4. Balancing Trust and Control Mechanisms in Building Effective Client Relationships: A Case-Study of an Indian Microfinance Institution

Friday, 3 July 2015: 2:15 PM-3:45 PM
CLM.2.05 (Clement House)
Viresh Amin, Birkbeck, University of London Centre for Corporate Governance and Ethics, London, United Kingdom
Microfinance Institutions (MFIs) have two missions competing for management attention. One is the social development mission of poverty alleviation of its clients (the social goal) and the other is the increasing pressure to achieve financial self-sustainability (FSS). Previous research suggests that prioritizing the FSS objective over the social objective has generated accusations of mission drift. Many MFIs lend only to female clients and conduct their operations in contexts of women’s socio-economic disempowerment. The economic vulnerability of women stems from social conventions where gender inequality could exclude women from participating in market economic activities, and could manifest itself in aggressive, unethical, and abusive behaviours toward women. In the case of MFIs, such behaviours could be perpetrated by loan agents responsible for the recovery of loans. Additionally, charging exorbitant interest rates and creating high indebtedness perpetuate social and financial inequality. Thus, an MFI’s drive for profitability could subvert the goals of empowerment of women and social development causing mission drift. In the context of widely reported allegations against a number of microfinance institutions of client mistreatment such as charging excessive interest rates and using coercive repayment tactics, a field-study exploration of microfinance operations reveals that an effective balance between trust and control mechanisms in operations processes enables an MFI to build strong client relationships and thus mitigate mission drift while (a) upholding its clients’ interests and (b) protecting its own FSS interests. Using an embedded case-study methodology comprising field-observations and focus group discussions, this study demonstrates several findings. Firstly, integrity-based trust behaviours that demonstrate transparency, monitor information exchange processes, and reduce information asymmetries between the MFI and its clients are critical. In addition, benevolence-based actions comprising calculative and relational trust that empower clients are also crucial for mitigating mission drift. Competence-based actions that demonstrate microfinance expertise and social networking skills also play a vital role. Finally, control-based mechanisms that support lending processes and also help prevent potential loan defaults are indispensable for mitigating potential negative impacts on client relationships. The findings also suggest that the relationship among trust-control mechanisms is not mutually exclusive, and thus the study identifies conditions, contingencies, and client vulnerabilities under which trust and control-based mechanisms are most effective. The study goes beyond the findings to propose a conceptual model that links MFI operations processes with trust-control mechanisms, client vulnerabilities, and client-relationships. It also proposes a typology of client relationships which stems from the interaction between the dependency of clients on the MFI and the incorporation of trust-control mechanisms into the MFI’s operations processes.