The secret of commercial microfinance’s sustainability: Turning social workers into bankers or bankers into social workers?

“NEITHER” (AMJ, 2nd R&R)

with Julie Battilana (Harvard Business School)

Loan officers: the secret of microfinance

What makes microfinance crucially different from an organization providing services to the poor or an organization providing financial services is their very distinct “division of labor”Providers of services to the poor – Jack of all trades

Providers of financial services – checks and balances

Microfinance loan officers: jack of all trades except money handling

In the mornings. They sell loans in the local markets.

Outskirts of “La Ceja” one of the largest street markets in Bolivia and one of the largest markets for microfinance.

the secret of microfinance: loan officers

In the afternoons. They visit borrowers homes to evaluate their repayment capacity.

Source: Villeda, Ricardo Contributing to the future of El Alto, Bolivia(http://www.kolping.org/EducationElAltoKolpingreviewed.pdf)

the secret of microfinance: loan officers

In the evenings. They visit late payers.

Source: Villeda, Ricardo Contributing to the future of El Alto, Bolivia(http://www.kolping.org/EducationElAltoKolpingreviewed.pdf)

the secret of microfinance: loan officers

At night. They go back to their offices to approve loans (depending on amounts) and work out the paper work.

Source: Villeda, Ricardo Contributing to the future of El Alto, Bolivia (http://www.kolping.org/EducationElAltoKolpingreviewed.pdf)

the secret of microfinance: loan officers

Who can do this job?

The required profile for loan officers is “subtly contradictory and not always found in the same person” (Roodman and Qureshi, 2006: 22).“you have to have…human sensitivity and you

have to be firm. You have to like working in the field and be okay working with the profile of people we do” (interview).

Source: The Economist (November 2005)

Can I borrow a lollipop?

So … Who would you hire?

• I explored this question through a comparative study of BancoSol and Los Andes • 2 Bolivian regulated financial institutions

providing financial services to the poor

BancoSol’s answer

Hire “social workers, teachers, sociologists, graduates from the school of life, ex-nuns and priests, trostkyites and theologians” (interview)

Get them to buy into the mission of the organization

Also hire bankers to manage purely “banking stuff” (get them to buy into the mission of the organization)

Los Andes’ answer

“Hire people directly from the university.… it is easier to acclimate them to the characteristics of the organization. It is harder when they come and try to frame our work within their working mental schemes” (Interview)

Teach them microfinance

Motivate them by getting them to love their jobs and think of themselves as a member of an elite group

Los Andes’ focus on love “the job” worked better?

Source: Rhyne 2001 and ASOFIN 2006

0

1020

3040

5060

7080

90

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Tho

usan

d

BancoSol

Los Andes

Evolution of number of loans provided

Crisis in Bolivia connected to Asian Financial crisis

Los Andes’ focus on love “the job” worked better?

Bancosol finished by adopting this approach. It is widespread in the microfinance world (see e.g. Jain (1992) study on Grameen, Roodman and Qureshi’s (2006) review of best practices)

THE END

“microfinance (…). At present it is far too manpower-intensive, more like private banking for the wealthy than retail bankingfor the middle classes. Typically, borrowers receive visits from their bankers, sometimes daily, rather than going to a branch or using an automated teller machine. Credit evaluation relies on character or cashflow valuation rather than the statisticaltechniques used by credit-card companies in rich countries. This has been made possible by low wages and an abundanceof highly talented people willing to work long hours, but it will not be sustainable.Quote from the Economist (November, 2005)

Under threat?