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 Existing client base Potential for large scale impact Potential for large scale impact Lower marginal costs Lower marginal costs of BDS with piggybacking of BDS with piggybacking Opportunity to cover costs Opportunity to cover costs of business services of business services Demand and need of MFI clients Demand and need of MFI clients May improve performance of MFI 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 same area  Unified - Two services delivered together - especially useful when rural people have access to few, if any, other development services

Microfinance Institution Supervisor/Trainer Field Agent Credit and Savings Groups Regular meetings for financial and educational services clients clients clients clients clients Group formation/ training Credit Management Supervision and Monitoring Facilitation of business sessions Planning, management supervision Staff Training and progress tracking A UNIFIED APPROACH

HOW DOES THIS MODEL FIT WITH THE BUSINESS DEVELOPMENT SERVICES MARKET DEVELOPMENT APPPROACH PROMOTED BY DONORS?

BDS Market Development Model BDS Facilitator BDS Provider BDS Provider BDS Provider SE Commercial Orientation Development 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 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 1 Mercado para Servicios de Desarrollo Empresarial en el Peru, Flavio Flores A., Forrest L. Metz, IDESI Nacional, Lima, Peru

Table 1: Comparison of Poverty Indicators of One MFI’s Clients with Businesses Surveyed by IDESI MFI IDESI Survey % of businesses with no paid employees87%12% % of businesses with <=5 paid employees100%79% % with secondary complete or higher education38%95% % with university or technical institute degree7.3%54% Monthly sales under S/. 2,000 per month68%38% Monthly sales over S/. 10,000 per month7%13%

The Peru MFI/BDS Program Design

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.

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 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 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.

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 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:

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

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.