Microfinance Products

Microfinance Products 

SESSION 4   : Products

A financial institution provides financial service such as saving account, mortgages, consumer credit, insurance, loan for funding a business and money transfer. Thge practice of adding more financial service from the supply side, such as insurance, is a common trend among financial institution worldview and comes from the different and increasing needs of these kind of service by their client.Product delivered by MFIs are many and include loans, saving, insurance and money transfer. Non financial products such as training or consulting are also often delivered by micri finance institutions.

1. Loans 

The succes of many can be identified in their ability to combine succesful practices from the informal sector (moneylenders) into formal institutions. These include flexibility, fast acces to funds, clear and easy conditions.

These interest rates still remain much higher compared to traditional banking loan due to the higher administrative cost of managing many small loans istead of fewer with larger amounts. However, What is important is ti give access to credit to people who otherwise would be excluded from the formal financial system at interest rates that are much lower compared to the interest applied by the competitors, that for this market segment are the moneylenders.The spesific features that microfinance institutions should implement to deliver valuable services for their clients are listed below.

a.Fast access

Rapid loan approval and fast disbursement is crucial for clients and it is often the main reason why many people deal with moneylenders even at very high interest rates.

b. Clear, easy and flexible conditions

It is important to provide the credit service at convenient conditions for the clients. Transaction costs, which include transportation costs (to pay the instalments or get the money) or time away of work, throughout the life of the loan must be kept low.

c. Permanent services

Credit services must be provided on an ongoing basis, not only for a limited period of time. The lack of this requirement is the main shortfall of many projects that despite their effectiveness do not have the goal of delivering financial services on an ongoing and sustainable basis.

d. Alternative collaterals and collateral substitutes

Poor people often lack traditional collateral. To overcome this obstacle many MFIs use other kinds of collaterals known as collateral substitutes and alternative collaterals.

2. Saving 

MFIs typically offer two types of savings accounts: voluntary and forced. Voluntary savings replicate the savings services provided by traditional commercial banks while forced savings serve as collateral for the loan. 

The “first generation” MFIs only provided credit to their clients in the belief that it was the only service they needed. This assumption has been demonstrated to be wrong and the most important additional financial services that the poor need are saving services. Loans for setting up a microenterprise are useful only to people that have economic opportunities and entrepreneurial skills while more people need to save instead of keeping riskier assets or hiding cash at home. 

Liquid accounts are flexible saving products often with no or small minimum balance but they usually do not provide or pay very little interests. Time deposit accounts, on the other hand, usually offer higher interest rate but clients have to leave their money in the account for a specified period of time.

Microfinance institutions should provide a complete set of short, medium and long term deposit accounts, in addition to more liquid accounts. This to meet the diverse needs of liquidity and rates of return of the clients.

Savings will also attract more clients than loans alone and constitute an important source of funds for the institution. Furthermore it should also be a less expensive source compared to traditional commercial loans as for most MFIs it does not represent a big additional cost. This is due to the already available infrastructure required to collect savings (branches, trained staff, clients relationships).

If deposit services are successfully implemented, the provision of these kind of services will also help MFIs to reach financial sustainability. Introducing savings facilities will better serve the clients’ needs, reducing the cost of capital and allowingm MFIs to accumulate resources for expansion. The main challenge for MFIs in establishing these services is the transformation of their corporate culture and also the involvement of the governments is equally important in the regulation and supervision of institutions taking savings from the public.

3. Microinsurance

Low-income entrepreneurs, just like anyone else, are vulnerable to risks, such as illness, injury, theft, death, accidents and flood.
Insurance is a financial service that some MFIs are starting to add to their portfolio to respond to this need of protection.
To directly provide insurance MFIs need a special license and the requirements to be granted such a license are usually very strict: governments control insurance companies for the same reasons why they control the financial soundness of deposit taking institutions, the protection of the clients and the stability of the system.
Insurance products to the target group of microfinance institutions must be designed to fit their specific needs and protect their specific risks: they may include health insurance, livestock insurance and crop insurance.

4.Money transfer

Money transfer service is another critical financial service: the business of remittances, i.e. the money that emigrants send home to relatives, is growing strongly and is often managed by informal arrangements with high charges and high risks.Depending on the local regulation and costs this service can be delivered directly or in partnership with money transfer companies. MFIs owns the competitive advantage  of the relationship with their clients and such service can also be linked to other products or can be taken into account when calculating the repayment capacity of each client.