30 Aug 2010

Beyond microfinance (2) : getting out of the Stone Age


“Nobody will have the ‘monopoly’ on microfinance and the term might eventually disappear”, according to Stefan Platteau (MicroNet) and Hedwig Siewertsen (Tridos Facet) in a very good essay of prospective called ‘Trends in microfinance 2010 – 2015” issued last year.

Trends MicroFinance 2010 - 2015

Trends MicroFinance 2010 – 2015

Act local … think local

The authors outline an increased integration in the mainstream financial markets, resulting in the fact that a new type of actors are expected to enter the market : there will be more and more high street banks that will see in microfinance the opportunity to capture new potential clients for their conventional offer of financial products. Other actors might be also those launching independent initiatives, such as funds set up by managers who are eager to develop social business.
The major change will come from the origination of these actors, as most of them will be located in the South. The financial flow from the North might decrease proportionally.

As a conclusion, microfinance could in a certain extent turn away the development sector (NGOs, DFIs, …). A growing number of MFIs are run as private owned companies. The development sector will nevertheless keep its role of innovator, as it is the sole one that can raise funds to test new services and reach segments of clients still considered not financially profitable : the very poor, mainly in remote areas. The main role of the development sector will be to pull microfinance to new frontiers and to explore new types of financial and technical assistance that might be the next business cases for the years to come.

Reaching professional standards

While a growing part of the microfinance industry is going to transform into a conventional business, it is facing the same standards of professionalisation … made up of opportunities and constraints : consumer protection, organizational and operational efficiency (including technological scaling up), rating (financial and social), strategic and financial planning, etc …
As a result, there will be an increasing demand for consultancy services. From my own experience, I would favor the participative consulting (i.e. just giving assistance to change) in the view to secure the optimal adherence of the MFIs.

If the MFI has made social mission a core part of its strategy, it will take care working with partners sharing their values.
The authors of “Trends in microfinance 2010 – 2015” strongly focus on a biggest – maybe the biggest ?? – challenge the microfinance industry will have to face, to step up in the “modern” age : the matching of the offer with the demand.
What shows at most the lack of maturity of the microfinance industry is it product oriented offer. While tacking into account more accurately the client needs, it should turn the current offer into a client oriented range of products and services. Like in any burgeoning industry, we should eventually assist a significant move from a product driven to a market driven business.

Credit : a human right ? (according to M. Yunus)

Unfortunately, the industry is poorly equipped to act differently today, because it is absolutely not impregnated with a culture of the client. No blame, as there is not enough history of client-servicing in microfinance. Back to the origin, ACCION and Grameen started with bravery to get access the poor money, what had never been done at a large scale in the past. There was no other objective than getting the poor the chance (like the rest of the population) to start or develop an income generating activity. Granting solely a credit appeared as being the solution to get them out of poverty. It has revealed some years later that lending money was not enough. Their needs were more complex, coming to the recent conclusion that clients expectations had been too few analyzed.

Clients centered …

Nowadays, the microfinance sector is just discovering that it is suffering from a lack of information data about the demand from the field. This situation will be a relevant factor to start a complete investigation’s work on what the poor really need to get better off (including a ranking by priority).

First action should probably consist in bringing the clients the ability to express their needs. For people living in countries ruled under a regime of dictatorship or suffering from deficient institutional bodies including a poor education system, having the chance to express themselves is not a habit. In the early stage, the sole fact of raising attention on them towards the granting of a loan was a sign of gratitude they would never have expected to. Owing to competition between microfinance actors, clients are now getting some unexpected power of negotiation. They might turn down offers that do not really meet their needs.
Microfinance actors will have then to strengthen on investigating the demand more accurately and on adapting their products accordingly. It will require first to educate the clients in order to start a constructive and open dialogue, built around mutual confidence. The aim is to gain a better understanding on how they generate revenues and deal with their living conditions. Again, it will offer to consultants further business, such as detailed market surveys.
“Listen to customer” and “data mining” as mentioned by the authors of “Trends in microfinance 2010-2015” will be the key to the new age of microfinance.

… and quality upgrade !

Along with client facing, what should not be underestimated is the dramatic lack of knowledge with the staff of most of the microfinance institutions.
Being a new industry, microfinance is suffering from a deficit of adapted educational cursus. Gaps are particularly acute in domain such as : accounting, risk management, global financial literacy … and also in general topics like team management or human resources management. The authors of the publication foresee with some relevant approach the evolution of the job of “Loan officer” to “Financial products advisor”, which outlines the unavoidable sophistication of microfinance while getting it closer to the customer.

2 Responses to Beyond microfinance (2) : getting out of the Stone Age
  1. I agree that people who can’t afrofd loans shouldn’t become indebted). However, I would like to see some more thought put into the objective in your final analysis of providing someone with a year’s worth of financial services. Do you really think that’s where the impact of microfinance ends? So far we have no evidence of the long-term effects of financial access, and two pieces of evidence demonstrating that there are no short-term effects in the Philippines and mixed effects in India, it seems. We also have an amazing piece of intensive research, the book Portfolios of the Poor, which meticulously tracks financial behavior and exposes issues associated with lacking basic financial services, while also exposing some of the failures of MF services as is. Though I agree that the multiplier effect of capital spent on microfinance might be small or nonexistent, I challenge you to think more about the effect of financial services on someone’s life. It is a tad unfair to compare financial services with something health-related like vaccines or deworming, which has a clear-cut link to being life-saving.

    • Thanks for your comment. I am aware that microfinance is just a piece of a global action plan that would need to be set up, if we (really) want to alleviate poverty. I am not sure that distributing 5 to 6 cycles loans (even more), as it is used to being done in almost every microfinance programmes gets people out of poverty. Almost every poor household is a special case and would require a specific treatment … like in medicine where the same drug doesn’t fit for all.

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