Social Entrepreneur Gregory Casagrande Looks at How to Build a Microfinance Institution

People in some of the world’s poorest countries are trapped in a vicious cycle, they have no opportunity for meaningful employment, and they have no ability to access capital to start a small income-generating business. If they had access to financing, to start a small business, then that could put them onto a path for a prosperous future. However, since most have no formal credit history and little or no collateral, they cannot obtain traditional financing such as a conventional bank loan. This is where microfinance institutions enter the picture and make the impossible, possible.

“Microfinance institutions provide small unsecured loans that enable micro-entrepreneurs to launch tiny businesses such as sewing operators, food production and processing, catering business, taxi services, hair and beauty salons, small farms and livestock raising and other easily understood but essential businesses,” commented Gregory Casagrande, a serial social entrepreneur and founder of SPBD Microfinance Network, which is the leading microfinance institution in the South Pacific. “Microfinance institutions, by connecting the poor to the economic ladder, empower the poor to pull themselves, their families, and their communities permanently up and out of poverty.”

However, while the potential and promise of microfinance in the developing world is nothing short of transformative — especially for traditionally marginalized populations such as women in rural, third world communities — Gregory Casagrande is quick to point out that the model only works when microfinance institutions are well-conceived, firmly established and competently led. Specifically, he highlights six pillars that microfinance institutions should focus on:

1. Affordable Business Structure

An Affordable Business Structure (ABS) is a planned cost structure at the financial break-even point where revenues equal total costs, which for a microfinance institution are typically composed of three categories: administrative costs, bad debt expenses, and financing costs. The primary function of the ABS is to clearly and objectively determine whether costs and revenues are in alignment with best-in-class benchmarks across the industry. If misalignment is detected, then it is incumbent on the microfinance institution to rapidly adjust operating strategy and bring everything back into balance.

“I view building an ABS as the financial guiding light for microfinance institutions,” commented Gregory Casagrande, who is also the founder of the microfinance acceleration fund MicroDreams, and of the microfinance advisory company Transformative Ventures LLC. “Losing sight of the prevailing metrics and key performance indicators, and failing to adjust and optimize strategy, accordingly, can be devastating and threaten the institution’s very survival. Decision-makers need to rely on accurate business intelligence, and not assumptions.”

2. An Empowered and Motivated Local Team

A growing number of microfinance industry authorities believe that microfinance institutions should not allocate their already-limited working capital to pay for expensive consultants. Instead, they should focus their efforts and resources on recruiting and building a good team from the local population, which is empowered and motivated to co-create sustained organizational success.

“Microfinance institutions need to provide staff with the same motivational and performance-based programs and incentives that other leading businesses do around the world, such as ongoing professional development opportunities, a clear and progressive career path, regular merit-based increases, and bonuses for top performers,” commented Gregory Casagrande, who has served as a director on several impact-industry boards including the International Association of Microfinance Investors (of NY), Microfinance Pasifika (of Fiji), Planet Finance (of Paris), and Plebys (of Irvine, CA) a Base of the Pyramid investment fund.

3. A Strong Network of Relationships

Microfinance institutions also need to build a strong network of relationships with local stakeholders, as well as advisors and influencers at regional, national, and international levels. Ultimately, these individuals and groups work together assisting with operational support, recruiting staff and volunteers, pursuing new funding opportunities, and ensuring that the institution is implementing cutting-edge best practices.

“As an example of strong relationship building, at SPBD Microfinance, we have worked very hard to create positive, enduring and trust-based relationships with the matai — or chiefs — in each village in which we operate,” commented Gregory Casagrande. “These relationships and others have played, and continue to play, a significant role in our sustained success.”

4. Detailed Procedural Manuals

Behind the scenes, microfinance institutions need to make generating and updating detailed procedural manuals a top priority and core competency. This documentation provides a foundation for controlled process improvement, staff development, and ongoing capacity building.

“I cannot overstate how vital it is for microfinance institutions to have extremely organized and accurate operational and financial documentation in place, and to keep these refreshed and updated,” commented Gregory Casagrande, who has earned an MBA with concentrations in Finance and Marketing from the Kellogg School at Northwestern University, an MS in Accounting from NYU Stern, and a BA with Honors in Economics from Colgate University. “Furthermore, this documentation should not be created retroactively, because it is easy to overlook critical steps or miss key details. It should be developed as the institution grows and develops.”

5. Internal Systems

A strong and sustainable microfinance institution needs two core systems as part of its operational, administrative, financial, and human resources infrastructure: a management information system, and an internal control system.

“A good management information system, for a microfinance institution, will have an integrated loan portfolio management system, and be supported by a separate basic accounting package,” commented Gregory Casagrande. “A good internal control system will help detect and prevent fraud, which unfortunately is something that microfinance institutions need to do. Early on when we started SPBD Microfinance Network, we were tested by would-be fraudsters many times. However, because we had excellent cash controls and procedures in place, we were able to act swiftly and to eliminate the threat. While fraud is no longer a significant issue for us, we still remain vigilant.”

6. Operating Processes that Drive Success

A major goal of every microfinance institution is to maintain high loan repayment rates — which is critical for organizational sustainability — while at the same time enabling its roster of micro-entrepreneurs to be successful operating their respective businesses. Implementing a set of targeted operating processes goes a long way to checking both of these boxes. Specifically, microfinance institutions are advised to provide all micro-entrepreneurs with extensive up-front and ongoing training; establish self-selected small groups of micros-entrepreneurs who guarantee each others’ loans (and who also have the power to reject loan applications if they do not approve of a prospective member’s business plan); offer loan products that are customized for the local market; and conduct loan utilization checks to verify that funds are being used for the purpose as stated on loan applications.

“All of these operational processes will provide new microfinance institutions with a good place to start,” commented Gregory Casagrande. “It is also advisable to provide micro-entrepreneurs who have received funds with the opportunity to obtain subsequent loans, provided that they adhere to all of the rules and principles of the program, for example, by having a flawless repayment record and having perfect attendance at weekly meetings. Such incentives help micro-entrepreneurs develop practices that support their long-term success, and when they succeed the microfinance institution succeeds, as does the community at-large.”

This article does not necessarily reflect the opinions of the editors or management of EconoTimes