Zaki Raheem Mindanao Regional Roundtable 26 August 2004

1. PERFORMANCE-BASED INCENTIVE SYSTEMS FORMICROFINANCE OPERATIONS OF RURAL BANKS:An Evaluation Study of Staff Incentive Systems in MABS Participating Banks Zaki Raheem Mindanao Regional Roundtable 26 August 2004

2. 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

3. 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.

4. 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

5. Questions for Designing an Incentive System • What is the management’s 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?

6. Questions for Designing an Incentive System, cont’d. • 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?

7. 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.

8. 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 branch’s 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 Incentive systems, 8 surveyed banks

9. 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

10. 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

11. A. Prerequisites for successful implementation … Computerized MIS • Microfinance depends on frequent loan disbursals and repayments • An incentive system’s minimum targets per AO and branch must be consistently monitored • Computerized MIS is also important as an internal control tool

12. A. Prerequisites for successful implementation … A competitive salary • AOs should feel properly compensated • As bank’s 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 bank’s region*/ • Base salary averaged PhP7,000 - 8,000/mo. */ This often included a food allowance of one sack of rice or more.

13. 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

14. 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

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

16. C. Important issues … Fraud and improper client analysis • Miscalculations of a client’s 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

17. 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

18. 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.

19. D. Other factors… • Medical and life insurance • Access to training • Awards and recognition • Extra financial bonuses during the year • MABS Eagle Awards

20. SALAMAT PO!