Every financial institution must seek to provide the services demanded by its clients. While this might sound like a truism, it is commonplace experience to see financial institutions offering services that are not needed by their clients. When this happens, we have a disconnect between the institution and its clients.
Microfinance institutions have a primary role of financial intermediation, which involves bringing together economic agents in need of funds in contact with those that have funds to give out. This happens through the instrumentality of savings. Saving permits the transfer of capital or liquidity from surplus economic agents to deficit ones. Most microfinance institutions are allowed to take deposits. Such institutions are also usually insured by the country’s deposit insurance providers to protect the depositors.
In Nigeria, microfinance banks (MFBs) take deposits in addition to providing other services, including insurance and payment services. Accordingly, the Nigeria Deposit Insurance Corporation has included them among the banks whose deposits are protected by the corporation. This deposit protection serves a number of purposes, including the building of confidence in the system and the provision of some level of protection to those who buy into that confidence and put their money in the MFBs.
The choice of what financial services to provide and how to provide them lies squarely with the microfinance institution. Generally, the choice is driven by the vision and objectives of the institution, its customers’ preferences or demand and its institutional structure. However, an MFB that is success-driven takes two key factors into consideration before it chooses the services to provide to its clients: demand and preferences of clients and the simplicity of the design of such products.
Such success-driven MFB must seek to always respond very quickly and effectively to the needs of its clients. This would, as a matter of necessity, imply the designing of simple products that answer to the needs of the customers. There is nothing to gain from esoteric products that do not meet the needs of the clients or that are hard for them to understand and operate.
When clients are offered services they do not need or products that are complicated, they respond negatively. The best that one could expect of such clients is to disappear at the end of the current transaction cycle. Thus, the chances of repeat business are often lost. One of the key success factors for small businesses is repeat business. This takes the form of a first-time client coming back after the first transaction. It also takes the form of such a client informing others like him to come and patronize the service provider.
Unfortunately, most service providers in Nigeria, not just the MFBs, have not understood the power of a satisfied client. His advertisement benefits are so huge that no well-run business should be in doubt of its value. Customers who are satisfied do not go away. They come back and when they do, they do not come alone. They bring new customers. That is how businesses grow. First, you have to provide the clients with the service they need. And you simplify the processes.
Microfinance institutions must learn the key tenets of viability, and the first of such tenets is the provision of services that meet the preferences of the clients. Most microfinance institutions (MFIs) run the Integrated Model, which involves offering more than financial intermediation services. Whatever the services are, be they insurance, credit, savings, payment or card services, they must be compatible with the client’s enterprise outlay and its cash flow pattern. Not matching the cash flow with loan repayment, for instance, is the first recipe for delinquency or default.
Another element of viability of MFBs is the ability to relate or tie additional financial support of loans to the performance of prior contracts. It is often tempting for an MFI to grant additional facility to clients with questionable performance records, just to meet targets or enjoy some short-term benefit. This does not allow the institution to identify and reward strong performance. A major purpose of repeat loans is to back the client in the pursuit of its viable projects. It helps them to support the client’s activities more effectively.
Microfinance clients are weak by nature. Their condition of weakness imposes some duty of care, as it were, on the service provider to ensure that services are not only appropriate to needs of the client but also provided with a high degree of convenience to them. This is why MFBs services must be brought as close to the clients as possible. Thus, one of the preliminary tests of service quality is the relative ease of access to the service. Microfinance institutions cannot afford to create the unapproachable image that defines the regular banks. The poor are vulnerable and should be supported not only financially but also physically and emotionally.
It is in keeping with successful operations for an MFI to motivate its clients to perform their obligations. Motivation includes simplicity of processes, allocations advantages and even financial rewards for performance.
Cost recovery is an inviolable principle for sustainability. MFBs must try to recover their costs. The need to make very small loans is critical in this business. It helps service providers create the right loans that are appropriate for the needs of their clients. However, small loans may necessitate higher loan pricing and interest rates that may be viewed as steep. MFBs must ensure that such high interest rates, even though above commercial bank rate, must be significantly lower than those of the informal credit markets such as the money lender. This way the MFB recovers its costs but still keeps its clients.
Emeka Osuji
