SESSION 4 

Microfinance Products

Low incomes people hard to access the financial institution product with high collateral such as savings accounts, mortgages, consumer credit, insurance, loans for funding a business and money transfer provided by bank. But MFI or Microfinance institution product is on the other hand, access these financial services?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 features of these products. Loans, and increasingly savings, constitute the main products actually offered by MFIs but as the industry matures additional products have been introduced by many institutions.

A. Loans

The success of many MFIs can be identified in their ability to combine successful practices from the informal sector (moneylenders) into formal institutions. These include flexibility, fast access to funds, clear and easy conditions. 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 larger amounts. However, what is important is to 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 specific features that microfinance institutions should implement to deliver valuable services for their clients are listed below. These characteristics are met quite well by moneylenders giving them a competitive advantage. But MFIs that have been able to include these features into their credit services successfully replicated this competitive advantage.

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 andd flexible conditions2. ClearIt 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. Loans should also not be strictly linked to a specific purpose. MFIs should monitor the income streams of their clients but with a certain level of tolerance as restricting the possible use of funds will not allow microentrepreneurs to have the necessary flexibility in the use of the money received and thus interfere with the microbusiness development.

3. 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.

4. 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. Group guarantee is an example of the former, while personal property such as equipment or jewellery are an example of alternative collateral that are not accepted as collateral by the traditional banking sector.

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 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.