Why and how should Microfinance Institutions provide non-financial services?

Alice Goubert

Junior expert in financial inclusion

Microfinance institutions’ mission is to provide financial services (loans, savings or insurance) to people who are excluded from the financial system because they are poor and do not have any credit history and are thus considered as risky and costly for the banks.

For Mohamad Yunus, founder of the first microcredit bank, poverty does not lie in the lack of skills but in the lack of financial means to exploit them. Consequently, providing poor people with liquidities is the most efficient way to fight against poverty, and microfinance then appears as the solution to the World’s misery.

But according to many other scholars, poverty is multidimensional[1], and giving access to financial services to poor people is not enough to lift them out of poverty sustainably. It is for instance the case of Amartya Sen, who explains in his Capability Theory that poverty lies in the deprivation of the capabilities to live the life one intended to and not only in the deprivation of money. People lack access to health and education infrastructures, business networks, innovation, markets, etc. In other words, they lack opportunities to break the vicious circle of poverty. Consequently, according to these scholars, microfinance institutions (MFI) should not content themselves by providing liquidities if they want to have an impact on the poverty level of their clients, but should also provide non-financial services.

Non-financial services (NFS) are “any services added to the microfinance package, which seek to enhance the poverty alleviation impact of the financial services”[2]. They can be of very various natures. Financial education is a key non-financial service. It consists in supporting beneficiaries towards a sound and sustainable management of their financial resources, to enable them to smooth their income over time and set money aside. Non-financial services can also be business–related such as legal advice, technical or business development trainings etc., or more socially-orientated services, which include health-related services, general education, green programmes, etc. The theoretical impact of non-financial services on people’s life is dual: on the one hand, they are supposed to increase their productivity and thus income through business training, market linkages, etc. On the other hand, financial education, health trainings, activities linked to sustainable agriculture or education, will increase their resilience to shocks, whether climatic or economic.

If the theoretical path through which non-financial services would improve beneficiaries’ livelihoods is pretty evident, empirical studies’ results diverge sufficiently to affirm that reality does not fully align with theory.

Numerous researchers did demonstrate a positive and significant impact of non-financial services on the livelihoods of the participants, such as Leatherman[3] who reviewed seventeen empirical studies, and found evidence that combining health and microfinance programmes results in a better health knowledge, changes in behaviours and better access to health infrastructures. Halder found similar results: higher income for the women who participated in the skills training provided by BRAC[4]. The number of studies finding a positive impact is large, however a significant number of studies find no or mixed evidence that non-financial services have any impact on poverty, such as Karlan and Valdivia[5] who found that business trainings do not have impact on the profits or revenues of the beneficiaries.

Studies like this last one strengthen the discourse of the advocators of a more minimalistic credit model, along with the fact that non-financial services threaten the financial performance of the institutions, because they obviously come at a cost. But if designed well, non-financial services should not harm the finances of the institutions and could even represent a competitive advantage. First, today institutions mostly deliver the non-financial services against a fee, which, although it often is inferior to the marginal cost, covers a part of the expenses.

But most importantly, non-financial services are a way for MFIs to sustainably improve the quality of their portfolio, by increasing their clients’ profits and resilience to shocks. Non-financial services thus increase the capacity of the clients to repay their loan but they may also increase their willingness to do so. As a matter of fact, non-financial services are a way for the microfinance institution to create a special relationship with their clients and increase their feeling of loyalty towards the institution, which has proven to be particularly beneficial to the institution in highly competitive contexts or in adverse situations.

Lastly, if they are demand driven and thus answer the needs expressed by the beneficiaries, non-financial services can be a way for institutions to stand out in an increasingly competitive sector. Conversely, if they are imposed and compulsory, borrowers will most likely desert to another institution, as attending the sessions represent an opportunity cost for them.

Non-financial services are a mean to tackle the deeper roots of poverty, but one could argue that it is not necessarily the role of microfinance institutions to do so. What is the legitimacy of a loan officer to deliver health-related trainings? And wouldn’t it, in turn, harm his or her credibility as a loan officer? In order to solve this problem, microfinance institutions are increasingly linking up with organizations specialised in the relevant field, in charge then of delivering trainings and other services. In Europe in particular, non-financial services can be the object of a partnership between a MFI and a public organization which is willing to deliver (and pay for) the services because they will in turn generate positive externalities such as the reduction of welfare costs linked with unemployment and health or the increase of income tax revenues.

Microfinance institutions thus place themselves within a larger, multi-sectorial and inclusive network and play the role of a link between isolated populations and various structures, all fighting against the different dimensions of poverty.

 

[1]Lensink R., Mersland R., Hong Vu N.T., Zamore S. (2018) Do microfinance institutions benefit from integrating financial and nonfinancial services? Applied Economics, 50(21), pp. 2386-2401

[2] Biosca O., Lenton P., Mosley P. (2014). Microfinance Non-Financial Services as a Competitive Advantage : The Mexican Case. Strategic Change, 23, pp. 503-516.

[3] Leatherman S., Metcalfe M., Geissler K., Dunford C. (2012). Integrating microfinance and health strategies: examining the evidence to inform policy and practice. Heath and policy planning. 27, pp. 85-101.

[4] Halder, S. R. (2003). BRAC’s business development services—do they pay? Small Enterprise Development, 14, 2, pp. 26–35.

[5] Karlan D., Valdivia M. (2011) Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions. Review of Economics and Statistics, 93(2), pp. 510–527.

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