Academic journal article
By Khan, Ashfaq
Australasian Accounting Business & Finance Journal , Vol. 5, No. 4
A great body of literature suggests that the poor were better off before the microfinance sector's paradigm shift of the mid-1990s. The sector's 'dependent' constituents' focus changed in an effort to cope with the changes dictated by its 'controlling' constituents. This paper's key finding is that the not-for-profit sector, where beneficiaries' interests are at stake, and the corporate sector, where owners and management are separate, should undergo an externally dictated change only after passing through a regulating agency's scrupulous check, lest the change harm the sector's beneficiaries. The paper attempts to create awareness among policy-makers of the need to be thoughtful of the ultimate beneficiaries in similar cases of externally dictated organisational change.
Key words: Not-for-profit sector, organisational change, controlling and dependent organisations, regulations
The primary purpose of microfinance is to provide loans of small amounts to poor people at an affordable interest rate, to help them start a small business and get out of poverty. However, after the paradigm shift of the 1990s in the finance sector, microfinance organisations have to strive not only to accomplish their primary objective, but also to keep their other stakeholders happy and content. DiMaggio and Powell (1983) and Meyer and Rowan (1977) argue that an organisation can ensure its success and long-term survival if all its policies and procedures conform to the local social values, and the benefits to the local community of its overall operations meet the community's expectations. This ensures that the organisation is sustainable and legitimate in the eyes of the general public, and thus eligible for the community's scarce resources. The following section will examine the welfarist approach to microfinance, which was the predominant approach until the mid 1990s. The paper will then discuss the shift in paradigm from the welfarist approach to the institutionist approach, and how this shift could ultimately jeopardise the microfinance sector's success in achieving its core objectives.
The commercialisation of the microfinance sector is a relatively new phenomenon, and carries a negative connotation for some academics of exploiting the poor. However, many professionals in the field advocate the concept, and refer to it as "the application of market-based principles to microfinance" or "the expansion of profit-driven microfinance operations" (Charitonenko & Afwan 2003, p. 2). These professionals argue that the limited outreach of microfinance services around the world makes it necessary to introduce the sector to commercialisation principles so that MFOs can meet the ever-expanding demand for microfinance services on a sustainable basis (Charitonenko & Afwan 2003).
Charitonenko and Afwan (2003) described the completion of microfinance commercialisation as a four-step process. First, the MFO changes its approach to its overall administration and operation from not-for profit to for-profit. At this stage, the institution diversifies its product-line, introducing new financial products according to the needs of its target clients. Second, the institution strives for operational and financial self-sufficiency. This involves keeping all costs at the lowest possible level, but without any negative impact on the level of its outreach. Third, instead of looking around for subsidised financial resources, the institution tries to generate market-based funds to meet its capital requirements. This may include seeking loans from other mainstream commercial institutions, mobilising voluntary savings and resorting to other non-subsidised sources. Fourth, the institution changes its overall approach and adopts commercialism in all its policies and operations. In other words, it tries to work alongside other mainstream commercial institutions and attract equity investment from commercial sources. …