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									                        Paper on

Business Development Service for Sustainable Microfinance




  Paper presented in the Microfinance Summit Nepal 2008

       Held at Kathmandu from 14-16 February 2008




                            By:
                       Hem Poudyal
         Livelihood and Microfinance Coordinator
                 Plan Nepal Country Office
                        Kathmandu




                     February, 2008
       Business Development Services for Sustainable Microfinance
                              Abstract

Microfinance is generally regarded as one of the effective tool to reduce poverty.
However, its impact among clients and their families will be limited if it is not
complimented with business development services. Microfinance institutions will
face client drop out, reduced or stagnated average loan size or more saver than
loaners unless client’s capacities are enhanced.

The paper highlights the role of different business development services, its
providers and the mechanisms that needs to be developed to promote this
service for the sustainable growth of the microfinance sector to contribute in
reducing poverty.




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1.      Background
More than 80 million people (1.4 million households) in Nepal live in poverty. Out
of this population, 20 percent are extremely poor. Female-headed households
accounting to 13.2 percent of the total households (NPC, 2002) in Nepal (20% in
the mountain and remote hill areas having high male migration) are considered
the poorest of the poor. The poverty threshold has been assumed Rs 7,696 per
person 2003 prices (CBS, 2006) and minimum calorie requirement has been set
at 2144 kilocalories per person per day. Almost 48 percent Hill Dalits, 46 percent
Terai dalits, 43 percent indigenous peoples in the Hills and 41 percent Muslim
communities live below poverty line (Bennett, Lynn, 2006). Latest NLSS report
reveals that….. Households do not have round the year food and ….do not have
sufficient income to cover their family expenses. Large number of men, women
and children migrate during winter to earn wages while some work as agriculture
laborer to smoothen family consumption. Furthermore, many survive as share
cropper.
Financial service plays a very important role in maintaining household economic
security. When families have times of low income, financial service helps to
smoothen household consumption and allows them to maintain stability of family
economy during the period of economic stress. The comprehensive food security
and vulnerability analysis shows that 57 percent households experiencing food
shortage borrow loan from friends and relatives and 45 percent borrow from the
moneylender to cope the food insecurity (WFP, 2005).
The contribution of microfinance is accepted by the development community. It is
generally regarded as one of the effective tool to empower women and
marginalized communities. Most rural or poverty reduction programs in Nepal
incorporate it as one of their activity.

2.       Products and services


Product     Grameen provider                    Cooperative Union           Money lender
Saving          Voluntary                         Monthly                 None
                Regular                           Personal
                Compulsory                        Term


Credit            General                                                             Loan
                  Seasonal agri.Loan                                                   without
                  Seasonal business loan                                               collateral
                  Tube well/ irrigation loan                                          Loan with
                  House/homestead loan                                                 collateral
                   Micro-enterprise loan
Money       Yes                                 Yes                         Hundi
transfer
Insuranc          Livestock insurance                Livestock insurance NA


                                                                                    3
e                 Member’s life insurance             Member’s         life
                  Family insurance                     insurance
                                                       Family insurance

Although, insurance and money transfer services have been recently included as
product by some practitioners, microfinance service in general is limited to saving
and credit activities. Money lenders still play a significant role in providing
financial service to the community. A survey carried out by Plan Nepal in areas
where professional MFIs were, active, 43 percent families had reported using the
services from the local money lender (Plan, 2004). This shows that either the
coverage was not adequate or the products and services were not enough to
prevent them to take the services.

3.     Use of financial service

Food accounts to 59 percent of the total consumption in Nepal. In the
economically insecure households, it occupies 73 percent of the total
consumption (CBS 2004). High investment of household income on food denotes
that little is left to meet other needs of the family. Though a formal assessment is
yet to prove, higher portion of the loan is also utilised on food and other
expenses. Very little is used in creating assets or income regenerating activities.




                                                                                   4
                                                         Asset
                                                        creation
                                                         House
                                                      construction
                                                       Homestead
                                                        purchase
                                                      House repair

                                                       Investment
                                                        in health
                                                          Social
                                                         events
                                                          Child
                                                        education
                                                       Food/cloth




Experience shows that the vulnerable non-poor and entrepreneur poor just below
the poverty line make use of the microfinance service more efficiently.
Researchers and practitioners generally agree that the poorest of the poor are
yet to benefit from microfinance programs in most countries partly because most
MFIs do not offer products and services that are attractive to this category.
(Hulme et all 1996 as cited by ADB, 2000).

It is possible to reach the lowest strata of poverty through financial service,
however, special complimentary services such as training, technical
backstopping and insurances are required to avert the risk of the client. MFIs
usually prefer less to cover this category as it requires more staff time and less
loan investment opportunities for them.

The NGOs and government agencies through carefully designed subsidised
schemes can prepare to receive microfinance services.




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                          Ladders of poverty
                                Vulnerable non-
                                poor (10-15%)
 Poverty line
                                Entrepreneurial Poor
                                       (10%)


                              Middle poor
                              (10%)

                              Hard-core
                              poor (18-
                              20%)




     Climbing towards the ladder of prosperity is slower but descending
     to level of poverty may be faster; sometimes very quick.
     Experience shows people just above and below poverty line make
     use of the financial service most.
     Source: Adapted from Exclusion in Microfinance by Hem Poudyal,
     (unpublished), 2007.




4.      Do clients really need business development services (BDS)

Many microfinance professionals argue that the primary aim of the MFIs should
be to provide financial service as per the need of the clients efficiently and
effectively. When large number of microfinance service is utilized in smoothening
consumption within the household, do microfinance clients really need BDS?
MFIs should design products and services in such a way that clients gets quick,
reliable and adequate services in a modest price. MFIs should not aim
themselves to provide or arrange but work with other stakeholders to provide this


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service to their clients. As the economic growth of the client is highly influenced
by the macroeconomic growth and the multiplier it creates, MFIs should
concentrate on the very areas rather in the areas that they have no control.

Microfinance practitioners are increasingly experiencing the problem of
stagnation. This is particularly evident in mature MFIs. A client progressively
realizing loans for 4-5 cycle have less incentive to continue with the MFI as
member as their loan ceilings are frozen and they have limited technical and
managerial capability to realize higher loans and scale up their enterprise. BDS
can be very instrumental in scaling up the enterprise and realizing bigger loans.

People above and below the poverty line are vulnerable to go further below the
poverty ladder. Crop or market failure, natural disaster, death or accident or pro-
long illness of the bread earner in the family drops them further down to the
poverty level.

5.     Types of BDS

Business development services depend upon the need of the client. However,
following BDS needs have been realized:




                                                                                      7
                                   Upgrade or
                                 acquire skill as
                                   opportunity
                 Obtain             emerges
              processing/se                              Advises for
              mi processing                               enterprise
              facility to tap                          selection/diver
               the market                               sification and
                                                          scaling-up


      Capability to               BDS-What
      network with              does this mean                 Training/supp
      other similar              to a client ?                  ort for Book
     groups/entrepr                                               keeping,
         eneurs                                                inventory and
                                                                  financial
                                                                management

               Enabling to
              negotiate with
              suppliers and              Enabling        to
                customers                receive     market
                                         information
                                         rightly at right
                                         time and take
                                         right decision



Business development services are situation specific. A client may need one or
more or all the above services.

6.      Effects of BDS

BDS creates various effects at the client and MFIs level as illustrated in the
diagram below. This also creates effects in the micro and macro economy.
However, this has not been mentioned.




                                                                                 8
                                                                 Higher
                             Higher profit                      coverage




     Enterprise                Higher                          Higher
     diversificat            investment                        profitability
         ion




                               Higher
                                loan                             Higher
                             absorption                        income/low
                                                                  er cost



                             Confidence




             Business Development Service




7.        Providers of BDS

The BDS providing industry has not grown in Nepal. An agony is that there are
no reliable microfinance focussed BDS provider institutions in Nepal. Though
some MFIs have realised the need for this service, it has not been pronounced
by the MF community. Progressively growing clients complain about their inability




                                                                                9
for further growth due to their limited knowledge, skills and capacity. However,
this does not get sufficient attention of the microfinance community.

Following could be the BDS providers and MFIs are receiving some support in
bits and pieces from different organisations.


                                        NGOs affiliated
                                          to MFIS


             Private business                                        Poly technical
                 houses                                                institutes




                                         Business
                                        Development
         Audit and                        services                           Radio/FM
      accounting firms                                                        stations




                            Agro-vets
                                                           Marketing
                                                          Cooperatives




   7. How BDS should be provided and managed

Though all MFIs said to have poverty reduction as main mission, most of them
are driven to meet operational sufficiency rather to go deeper into poverty level.
Those MFIs which are continuously expanding in geographical and member
outreach are usually constrained to set aside a significant portion of their income
into BDS. But those that are increasingly distributing dividends to the promoters
should re-assess their poverty reduction agenda. They seem to be treating
clients as treated by the commercial providers and have less concern about their
empowerment.



                                                                                      10
It would be convenient for the BDS providers if the MFIs launch initiatives such
as “one product one village” to have economies of scale.

      Carryout research to find out the BDS needs of the community by
       geographical region, socio-economic situation of a client, scale of
       economic activity in the area and years and amount of loan undertaken.
      Define BDS and its scope in the local context
      Identify potential players in providing BDS
      Prepare/ test different service modules as per different context
      Develop a consortium (company ?) with the financial participation of the
       MF practitioners and BDS supplier- receive government or donor support
       if possible
      Introduce a pay for service system
      The company approaches other players for the services it can not offer or
       have.

The initiative can be taken by any networks of the MFIs or National federation of
the saving and credit union (NEFSCUN )




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                                   References



ADB, 2000. Finance for the Poor: Microfinance Development Strategy, Asian
      Development Bank, Manila

CBS, 2006. Situation of poverty, calorie intake and malnutrition in Nepal, Central
      Bureau of Statistics, Kathmandu, Nepal

CBS 2004, National Living Standard Survey, Central Bureau of Statistics,
     Kathmandu, Nepal

Bennett, Lynn, 2006. Nepal Gender and Social Exclusion Assessment (GSEA)
     Getting Social Exclusion on the Policy Radar Screen, Macro Social
     Analysis Conference, DFID, UK and The World Bank

NPC. 2002. Poverty reduction strategy of the Tenth plan, National planning
     commission, Kathmandu, Nepal
Plan Nepal. 2004. Baseline study of Plan Nepal program area, Plan Nepal
      Country office, Kathmandu.

Poudyal, Hem,. 2007. Exclusion in Microfinance (unpublished)


WFP, 2005. Comprehensive food security and vulnerability analysis, World Food
   Program, Kathmandu.




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