Banking on Customer Loyalty
by Craig Churchill

Enhancing customer loyalty is a microfinance institution’s most important business strategy. Every critical element involved in managing microfinance operations—from product pricing to staff incentives, from marketing to eligibility requirements, from client screening to the menu of available services—can (and should) be formulated to promote loyalty. While most MFIs recognize the importance of client retention, few have designed business strategies to maximize customer loyalty. Hopefully that will change. This article details the economic impact that customer loyalty has on a microfinance institution (and the negative effect of desertion).

Microfinance in the United States: The Working Capital Experience—Ten Years of Lending and Learning
by Jeffrey Ashe

Working Capital is the United State’s largest peer-group lending program. This article reviews what Working Capital has learned about the marker, its customers, program impact, and service delivery over its ten year history. It presents a model for understanding how participation in peer lending groups develops "social and economic capital" in poor communities. The article then discusses how participants judge the group model as they identify the characteristics of successful groups and the impact of the group on their businesses, on themselves personally, and on the larger community. The rest of the article discusses how Working Capital evolved from a start-up operation in a single town into a multistate program and explores the advantages and limitations of rapid expansion. A checklist for choosing affiliate partners is presented, along with a list of the lessons learned about delivering services through affiliates. The article concludes with a discussion of the differences between running a group-lending program in the United States and in a developing country and the implications of Working Capital’s experience for the microfinance industry in the United States. Noting that the hundreds of microenterprise programs in North America are reaching less than seventy thousand businesses, the author makes the case for going back to the customers of these programs to learn from them how they would set up a microenterprise service initiative as a business. This would generate new ideas on how these programs could best be carried out within the context of hard pressed low income communities.

Replication: Regressive Reproduction or Progressive Evolution?
by Graham Wright

Increasing numbers of organizations are “replication” the programs of successful microfinance institutions (MFIs). This approach allows rapid start-up using tested models and systems. These strengths are also weaknesses, though, since the models being replicated usually require substantial modifications to make them appropriate for local conditions. Furthermore, close adherence to “blueprints” is likely to substitute for careful research into the needs and opportunities for the provision of financial services to the poor—and thus the design of appropriate systems. Replication also risks the suppression of innovative ways of providing still better financial services—particularly when promoted by powerful apex funding organizations, as is currently in vogue among donor agencies. Perhaps the most dangerous form of replication is that driven by consultants, leaders, or donors who design or recommend systems they only partly understand, thus giving incomplete or blurred blueprints. Credit is also used as a way to attract clients to meetings (where they may be required to participate in other activities, such as family planning, etc.). This “part-time banking” is dangerous, both as a result of the complexity of providing financial services, and because clients come to rely on permanent access to these services.

Capital Enhancement Guarantees and Risk Management by Capital-constrained Lenders
by J.D. Von Pischke

Commercial lenders require capital to bear risk. The capital enhancement guarantee (CEG) encourages lenders to make loans they would not otherwise make, such as microenterprise loans. The CEG is auctioned, awarded to bidders promising the greatest amount of such new lending for a given increment of permanent capital. Whether the incremental lending causes losses or gains for the lender, the incremental capital is free. The CEG subsidizes innovation in risk management. It places the analytical focus on risk and its cost, supports the key party to the lending decision, promotes skill in managing risk, is transparent, minimizes moral hazard and has trivial transaction costs. The CEG should be attractive to donor agencies.

Credit Scoring for Microfinance: Can It Work?
by Mark Schreiner

In rich countries, lenders often rely on credit scoring—formulae to predict risk based on the performance of past loans with characteristics similar to current loans—to inform decisions. Can credit scoring do the same for microfinance lenders in poor countries? This paper argues that scoring does have a place in microfinance. Although scoring is less powerful in poor countries than in rich countries, and although scoring will not replace the personal knowledge of character of loan officers or of loan groups, scoring can improve estimates of risk. Thus, scoring complements—but does not replace—current microfinance technologies. Furthermore, the derivation of the scoring formula reveals how the characteristics of borrowers, loans, and lenders affect risk, and this knowledge is useful whether or not a lender uses predictions from scoring to inform daily decisions. In the next decade, many of the biggest microfinance lenders will likely make credit-scoring models one of their most important decision tools.

Impact Assessment of Microfinance and Organizational Learning: Who Will Survive?
by James Copestake

To what extent is it possible for organizations to reflect honestly on their own performance, draw appropriate conclusions and then act on them? For many microfinance organizations this is now a question of survival. This paper argues that formal impact assessment can assist in the transition from donor controlled replication projects to autonomous and adaptable organizations – but that it also often fails to do so. Pitfalls include inadequate attention to methodological detail and to the links between impact assessment and wider aspects of organizational change. The paper starts by highlighting the complexity of the overall task to which impact assessment is expected to contribute. It then critically reviews methodological options – why do impact assessment, what indicators to use, how to collect data, how to analyze it, who should be responsible for which tasks? It concludes that the key to success is the quality of the relationship between microfinance managers and impact assessment specialists. A prerequisite for this, in turn, is the transfer of more responsibility for managing impact assessment from donor agencies to the leaders of microfinance organization themselves.

Moving Microenterprises beyond a Subsistence Plateau
by C. Beth Haynes, Kristie K. Seawright, William C. Giauque

Enthusiasm for microcredit programs has increased during the past decade. The attention these programs have drawn stems philosophically from progress in cultivating self-sufficiency among those in abject poverty, and practically from the viability and high loan repayment rates of many microfinance institutions. A basic assumption of the programs is that lack of capital is the main barrier to the economic progress of the poor. However, the lack of entrepreneur business management experience and training may create a barrier equally as powerful and limit the growth potential of microenterprises. Microcredit programs could foster even greater economic progress by ensuring that clients receive appropriate human capital development. Without adequate training of microentrepreneurs, microcredit loans may allow the poor to move from abject poverty to subsistence income levels, but limited skills leave the opportunity for substantial further firm growth untapped. The potential of these firms to employ others also remains unfulfilled. This paper reviews relevant microcredit and microenterprise literature, and then argues for increased microentrepreneur training based on the case of a Manila microentrepreneur.

Book Review
Microfinance and Poverty: Questioning the Conventional Wisdom By Hege Gulli
by Lisa M. Jones