Marketing and Microfinance - How to Attract Low-Income Customer - Essay Example

1 Microfinanace An appropriate description for Microfinace Institutions is that they were established so that low-income people would be able to avail of credit and financial services. According to C. Dunford 2000, “Nowadays there is a bewildering variety of types and combinations of clients, delivery systems, and institutional structures, that shelter uneasily together under the big tent known as microfinance…they are traditional business ( a purely financial bottom line; traditional social service ( a purely social bottom line), in the middle is the emerging phenomenon is the ‘social enterprise’, which manages to have a double-bottom line, seeking to achieve a productive balance between business objectives and social objectives”(Dunford 2000) When we view the three types of microfinance schemes which are prevalent today and align them with the special circumstances which poor people are confronted with, it is evident that the most feasible type is that which seeks to achieve a productive balance between business and social objectives. It is through this type of microfinancing that the maximum achievable objective of attracting new customers can be attained. This position is supported by the history and overall objective of microfinancing. In order for the program to be effective, it must pass muster of a preliminary test; It must demonstrate how the low-income person can be depended on to meet their predetermined financial commitments. Also, it must demonstrate the ability to make financial packages to low-income persons through market based ventures which do not require a subsidy Timothy Guinname of Yale University presented convincing evidence that the accomplishment level of Friedrich Wilhelm Raiffeisen’s rural bank undertaking, which serviced more than two million farmers, was because it adhered to the precepts of the test 2 mentioned above; Reiffeisen’s versatility of being more than a banker, as he stepped outside of the traditional mold to provide the beneficiaries with a mixture of special personal (social) services which addressed their needs outside of their specific enterprises and contributed to the total operation of their enterprises. Obviously, the primary objective of Raiffeisen was to assist the low-income individuals to improve the financial standing. He recognized there were a number of social obstacles, which when viewed by the average (low-income) individual who qualified to receive financial assistance, would be very difficult or impossible to overcome. There were however, three common problems which all of the prospective beneficiaries shared in common; first on the list was proximity; the nest was, most of them were too poor to access a loan from a conventional bank, and to further compound the problems faced by this group, the only feasible means at the time which was available to this group, were local lenders who customarily charged usury rates on their loans. Of course when we speak of microfinance, one automatically accepts the reality that this encounter will possess very few similarities to a traditional banker, borrower relationship. This is a given, because the needs of the poor are much more varied than an individual in the traditional/conventional context. The group who has committed itself to lending money to low-income persons, must be prepared to come to the table, to offer a variety of services, which would be considered, non-conventional in the traditional banking arena. It is safe to say that the financial needs of the poor are decidedly more challenging than those of the conventional borrower. Any microfinancial institution seeking the business of low-income persons must be cognizant of the reality, that while the transaction is on the line of business, it also 3 possesses a very strong social premise. Consequently, if they are desirous of having more successful outcomes they must be prepared to offer a broader range of services, both financial and social.. The scope and specific types of social services would vary accordingly, with the dynamics of the groups or persons encountered. Also, these low-income persons are prone to be members of a distinct financial standing; they either have no previous formal track record with any financial institution, or their track records have been scarred, due to their precarious financial standing, therefore, under both scenarios, they will be in need of a range of financial services as well, i.e., cash transactions, savings, and possibly, they will be in need of checking accounts and insurance. A microfinancial institution which has prepared itself to be a full-service financial bridge, as well as a social buffer, will be viewed by the low-income person as the appropriate organization, to provide them with the resources and know how, which is needed to assist them in moving onto a better financial plane. They seek a financial plane which catapults them from a mere state of survival, into a realm where they can plan for the future of their enterprises as well as positioning them where they can now plan for the education of their children, and deal appropriately their health and nutrition needs. Additionally, that the microfinance institution which is equipped with a counseling component, in conjunction with its comprehensive delivery of loans, will enable them to acquire better housing for their families and themselves. There is a realistic need for microfinance institutions to become more closely aligned with the general financial sector. Obviously, this is not being proposed in an attempt to clone microfinancial institutions in the likes of traditional banks, nor is it to 4 duplicate the operation of traditional banks. The givens ( financially sound vs. financially unsound), precludes any similarities in financial service availability or delivery. This alignment is being suggested, so the microfinancial institutions will remain aware of those policies and procedures it must adhere to as well as avoiding some of the conventional pitfalls. Additionally, so that microfinance institutions through affiliation, can accommodate referrals from members of this sector, who are in need of their special services which the traditional banks can not or will not accommodate. Also, last but surely not the least, large financial institutions are an excellent source of philanthropy. While a traditional bank might be precluded from lending to most or any of the microfinancial institutions clientle, they would not be exhibited or precluded to make financial contributions, to organizations, which will in turn enable the traditional institution to continue to operate with continued unfettered prudence. The formation of coalitions and alliances with these mainstream entities will enable the microfinance institutions to reach and service a larger and broader scale of low-income persons. This type of mainstream cooperation by the organizations represents a win, win situation for everyone involved. If a microfinance institution is going to impact and be strong, it must possess the ability to sustain itself. Of course, the primary key to sustainability is that the entity ‘must’ remain financially solvent. The borrowers must be made to feel that they have a personal stake in the endeavor, and that the institution feels a kinship to the success of their enterprises, as well as their personal well-being. On the surface this may sound like a dichotomy, since the key to sustainability involves keeping transaction costs at the lowest point possible. However, this is doable, even with providing the social services 5 which fosters this special bond. Institutional management must implement a program of ‘Organizational Learning’, wherein all employees have a specific grasp of the organizational culture, and all of the employees are encouraged (taught) to share the same vision. The organizational culture must be personified by each employee. Whenever an organization exhibits the maximum effort of getting all of its employees on the ‘same page’, there is a minimum amount of duplication, or repetitious effort. Moreover, a minimum amount of mistakes, especially when everyone has the same response to stimuli. The microfinance Institution must possess, planned focus and controlled intent. Surely they will encounter individuals and groups, whom they will not possess neither the capacity or scope to service within the realm of their mandated purpose. However, with an expansion or diversification of services (this deviation must be well planned), such as small grants, infrastructure programs, employment and trainings, will appeal to low- income people who are destitute, and do not in their present condition, possess the capacity or potential of repaying a loan. However, if some of these people are pulled up by their bootstraps, it is conceivable that some of them can work themselves into a more favorable position. This suggestion is made, and it is made with two salient understandings in mind; foremost the microfinance institution can and should make a concerted effort to challenge low-income conditions, no matter where the conditions persist (in or outside) of their targeted area of operation. But it must also accept the reality of its limitations, to the extent that they realize, they are neither a financial or social panacea. Additionally, taking into account, that at all times, they must maintain a solvent sustainability. It must not spread itself too thin. If it is going to become involved 6 in some or all or the auxillary services ( employment and training, small grants, farm to market roads etc.,), it must recognize and appropriately deal with its limited financial resources..Whenever an effort such as auxillary outlays are attempted and are reasonably successful, these efforts not only assist the microfinance institution in increasing its service base, (perhaps by offering savings accounts to recipients of auxillary services) it also expands its client base. It is critical that much emphasis be placed on efficiency. When we speak of efficiency in this instance, the reference deals specifically with the cost incurred to service loans. An absence of efficiency will drive up interest rates, which will manufacture burdens for those whom one is attempting to help. Moreover, it will discourage the vast majority of potential clients to shy away. While the microfinance institution will rely on ‘soft money’, ( donations from government and other private sources), the organization must not be dependant on these outside sources to sustain itself or to pull it through hard times. One of the ironic realities which the microfinance institution must live with is, it does require a larger financial cost to make a substantial number of small loans, than it costs to make a small number of large loans.Though the position is precarious, since the microfinance institution’s thrust is to attract and service a substantial number of small loans to low-income persons (wherein there is substantial risk of default), the microfinance institution ‘must’ remain efficient. Again, the concept of Organizational Learning is emphasized as a necessary tool for achieving organizational objectives. Albeit microfinance is only akin to traditional banking, one should not be blind- sided by the fact that it mixes social goals with banking. The successful operation 7 requires a sophisticated infrastructure and a highly functional information system. A well planned highly tuned system speaks volumes in the attainment of efficiency. The presence of efficiency in servicing accounts, speaks to lower interest rates, and lower interest rates, amount to larger participation rates. It is too the advantage of the microfinance institution to remain extremely transparent. Full disclosure of all matters financial, as well as social, is a definite plus, which will stand as a hallmark of the entire operation. Full disclosure will assure that everyone is aware of every aspect and transaction. This type of transparency fosters trust. Works Cited Dunford, C.,(2000), Microfinance As A Vehicle for Educating the Poor, accessed on line on February 8, 2007, from www.devnet.anu.edu.au Read More