microfinance and business development services for the very poor or where there is no market...
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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 - PowerPoint PPT PresentationTRANSCRIPT
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 ServicesBDS 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 POORprefers 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.