The Importance of Management Systems to MFI Operations

Microfinance being a financial business requires some management expertise apart from sound financial knowledge and accounting discipline.  While the development approach is essential for a client-focused business like microfinance, systemic strength is required to scale up the operations to a significant level and enhance outreach.  As the discussion in the above sections indicates, Indian MFIs have a very strong developmental perspective.  While their client focus has rarely been in doubt, their lack of management strength has always impeded their growth.  This problem has been reinforced by the unsuitability, for this purpose, of the legal and regulatory framework.

It is apparent from the discussion in this section that of the 127 MFIs rated by M-CRIL in India (until December 2004), not more than 15 have sound management practices and adequate techno-managerial capabilities.  Considering the size of the microfinance market and the present (relatively limited) outreach of MFIs in India, this position is far from satisfactory.  The lack of professionalism among MFIs has always been a matter of concern for bankers, donors and other (more commercial) investors in the microfinance industry.  As a result, not only do most MFIs face difficulties transforming to the more regulated and professional forms of legal structure represented by NBFCs, they also face difficulty in raising funds for on-lending. While there is a need for a legal framework in India that creates a facilitating environment for the establishment of MFIs, the healthy and steady growth of the sector also requires the establishment of more professional management systems that can enable growth and generate confidence amongst investors. These are the primary requirements in India today for increasing the outreach of microfinance to the large majority of the 60-70 million poor families in the country.