In its short history, micro-financing has become known as a proven tool for enabling the poor to gain a small measure of economic traction. Less known is the fact that the institutions providing micro-financing, such as those described in this article, can improve their own performance as well. These authors have written an excellent informal case study that highlights the very significant benefits that flow to both borrowers and lenders in a micro-financing relationship.
In September 2000, the United Nations unanimously adopted the Millennium Development Goals to alleviate poverty and its derivatives, such as the need to achieve universal primary education, promote gender equality and empower women, combat deadly diseases, reduce child mortality and improve maternal health, and ensure environmental sustainability. Microfinance1 institutions (MFIs), for example, banks, non-government organizations (NGO), and government agencies, are one such vehicle used to achieve these goals. By far, microfinance has been able to provide financial and non-financial services to the “unbankable” (poor or marginalized) to not only establish financial independence, but also reap the benefits of added income and work security, food security, and social security (at least health care, child care and shelter). According to Nobel Prize Winner, Professor Muhammad Yunus, microfinance is a “social business” that “creates economic and social development from below.” However, one of the legitimate questions asked at the most recent United Nations Global Compact and Academy of Management Conference at Case Western University (2006) was that if, presumably, microfinance has reached a tipping point, what else can microfinance institutions do to help the impoverished while enhancing their own performance? What mechanisms and structures are currently being used and can be improved upon to accrue additive benefits and accomplish a sustainable growth model for both the borrowers and microfinance institutions?
This article attempts to answer these questions by referring to the best structural practices adopted by two pioneering microfinance institutions — Grameen Bank of Bangladesh and Self-Employed Women Association (SEWA) of India — that have helped them manage and implement their changing roles, activities, portfolios, and responsibilities over the years. These institutions have been transformed from providers of micro-credit to the impoverished to developers of business-social ventures and providers of support programs and non-financial services. Using the social network2 theory, we propose an institutional network model based on existing structural models used by Grameen Bank and SEWA. This innovative model will develop optimal social channel capacity that may allow both clients (borrowers) and microfinance institutions to effectively manage relationships while systematically disseminating and assimilating essential knowledge and information and hence, reap maximum benefits. Furthermore, the model can be imitated by other developing organizations as it may assist them to understand how institutional boundaries can be extended to experience growth and increased performance. Figure 1 illustrates the proposed institutional network framework.
Figure 1: Institutional Network Framework
Microfinance institutions: Role Models
Grameen Bank
Professor Yunus made the Grameen Bank famous for micro–credit – giving small loans to people so that they can invest in productive assets to improve their socio-economic status. Since Muhammad Yunus founded the Grameen Bank in 1976, it has provided micro-loans worth more than $4 billion to three million of the poorest rural village residents in Bangladesh. Grameen’s borrowers, 95 percent of whom are women and mostly illiterate, have helped make the bank profitable by maintaining a 98 percent loan repayment rate. The Grameen Bank has become a totally self-financing operation that stopped accepting donor contributions six years ago. Expanding beyond micro credit, Grameen Bank has explored an emerging trend for eradicating poverty by developing business-social ventures. For example, Grameen’s first business-social venture evolved as Grameen’s Fisheries and Livestock Foundation, a joint venture with local farmers, whereby the latter used their farming expertise to fertilize the fishponds. Grameen, in turn, gives farmers the technology and training they need to practice sustainable fish farming and livestock husbandry. As a result of the equal partnership, 4,000 farmers created small enterprises not only in fishing but also in dairy farming, production of biogas from animal manure, forestry, and agriculture.
More recently, Grameen Bank made the leap from rural banking and agricultural enterprises into high technology with the ‘GrameenPhone’ venture. It has grown to be the largest cellular phone company in all countries in south Asia, with more than one million subscribers in Bangladesh, and has earned after-tax profits of about US$50 million in 2002. The “phone ladies “ that resell airtime bought in bulk by GrameenTelecom, earn an average annual income of US$800, an amount that is twice Bangladesh’s per capita annual income.
The progression and succession from a microfinance bank, from providing micro-credit to the poor to a social enterprise, is largely attributable to the women stakeholders, who are also Grameen bank borrowers. The Grameen bank model has helped develop social relationships within and across groups of women borrowers and the bank, hence allowing stakeholders to reap the benefits of social capital and social power. Women in the villages hold regular meeting to discuss their progress, concerns, and issues, as well as to make payments to the Grameen bank representative. The latter, in turn, feeds collected data and information to the central office. Moreover, the Grameen Bank’s borrowers – poor women – own the bank. They control 92 per cent of its shares (the balance is owned by the government) and 9 of the 13 members of the bank’s board of directors are elected from among these bank borrowers, allowing them to participate in its governance and strategic development.
Self Employed Women Association (SEWA)
SEWA is a trade union registered in 1972. It is an organization of poor, self-employed women workers (unprotected and unorganized labor force) who earn a living through their own labor or small businesses. SEWA recognizes the need for supportive services like savings and credit, health care, childcare, insurance, legal aid, capacity building, and communication services. It has helped women take a number of initiatives in organizing these services for themselves and their SEWA sisters. They provide these services in a decentralized and affordable manner, at the doorsteps of workers. Further, supportive services can be and are themselves a source of self-employment. For example, midwives charge for their services and home workers collect fees for taking care of young children. Also, women are ready to pay for the services, which in turn results in the financial viability of the support services. They do not have to be totally dependent on subsidies and grants. Some support services like savings and credit, health and childcare have formed their own co-operatives that have gained operational self-sufficiency. SEWA bank has achieved social entrepreneurship through financial viability for many years now, while the other cooperatives are steadily moving towards this.
SEWA has identified four types of self-employed women workers which can be springboards for several trades associations: (1) hawkers, vendors and small business women, (2) home-based workers like weavers, potters, bidi (cigarette) and agarbatti (incense) etc., (3) manual laborers & service providers in agriculture, construction, etc. and (4) producers who invest their labor and capital to carry out their businesses, for example, agriculture, cattle-breeders, salt workers, cooking, etc.
SEWA is governed a by two-tier level of elected representation. The members of each trade elect their representatives based on the ratio of 1 representative per 100 members. These representatives then form the Trade Council. In addition, and parallel to the Trade Council, are Trade Committees in each trade. Trade Committees and Trade Council work very closely together to get feedback from each other. Every three years the Trade Council elects an Executive Committee of 25 members. The representation on the Executive Committee reflects the proportion of the membership. The office-bearers of the Trade Union are elected from among the executive members. It has become a practice to elect the president from the trade with the largest membership.
In our opinion, the success and sustainability of SEWA and Grameen Bank are largely attributable to the team-based methodologies they adopt. Expanding on the concepts of sub-sectors and the feedback mechanism while integrating the theoretical knowledge of social networks, we have developed an institutional network model to depict the symbiotic relationship between clients and microfinance. Our proposed model can be replicated and may be instituted not only by microfinance institutions but also by other developmental agencies.
The institutional network
The institutional network consists of two networks, focal and principal networks. For each we identify the actors (clients/borrowers); network goals and objectives; and their characteristics. They are all said to commonly enjoy informational advantages.
Focal network
Formal sub sectors are analogous to focal networks and may consist of clusters of 20-30 actors in the same or related businesses, such as garment, poultry, dairy, etc., similar to the ‘trade committees’ in SEWA’s organization structure. To maintain stability and solidity within the focal network, to orchestrate decisions for the network, and to be represented in local communities, an administrative “hub” in each of the focal networks should be established; a very limited role-played by the member secretary in SEWA’s model. Network orchestration is likely to be the key role performed by the “hub” and is defined “as a set of deliberate, purposeful actions undertaken to create value (expand the pie) and extract value (gain a larger scale of the pie) from within and outside the institutional network.” This hub should consist of two or three actors from the focal network, who may be elected.
Critical problems that may surface among clients in these networks are their social and business likes, dislikes and preferences. This may create a biased environment, which may hinder the success and progress of the network. Negative conflict may be one of the precursors to negative relationships but if positive conflict arises in a network, it is generally considered beneficial. Nonetheless, other factors, such as personality traits, perception of inequity, selective perception, halo effect, lack of group association, etc. may also trigger negative relationships.
Network goals and objectives. The focal networks are likely to perform both proactive and reactive advisory3 roles. The proactive approach allows the actors within the focal networks to share amongst themselves task-related issues and collectively make decisions to overcome specific, practical obstacles such as acquiring retail licenses, establishing transport system, enhancing buyer power by combining orders and -economizing value chain activities. Moreover, their advisory capacity may be extended to formulating and implementing strategies necessary for business growth. The focal networks can also take a proactive approach to eliminate bottlenecks and reduce uncertainties, as it will be beneficial for the entire network, not simply one or two actors in the network. These accrued benefits may be operational and strategic in nature. For example, it will be considered operational in a transportation focal group, when the hub negotiates a deal with different wholesalers to deliver products to several different destinations at the same time. The communal impact of this decision will help the network attain economies of scale, employment for all, and increased profitability. Logistically, actors can share routes and deliveries to reduce expenses. Decisions are of a strategic nature, if a garment or apparel focal network launches a line of designer clothing by forming alliances with fabric, tie and dye, and/or embroidery suppliers and if need be vertically integrate into these businesses.
On the other hand, the network’s reactive approach helps resolve everyday glitches and hindrances that individual actors may face. Micro-level businesses survive on day-to- day transactions and loss of a day’s work can considerably reduce their profitability. The administrative hub and the lateral linkages created within the networks may reduce these anomalies by providing immediate assistance and advice, normalizing everyday work.
In general, it is essential for actors to clearly understand the advisory roles each one plays within their respective focal network. For example, in their monthly or bi-weekly meetings, they should all proactively discuss prioritized agendas. They are likely to benefit most by collectively addressing the issues or concerns on the agenda and finding remedial solutions besides learning private lessons and using it in their favor. The administrative hubs, on the other hand, are likely to facilitate and monitor discussions, schedule time lines, and equally distribute implementation responsibilities, if it is for the common good of the entire network. The hubs can also act as payment collectors for microfinance institutions. After a period of time these networks will be transformed into friendship networks4, in which women in the network may provide informal advice, social support, and mentoring services.
Network characteristics. Two types of linkages exist within the focal network – (1) formal central linkages between the administrative hub and actors, and (2) informal lateral relationships among actors. It can be fairly stated that focal networks can accomplish their goals and objectives through central ties that are highly cohesive5, strong, and dense6. The characteristics of informal lateral linkages may be different in urban and rural settings. Due to geographic dispersion in an urban setting, the horizontal linkages may initially be sparse and weak, but may become dense and cohesively strong overtime. On the other hand, lateral linkages are likely to be strong to begin with in rural setting due to geographic proximity.
As actors in individual focal networks are in the same or related businesses, they require access to the same or similar pool of resources and knowledge; therefore, the possession of redundant, fine-grained information may be prolific. This informational gain can help reduce environmental uncertainty, prescribe solutions to existing and potential problems, and augment business growth. Simply put, cohesion, density, and strength of relationship between administrative hub and actors within the focal network are likely to encourage effective communication, cooperation, and the sharing and exchange of information. Prolonged positive impact comes from the development of trust and, and in turn, social capital. Network intensity develops over time but the benefits may be reaped for years to come. However, there may be drawbacks associated with cohesive and dense networks. These include rivalry and negative conflict within the network, which may have severe repercussions for business development and harmony.
Principal Network
Paralleling the board of directors of the Grameen Bank and the executive council of SEWA, the advisory principal network should be comprised of the administrative hubs of the individual focal networks and the respective microfinance institution, which may be considered the hub of the principal network. Hub may be considered as the key actor, the triggering entity, and/or the strategic center, and is likely to possess prominence and power, gained through individual attributes, and from the knowledge and information achieved through their presence in their respective external networks and their affiliations with other world organizations. This would allow them to earn a central, advisory position in the principal network structure and subsequently, perform a leadership and governance role in pulling together dispersed resources and capabilities of network members i.e. focal networks. Formal institutionalization is decisive for its success.
Network’s goals and objectives. It is fundamental that the representative of the focal networks and their respective microfinance institution meet periodically, at least once every quarter, for the former to submit and share progress report, goals and achievements, current endeavors and work in progress, and future aspirations. More specifically, individual focal networks can share information about the obstacles and hindrances their businesses experience, the solutions and interventions to the problems, the results achieved pertinent to their respective industries, and their growth strategies and tangents. This may be for the common and private good of all focal networks in diverse industries and for microfinance institutions, which, because of the broad information base attained from the diverse sources, will remain well informed of opportunities and impending disasters (access benefits) and hence determine their own future direction. It will also encourage microfinance institutions to act as connectors to build cooperative relationships among different focal networks. For example, if microfinance institutions ascertain that a new opportunity is created in one of the focal groups, which may be catered to by the skills of another focal group, they can connect them appropriately (timing and referral). Furthermore, eruption of lateral linkages among independent focal networks can give them the opportunity to share complementary skills, allowing for economies of specialization. This reduces duplication of time and effort, costs, and relational risks that focal networks may otherwise independently experience.
Even though focal networks may be considered the backbone of the institutional network, the principal network is the interface of the institutional network. The role of the principal network, in general, is to enhance reputation, lengthen the shadow of the future, and build multiplexity within the institutional network. Thus, representatives from the principal network should seek legitimacy and recognition within the country and microfinance community at large by attending and participating in conferences, developing and promulgating programs and initiatives, and maintaining transparency at the network level. They should also build robust strategic alliances with other similar institutions and government agencies.
Network characteristics. As in focal networks, principal networks are also likely to consist of formal central linkages between microfinance institutions and focal networks, and informal lateral linkages among focal networks. The former may be characterized as strongly connected, dense networks with structural holes7, as this would allow most appropriate implementation of network goals and objectives. The latter are likely to be sparse with weak connections. For example, due to the prevalence of industrial diversity in this network, the actors are mostly disconnected, dispersed, and share only weak ties but are held together by microfinance institution as the prime connector. The structural holes that exist in the principal networks permit the microfinance institution to collect non-redundant, critical information of plausible bottlenecks and interventions used by different focal networks, and to disseminate the gathered information to others within the principal network, reducing duplication of resources and learning curve effects. A caveat here is that as focal networks belong to different industries, the learning implications of one industry may not be carried over to another in totality. Nevertheless, with amendments, private synergies can be attained.
We hope that this article will offer new insights for future policy makers. First, the social institutional network proposed confirms that development should be grounded in the social, cultural, and economic needs and priorities of the society. This highlights the importance of the bottom up approach and in turn, ensures that microfinance institutions have a stake in the future of their business community. Both the Grameen Foundation and SEWA acknowledge and appreciate that the best development ideas come from the clients themselves. Second, the non-financial services and support packages offered by microfinance institutions would create a skilled working class and improve the quality of labor and their access to productive resources. Third, the methods and technical services employed should be simple so as to reduce the demand for highly skilled labor and management for the project to attain self-sustainability. Finally, the feedback mechanism developed could be used to educate future clients to operate and function more efficiently, subsequently allowing the next batch of clients do better and follow economies of scale. The focal and principal networks can eventually build up business alliances where the buying and selling power of borrowers gives them social power as well. In short, this symbiotic relationship not only improves the socio-economic status of the poor but also augments the performance of microfinance institutions for them to attain sustainability.
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- activity of provision of financial and non-financial services to clients who are excluded from the traditional financial system on account of their lower economic status.
- a set of nodes (e.g. actors, businesses, organizations) linked by a set of social relationships (friendship, transfer of funds, overlapping membership) of a specified type.
- Work-related information transfer.
- exchange of liking and social support.
- Direct, redundant relationship that have the same sets of information.
- number of ties per actor.
- Indirect, non-redundant relationships with distinct information flows.
