• Thursday, March 28, 2024
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Enterprise development: Understanding efficiency and productivity (1)

Enterprise development

 The survival of any institution – production and services, microfinance programmes inclusive – be it donor-supported or commercially driven, is in the ability of its operators to understand and internalise what gives the bottom-line its colours, red or black, and then learn to respect it. Microfinance institutions, including commercial microfinance banks, are generally constrained by the challenge of Double bottom lines (DBL). On one hand they need to demonstrate financial sustainability while on the other, they must operate in a way to meet their social mandates and mission statements of supporting the underprivileged. There is therefore a dilemma of the DBL but even at that, they still need to operate efficiently.

Generally, informal credit market operators and by extension exist to make small loans, especially to micro, small and medium enterprises. This point needs to be well understood by operators, some of whom often pretend to be commercial banks but we know a butterfly is not a bird. For the avoidance of doubt, and at the risk of saying what ought to be a truism, the making of jumbo loans to single obligors, or anybody at all, is an aberration in that market, including microfinancing. That is not the tested way to reach the poor and underserved; nor is it a way to grow that industry.

The managerial attributes and culture for handling jumbo loans in the hands of a few clients is different from and not akin to the demands of effective microfinancing. As manufacturers of consumables cannot assume higher market knowledge than their key distributors, so should the distributors not claim better knowledge of the retail market than the retailers.

However, we must acknowledge that covering operating costs from making small loans, especially to clients located far and wide, especially in geographically large areas, such as those in the agricultural sector, is not an easy task. Highly spatially distributed clientele imposes additional cost on operators. This is why the knowledge of efficiency and productivity has become even more compelling.

There are other reasons. First, regulatory concerns have increased, as deposit-taking microfinance institutions face harder challenges, and higher risks of failure, due mainly to the general southward direction of the economy.

Secondly boards and management of these institutions are also becoming more enlightened and therefore more competent in their roles as leaders who owe their institutions a duty to enforce good corporate governance standards.

Thirdly, investors have always had difficulty understanding what goes on in the opaque recesses of MFBs, and indeed, any operator in the informal sector. These days, investors and donors no longer take things for granted or resign to fate. They ask real hard relevant questions, and insist on answers because there are competing alternative uses and destinations for their money.

More so, weak institutions are not good for the system. The danger of contagion is ever hanging, like the Sword of Damocles, over an industry with sick and dying institutions. They must be revived or removed. Such institutions must be repaired through regulatory support if possible or outrightly removed, because they do not serve anybody’s purpose – not their investors nor the industry. This validates the current recapitalisation action of the regulators.

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While innovation is important, we are not to lose sight of the core principles of the microfinance industry, which is not completely green. There are success stories, and those of failures too, that we can learn from, including the Grameen Bank in Bangladesh, K-REP in Kenya and several failed efforts at canalising finance to the informal sector in Nigeria in particular and elsewhere (Read: People’s Bank of Nigeria and lots more), to mention just a few.

The point needs to be made therefore that operators in the microfinance industry must be efficient and their productivity must be high, if we are to attain respectable levels of outreach, and achieve sustainability. In this regard, efficiency and productivity, anchored on competence of staff and management, is inalienable, and must be clearly understood as the bedrock of survival, not only by operators but also by regulators. It is even more important for regulators to be fully abreast of these concepts, if they are to avoid the perennial challenge of being always a few steps behind operators – like the police playing catch up with criminals and never catching up.

Recent reports from the deposit money banking sector indicates that the level of Non-Performing Loans (NPL) is coming down. Indeed, a three-year low figure was reported. This should be good news for both regulators and operators, notwithstanding the fact that we are still far from best practice thresholds. Improving performance is key to attaining the goals of the any institution. One of the best ways to achieve and sustain a downward trend in such variables as the NPL is to promote efficiency and performance management.

While innovation is important, we are not to lose sight of the core principles of the microfinance industry, which is not completely green. There are success stories, and those of failures too, that we can learn from, including the Grameen Bank in Bangladesh, K-REP in Kenya and several failed efforts at canalising finance to the informal sector in Nigeria in particular and elsewhere

 

By prioritising operational efficiency and performance management, and keeping them very high on the agenda of the enterprise, both in boom and lean times, the enterprise stands to record considerable progress in achieving its objectives, especially with regard to earnings and profit. Productivity and efficiency data provide information for decision-making. By computing and comparing efficiency and productivity ratios we can validly comment on the performance of any entity regarding its performance.

Although efficiency and productivity relate, they are not the same thing, technically. While productivity deals with the volume of business generated (output) at any given time, efficiency refers to the cost per unit of the output in question (input). The concern for cost or efficiency is also borne out of the fact that resources have alternative uses. This is a generations old adage but it has become more relevant now.

There are more competitors for every dollar of investible fund. It is only rational that every effort should be made to apply them to causes in which they yield maximum benefits. There is therefore a tacit reference to opportunity costs in efficiency considerations – what did we give up to achieve our results. In the theory of opportunity costs, entities are encouraged to engage in activities in which they have the lowest comparative cost. Thus, the lower the resources (costs) expended to reach a goal; the lower the opportunity cost and the higher the efficiency rating. This is actually the basis of all trade and exchange – ability to do things at a relatively lower cost.

The cost at which goods and services get to the consumers should be of interest to both business entities and government. Inefficient operation often translates to higher charges, which are invariable passed to consumers. They also hasten the demise of the enterprise. Either way, it is in our enlightened interest to curb inefficiency. This begins with the awakening of our collective consciousness to improve efficiency, understand its causes of inefficiency and plug the gaps. Efficiency improving measures also call for fundamental changes in several areas of the institution. In other words, the search for improved productivity and efficiency should not be pursued in isolation.