Q&A with Joanna Ledgerwood and Victoria White

Introduction

Joanna Ledgerwood and Victoria White are the co-authors of Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. The book is a practical "how-to" manual for MFIs looking to become regulated institutions. We talk to Joanna and Victoria about how MFIs can transform to successfully offer savings services while maintaining a pro-poor focus.

Joanna was Deputy Chief of Party for the USAID-funded Support for Private Enterprise Expansion and Development (SPEED) Project in Uganda and also served as Deputy Chief of Party for the Microenterprise Access to Banking Services (MABS) Project in the Philippines. Victoria is Vice President of International Operations for ACCION International where she provides technical assistance to ACCION's African- and Caribbean-based microfinance partners.

• What is the most common mistake made by organizations just starting to offer savings services?
• How can a MFI reconcile serving non-poor savers with their claim to have a pro-poor focus? Why is serving non-poor depositors NOT an example of mission-drift?
• To serve up-market savers, your book says MFIs need to hire more sophisticated staff and presumably reward them more generously. How might this affect organizational culture?
• What is your take on compulsory savings? When and where should MFIs use this practice?

What is the most common mistake made by organizations just starting to offer savings services?

Joanna:

I think the most common mistake made by MFIs starting to offer savings services is assuming that voluntary savings is simply a new product. MFIs need to appreciate that mobilizing and intermediating savings will fundamentally change their institution.

By definition, MFIs mobilizing savings from the public must be regulated and supervised, usually by the central bank. To become a regulated institution, MFIs must have shareholders (unless they are member-based) and thus answer to both shareholders and regulators-- two stakeholder groups likely new to the MFI. Mobilizing savings also means that human resource requirements will likely change.

Likewise, attracting deposits requires a completely different marketing and promotional strategy than offering loans. To attract savings on a significant scale, MFIs need to understand the profile and preferences of current and potential clients, and work to reposition themselves as more than just credit institutions.

Furthermore, voluntary savings is not only a service and a source of funds, but also a liability. In most cases, MFIs must improve their internal controls and overall risk management to protect poor people's savings.

Victoria:

There are actually two issues here. One is acquiring technical competence in all the new areas that Joanna mentioned; the other is the managing these changes. Historically, transforming MFIs have not appreciated the importance of investing in the change management process that comes with transformation. The extent to which the leaders of the institution, or the change agents, follow a transparent, clear and open process for this transition, directly correlates with the degree to which buy-in will be achieved among staff and other stakeholders.

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How can a MFI reconcile serving non-poor savers with their claim to have a pro-poor focus? Why is serving non-poor depositors NOT an example of mission-drift?

Victoria:

Serving non-poor depositors does not mean that the institution no longer serves poor depositors. For a deposit-taking MFI to operate profitably and thus continue to provide both credit and savings services to the poor, it needs to mobilize deposits from poor savers, non-poor savers, and ideally, institutional savers.

Providing poor savers with accounts that allow unlimited number of withdrawals (often the most popular option with poor savers) is labor intensive and costly, even if no interest is paid on the accounts. Transaction costs are too high for an MFI to serve only small savers, and MFIs need to raise the average account size with larger accounts. Only then can they afford to meet the demand from low-income savers and borrowers. Larger deposits can also translate to more loans for clients, since deposits represent a source of funding for the institution.

Joanna:

Serving non-poor depositors may be an example of mission-expansion but not mission-drift. Even when accepting deposits from non-poor clients, the MFI's mission need not change at all. Its target market remains poor savers and poor borrowers but it necessarily expands to include non-poor savers (and in some cases non-poor borrowers) but not to the exclusion of poor clients.

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To serve up-market savers, your book says MFIs need to hire more sophisticated staff and presumably reward them more generously. How might this affect organizational culture?

Joanna:

As I mentioned earlier, adding deposit services will fundamentally change an MFI. Hiring staff with differing backgrounds and skills such as those gained from experience in the formal financial sector, can contribute to a dual culture within the organization. Such organizational change disrupts the established dynamic and can lead to fear and uncertainty among staff members. The development of a new business strategy, incorporation of new stakeholders such as investors and supervisory authorities, upgrading of policies, procedures and systems, changes in the organizational structure and staffing patterns, introduction of a range of new products and services--all of these changes impact the way people carry out their work, how people interact with each other, and ultimately how people feel about their work. So, clearly the organizational culture will be impacted.

Victoria:

And if the transformation is not well-managed, the culture can change inadvertently or suddenly. The initial experience of BancoSol, which was the first NGO to transform into a commercial bank, demonstrates the challenge of managing a change in culture. The original NGO had a culture somewhat defined by an "anti-banking" ethos. As a result, the NGO staff that transferred to the bank felt disconnected in the new "bank culture" of the commercial bank. Despite investments in a human resource specialist and training sessions for transitioning staff, tensions still grew within the institution. As experienced bankers were hired for many of the specialized functions, such as asset and liability management and internal control, the disconnect between staff became even more of a challenge. Similar tensions between the old guard and the new guard were evident in the ACP/ Mibanco transformation, as formal bankers were brought into senior management positions. Both of these institutions however ultimately overcame these initial challenges with additional investments in various communications strategies and additional training.

As the book says, though, institutional culture can be deliberately changed or molded by dynamic leaders. And there are things MFIs can do to manage culture change during transformation: articulate institutional values; recognize and encourage distinct roles of old staff and new staff; incorporate core values into the recruitment process; build consensus on the target market; incorporate the double bottom line into performance evaluations; and select partners with shared values.

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What is your take on compulsory savings? When and where should MFIs use this practice?

Joanna:

I think the term "compulsory savings" is a misnomer. The fact that most compulsory savings are illiquid until the borrower no longer has a loan outstanding or, in some cases, until the client has "left" the organization, doesn't really signify savings. To me, this makes them not savings, but rather guarantees, or as we call them in Canada, "compensating balances". Which means they represent an amount of money held by the financial institution as a percentage of the loan amount to compensate for potential losses on the loan.

We state throughout the book that transforming MFIs should consider getting rid of compulsory savings for their loan products or at a minimum, not call them "savings" so as not to confuse compensating balances with voluntary savings accounts. At an absolute minimum, MFIs need to separate the reporting of compulsory and voluntary savings to both clients and regulators.