive service possible.
To receive a loan from La Ceiba, you must be female and be at least 18 years of age (though we just recently began lending to men). To receive a second loan from us, you must merely pay back the first loan with an effective interest rate of around 3 percent. There are no fees, no penalties and no pressure to repay from group lending or from a loan officer. From what we could see online, no other MFI was quite as client-centered as us. We design our programs and policies around the wants, needs and capabilities of our clients and not necessarily in the best interest of the institution. We are committed to social justice and complete financial inclusion with no strings attached.
And we are successful. Our clients value our service and our loans, and demand for our loans and services are growing. So we more-than-doubled our client volume and hired a full time program director in Honduras to manage the rapid loan activity growth and expansion. We have a repayment rate of 94.25 percent, astonishing considering that we have virtually no risk-mitigating practices in place. We didn’t lose our way and raise interest when we saw the loan loss far exceed our interest income, and we didn’t change our requirements to get a first loan even after 65 percent of our smallest loans were in arrears or written off.
But then we looked closely at our bank statements. We consistently disburse more loans than income generated from loan payments, and when you compare our interest income to our loan loss we usually don’t break even. We are under constant pressure to fundraise in order to pay our loan officers and keep the lights on, and we aren’t sure how much longer we will survive.
Nevertheless, wherever business principles conflicted with our belief system, we rejected them. For example, we offer the lowest interest rates and greatest flexibility to our brand new clients which is where our portfolio is at greatest risk, because we start relationships as we aim to continue them, with trust. We also have clients who pay back a loan within a week because they want to climb the loan ladder as fast as possible, meaning that we get almost nothing in interest fees to compensate for our transaction costs – but we commit ourselves to giving them exactly what they want and letting them decide how best to manage their loans. We listen to the clients’ wants and needs, put ourselves in their shoes as best as we can, and then design programs from this understanding. This alternative approach to program design is what defines our student-run organization’s culture and what separates us from the general microfinance crowd.
So while we stood alone, clinging to our ethics, refusing at all costs to conform to the practices of other, more profitable MFIs, we found ourselves in a really tough spot—bankruptcy only salvageable by extensive fundraising and donations. So maybe it’s time that we start behaving like a business and concern ourselves with things like covering our costs and increasing repayment.
But then again, maybe we shouldn’t mix business with poverty. In U.S. history, economies of scale and capitalism made this country wealthy – but is that the best way to develop a country and increase the average income of its people? And even if it is, is income the best way to measure poverty alleviation and prosperity? The characteristics of poverty extend beyond just small and irregular incomes — other characteristics include a lack of opportunity, education and resources which diminishes “individual agency” (according to the economist Amartya Sen).
Now we have some tough decisions to make. How much must we sacrifice our client-centered programs and policies to adopt a more solid business design? If we start making institution-centered programs that reduce our risk but also increase costs and inconvenience to the clients — then what is the virtue of financial sustainability? Maybe the best microfinance model is also the most unsustainable, and maybe that’s the way it should be. Or maybe we are too naïve and idealistic, and the only way to offer effective and impactful microfinance services to the poor is to be sustainable first.
Editor’s Note: This post was originally published on the Month of Microfinance blog. It is cross-posted with permission. NextBillion Financial Innovation is a media partner with the 2014 Month of Microfinance.
Kelsey Whitman is a senior economics major at the Univeristy of Mary Washington and is the loan program leader for La Ceiba Microfinance.