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FEATURE ARTICLESable clients. These clients often take larger loans toexpand the working capital of their businesses or tofinance asset acquisition. The MFI will make mostof its profits on these larger loans since the cost ofadministering a loan is almost the same irrespectiveof its size. These long-term customers should alsobe better credit risks—although this is subject todebate. And crucially, these larger-loan clientsallow the MFI to finance its smaller loans to poorerclients. The last thing that an MFI, with its sightsset on financial sustainability, wants to see is thegraduation of these precious clients. Instead, MFIsshould retain them by seeking to meet their needsthrough a range of client-responsive financialservices.Conclusions for the Microfinance IndustryThere is compelling evidence, not just fromBangladesh, to support the contention that mostdropouts occur because MFIs do not meet theneeds of their market. Dropouts are expensive forMFIs, in terms of money already invested that islost when the member leaves, and the lost potentialbusiness from that member in the future. MFIsseeking to develop permanent sustainable organizationsshould improve their services to reduce clientdissatisfaction and thus desertion. Such a strategyis likely to prove cost-effective.For MFIs committed to creating permanent institutions,graduating the most experienced and affluentclients into the formal banking system is not adesirable strategy as it implies the loss of the mostvaluable and cost-effective clients. Indeed, MFIsshould tailor their services to ensure that they retainthese high value customers.For all these reasons, MFIs should pay (and indeedare paying) close attention to the nature and qualityof their financial services. The trade-off betweenthe quality of the services and cost of providingthem is clear, but finding the right balance isdifficult. To date, MFIs in Bangladesh have put toomuch emphasis on trying to implement standardized,inflexible, low-cost, credit-driven systemswhen their clients are asking (and willing to pay) fora broader range of quality services.The irony of this situation was that the genesis ofmicrofinance in Bangladesh was originally driven byan extensive program of careful market and operationsresearch designed to understand the needsof the clients. Professor Yunus’ work with his studentsat Chittagong University in the village ofJobra in 1976 was quintessential market research.It is to the fundamentals of market research andproduct development that MFIs must return if theyare to retain clients and build sustainableinstitutions.Graham Wright is Programme Director of MicroSave-Africa, Chair of CGAP’s Savings Mobilisation WorkingGroup and a Research Associate at the Institute ofDevelopment Policy and Management, University ofManchester, UK. He can be reached atGraham@MicroSave-Africa.com.ReferencesBrand, M. and J. Gerschick. (2000). Maximizing Efficiency inMicrofinance: The Path to Enhanced Outreach andSustainability. Washington: ACCION International.Hulme, D. (1999). “Client Exits (Drop outs) from East AfricanMicro-Finance Institutions.” Kampala: MicroSave-Africa.Khan, Md. K. A. and A.M.R. Chowdhury (1995). “Why VOMembers Drop Out.” Dhaka: BRAC.Matin, I. (1998). “Informal Credit Transactions of Micro-CreditBorrowers in Rural Bangladesh.” mimeo, Dhaka.Mustafa, S, et al. (1996). “Beacon of Hope: An ImpactAssessment Study of BRAC’s Rural DevelopmentProgramme.” Dhaka: BRAC.PromPT (1996). "Financial Services for the Rural Poor -Users' Perspectives." Dhaka: PromPT.Rutherford, S (1995). ASA: The Biography of an NGO,Empowerment and Credit in Rural Bangladesh. Dhaka: ASA.Wright, G.A.N. (2000). “Microfinance: The Solution or aProblem?” in MicroFinance Systems: Designing QualityFinancial Services for the Poor. Dhaka: University PressLimited and London: Zed Books.16 MICROBANKING BULLETIN, APRIL 2001
FEATURE ARTICLESExodus: Why Customers LeaveKim WilsonA customer is an asset. It is hard to disagree withthat statement. Yet the microfinance industry hasnot caught on to a customer’s value. While manymicrofinance institutions pay close attention tominimizing the costs of delinquency, they seem todisregard the expense of losing good customers.This article proposes that the microfinance industrylook at deserting customers with the same passionand precision as it examines delinquency. Tworeasons compel us to do so. First, lost customersplace our social agenda in peril. How can theempowering benefits of microfinance take place ifour customers flee after one loan cycle? And,worse, we may be losing our poorest customers,those whom we most want to serve. Second, lostcustomers cost money. They cost additional marketingdollars to attract and prepare new customersfor loans; and they cost us in lost profits.An Example of Using Dropouts to InformMarketing DecisionsThe first step in stemming the flow of dropouts is tounderstand who is dropping out and why. At Mikra,a new MFI in Bosnia-Herzegovina, the ExecutiveDirector, Sanin Campara, and his staff pay specialattention to data on deserting customers. They usedata to draw conclusions and make changes in theprogram. Campara believes that information suppliedby deserting customers is sometimes far morevaluable than data from existing customers.Deserting customers have nothing to fear inanswering questions. They have already made thedecision to leave, so information is likely to be valid,absent any bias a current customer might have.Current customers may fear losing services altogetherif they are honest in answering questions.Deserting customers can afford to be honest.Moreover, deserting customers offer a marketsavvyMFI more than information about themselves.They may offer clues as to why some customersmay not be interested in the MFI in the first place,as well as insights into the relative attraction of thecompetition (where applicable).To understand deserting customers better,Campara and his team interview every singledropout. To simplify the procedure, they check offreasons for dropping out on a one-page sheet thatdisplays the most commonly cited answers.They found that in one town, Kakenj, businessfailure caused 30 percent of the dropouts. Kakenjhad suffered many economic set backs—the closingof a coal mine, thermo-electric plant, and thestate-owned salmon processing facilities. Mikraimmediately put this information to use by tailoringservices to the local environment. In Kakenj, theloan officers started to help village banks becomemindful of potential business problems due to afailed economy.In another example, 7 percent of the dropoutsindicated that the loan terms were too short. Whileonly a small percentage, this figure became alarmingwhen staff discovered that the clients in thiscategory included some of Mikra’s best customerswho left as they approached their fourth loan. Mikraresponded by lengthening the term in the fourthcycle from six to eight months. Was this the rightmove? Mikra staff polled two village banks in thefourth cycle and learned that 13 percent would havedropped out if Mikra had not lengthened its loanterm. When asked how many would have droppedout if competition had offered longer terms, elevenof twenty-five members in one village bank respondedthat they would have defected.Mikra is now turning its attention to the relationshipbetween delinquency and desertion. Are delinquentcustomers dropping out when they would prefer tostay? Does an increase in tardy payers who areforced to leave the program signal the need for aproduct that better matches their cash flow? AtMikra, approximately 13 percent of the dropoutswere delinquent. Staff is fine-tuning their datagathering and database filters to determine who isboth delinquent and dropping out. Do dropout/delinquent customers have larger loans? Sincelarger loan customers are more profitable, changingthe loan product to meet their needs may be worththe effort (if it does not increase the organization’scredit risk). If new customers are deserting, thissuggests the need for adjustments to the marketingand screening processes.Mikra has one of the lowest desertion rates of allCRS-sponsored programs. Over the past 30months, with 2,500 customers, Mikra enjoys anannualized desertion rate of less than 11 percent. 13Is this because Mikra’s attention to deserters isexactly what prevents customers from deserting?At this early stage, we can only speculate.13This is calculated as follows: (number of dropouts last month /number of clients this month) x 12.MICROBANKING BULLETIN, APRIL 2001 17
Page 3 and 4: The MicroBanking Standards ProjectT
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Page 8 and 9: • Loan Size: The size of the loan
Page 11 and 12: FEATURE ARTICLESFEATURE ARTICLESDes
Page 14 and 15: FEATURE ARTICLESFigure 1: An Illust
Page 16 and 17: FEATURE ARTICLESsubject to a higher
Page 18 and 19: FEATURE ARTICLESThis modification w
Page 20 and 21: FEATURE ARTICLESDropouts and Gradua
Page 24 and 25: FEATURE ARTICLESHow to Analyze Drop
Page 26 and 27: FEATURE ARTICLESCultivating Client
Page 28 and 29: FEATURE ARTICLESIndustry DynamicsIn
Page 30 and 31: FEATURE ARTICLESThe group meeting i
Page 32 and 33: TALKING ABOUT PERFORMANCE RATIOSTAL
Page 34 and 35: BULLETIN HIGHLIGHTS AND TABLESCOMME
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