ARTICLE (March 28 2010): Microfinance plays a vital role in offering access to financial services to those segments of the society that are typically excluded from the formal financial sector. As such microfinance is far more than microcredit as offering 'micro' loans is actually one part of the spectrum of services microfinance offers to society.
Microfinance services include loans to poor people certainly but also offer access to deposits, money transfers, insurance policies and so on to a large part of the 'unbanked' population. People living in poverty have as much, if not more, of a need for diverse financial services as do those with higher incomes. For the poor, a day's lost wages can mean no food for the household while for the well-off, a few days of unemployment have little effect on basic consumption.
Just as the range of services offered by microfinance providers is huge so is the distinction between various segments of the market that each type of service caters to. Microfinance clients are for the most part categorised according to their poverty level and appropriate services are offered to each niche of the market. In Pakistan, as is the case globally, we describe the niches in the market beginning with the bankable non-poor and ending with the destitute extremely poor.
The pyramid contains between those two extremes, four segments - transitory non-poor, transitory vulnerable, transitory poor and the chronic poor. As the microfinance sector evolves, each segment of the market is treated as a niche that is a subset of the entire market towards which specific products with distinctive features need to be focused.
Within the wider demographic audience each of the six segments can be catered to by some category of microfinance providers once the products and services are modified to serve the needs of that segment. Targeting the right segment with the correct product and service mix is the key to efficacious delivery.
Usually, people who use microfinance are poor, belonging to the poor stratum of the economy. Clients might even be unemployed, trying their hand for the first time at entrepreneurship. Microfinance providers (MFPs) cater to the needs of clients, who are excluded from the main stream of financial services as commercial banks do not find it viable to operate in the poorer, more isolated, parts of the country.
As is the case globally, in Pakistan also microcredit clients predominantly fall in the segments that are just above and below the poverty line. Over the past decade, the MFPs have seen an opportunity to increase their client base by diversifying. They have started developing a range of products to meet the needs of other clients, like pensioners and salaried workers.
Although the exact number of potential clients of microfinance is not known, estimates suggest that it ranges between 10-60M individuals (above the age of 18 and below 65) and they require a range of financial services as are required by the wealthier segments (don't you think like us they require annuity plans to meet their education and marriage requirements, what about the need to be able to access deposit services whenever there is a need of cash to meet a particular emergency or to deposit excess cash when it is available after wheat or cotton harvest).
Logic dictates that the extremely poor are not the 'real' clients of microfinance, which is after all the provision of financial services to those, who are economically or at least potentially economically active. The extremely poor are that segment of the population that lacks assets, has no (or minimal) saleable skills and in short, has the least developed natural capabilities to be productive.
The extremely poor are then the niche for safety net programmes, such as the Zakat fund or the Bait-ul-Maal or more recently the Benazir Income Support Programme and the Sasti Roti schemes, which effectively subsidise their lives without any compulsion for economic participation or responsibility.
In complex models or graduated programmes, the extremely poor can become recipients of grants and trainings such that they are eventual clients for microfinance providers. This segment, however, cannot be catered to without the support and involvement of the government and is not at present able to take advantage of the extensive and complex services that are the repertoire of microfinance.
Microfinance providers now use poverty assessment tools to determine where their 'investment' in people will do the greatest good. Serving the extremely poor requires ongoing subsidisation and government involvement to ensure food security, shelter and healthcare.
Similarly, the chronic poor require greater flexibility in the sort of services offered to them. At the upper end of this spectrum, microfinance providers are offering services that include savings, money transfer and micro insurance. It is the considered opinion of the MF sector that microcredit to the bottom two bands is counterproductive as lending to the very poor can lead to a debt trap.
Traditionally, the main target clientele for the microfinance industry are those segments of the population that straddle the poverty line - the transitory poor and the transitory vulnerable. These are the segments of society who are economically active - they work for themselves or for others, have some marketable skill and have earning potential, realised or unrealised.
These are the people who can start their own businesses or expand it once they are given access to capital - microcredit. These are people who given the opportunity would prefer to save in a formal institution as opposed to buying non-earning assets. These are the potential entrepreneurs that microfinance targets.
The transitory poor and the transitory vulnerable are, also, the most likely to traverse segments as their economic status is the most volatile and unstable. Price hikes of any staple good can cause either to move to the segment below, while unemployment, illness or death in family can cause the same.
Microfinance does substantially more than offer this population credit - it offers them security. Savings, remittances, insurance (health and life) and working capital facilities smooth out consumption patterns and give them a relatively stable income to focus on raising their standards of living.
The transitory non-poor and the non-poor, of course, can, if they so choose, utilise the savings facilities offered by Microfinance Banks, but they are not the target clientele of traditional microfinance.
It would, however, certainly be socially responsible of those not beset with poverty to place their funds where they will be utilised for microfinance services. It is, however, an important segment that is known as the "missing middle" and needs capital of a larger amount to set up or expand business.
A lot of research is now being carried out to find out opportunities available and the risk associated with this segment. There is no doubt, however, that this is the segment that could result in the setting up of small to medium enterprises, hence creating jobs for the larger population.
The wide range of microfinance providers (MFPs) present in the market, is symptomatic of the variations in the type of services they offer and who they target as their clientele. The MFPs range from small non-government organisations (NGOs) to microfinance banks, from community organisations to telecommunications services for remittances. These providers have over the years evolved clear structures and policies for catering to the needs of their particular niche in the market.
As the industry evolves further, we are likely to see more specialised product development and more targeted delivery of those products. While microfinance began with credit provision for productive purposes, it already has multiple loan and insurance products like health insurance, loans for children's education, emergency covers, money transfers through mobile banking and saving services that cater to the need of different segments. The microfinance industry by its very nature is evolving to provide market segments with those financial services that best serve society and target populations.
Niche marketing and co-operation with external stakeholders is the next step to expand the provision of financial services to poorest and transitory non-poor segments.
Source: http://www.brecorder.com/index.php?id=1036602&currPageNo=1&query=&search=&term=&supDate=
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