MICROFINANCE HANDBOOK: AN INSTITUTIONAL AND … · 2021. 6. 3. · 198 BOOK REVIEW MICROFINANCE HANDBOOK: AN INSTITUTIONAL AND FINANCIAL PERSPECTIVE BY JOANNA LEDGERWOOD.THE WORLD

198

BOOK REVIEW

MICROFINANCE HANDBOOK: AN INSTITUTIONAL AND FINANCIAL PERSPECTIVE BY JOANNA LEDGERWOOD.THE WORLD BANK,

WASHINGTON D.C, 2000. ISBN: 9987-21-035-X. 286PP.

Richard Ibrahim Msuya and Angelina Lucas Nkilijiwa Department of Co-operative Development and Management,

Moshi Co-operative University - Tanzania Email: [email protected] [email protected]

ABSTRACT Microfinance is all about the provision of financial services to low-income people who are excluded by mainstream financial services including commercial banks. However, running successful microfinance institutions needs enough knowledge and skills. This book review found that the Microfinance handbook was written to guide microfinance practitioners, donors, academicians, consultants, and students who are interested in microfinance design, implementation, evaluation, and running successful microfinance institutions. Nevertheless, the book has limited discussions on member-based MFIs, outreach aspects of microfinance, and microfinance service quality. Despite highlighted limitations, the book remains to be one of the important and useful resource in the microfinance discipline. The book review was very important because not only it shades the light for the readers to decide whether or not to read the book but also it might help the author to improve the book in upcoming editions. It is recommended to the general public who are interested in microfinance practices and professionalism to continue using the Microfinance handbook since it has essential knowledge which fits the demand of different microfinance stakeholders as far as the microfinance discipline is concerned. Keywords: The Microfinance handbook, Microfinance Institutions (MFIs), member-based

MFIs, outreach aspects of microfinance, microfinance service quality. Paper type: Book Review Type of Review: Peer Review

1. THE BACKGROUND AND SUMMARY OF THE BOOK

Microfinance Handbook was written by Jonna Ledgerwood and printed for the first time in December

1998. The second edition was printed in July 1999 while the third edition was printed in July 2000. The

book was written as a product of the World Bank’s Sustainable Banking with the Poor Project (SBP). It

was designed specifically to impact relevant microfinance knowledge to donors, policymakers, and

microfinance practitioners. It covers in-depth matters regarding the regulatory and policy framework and

important aspects of institutional capacity building such as product design, performance measuring, and

monitoring, and management of the microfinance institutions.

The book consists of ten chapters which were organised into three parts. Chapter one addresses how

macroeconomic contextual factors positively or negatively influence the ability of MFIs to provide

East African Journal of Social and Applied Sciences (EAJ-SAS) Vol.3, No.1 Publication Date: May. 20, 2021

ISSN: (Online) 2714-2051, (Print) 0856-9681

The current issue and full text archive of this journal is available at: http//www.mocu.ac.tz

Cite this article as: Msuya, R. I. & Nkilijiwa, A. L. (2021). Microfinance handbook: An institutional and financial perspective by Joanna Ledgerwood. The World Bank, Washington D.C, 2000. ISBN: 9987-21-035-x. 286pp, East African Journal of Social and Applied Sciences, 3(1), 198-202.

mailto:[email protected]

mailto:[email protected]

Msuya, R. I. & Nkilijiwa, A. L. (2021). Microfinance handbook: An institutional and financial perspective by Joanna Ledgerwood.the World

Bank, Washington D.C, 2000. ISBN: 9987-21-035-x. 286pp.

The East African Journal of Social and Applied Sciences [EAJ-SAS] Vol.3, Issue 1, 2021 199

microfinance services to clients. The author pinpoints that the country’s financial sector policies and legal

environment, financial sector regulation and supervision as well as economic and social policy affect how

MFIs supplies financial services to poor people in a certain country (p.11). The conducive macroeconomic

environment set by a country facilitates the smooth operations of MFIs, thus the majority of poor people

would have access to financial services.

Chapter two offers discussions on two main issues: how MFIs can identify a target market and measure

the impact of services provided to that targeted market (demand). This chapter analyses how MFIs

should target underserved or unserved populations by a focus on characteristics of clients such as

poverty level, gender, ethnicity, and geographical environment (p.38). Due to the complexity of

conducting impact analysis, the chapter further emphasises that the impact of MFI’s services on clients’

welfare should be measured by both qualitative and quantitative techniques rather than depending on

one technique alone.

Chapter three gives analytical discussions on various products and services which can be offered by

MFIs. The author stresses that MFIs that follow a minimalist approach usually offer only financial

intermediation services including credit, savings, micro-insurance, micro-leasing, and payment services

among others. On other hand, MFIs that follow an integrated approach provide not only financial

intermediation services but also social services such as business skill training, health care, literacy

training, and so forth to improve clients’ ability to operate microenterprises.

Chapter four offers information on various forms of microfinance enterprises including formal, semi-

formal, and informal institutions. It also narrates institutional issues focusing on legal structures,

governance, growth and transformation and access to new sources of funding. Chapter five emphasizes

designing lending products based on clients’ needs. It also provides details on how to price the lending

products by setting sustainable interest rates and computation of effective interest rates to ensure the

financial sustainability of the microfinance institution. Chapter six highlights the importance of designing

different types of savings products to meet the demand of poor people. Moreover, it provides detailed

information on how to price savings products that can be offered by MFIs. The author further cements

that MFIs must meet legal requirements including licensing and reserve requirements in order to qualify

to mobilise savings from the public (p.157).

Chapter seven stresses the significance of management information systems for the generation of

information that guides MFI’s management in its daily decisions and actions. Three areas of management

information system emphasised by the author for MFIs include accounting system, credit and savings

monitoring system and a system designed to gather data on client impact. The chapter further highlights

the necessary eight steps to be undertaken by MFIs in order to install an effective management

information system. These steps involve institutional assessment, configuration, software modifications,

testing, data transfer, training, parallel operations and ongoing support and maintenance. Chapter eight

presents reasons and ways for adjusting financial statements in order to analyse the financial

performance of MFIs. Throughout this chapter, the author underlined the significance and techniques for

adjusting accounting for loan loss and loan loss provisions, depreciation of fixed assets, accrued interest,

and accrued expenses, subsidies and inflation. Chapter nine provides the basis for measuring and

improving the financial performance of MFIs using standard ratios. Areas insisted include portfolio

quality, productivity and efficiency, financial viability, leverage and capital adequacy and scale, outreach

and growth.




The last chapter offers the information dealing with effective management of the financial and

operational aspects by focusing on cost control and revenue increase. Also, the chapter detailed three

areas of performance management which include delinquency, staff productivity and incentives..

Moreover, the chapter provides information on how to manage risks on investment (assets) and liability.

2. CRITICAL EVALUATION OF THE BOOK

The book was written to fits the need of stakeholders who are interested in microfinance design,

implementation, management and evaluation. Different stakeholders have different interests in

microfinance. For instance, microfinance practitioners are interested in how effectively and sustainably

they can run MFIs in order to meet the needs of their clients. Donors focus to evaluate whether the fund

injected into MFIs have resulted in poverty reduction among low-income earners. Governments are kin

to design macro policies which facilitate the smooth establishment and operation of MFIs. Researchers

and academicians are interested to study and propose different microfinance models which fit the

different need of people in the different geographical environment all over the world. The author brought

together a combination of different knowledge from different field of expertise including economics,

marketing, financial management, Information and Communication Technologies (ICTs) and project

management in the one-stop guide book in order to offer wide knowledge which fits the need of all

microfinance stakeholders. In the setting of MFIs, the book offers a clear understanding of how macro-

level policy and regulations affect not only the establishment of MFIs but also the abilities of these

institutions in offering microfinance services. It has been emphasised that the country’s financial

favourable financial policies, laws and regulations and economic stability are some of the important key

factors which influence the development of microfinance markets (p.11). This idea is supported by the

study conducted by Vanroose (2008)which sought to identify factors influencing MFIs reaching more

clients in some countries than in others. The study found that MFIs flourish in countries with political

and economic stability. Moreover, countries that receive more international aid have developed a bigger

microfinance market than their counterparts. This clearly tells that macro-policies effect positively or

negatively the development of microfinance in a certain countries.

Moreover, the book helps to see the importance of designing microfinance products and services based

on clients’ needs. This implies that when MFIs design and supply products and services must do so by

responding to the demand in the market. The book emphasises that poor people need various types of

products and services including savings, insurance, micro-leasing, credits among others. The author

argued that in the old paradigm poor people need micro-credits which were pumped to smallholder

farmers in developing countries in the 1970s in form of subsidised loans. However, in the mid-1980s the

subsidised micro-credit was subjected to criticism due to accumulated loan delinquency, thus developing

market-based microfinance products and services was found to be an appropriate solution (p.2). In line

with this argument, the book cementing that MFIs should not rely on subsidised funds from either

donors or governments rather they should build their own financial ability by charging sustainable

interest rates and mobilising savings from their clients (p.149).

Likewise, the book gives a clear understanding on how to evaluate the performance of MFIs through

assessing clients’ impact and financial sustainability. The evaluation of MFIs comes as a mandate in order

to find out whether the intervention of microfinance services is ultimately aimed at poverty reduction

among clients and whether MFIs are financially sustainable (Zeller and Meyer, 2002). However, the book

cautioned that the assessment of the client’s impact should be done carefully due to its complexity. The

book clearly indicates that since impact assessment is facing a number of limitations like selection biases,

thus multiple methods should be used with a combination of qualitative and quantitative approaches

while maintaining a large sample size of not less than 500 respondents which allow effective use of




control variable (p.53). On other hand, the book gives a guide to the reader on how to control loan

delinquency which is the biggest challenge for most MFIs toward achieving financial sustainability. Some

of the methods posed by the book in controlling loan delinquency include carefully screening of the

client’s application of a loan, use of timely management information system by MFIs and effective follow-

up procedures among others (p.245). This information is very essential for MFIs’ practitioners who need

to ensure that their institutions have less loan delinquency as possible. Furthermore, the book provides a

clear guide on how to analyse the financial conditions of an MFI through a group of ratios. The first

group of ratios analyses the ability of MFI to meet the needs of clientele without reliance on external

assistance (financial sustainability). The second group of ratios focuses on analysing financial efficiency

which concerning with serving as many people as possible with their resources. The last group of ratios

concentrates on helping MFIs to monitor their portfolio quality so as to ensure long-term operations.

Thus, the book helps the reader to understand clearly how to establish and design appropriate products

and services based on market needs. It also coherently narrates the procedures to measure the

performance of MFIs financially as well as in terms of the client’s impact on poverty reduction.

Despite the above mentioned remarkable discussion put forward by the book, however, the author has

oriented the discussion on issues relating to non-member-based MFIs while issues concerning member-

based MFIs were limited or not discussed at all. Some scholars (Msuya, 2019; Smith et al., 1981)argued

that member-based MFIs including Savings and Credit Co-operative Societies (SACCOS) have unique

characteristics which distinguish them from other organisations. In SACCOS and other co-operatives in

general, members are owners of the organisations and at the same time they are consumers of its outputs

or suppliers of its inputs. Secondly, in SACCOS membership forms the demand for and supply of

loanable funds. The role of SACCOS is to intermediate between its member-savers and member-

borrowers. On other hand, in non-member-based MFIs, suppliers of the loanable funds are different

people from clients. The author ought to have brought in the discussion on distinctions between the two

types of MFIs in terms of product or service designing and development, institutional governance and

internal control mechanisms among others.

Further, the book has limited discussion on the evaluation of MFIs' performance in terms of outreach

services. According to Zeller and Meyer (2002) evaluation of MFIs performance should base on three

items: outreach, impact and sustainability. The book covered a good discussion on sustainability and

impact assessment on clients’ poverty reduction while outreach assessment was little narrated. Schreiner

(2002) pointed that microfinance outreach has six aspects: worth, cost, depth, breadth, length and scope.

In addition, Gulli (1998)argued that service quality should be added as one of the aspects of microfinance

outreach because it deals with how customers perceive services offered by MFIs against their

expectations. Service quality plays important role in any successful business competitive environment

because an organisation with quality services is likely to satisfy its customers and eventually increases

customer retention, maximise sales, generate more profits and achieve better market share relative to its

competitors (Kotler and Keller, 2016; Wolter et al., 2019).On similar note, Msuya (2019) and Auka and

Mwangi (2013) revealed that service quality is a big challenge among MFIs and is among the reasons

contributing to the failure of most MFIs. The book could have brought more value to the readers if

microfinance outreach aspects and service quality could have been discussed adequately.

3. CONCLUSION AND RECOMMENDATIONS

It is concluded that the Microfinance handbook is among of the useful and important resource in the

microfinance discipline so far because it is detailed with essential information on regulatory and policy

framework and important aspects of institutional capacity building such as product design, performance

measuring, monitoring and management of the microfinance institutions. The book can be used by




microfinance practitioners, donors, policymakers, academicians, consultants, and students who are

pursuing courses relating to the microfinance management at the Colleges and Universities. However,

updating the book by adding more discussions relating to member-based MFIs, outreach aspects of

microfinance and service quality will make it more useful and valuable to the readers.

REFERENCES

Auka, D. O., and Mwangi, J. K. (2013). Factors Influencing Sacco Members to Seek Services of Other

Financial Service Providers in Kenya. International Review of Management and Business Research, 2(2),

610 – 626.

Gulli, H. (1998). Microfinance and Poverty: Questioning Conventional Wisdom (1st ed.). Washington, D.C.

20577 U.S.A.: Inter-American Development Bank.130pp

Kotler, P., and Keller, K. L. (2016). Marketing Management (15th ed.). Edinburgh Gate: Pearson Education

Limited. 833pp

Msuya, R. I. (2019). Social Performance of Savings and Credit Co-operative Societies in Mwanza and Tabora Rural

Areas, Tanzania. A Thesis Submitted in Partial Fulfilment of Requirements for Degree of Doctor of

Philosophyat Moshi Co-operative University, Moshi, Tanzania. 235pp.

Schreiner, M. (2002). Aspects of outreach: A framework for discussion of the social benefits of

microfinance. Journal of International Development, 14(5), 591–603.

Smith, D. J., Cargill, T. F., and Meyer, R. A. (1981). Credit Unions : An Economic Theory of a Credit

Union, XXXVI(2), 519–528.

Vanroose, A. (2008). What macro factors make microfinance institutions reach out? Savings and

Development, 32(3), 153–174.

Wolter, J. S., Bock, D., Mackey, J., Xu, P., and Smith, J. S. (2019). Employee satisfaction trajectories and

their effect on customer satisfaction and repatronage intentions. Journal of the Academy of Marketing

Science, 1(1), 1–22.

Zeller, M., and Meyer, R. L. (2002). The Triangle of Microfinance: Financial Sustainability, Outreach and

Impact. Washington, D.C. 20006 U.S.A. 2pp

Documents

MICROFINANCE HANDBOOK: AN INSTITUTIONAL AND … · 2021. 6. 3. · 198 BOOK REVIEW MICROFINANCE HANDBOOK: AN INSTITUTIONAL AND FINANCIAL PERSPECTIVE BY JOANNA LEDGERWOOD.THE WORLD