Social Performance Management Resource Centre

Managing reputation risk

Reputation, though an intangible asset, has far-reaching consequences for an MFI’s ability to secure resources and function effectively. .

Building a reputation for being an MFI that delivers responsible and quality finance is about more than just adhering to your core goals and values. You need to take concrete steps to build your reputation, or else risk headlines such as these:

What happens when an MFI gets it wrong?

'Child taken hostage for loan’   This was a headline from The Telegraph (India), 6 June 2008. Focusing only on financial performance, MFI managers are often unaware of how some of their staff achieve their targets and results. The MFI involved in this news story would most probably have: lost a significant number of good clients had more difficulty attracting new clients (especially those with children) faced increased costs trying to do damage limitation through the media lost income, as its portfolio shrank and costs increased. Given all these potential effects, one has to ask: was collecting that one bad loan worth it?

Here are key pointers to help you avoid reputation risk:

1. Avoid mission drift

Mission drift happens when an MFI’s operations move beyond its original goals. This is a risk in itself, but it also has implications for your MFI’s reputation. It may cause donors to pull your funding. Or the MFI may lose its coherence and integrity, which can be confusing and demotivating for your staff, clients and other stakeholders. You can avoid this by:

• Measuring your poverty outreach: Are you reaching your target clients? Without collecting and analysing relevant information, you cannot know if you are straying from your mission. Learn more about strengthening information systems>
• Making sure your HR policies don't promote mission drift: Staff incentives can be a factor in mission drift, especially where they are biased towards growth and a focus on financial outcomes – in other words, incentives that encourage taking on large numbers of low-risk clients.If incentives are driven purely by disbursements and repayment rates, other critical aspects of outreach – such as behaving ethically towards clients and avoiding harmful debt collection practices – may be overlooked. Learn more about staff incentives here>

• Think through the transformation process: A change in ownership structure, such as when an MFI is transforming to a for-profit body,can also lead to mission drift. Equity investment by profit-oriented investors could tip the balance away from social performance to the financial bottom line. Learn more about transformation>

• Manage growth using a social lens: One of the biggest challenges for MFIs today is to manage growth without losing sight of their mission. Growth reflects and supports financial inclusion – and necessarily involves a broader clientele, particularly for MFIs who may have started out with a narrow poverty focus. This leads us to question what are the drivers of growth. Is expanding your client base synonymous with mission drift, or is it simply one of a range of strategies to help you continue supporting your original target group?

2. Avoid client over-indebtedness

MFIs generally want to support their clients to grow their businesses as quickly as they can. But we are aware that not all clients can know how much debt is too much. Microfinance providers should take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated that they can meet repayments and that further loans will not put them at significant risk of over-indebtedness. While these preventative measures may seem simple, putting them into practice can be tricky, so you should:

• Check that you have robust  policies and practices for ensuring that clients can meet their repayments
• Ask yourself how you determine loan size thresholds, and whether these are set at the right level

Avoiding over-indebtedness – look out for these pitfalls

How effective is your MFI when it comes to protecting your clients from over-indebtedness?   These common strategies for assessing clients’ ability to repay all have weaknesses that are worth bearing in mind.   Trusting a group to determine each other's loan size: experience shows that this strategy works to some extent, especially if groups are well facilitated and really understand the importance of avoiding over-indebtedness. But experience also shows that groups help each other to get larger loans. Business evaluation of clients: this is very tricky to do well. Not only is it time-consuming, but it also demands certain skills on the part of loan officers. The experience of the Global Learning Programme shows that loan officers are often tempted to take shortcuts. And where business evaluation is not well managed, it is not effective. Household cash-flow analysis: this can be even more complicated than business evaluation, and has similar operational problems.   Credit bureau checks: these are nice to have, but unrealistic in most microfinance contexts, where many clients do not even have ID numbers.

Learn more about protecting clients here>

 

3. Avoid harsh collection practices

What do you do when clients can’t repay? Do you opt for zero tolerance or flexibility? This key debate lies at the heart of social performance management. How do you balance the need to be flexible and responsive to the problems your clients face, with the pressure to achieve high repayment rates and a low portfolio at risk? 

One of the defining features of poverty is that people cannot cope with sudden, one-off ‘shocks’ such as serious illness, death and natural disasters . For your clients, who may be locked into a rigid system of regular loan repayments, these life events often have a catastrophic effect. Evidence shows that in many cases, such events lead to clients’ inability to repay, and even failure of their business. If your MFI cannot give your clients support to help them cope with these shocks, then the only option left is for the client to leave (or be pushed out by other group members). The most common reasons for client dropout include repayment problems created by a family crisis or emergency.

So how do MFIs respond when clients cannot repay? Most see a strong delinquency management strategy as being critical to success, and send out a strong message to staff that part-payment or arrears should not be tolerated – a message often supported by incentive schemes. In the worst cases, we see MFIs that achieve a 100% repayment rate through practices such as refusing to end client meetings until all money has been collected. Clients leave the meeting to go home to 'find' the money, but where do they find it from? Probably moneylenders.

You need to find ways to help your clients resolve any problems that affect their ability to repay – this is what we mean when we talk about balancing social and financial performance at the front line.

5. Assess clients’ businesses for their social and environmental impact

You should not be supporting activities that could damage people’s health (eg, illegal ‘home-brewed’ alcohol or liquor) or the wider environment, including natural resources (eg, businesses based on chemical agriculture, over-fishing or charcoal burning). There may also be health and safety issues around the working conditions of some activities, and you should investigate these.

Your MFI should develop its own policies, clearly stating activities for which it will not lend. For example, an environmental protection policy could steer your loan officers away from lending to businesses known to create pollution. You could also go further and develop a more proactive strategy, encouraging alternative, low-cost technologies that could help your clients, their families and their communities in the longer term.

6. Communicate clearly and openly

MFIs need to routinely report on their performance to all stakeholders, including investors and regulators. This communication is usually through the annual report, or other reporting mechanisms such as the MIX. Reporting on how far the MFI is achieving its social goals – if mentioned at all – is usually limited to a few case studies in the annual report. What does your annual report say about how far your MFI has achieved its social goals?

Your MFI should systematically report on its social performance, for internal as well as external stakeholders, including clients. Recently, the MIX launched an online social performance standards matrix, and MFIs have now begun to report on these indicators, along with their financial indicators. If you take reporting on your social performance seriously, this will enhance your reputation for transparency and impact. Social performance reports (including information on clients) can also help you assess what progress your MFI is making towards achieving its mission.

Harmful practice by one MFI, when picked up by the press, can affect the reputation of the entire microfinance industry. In such a situation, it becomes imperative for an MFI or a network of MFIs to develop a clear communications strategy to communicate with all stakeholders: staff and clients, investors and competitors, and the media.