IMF Resume Chapter 4

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.