PERFORMANCE-BASED INCENTIVE SYSTEMS FOR MICROFINANCE OPERATIONS OF RURAL BANKS: An Evaluation Study of Staff Incentive Systems in MABS Participating Banks

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PERFORMANCE-BASED INCENTIVE SYSTEMS
FORMICROFINANCE OPERATIONS OF RURAL BANKSAn
Evaluation Study of Staff Incentive Systems in
MABS Participating Banks

• Zaki Raheem
• Mindanao Regional Roundtable
• 26 August 2004

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Outline

• Objectives of the Study
• Research Methodology and Scope
• Questions for Designing an Incentive System
• MABS-designed Incentive Scheme
• Incentive Systems of 8 Surveyed Banks
• Survey Results

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Objectives of Study

• A) Describe the various complexities of designing
  rural bank microfinance staff incentive systems
• B) Analyze the rationales and effectiveness of
  the MABS recommended incentive system
• C) Compare and contrast the staff incentive
  systems of 8 MABS participating banks in regards
  to incentive system prerequisites, best
  practices, potential pitfalls, and other
  non-financial incentives
• D) Outline a best practices staff incentive
  system framework.

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Research Methodology and Scope

• 6-week research from mid-April to end of May 2004
• Survey design 2 surveys
• 8 MABS participating banks
• - 6 from Mindanao and 2 from Luzon
• Bank manager and supervisor survey
• Account officer Survey
• Face-to-face interviews
• 43 respondents
• 20 managers
• 8 supervisors and 15 account officers

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• Questions for Designing an Incentive System
• What is the managements major objective for
  designing an incentive system?
• Does the bank desire an MFU-only incentive system
  or a bank-wide policy? What is the rationale for
  their choice?
• What would provide effective incentives for other
  banking staff (i.e. staff not directly engaged in
  lending operations)?
• Is branch unity a desired outcome of the
  incentive system?

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• Questions for Designing an Incentive System,
  contd.
• Will the incentive system be solely characterized
  by individual performance or will the management
  demand minimum MFU quotas to be reached?
• How do other financial and non-financial bonuses
  play a role in the microfinance incentive
  structure?
• How can staff incentive system be designed so
  that the risk of severely negative effects
  (perverse incentives such as fraud) is
  minimized?

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MABS-designed Incentive Scheme/

• Uses 3 performance indicators
• Portfolio at risk (PAR 30)
• No. of active borrowers
• No. of loans disbursed for the period
• Uses break-even yield analysis to determine the
  minimum portfolio size and number of borrowers an
  AO should meet before being entitled to
  incentives

/Introduced to Mindanao Banks in 2000/01.
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Incentive systems, 8 surveyed banks

• MABS recommended approach
• 3 Banks had individual AO performance tied to a
  monthly minimum PAR for the MFU
• 1 bank had individual performance tied to a
  monthly minimum PAR for the Area (two nearby
  branches)
• 2 banks had individual performance not tied to
  any branch requirements

• Profit-sharing bank wide approach
• 1 bank had a monthly incentive system where equal
  distribution went to all staff based on
  branchs targets being met and on the comparable
  net income that each branch earned
• 1 bank had end of the year bonus where an equal
  distribution is given to all staff as long as
  yearly targets are met by each unit of branch

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Survey Results

• A. Prerequisites Outlines necessary preliminary
  policies
• B. Success Documents best practices
• C. Issues Discusses potential pitfalls
• D. Other Factors Evaluates other financial and
  non-financial bonuses

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A. Prerequisites for successful implementation
of an incentive system

• Investment in training -The most important
  prerequisite.
• A well-trained AO has
• a better understanding of CI/BI and cash-flow
• a better understanding of zero-tolerance
• the ability to reach more clients resulting in
  higher incentives which in turn results in
  higher profits for the bank

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A. Prerequisites for successful implementation

• Computerized MIS
• Microfinance depends on frequent loan disbursals
  and repayments
• An incentive systems minimum targets per AO and
  branch must be consistently monitored
• Computerized MIS is also important as an internal
  control tool

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A. Prerequisites for successful implementation

• A competitive salary
• AOs should feel properly compensated
• As banks microfinance operations grow, quality
  AOs become a scarce commodity
• In the survey, the best run microfinance programs
  had
• An AO base salary 1.75 - 2 X the minimum wage for
  the banks region/
• Base salary averaged PhP7,000 - 8,000/mo.

/ This often included a food allowance of one
sack of rice or more.
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B. Success factors

• A management that believes in microfinance
• A performance-based incentive system for MFU/bank
  staff
• An incentive system proportionate to the base
  salary
• Importance of teamwork
• Strength in numbers

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B. Success factors

• Promotion as a motivation
• Importance of insurance
• Supervisor empathy
• Incentive indicators that were differentiated
  based on AOs area of coverage
• Staff monitoring system

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C. Important Issues to be
Addressed(Percentages based on multiple
responses)
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C. Important issues

• Fraud and improper client analysis
• Miscalculations of a clients cash flow
• Rushed CI/BI analysis
• Problems when incentive targets are revised to
  over-ambitious levels
• Communication
• Most AOs did not fully understand the incentive
  system
• Minimum and Maximum targets should be clearly
  communicated to all AOs before being finalized by
  management

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C. Important issues

• Tensions between AOs and other bank staff
• Competition among AOs
• Lack of competition among AOs
• Need for proper planning during AO promotions

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D. Other factors

• From a managerial perspective, a
  performance-based monetary incentive system is
  only one of many policies that a bank can use to
  enhance staff performance, motivate AOs, and
  retain staff.

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D. Other factors

• Medical and life insurance
• Access to training
• Awards and recognition
• Extra financial bonuses during the year
• MABS Eagle Awards

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SALAMAT PO!