Management Trumps Environment

Best practices help Caribbean MFIs improve their performance and knock down persistent myths

“Definitely an eye-opening experience,” stated Debra Williams, executive director of Jamaica’s Micro Enterprise Financing, Ltd. She had just fi nished visiting a small offi ce of one of the leading Bolivian Microfinance institutions, PRODEM in Santa Cruz de la Sierra, and was clearly impressed by what she had seen. The offi ce works with low-income vendors who run stalls at a market across the street in downtown Santa Cruz. PRODEM gives its clients what they want, when they want it and how they want it: timely credit on terms tailored to their individual needs.

Williams was one of 13 representatives of Caribbean microfinance institutions (MFIs) invited to the Microenterprise Forum held in October 2005 in Santa Cruz. Besides participating in the meeting’s workshops, panels and networking, the Caribbean delegation visited several successful local institutions working in microenterprise development, including PRODEM, BancoSol, Jesus Nazareno Cooperative, FUNDECO and CEDE MYPE. The point of the tour was to place what was preached at the forum into perspective by seeing it in practice. Apparently, the goal was achieved. “How do they do it?” asked Williams, shaking her head after learning PRODEM’s high ratio of clients per credit offi cer and its low level of delinquent loans.

The answer is in the methodology PRODEM and many other MFIs employ to attract, assess and monitor clients. Like many of the forum’s 1,200 participants, the Caribbean contingent was acquainted with Microfinance best practices, but watching credit offi cers carry them out thoroughly and consistently made it much more tangible—perhaps even replicable in the Caribbean, long perceived as a tough market for MFIs.

One of the panels of the Santa Cruz forum, “Microfinance in Difficult Situations,” analyzed the Caribbean case. Practitioners have argued that conditions are more complex in the English- speaking countries in that part of the world due to factors that set them apart from their Spanish-speaking neighbors. Not necessarily so, argues IDB economist Glenn Westley. In his study “Microfinance in the Caribbean: How to Go Further,” Westley holds that many Latin American MFIs have encountered and overcome numerous problems and equally diffi cult environments, and cases in Bolivia, Colombia and Peru prove that MFIs can survive and even thrive in hard times.

Westley further maintains that conditions that Caribbean microlenders see as root causes of their underwhelming performance are by no means insurmountable. One of the obstacles often cited in the Caribbean is a limited demand for microfi nance, given the region’s smaller population, fewer microenterprises, relatively better economic conditions and access to other sources of fi nancing. And it is true that Caribbean MFIs in general have to cope with smaller microenterprise markets and smaller populations than Latin America. On the other hand, the ratio of microenterprise to the population is not that different—in fact, Jamaica has almost the same ratio as Bolivia (16% and 16.7%, respectively).

Another factor is the availability of donor- and government-subsidized fi nancing for MFIs, which undermines institutions’ incentives to control their operating expenses and guard their loan portfolio quality. But however big and widespread a program that donors or governments implement, there always will be large market segments that go unserviced, as numerous Latin American MFIs can attest to, having survived and prevailed in similar situations for at least three decades.

According to Westley, poor performance in profi tability and delinquency rates almost always can be traced back to internal factors, such as inadequate management. In fact, he believes there is little or nothing to hinder Caribbean institutions from performing as well as their Latin American peers, provided they apply the right methodologies and manage their portfolios as studiously as their Spanish-speaking counterparts. “Management almost always can trump environment,” says Westley. And some of the Caribbean institutions represented in the forum are already proving that point. Interviews with four participants conducted six months after their visit to Santa Cruz show that best practices and good examples are now being employed, with encouraging results.

Keeping an Eye on Clients and Paybacks

Perhaps the single biggest concern among microfinance practitioners is loan delinquency. To keep it under control, they must make sure to have the right clients. Solid character assessments of borrowers should enable MFIs to weed out unreliable prospects. Equally important is the efficient and immediate follow-up of any delay in repayment.

Errol Chapman, of the Institute of Private Enterprise Development in Guyana, took the critique of his MFI’s lax delinquency controls to heart. With the arguments he heard at the forum still fresh in his mind, Chapman asked the Bolivian institutions he visited about their approach to evaluating clients and ensuring prompt payment. Armed with the impressions from institutions such as BancoSol and PRODEM, he organized seminars in his own MFI shortly after returning to Guyana, focusing on the establishment of a set package for managing loans at every stage. In the past his institution relied exclusively on collateral. “We have now become much more diligent in assessing the character of our clients, and we have gotten much tougher and consistent in our repayment follow-up,” Chapman says. After six months, the number of loans has decreased slightly, but he feels the overall clientele quality is better. Best of all, Chapman adds, the delinquency rate has fallen from 35% to 21%, still too high for comfort, but definitely on the right track.

Julian Henry, general manager of MICROFIN in Trinidad, reported similar changes. “It’s not that we didn’t know these things, but seeing the institutions actually doing it in practice, and hearing the credit officer on the ground explaining how to do it, that is very different, and very concrete.” With the introduction of a more thorough system to monitor loans, MICROFIN is already seeing signs of improvement in its control of arrears.

One Size Won’t Fit All

Another issue that seemed to hit home with numerous participants was product diversification and development. Williams has no doubt as to what she took away from the forum and the institutional visits. According to the Jamaican executive, most microfinance institutions in her country are run by bankers with little appreciation for the keys to successful microfinance, which results in inadequate products for their small clients. The Bolivian institutions showed her another reality. “Their approach is totally different; whereas we offer more or less one product, they offer numerous products depending on the demand and the type of clients,” she says. “It just really emphasized to me how in Jamaica there is a lack of understanding of microfinance, and we don’t know how to adapt to this type of market and the needs of this type of client.” Since her visit to Bolivia, Williams has taken steps to diversify her MFI’s products and loan terms for different clients. Her most successful experiment was changing the methodology for serving rural clients, whose needs are very different from urban clients.

Workshop for Caribbean participants in Santa Cruz

A new mindset can be noticed in other institutions. “Our main revelation was that the cookie-cutter approach is simply not good enough,” says Stephanie Missick-Jones, credit and SME specialist at the Bahamas Co-Operative League Limited. Her institution is increasingly aware of the importance of assessing demand, particularly in rural areas, as well as of designing different products for different clients. “We definitely have product development on our radar screen,” she says. The next goals are to gauge demand more accurately and develop strategies to market new products effectively.

These four Caribbean institutions have concluded that there is great potential in improving products and services, even if their clients are very few or very small. “I guess we saw that with better services and greater attention to the individual client, you also get better customers in return,” Williams says. Her Kingston office, for one, is now open for extended hours to better serve its clients.