MICROFINANCE HANDBOOK
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MFIs using the minimalist approach normally offer only financial intermediation, but they may occasionally offer limited social intermediation services. Minimalists base their approach on the premise that there is a single “missing piece” for enterprise growth, usually considered to be the lack of affordable, accessible short-term credit, which the MFI can offer. While other “missing pieces” may exist, the MFI recognizes its comparative advantage in providing only financial intermediation. Other organizations are assumed to provide other services demanded by the target clients. This approach offers cost advantages for the MFI and allows it to maintain a clear focus, since it develops and provides only one service to clients. The integrated approach takes a more holistic view of the client. It provides a combination or range of financial and social intermediation, enterprise development, and social services. While it may not provide all four, the MFI takes advantage of its proximity to clients and, based on its objectives, provides those services that it feels are most needed or that it has a comparative advantage in providing. An MFI chooses a minimalist or more integrated approach depending on its objectives and the circumstances (demand and supply) in which it is operating. If an MFI chooses to take an integrated approach, it should be aware of the following potential issues: ■ Providing financial and nonfinancial services are two distinct activities, which may at times lead an institution to pursue conflicting objectives. ■ It is often difficult for clients to differentiate “social services,” which are usually free, from “financial services,” which must be paid for, when they are receiving both from the same organization. ■ MFIs offering many services may have difficulties identifying and controlling the costs per service. ■ Nonfinancial services are rarely financially sustainable.
Financial Intermediation The primary role of MFIs is to provide financial intermediation. This involves the transfer of capital or liquidity from those who have excess at a particular time to those who are short at that same time. Since production and consumption do not take place simultaneously, something is needed to coordinate these different rhythms.
“Finance in the form of savings and credit arises to permit coordination. Savings and credit are made more efficient when intermediaries begin to transfer funds from firms and individuals that have accumulated funds and are willing to shed liquidity, to those that desire to acquire liquidity” (Von Pischke 1991, 27). While virtually all MFIs provide credit services, some also provide other financial products, including savings, insurance, and payment services. The choice of which financial services to provide and the method of providing these services depends on the objectives of the MFI, the demands of its target market, and its institutional structure. Two key imperatives that must be considered when providing financial services are: ■ To respond effectively to the demand and preferences of clients ■ To design products that are simple and can be easily understood by the clients and easily managed by the MFI. The range of products commonly provided includes: ■ Credit ■ Savings ■ Insurance ■ Credit cards ■ Payment services. The following section provides a brief description of the products MFIs offer their clients. This overview is provided to familiarize the reader with the unique ways that financial services are provided to microentrepreneurs. Specific information on how to design credit and savings products can be found in chapters 5 and 6. Appendix 1 summarizes the main approaches to financial intermediation. Credit Credit is borrowed funds with specified terms for repayment. When there are insufficient accumulated savings to finance a business and when the return on borrowed funds exceeds the interest rate charged on the loan, it makes sense to borrow rather than postpone the business activity until sufficient savings can be accumulated, assuming the capacity to service the debt exists (Waterfield and Duval 1996). Loans are generally made for productive purposes— that is, to generate revenue within a business. Some MFIs also make loans for consumption, housing, or spe-