Managing Changes In The Microfinance Institutions Business Essay

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Microfinance has captivated many parties such as government, investor, academic as well as poor community. This field is growing tremendously over the last decade. The main reason is microfinance institutions (MFIs) are not only able to produce some improvements for its beneficiaries but also to stand for the development of sustainable institutions (Labie, 2005). The principal of double bottom line, win-win solution and doing good by doing well, high profit business and any other motives has pushed a burgeoning number of new entrants in microfinance field day to day. On the one side, there have been various successful stories about microfinance institution but on the other side threat of failure seem to appear as the business changes for survival such dynamic and stiff competition.

Several successful experiences such as Bank Rakyat Indonesia (BRI), Grameen Bank and BancoSol demonstrated that they can have sustainable growth in its business and accelerate with the pace of change. In Indonesia, Bank Rakyat Indonesia (BRI) unit system is recognized as one of the largest and most successful microfinance institutions in the world. Factor contributing to the success of BRI lay on the decision to keep adapting its practice with environmental changing (Hartungi, 2007). In Bangladesh, the main factor behind the Grameen Bank's success has been the way it is organized and managed. Grameen's organizational system and associated practices have evolved over the years in response to the specific developmental needs of the target group (Shams, 1992). BancoSol in Bolivia shows outstanding success in terms of breadth, depth, and quality of outreach and in terms of sustainability (Vega et al, 1996). The original success of Bancosol was not just due their product and interest rate, which are very important, but mainly to the way their employee behaved and treated the target market as the increased competition amongst MFI. Those MFIs have been showing very successfully.

However, not all microfinance institutions have succeeded and survived the sustainability. Just take Finansol (Labie, 1998) as an example: a social enterprise group founded in 1988 whose vigor had earned its international recognition but then experienced with problem to support the development of micro entrepreneurs through providing credit, training, and other services. This institution is known for a growth trajectory that offers important lessons for the microfinance industry. The experience of the Finansol suggests that when an institution grows faster than does its capacity to manage change, dis-economies of scale result as the stability of the institution is put at risk.

The successful MFI should be able to manage such changes. But questions are raised what, why and how should they manage change. To answer, this paper explains managing change in a MFI in order to survive and able to keep up its sustainability.

What is change management?

Change management is the coordination of a structured period of transition from situation A to situation B in order to achieve lasting change within an organization. Change management can be of varying scope, from continuous improvement, which involves small ongoing changes to existing processes, to radical and substantial change involving organizational strategy (BNET Business Dictionary, 2009).

According to Prosci, 2002, the definition of change management is the processes, tools and techniques to manage the people side of business change to achieve the required business outcomes. Change management incorporates the organizational tools that can be utilized to help individuals make successful personal transitions resulting in the adoption and realization of change. Prosci's definition has been commonly used among practitioners and users.

Why MFIs should think about change management?

Change is always been a reality for all the organization either big or small. Like in many organizations, change in today's MFI of every size is inevitable. Even it is the biggest MFI in a certain country, doing really well, growing fast and so forth, they still have to change something within organization to cope with the challenges of rapid growth. But in the fact, most people, organizations and society will resist to change consciously or subconsciously. They all actually have the ability to change their behavior (Deutschman, 2007). In the popular guide to change, Who Moved My Cheese, a line in the book stated, "I keep doing the same things over and over again and wonder why things don't get better" (Johnson, 2002). This is a good analogy to describe the sense urgency of change.

There are a number of specific, even obvious factors which will push doing change from the status quo. The most obvious of these relate to changes in the external environment which trigger reaction. (Paton & McCalman, 2000).The impact of the external environment, for example the process of globalization and advancements in technology, confronts the organization to go beyond the many assumptions they have made of business and governing the business in which they operate. It also can be imposed by regulatory bodies or made necessary by the actions of competitors.

Green, 2001 mentioned that change can emerge from a perceived need within the organization as a result of a planned process of strategic review, as a result of a crisis or a change in leadership. Both of environments have relation each other since the internal environment of the organization could also gets impacted by the external environment and creates turbulence within the organization

The activities such as technological change, international economic integration, maturation of market in developed countries and the fall of communist and socialist regimes are considered as the drivers of change (Kotter, 1996). Some organizations have discovered how to make new strategies, acquisition, reengineering, quality programs and restructuring works in order to minimize the change.

According to Rhyne and Otero, 2007, microfinance today is affected by powerful change-producing forces. Those kinds of forces already present to varying degrees across the globe which will continue to evolve and markedly change the way microfinance institution operates in the next decade. There are competition, commercial entry, changes in financing, technology and the enabling environment.

The other form of change is also related to institutional transformation. Changes drive towards financial self-sufficiency, along with fewer donor funds, has led microfinance practitioners to consider commercialization. (Campion & White, 1999)

This paper is proposing another opinion about change drivers has been faced by MFIs and the reasons why they should think about change. All these change drivers should be considered as opportunity by MFIs which are the following:

Markets. The market is the prime opportunity for any organizations, and since demand is continuously changing, MFIs also have to change. MFIs can either set up a specific target market or open up newly diversified target market. However, the market is also a threat. Meaning if on the one hand the competition is capturing a new market and on the other hand MFIs miss out it, then if they are still doing so, it eventually will perish them one day. Competition as the impact of the growing market forces many MFIs to grow or to go.

Sources of funds: Nowadays, MFIs face an array of options in their funding strategies. Should they rely on deposits as their basic source of funding and try to attain a funding structure similar to that of banks? What should be the role of borrowing? Should these institutions issue stock or bonds? To be able to make appropriate decisions on these matters, MFIs should consider the financial and operating costs of each funding source (Maisch, Soria & Westley, 2006). Basically, there are many opportunities for MFIs in terms of getting funds. Apart from savings mobilization and borrowing money the capital markets offer an increasing number of opportunities. If a MFI doesn't use these opportunities, others will do.

New Technologies. New technology can be a significant driver of organizational change. Technology has already begun to transform microfinance. These technologies will require MFIs to redesign their business models and educate both their employees and customers on new ways to deliver and receive services. New technologies will require fundamental changes in the way an institution relates to their clients, which to date have consisted of high cost, high touch contact, and such changes will most likely be met with both internal and external resistance (Rhyne & Otero, 2004)

Changing business practices. Rapidly changing business environment is forcing MFIs to change many of their traditional business practices. Globalization of markets, customer needs and shareholder demands require that MFIs should find new avenues to lower operating costs. These can be both, an opportunity or a threat. Take a simple example the price for oil or coal: it affects almost everything, cost of electricity, cost of production, prices for consumer goods, transport, housing, etc. Anything that affects customers will also affect MFI either in their business operation or the way they serve customers.

Laws and regulations. Laws and regulatory requirements will have a significant effect on a MFI, either making life easier or worse. On the one hand, regulations created by government's body often are needed to encourage the shift toward sustainable and market-based microfinance. But on other hand, it sometimes forces MFIs to change. For example the regulation of minimum capital requirement imposed for MFIs. Such a requirement is necessary in order to prevent the misuse of MFI establishment for purposes. Then MFIs should think the strategy that may be able to increase liquidity to meet capital requirement.

How should MFIs manage change?

Creating a change management plan can be difficult. But by observing and identifying several change drivers can help MFIs in managing change and deal with it most effectively. When the identification of the drivers for change is already known, then MFIs need to consider primarily threats and opportunities. In fact, often a MFI cannot even distinguish between threat and opportunity because any opportunity may become a threat and vice versa. This requires tuning to people's mindsets inside the organization and outside forces of change impacting the organization. See change as opportunity, said Jack Welch, a former GE CEO (Krames, 2002). The key to making a better GE was for Welch and the rest of the company to embrace change, rather than fear it. They saw change as an opportunity, not as a threat. For example, a new technology is an opportunity, but if competitors make use of this opportunity before a MFI does, it becomes a threat. It happens for other drivers as well. Nevertheless any threat holds an opportunity because it pushes us to improve organization. The explanations below are what MFIs should do in term of managing change.

Defining Change Strategy

Start by listing change drivers as mentioned above and relate those to the in the five fields of microfinance which called as Diamond change strategy. The diamond microfinance change area is a simple way to describe the main areas to be changed by a MFI in order to recognize the problem and determine the change projects. These areas are described as the following:

Exhibit 1. The Diamond of Microfinance Change Areas

Products: Products are the key success to embrace existing market or new one, where variety and time-to-market play an increasingly important role. MFIs screen and use market opportunities. Improving product means to conduct a market analysis to ascertain where MFIs should be focusing their efforts. Principally, in any given situation MFIs will have a number of options (Green, 2007):

to focus on current products and services in current markets;

to expand current products and services into new markets;

to develop new products and services for current markets; and

to develop new products and services in new markets.

Profitability: Profitability strategy could be considered as a way for facing changes in term of selecting many types of funding sources. It is obviously that profits are used for the growth and further outreach of MFIs. As explained in some financial literatures that profitability strategies can generally be divided into cost-oriented strategies and income-oriented strategies. Cost-oriented strategies means much more focus on reducing costs or increasing productivity for instance by selecting the cheapest funding sources for financing MFI, which vary from savings, equity, loans and various types of capital market investment. While income-oriented strategies are geared towards proper pricing, for example exploration or inclusion of market segments to create and develop products, as mentioned above.

Processes: Since change is a kind of activity in finding a better way of an existing process or new process of doing something, the improvement of process can be set as MFIs change strategy, either in term of an amendment to existing processes or an introduction of a new process. Changing process of MFIs is highly corresponded to profitability. Consequentially when the pressure to achieve profitability will be intensified, then MFIs are coming to grips with the critical need to find technology-based solutions. MFIs are able to use the process approach to answer the technological change. Meaning that in selecting technology-based solution, the MFI should give attention to aspects of the faster in the term of process and the cheaper in term of cost. Besides, it can help to reduce risks and increase profits. For example, a manual system can be redefined or automated, or an automated system can be upgraded, complemented or replaced entirely with new packages.

People: The most important element of every change effort is to change the way people do business: change their behavior. As there has been a changing business environment, people also must change to adapt it. Unfortunately, this is the most difficult part. But it doesn't mean that there is not solution for the organization to change people behavior. People will not put sustained effort into a new kind of behavior if they have only a rational understanding of why it matters to the organization; it must mean something much deeper to them, something that they know will have an effect on their personal growth. According to the scientist Abraham Maslow, people are generally motivated to change if the outcome of the action will fulfill their own needs. The needs of people can be categorized in a hierarchy of priorities. Focus on win-win solutions. Try to find solutions which will make all stakeholders winners: the owners, the investors, the staff members and of course the clients need to get something out of it. In the context of MFI, this area could be related to management attitude, vision and objective, approach to resistance of people to change, training and developing skills, communication, individual mindset and work performance. The board management of MFI can use their strong leadership as role model and empower their best staff as change agent and create an organizational culture which is conducive for learning, change and good performance.

Public: One of the most commonly change drivers is regulations. With the intent for opening up of the economy then various laws and regulations passed by the government. These ways greatly influence in which the MFI need to operate change swiftly. To grow in line with change in regulations, MFI can put the public approach in such a way in its operation for the purpose of promoting transparency, participating in industry benchmarking and getting regular ratings in order to create trust amongst the general public and amongst investors. This also allows them to access new funding sources such as savings, equity, commercial loans and various types of capital market investment.


Change Drivers

Change Strategy



Improve Product


Sources of funds

Focus on Profitability


New Technologies

Improve Process


Changing business practices

Focus on People for Performance


Laws and regulations

Meet the demand of Public

Exhibit 2. Change Drivers and Change Strategy in the five fields of Microfinance Diamond

Change Process in MFIs

Change process starts by prioritizing change project, implementing, monitoring what happens, and evaluating progress, then if it does not work , trying another change, evaluating it and so on continuously . In practice actually MFIs should set phases of change process as below:

Exhibit 3. Change Process in a MFI

Prioritization: SWOT Analysis and Project Design

The easiest way to find out, which challenges MFIs face today and in the foreseeable future, is to do the SWOT analysis: As people plan for their future, it is useful to conduct a SWOT analysis - Strengths, Weaknesses, Opportunities, and Threats. But each element of the SWOT is not to be treated independently. Instead, each is tied together in an evaluation of self and market place, and as a means for setting direction. The SWOT analysis is often thought of a strategic tool, because it helps people and organizations to see themselves and their work environment clearly in order to plan specific ways or strategies to get where they want to be. The SWOT analysis asks for list of possible change ideas and has a look at priorities. Which of the many change ideas on list are easy to do? .The first priority would have a big impact on MFI - big impact in the sense of reaching MFI's vision or mission. Any ideas in this category should have the highest priority for implementation. The second highest priority is those ideas that may be difficult to do but would have a big impact. These are more long term projects, for example the change of MFI's organizational culture from a bureaucratic towards a customer oriented attitude. The third priority is those ideas which may be easy to do but would have low impact. The fourth category is those project ideas which should not start at all, they are difficult to do and have low impact.

Change Project : PRODUCT






Easy to do/High Impact

Difficult to do/High Impact

Easy to do/Low Impact

Difficult to do/ Low Impact

Exhibit 4. An example of prioritization of change project

In prioritizing process, a MFI needs the final design of change projects. A change project needs a goal, objectives for each segment of the diamond, measurable milestones, activities and a responsible team with a change champion. For example: an overall goal could be "Transform our MFI into a licensed bank until end of next year". Objectives would be for example: "Our products and services are in line with banking regulations", "We get additional 1 million USD in equity capital", etc. Milestones could be for example: "Report on necessary adjustments to our credit policy is ready until 31 March this year". To achieve this a MFI would need various activities such as "Hire legal advisor to analyze our credit policy", "Discuss credit policy with branch managers and loan officers", etc For the change project a MFI would have to assign a so called Champion, maybe the CEO. He or she would then assign responsibilities for each major activity. Many organizations use small project teams to implement change projects. Once a pilot project has been successful the change can be introduced into the entire organization.









Champion &Team

Exhibit 5 . A table for project design of microfinance diamond


In the book Organizational Behavior, John et al, 2002 mentioned that psychologist Kurt Lewin recommends that any change effort be viewed as a process with three distinct phases-unfreezing, changing, and refreezing, all of which must be well handled for a change to be successful. He also suggests that we may become easily preoccupied with the changing phase and neglect the importance of the unfreezing and refreezing stages.

Unfreezing. In Lewin's model, unfreezing is the managerial responsibility of preparing a situation for change. It involves disconfirming existing attitudes and behaviors to create a felt need for something new. Unfreezing is facilitated by environmental pressures, declining performance, recognition of a problem, or awareness that someone else has found a better way, among other things. Many changes are never tried or they fail simply because situations are not properly unfrozen to begin with.

Changing. The changing stage involves taking action to modify a situation by changing things, such as the people, tasks, structure, or technology of the organization. Lewin believes that many change agents are prone to an activity trap. They bypass the unfreezing stage and start changing things prematurely or too quickly. Although their intentions may be correct, the situation has not been properly prepared for change. This often leads to failure. Changing something is difficult enough in any situation, let alone having to do so without the proper foundations.

Refreezing The final stage in the planned change process is refreezing. Designed to maintain the momentum of a change and eventually institutionalize it as part of the normal routine, refreezing secures the full benefits of long-lasting change. Refreezing involves positively reinforcing desired outcomes and providing extra support when difficulties are encountered. It involves evaluating progress and results, and assessing the costs and benefits of the change. And it allows for modifications to be made in the change to increase its success over time. When all of this is not done and refreezing is neglected, changes are often abandoned after a short time or incompletely implemented.

The success of a change project implementation depends very much on how management of MFIs communicates it. People want to know where the journey is supposed to go. They want the big picture. Talk about the organizational vision frequently. Keep the message simple. If a change project is very complex and abstract nobody will understand it and it will be impossible to manage it. For example, if the management of MFI says "We want to become more responsive to the needs of our clients". Everyone will say "Yes, of course", but nothing will change. Customer orientation is a very complex issue and the best way to communicate it is to give real life examples and to measure results. For example: the management can measure the percentage of repeat clients and can award the staff member of the month for best customer service.

It is also important that leaders of MFI give evidence of what has been achieved. Since people value what can be measured the evidence should be measurable, for example "We have increased our market share by 5% since we started the new customer service project".

Communication is a tricky thing: people can easily misunderstand or forget management's message. Therefore it is wise to communicate repeatedly and to use different channels, such as the company newsletter, emails, personal letters, speeches, videos, etc. It is also important to keep people informed about the progress of the change project. Invite people in the organization to give feedback and listen to people. Feedback should be used to adjust the change project or the communication about it. Maybe people need more convincing.

Finally, don't declare victory too soon. If the management of MFI are not 100% sure that the change has been integrated into the organization, then they should not declare the project completed. Otherwise, if something goes wrong at the very end of the process, they will lose credibility. Walk the Talk is a well known management principle. It basically means to lead by example.

Monitoring and Evaluation

Monitoring and evaluation plays important role in ensuring whether the MFI has the desired impact of change process. Monitoring and evaluation helps us to keep track of whether they are on track, and provides information to help us steer the intervention towards a desired direction. In a change project it is therefore best to have regularly evaluation which can be measured

Although the term "monitoring and evaluation" tends to get run together as if it is only one thing, monitoring and evaluation are, in fact, two distinct sets of organizational activities, related but not identical. Monitoring is the systematic collection and analysis of information as a project progresses. It is aimed at improving the efficiency and effectiveness of a project or organization. It is based on targets set and activities planned during the planning phases of work. It helps to keep the work on track, and can let management of MFI know when things are going wrong. If done properly, it is an invaluable tool for good MFI's management, and it provides a useful base for evaluation. It enables management of MFI to determine whether the resources they have available are sufficient and are being well used, whether the capacity they have is sufficient and appropriate, and whether they are doing what you planned to do.

Evaluation is the comparison of actual project impacts against the agreed plans. It looks at what the management of MFI set out to do, at what they have accomplished, and how they accomplished it. It can be formative (taking place during the life of a project or organization, with the intention of improving the strategy or way of functioning of the project or organization). It can also be summative (drawing learning from a completed project or an organization that is no longer functioning).


Managing change is an important task of the MFI in the competitive landscape and in uncertain time. Therefore change management should be essential skills for the manager of MFI in order to stay survive, sustainable and competitive on the long term. It is necessary for MFIs to create a planned change which focusing on what they could achieve and ensure that everyone in the organization understand why they should do so.

The success factors for managing change in a MFI is that the MFI's management must have a organization's vision and can identify the change drivers, then design the change projects such as change project of microfinance diamond areas, as well as the desired result which are shared by many people and they must have a clear communication style to the strategic advantage of MFIs.