Adopting a Client-Centric Strategy to the Base of the Pyramid (BoP)
By Seema Gohil ‘13
Microfinance has long been heralded as one of the key tools to economic development and financial inclusion for the underbanked. From its humble beginnings in the 1970’s, it has now grown to a $25Bn industry, and studies estimate that it will require another $250Bn to provide capital to all the poor worldwide. However, as the industry has matured, it has also come under increasing scrutiny over the last few years.
Critics argue that the pursuit of scale, efficiency, and a profit-oriented approach has driven the industry away from its core mission of serving the poor. High interest rates and over indebtedness have many people questioning the real motives of the MFIs, and they are calling on these organizations to re-evaluate their strategies towards a client-centric approach. The recent issues in Andhra Pradesh and the SKS IPO have put a spotlight on these issues, and attracted harsh political and social backlash towards the industry at large. Is all microfinance bad then? What best practices can the industry adopt to ensure a balance between sustainability, scale and client centricity?
Over the last few years, MFIs have come together to adopt client protection policies such as the Smart Campaign, to ensure accountability to the borrowers. Additionally, governments have stepped in to set rules and regulations to govern the local MFIs and ensure transparency and fair and responsible lending practices. While there is still a lot more work to be done, the industry is moving in the right direction to ensure consumer protection.
MFIs are also expanding their products and services to meet the holistic financial needs of their clients. They recognize that a “one size fits all” approach is unrealistic and that similar to large corporations, there is a need to tailor services to different levels of clients. Another fast-growing product area is microsavings, which has strong implications for encouraging positive financial behaviors. Microinsurance, remittances and mobile payment systems are additional products that MFIs have introduced to provide innovative client solutions.
Pricing transparency also remains a key issue that will drive positive changes in the industry. A regulatory framework will be integral to ensuring pricing transparency; however, they must also recognize the increased cost of providing microfinance services due to lack of formal infrastructure and the relationship lending nature of the enterprise. Balancing the interests of the clients, while also providing for sustainable and scalable organizations is a tricky balance and will be vastly different in different places.
Finally, the industry needs to build its capacity around impact measurement and evaluation. While there are several ongoing initiatives, most MFIs agree that there is a lack of focus monitoring and measurement within their organizations. A lack of financial and labor resources are cited as the primary reasons; it becomes a difficult trade-off between deploying resources towards serving more customers and impact evaluation. Additionally, there are no universal measurement standards, and it is extremely difficult to compare across organizations.
As with any growing industry, the microfinance sector has its challenges and is trying to address these issues to create a sustainable path forward. It has come a long way over the last 40 years, and while we continue to build upon it, we must also recognize the impact it has had to-date on millions of people worldwide.