"Microfinance has been acknowledged as an effective tool for meaningful development. Muhammad Yunus, that icon of poverty lending, calls it “development from the bottom.”
Increasing literature on microfinance point to the fact that access to financial services enables poor households and owners of micro-enterprises to move from every day struggle for survival to planning for the future. Affordable financial services enhance their productivity and living standard.
However, effectiveness of microfinance as a development strategy is contingent on existence of microfinance institutions and banks that have adequate outreach; institutions that are financially viable and delivering wide range of responsive financial services. There must be institutions that are able to meet financial needs of farmers, food processors; urban traders and artisans.
Microfinance banks and institutions desiring to be viable, delivering appropriate services to a large number of clients, and doing so with excellent loan portfolio quality must pay attention to a number of success imperatives.
First, is imaginative engagement of clients as service users of microfinance institutions are called. In transactional relationship, these service users are not seen as faceless customers of conventional banks who are identified mainly by their account numbers! By their nature, clients of microfinance banks expect to be given adequate attention. They require support of financing institution to grow their businesses. Conventionally these small business people see microfinance bankers as not just financiers but also as counsellors in matters as diverse as marketing, basic financial planning and access to inputs. Frontline staff of microfinance institutions must therefore be equipped to meet these extra-financial expectations.
Related is innovation in product development and delivery procedures. Innovation is the hallmark of microfinance. Recently, emphasis has shifted from the so-called “best practices” to “next practices”. Microfinance bankers should always ask and take actions on what should be the next ways of doing things or products. This attitude is informed by the fact that financial needs of microfinance enterprises are diverse. As these businesses grow, there are emerging needs. The era of mono-product as only credit is over. There is now an array of financial services as savings, micro-insurance, micro-investment and micro leasing. A restaurant operator whose business grows may want to acquire storage facility with equipment loan in addition to working capital credit. Another success factor is staff development. Microfinance is much more than miniature banking. It is not just the disbursement and collection of small bits of loans. In practice, microfinance refers to the entire unique processes by which financial and enterprise development services are channeled to owners of micro and small enterprises in a sustainable manner.. It entails effective engagement of clients in order to adequately determine their financial needs. The right quantity services and when required must be properly determined. Do the foregoing require skills beyond conventional banking and business management proficiency.
Skills required for success span disciplines such as sociology, psychology, agriculture, education, extension methods, financial planning and economics. The challenge here is that there is an acute shortage of skilled manpower in microfinance globally. Successful microfinance banks and institutions must invest in manpower development. Detailed training manuals and plans for various levels of staff should be developed. For maximum impact, emphasis should be on practical/field experience for fresh credit officers.
The field based nature of space microfinance operations makes intensive monitoring imperative. An element of microfinance practice is the door –step delivery approach which requires service providers to take their services to the clients. This is a reversal of the dominant practice in the conventional banks.
A major trade-off of reaching the poor with financial services is the high exposure to risk, especially financial risk. To mitigate these risks, microfinance banks must formulate and implement monitoring strategy with capacity to prevent, detect and respond to breaches of financial and operation procedures.
A useful advice to microfinance bankers is that there should not be any room for subsidy in product pricing. The usual argument against “high” or “real” interest rates in microfinance is that since users of microfinance are poor or small businesses, rates of interest should be low or subsidized. This is no longer tenable. Doing microfinance is expensive and this should reflect in pricing. Furthermore subsidized interest rates connote charity, which diminishes the feeling of obligation for repayment among borrowers. This explains in part, the weak performances of government-led microfinance programmes worldwide.