Is Client Retention Always a Good Thing?

> Posted by Beth Rhyne
Client retention rates are a convenient quantitative indicator for microfinance institutions to track social performance.  For years, practitioners assumed that high client retention indicates a healthy microcredit program. Certainly, from a business perspective, this is true.  High client retention means lower administrative costs, as renewals are processed quickly and loan officers spend less time recruiting new clients. Client retention is also a positive social indicator if it signals that clients are happy with the services and get good value from borrowing.  That’s why client retention is one of the quantitative indicators in the Social Performance Task Force’s draft “Universal Standards.”
But a recent review of microfinance impact literature  calls this into question (Stewart R, van Rooyen C, Dickson K, Majoro M, de Wet T, “What is the impact of microfinance on poor people? A systematic review of evidence from sub-Saharan Africa,” EPPI-Centre, Social Science Research Unit, University of London, 2010). After combing through the available impact studies, the authors conclude, “The evidence from SSA [Sub-Saharan Africa] reveals a worrying trend: that the benefits of micro-credit appear to diminish – and even become negative – the longer clients are enrolled in a programme.” They contend that remaining in a microcredit program is only beneficial for clients who can use credit to increase their income (i.e., through business growth).  If, however, credit is used for consumption, over time clients are likely to work their way into chronic debt dependence in which a greater share of income goes into repayment.
The authors see this playing out in school enrollment: “One study finds that that on-going borrowing reduces children’s enrolment in school, with the proportion of the household’s girls aged 6 to 16 in school decreasing more for continuing clients than for departing clients and non-clients.”
This leads them to recommend to practitioners: “Be cautious about offering clients continuing loans, as the longer people are engaged in microfinance schemes, the greater the potential for harm.”
While there may be issue with the evidence or methodology that led the authors to these findings (but this blog is not the place for that) the findings are, at the very least, food for thought.
Most obviously, the findings raise a yellow flag on the use of retention rates to signal that all is well for credit clients.  This is very problematic for social performance measurement, and raises an incentive problem, because high client retention will clearly still be a good business indicator even if it is not reliable at signaling client benefit.
Going deeper, the finding suggests that credit renewal methodologies should look more precisely at what is happening to individual clients.  For example, renewal could be made contingent on evidence that a client’s business or income is growing or on trends in the client’s debt service ratio (although this would create a perverse to inflate incomes on loan applications). Or mandatory “resting” periods might be implemented (although most lenders would see that as directly counter to their own self-interest).
And stepping back, the finding challenges the contention often made that the full impact of microfinance on poverty alleviation occurs only over time, not in the first few months.  This contention has been used by microfinance advocates to discredit impact studies that tend to look at results over a relatively short time frame.
As I contemplate these findings, I admit to being confused about the best way forward. More client surveys? More academic research? Less exuberant lending? Lately, it seems, the microfinance community is engaged in re-evaluating most of its fundamental tenets.  Let’s add this one to the list of items to think through once again.
Image credit: Tango Desktop Project
Have you read?
Voices of Financial Inclusion: ‘It’s the Clients, Stupid’
Introducing the Smart Assessment: an In-Depth Client Protection Diagnostic Tool
The Business Case for Transparent Pricing