The less-known entrepreneur

In June 2005, Cordaid invited me to speak at its Year of Microcredit Congress in Soesterberg, Netherlands.  I was asked to speak about Business Development Services as they pertain to Micro Finance Institutions (MFIs) – that is, how to improve the performance of MFIs through changes in their management practices.

Much to the chagrin of most of the nice folk in attendance (and the not-so-secret satisfaction of my sponsor), I made a comparison of MFIs to SMEs, based on the fact that the needs exhibited by most MFIs are very similar to SME needs (see what is an SME?).  The reaction from the crowd was sufficiently violent that I briefly considered aborting the presentation, but the support from my sponsor was enough for me to press on.

After I left the hotspot, a couple of people came up to me to express their vehement rejection of the possibility that the laudable institutions of poverty relief (MFIs) could be mentioned in the same breath as the money-grubbing, capitalist swine (SMEs).

In the intervening years I have been able to observe this same sentiment throughout the Microfinance sector.

One of the first impacts of this attitude is the rejection of management best-practices, especially those that come from commercial banking.  Without a doubt, the success of microfinance is based on some very “un-bank” activities (some of which commercial banks would do well to adopt - another post), but that doesn’t necessarily mean that all banking practices don’t have a place in MFI operations. This limits even regulated MFIs to “medium-sized” at best, as they just can’t seem to resolve their governance and strategy issues. Worse yet, it provides a vulnerability that Commercial Banks that wish (need?) to grow their market share may exploit.

The total absence of discussion and research regarding “management” in the International Development world, as compared to the attention directed at the Commercial Banking sector, underscores the prevailing attitudes of MFIs and their investors towards the professionalization of their management teams.  For example, at the recent Microfinance Leaders Retreat, which produced the Pocantico Declaration, the participants felt it necessary to declare “We are concerned by low standards of transparency in the sector and an emphasis on hype” (like that statement doesn’t apply to banking as a whole), but no mention was made of broader management practices.

I believe that as the competitiveness of the microfinance sector starts to rise (can that happen in a virtual oligopoly? - another post) MFIs will be forced to pay attention to how they manage their business (regardless of the profit focus that each institution pursues) – those teams that are open to including tried methods will generate faster positive results.

That is, if Commercial Banks don’t discover microfinance’s secrets and expand their presence to the low-income segments first…