Purpose and Rationale
In order to grow, SEs may need access to a range of services that include both finance and business development. In this strategy, an organization either develops two separate initiatives or collaborates with another organization to offer SEs both finance and BDS. The benefits of this parallel program approach are:
§ One service can help develop the market for the other if they work together. Providing market access services where few viable businesses exist could generate demand for working capital as businesses expand; and microfinance institutions (MFIs) could provide clients with information on BDS opportunities.
§ Each service enhances the other’s performance and impact. When microfinance (MF) clients experience business stability and growth as a result of effective BDS, they are better positioned to use financial services efficiently, maintain a relationship with an MFI, repay regularly, and borrow increasing amounts. When BDS clients have access to finance they are more likely to use business services and to make investments that fully utilize them.
It should be noted that delivering finance and BDS usually requires different technical skills and delivery strategies that allow separate programs to mobilize the skills and design the structures that each needs. When SEs purchase financial and business development services separately, the demand signals for each are very clear. SEs often think they don’t need training in order to get a loan. However, the services do complement one another, such as when training focuses on planning for and managing a loan or when a loan enables an SE to purchase business services and the financial institution structures repayment terms around expected returns from the service and related business activities.
When is this activity appropriate?
This activity is relatively new to the SE development field and is best used in pilot, learning, or test initiatives. It is appropriate for SEs that need financial and business development services to help their businesses stabilize and grow. In most cases there is some demand for both, but a lack of institutional capacity to meet that demand can be a serious constraint. In practice, the strategy is appropriate when an MFI or BDS program reaches a sufficient level of institutional strength and sustainability to manage a new program or complex partnership.
The strategy can be implemented by one organization that develops parallel programs, or by several organizations working closely together. The microfinance and BDS programs must follow the best practices of their respective fields. There are three ways in which a parallel program might emerge:
MFIs helping clients find out about and access BDS
BDS programs helping clients access financial services
A new initiative that assists clients in accessing both services
CONTINUE TO EVALUATION, EXAMPLE PROGRAMS & LESSONS
A microfinance program that helps its clients find out about and access business development service.
§ Let demand evolve: Once an MF program matures and has significant scale and an appropriate level of financial sustainability, staff and clients alike may become interested in helping to strengthen and grow the clients’ businesses. This is when clients ask staff for services and the program considers the pros and cons of adding a BDS component.
§ Consider demand for services: Rather than assuming that training or technical assistance is the appropriate service, assess client demand for a range of services—market access, communications, advocacy, etc. Also think about sector-based services targeting sectors in which the MFI has a large number of clients.
§ Consider the business development strategy: What is the MFI attempting to achieve by offering BDS? How will the services help client businesses? How will they help the MFI? Basic business skills training can assist clients to better manage the business, and to improve sales, profitability, and cash flow. These help clients stabilize and increase their income and improve loan repayment, client retention, and loan size, and may also assist in marketing the MFI’s services. In remote areas where businesses are not thriving due to lack of market access, a program that increases access to markets may help SEs increase sales and grow, which then stimulates demand for financial services.
§ Consider supply of service: Which institutions and businesses (formal or informal) typically deliver business services to this population? What are the services and are they relevant to MF clients? What percentage of clients have access and why? What do clients like and not like about the services?
§ Explore partnerships: Attempt to develop partnerships with BDS suppliers in relevant service areas and explore how services and delivery strategies might be adapted to help MF clients gain access to them.
§ Explores direct service delivery: If it is clear that no other organizations will be able to offer the services to the MF clients, consider how to develop a parallel program designed as any other BDS initiative to offer the services. The MFI is a player in the market and should assess the BDS market and the potential impact of such a program on that market. It also needs to develop demand-driven services; strive for financial sustainability; and develop relevant performance indicators.
§ Develop seamless marketing and delivery system: Establish marketing and delivery strategies that minimize transaction costs for clients and service providers.
§ Develop institutional capacity: Whether the service is offered through a partnership or an internal parallel program, the MFI must identify, hire, and/or train staff in BDS program management.
§ Establish institutional boundaries: To preserve the integrity of the financial services, it is important to identify and isolate the BDS activities and costs by creating separate departments and cost / profitability centers for the two programs. Some organizations establish separate institutions / companies for delivering the BDS.
§ Test it first: Prior to a full-scale launch of the initiative, test it in one area. Document the performance of both clients and the financial institution branch prior to and after offering the parallel services to learn about what works and what doesn’t and to make changes to the program. Use this branch as a training situation for other branches.
§ Don’t make too many changes at once: Do not introduce both BDS and a new financial product or loan policy simultaneously. It is too difficult to track the impact and it can stretch an institution’s capacity beyond its limits.
CONTINUE TO EVALUATION, EXAMPLE PROGRAMS & LESSONS
A BDS program that helps its clients identify and access financial services.
§ Let demand emerge: Once a BDS program is well-established and reaching significant scale and sustainability, staff and clients may become interested in having financial services. In many cases, the demand come as the result of a crisis, such as when a client succeeds in accessing a market, but now does not have the capital to meet the demand; or when a manufacturer and a distributor receive numerous orders for small-scale irrigation equipment, but too many customers ask for credit and distributors don’t have sufficient cash-flow.
§ Consider demand: Conduct a brief market assessment to determine what type of financial services clients need—a traditional microfinance offering of short-term working capital in gradual increments; or they may need long-term, seasonal, or line-of-credit financing.
§ Consider the business development strategy: How can access to finance improve client business performance? How can it improve BDS program performance? Focus the program design around these goals.
§ Consider supply: How do clients currently access finance? Is there some finance available from suppliers or buyers or in the informal sector? Do they have access to an MFI or other financial services suppliers? What kinds of financial institutions are (or could) operating in the area? How do their financial service offerings overlap with BDS client needs? How are they different?
§ Consider a partnership: How might any of the above suppliers adjust their offers to meet client needs? Why would they? Explore relationships and opportunities for helping existing suppliers adapt and offer their financial services to BDS clients.
§ Consider a new microfinance initiative: If an existing financial services provider or MFI is unable or unwilling to partner, consider establishing a new financial services intermediary or program. It should be designed like any financial services program and based on best practices and proven methodologies while meeting (BDS) client demand for services. Traditional MF methodologies are one option. For others, see the Alternative Finance section of the Guide.
§ Develop a seamless marketing and delivery system: Establish a strategy for marketing and delivering both services that minimizes transaction costs for both clients and service providers.
§ Develop institutional capacity: Whether the service is offered through partnership or in an internal parallel program, the BDS project or organization must identify, hire, and/or train staff in financial services management.
§ Establish institutional boundaries: To preserve financial integrity and understand the impact of both services, it is important to identify and isolate the activities and costs of each service. Create separate departments and cost / profitability centers for them and consider establishing a separate institution or company for delivering the financial services.
§ Test it first: Prior to launching a full-scale initiative, conduct a pilot program in one area. Document the performance of both the clients and the BDS program prior to and after offering the parallel services to understand what works and what doesn’t (lessons learned) and to make improvements before implementing on a wider scale. Use the pilot as a training situation for the rest of the BDS initiative.
§ Don’t make too many changes at once: Do not introduce financial services at the same time you introduce a new BDS or pricing policy. It is too difficult to track the impact of different changes and it can stretch institutional capacity too far.
CONTINUE TO EVALUATION, EXAMPLE PROGRAMS & LESSONS
Programs developed explicitly to help clients access both financial and business services.
In deciding whether to 1) establish an MFI to create a large, sustainable BDS program or 2) develop the BDS market, program designers need to:
§ Consider Demand: Conduct a market assessment to determine the types of business development and financial services clients need. Use the appropriate state of the art tools for each.
§ Consider the business development strategy: What is the program trying to help SEs achieve and how can financial and business development services help them succeed?
§ Consider supply: How do clients currently access services? What formal and informal channels exist and to what extent are they meeting SE demand for services?
§ Consider a partnership: How might those suppliers adjust their offers to meet client needs? Why would they? Explore relationships and opportunities for helping existing suppliers adapt and offer their services to target clients.
§ Consider a new initiative: If existing providers are not able or willing to offer appropriate services, consider initiating a new financial intermediary and/or BDS program. This program should be designed like any financial services or BDS program, based on best practices and proven methodologies as much as possible while meeting client demand for services. The crucial decision with parallel programs is whether to create a single or two separate institutions and, whether the institution will be a direct provider of BDS, or a market facilitator.
§ Develop a seamless marketing and delivery system: Establish a marketing and delivery strategy for both services that minimizes transaction costs for clients and service providers.
§ Develop institutional capacity
§ Establish institutional boundaries: To preserve the financial integrity and understand the impact of both services, it is important to identify and isolate the costs and activities of each. Create separate departments and cost / profitability centers for the different programs and consider establishing separate institutions or companies for delivering each service.
§ Test it first: Prior to launching a full-scale initiative, test it in one area and document the performance of both the clients and the program to understand what works and what doesn’t (lessons learned) and to make improvements. Use this pilot program as a training situation for further expansion.
§ Develop the program incrementally: Start by developing services to meet clients’ immediate service needs and phase in additional services that support the overall business development strategy and initial offerings.
CONTINUE TO EVALUATION, EXAMPLE PROGRAMS & LESSONS
How should the program be evaluated?
The program should be evaluated using criteria appropriate for each service (standard indicators include impact, outreach, scale, sustainability, and cost-effectiveness), plus:
§ Percent of target SEs that have purchased or received both services;
§ Performance of SE clients with access to both services compared to those with access to only one service to understand the impact of access to both;
§ Comparative performance of the initiative prior to implementing the collaborative or parallel program to understand the positive and/or negative impact(s) of the collaboration;
§ Sustainability of the MFI and sustainability of either a) the services in the BDS market, b) the BDS supplier, or c) the BDS and financial services institution; and
§ Achievement of specific goals of the parallel services—did the BDS services open markets for microfinance services or, did access to finance help BDS clients use or benefit more from BDS?
Potential Impact: Offering SEs access to both BDS and microfinance services has the potential to significantly enhance the impact of both and it can also enhance their sustainability and outreach.
Illustrative Programs, Sectors, Regions:
SEEDS,
§ Microfinance – minimalist group savings and lending program,
§ Training & Technical Assistance – in loan fund management, and
§
Services are promoted and sold by a staff person who is the main contact or “case worker” for the client. Clients choose the service(s) they want and receive financing, business training and advice, and technical training from staff specialists. Clients are charged a fee for training services and have the option of financing the services by paying a higher interest rate on their loans. Between 1996 and 2001, SEEDS reduced donor dependency from 83% to 53% and plans to decrease these subsidies to 25% of overall costs by 2005.
SEWA,
BRAC,
Grameen Bank,
CARE Bosnia – CARE established an independent microfinance agency (MFI) and then developed a market information service and linking business (see Market Information Links) with the potential to become viable. It sold the market info and linking services to microfinance clients when the MFI approved the program and shared its customer list. For more information, contact Mary Morgan at m.morgan@telus.net.
Lessons Learned
The strategy of helping SEs access both business and financial services is experiencing renewed attention and interest, particularly as BDS programs are now demonstrating increased levels of impact, scale, outreach, and sustainability. However, there is still much more discussion than there is action and only a few programs are offering both types of services to their clients. Although there is a good deal of debate about the appropriateness of this approach, there are some lessons:
§ Costs and services should be kept separately and clients should be able to choose business and/or financial services. Offering services in parallel helps programs maintain these principles;
§ Delivering integrated services is a low-cost option;
§ When delivering services in an integrated fashion, ensure that the BDS is optional, fee-based, and not required to get a loan;
§ Ensure that the BDS is focused on client needs rather than the MFI’s need to track client finances or increase loan repayment;
§ Ensure that the finance is not linked exclusively to the BDS and that clients are eligible for finance whether or not they use it to invest in BDS;
§ When delivering technical training and consulting services to borrowers, MFIs need to be careful not to tell clients how to run their businesses. In some countries, lenders may be liable to business owners if they provide bad advice;
§ For collaboration to be effective, business and financial services may have to adapt services and strategies to enhance their usefulness; and
§ MFIs that consider offering BDS programs have a dilemma—if they deliver services directly on a sustainable or subsidized basis, they may discourage other private sector suppliers from operating in the market. However, if they decide to develop the BDS market, they are unlikely to recover the cost of the BDS. So, they must a) get a grant to subsidize the BDS initiative, or b) weigh the investment in the BDS program against the benefits to financial sustainability that may result from increased access to new borrowers, improved repayment, better client retention, and greater loan sizes.