Impact of Knowledge Management on sustainability of Microfinance Institutions
Abstract
Purpose
The paper provides insight into building a knowledge-driven ecosystem for microfinance to ensure that the twin objectives of social performance and financial performance are achieved by microfinance institutions (MFI). The creation of an ecosystem also enables the development process to become self-sustaining. For MFIs, the model provides a mechanism that mitigates the risk associated with collateral-free loans while enabling them to grow profitably without having to resort to usurious interest rates. Importantly the introduction of Knowledge Management (KM) as a key component in a dynamic ecosystem ensures the sustainability of such an initiative. An appropriate technology framework will allow the unhindered growth and outreach of this microfinance ecosystem.
There is insufficient understanding of the impact of knowledge management in microfinance companies. Hence, one of the authors spent several months with a microfinance institution to conduct an in-depth study of the use of knowledge and the sustainability of a microfinance ecosystem. The case study that evolved out of this study forms the basis of this research article.
Contents
Abstract 1
Tables 2
Figures 2
Introduction 3
Area of investigation and research questions 4
Literature Survey of existing KM practice in Microfinance 4
Research methodology and model adopted 11
Findings 16
Practical implications 19
Conclusions and further research 19
References 22
Information about the Authors 24
Tables
Table 1 - Region-wise crop yield 12
Table 2 - Costing 12
Figures
Figure 1 – Knowledge ecosystem 7
Figure 2 - A typical Rural ecosystem 10
Introduction
Much of the passion towards microfinance is anchored in the belief that access to financial services can help clients improve their lives. In addition to financial intermediation, MFIs provide social intermediation services such as group formation, training in financial literacy, and management capabilities among the group. Thus, the definition of microfinance includes both financial aid and social intermediation. However, in the pursuit of financial stability, which is critical for MFIs to sustain their growth and expand their outreach, they sometimes tend to drift away from their social mission.
To compound matters, the advent of market capital into microfinance has now raised fears of those who believe that this is further going to erode the social aspect. It is argued that MFIs in their desperate attempt to maintain financial performance measures will give social performance indicators the short shrift. The emphasis on generating return on investment will be all-consuming and will subsume efforts at improving the lives of the people it was intended to improve.
However, on the other hand, this also raises hopes that with the advent of professional and managerial talent, social performance may actually get a fillip. Research, has shown that managing social performance can actually mean good business (1): in increasing client retention, and in cutting down costs. The authors offer the hypothesis that when MFIs build their business around the ecosystem of their clients, they will leverage the demand-supply chain to produce sustainable progress, both socially and financially. For this movement to be self-sustaining, it is important that the ecosystem integrates knowledge into the core processes to add value in the demand-supply chain. This will, in the long run ensure that MFIs achieve the twin objectives of social progress and financial performance.
Work by USAID (2) shows that there is little or no evidence of research being carried out to link knowledge management initiatives to performance improvements. The absence of such data is by itself clear indication that very little is being done with regard to knowledge management in this sector. Research in Kenya by Mchombu (3) has shown that to a large extent the absence of well-defined and efficient processes and systems have resulted even in the introduction of technology not being very effective. Kalseth’s (4) research shows that the lack of integration of KM initiatives into the overall business strategy has been cited as one of the causes of technology project failures in this sector.
For reasons of confidentiality, the name of the organization with which the authors worked very closely in researching the impact of knowledge-driven ecosystems has been withheld. However, the details of the research have been provided here without compromising on the integrity or validity of the data. The context has been a rural ecosystem where the microfinance institution enabled the aggregation of fragmented value-chains.
Area of investigation and research questions
This research paper examines the prevalence of KM practice in Microfinance institutions. The objective of this research is to develop a technology-based knowledge framework for creation of microfinance ecosystems. Further, this research intends to analyze the impact of knowledge-driven ecosystems on the ability of MFIs to achieve their socio-economic objectives.
The key questions being addressed in this paper as part of the research are:
1. How can microfinance companies create ecosystems which will allow them to achieve the twin objectives of social performance and financial profitability?
2. How can a knowledge-driven framework create a sustainable practice?
The focus of this research paper has been to review existing literature to determine the influence of Knowledge Management in building sustainable microfinance and whether there is a symbiotic relationship among the various participants in a knowledge-driven ecosystem. It also seeks to find evidence of social performance improvement in the lives of microfinance participants where such knowledge management initiatives exist.
Literature Survey of existing KM practice in Microfinance
The Consultative Group to Assist the Poor (CGAP) along with several other institutions like USAID, GTZ, ACCION International, and PlaNet Finance, to name a few, have been torchbearers in the attempt to fight poverty using Microfinance as a tool. Ledgerwood, [5] in “The Microfinance Handbook” describes the role of Microfinance in poverty alleviation. It is quite evident that access to financial services enables people progress from a hand-to-mouth existence to an improved life where financial assets, risks, health, living conditions and education are better managed. It is in the pursuit of these goals that microfinance, as a tool for poverty alleviation is expected to play a significant role.
India is the largest emerging market for microfinance with 300 million poor households, of which only 15-20% has access to the formal financial sector, according to the latest India Microfinance Review report [6]. The inadequacy of existing agencies like the Regional Rural Banks (RRB) and Cooperative banks has led to a number of microfinance companies stepping in to fill the gap. Traditionally, microfinance has been a donor-led initiative with Non-governmental organizations (NGO) spearheading the social intermediation effort.
In recent times MFIs have come under severe criticism for focusing only on financial performance [1], often at the expense of the social objectives, for which they were initially setup. While the proliferation of Microfinance Institutions and peer-to-peer social investment portals has been on the rise, a recent report on the state of the microfinance sector in India [7] reveals very unevenly distributed growth across regions. The financial products are also mostly in the nature of standard microcredit products, which seems to indicate that MFIs need to get more client-focused and provide need-based financial intermediation [8]. The absence of a formal mechanism to regulate MFIs further dilutes the effort to build social performance as part of their core objectives. It is hoped that this shortcoming will be addressed through the proposed bill to institute a body that will regulate activities of Microfinance companies [9].
Although, managing social performance can actually mean good business, measuring social performance involves effort, cost and time, and many MFIs tend to give it the short shrift. Consultative Group to Assist the Poor (CGAP), a World Bank-funded organization has been at the forefront in increasing awareness of social audits and social performance assessments for MFIs. Organizations like ACCION, USAID and CERISE have joined them in developing tools for Social Performance Measurement (SPM). There has also been an attempt to standardize on including social performance metrics [10] as part of the overall economic metrics that MFIs report to MIX (Microfinance Information Exchange), a global, web-based, microfinance information platform. However, the absence of a direct link between social progress and economic metrics has been a dampener in rigorous collection of SPM data. Moreover, economic metrics are focused on data relating to repayments, defaults and portfolio, which do not reflect on the overall social progress of the customers they serve.
The social value of microfinance relates to the way financial services improve the lives of the poor and financially excluded clients and their families. The United Nations’ Millennium Development Goals (MDG) [11] are framed as concrete outcomes to provide succor to the world’s neediest poor; and Microfinance is being perceived as an important tool in delivering financial services that will help alleviate poverty. USAID, in its Microreport #42 [12] reflects on microfinance as unique among development interventions in that it can deliver benefits on an ongoing, permanent basis, and on a large scale. It has the potential to develop into a self-propelling cycle of sustainability and massive growth, while providing a powerful impact on the lives of the poor. This impact intensifies as clients stay with a given program, thus deepening the power of the virtuous cycle.
C K Prahalad, in “The Fortune at the Bottom of the Pyramid” [13] stresses on the need to understand the financial reality of the poor and enable partners to respond to market demand. He says the MFIs need to seek to become a market platform for providing products and services based on the strength of relationship with these clients. The ability to extend market infrastructure to microfinance and concentrate on building a marketplace rather than individual projects will ensure that this becomes self-sustaining. It will promote collaboration among institutions, and support specialization.
Bloom and Dees [14] highlight a very important element that is required for inclusive growth to take place – that of a microfinance ecosystem. Social entrepreneurs must work towards shaping the environment in which they work towards supporting their goals. This calls for an integrated approach – one in which we can leverage the microfinance demand-supply chain to produce sustainable progress, socially and economically. Microfinance Institutions, given their proximity to the clients are best placed to leverage existing client relationships to build such an ecosystem. The creation of communities of clients will enhance the ability of serving clients better, and in accordance with their needs. The aggregation of such communities will further enhance outreach and create a self-sustaining and self-reliant economy among the microfinance clients.
We see the emergence of MFIs as a platform for providing products and services. In such a role, the core strength of MFIs, which is their relationship with their clients, can be leveraged to create an ecosystem in which economic objectives and social goals merge. Technology will then play an important role of identifying relationships, and nurturing the ecosystem in a collaborative environment. Firpo, [15] in the report on “Banking the unbanked”, talks about the role of technology in creating outreach and enabling access of financial services to the unbanked and the under-banked.
There is awareness among the leaders of this industry that bringing about change requires definition and implementation of business processes, standardization of collection and management of customer data, and sharing costs of underlying infrastructure [16]. There is even greater understanding of the fact that sharing of data creates greater opportunity across the board, for all players in the ecosystem. The collaboration across the support organizations right from the funder to the client will benefit from the ability to share knowledge.
In this context, it is important to review the role that KM can play in Microfinance institutions. The research of Lettieri et al [17], who analyzed KM practices in the Italian non-profit sector, and Daniel Matzkin’s [18] research of KM in the Peruvian non-profit sector, have helped in understanding the prevalence of KM in Non-profit Organizations (NPO). Lettieri’s main contribution was first to contextualize knowledge management in NPOs by defining a model that related KM and performance improvement. The approach was to obtain higher operating efficiency to empower the creation of social value.
Ayayi and Sene [19] have conducted their own research on 223 MFIs with audited financial statements and other verified information. Credit Risk management was identified as a very significant factor in determining financial stability. In the case of MFIs, this translated to managing costs efficiently, apart from being able to monitor the activities of members. Unlike banks which have elaborate documentation and credit checks, the adoption of JLGs and mutual sharing of risks has been found to be the most effective method of managing credit risk in MFIs. To manage costs, building economies of scale and using information systems appears to be crucial. In addition, driving costs down through sharing of experiences and institutionalizing process is also a very important factor. From this perspective, setting up a KM system appears to be a critical aspect in creating sustainable MFI operations.
The importance of KM practice has been stressed upon by CGAP, especially in ensuring that Funders and Donors invest their funds meaningfully. With dwindling funds, MFIs are further constrained to contain costs and deploy resources profitably. This has further increased the need for Funders to look at organizations that have their internal management systems, policies and procedures in place. In this context, CGAP has launched Smart Aid Methodology [20], a framework that allows funders to measure their preparedness to support microfinance initiatives effectively. This calls for streamlining policies and processes across the spectrum of Network support organizations and in MFIs.
The Appraisal Guide for Microfinance Institutions [21] serves as a guideline for MFIs seeking grants and provides them with the inputs required to ensure that they have the appropriate processes and policies in place. It also allows funders to evaluate MFIs for shared interests; it helps provide insight into the vision of the organization and its preparedness in terms of business process changes. From research [4] it is clear that, only organizations that have implemented a process-oriented approach to working, have had success in creating sustainable operations. Scale poses the biggest challenge that is best resolved through appropriate technology.