As MFIs try to unravel industry expectations on social performance, there is often a missing piece in MFIs’ internal functioning. Lack of clarity in their own expectations can lead them to pursue ‘standards’ that might not reflect their reality, or worse, create further ambiguity amongst the staff and management on what exactly should be done to achieve the social objectives. Shareholders and directors can help set the right expectations at all levels. I share some of my experience at AMK Cambodia on how our Board has been instrumental in operationalizing social performance and also how it has encouraged the management to guide the formulation of an appropriate design around social performance.
When AMK Cambodia was created in 2003 out of an NGO’s existing credit and savings project, the erstwhile implementer of the project was now in a new role of a ‘shareholder’ in a for-profit institution. The shareholder Concern Worldwide was concerned that a for-profit structure could lead to a dilution of the social ethos of the MFI. Therefore the message from the shareholder to the new management was quite unequivocal at the time – while they wanted AMK to be financially viable, the adherence to its ‘social’ objectives was much more important. In its initial Board meetings the question of social impact was raised often by members of the board. Every new initiative, like the opening of new branches or introducing a new loan or a savings product was scrutinized from this ‘social’ lens. Despite the initial lack of precision in defining social performance, this expectation nevertheless established a value system within the MFI where every management decision required an assessment of both the financial impact on the institution as well as the likely impact on clients. For example, at the beginning it was important not to encourage client officers to push up loan sizes because staff incentives were linked to loan portfolio sizes and disbursement targets, a common practice amongst MFIs. AMK designed an alternative incentive system that incentivized aspects such as working in a difficult area (remote rural areas, areas with frequent flooding or droughts) and efficiency measured by client caseload levels rather than being based entirely on loan portfolio size and interest income.
On its part, the management realized that the question of impact that was raised by the Board would take a long time to answer, however there was a need to break this aspiration down into processes that could be tracked and that would help the chances of a positive impact on clients. With this in mind a high caliber research department in AMK was established which led the design of the current framework for social performance. To augment this effort, in 2004 the Board created a separate sub-committee of mostly independent experts to oversee the institution’s progress on its social performance.
Currently, Agora and Concern Worldwide, the main shareholders of AMK, both work closely in ensuring a balanced approach to financial and social performance. In the recent past the Board of AMK has strongly pushed the MFI to invest in strategies that allow collection of very small deposits from remote rural areas. While the Board believes that such deposits might not be financially very attractive in the short term, they are important because they will offer clients a reliable solution for their fluctuating cashflows. This belief has also led to a strategy to develop agent networked mobile phone based systems to collect deposits. This strategy is guided to help AMK fulfill its own mission.
Recently, the Remuneration Committee of AMK approved an incentive system for the senior management that dis-incentivized excessive profits, by lowering the incentives for senior management if profits exceeded a certain level. The expectation is that once AMK achieves its optimum level of profits it should look to lower its lending rates. This is another example of the Board following an indirect but clear strategy to ensure optimum social focus in the work of the MFI.
Agora is currently implementing a similar approach in its other MFIs in Zambia and India as well, built on a careful balance of financial and social objectives.
In conclusion, it is important to mention that the strategies being followed at AMK, Agora or its other MFIs are not a trade-off on financial performance in favor of the social good. Quite the contrary. The emphasis is on finding solutions and strategies that are likely to benefit the clients, which will lower the risk in a business model that is dependent on clients being able to improve their quality of life. Shareholders and the Boards can be instrumental in shaping these strategies. There is enough evidence at AMK that such an approach leads to a stable and financially reliable MFI over a long period while directly reaching and helping the poorer communities. Therefore, social performance for us is very much our core strategy. In other words it is not merely the icing on the cake, it is the cake itself.