Clients' freedom of choice and emerging challenges in microfinance market
Tuesday, 7 August 2007
S. M. Rahman
QUESTIONS can be raised how far the microfinance clients are free in choosing quality financial services that will meet their needs. Product concepts largely spring from a top-down approach. Theoretically microfinance market is a segmented market (s) crisscrossed by legions of Micro finance institutions (MFIs) over the country. Each MFI has mobilised its resources in a member-community who are clients or customers in commercial sense. As per MFI rule, a client is not supposed to belong to other MFIs. The microfinance market is apparently akin to a captive market (s).
In Bangladesh it is characterised by somewhat oligopolistic competition with a few MFIs dominating the market. ASA, BRAC and Grameen Bank, each has a total customer accounts more than 6.0 million - larger than the population of many small countries in the world. Overwhelmingly, the women are the official clients who carry out the financial transactions with MFIs. In reality mostly the males, barring a few exceptions, handle the loan money themselves and hand over the weekly savings to the females for depositing in the MFIs. Amazingly, the women have proved themselves to be a viable conduit for transacting the business as they are shy, more domesticated and easy to spot anytime.
In terms of a sample survey (2006), PKSF reckons that average overlapping is 40%. A customer belongs to five MFIs on average, shows a study done by EDA in 2003. MFIs accept membership of clients knowing fully well of their otherwise involvement. Checking or cross-checking has become immaterial as it is contrary to purpose. MFIs are now well set in pursuing somewhat commercial approach depending on client savings, bank loans, not to mention their own resources. Client satisfaction is largely ignored. Systems and services are not designed the way the clients like it. A weird competition exists in the market where prices hardly go down on its own despite the fact that many MFIs have reportedly gained high efficiency in operations. Currently, grants are, in one sense, no longer available for microfinance operations, except concessionary loans by PKSF and by some small outfits run by foreign funds. There is a mismatch between demand and supply.
Clients conceal identity while MFIs are advisedly relaxed. It has been gathered that the MFI clients before admission never reveal their involvement with other MFIs. Clients conceal the past identity while MFIs are advisedly relaxed. But the matter is not at all secret. The clients know each other's position in rural and urban areas. They do not make it public as it may frustrate their mutual interest. The MFIs turn a blind eye since they need customers in droves. In policy, some stated measures are in place in most MFIs for chastising the wayward clients for refraction of the rules but to our surprise there is still no example of punishment.
Traditional methodology gradually fraying: Weekly meeting is not that strict nowadays as was in the past. Sometimes it is seen that the groups do not have social cohesiveness as it includes umpteen near poor and non-poor clients representing a disparate social mix. Many clients do not want physically to attend meetings due to shortage of time and a lack of interest. Now-a-days, they do not show much enthusiasm to listen to the development issues discussed by the field workers. Most meetings are held in peak hours of the day when the women remain busy with their household chores. They send proxy to give deposits and loan payments. In some commercially busy places, it is immensely difficult for the clients to attend meetings. The traditional credit methodology is gradually fraying, posing a new challenge.
Savings is mandatory in all MFIs and cannot be usually withdrawn. There is demand for various kinds of short-term and long-term savings products. Few MFIs indeed provide such services. Many MFIs do not provide any interest on savings, despite having a policy on this and sometimes they harbour a tendency to bilk them paying at all. The clients have to lump it anyway. Loan is not given unless savings is made. This kind of situation is not favourable to many. They want to get rid of this predicament. In many MFIs, clients are barred from receiving new loans, if they fail to pay the defaulted loans of other member (s) of the small caucus. They are compelled to repay the group members' defaulted loans.
The situation sometimes leads to serious acrimony in the family and the wives are carpeted by husbands and ask them to switch over to other MFIs. Some clients are found who are not keen to take any loans for various reasons, such as fear about their possible failure to repay on time, small loan size, high interest rate, no time to attend meetings, etc.
Taking loans years after years, as if has become a tradition: Many are not required taking loans after a certain period of time. Some unscrupulous persons lie in wait for the opportunity of grabbing their money. They have formed a kind of syndicate in various parts of the country and cajole the MFI clients in taking loans, who then hand over these loans to them. These transactions however pass on merrily. In the industry context, the total quantum of such portfolio may be insignificant, though. These people later on-lend these loans elsewhere at higher interest rate. For good measure, some bonafide clients are encouraged to take larger loans who then on-lend these to others at high rate without the knowledge of MFIs. Many small clients are deprived of getting stepped-up loans consequently. This has emerged as a new phenomenon that calls for stringent action.
Clients abound in millions in microfinance. The demand for loans outpaces supply. The market suffers from low fund supply. About 218 MFIs have access to PKSF fund that forms the bulk of the market. Another 200 MFIs including some ones from PKSF have also access to a good number of commercial banks. The banks are indeed pussyfooting in micro lending. Bank loans are not adequate enough to meet the current demands of the clients. The MFIs chip in 25% savings to the total revolving fund in the NGO-led microfinance sector. To obviate the fund crisis of the MFIs, the share has to be revved up through introducing innovative savings instruments including allowing public deposits to some worthy MFIs at the national level. It has been seen that clients take loans for various purposes, though generally they mention a single purpose. But those who really use the loan money for productive purposes sometimes do not get the loans timely. To mitigate such problems of the clients, the MFIs need to work out sector-specific loan disbursement planning. It is understood that the loan demand does not increase due to apparent nature of captive market. Many clients remain edgy and confined to a single MFI, as fear is gumming up their free movement to other MFIs. The MFIs need to review their policies to guarantee clients' freedom.
Captive markets degenerating and new market emerging: The client overlapping issue is quite known in the industry. Like in the past, nobody now- a-days bothers about this issue. During the initial days of microfinance there was hardly any occurrence of overlapping. The idea was that belonging to more than one MFI for additional loan money is unbecoming. Both sides were more studious than they are now. But as time went by, pattern of thinking began to change. MFIs pumped more money for more income to fuel rapid growth. They overlook the overlapping issue unless there is difficulty in loan collection. Contrary to wide-scale perception, the larger MFIs do not indeed crowd out the smaller ones - all coexist eventually. Initially the small MFIs fear the presence of the bigger ones but soon the panic dissipates as the clients do not leave them. In almost all MFIs, the average loan size keeps increasing but not remarkably. Whatever be the reasons, the clients need more loans than a MFI can provide. Yearly increment of loan is too small not more than 20%. This small loan cannot help a customer to stay with one MFI. Many MFIs cogitate that as long as the clients can pay off their dues, they are not worried. The clients' view is that a single MFI cannot usually meet their financial requirements. Failing which they approach many lenders to optimise their basket of credit needs. This implies that captive markets are crumbling and new markets are emerging. The upshot is likely to stoke up the demand for more loans. Against this backdrop, the MFIs have to be chary and develop effective mechanism to serve the needs of the genuine clients as well as guarding their own interest applying their professional wisdom.
Microenterprise financing should not become a fashion. Generally most MFIs want to enter activities where there is an upcoming opportunity of funding. They do not look at their capacity and the inherent risks involved. Many small MFIs are desperate to provide larger loans to some clients even not knowing the cash flow of the enterprise. They apply the same microfinance methodology, particularly the lending rate, loan period and mode of payment i.e. weekly payment system. Their objective is not employment generation but ensure more interest income. These clients are compelled to take loans on very unfavoubale terms without knowing that such financing will eventually erode their business. A good number of large and medium MFIs are nevertheless trying to finance micro enterprises somewhat professionally. They need to equip themselves in line with banking technology. The MFIs have to understand that high interest rate of microfinance will effectively make the enterprise a losing concern. It should not be case that lending rate will always ratchet up. Microfinance and micro enterprise should have separate treatment in terms of methodology as well as professionalism. Bigger borrowers of smaller MFIs are smarting under high interest burden, short repayment period and frequently instalment payments. As time goes by, the loan capital of the genuine clients dwindles and their businesses start squeezing. The clients want redress from this situation. Frankly, microenterprise financing should not become a fashion for all MFIs. The overriding objective of micro enterprise is income and employment generation. This is no easy task. To do this, an MFI must have professional expertise and financial soundness.
Agriculture sector has been generally overlooked by MFIs. Small and marginal farmers' access to enterprise financing has to be reinforced. They are the backbone of agriculture. It is heartening to note that some intervention by PKSF is in the offing but the involvement of more actors is warranted. The government might ponder channelling agricultural credit to the farmers through selected MFIs. The farmers will be immensely benefited and the government will surely get back the full money. Money has to be disbursed cleanly and timely. Their repayment schedule has to be realistic based on the nature of the activities. The larger MFIs need to come forward with easy terms and conditions.
Dealing with extreme poor is difficult and very costly: In the country 10-15% bottom poor are considered as hardcore or extreme poor. Their poverty reduction is an uphill task. Some interventions are already under way. They remain scattered across regions. Their foremost need is handouts i.e. getting free support for survival first. Then microfinance and social services may come in to minister them. This segment of very people is now coming into limelight. But the direct actors are not much enthusiastic as dealing with them is very costly. On top of that suitable approaches are yet to be found out to work with them as the characteristics of hardcore poor widely vary in terms of regions, terrains, community, culture, etc. However current experience suggests that they need credit plus services. Those who are providing financial services to them now, their terms and conditions need be made much more relaxed. Savings should be optional. The savers should be allowed full withdrawal of money in case of needs. For the time being it will be wise for the MFIs to shun mercantile approach in dealing with the hardcore poor. The small MFIs should not be involved in financing the extreme poor rather they can be associated with ancillary activities like identifying and organising them for the relatively bigger MFIs. Some special projects can be undertaken either by the government or the MFIs in the highly poverty stricken places or regions where they are teeming in huge number and prone to vulnerability. Notably a donors' hefty programme (hardcore poor, microenterprise, marginal farmers and others related to poverty reduction) spearheaded by DFID is on the anvil to meet the current gaps in the sector.
The writer is a Microfinance Specialist. More next
QUESTIONS can be raised how far the microfinance clients are free in choosing quality financial services that will meet their needs. Product concepts largely spring from a top-down approach. Theoretically microfinance market is a segmented market (s) crisscrossed by legions of Micro finance institutions (MFIs) over the country. Each MFI has mobilised its resources in a member-community who are clients or customers in commercial sense. As per MFI rule, a client is not supposed to belong to other MFIs. The microfinance market is apparently akin to a captive market (s).
In Bangladesh it is characterised by somewhat oligopolistic competition with a few MFIs dominating the market. ASA, BRAC and Grameen Bank, each has a total customer accounts more than 6.0 million - larger than the population of many small countries in the world. Overwhelmingly, the women are the official clients who carry out the financial transactions with MFIs. In reality mostly the males, barring a few exceptions, handle the loan money themselves and hand over the weekly savings to the females for depositing in the MFIs. Amazingly, the women have proved themselves to be a viable conduit for transacting the business as they are shy, more domesticated and easy to spot anytime.
In terms of a sample survey (2006), PKSF reckons that average overlapping is 40%. A customer belongs to five MFIs on average, shows a study done by EDA in 2003. MFIs accept membership of clients knowing fully well of their otherwise involvement. Checking or cross-checking has become immaterial as it is contrary to purpose. MFIs are now well set in pursuing somewhat commercial approach depending on client savings, bank loans, not to mention their own resources. Client satisfaction is largely ignored. Systems and services are not designed the way the clients like it. A weird competition exists in the market where prices hardly go down on its own despite the fact that many MFIs have reportedly gained high efficiency in operations. Currently, grants are, in one sense, no longer available for microfinance operations, except concessionary loans by PKSF and by some small outfits run by foreign funds. There is a mismatch between demand and supply.
Clients conceal identity while MFIs are advisedly relaxed. It has been gathered that the MFI clients before admission never reveal their involvement with other MFIs. Clients conceal the past identity while MFIs are advisedly relaxed. But the matter is not at all secret. The clients know each other's position in rural and urban areas. They do not make it public as it may frustrate their mutual interest. The MFIs turn a blind eye since they need customers in droves. In policy, some stated measures are in place in most MFIs for chastising the wayward clients for refraction of the rules but to our surprise there is still no example of punishment.
Traditional methodology gradually fraying: Weekly meeting is not that strict nowadays as was in the past. Sometimes it is seen that the groups do not have social cohesiveness as it includes umpteen near poor and non-poor clients representing a disparate social mix. Many clients do not want physically to attend meetings due to shortage of time and a lack of interest. Now-a-days, they do not show much enthusiasm to listen to the development issues discussed by the field workers. Most meetings are held in peak hours of the day when the women remain busy with their household chores. They send proxy to give deposits and loan payments. In some commercially busy places, it is immensely difficult for the clients to attend meetings. The traditional credit methodology is gradually fraying, posing a new challenge.
Savings is mandatory in all MFIs and cannot be usually withdrawn. There is demand for various kinds of short-term and long-term savings products. Few MFIs indeed provide such services. Many MFIs do not provide any interest on savings, despite having a policy on this and sometimes they harbour a tendency to bilk them paying at all. The clients have to lump it anyway. Loan is not given unless savings is made. This kind of situation is not favourable to many. They want to get rid of this predicament. In many MFIs, clients are barred from receiving new loans, if they fail to pay the defaulted loans of other member (s) of the small caucus. They are compelled to repay the group members' defaulted loans.
The situation sometimes leads to serious acrimony in the family and the wives are carpeted by husbands and ask them to switch over to other MFIs. Some clients are found who are not keen to take any loans for various reasons, such as fear about their possible failure to repay on time, small loan size, high interest rate, no time to attend meetings, etc.
Taking loans years after years, as if has become a tradition: Many are not required taking loans after a certain period of time. Some unscrupulous persons lie in wait for the opportunity of grabbing their money. They have formed a kind of syndicate in various parts of the country and cajole the MFI clients in taking loans, who then hand over these loans to them. These transactions however pass on merrily. In the industry context, the total quantum of such portfolio may be insignificant, though. These people later on-lend these loans elsewhere at higher interest rate. For good measure, some bonafide clients are encouraged to take larger loans who then on-lend these to others at high rate without the knowledge of MFIs. Many small clients are deprived of getting stepped-up loans consequently. This has emerged as a new phenomenon that calls for stringent action.
Clients abound in millions in microfinance. The demand for loans outpaces supply. The market suffers from low fund supply. About 218 MFIs have access to PKSF fund that forms the bulk of the market. Another 200 MFIs including some ones from PKSF have also access to a good number of commercial banks. The banks are indeed pussyfooting in micro lending. Bank loans are not adequate enough to meet the current demands of the clients. The MFIs chip in 25% savings to the total revolving fund in the NGO-led microfinance sector. To obviate the fund crisis of the MFIs, the share has to be revved up through introducing innovative savings instruments including allowing public deposits to some worthy MFIs at the national level. It has been seen that clients take loans for various purposes, though generally they mention a single purpose. But those who really use the loan money for productive purposes sometimes do not get the loans timely. To mitigate such problems of the clients, the MFIs need to work out sector-specific loan disbursement planning. It is understood that the loan demand does not increase due to apparent nature of captive market. Many clients remain edgy and confined to a single MFI, as fear is gumming up their free movement to other MFIs. The MFIs need to review their policies to guarantee clients' freedom.
Captive markets degenerating and new market emerging: The client overlapping issue is quite known in the industry. Like in the past, nobody now- a-days bothers about this issue. During the initial days of microfinance there was hardly any occurrence of overlapping. The idea was that belonging to more than one MFI for additional loan money is unbecoming. Both sides were more studious than they are now. But as time went by, pattern of thinking began to change. MFIs pumped more money for more income to fuel rapid growth. They overlook the overlapping issue unless there is difficulty in loan collection. Contrary to wide-scale perception, the larger MFIs do not indeed crowd out the smaller ones - all coexist eventually. Initially the small MFIs fear the presence of the bigger ones but soon the panic dissipates as the clients do not leave them. In almost all MFIs, the average loan size keeps increasing but not remarkably. Whatever be the reasons, the clients need more loans than a MFI can provide. Yearly increment of loan is too small not more than 20%. This small loan cannot help a customer to stay with one MFI. Many MFIs cogitate that as long as the clients can pay off their dues, they are not worried. The clients' view is that a single MFI cannot usually meet their financial requirements. Failing which they approach many lenders to optimise their basket of credit needs. This implies that captive markets are crumbling and new markets are emerging. The upshot is likely to stoke up the demand for more loans. Against this backdrop, the MFIs have to be chary and develop effective mechanism to serve the needs of the genuine clients as well as guarding their own interest applying their professional wisdom.
Microenterprise financing should not become a fashion. Generally most MFIs want to enter activities where there is an upcoming opportunity of funding. They do not look at their capacity and the inherent risks involved. Many small MFIs are desperate to provide larger loans to some clients even not knowing the cash flow of the enterprise. They apply the same microfinance methodology, particularly the lending rate, loan period and mode of payment i.e. weekly payment system. Their objective is not employment generation but ensure more interest income. These clients are compelled to take loans on very unfavoubale terms without knowing that such financing will eventually erode their business. A good number of large and medium MFIs are nevertheless trying to finance micro enterprises somewhat professionally. They need to equip themselves in line with banking technology. The MFIs have to understand that high interest rate of microfinance will effectively make the enterprise a losing concern. It should not be case that lending rate will always ratchet up. Microfinance and micro enterprise should have separate treatment in terms of methodology as well as professionalism. Bigger borrowers of smaller MFIs are smarting under high interest burden, short repayment period and frequently instalment payments. As time goes by, the loan capital of the genuine clients dwindles and their businesses start squeezing. The clients want redress from this situation. Frankly, microenterprise financing should not become a fashion for all MFIs. The overriding objective of micro enterprise is income and employment generation. This is no easy task. To do this, an MFI must have professional expertise and financial soundness.
Agriculture sector has been generally overlooked by MFIs. Small and marginal farmers' access to enterprise financing has to be reinforced. They are the backbone of agriculture. It is heartening to note that some intervention by PKSF is in the offing but the involvement of more actors is warranted. The government might ponder channelling agricultural credit to the farmers through selected MFIs. The farmers will be immensely benefited and the government will surely get back the full money. Money has to be disbursed cleanly and timely. Their repayment schedule has to be realistic based on the nature of the activities. The larger MFIs need to come forward with easy terms and conditions.
Dealing with extreme poor is difficult and very costly: In the country 10-15% bottom poor are considered as hardcore or extreme poor. Their poverty reduction is an uphill task. Some interventions are already under way. They remain scattered across regions. Their foremost need is handouts i.e. getting free support for survival first. Then microfinance and social services may come in to minister them. This segment of very people is now coming into limelight. But the direct actors are not much enthusiastic as dealing with them is very costly. On top of that suitable approaches are yet to be found out to work with them as the characteristics of hardcore poor widely vary in terms of regions, terrains, community, culture, etc. However current experience suggests that they need credit plus services. Those who are providing financial services to them now, their terms and conditions need be made much more relaxed. Savings should be optional. The savers should be allowed full withdrawal of money in case of needs. For the time being it will be wise for the MFIs to shun mercantile approach in dealing with the hardcore poor. The small MFIs should not be involved in financing the extreme poor rather they can be associated with ancillary activities like identifying and organising them for the relatively bigger MFIs. Some special projects can be undertaken either by the government or the MFIs in the highly poverty stricken places or regions where they are teeming in huge number and prone to vulnerability. Notably a donors' hefty programme (hardcore poor, microenterprise, marginal farmers and others related to poverty reduction) spearheaded by DFID is on the anvil to meet the current gaps in the sector.
The writer is a Microfinance Specialist. More next