Human Resource Perspective: Achieving Sustainable Growth in Microfinance – Part II

This is the second part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. Read Part I (Marketing Perspective) here.

Human Resource Related Issues

Managing information that will improve the human resource function.

A human resource information system can offer detailed reports on various elements of human resource management, and therefore, help managers prevent various issues that emerge with rapid expansion of a microfinance provider’s business:

Credit: nasaimages.org

1. Deficient Human Resources

The speedy penetration of an MFI into current or new markets requires an instantaneous rise in workers (loan officers, branch managers, administrative staff, etc.) to handle more clients, products and branches. Once the necessary appointments have been made, MFIs are eager to send workers out into the field, and hence, they resort to shortening the required training period of 3 to 6 months. The organization ends up relying on poorly skilled workers who are unable to analyze the cost and benefits related to each client, product and market, and consequently, risky and misinformed judgments are made.

Some solutions are as follows:

Maintain an updated profile of each loan officer’s capabilities (formal training, qualification details, skills, and past experience),

Determine areas that need improvement through various resources available (books, CDs, other workers, etc.), and

Automate certain management processes to ensure better managerial control.

Identification of market trends through analysis of sales figures, based on which managers can quickly make lucrative choices.

2. Short-term and Commission-based Compensation System

Some incentive schemes reward loan officers for the monthly or quarterly growth in their client base and the quality of their loan portfolios. This approach is more staff-centric than customer-centric, because it not only leads to poor analysis of customer risks and needs prior to the approval of loan applications, but also results in hostile credit recovery methods by loan officers (as mentioned in the previous post).

Some solutions are as follows:

In-depth analysis of a loan officer’s portfolio and performance to determine ‘real quality’,

Remove or dilute detrimental and conflicting compensation policies,

Develop robust credit risk management mechanisms, and

Take regular client feedback to check performance of loan officers.

3. High Turnover Ratios

Microfinance providers in competitive markets usually face high turnover ratios because of soaring demand for skilled workers. As new entrants expand into different markets, ‘market followers’ try to attract workers who have already been extensively trained by new entrants, leading to the following inconveniences:

Instability in human capital of new entrant as employee retention rate wavers,

Severe shortage of skill, and

Significant waste of time and money for the new entrant, as benefits of investment in human resource is reaped by competitors.

Some solutions are as follows:

Create compensation programs and HR policies that promote worker retention and improve employee loyalty and morale,

Analyze costs and benefits associated with high turnover ratios, and minimize losses,

Identification of strategic job families that must have back-up human capital, i.e. identify positions that must be filled at all times and create succession plans, and

Introduce job rotation programs as a tool for employee motivation and growth.

4. Job Descriptions of Middle Management

As the top management of a high-growth microfinance provider becomes involved in public relations with donors, investors and regulators, the task of supervising the expansion of an MFI’s operations is handed down to the middle management. Since most position holders in the middle management are promoted after working as loan officers, they lack the experience essential for dealing with the organization’s forays. Consequently, haphazard managerial control may ensue as complex strategic changes to policies and processes are required to sustain developments in clients, lending portfolios, products, branches, external agents, markets and employees.

Similarly, the job responsibilities of junior officers may be expanded to handle additional administrative tasks, and if delegated incorrectly, certain workers may end up overburdened with work.

Some solutions are as follows:

Set up robust and well-integrated information systems that translate the MFI’s strategy into automated operational mechanisms,

Create well documented job descriptions that match each worker’s experience and expertise (this point is linked to the solutions for Deficient Human Resources)

Generate periodic work plans, budgets and other reports that monitor and evaluate the performance of various internal and external organizational elements, and assist managerial decision making,

The last component of technology (generation of various periodic reports) assists in solving problems related to internal control and accounting as well, as we shall see in the next two posts.

This was the second part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. You can read the other three parts of this series at the following links:

• Marketing Perspective: Achieving Sustainable Growth in Microfinance – Part I
• Internal Control Perspective: Achieving Sustainable Growth in Microfinance – Part III
• Financial Perspective: Achieving Sustainable Growth in Microfinance – Part IV.

Marketing Perspective: Achieving Sustainable Growth in Microfinance – Part I

It has already been established that microfinance institutes (MFIs) who seek profits through aggressive growth of clients, are at risk as their systems and controls begin to strain under the pressures of expansion. CGAP recently revealed that MFIs in the four countries facing repayment crises (Nicaragua, Morocco, Bosnia and Herzegovina, and Pakistan) enjoyed years of high growth, and then developed vulnerabilities in the following areas:

• Marketing function – rapid rise in client base and delivery channels, steep business targets without laying emphasis on long term client relationships with micro entrepreneurs.
• Human resource function – deficient human resources, short-term & commission-based performance incentives, high staff turnover ratio, and inability of middle management to handle growth of microfinance institute.
• Other Non-Financial Internal Matters – lopsided & disorganized loan approval processes, widespread multiple borrowing and credit pollution, lax credit monitoring and recovery policies of microloans, poor informational flow between organizational functions.
• Accounting function – unsuitable accounting function, poor risk management, incomplete internal audit, and inadequate delinquency management.

Avoiding such hazards is a matter of management wisdom, rather than luck. Proper capacity building, led by an efficient information system that supports the MFI’s strategy and integrates all business processes (finance, marketing, human resource, technology and operations), will ensure sustainable growth due to prompt recognition of threats and opportunities. Various functional pitfalls, as well as their solutions, which have been gathered from the CGAP report and other sources, will be presented through a series of blog posts over the next few weeks.

Marketing function

Managing information that will improve the marketing function of microfinance providers.

1. Sudden Expansion in Client Base and Delivery Channels

With a rapid rise in client base, MFIs need to deal with more individuals, groups, as well as micro enterprises in new locations, through different delivery channels. Each one of these client groups have unique needs, backgrounds, religions, political opinions, working styles, skills, etc. and microfinance providers must be privy to these characteristics so customers can be better served. In other words, high growth MFIs must quickly face the daunting task of information logistics associated with micro-segmentation as its finest.

Some solutions are as follows:

Keep track of customer details and behavior through an information system (both formal and informal) and use it to devise Customer Relationship Management programs,

Link this information system (customer database) to a credit rating bureau,

Detailed analysis of market shifts to identify strategic opportunities and threats, and

Regular review of product performance and value proposition.

Identification of high-value and profitable clients that can be focused on to generate profits.

Details of seasonal spikes and troughs in demand to help the development of customized products.

2. Business Targets and Client Relationships

The high-touch nature of microfinance surges the importance of client relationships. Loan officers regularly visit clients at their homes or in groups, not only because clients value personal relationships over professional ties, but also to ensure everything is in order at the client’s end. Naturally, this becomes difficult and costly once the number of clients balloons up.

Furthermore, workers are rewarded for the quality of their loan portfolios (default rate, loan write-offs, etc.) which often leads to aggressive credit recovery practices by loan officers who are primarily concerned with their own performance, instead of the long-term welfare of struggling clients. As a result, the quality of customer service deteriorates, relationships between clients and MFIs become unsustainable, and credit discipline takes a toll (which will be discussed in a later post in this series).

Some solutions are as follows:

Search for cost savings through technology-led operational efficiencies and not by shifting to a ‘low-touch’ model, which sacrifices control and monitoring,

Establish good quality client service procedures and marketing practices relevant to microfinance,

Regular assessment of social performance(feedback and surveys) to determine client satisfaction levels,

Install appropriate credit  risk management tools to create specialized products and credit recovery procedures for high-risk clients,

Integrate compensation policy with risk management mechanisms, and

Analyze client retention and acquisition rates to determine how much is sustainable.

This was the first part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. The other three posts of this series can be read at the following links:

• Human Resource Perspective: Achieving Sustainable Growth in Microfinance – Part II
• Internal Control Perspective: Achieving Sustainable Growth in Microfinance – Part III
• Financial Perspective: Achieving Sustainable Growth in Microfinance – Part IV.