Transcript No Slide Title

MICROFINANCE AND BUSINESS
DEVELOPMENT
SERVICES FOR THE VERY POOR
OR
WHERE THERE IS NO MARKET
Kathleen Stack, Vice President
Freedom from Hunger
Middle East/Africa MicroCredit Summit
October 12, 2004
Why Combine Microfinance and BDS?
Existing client base
Potential for large scale impact
Lower marginal costs
of BDS with piggybacking
Opportunity to cover costs
of business services
Demand and need of MFI clients
May improve performance of MFI
Ways to Integrate MF and BDS
Microfinance and BDS services are offered
to the same clients in the following ways:
Parallel -
Two or more programs of
the same organization
Linked -
Two or more independent
organizations operating in the
same area
Unified -
Two services delivered together especially useful when rural people
have access to few, if any, other
development services
A UNIFIED
APPROACH
Microfinance
Institution
•Planning,
management
supervision
•Staff
Training and
progress
tracking
20-40
clients
•Group
formation/
•training
•Credit
Management
•Supervision and
Monitoring
•Facilitation of
business sessions
Supervisor/Trainer
Field Agent
20-40
clients
20-40
clients
20-40
clients
Credit and Savings Groups
Regular meetings for financial
and educational services
20-40
clients
THE SERVICE: Basic Business Education
Module
Example
Session
Topics
 Using
Manage
credit for
Your
productive
Business investment
Money
s
 Separating
family and
business
money
 Preventing
businessmoney
losses
Applications
 Reduced diversion of
loan capital to
nonproductive uses
 Improved tracking of
actual business returns
 Increased
reinvestment
 Strategies to reduce
stock loss
Benefits and
Improved Business
Performance
 More steady and
increased working
capital
 Reduced input costs
 Increased business
profitability and
profit level
Module
Example Topics
Applications
 Think like a
 Increased
Increase
customer
responsiveness
Your
to customer
 Strategies for
Sales
demand in
product
product
improvement
selection and
and
marketing
diversification
 Changes in
 Marketing
selling
strategies
strategies
 Customer
(packaging,
service
presentation,
location,
promotion,
customer
service)
Benefits and Improved
Business Peformance
 Increased product quality
and diversity
 Increase in repeat
customers. Increased
number of customers.
 Increased sales
Example
Topics
 Importanc
Plan for a e of
Better
business
Business
planning
 Paying
yourself a
wage
 Plan for
unexpecte
d events
 Plan for
greater
profits
Module
Applications
 Improved
decisionmaking, based
on sales and
financial
projections
 Consultations
with suppliers,
interviews with
potential
customers and
product testing
 Setting and
earning a target
“wage”
 Improved risk
management
Benefits and Improved
Business Performance
 Fewer cash or
enterprise “crises”
 Increased owners
draw
 Increased business
sales and profitability
Traditional Integrated
Programs
Training required
New Unified Model
BDS Market Field Test
Optional and Required
Training are compared
Training delivered up-front Training delivered during
the loan cycle
Training requires literacy
Training adapted for
illiterate populations
Training requires significant Training offered where (and
classroom time in a central when) microenterprises
facility
usually go to repay loans –
in short, ½ hour sessions.
Training based on western
Training based on local
business concepts and using business practices and using
many foreign examples
customized, local examples.
Training offered for free –
Training requires a fee or
sometimes paying
covered through interest and
participants to come
is expected to contribute to
financial sustainability.
HOW DOES THIS MODEL FIT WITH
THE
BUSINESS DEVELOPMENT
SERVICES MARKET
DEVELOPMENT APPPROACH
PROMOTED BY DONORS?
BDS Market Development Model
Development Agenda
Commercial Orientation
SE
Donor
BDS
Provider
SE
SE
SE
BDS
Facilitator
BDS
Provider
SE
SE
BDS
Provider
SE
SE
SE
THE MARKET DEVELOPMENT APPROACH
Basic Principles:
Impact-centered programs;
Specific, focused, tailored services;
Demand-driven services;
Sustainable Service delivery; and
Development of competitive, vibrant BDS markets.
THE PERU STORY
In Peru, a successful, fully financially viable village
banking MFI requested technical assistance from
Freedom from Hunger to to learn how to provide lowcost, high impact business education to poor clients. The
idea was to train credit officers of the organization to
deliver business education to village banking clients
during their regular meetings. The two organizations
decided to seek funding to integrate business education
through USAID’s BDS IGP.
Challenges:
Find a local facilitator
Identify other interested providers
Demonstrate demand for business education
service
THE TARGET GROUP
The target group we wanted to serve are poorer than
typical recipients of business development services. We
completed a poverty profile of 149 MFI clients and
compared them with a business survey from a recent
study of the Peruvian market for business development
services carried out by IDESI.1
Mercado para Servicios de Desarrollo Empresarial en el Peru, Flavio Flores A., Forrest L. Metz, IDESI
Nacional, Lima, Peru. 2001.
1
Table 1: Comparison of Poverty Indicators of One
MFI’s Clients with Businesses Surveyed by IDESI
MFI IDESI
Survey
% of businesses with no paid employees
87% 12%
% of businesses with <=5 paid employees
100% 79%
% with secondary complete or higher education 38% 95%
% with university or technical institute degree
7.3% 54%
Monthly sales under S/. 2,000 per month
68% 38%
Monthly sales over S/. 10,000 per month
7%
13%
The Peru MFI/BDS Program Design
Development Agenda
Commercial Orientation
VB
MFI
Provider
VB
VB
VB
MED
Consortium
MFI
Provider
VB
VB
MFI
Provider
VB
VB
VB
The Design
The Facilitator
a consortium of microenterprise development organizations
throughout the country
primarily microfinance but a growing technical capacity in
BDS
experience in business training oriented to higher-level
enterprises
Adapt and Pilot Test the services with one MFI
large client demand
strong financial performance
analytical skills
champion for the approach
Board and staff buy-in
willing to invest its own time and money
willing to experiment with voluntary and mandatory education
Facilitator to train 6 MFIs
3 business modules
training of trainers
supervision and management systems
Research - FFH and Princeton-based
Economist
We wanted to answer the following questions:
What is the effect of the business training
services on client business practices, business
income, business assets, employment,
household consumption, household income and
household health?
Which adopted business practices are more likely to
yield better business and household outcomes (this
helps understand which training modules work best)?
Is the impact different for those with high versus low
demand for the training services? This has immediate
implications for the optimal pricing structure for the
services, as well as the appropriate targeting approach
for identifying potential clients.
What is the effect of offering business services on the
outcomes for the financial institution; specifically, client
retention, savings level, loan repayment rate, loan
amount and attendance? Furthermore, how does the
method of delivery (mandatory vs. voluntary) influence
this impact?
What is the relative demand for business education
services and are there differences among client
“niches” for these services and the range of packaging
options? What are the best strategies for stimulating
client demand for these services?
FIT WITH MARKET DEVELOPMENT
APPROACH
1. IMPACT-CENTERED: Who does the
program serve?
Peru program aimed to reach at least 10,000+
very poor microfinance clients with high quality
services offered through 6 MFI providers.
Program included an impact evaluation to
determine the affect of services on clients, their
businesses, households, and the MFI.
2. SPECIFIC, FOCUSED, TAILORED
SERVICES:
Business Development Services must:
Address specific SE wants and needs;
Focus on high-priority issues; and
Be tailored to add high value to SEs.
Basic business education geared to clients lack of
knowledge and skills in basic business planning,
financial management, marketing and sales.
Lays the groundwork for interest in more advanced
services such as improved production techniques,
and market access, inputs and infrastructure and
technology services.
3. Demand-Driven Services
Respond to SE wants and needs;
Are paid for by SE or commercial actors
with vested interest;
Put immediate financial pressure on
supplier to provide relevant services.
Market Research included 1) a UAI type individual
survey of 149 MFI clients or potential clients, 2) focus
group discussions with an additional 111 MFI clients at
the end of their regular group meetings, 3) a market
test of one business education session.
Market Research Findings: The very poor do not
actively demand available BDS because they
Do not have time
Do not have skills that will allow them to benefit from
complex value added production services
Cannot pay full cost of services
Do not see services relevant to their own businesses
therefore do not value them
Are not aware of BDS
The poor need and want basic business education as a
part of the regular group meetings.
Table 4: Awareness and Use of Business Services
Training for business
planning and management
Training for accounting
and money management
Services for accounting
and money management
Services to help find new
clients or access new
markets
Services to help with legal
processes
Services to help improve
access to supplies
For producers, services to
improve product quality
Services to improve
access to transportation
services
Technical training
services
Information and
communication services
AWARENESS: % who reported
having heard of, or are aware of …
Std
Obs.
Mean Error
95% Conf.
Interval
149
11.4% 2.7% 6.8%
17.4%
149
14.1% 3.0% 10.1%
USED: %
who
reported
having
used
USED: %
who
reported
having
used, not
including
the MFI
Mean
Mean
KNOWS
OTHERS:
% who
reported
knowing
someone
who used
Mean
7.4%
2.7%
10.1%
22.1%
10.7%
5.4%
11.4%
149
6.7% 2.1%
2.6%
10.8%
4.7%
4.7%
6.0%
149
8.7% 2.2%
3.6%
12.5%
6.7%
4.0%
6.7%
149
4.7% 1.9%
1.7%
9.0%
2.0%
2.0%
2.7%
149
3.4% 1.5%
0.4%
6.3%
3.4%
1.3%
3.4%
11
9.1% 9.1%
29.3%
9.1%
9.1%
0.0%
149
11.2%
0.0% 0.0% 0.0%
0.0%
0.0%
0.0%
0.0%
149
1.3% 0.9% -0.5%
3.2%
0.7%
0.7%
1.3%
149
2.0% 1.2% -0.3%
4.3%
1.3%
0.7%
2.0%
Business Problems and Sources for Help N=149
SOURCE OF HELP: Percentage of Respondents Who
Sought Help from Each Type of Source
INFORMAL
Report
as a
Proble
m
Marketing
Competition
79.9%
Low sales
76.9%
Low purchasing power of clients
69.0%
Finance
Lack of financial capital
90.5%
Selling on credit
63.7%
Lack of management or finance knowledge 64.5%
High costs of doing business
38.5%
Inventory
Family consumes my inventory
40.3%
Lack of availability of supplies or materials 32.4%
Infrastructure Cost of transport
39.3%
Lack of own store
43.9%
Rent of location
14.8%
Other
Low quality of employees
11.5%
Difficult to comply with govnmt regulations 52.8%
Difficult to pay taxes
60.1%
Other
8.2%
Sought
help, as a
% of
TOTAL
those
INFORMAL,
who
as % of TOTAL
report a those who INFORMA
problem sought help L
11.8%
57.1%
6.7%
12.4%
43.3%
5.4%
9.0%
29.8%
2.7%
65.7%
6.1%
4.0%
6.5%
31.2%
2.0%
9.9%
40.7%
4.0%
5.5%
12.3%
0.7%
18.3%
40.3%
7.4%
8.7%
0.0%
0.0%
8.8%
15.3%
1.3%
18.5%
32.7%
6.0%
18.2%
7.4%
1.3%
0.0%
n/a
0.0%
2.6%
51.0%
1.3%
2.3%
29.8%
0.7%
9.1%
0.0%
0.0%
FORMAL
TOTAL
FORMAL,
as % of
those
who
sought TOTAL
help FORMAL
22.8%
2.7%
27.1%
3.4%
37.3%
3.4%
83.8%
55.0%
31.2%
2.0%
20.4%
2.0%
24.6%
1.3%
0.0%
0.0%
30.9%
2.7%
23.0%
2.0%
10.9%
2.0%
7.4%
1.3%
n/a
0.0%
0.0%
0.0%
29.8%
0.7%
7.4%
0.7%
SUMMARY: CLIENT AWARENESS
AND USE OF BDS
Not only are business development services for this level
of clientele not available, but that without further exposure,
these clients do not even realize what such services would
entail.
When clients do report seeking help for their problem,
more often than not they report an informal source of help,
such as family or friends, church or other entrepreneurs.
SELECTED RESULTS OF MARKET TEST OF
THE BUSINESS EDUCATION
Seventy-nine percent (79%) of clients stated that they were
interested in more training similar to that introduced during the
market test.
Seventeen percent (17%) said that participation in training
would depend on the cost, what their village bank members
wanted to do, and the timing of the training.
Only 3 percent said they were not interested in training.
Of a total of 95 responses, 53 percent reported willingness to
pay for the training. Another 27 percent would pay if the
training is affordable and if it is “good.”
CHALLENGES OF DELIVERING BUSINESS
TRAINING
Business skills are one of the most challenging
services to deliver on a commercial basis. They
help entrepreneurs make the most of the business,
but do not add immediate cash to their pockets.
When offered in a classroom setting results in high
transaction costs of participants – time away from
the business, transportation costs, etc.
Delivering basic business skills training through
microfinance institutions provides finance for the
training and minimizes transaction costs for poor
people.
4. Sustainable Services
BDS should be made available to SEs over the long
run through financially sustainable delivery
mechanisms, institutions, and markets –
In sum, through the PRIVATE SECTOR.
Sustainability depends on:
•Private sector financing (demand-driven services);
•Cost-structure in-line with SE and market ability to
pay;and
• Independent, financially viable institutions and
delivery mechanisms
The program aimed to work with
commercial MFIs -- the private
sector.
The MFIs cover all costs of the education service through
interest revenues and fees for services.
The pilot activities with the Peruvian organizations
determine the appropriate packaging, pricing and delivery
strategies to achieve sustainability.
In Freedom from Hunger’s experience, the cost of the
education (both business and health) integrated with
financial services is marginal and can be covered through
the interest earned on the loans.
Separate accounting and reporting of education costs is often
not recommended because it may be as expensive as the
education itself. As Chris Dunford reports in a recent paper,
...of the best performing village banking programs reporting data
to the MicroBanking Bulletin, three with extra education had the
lowest administrative expense and salary expense ratios of the
nine institutions…..For the cost-per-borrower ratio, the three
organizations placed first, fourth and sixth…. Compared to all 22
village banking institutions reporting to the MicroBanking Bulletin,
all three integrated service providers out-perform the norm
(average) for the administrative expense and salary expense
ratios, and two of the three organizations out-perform the norm
for the cost-per-borrower and staff-productivity ratio. While
education might add 6 to 10 percent to the administrative cost
ratio, it is offset by the productivity gains made in the portfolio,
which actually lead to lower administrative-expense ratios.”
Dunford, C. (2001) Building Better Lives: Sustainable Integration of Microfinance with Education in Health,
Family Planning and HIV/AIDS Prevention for the Poorest Entrepreneurs. Microcredit Summit Web site:
http://www.microcreditsummit.org/papers/paper.htm
5. Develop Vibrant, Competitive, BDS Markets
Success is:
A vibrant, competitive BDS market in which a range
of SEs are accessing a wide selection of BDS
supplied by numerous commercial suppliers that
SEs choose to patronize.
No BDS available for this market with the exception
of a few subsidized projects
High demand from MFIs to provide services
No commercial BDS providers interested in serving
the poor since not believe it would be profitable.
Need for retooling existing NGO providers to
provide sustainable services to the poor
Challenges to Building Existing
BDS Suppliers
 Orienting formal BDS suppliers to
a demand-driven approach;
 Building relationships between
BDS suppliers and a new client
base;
 High marketing and delivery
costs associated with a new
product and a new client
population;
 High transaction costs for clients
having to attend an additional
event;
 Lack of financing, needing to pay
up front;
 Lack of financial viability due to
built-in high overhead costs of
formal suppliers;
 Lack of training skills among
informal trainers;
 High cost of working with large
numbers of informal trainers to
reach many people.






Advantages to Building MFI
Capacity
Low marketing costs because the
clients have an existing
relationship with the suppliers;
Low transaction costs to clients if
the service is delivered at the
credit meetings;
Low delivery costs because
significant marketing, delivery,
tracking, management and
overhead costs are shared with the
financial services delivery;
Availability of financing to pay for
services;
Consistency and quality of training
because it is delivered through
standard modules by qualified
trainers and institutions that
regularly assess training
effectiveness and progress toward
impact;
Financial sustainability because
the institutions are already
committed to financial viability.
FINDINGS
There was no market for existing BDS from this economic level
of client.
Lack of awareness of business services
Lack of skills to use existing services
Lack of money to pay for services
Lack of perceived value of services to be worth cost
There was a demand for basic business education.
Financial management
Customer service and marketing techniques
Business management
There were no high quality business development services
available for this economic level of client.
Intermittently available subsidized PVO or government services of
questionable quality
Lack of willingness on the part of commercial providers to offer
services to clients unable to pay for them
To create a market for business development services
among the poor and moderate poor it is important to:
Provide a service that imparts knowledge, skills and attitudes
that enable clients to become interested in and make use of
higher-value services;
Provide information and linkages to formal and informal
providers;
Find creative ways to cover the costs of these services to
ensure viability, such as piggybacking on microfinance;
Build on networks of peers who can vouch for the usefulness
of the services so clients become willing to use and purchase
them.
CONSTRAINTS OF CURRENT BDS MARKET
DEVELOPMENT PARADIGM FOR INTEGRATING
MICROFINANCE AND BDS FOR THE POOR
prefers traditional BDS providers rather than
microfinance providers
concern that integration of BDS and microfinance will
compromise the financial viability of the MFI
need to demonstrate demand through separation of
payment structures
focus on services that meet the needs of more
sophisticated small and medium enterprises
.
CONSTRAINTS (Continued)
assumes commercial providers will be willing to
provide BDS to the poor
assumes poor will value business services
without intervention to stimulate demand
focus on proving a market theory based on
theoretical blueprints created by the industry and less
on innovation
CONCLUSION
There is a need for the BDS sector to allocate
resources for the research and development of
innovative programs to serve the very poor and
moderately poor effectively, sustainably and on
a large scale.