Microfinance Best Practices
Many different approaches to microfinance have been applied in developing economies throughout the world. Experienced microfinance practitioners agree that the successful delivery of financial services to the working poor requires the systematic application of best practices. A policy of rigorous adherence to best practices makes it easy for lenders to incorporate the successful strategies of other institutions and to avoid commonly made mistakes.
Best practice application typically occurs at three institutional levels: management, operations and customer relations. Strategies must be tailored to suit the local environment, however, effective programs all share a number of common characteristics.
Management Best Practices
Commit to the Provision of Microfinance Services
Successful programs are committed at the highest levels of management to the delivery of financial services to the entrepreneurial poor and to micro and small business owners who lack access to traditional sources of capital. Formulate a microfinance operations business plan and dedicate the financial and human resources needed for implementation and maintenance.
Maximize Efficiency of Microlending Operations
Profitable microlending operations require streamlined, low-cost procedures. Develop rapid and accurate loan approval, funds disbursement and collection methods for maximum efficiency.
Cover Costs
Know the direct and indirect costs of each component of your microfinance program. The interest rates and loan fees of sustainable programs recover their operating costs.
Assess Market Demand
Lending rates and application fees must allow total cost recovery, but the cost of borrowing cannot exceed what local clients can afford to pay. Conduct market analysis surveys to determine the balance between cost recovery and market demand.
Train Loan Officers
Educate your loan officers on microfinance best practices and operating procedures. Specialized staff training in microfinance operations is essential.
Network with other Microfinance Programs in the Region
Communicate regularly with regional microfinance partners through practitioner forums and associations. Program innovations, effective techniques and client referrals often result from the ongoing exchange of information among regional lenders.
Participate in Studies, Seminars and Workshops
Local and regional microfinance forums often sponsor education and outreach events. Conferences, courses and seminars provide valuable information and networking opportunities for loan officers and program staff.
Operations Best Practices
Recruit Local Loan Officers from Community
Recruit local loan officers from the target community to expedite monitoring activity and to establish a local presence for the lending institution that is well connected to the community. Social ties are an important factor in the guaranteeing repayment of microfinance loans.
Extensive Geographical Coverage
Having extensive geographical coverage especially in remote areas, through the provision of mobile branches serves as an important time saver for borrowers; borrowers do not have to take time from the workday to visit main branches, and loan officers can efficiently conduct community outreach services and monitor borrowers' operations.
Utilize Information Technology
Internet, fax and wireless technology play an important role in connecting remote communities to banking services. Microfinance lenders can exchange information and access borrowers' credit histories as that data is collected and becomes available through a central credit bureau.
Customer Relations Best Practices
Create Community Awareness of Microfinance Programs
Generate borrower interest and educate the community as to the purpose and potential of microfinance through targeted publicity campaigns. Distribute Arabic language flyers and brochures. Sponsor outreach events together with local community organizations to enhance local awareness of microfinance services.
Separate Microfinance Activity from Social Welfare Programs
Pay careful attention to the separation of microfinance program activity from charitable or social welfare programs. Promote the long-term economic goals of microfinance and educate borrowers on its potential contribution to sustainable community growth. Reinforce the concept of microfinance as a business tool rather than a welfare program.
Grameen Foundation – Best Practices
The Grameen Foundation has produced a list of best practices involving mobile microfinance. According to Grameen launching Mobile Financial Services (MFS) involves several activities and processes.
The first step to implementing MFS would be to carry out extensive research, preferably in the form of a feasibility study. MFIs should bear in mind that, despite pressure from the market, it is necessary to take the proper amount of time to prepare the launch of the service.
It is understandable that the need to maintain a competitive edge could push MFIs to launch services before they have taken the necessary measures. However, in this case, implementation can be very rocky. Because it is extremely difficult to regain the trust of disgruntled clients, it is preferable to ensure that the service is tested and running smoothly with a diverse group of clients before rolling it out across the broader organization. It is sometimes too late and more costly to try to sort out kinks later.
Grameen’s experience has revealed that when research is rushed, internal costs to the organization – such as training, upgrading the IT/MIS and developing the agent network – are rarely factored in, making it impossible for MFIs to calculate the real costs of implementing MFS. By conducting a feasibility study, MFIs can ensure that they have examined all aspects of the market and are fully aware not only of the costs and risks, but also of the opportunities and benefits to expect from MFS.
Once the research is completed, the next important step will be to decide on the type of business model to implement. Questions will arise as to whether to create your own platform, to partner with one or several MNOs, partner with a bank or third party, or merge with a partner institution. The decision should be based on the results of the feasibility study.
The majority of MFIs implementing MFS today do so in partnership with an MNO or third party (e.g., Wizzit or Wing Money). This is largely due to the fact that, in many cases, the MNO (Mobile Network Operator) has already started developing remittance services, clients trust its systems and the MFI wishes to take advantage of its existing network and visibility among the population.
Before engaging in a partnership with an MNO, the MFI must keep in mind the following:
- Respective vision and mission statements
- Negotiating power
- Consumer protection
- Ensuring confidentiality of data
- Interoperability
- Real‐time reconciliation
MFIs should try to segment their clients and to understand their specific needs. A simple replication of existing products to mobile platform is not the only solution. MFS provides a channel to deliver innovative products that often had been too costly to implement.
Another important point is the importance of securing staff support for MFS. Understanding how their individual roles would change, revising performance expectations and learning the new processes and procedures were all essential elements in guaranteeing the success of MFS implementation. Without the support of the staff, especially loan officers, there is a high probability that adoption by clients will be low.
For most MFIs, the most effective way of training clients is through face‐to‐face training, either individually or during the group meetings. A live demonstration is a good tool for explaining the new product, but it is not sufficient. The technological side may in fact be the simplest area for the client to understand; they may rely on family, friends or other group members to help with this. It is more important to show the advantages they could gain from MFS.
Fliers explaining the service are also helpful, but should be a support rather than the main methodology for training your clients and bringing them on board. This is especially the case if low literacy is an issue for your clients. The fliers should use simple language that is easily understood by those who can read. It should also include images and visuals depicting the different steps.
An important element in implementing MFS involves designing a pilot. Through the careful selection of pilot groups, the MFI provides a semi‐controlled environment for testing the new products. This in turn will enable the MFI to understand the issues and resolve them before it makes the service available on a large scale.
MFIs often underestimate the importance of marketing and communication in developing their products and services. Communication must begin within your own institution. This implies involving all staff members in the development process, not only staff in the departments that will be directly affected by the rollout of mobile services. Share proposed client communication pieces with field staff first, to gather their opinions on clarity, simplicity, etc.
Regarding external communication, differentiating your product through a well‐targeted advertising and branding campaign can help speed adoption by your clients. In addition to the usual communication tools (fliers, posters, newspapers, radio and television advertisements), word of mouth is an effective way of promoting your MFS, even more than with other products. One reason for this is that microfinance clients often live in remote areas and may not be exposed to general public advertisements.
For information on more best practices, please visit the following sites:
For European Good Practices in rural microfinance, click here.
For the Inter-American Development Bank’s Best Practices and Guidelines for Project Design, Monitoring, and Evaluation, click here.
For Best Practices Guide for Microfinance Institutions Active in Remittances, click here.