ABSTRACT
Outreach In de veloping coun tries, a major reason why many microfinance institutions were able to reduce pov erty on a substantial scale was that they were able to grow rapidly, without putting their finances at risk. The mere fact that BRAC and the Grameen Bank of Bangladesh, for example, were able to reach six million borrowers by the millennium, and Bank Rakyat Indonesia twenty-seven million savers,1 was an im port ant factor under lying the success of those institutions in re du cing mass poverty. In Britain, as we have emphasised, the market for microfinance, in the sense of the numbers of people who ex peri ence fin an cial exclusion, is not on this scale.2 However, in Britain as across the world as a whole the outreach of CDFIs – the speed at which they can grow and sup port their market – is an im port ant determinant of the degree to which they can reduce pov erty and depri va tion. The social impact which they achieve, in fact, is simply their outreach – the number of people they manage to reach – multiplied by their impact margin – the average amount by which a CDFI increases the well-being of its clients. In this section, we examine and seek to explain the outreach of the UK CDFIs in our sample. We then go on to discuss the evolution of their fin an cial performance. Unlike commercial businesses such as banks, UK CDFIs are gen erally nonprofit organ isa tions;3 but they also need to cover their costs if they are to survive long term. What determines their degree of success in covering costs and pro gressing towards viabil ity? A point of departure is provided by John Kay’s ana lysis of business corporations (1993), which identified four distinctive capabil it ies associated with corporate success. These he defined as stra tegic assets or initial ad vant ages, reputation, capa city for in nova tion and, finally, what he called architecture, or the network of relationships and incentives which the institution is able to negotiate both within the organ isa tion and with external partners such as sponsors, sup port agencies4 and clients. Many of these relationships, both in commercial firms and in CDFIs, are based on informal trustrelationships rather than formal legal contracts. Kay’s book was concerned with modern business corporations with mainly commercial ob ject ives – including profit maximisation but pos sibly also other
purposes such as corporate growth, share price maximisation and deterrence of com peti tion.5 These are likely to differ from the ob ject ives of CDFIs, which are not commercial corporations but char it ies (formally, in the terms of the Financial Services Authority’s rule-book, most of them are ‘Industrial and Provident Societies’).6 In par ticu lar, CDFIs need to achieve ob ject ives associated with combating fin an cial exclusion and pov erty in local com munit ies, as we have discussed. However, unless they raise enough finance to keep going, CDFIs like commercial firms cannot survive; and all of Kay’s ‘founda tions of corporate success’ are rel ev ant to the performance and outreach of CDFIs, as they are to corporations. We now specify the way in which they are relevant. Most obviously and directly, CDFIs need, if they are to achieve outreach, to be innov at ive in confronting their core prob lem, which is that lenders who cannot take collateral are defenceless until they design institutions to protect themselves. We de scribed in Chapter 1 the manner in which the developingcountry pioneers built their defences, through working out ingenious new incentives, such as peer pressure, to make the beha vi our of debtors transparent and thereby control the cost of default. In the CDFI con text also, bankable clients need to be identified, deterred in a cost-effective way from defaulting, mentored when their morale fails and motiv ated to save and accu mu late capital. In an experimental envir on ment in which ‘what works’ is not clear, this combination of requirements has not been easy to fulfil, and many CDFIs, as we shall see, have fallen by the wayside. As we shall discover through our case studies, an im port ant com plement ary asset in successful CDFIs has been the construction of an architecture of trustrelationships, or ‘social capital networks’ as they are sometimes known. In Chapter 4, we shall show that for CDFI clients, mem ber ship of social networks was often the key to whether they emerged from the pov erty trap or failed to do so; and sometimes, as we shall show in Chapter 5, these social networks were able to reproduce themselves through initiatives from those clients. For CDFI managers, social networks are also of vital im port ance in determining success and failure. The types of networks which are rel ev ant for determining pro gress down the cost curve and towards viabil ity are of three kinds:
1 Horizontal within-group linkages, or what is sometimes known as ‘bonding social capital’ (see Woolcock and Narayan 2000) links of mutual sup port amongst the staff of the CDFI and sometimes also amongst CDFI clients within the com mun ity. In some CDFIs, the chemistry is such that the workforce is more than the sum of its parts, and lowpaid staff nonetheless volunteer to perform vital tasks such as savings mobil isa tion in overtime; in others, in ternal inefficiencies persist and fester because of within-group rivalries and resentments, with the consequence that some CDFIs over a period of years simply do not know the state of their profit and loss account and therefore are powerless to improve it (see Case Study 3 for the contrasting cases of ELM and Yorkshire Moneyline).
