Led by research

OUT OF FOCUS

Going by just the number of conferences, round table discussions, partnership meets etc, that are happening on the theme of microfinance these days, it would be easy to conclude that the sector is growing at a healthy clip.

But of course, even as yet, words, are getting around faster than money in the microfinance sector. The fact that Vinod Khosla, the America-based venture fund guru, came visiting a few micro finance organisations last month and said he would be interested in investing his personal money in this sector, has even added a touch of glamour!

Only when cumulative disbursal figures for fiscal 2004 are out will we really know how much of the talk has translated into volume, but many indications point to the fact that microfinance has reached an inflection point.

Last month, this column spoke about how more and more private sector and foreign banks were increasing their microfinance book because they were clearly finding bankable assets. But all of them, including multinational donor agencies lending to this sector, have been constrained by the lack of research and training.

So it was probably the reason why the Department for International Development (DFID), UK, asked Graham A. N. Wright, programme director for Microsave - Africa to assess the situation in India.

Microsave is known for it's research oriented approach to product development in the microfinance sector and Wright mixes with that his brand of practical experience, having worked for over fifteen years in this sector in Bangladesh and Africa.

Wright, who was on an exploratory mission last September, came back this month to try and set up an Indian chapter of Microsave. Having spent the last few years in putting the microfinance sector on track in Africa, Wright talks about his organisation's experience in Africa.

In East Africa almost 50 per cent of the microfinance sector clients were leaving every year because of inappropriate product design and delivery.

As an example, Wright recalls how the repayment periods for traditional Grameen Bank influenced working capital loans were getting shorter and shorter and at one stage in Africa were down from almost a year to only four months.

But after four or five loan cycles as the loans got larger the repayment got more and more stressful. However, now in Kenya and Uganda most microfinance institutions (MFIs) are more flexible and there are no rigid repayment cycles but more loan or client specific ones.

The implication for MFIs is that clients don't get forced out and consequently their interest realisation is higher. Research into product design also led to conclusions on how consumption loans or educational loans for children or other emergency loans actually protect the larger loans.

On the savings side, research in Uganda showed how 99 per cent of MFI clients lost money in informal savings which wiped out almost 22 per cent of their savings.

So the story is the same, only the setting is different. All those working in the MFI sector in India will vouch for how all this and more holds true for the Indian scenario as well.

According to Wright, research and product design work done by Microsave dramatically improved client satisfaction and profitability for the MFIs, in addition to the significant gains it meant for development in general.

Microsave wishes to adopt a three pronged approach in India:

1.Set up a research wing which would

• conduct detailed market research,
• carry out costing analysis of different delivery processes,
• build on existing infrastructure for the urban microfinance sector.

2. Begin to provide information to policy makers

3.Financial services learning centre which would include exposure to real life situations in addition to classroom lessons.

Since some if not all of this has been initiated in India already, Microsave's efforts would help reinforce what Sadhan, the association of microfinance association or the Basix promoted school for livelihood training is hoping to do.

What is therefore interesting in Microsave's agenda is that it also is setting up two pilot projects which would serve as models for whatever Microsave prescribes for the Indian MF sector based on research.

The two places that have been chosen as settings for this action research is Tamil Nadu (a strip between Chennai and Madurai which has a mix of rural and urban areas) and Uttar Pradesh (near Varanasi).

Wright, who was in India this time also on a fund raising mission for the Indian initiate reckons that it would imply a project cost of about $ 10 million over a period of six years. Of this, the hope is to raise 20 or 30 per cent within India (pitches have been made to SIDBI, Nabard, ICICI and other private banks) and the remaining from the international donor community.

Whether or not Wright gets his funding will, as in all fund raising efforts, depend on a host of factors. But what is important for the MF sector in India is that so far driven by RBI diktats (for priority sector lending) or by passion of individuals (behind all successful MFIs) is only now beginning to get the attention of serious research.

Demand- supply gap, product design, market research to gauge client satisfaction are all tools which lay the foundation of any industry.

For the microfinance sector all such efforts have been sporadic and no serious money has ever been committed to build all this necessary foundation. It is in that context that all fingers remain crossed for Microsave in India.

keyasarkar@yahoo.co.in

(The columnist has been a journalist and has worked in the financial sector)