GROWTH STATEGIES FOR MFIs IN MICROFINANCE SECTOR

By Nidhika M.Com (hons.) 2nd sem Roll no. 17

There are various intensive growth strategies for MFIs which include:
(i) Market penetration (ii) Market development (iii) Product development (iv) Diversification

These intensive growth strategies for market-product factors are :

(i)Existing microfinance market- existing microfinance products situation (ii)New microfinance market- existing microfinance product situation (iii) Existing microfinance market-new microfinance product situation (iv) New microfinance market new microfinance product situation

y 1) Existing microfinance market-existing microfinance y y

y y y

products: Under this situation ,the customer retention is the biggest challenge for MFIs. In this case, MFIs are advisable to penetrate in the market by bringing more customer base and try to maximize the outreach. 2) New microfinance market-existing microfinance products: When the MFI has a microfinance product with a saturated market and sees other virgin market. In this case, MFI is advised to develop other microfinance market by vigorous field works.

y 3) Existing microfinance market-new microfinance

product: y Under this situation, the market understands about some of the microfinance products, the MFIs who thinking of introducing new product should go for product development. y 4) New microfinance market-new microfinance product: y If the market is new and microfinance product is also new, the MFI should go for diversification.
y MFIs focus on the market and product development as

their growth strategies

Existing microfinance Products Existing microfinance market

Market penetration and customer retention (top priority)
Market development Search for new product and modify existing to the need of new market (medium priority)

New microfinance Products

Product development By refining the existing product and developing new products (medium priority)

New microfinance market

Diversification (lowest priority)

Intensive growth strategies for MFIs

MFIs develop product for various reasons like:

(i) Meeting the client s demand (ii) To increase the client base of the MFI (iii) To increase the market share when the market is competitive (iv) To minimize risk associated with products, clients and market (v) To reach new market segments

The conventional view of market development has four phases of competition:

PIONEER
First phase

Growth volume is slow. Less competition as one or only few MFIs provide financial product and services More supply driven than demand driven

TAKE-OFF Second phase

Market experiences rapid growth. Sharp competition among MFIs. More supply driven than demand driven

CONSOLIDATION Third phase

Market starts growing and leads to saturation. MFIs have to increase their scale of operation and self-sufficiency and reduce the cost on the products and services. More demand driven than supply driven.

MATURE Fourth phase

The market competition depends upon brands. More competition. The existence of an MFI in mature market is determined by the organizational sustainability of the MFIs

Pioneer Few MFIs Take-off MFIs start tailor the products as per the customer demand

Consolidation Increased scale of operation and self-sufficiency,

Mature High competition, product innovation and economies of scale of MFIs

According to Churchill and Frankiewicz (2006), MFIs can adopt four strategies as their horizontal growth options. These strategies are: MFIs can open their branches in the field where they expect to make their strong position. Then these branches will try to bring more and more clients to the MFIs book by geographic diversification.

MFIs can allow growing their branches to a certain maximum size and then splitting the branch into more branches or sub-units MFI may go for concentric expansion i.e., new branches may be opened to the existing branches MFI can open all their branches at once

Customer Retention In Microfinance

y The MFIs are interested that their clients should be loyal

to them by purchasing the microfinance products regularly and refer about the MFIs products to their friends, relatives. y Customer retention is very important to MFI as the cost of selection of new clients incurs high costs to MFIs. y The MFIs increase in new clients mostly depends upon the reference of old clients to new potential clients. y The moment , the old clients provide negative feedback, the MFI will certainly loose the market share.

The MFIs client dropping mostly depends upon:

1) Inadequate, inappropriate and inefficient services of the MFI to the clients:
Many cases, the MFI staffs make false commitments.

2) Non-provision of tailor-made products and repayment schedule:

The livelihood of all the villagers and urban poor is always changing. So, The clients need different products and different sizes of same product . As per their livelihood.

y 3) Imposition of wrong and negative picture of the

MFI and its products by competitors:

Often the non-institutional financial sources play guerrilla warfare with the MFI and try to defame the MFI and its products.

4) Non-follow up of the clients:

Often many MFIs stop follow up of the clients after the repayment of the loan product or completion of financial transactions. This develops a feeling of desertion in the client.

Clients Retention Of The MFI Depends Upon:

y 1) PRODUCT VALUE:
y The products offered by an MFI should be based on the

clients need. y The demand for the financial products changes with location, preferences, livelihood, availability of infrastructure, economic condition of people, level of literacy, religion etc. y The MFI should be priced less i.e., the MFI must actually design the cost of the product.

2) SERVICE VALUE:
y The MFIs should focus for such services where

the clients will face less transaction cost and less transition period. y The products should be provided at the doorstep of the clients. y The MFI staff should be ready to explain these financial aspects to the clients as many times the clients want.

3) IMAGE VALUE:
y MFI should always try to position their image

value. y The MFI should maintain the regular contacts with the clients so that the clients may not get affected by ridicule speculations of the market.

4) NON-FINANCIAL SERVICES:
y The non-financial services pull new clients to the

MFIs book and retain the existing clients. y The non-financial services of the MFI act as an incentive to the clients.
y Non- financial services include: y (i) capacity building programmes y (ii) business development programmes y (iii) training programmes etc.

PRODUCT VALUE

IMAGE VALUE

Client retention by MFI

NONFINANCIAL SERVICES

SERVICE VALUE

Outreach Of Microfinance:
y The cost of operations of MFIs depends upon the level of y y

outreach. The cost of fund, operating cost and bad debts decreases when the number of clients increases. Operating cost of MFIs having less than Rs. 5 crores annual outstanding and less than 10,000 clients is 12-15% of the outstanding. Operating cost of MFIs having 10,000-1,00,000 clients and annual Rs. 5-50crores outstanding is 10-12% of the annual outstanding. Similarly, the mature MFIs having client base of more than 1,00,000 and annual outstanding over Rs. 50 crores have the operating cost which is 8-10% of the outstanding.

Churchill and Frankiewicz (2006) mentioned six aspects of outreach of microfinance , in their book Making Microfinance Work. Depth Worth Breadth

Outreach of Microfinance

Scope Cost

Length

y 1) The LENGTH of outreach determines the

sustainability of the microfinance institution. Length is the period for which the microfinance is provided i.e., 10 years , 20 years.
y 2) The BREADTH of outreach is the cliental base or

number of clients.
y 3) The DEPTH of outreach is the poverty level of

the clients of the microfinance institution.

y 4) The WORTH of outreach for clients is the

willingness of clients to pay. Worth depends upon the design of microfinance products like credit, saving etc.
y 5) The SCOPE of outreach reflects the variety

of financial services the MFIs provides.

y 6) The COST of outreach is the sum of the

costs including interest rates, fees, and transaction costs.

Outreach of BANDHAN:
BANDHAN, an MFI registered under NBFC Act, opened its first microfinance branch at Bagnan in Howrah district of West Bengal in July 2002. It had started with two branches in the year 2002-2003 in the state of West Bengal and it had maintained the outreach across six states of India with 412 branches by 2007. Now at present it has 1553 branches across India. Staff 9441, Loan disbursed Rs. 594 crores., Loan outstanding Rs. 3177 crores.