the microbanking bulletin - Microfinance Information Exchange

• Loan Size: The size of the loan also affects productivitybecause MFIs need to be more carefulwhen issuing larger loans.• Client Market: MFIs serving sparsely populatedareas face a serious productivity challenge.• Labor Market: Better-educated employees tendto require less supervision, which raises productivity.If a tight labor market causes staffturnover, productivity could be undermined.• Growth Rate: An MFI in high growth mode willhave lower productivity because new loanofficers will have excess capacity and arenaturally less productive than veterans. Inaddition, productivity will suffer if the client baseconsists of many new clients, since they tend torequire more work than repeat borrowers.• Age: Continuing with the same logic, matureMFIs tend to have higher rates of productivitythan new organizations.Because of these (and other) factors, a comparisonof productivity between institutions needs to beconsidered very carefully. Perhaps the most usefulproductivity benchmark is how an organization comparesto itself over time.Contents of this IssueFeature ArticlesAlthough there are numerous strategies to improveproductivity, the feature articles in this Bulletin honein on two approaches: 1) giving financial incentivesto encourage staff to work harder and smarter (or atleast to reward those that do); and 2) understandingand reducing customer desertion.The first two articles provide insights into the effectsof staff incentives on productivity; the next threeshow how productivity is adversely affected byclient desertion. The unifying theme of these articlesis that clients and employees behave rationally.If the rewards are right, loan officers can domore with less. If loan products are well designed,customers will continue to patronize an MFI.In “Designing Financial Incentives”, MartinHoltzman provides a detailed example of anincentive scheme structure that the Germanconsulting firm IPC has employed successfully in avariety of different settings. With this flexible model,MFIs tailor the scheme to individual loan officersand adjust weightings to address different scenariosat different points in time.Eduardo Bazoberry counters by describingPRODEM’s experience with staff incentives. Hecontends that individual financial incentives breakdown the sense of teamwork and commitment to anMFI’s social mission. He recommends the use ofgroup-based incentives, such as profit sharing andemployee ownership, as well as non-financialincentives, to motivate staff.While the two authors have different perspectives,they agree on key aspects:• If not approached carefully, financial incentivescan do more damage than good.• The objective of an incentive scheme is to alignthe goals of the employees with those of theinstitution.• Financial incentives are one piece in a toolkit ofmotivational strategies that are needed toproduce optimal levels of staff productivity.The second set of articles outlines the costs (andbenefits) of customer desertion. Based on experiencein Bangladesh, Graham Wright examines theinappropriate match between the credit product andclients’ needs. He contends that MFIs in Bangladeshoveremphasize the importance of standardized,low-cost loan products when their clients wanta broader range of flexible services.The next two articles, by Kim Wilson and InezMurray, highlight the value of learning from lostcustomers. Through exit interviews, affiliates ofCatholic Relief Services (Bosnia-Herzegovina andGaza) and Women’s World Banking (Uganda andBangladesh), respectively, learned what was rightand wrong with their services. Results from this researchenabled the MFIs to modify their productsand delivery mechanisms to become more clientfocused.These three articles call for a change in the servicedelivery culture of microfinance institutions. ManyMFIs are supply-driven: they have credit productsthat they provide to clients. The authors argue thatMFIs should: 1) embrace a customer service ethic;2) provide financial products that are demanddriven;and 3) conduct market research so that theyknow what their customers really want.Performance RatiosThe first step toward reducing client desertion isbeing able to measure it, but there isn’t consensuson how to do that. Each of the articles on customerretention uses a different formula. In a new sectionof the Bulletin (“Talking about PerformanceRatios”), Rich Rosenberg reviews five retentionratios and endorses what he calls the Waterfield/CGAP ratio. Since this is not the ratio used by theBulletin, or by any of the other organizations thatdefined desertion in this Issue, it is apparent that abroader discussion is needed on defining andmeasuring customer retention.2 MICROBANKING BULLETIN, APRIL 2001