Promoting Microfinance for Small- and Medium-Enterprises
A month ago, I attended a conference in Manila sponsored by the Microfinance Council of the Philippine Islands. I wrote briefly about the level of cooperation among the participants, but have yet to share what I learned. The conference – titled “Operationalizing Social Performance Monitoring (SPM)” – brought together a dozen microfinance institutions (MFIs) and lenders from across the country to discuss best practices for focusing on the social mission. In the microfinance world, theoretical solutions to problems, like how to focus on the poor and remain financially sustainable, are often incompatible with the nuanced realities on the ground. This gathering offered a chance for MFIs to share what has worked and what has not, so that the microfinance community at large can be more effective at addressing poverty alleviation in the Philippines.
The keynote speaker, Prof. Ron Chua, functioned more as a facilitator and moderator than a lecturer. He asked the MFIs to present a specific social goal and discuss the measures each would take to achieve it. One nameless participant set an organizational goal of transitioning 30% of existing clients from micro-enterprises to SME (small- to medium enterprise) within five years. They presented a laundry list of programs designed to aid in this process. The underlying assumption behind each of these measures is that financial services (microcredit) must be complemented by the provision of non-financial services, including business development and support services and integrated community development. Provision of financial services alone is not enough to bring people out of poverty. This exhaustive list addresses all of the key issues in moving a client out of poverty. I will present the first six here, and the remained six in the next post.
1. Conduct trainings on personality and spiritual development
The Philippines is a religious country. The U.S. may call itself a Christian nation, but the Philippines walks the walk. Microfinance institutions serving the poor often have a basis in Christianity, though not all explicitly use the forum for evangelization. But giving women faith in God and building confidence in their abilities is important for success in their businesses.
2. Linkage of clients to DTI for product development, packaging, labeling
While most micro-businesses in the Philippines are sari-sari stores, many women still make food (native delicacies, candies, etc.) and manufacture crafts for sale in the local markets. Providing these clients with access to affordable packaging and labeling solutions allows them to improve the design of the product. In turn, the client can more easily introduce her products to the larger markets – a necessity for becoming an SME.
3. Exposure of clients’ products to local and international markets
In rural areas, much of the commerce remains within the community. Products are bought and sold between businesses and food might be sold door-to-door. But the most successful businesses are those with contract buyers in local markets that take product on delivery. Facilitating access to domestic buyers across the country removes the demand ceiling for these products. Holding trade fairs and collecting your clients with buyers on other islands and abroad opens up a whole new market. So, instead of selling your candies or banana chips outside the local university, now you can package and ship them to Manila.
4. Creating of a marketing cooperative which serves as a market link between entrepreneurial communities and potential markets
Micro-businesses are, by nature, small in scale. Without the adequate size, these women have little or no leverage in buying materials and negotiating on prices for goods. A marketing cooperative uses the combined purchasing power of the collective to get better prices for their products and cheaper input costs.
5. Livelihood skills development
Instead of just giving clients money to start a business, why not teach them a trade? Giving them the requisite skills needed to start a unique business – commercial cooking, welding, cosmetology, and massage, to name a few – gives clients a competitive advantage over their competitors. In addition, businesses requiring vocational training have a higher barrier to entry than the more traditional microfinance businesses, like a sari sari store or fish vending. The opportunities for success increase when fewer people are doing the same thing as you.
6. Financial education
Most microfinance clients have, at best, a high school education. Attending school is expensive and too often cost-prohibitive. Even if the women have been running a business for years, few have any formal training. By giving clients a basic education in debt management, savings, budgeting, and sourcing of funds, the MFI can improve its repayment rate and also help these businesses to grow. “Grassroots Entrepreneurship & Management,” or GEM, is a specific program used by this MFI to give its clients the basic business skills needed to grow their business into an SME.
The following clip highlights an eight-week program that, by offering a marketable skill in a short timeframe, generates opportunities for participants. In addition, the program promotes discipline, self-respect, and the “buddy system,” all crucial elements of microfinance.
7. Assistance in the placement of the graduates of the livelihood trainings
Developing marketable skills is critical to finding employment. Most of the poor served by microfinance do not have steady jobs. Some have seasonal or contract work, but very few have a job with a paycheck. But training is only one part of the equation. Connecting program graduates with potential employers presents another challenge, particularly when the labor pool is large and the jobs are few. Securing positions for clients is the critical next step after investing in training.
8. Creation of a mutual benefit association owned and managed by the clients to ensure the financial needs
In the developing world and the United States alike, sometimes life gives you lemons. In the latter, it’s easier to make lemonade. Unexpected medical emergencies, a death in the family, or a natural disaster can negate any upward progress. In the U.S., all but 45 million of us have health insurance to cover the astronomical cost of a hospitalization. For microfinance clients, that is not the case. An MFI can create a mutual benefit association to provide insurance for its clients. Clients pay dues to be a member of the association and, in exchange, are given low-cost insurance premiums. The sheer size of the insured pool generates economies of scale and drives costs down. CARD Bank, the largest MFI in the Philippines, offers these services to its clients through a subsidiary organization. As of year-end 2009, the association serves 967,963 households, or 4.8 million people, and has 1.8 billion pesos ($40 million USD) in assets. Here is the description from the website:
CARD-MBA is a mutual benefit association formed to promote the welfare of marginalized women; to extend financial assistance to its members in the form of death benefits, medical subsidy, pension and loan redemption package; and to actively involve the members in the direct management of the association including formulation and implementation of policies and procedures geared towards sustainability and improved services.
9. Linkage with Philhealth to augment their medical needs
Philhealth is the state-run health insurance program in the Philippines. It offers a basic level of coverage – like Medicaid, if Medicaid only allowed you to go to the state-run hospitals and did not offer full benefits. The problem is that a large percentage of the population – particularly poorer people living in rural communities and working in the informal sector – do not have access to the program. Enrollment is voluntary, and some people cannot or will not make payments. But microfinance institutions have access to these off-grid areas and connections with the unenrolled. Formalizing the process will provide low-cost health insurance to millions in need. This, in turn, will reduce delinquencies from medical emergencies and hospitalizations and will contribute to growth out of poverty.
10. Provision of accounting, auditing and consultancy services as well as business management advisory
When a company needs something done that it can’t do itself, it hires an expert, a business consultant that offers advice and guidance for a fee. The same can be true for micro-enterprises, but on a more basic level. Some of the ideas thrown out during this exercise were business idea generation, prototype production, pilot testing, business feasibility analysis, costing, tax awareness, and commercialization. Giving clients a base knowledge of finance, marketing, accounting, and management pays dividends as their business grows.
11. Provision of electricity to far-flung places thru the use of renewable energy
I discussed rural energy delivery, distributed energy, and the use of solar lanterns during a previous post. There are obvious economic benefits to electrifying a community.
12. Empowerment of the Indigenous Peoples (IP)
Microfinance institutions can offer a range of services designed to empower people to control their economic and financial destiny. Through the formation of functional working groups and the extension of training activities such as livelihood training programs, leadership training, resource mobilization, advocacy and networking, and gender forum on violence against women, clients have more in the information they need to make the right decisions.
Those are twelve critical components of poverty alleviation through microfinance. More specifically, this is how to turn a microenterprise into an SME. The premise best be summed up in an equation given by the microfinance institution that presented this 12-point plan:
Financial Services + Values Formation + Capacity Building + Linkage = Poverty Alleviation