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This summer for Microlumbia (Columbia's student-run microfinance investment fund) an International Development Club MBA student consulting team surveyed the small but growing number of partnerships between multinational corporations and microfinance institutions. The team delineated best practices and performed due diligence on specific companies for its client, the Sarala Women Welfare Society, based in Calcutta, India.
The microfinance movement has truly taken off, yet obstacles to further growth continue to plague efforts to scale up its impact. In the 1970s, pioneering organizations, such as the Grameen Bank and FINCA, proved conventional wisdom wrong by showing that poor, illiterate and uncollateralized entrepreneurs could be trusted to pay back loans at a startling high rate. By 2006, over 3,300 microfinance institutions were making microfinance loans to more than 130 million clients. Besides it success from a growth perspective, controlled studies have demonstrated a statistically significant economic and social impact. Providing greater access to financial services to the poor has been shown to raise entrepreneurs’ income, health and social status. [Source: State of the Microcredit Summit Campaign Report 2007.]
Despite microfinance’s rapid growth, much of the world’s poor is still unserved by financial institutions. For example, the World Bank estimates that just 17 of low income families in South Asia have access to financial services. [Source: Microfinance in South Asia: Toward Financial Inclusion for the Poor.] A primary obstacle to further outreach is the failure of many microfinance institutions (MFIs) to cover their operating costs. A 2005 study of MFIs listing their financial information on global public information exchanges found that of this highly selective sub-set of more established institutions, just 46 were financially sustainable. [Source: How Long Does it Take to Achieve Sustainability? Glimmers from Ongoing Research.] While nonprofit MFIs may be able to supplement their operational losses with donor contributions, the inability to cover costs diminishes the ability to scale and to reach more poor clients. To expand microfinance coverage, Development Finance Institutions, nonprofits and private investors are pressuring MFIs to achieve sustainability.
One strategy MFIs have used to achieve sustainability is increasing scale, thereby reducing operating and overhead costs. Surprisingly, a World Bank study of hundreds of MFIs found that administrative costs per portfolio size did not decline once institutions had gained 10,000 borrowers, an extremely low number in the microfinance world. Although increasing the number of borrowers is a goal to be strived for from an impact standpoint, it is not a sure-fire why to bolster MFI’s financial performance. Expanding the product line, by offering insurance, remittances, or saving accounts, often requires high administrative capacity and submitting to government regulation.
Recently, several MFIs have tapped new income streams by moving beyond financial activities and forming revenue generating partnerships with other organizations. In particular, microfranchise partnerships have sprouted in several developing markets. These alliances have the unique trait of generating attractive returns for MFIs, their clients, and private companies. However, these partnerships are not suitable for every MFI and if entered into in the wrong stage of the MFI’s lifecycle, may diminish the loan business, the main revenue driver of every MFI.
MFIs offer several valuable assets to multi-national corporations (MNCs) seeking to gain access to the two thirds of the world population at the “bottom of the [world’s economic] pyramid.” The 4 billion people in this segment represent a growing, unsaturated market to introduce goods and services, utilize excess capacity, and experiment with new offerings. To reach this market, however, MNCs must overcome the particular distribution and marketing challenges associated with the poor. In many countries the poor are disproportionately located in isolated, hard to reach locations. In India, 67 of the population resides in villages of less than 1,000 people. In these areas train tracks are frequently non-existent, road access is limited, and street conditions are poor. [Source: Unilever in India: Hindustan Lever’s Project Shakti. Harvard Business School, 2007, p.6.] Because of higher transportation costs to rural areas, MNCs must streamline their distribution to reduce costs. Marketing is also more difficult. Traditional advertising methods, such as television and print media, gain less exposure in areas with lower exposure to mass media. In addition, feelings of distrust of large foreign companies in poorer areas may serve as a barrier to consumer trial. [Source: The Pragmatics of Care in Sustainable Global Enterprise, Simola (132).]
The challenge of geographic dispersion, high distribution costs, product unfamiliarity, and distrust have been faced by MFIs for years. A methodological innovation of many MFIs was pooling together clients in groups, which not only reduces servicing costs but creates “process capital,” a term coined by the founder of the Bangladeshi MFI BRAC. Instead of disbursing individual loans to clients located miles apart, MFIs using the group model to extend credit to members who agree to meet every week and pay off a jointly held loan. Bringing clients together streamlines the collection process and forces punctuality (as well as limiting risk). Clients may show up late to pay a collector but will arrive on time for a meeting of their peers. The meetings also provide clients opportunities to exchange information on business best practices, share tips on family and health issues, and gain leadership skills within the group. The positive spillover effects of the meetings improve clients’ business performance, which improves repayment rates. While much has been written about the social impact of client meetings and the ability of socially-minded NGOs to link with MFIs, non-financial companies are just beginning to generate returns on the work MFIs have invested in creating process capital.
The multinational consumer manufacturer Unilever, which in many respects is leading the way in pursuing the bottom of the pyramid segment, has made a major effort to link with microfinance groups in India to help sell their fast moving consumer goods. The business model is simple. Unilever sells goods, such as soap, shampoo and tea, to MFIs. The MFIs then resell them to members of microfinance groups. This process greatly simplifies Unilever’s distribution process. In addition, having the microfinance groups select who the most appropriate sales woman will be ensure that a trustworthy and respected representative is chosen. The group’s weekly meetings provide a captive market to practice the first sales calls. Unilever’s partnership with MFIs contributes 3.5 of the company’s total Indian revenues and has helped Unilever penetrated 80,000 of India’s 638,000 villages. [Source: Project Shakti.] In turn, MFIs are paid a commission for serving as an inventory distribution point and personnel head hunter.
In Bangladesh, the Grameen Bank, has teamed with the telecommunications company Nokia to spread cell phone usage to the rural poor. Grameen selects clients for loans to buy a cell phone. The “village phone operators” then rent the phone on a per call basis to local community members. Grameen and Nokia’s partnership, Grameen Phone, is now the largest cell phone company in South Asia. The Grameen Foundation has since partnered with the South African mobile company MTN and local MFIs to set up village phone programs in Rwanda and Haiti.
The circumstances and manner in which MFIs should link with NGO health, agriculture and business development service providers is a hotly contested issue in the microfinance field. MFIs must consider many of the same questions in assessing their ability to manage the risk associated with linking with companies. Managers must ensure that they have the infrastructure to support a partnership, credit officers can continue to promote financial products, and management information systems are sophisticated enough to handle new line items in the balance sheet. Unlike expanding financial offerings or linking with NGOs, partnerships with MNCs frequently require managing physical inventory, which may simply not be possible for many MFIs.
Despite methodological innovations, MFIs constantly struggle to make up the cost of accessing a client base isolated from larger markets. Companies, such as Unilever, Nokia, Danone and Hewlett Packard, are now offering MFIs an opportunity to leverage techniques originally developed and utilized solely for providing financial services. Ultimately, whether the relation between MFIs and private sector companies continues to expand may depend on whether the poor prove to be as good as sales people as investors.