MICROFINANCE AND BUSINESS MICROFINANCE AND BUSINESS DEVELOPMENT DEVELOPMENT

SERVICES FOR THE VERY POOR SERVICES FOR THE VERY POOR

OROR

WHERE THERE IS NO MARKETWHERE THERE IS NO MARKET

Kathleen Stack, Vice PresidentKathleen Stack, Vice PresidentFreedom from HungerFreedom from Hunger

Middle East/Africa MicroCredit SummitMiddle East/Africa MicroCredit SummitOctober 12, 2004October 12, 2004

Why Combine Microfinance and BDS?Why Combine Microfinance and BDS?

Existing client baseExisting client base

Potential for large scale impactPotential for large scale impact

Lower marginal costs Lower marginal costs of BDS with piggybackingof BDS with piggybacking

Opportunity to cover costs Opportunity to cover costs of business servicesof business services

Demand and need of MFI clientsDemand and need of MFI clients

May improve performance of MFIMay improve performance of MFI

Ways to Integrate MF and BDSWays to Integrate MF and BDS

Microfinance and BDS services are offered Microfinance and BDS services are offered to the same clients in the following ways:to the same clients in the following ways:

Parallel - Parallel - Two or more programs of Two or more programs of the same organizationthe same organization

Linked -Linked - Two or more independent Two or more independent organizations operating in theorganizations operating in the same area same area

Unified - Unified - Two services delivered together - Two services delivered together - especially useful when rural people especially useful when rural people

have access to few, if any, other have access to few, if any, other development servicesdevelopment services

Microfinance Institution

Supervisor/Trainer

Field Agent

Credit and Savings GroupsRegular meetings for financial

and educational services

20-40clients

20-40clients

20-40clients

20-40clients

20-40clients

•Group formation/•training•Credit Management•Supervision and Monitoring•Facilitation of business sessions

•Planning, managementsupervision•Staff Training and progress tracking

A UNIFIED APPROACH

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HOW DOES THIS MODEL FIT WITH HOW DOES THIS MODEL FIT WITH

THETHE

BUSINESS DEVELOPMENT BUSINESS DEVELOPMENT

SERVICES MARKET SERVICES MARKET

DEVELOPMENT APPPROACH DEVELOPMENT APPPROACH

PROMOTED BY DONORS?PROMOTED BY DONORS?

BDS Market Development Model

BDSFacilitator

BDSProvider

BDSProvider

BDSProvider

SE

SE

SE

SE

SE

SE

SE

SE

SE

Commercial OrientationDevelopment Agenda

Donor

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 STORYIn 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 facilitatorIdentify other interested providersDemonstrate 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

1Mercado para Servicios de Desarrollo Empresarial en el Peru, Flavio Flores A., Forrest L. Metz, IDESI 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%

MEDConsortium

MFIProvider

MFIProvider

MFIProvider

VB

VB

VB

VB

VB

VB

VB

VB

VB

Commercial OrientationDevelopment AgendaThe Peru MFI/BDS Program Design

The DesignThe Facilitatora consortium of microenterprise development organizations throughout the countryprimarily 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 MFIlarge client demandstrong financial performanceanalytical skillschampion for the approachBoard and staff buy-inwilling to invest its own time and moneywilling to experiment with voluntary and mandatory education

Facilitator to train 6 MFIs 3 business modulestraining of trainerssupervision and management systems

Research - FFH and Princeton-based EconomistWe 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.

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.

3. Demand-Driven ServicesRespond 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 Findings: The very poor do not actively demand available BDS because they

Do not have timeDo not have skills that will allow them to benefit from complex value added production servicesCannot pay full cost of servicesDo not see services relevant to their own businesses therefore do not value themAre 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

AWARENESS: % who reportedhaving heard of, or are aware of …

USED: %who

reportedhavingused

USED: %who

reportedhaving

used, notincludingthe MFI

KNOWSOTHERS:

% whoreportedknowingsomeonewho used

Obs. MeanStd

Error 95% Conf.Interval

Mean Mean Mean

Training for businessplanning and management

149 11.4% 2.7% 6.8% 17.4% 7.4% 2.7% 10.1%

Training for accountingand money management

149 14.1% 3.0% 10.1% 22.1% 10.7% 5.4% 11.4%

Services for accountingand money management

149 6.7% 2.1% 2.6% 10.8% 4.7% 4.7% 6.0%

Services to help find newclients or access newmarkets

149 8.7% 2.2% 3.6% 12.5% 6.7% 4.0% 6.7%

Services to help with legalprocesses

149 4.7% 1.9% 1.7% 9.0% 2.0% 2.0% 2.7%

Services to help improveaccess to supplies

149 3.4% 1.5% 0.4% 6.3% 3.4% 1.3% 3.4%

For producers, services toimprove product quality

11 9.1% 9.1% -11.2%

29.3% 9.1% 9.1% 0.0%

Services to improveaccess to transportationservices

149 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Technical trainingservices

149 1.3% 0.9% -0.5% 3.2% 0.7% 0.7% 1.3%

Information andcommunication services

149 2.0% 1.2% -0.3% 4.3% 1.3% 0.7% 2.0%

Report as a

Problem

Sought help, as a

% of those who

report a problem

TOTAL INFORMAL,

as % of those who

sought help

TOTAL INFORMAL

TOTAL FORMAL,

as % of those who

sought help

TOTAL 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%

INFORMAL FORMAL

SOURCE OF HELP: Percentage of Respondents Who Sought Help from Each Type of Source

Business Problems and Sources for Help N=149

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.

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.”

SELECTED RESULTS OF MARKET TEST OF THE BUSINESS EDUCATION

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 MFIs cover all costs of the education service throughinterest revenues and fees for services.

The pilot activities with the Peruvian organizationsdetermine the appropriate packaging, pricing and deliverystrategies to achieve sustainability.

In Freedom from Hunger’s experience, the cost of theeducation (both business and health) integrated withfinancial services is marginal and can be covered throughthe interest earned on the loans.

Separate accounting and reporting of education costs is oftennot recommended because it may be as expensive as theeducation itself. As Chris Dunford reports in a recent paper,

1 Dunford, C. (2001) “Building Better Lives: Sustainable Integration of Microfinance with Education in Health, Family Planning and HIV/AIDS Prevention for the PoorestEntrepreneurs.” Microcredit Summit Web site: http://www.microcreditsummit.org/papers/paper.htm

The program aimed to work with commercial MFIs -- the private

sector.

...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 ExistingBDS Suppliers

Advantages to Building MFICapacity

Orienting formal BDS suppliers toa demand-driven approach;

Building relationships betweenBDS suppliers and a new clientbase;

High marketing and deliverycosts associated with a newproduct and a new clientpopulation;

High transaction costs for clientshaving to attend an additionalevent;

Lack of financing, needing to payup front;

Lack of financial viability due tobuilt-in high overhead costs offormal suppliers;

Lack of training skills amonginformal trainers;

High cost of working with largenumbers of informal trainers toreach many people.

Low marketing costs because theclients have an existingrelationship with the suppliers;

Low transaction costs to clients ifthe service is delivered at thecredit meetings;

Low delivery costs becausesignificant marketing, delivery,tracking, management andoverhead costs are shared with thefinancial services delivery;

Availability of financing to pay forservices;

Consistency and quality of trainingbecause it is delivered throughstandard modules by qualifiedtrainers and institutions thatregularly assess trainingeffectiveness and progress towardimpact;

Financial sustainability becausethe institutions are alreadycommitted to financial viability.

FINDINGSThere was no market for existing BDS from this economic level of client. Lack of awareness of business servicesLack of skills to use existing servicesLack of money to pay for servicesLack of perceived value of services to be worth cost

There was a demand for basic business education.Financial managementCustomer service and marketing techniquesBusiness 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 qualityLack 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 MARKETDEVELOPMENT 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 serviceswithout 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.