Microfinance institutions vary widely when it comes to the success rates of individual branches. Some branches in an organization perform extremely well while others do quite poorly, even when they all serve the same kinds of clients and use the same contracts. What accounts for the difference?

To find out, Rodrigo Canales conducted a research project that covered three well-established microfinance institutions (MFIs) in Mexico. And he learned that individual loan officers are pivotal in determining the variance in performance from one branch to the next. Canales, an associate professor of organizational science at the Yale School of Management, identified a crucial tension that is at work within any MFI: The need to centralize and standardize procedures conflicts with borrowers’ demand for customized service. “The economics of microfinance make it very expensive to give out loans, so you have a huge incentive to standardize things as much as possible,” Canales says. “But at the same time, standardization really goes directly against having a social impact.”

To study how that tension plays out in practice, Canales divided loan officers into two categories: “letter of the law” (LL) officers, who tended to adhere strictly to the rules of their organization, and “spirit of the law” (SL) officers, who interpreted policies flexibly and saw rules not as binding constraints but as tools to help customers in the best way possible. Canales found that, on average, the rule-breakers performed better than the rulesticklers. In other words, SL officers did a better job than LL officers, as measured by their respective client-retention, loan-repayment, and loan-increase rates.

The problem with the rulebreakers, though, is that sometimes they would break one rule too many. “They were so immersed in the client reality, and so invested in the client relationship, that they had an extremely hard time knowing when an exception [went too far]. So they started taking bad risks,” says Canales. But the rule-enforcers, because they were too rigid, didn’t have as big an impact on clients as they might have had.

(Illustration by Ben Wiseman) 

What worked best, Canales discovered, was to have LL and SL types work together. Branches with a mix of LL and SL officers performed better on average than branches that employed only (or mostly) one type or the other. Canales surmises that when officers of one type had to discuss credit decisions with officers of the other type, they had no choice but to step back and see the big picture. “That allowed them as individuals to be better aligned with the true reality of the organization,” he says. And making better loan decisions pays off. “Collecting on a delinquent loan is what takes the most work [for officers],” Canales explains.

Yuri Soares, chief of the Development Effectiveness Unit for the Multilateral Investment Fund at the Inter-American Development Bank, says that Canales’s work is notable because it draws attention to the importance of personal relationships in the microfinance industry. “I think we have a tendency in our business to look for easy solutions to development,” Soares admits. “[So far] we’ve not done a lot of work on how MFIs deploy human resources and make credit decisions in the field, but that’s something that we’re certainly going to look at.”

Rodrigo Canales, “Weaving Straw Into Gold: Managing Organizational Tensions Between Standardization and Flexibility in Microfinance,” Organization Science, 25, January-February 2014.

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