By: Mike Wiesner Issue: Resource Management Section: Community
Microcredit Takes a Lesson from American Business
Is the economy continued to get worse and the effects of the current political crisis in Honduras took hold, our little NGO, the Adelante Foundation of Honduras, was in a fight for its life. In 2008, we lost $400,000. In 2009, we lost $150,000. In 2010, we made $50,000. In 2011, we are on pace to make $100,000 - $125,000. How does that happen in one of the worst global recessions in recent history coupled with a political crisis?
We had become very fat on other people’s money. In the early part of the decade, as microcredit gained in popularity among private donors and foundations, it felt like we couldn’t write a grant that didn’t get funded. It seemed as though money was “falling from the sky,” and at the rate we were going, we were helping a lot of poor people and spending an enormous amount of money doing it. This money was not concentrated in salaries or profiting any individuals of the organization, but the organization was constantly looking to expand with the notion that we would eventually reach sustainability if we could get to a scale that could support the operations. So Adelante opened two new offices in very poor parts of the country and continued to hire loan officers with an expectation that with more loan officers we could get more and more clients, and ultimately, this would get us to the scale we needed in order to be able to afford to pay them without fundraising. By the end of 2007, the organization had around 4,500 clients, six branch offices, and 65 employees. We were cookin’!
Then BOOM! The crash of 2008 hit like a ton of bricks. In our November board meeting of that year, we had to seriously discuss how we would fund our continued operations and growth with the reality of the fundraising climate in the United States. We were burning through money like nobody’s business, and it didn’t take a certified accountant to tell that we were headed for disaster. As one board member noted from his business experience, “Once you are out of cash, you are out business.” And even though we had the option of liquidating loans to stay afloat, it would have gone against what we were trying to do. So we knew we had to make some organizational changes and fast.
We had to “cut the cloth to fit the suit” because the grant money and private donations started to disappear. The foundations that we solicited told us that they had been hit hard, as many had and that they now had twice the applications with half the assets. And we got similar responses from some of our most dedicated donors. So we could either not count on them to fund our proposals or we could count on a lot less than what they had been able to do in the past.
The first step to fiscal responsibility was to look at our personnel—we had far too many people. We reduced our staff from 65 to 35 in a matter of two months. No department was left undisturbed—every department manager had to feel some pain by reducing their staffs and doing more with less.
Then again in 2009, another boom arrived! Then-President Mel Zelaya was deposed because he blatantly tried to unconstitutionally extend his term and dissolve the rest of the government, just as Hugo Chavez had done in Venezuela. As a result of the Honduran political crisis, the United States terminated a broad range of aid to Honduras totaling more than $31 million. Adelante had lost more than $300,000 in potential funding commitments for the next year as a result. The World Bank and Inter-American Development Bank cancelled all economic aid to Honduras for that year. It was estimated that Honduras’ $14.1 billion economy lost as much as $200 million in foreign investment since President Manuel Zelaya was removed from office on June 28, 2009. Not only that, but Honduras was paralyzed economically for more than three months: schools were closed, the military enforced curfews, demonstrations occurred and the overall mobility around the country was seriously inhibited. This in turn had a terrible effect on our clients and their businesses, which impacted their ability to perform on their loans.
This all had a compounding effect. We, as an organization, faced very difficult decisions and at the rate that we were losing money, we could no longer sustain our operations as they were. We had to maximize organizational efficiency by getting a lot smarter about how we spent the little money that we had. This meant that we needed a new strategy. We had to “cut the cloth to fit the suit”—again. So we started with what would be required to end that year making money. We asked ourselves how much we would have to cut our budget to be able to reach sustainability in the last quarter of 2009. From there we developed several policies about growth and maximizing each employee’s performance. We created new incentives (and expectations) for our loan officers to make better loans to more clients with better customer service. In the back office we worked to mechanize processes that we had been doing manually for years, thus eliminating superfluous positions that were mainly people pushing paper.
Our response also had a compounding effect. We were better, faster, and stronger than we had ever been. Now, everyone values their job. We are more efficient at every level and are continuously looking to improve. Today we hire superior people and train them better. We are also able to give them more responsibility which results in a better product and better customer service.
So here we are in the last quarter of 2011, and we are one of the only microfinance organizations serving the rural areas in Honduras and one of but a few in Central America that is doing so with an average loan size under $150 without any form of guarantees. We have a 97 percent repayment rate and a 95 percent retention rate.
The future looks very bright; we have survived and are stronger for it. We have become true leaders in the microcredit industry in Central America. We have proven that our methodology works and that it is possible to focus on the poorest of the poor by providing them with business development and sustainable business services.
In the end, we learned that money being raised today is not guaranteed tomorrow. The only way to survive in these tough times is to be as efficient as possible, deliver a good product and take care of one’s customers, because without the success of the organization, there is very little hope for the success of our clients.