Microfinance Products
Products delivered by MFIs are many and include loans, savings,
insurance and money transfer. Non Financial products such as training or
consulting are also often delivered by microfinance institutions. This
session analyses the main products actually offered by MFIs but as the
industry matures additional products have been introducted by many
institution.
A. Loans
The success of many MFIs can be indetified in their ability to combine
successful practices from informal sector (moneylenders) into formal
institutions. The extraordinary success of microcredit comes from its
ability to replicate some of these features from moneylenders into more
“formal” financial institutions lowering the interest rates applied.
These interest rates still remain much higher compared to traditional
banking loans due to the higher administrative costs of managing many
small loans instead of fewer with large amounts.
The specific features that microfinance instutions should implement to
deliver valuable service for their clients are listed below.
1. 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.
2. Clear, easy, and flexible conditions
It is important to provide the credit service at convenient conditions
for the clients. Transaction costs, which include transcactions costs
(to pay the instalments or get the money) or time away of work,
throughtout the life of the loan must kept low. Loans should also not be
strictly linked to a specific purpose.
3. Permanent services
Credit services must be provided on an ongoing basist, not only for a
limited period of time, the lack of this requirement is the main
shortfall of many project that despite their effectiveness do not have
the goal of delivering financial services an ongoing and sustainable
basis.
4. Altenative collaterals and collateral substitutes
Poor people often lack traditional collateral. To vercome this obstacle
many MFIs use other kinds of collateral known as collateral substitutes
and alternative collaterals.
B. SAVINGS
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. These accounts do not necessarily provide a return on
deposit and are kept by the institution until the balance of the loan
has been paid off.
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.
C. MICROINSURANCE
Low-income entrepreneurs, just like anyone else, are vulnerable to
risks, such as illness, injury, theft, death, accidents and flood. This
is why financial products to mitigate the effects of these risks are
valuable for them. Insurance is a financial service that some MFIs are
starting to add to their portfolio to respond to this need of
protection. Providing savings and insurance services besides credit make
the MFI a full service financial institution delivering microfinance,
i.e. a full set of financial services to low income people.
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. As the
majority of the MFI do not satisfy these conditions, there are
alternatives to the direct provision of insurance and the most common is
a partnership with an existing insurance company. Insurance companies
may not offer their products directly to poor people because they lack
experience in this market segment: the MFI can fill this gap and work as
an intermediary between the insurance company and its clients.
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. At present few MFIs are offering insurance services but as
the industry grows they start to be included among the set of products
offered.
D. 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. There is the
possibility to link remittances with credit products when remittances
are not used for consumption but for production purposes, combining the
different sources of funds.
A study by Manuel Orozco showed that in 2002 the average fee to send
between US$150 and US$300 from the United States to Central America was
on average 7.35 percent the value of the amount sent, to which must be
added average additional costs of about 2.3 percent. The total average
percentage paid on a transaction of US$150 was about 18 percent. These
high charges are primarily due to a low competition in the market and
this is why MFIs started to provide, together with the other traditional
financial products, this valuable service for their clients.
