Mr. Matthew Fuchs of Microfinance Focus spoke with Graham A.N Wright, Program Director of MicroSave India, a microfinance consultancy firm. Here are the excerpts from the interview:
Microfinance Focus: MicroSave recently launched the “MFI in a Box.” Can you explain what this project is about? Graham Wright: We’ve been working with the RBSFI, the Royal Bank of Scotland Foundation India, to develop 42 nascent MFIs in under-served areas of India, in the north and north east and soon on. As part of that program we have basically had to build MFIs from scratch, from the ground up. So what we thought we would do is put all that knowledge together in one reference DVD. It includes all the outline of operations, HR manuals, accounting manuals, strategic business plans, videos of all the processes and so on. We started doing that for the Joint-Liability based systems and then, being MicroSave, we got over-ambitious and we did it for Self-Help Groups and individual lending systems as well. Microfinance Focus: Who were some of the partners who worked with?
Graham Wright: Nightingale and Grameen Sahara are two of the major partners in the north east. There is also Sanchetna in Lucknow, C-Dot and BMS in West Bengal, SSBWS, and we have Disha and PANI in Uttar Pradesh. BNC is a new partner, as is Sangini cooperative in Orissa, and we have also BPFL in Rajasthan.
Microfinance Focus: What has been the results so far? Graham Wright: Well, the phase two partners who have been with us for 18 months have increased their portfolio on average 250% and reduced their portfolio at risk by 60%. A lot of them are now attracting equity and debt investments from commercial investors. It demonstrates what can happen when you get first-class systems in place at the basement level when you’re starting MFIs.
Microfinance Focus: So it is critical to get effective systems in place when MFIs are still in their start-up phase?
Graham Wright: Yes, because that is where you are going to manage the risk. We put in several key components to these MFIs: an operational manual based on process maps, HR manual based on HR analysis, basic accounting and financial management system, ratio analysis capabilities, internal audit and controls,MIS and finally governance.
Microfinance Focus: What other projects is MicroSave working on at the moment?
Graham Wright: We have three other big projects and a number of smaller ones. One is an innovation program, looking at in particular how to mobilise savings in low-income earners using electronic and mobile banking solutions and so on. In the other we are working with a social investor doing the Due Diligence, technical assistance and facilitating the investments in the MFIs they choose. These two are the big ones in India.
In the Philippines, we are looking at turning around three of the leading MFIs who found themselves in a situation where their growth was slowing significantly due to high rates of client churn. We have been building new products with them and overhauling existing processes.
Microfinance Focus: Does this relate to what you were saying before about the importance of getting effective systems in place early on?
Graham Wright: Not in the Philippines case no. In this case they put in the products many years ago and haven’t changed them over time – so they needed reinventing to move with the modern market. We are also in the process of turning around a bank in the Philippines that is struggling with its individual lending products, HR and staff incentives, and so we are re-engineering these as well as the branch infrastructure to turn it around.
Microfinance Focus: Do you see a demand from MFIs to offer livelihood programs or are they mostly focusing on credit?
Graham Wright: Most of them are focusing on microfinance and I think that is a very sensible decision. There are very few organisations that can credibly do both. I think strategic alliances with high-quality livelihoods support agencies is a good idea, but I think there are very few high quality livelihoods support agencies. Livelihoods has struggled for many decades and is just re-inventing itself around Value Chain Analysis which is a much more powerful paradigm. We at MicroSave are looking at getting into that more and applying the same rigorous management tools that we use for microfinance to analysing and supporting value chains.
Microfinance Focus: So it is better for microfinance organisations to specialise in microfinance rather then trying to incorporate livelihoods into their operations?
Graham Wright: To be very honest if you look at most MFIs they are struggling with the basics of providing credit services. In the future good microcredit organisations will become microfinance organisations and they will offer a range of services. Each product they introduce complicates their front and back offices and processes. They will have plenty to keep them occupied without getting into a whole new vertical like livelihoods. I have seen this when I worked in Bangladesh and East Africa, and very rarely do you see microfinance organisations that can offer livelihoods services effectively.
Microfinance Focus: Do you see specific problems relating to introducing new products like microinsurance or savings?
Graham Wright: The key to providing new products is to understand what the client really wants. The traditional approach is what I call “bathtub product development”, where the CEO gets out of the bath one day and says “we need to be doing this.” The product is foisted on the client and often they don’t like it. So you have to really get down in the dust and see what the clients really need, and that involves qualitative research to understand the complexity of human financial behaviour. Then you can build products and delivery systems around that.
Microfinance Focus: It is sometimes said that organisations are more comfortable with quantitative, spreadsheet-style analyses. What is the key to conducting good qualitative assessments?
Graham Wright: The moderator. It is essential that the moderator knows how to moderate groups – good moderation is much more than just about sitting under a tree and talking to people. If you have got good moderating skills you do not communicate what you expect in answers, which is how we normally talk – we are constantly giving one another signals about what we are expecting. If you communicate through verbal or non-verbal prompts what you expect to hear to a poor person, they will simply reflect back what they think you want to hear. So when we train people on moderation skills we run a course that goes for two weeks, and much of it is on the ground listening to clients and honing that ability to moderate those groups. That’s the first piece.
The second piece is proper analysis involving triangulation, tally sheets and so on, so that you’ve got a basis on which to draw conclusions to go on and not just a gut feel.
But you are absolutely right, most people are more comfortable in the quantitative arena. It is what we all learn at school and university with all the stats and everything and so people are just more comfortable with it. But as I said earlier, if you want to understand the complexities of human financial behaviour, you have got to go the qualitative route.
Microfinance Focus: Is the increasing integration of the microfinance sector into mainstream finance improving transparency?
Graham Wright: One would hope it would lead to improved governance. But particularly when private equity firms come this could be a mixed blessing because they are driving a particular agenda. It is typically a short term agenda: it is a sales and expand at all costs agenda with a view to getting to the IPO and cashing. So whether it is in the best interest clients or indeed the MFIs themselves I think is very much open to question.
Microfinance Focus: Where do you see the industry in five to ten years? Graham Wright: The optimistic scenario is that we have a series of MFIs that are able to offer a wide range of services, not just credit but also savings, insurance and remittance services and they do this in a very customer-responsive manner. We have models emerging of that, the obvious one is the KGFS [Kshetriya Gramin Financial Services] model down in Thanjavur, which is absolutely outstanding and is what I believe what microfinance ought to look like.
Microfinance Focus: Can you give a brief description of the KGFS model?
Graham Wright: KGFS, first of all, put the client absolutely in the center of their business, which is the key to successful microfinance. Instead of Credit Officers they have Wealth Managers. The Wealth Managers map out the household and sell financial products to that household in response to their needs. For example, they offer group-based loans but they also offer gold-backed loans, and they offer savings services and insurance and remittance services. So if they see that a household has three buffalo, they will go out of their way to get that household to insure those buffalo. Of course they are still selling loans, but they are not offering one product whether the client needs it or not. They are understanding the household’s needs and they are measured against a complex algorithm that assesses the level of risk in that household. So their mission as Wealth Managers is to reduce the overall risk and increase the wellbeing of the household. That makes your front-line staff behave in a very different way. But to do that you have to have a first-class front and back office that really goes out of its way to serve the clientele well. They are still fine-tuning that model but we are working very closely with them on that and I think it is an outstanding model.
If we see the equivalent of that type of “third generation” microfinance, and there are all sorts of ways you can reach that, with a wide range of services, customer-centric approach, that would be the optimistic scenario.
The pessimistic scenario would be that as a result of one or two IPOs and screaming headlines reading “foreign private equity firms make off with thousands of crore rupees” made on the backs of India’s poor,  the regulatory environment is tightened to extent where a lot of MFIs simply cannot function. That would set India back quite a long way. I sincerely hope that that won’t happen. I hope that as Banking Correspondent requirements are relaxed banks will come further down market and will make savings and remittance services more available. I hope insurance companies will tailor products for down-market and use mobile banking for delivery of that. But we will have to see how that plays out. As usual, it depends on the regulator. —
Graham A.N. Wright was instrumental in developing MicroSave programs, in particular the market-research toolkits. He has had a career of two decades of development experience under pinned by five years of experience in management consultancy, training and audit with a leading accounting firm in Europe.
MicroSave has provided consultancy and support services to MFIs across Asia and Africa since 1998 with offices in Kenya, Uganda and India. Areas of specialisation include strategic business planning, institutional development, product development and impact assessments.