the microbanking bulletin - Microfinance Information Exchange

FEATURE ARTICLESThe group meeting is the nexus around which theGrameen model is based and indeed the majority ofclients in both Bangladesh and Uganda said theyliked attending meetings. In Bangladesh, clientsindicated that they liked the opportunity to socialize,whereas in Uganda the meetings presented anopportunity to share ideas and learn from eachother. However, some clients definitely tire of themeetings. For some borrowers, the opportunitycost becomes too high; for others, changes infamily situations make attendance difficult.Group guarantee: The ‘peer guarantee’ is anessential element of most group lending methodologies.It acts as a collateral substitute, whichenables group lenders to target client segmentsbelow that of individual lenders. However themajority of respondents in both countries do not likeit. Not only do they not like paying for others, butalso they do not like others paying for them.To reinforce the group guarantee, MFIs need toimprove client selection and group formation. It isimportant to select only clients who are economicallyactive, to be forthright about the risks associatedwith peer guarantees, and to emphasize peer‘support’ rather than ‘pressure’ when clients experiencedifficulty. Loan officers also need training tohelp groups work through solutions to repaymentproblems.Customer ServiceIn both countries, a small percentage of clients saidthat negative interactions with loan officers were thereason they dropped out. This appears to be due toa mixture of factors, including clients not understandingthe risks of borrowing and loan officersbeing under a lot of strain and being harsh withclients. Clients can and do generalize about anentire organization based on one bad interaction.Loan officers, and indeed all staff, must see clientsas customers who are paying for services. Theymust realize that they are managing long-termrelationships, not one-time transactions. Employeesshould be given the appropriate support fromthe institution, including skills and time, to deliver ahigh quality service.ConclusionSince this research was completed, both affiliateshave modified their loan product and transactioncosts. Shakti Foundation increased loan amountsand increments. UWFT reduced the compulsorysavings requirement, and lowered fees andcommissions. In addition, one half of the remainingfees and commissions were allocated to a loaninsurance fund. Clients were also given the optionof increasing loan terms and loan sizes subject totheir capacity to repay.The research shows that microfinance clients, likeall consumers, behave rationally. They will staywith a supplier as long as benefits outweigh costsand there are no better alternatives. When theyleave, they do so because of product features thatare unsuitable to their needs and/or service deliveryattributes that are difficult or costly. The researchhighlights some key challenges facing MFIs:• Managing the balance between flexibleproducts and services and the need tostandardize procedures to improve efficiency;• Building a range of products that focuses onretaining clients over time, such as introducingindividual lending, flexible compulsory savings,voluntary savings, micro-insurance and accessto BDS;• Shifting the mindset throughout the organizationto view the client as a customer and to realizethat the customer is important.The research also demonstrates that talking toformer clients can provide an MFI with a wealth ofinformation about why they became dissatisfied. Ifthe research is designed well, the MFI can identifythe product or service delivery attributes it shouldbuild on and which features should change to improveretention. The issue then becomes, whichclients does the MFI want to retain? This leads tothe next big challenge in microfinance—segmentingthe customers.To segment customers, an MFI should at minimumtrack information about the borrowing and savingbehavior of individual clients, even within grouplending methodologies. This data can then beanalyzed and fed into complementary marketresearch activities.Deepening the institution’s understanding of itsclient base is an iterative and continuous process.Every transaction with a client should be viewed asa learning opportunity. Finding inexpensive ways ofinstitutionalizing feedback mechanisms from theclient right up through to the board of directors iscritical. This can be achieved, for example, byholding monthly meetings with field staff and actingon their ideas for improvement, and ensuring topmanagement spends more time talking with currentand former borrowers. Finally, developing a morerefined understanding of client needs andpreferences not only makes good business sensenow, but it will also be a defining source ofcompetitive advantage in the future.24 MICROBANKING BULLETIN, APRIL 2001