Globally, Micro, Small and Medium enterprises (MSMEs) have been playing a crucial role in promoting economic development. MSMEs contribute to the local economy by creation of employment opportunities for millions and in the process inject much-needed capital and liquidity in the local economy. However, one of the major challenges faced by MSMEs is the lack of access to finance. As per a recent McKinsey1 study, 15-40% of SMEs cite finance as the most important obstacle to growth. On the other hand, financial institutions are wary of financing MSMEs and cite a variety of reasons including lack of reliable financial information, poor financial record keeping and absence of credit history. High transaction costs in servicing MSMEs as well as a perceived high-risk profile further add to the distrust. Through this paper, we suggest a fresh approach to MSME finance by introducing a simple but effective credit scorecard. We base our approach on practical examples from MicroSave’s work in expanding access to finance for MSMEs and hope that this approach will help financial institutions to look at MSMEs as a strategic segment.
Blog
White Labelled Mobile Financial Services
White labelling is quite common in the financial services sector. Smaller banks sometimes outsource their credit card operations to larger banks. The larger bank issues and processes the credit cards as white label cards, typically for a fee, allowing the smaller bank to brand the cards as their own without having to invest in the necessary infrastructure. There are also white labelled ATMs where a third party sets up an independent ATM network which can facilitate cash withdrawals on behalf of multiple partner banks. Taking a leaf out of African countries, Canada and Europe, Reserve Bank of India recently permitted non-banking companies to set up and run ATMs for commercial banks. In mobile financial services sector, white labelling is becoming increasingly popular. In this video, MSC’s Senior Analyst, Shivshankar V., outlines the benefits of white labelling mobile financial services and provides quick reminder to financial service providers on things to remember while white labelling mobile financial services.
Pitfalls of SME Lending
Microfinance banks and MFIs generally venture in to SME financing without understanding the model and common pitfalls, which might result in losing the portfolio. In this episode, MSC’s Specialist, Venkata N. A., discusses the common pitfalls of SME financing. In his words “SME financing is completely different from Joint Liability Group model of lending. It has different HR requirements, different organisational structure, different MIS requirements etc.” The common pitfalls are lack of financial statements, lack of industry benchmarks, lack of credit history, lack of skilled appraisers and one size fits all dilemmas. It is very important for any institution to understand the pitfalls of SME financing and also to conduct institutional assessment before venturing in to it.
Index based Insurance as a Tool for Disaster Management – A study in South and South East Asia
Speaking at the conference, Sunil highlighted how index insurance can be an effective tool for disaster management for the poor. He further discussed the progress and experiences of weather index insurance in 5 Asian countries – India, Pakistan, Sri Lanka, The Philippines and Indonesia. The presentation also touched on the challenges faced by index insurance and emphasised the potential for scaling it up.
The index insurance study is conducted by MicroSave in collaboration with Climate and Development Knowledge Network, UK (CDKN) in South and South East Asia. The CDKN is managed by an alliance of organisations led by PricewaterhouseCoopers LLP along with Fundación Futuro Latinoamericano, INTRAC, LEAD International, the Overseas Development Institute and South North. “
Microinsurance Booklet
Microinsurance is the silent offspring of insurance and microfinance. However the complexity, technicality and diversity of microinsurance make it a unique sector. For close to a decade, MicroSave has been conducting industry assessment, market research, process design and optimisation including pilot-testing, brand/marketing and insurance literacy campaign design in addition to providing training in the fieldof microinsurance.
The Optimising Performance and Efficiency Series (OPE Series) brings together key insights and ideas on specific topics, with the clear objective of providing microinsurance practitioners with practical and actionable advice. The present volume of OPE series compiles the learning of MicroSave on strategising for microinsurance and optimising product and delivery channel for delivery of microinsurance.
Financial capability via listening and learning
Here is what we already know: most people at all income levels learn more from their first-hand experience with various financial services (formal and informal) than from “expert” or outside advisors. And sharing that learning with immediate friends, colleagues, and family carries more trust and has more impact than any brochure or video or special training programme.
For the wealthy, and even those with merely average earnings, the follow-up research for these personal experiences is readily available—much of it is even free—for anyone who can read, take notes, and seek out second opinions, via their computers, smartphones, radios, and televisions.
And yet we all still make injudicious choices. Imagine how much harder this is for very poor individuals and communities with far less to invest, no cushion for even small losses, and limited access to reliable information. Many of them must borrow to survive, and many of them see informal lending in the secondary markets—i.e. they themselves become the bankers—as a safer, more lucrative investment opportunity than the more formal channels.
“Poverty Impedes Cognitive Function”, a recent study sponsored by Princeton University in the US, and published in Science Magazine, 30/08/13, goes further to state that “poverty-related concerns impair cognitive capacity”, and the majority of study respondents can only make the “right” financial decisions after a successful harvest or with sufficient cash in hand to feel “rich”.
If true, this has interesting policy implications for fuller participation and financial inclusion, but MicroSave has been paying attention to how poor people save and invest in developing countries around the world for 15+ years. We would maintain that the first-hand experiences noted above, plus accurate, easily available and understandable (non-theoretical) information, and differing individual needs play equally important roles in making the correct decisions. The confidence, or lack of it, underlying the decision process is more complex than simply cash.
More to the point perhaps, the financial capability cannot even really begin until new account holders agree to keep at least some small portion of their earnings and/or government benefits and remittances in the bank accruing interest on a regular basis. Many choose not to. (We’re limiting the discussion in this blog to banks since most mobile network operators unless they are fully partnered with a licensed financial institution, cannot offer interest-bearing accounts.)
Extensive research on India’s No Frills Accounts (NFAs, now called Basic Saving Bank Deposit Accounts), and similar studies in comparable environments, reveal that up to 70-80% of these limited savings accounts remain “dormant” for a significant majority. Dormancy in this instance is not defined as “no use” but a rather full withdrawal of all external deposits and no other account activity.
But not everyone ignores their savings accounts. Our research also shows there is always a percentage of financially capable customers who are not momentarily flush with cash and yet still seek out information from various sources, and read the fine print–or have someone read it for them. They understand their rights and how the banking process works, and they know how to redress grievances. Some even question whether or not their bank should be using their deposits and savings, however minimal, for investments over which they have no control. (For more information on the various myths concerning financial education, please click here).
The standard predictors of sound money management—sufficient information, long-term needs vs. short-term benefits, and patience plus prudence–may seem more like common sense than important research findings, until we consider how very difficult all three are to achieve in circumstances which often include only semi-literacy, no technology support, long and often expensive distances to the nearest bank branch, and limited information and other resources at these branches.
Insurance is an example of this dilemma. MicroSave’s research on relative risk to savings in India shows most low-income insurance customers interviewed think they are buying a long-term savings product with risk coverage as an add-on. And this, in fact, is the usual sales pitch. Almost no one wants to visit an intimidating, distant office to confirm specific terms and conditions. So they don’t. Even those flush with profits, as per the Princeton study noted above, are unlikely to think the “cost” of collecting more information is worth the trouble.
The key is still probably in one positive – or negative – first-hand experience, transmitted with reasonable accuracy to others, who in turn share this knowledge with others. High dormancy, low deposits, bad credit choices, worse insurance choices are all potentially solvable if we design more financial education programs with specific product solutions, if and when appropriate, and with more involvement from all participants. If people ask more questions, they will have more answers for themselves and others. Financial inclusion initiatives may prove more effective if we encourage both.