the microbanking bulletin - Microfinance Information Exchange

FEATURE ARTICLESDropouts and Graduates: Lessons from BangladeshGraham A.N. WrightIn microfinance, the value of retaining clients isparticularly clear. Typically, repeat customers havea credit history and want to borrow larger loans,whereas new customers require induction trainingand can often weaken the solidarity of groups.MFIs typically break even on a customer only afterthe fourth or fifth loan (Brand and Gerschick, 2000).And yet, many MFIs suffer chronic problems withclient desertion.Client desertion has profound implications for theviability of an MFI. High dropouts cost the organizationdearly. Groups from which members drop outare destabilized and must recruit new (less experienced)members, who qualify for smaller loans thusreducing the overall interest income for theinstitution. The new members have to take a disproportionaterisk and guarantee the larger sumstaken by their fellow group members, adding furtherstress to the group guarantee.Each dropout is a lost client who underwentlengthy, expensive training. The replacement membersmust either receive this training on an individualbasis, or join the system without the trainingthat many MFIs regard as critical. The formeroption of ad hoc training is extremely inefficient, andthe latter—if indeed initial training is soimportant—threatens to undermine the system. Inthe face of frequent or multiple dropouts, some ofthe groups may disintegrate entirely.Careful analysis of the reasons for these dropoutsalmost invariably points to inappropriately designedproducts that fail to meet the needs of thecustomers (see Wright, 2000 and Hulme, 1999).Much of this problem is driven by the attempts toreplicate models and products from foreign environmentswithout reference to the economic or socioculturalconditions into which they are beingimported. This has been exacerbated by the lack ofcompetition in the markets where the originalmodels were developed.Ironically, many of the clients are driven out not onlyby the inappropriate design of loan products butalso by the unwillingness of MFIs to recognize that(particularly in rural areas) there are seasons whensavings services, not loans, are required. Thusclients are forced either to borrow and try (againstthe odds) to service the loan, or to leave the MFI.All the while, their need for savings is unmet andignored.Dropouts In East AfricaIn East Africa, the rate of client dropout rangesbetween 25 and 60 percent per annum. 11 Clearly thisrepresents a substantial barrier to achieving selfsufficiency.When an organization loses over aquarter of the clients every year, it is “running hard tostand still”. In the words of Hulme (1999), “client exitis a significant problem for MFIs. It increases theircost structure, discourages other clients and reducesprospects for sustainability.”Finally, dropouts often leave because they cannot(or do not want to) manage loan repayments.These clients stop attending meetings and, freedfrom the group guarantee and from the incentive ofcontinued access to financial services, are likely toleave behind an unpaid loan.High dropout rates often indicate dissatisfactionwith the financial services offered by the institution.Members choosing to leave generally do so eitherbecause the organization is not providing goodenough services to warrant the (social andfinancial) costs involved, and/or because they haveidentified a better alternative.Members expelled from a microfinance program(for, of course, not all dropouts are voluntary) arelikely to be indicative of an even more complicatedbundle of factors, including: client selection (orbetter said “de-selection”) by fellow membersand/or staff, the clients’ inability to pay loans oreven savings, and the clients’ unwillingness torepay loans, which is in part a proxy indicator forcustomer dissatisfaction.Dropouts in BangladeshThe reasons for desertion are multidimensional.Indeed, the unifying theme of the studies on thesubject is that dropout causes are complex. Khanand Chowdhury (1995) present interesting findingson the high proportion of voluntary dropouts drivenaway by the inflexibility of BRAC’s system—inparticular its savings facilities (see Figure 1).11The desertion rate is the number of dropouts in the period /[(number of clients at beginning of the period + number of clientsat the end of the period) / 2]. If the period is not a year, then therate is annualized.14 MICROBANKING BULLETIN, APRIL 2001