Financial Access to Small and Remote Communities
Microfinance borrowers in Nadi, Fiji, a nation of islands in the Pacific
1. The challenge of serving small/remote communities
One of the main challenges in providing financial services to small and remote communities is the number of clients needed to generate a critical mass to have good profit. It is simply saying
small population is equal to fewer potential clients. Another challenge is the limited economic activities in a sparsely populated area. A small buy-and-sell business trading business may not thrive in areas where neighbors are a kilometer away. To simply say it, lesser developed local economy translates to less demand for credit. In small or remote communities, the volume of transactions may not be large enough to generate profit to cover the cost of a branch. The challenge for microfinance services providers then, is how to generate the ideal volume of transactions that will provide the profit to make the institution sustainable.
There are two main methods to address the challenge of sustainable operations in small or remote communities: either increase the price of your products or lower your expenses to increase profit from your existing operations. In the context of social performance, increasing price is not an appropriate action since the burden will go to the clients. Lowering expenses therefore is the most appropriate action to take under current circumstances.
Lowering cost of operations can be done two ways: reduce your expenses, or shift expenses to others. Reducing cost without affecting operation can be a headache for the management. Most often, reduction in costs results to deterioration of service, and the clients often can observe these changes. When clients are not happy and the competitors offer better products and services, it would not take long before client migration happen. Cost-shifting methods at this point are therefore the most ideal approach.
2. The cost structure of a typical branch
There are three main functions in the branch which define the types of staff and the cost. First is marketing: finding new clients, making new loans and projecting the image of the institution. If the institution is conscious of its social mandate, this is not easy since it should be ensured that you have the right clients. About 40% of activities in the branch are marketing-oriented. Second is maintenance: ensuring that the clients used the money to its intended purpose, collecting repayment, conducting training and other non-financial services. This function takes another 40% of the institutions time and resources. These two frontline activities are being done by the credit staff of the institution. The remaining 20% constitute the backend functions of bookkeeping, cash handling and office maintenance.
Making new loans
Servicing existing loans
• Marketing and promotion
• Client identification
• Assisting clients to make loan applications
• Loan application review and approval
• Loan disbursement
• Loan utilization check
• Repayment collection
• Client monitoring
• Follow-up with delinquent clients
• Bookkeeping/ transaction recording
• Settlement of books
• Monitoring and supervision
• General accounting and reporting
• Branch HR management (recruiting, training, etc.)
• General administration and maintenance
Based on these premises, the ideal approach to cost reduction is to look at how the frontline expenses can be reduced. This paper discussed three approaches being undertaken by microfinance institutions.
3. Recent “innovations”: agent banking and mobile banking
Recent technological advancements provided two innovations which is being considered as the answer to concerns of outreach and cost reduction. Ideally, it is assumed that as mobile phones are becoming affordable, many people can acquire it and it can be a platform for the provision of financial services, reducing the costs related to staff salaries, transportation, food, accommodation and other field expenses incurred by the credit staff. Clients can then deposit, withdraw, receive loans and pay using their phones.
In a broad sense, AGENT banking is basically placing an intermediary to do some activities in return for certain commission based on the volume of transactions. MOBILE banking particularly depends on technology (mobile or cellular phones) to do financial transactions. The matrix below provides some details.
Agent banking model
Mobile banking model
Branch cost reduction/ cost shifting strategy
• Repayment collection
• Some cash handling activities
• Some promotion (to walk-in clients)
• Disbursements (sometimes)
Clients bears transportation cost
Similar to agent banking model: telecom kiosks acts as the agent
Some client monitoring can (theoretically) be done through mobile communication
• MFI still bears largest operational cost (promotion, client identification, monitoring and follow-up) and the overhead costs that go with them.
• Agents need to be trained and monitored (additional cost to MFI)
• Agent incurs cost to enhance cash management capacity (security and access to a depository institution to manage liquidity
Similar to agent banking model,
• Building and maintaining a working technology platform is an additional cost
• There will be two layers of fees rather than one (kiosk owner and telecom platform)
The institutions who pilot-tested these innovations have shown that the clients used the platform mostly for money transfer and account checking. Savings and credit however is not yet extensively used, especially in the South East Asian region.
Among the reasons why these innovations are not widely used are:
a. Finding clients, especially the “target clients” remain with the MFI
b. Maintenance is still with MFI, and if this is outsourced to an “agent”, the risk is higher
-and therefore the only function transferred is cash handling which is minimal;
-the agents are external to the MFI, and one issue will be the agents’ attitude towards the clients might be more “commercial” rather than “social”.
c. There are additional costs – like training, commission, etc.
Going back to the issue, of cost reduction, the present configuration of agent/mobile banking does not allow, or cannot ensure that the institution will reduce cost and ensure maintenance of its social mandate.
4. The happy medium: shifting some costs but keeping the MFI involved
Let me emphasize that these are not new methods, and since it is there for all to see, we often miss it as we look for more “exotic” way of doing things.
Cambodia case study: MFI sub-branch, a cost-reduction strategy
MFIs in Cambodia are registered as private limited companies and it has to pay the National Bank of Cambodia (NBC) for every branch it will set up. The concept is: a branch is always a profit center. To be sustainable, MFIs should have branches that earns and contributes to the over-all profit of the institution. Making each branch a profit center is the first objective of the institution. It should have the right number of clients and loan portfolio that will generate profit.
Within the branch are the sub-branches. Sub-branches are set up to target specific areas or specific type of clients. Its functions are focused on marketing and maintenance of existing clients. Backend operations still belongs to the branch where it is attached. A sub-branch may not be earning at the start, but in the overall performance of the branch, its “losses” is offset by the income from other sub-branches. Some of these branches are set-up to cover specific areas where there are target clients like indigenous people, areas which cannot be reached by any transportation and other physical limitations. Sub-branches therefore are used in reaching out to small and remote communities with minimal impact on the sustainability of the branch. As the sub-branch matures and the volume of transaction reached to a point where it can be a profit center in itself, then it can be registered as a separate branch.
Philippines and Vietnam case studies: a cost-shifting strategy
There are three types of MFIs in the Philippines: NGO-MFIs, cooperative MFIs and Banks with MFI functions. This case study is focused on cooperatives with microfinance operations. Cooperatives in the Philippines are owned by its members who are also the clients.
In Vietnam the “social funds” are owned mostly by the Women’s Union. Funds of Women’s Union unit, either provincial, city or district are used to set up a social funds that will provide microfinance services. To put it simply, the social funds are owned by the Women’s Union. Of more than 50 microfinance operators, only two are officially registered as MFI, the rest are social funds.
The essence of the Philippine and Vietnam cases is ownership. The clients themselves are the owners of the institution. As such, some people within the institution assume functions that are “voluntary” in nature, that is, without pay. If paid, it is in the form of honorarium which is not fixed and regular. In the Philippines a member-client may work as a committee member helping in the assessment and even collection, technically extending the reach and work hours of a paid staff. In Vietnam, the local WU officers do the assessment, monitoring, and even running after delinquent borrowers. For these volunteers, it is not about work, but for the strengthening of their institution.
As a result of these volunteer works, a big chunk of workload is taken off from the credit staff and allows him/her to do more work. Small and remote communities can be served through these volunteers with minimal impact on the sustainability of the institution. The credit staff, relieved of most maintenance work can focus on the marketing function and become “volume drivers”. In addition, time spent for remedial measures or recovery measures is lessened, resulting to higher efficiency and higher profit. These volunteer works are not exploitative in the sense that it is an assumed responsibility of the client-members. As the profit grows as a result of the cost reduction, they share in terms of dividends for individual members in the case of cooperatives in the Philippines, and the increased fund of the WU in Vietnam.
5. Institutional sustainability: ownership (and SPM)
The concept of clients as owners is part of the progressive development process. In the early days of microfinance in the 80’s, there was a call to refrain from calling the borrowers as beneficiaries because it is demeaning and patronizing, so in the 90’s up to now, we call them clients. In the 21st century, empowered clients are aware of their rights and as they move out of poverty, the time will come to make them not only clients but owners as well. With clients as owners, client protection will be easily addressed, and what will be more socially-relevant than a financial institution that is owned and managed by people it is mandated to serve.
Presented during the Pacific Microfinance Week celebration in Nadi, Fiji on October 21-25, 2013