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Managing Microfinance
Introduction
For the most part, economists cite contract design to explain microfinance successes. Group lending is especially celebrated, followed by the dynamic incentives described in chapter 5. International donors tend to focus on financial choices instead, celebrating lenders that minimize subsidies and set interest rates at levels that promote saving and wise investment (as described in chapter 9). Both good contract design and pricing policy matter greatly. Still, they are necessary conditions for success, not sufficient conditions. A great deal of what distinguishes failed microfinance from successful microfinance ultimately has to do with management: Particularly with how staff members are motivated and equipped to do their jobs.’ In this, microfinance is no different from businesses that sell soft drinks or haircuts.
If one just read newspaper stories, it would seem that all microlenders can boast repayment rates above 98 percent and are making steady profits; management does not seem to be a big issue.2 But table 10.1 shows a wide range in levels of productivity indicators for the 147 leading microlenders surveyed by The Micro banking Bulletin. The first column and third columns give the range minus and plus one standard deviation from the mean. (If the indicators are distributed normally, the range should include about two-thirds of the observations, so one-third of programs would be even further away from the average.) The programs vary by age, scale, and location. Were the data made accessible, we could control for these factors, but the raw numbers suggest the basic point: While all of the lenders employ at least some of the mechanisms described in th ...