Strategic Management in Microfinance - Credit Methodology Innovation

valenzuela smp: sustaining the gains through strategy innovation:

Ms. Elma B. Valenzuela, Associate Director of CARD NGO, looked into a major strategy innovation recently adopted by CARD MRI: the shift to individual liability in loans. Her strategic management project -- the first attempt to assess the effectiveness of this new lending scheme -- documented the evolution of a successful strategy which has had a great impact on CARD’s microfinance operations.

The Challenge: Containing CARD’S Drop-Out Rate

In 1990, CARD launched its lending scheme patterned after the Grameen Bank Model, adopting the solidarity group lending scheme from Grameen in Bangladesh. Under the scheme, non-collateralized loans were provided to individual members under organized groups called "samahan" or associations. The results were very promising, as the institution maintained a recovery rate of not less than 88%. However, after a decade of implementation, there were repeated feedbacks from clients that one of the major causes of their repayment problems is "imbunahan" (patching) or the policy of requiring clients to contribute whenever one of their co-members default on his or her loan obligations. This was reportedly the cause of much stress and tension within the association, and usually resulted to client resignations.

CARD, Inc. conducted several studies to validate the issues regarding the effects and causes of "imbunahan." It also began doing exit surveys in 1999, after noting the trend of increasing dropouts among members. The studies and surveys revealed that the effect of the group liability on loans is the clients’ primary reason for leaving.

The Solution: Shift to Individual Liability Scheme

In 2001, CARD, Inc. introduced the ASA Methodology in its operations. However, the partial adherence to the basic principles of the ASA technology by carrying over the group liability approach of the Grameen Bank technology has brought some operational problems such as high dropout rate, as over time, clients felt the negative effects of "imbunahan" (patching) practices.

The implementation of the individual liability on loans started with the conversion of old branches implementing group liability in the last quarter of 2003. It was followed by the establishment of new branches that adopted the individual liability scheme. Full implementation of the new loan scheme was preceded by the following:

1. CARD executives and middle managers undertook exposure trips and hands-on training on ASA methodology in Bangladesh.
2. Consultants from ASA, Bangladesh were contracted to lend their expertise and provide technology transfer to local staff.
3. The CARD Calamba Branch was established as a pilot area for the implementation of the individual liability on loan.
4. Fifty-nine (59) old branches were gradually converted from the group liability approach to individual liability scheme.

Beginning August 2005, all newly established CARD branches adopted the individual liability scheme on loans.

The Results: Massive Area Expansion, Staff Promotion and Recruitment, and Astounding Increases in Outreach, Loans Portfolio and Capital Build-Up

Valenzuela’s strategic management project showcased the adoption of a strategy – the individual liability scheme on loans – to sustain CARD’s competitive advantage over other microfinance institutions. CARD’s strategic innovation, the shift in loan policy from group liability to individual liability, was a resounding success. Once again, it proved that it is a dynamic organization, willing to explore and try new approaches to better serve its clients.

Trend analysis of the following indicators in the SMP showed:

1. Increased Operational and Financial Efficiency. There was a significant 2% increase in repayment rate, as well as an increase of PhP131.4 million (31.42%) in loan outstanding for the eight-month period of project implementation. Correlated to improved repayments, there was a significant 2.17% decrease in Portfolio at Risk (PAR) and CARD was able to reduce the number of defaulters, leading to the PhP5.3 million (25.47%) reduction in past due loans.

There was also a total increase of 62,145 or 77.96% in active members as of June 2006. The dropout rate has been reduced to 16.7% as of Dec. 2005. With regard to institutional self-sufficiency, most indicators showed a decreasing trend:

(a) Operational Self-Sufficiency or OSS, at 25.18%;
(b) Financial Self-Sufficiency or FSS, at 27.61%;
(c) Return On Assets, at 63.29%;
(d) Return On Equity, at 69.27%; and,
(e) Portfolio per TO, at 38.38%

This performance status, however, was affected by the massive branch establishment in Luzon, Visayas and Mindanao.

2. Program Enhancements. The SMP covered a gamut of program enhancements in CARD, Inc. processes and implementation procedures. Interventions were made, and further improvements proposed, in the following processes: (a) client recruitment; (b) center meeting; (c) loan processing and approval; (d) loan disbursement; (e) loan collection; (f) capital build up or CBU collection and withdrawal; (g) record keeping; and (h) monitoring and supervision.

3. Client and Staff Satisfaction. Ten (10) focus group discussion (FGD) sessions were held with clients, the results of which elicited evidence of client’s satisfaction with the individual liability on loans scheme. They indicated their preference for the new scheme because: (a) it eliminated patching or "imbunahan"; (b) it allowed them to focus on the repayment of their own loans; (c) it motivated members to pay their obligations on time because they feel ashamed if they are not able to pay; (d) it increased the attendance rate in center meetings; and (e) it improved relationships among center members. This high level of satisfaction is further supported by operational performance records showing increases in outreach and in the number of "Balik-CARD" or rejoining clients.

Similar positive responses were elicited from the ten FGD sessions conducted with the staff. Like the clients, most of the staff also appreciated the good effects of the removal of group accountability on the clients and in CARD operations, as they said it made easier the controlling of past dues. The staff happily noted that the scheme facilitated client recruitment, minimized the resignation of old members and encouraged the exit clients to return to CARD – and such developments reflected positively on their performance.

CARD’s success in this area proves that strategy should be a stretch, rather than a fit, exercise. The organization faced the dilemma of increasing client drop out due to dissatisfaction over its lending scheme. Using participatory research and strategic management tools, it made the shift in its lending strategy and voila! Not only was it able to solve its drop out problem, it achieved an unprecedented overall institutional improvement.

The introduction of the individual liability on loans scheme was initially intended to address the issue of clients’ dissatisfaction. By abrogating the policy on group liability for loans, with its concomitant systems and procedures, CARD was able to reverse the drop out trend in its membership. Its client-members were satisfied, resulting to less drop outs and improved repayment rates. Ultimately, maintaining clients’ satisfaction led to improved overall institutional performance, with the attainment not only of financial gains (sound FSS and OSS) and operational efficiency (high outreach, less PAR, less dropouts), but CARD’s social mission to improve the lives of its constituents.

Truly, strategic management is not a task, but rather a set of managerial skills that should be used throughout the organization, in a wide variety of functions. Strategic cross-functional management is central to capitalizing on functional excellence, fitting them into the web of the organizational processes and, ultimately, into the overall strategy.

Successful companies are those that focus their efforts strategically, like CARD. A successful strategy adds value for the targeted customers over the long run by consistently meeting their needs better than the competition does. CARD’s strategy innovation will surely secure its position at the helm of micro finance and social development institutions in the Philippines and abroad.