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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 •Group •Planning, Supervisor/Trainer formation/ management •training supervision •Credit •Staff Field Agent Management •Supervision and Training and Monitoring progress •Facilitation of tracking business sessions 20-40 20-40 20-40 clients 20-40 20-40 clients clients clients clients Credit and Savings Groups Regular meetings for financial and educational services THE SERVICE: Basic Business Education Benefits and Module Example Applications Improved Business Session Performance Topics Using Reduced diversion of More steady and Manage credit for loan capital to increased working Your productive nonproductive uses capital Business investment Improved tracking of Reduced input costs Money s actual business returns Increased business Separating Increased profitability and family and reinvestment profit level business Strategies to reduce money stock loss Preventing business- money losses Module Example Topics Applications Benefits and Improved Business Peformance Think like a Increased Increased product quality Increase customer responsiveness and diversity Your Strategies for to customer Increase in repeat Sales product demand in customers. Increased improvement product number of customers. and selection and Increased sales diversification marketing Marketing Changes in strategies selling Customer strategies service (packaging, presentation, location, promotion, customer service) Module Example Applications Benefits and Improved Topics Business Performance Importanc Improved Fewer cash or Plan for a e of decision- enterprise “crises” Better business making, based Increased owners Business planning on sales and draw Paying financial Increased business yourself a projections sales and profitability wage Consultations Plan for with suppliers, unexpecte interviews with d events potential Plan for customers and greater product testing profits Setting and earning a target “wage” Improved risk management Traditional Integrated New Unified Model Programs BDS Market Field Test Training required 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 SE BDS Provider SE SE BDS BDS SE Facilitator Provider SE SE BDS Provider 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 low- cost, 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 1 Nacional, Lima, Peru. 2001. 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 VB Provider VB VB MED MFI VB Consortium Provider VB VB MFI Provider 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 USED: % who KNOWS USED: % reported OTHERS: who having % who reported used, not reported having including knowing AWARENESS: % who reported used the MFI someone having heard of, or are aware of … who used Std Obs. Mean Error 95% Conf. Mean Mean Mean Interval Training for business 149 11.4% 2.7% 6.8% 17.4% 7.4% 2.7% 10.1% planning and management Training for accounting 149 14.1% 3.0% 10.1% 22.1% 10.7% 5.4% 11.4% and money management Services for accounting 149 6.7% 2.1% 2.6% 10.8% 4.7% 4.7% 6.0% and money management Services to help find new 149 8.7% 2.2% 3.6% 12.5% 6.7% 4.0% 6.7% clients or access new markets Services to help with legal 149 4.7% 1.9% 1.7% 9.0% 2.0% 2.0% 2.7% processes Services to help improve 149 3.4% 1.5% 0.4% 6.3% 3.4% 1.3% 3.4% access to supplies For producers, services to 11 9.1% 9.1% - 29.3% 9.1% 9.1% 0.0% improve product quality 11.2% Services to improve 149 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% access to transportation services Technical training 149 1.3% 0.9% -0.5% 3.2% 0.7% 0.7% 1.3% services Information and 149 2.0% 1.2% -0.3% 4.3% 1.3% 0.7% 2.0% communication services Business Problems and Sources for Help N=149 SOURCE OF HELP: Percentage of Respondents Who Sought Help from Each Type of Source INFORMAL FORMAL Sought TOTAL help, as a FORMAL, % of TOTAL as % of Report those INFORMAL, those as a who as % of TOTAL who Proble report a those who INFORMA sought TOTAL m problem sought help L help FORMAL Marketing Competition 79.9% 11.8% 57.1% 6.7% 22.8% 2.7% Low sales 76.9% 12.4% 43.3% 5.4% 27.1% 3.4% Low purchasing power of clients 69.0% 9.0% 29.8% 2.7% 37.3% 3.4% Finance Lack of financial capital 90.5% 65.7% 6.1% 4.0% 83.8% 55.0% Selling on credit 63.7% 6.5% 31.2% 2.0% 31.2% 2.0% Lack of management or finance knowledge 64.5% 9.9% 40.7% 4.0% 20.4% 2.0% High costs of doing business 38.5% 5.5% 12.3% 0.7% 24.6% 1.3% Inventory Family consumes my inventory 40.3% 18.3% 40.3% 7.4% 0.0% 0.0% Lack of availability of supplies or materials 32.4% 8.7% 0.0% 0.0% 30.9% 2.7% Infrastructure Cost of transport 39.3% 8.8% 15.3% 1.3% 23.0% 2.0% Lack of own store 43.9% 18.5% 32.7% 6.0% 10.9% 2.0% Rent of location 14.8% 18.2% 7.4% 1.3% 7.4% 1.3% Other Low quality of employees 11.5% 0.0% n/a 0.0% n/a 0.0% Difficult to comply with govnmt regulations 52.8% 2.6% 51.0% 1.3% 0.0% 0.0% Difficult to pay taxes 60.1% 2.3% 29.8% 0.7% 29.8% 0.7% Other 8.2% 9.1% 0.0% 0.0% 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 Advantages to Building MFI BDS Suppliers Capacity Orienting formal BDS suppliers to Low marketing costs because the a demand-driven approach; clients have an existing Building relationships between relationship with the suppliers; BDS suppliers and a new client Low transaction costs to clients if base; the service is delivered at the High marketing and delivery credit meetings; costs associated with a new Low delivery costs because product and a new client significant marketing, delivery, population; tracking, management and High transaction costs for clients overhead costs are shared with the having to attend an additional financial services delivery; event; Availability of financing to pay for Lack of financing, needing to pay services; up front; Consistency and quality of training Lack of financial viability due to because it is delivered through built-in high overhead costs of standard modules by qualified formal suppliers; trainers and institutions that Lack of training skills among regularly assess training informal trainers; effectiveness and progress toward High cost of working with large impact; numbers of informal trainers to Financial sustainability because reach many people. 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.
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