CATEGORIZING MICROFINANCE LOAN PRODUCTS

ImageMarket research is now an indispensable tool for MFIs in enhancing their products and services. The emerging trend is now far from the previous one-size-fits-all financial products that has been the cornerstone of microfinance success for several decades.   Group loans are basically reserved for first time borrowers that have yet to establish track record of repayment and those without collateral. For those who have been accessing loans from MFIs for several years, and who were able to move up to the income ladder, financial products that respond to their specific requirement are what they needed.

MFIs should respond to this reality to be able to retain their existing clients and to reach out to other clients. Categorizing products and services will help MFIs rationalize its offering and be able to look at what is lacking.

Loan products can be categorized into two main purposes: for income-generating economic activities and non-income-generating activities. In most Asian countries, the income-generating activities can further be divided into two: enterprises and agricultural production.

Enterprises on one hand, refers to the economic activities of microfinance clients mostly trading in nature. These includes, vending, buy-and-sell, small variety store and the like.  Other economic activities involving simple production skills also fall in this category like handicrafts, preparation of foodstuff and the like.  Activities with growth potentials can be provided not only with loans but also with technical assistance for it to move up from micro-enterprise to small and medium classification, where a more organized and systematic  management skills is needed.

Agricultural production on the other hand, refers to economic activities related to the production of crops, poultry and livestock and even fishery particularly fish culture. The production process from planting to harvesting is the main focus of financing. The risky nature of agricultural production is the reason why banks shy away from this sector.

The non-income-generating needs also known as consumption needs of the clients can also be further categorized into two: life cycle needs and emergency needs.

Life cycle needs refer to the events in one’s life where bigger amount of money is needed. This includes expenses for birth, education, house building or improvement, acquiring assets like land, marriage, old-age pension, death, and other events determined by our tradition and culture.

Emergency needs refer to unexpected expenses brought about by natural calamities like typhoons, floods, earthquakes and even man-made calamities and personal emergencies like sickness, accidents and the like.

These general categories rationalize an MFI’s list of products and services. Providing the clients with wide array of products that can cover their specific needs will surely develop client loyalty. It will ensure not only the sustainability of the institution but the improvement of standard of living of the client as well.

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Developing Agri-Microfinance (AMF) Loan Product

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Developing agricultural microfinance (AMF) addresses two main issues in development finance: first, to ensure that small farmers have access to credit for production expenses; and second, to address the risks involved in agricultural production. Risks is agricultural production  is so high that most formal financial institution do not venture in the agricultural sector, leaving  government  banks and the informal money lenders to serve this sector. Developing AMF products involved several activities:

  •  The Market Study includes market-understanding research to determine the features of the loan products. It will also provide information of the specific agricultural commodities that can be financed. It also includes a risk profile identifying various risks related to the commodities and the coping mechanisms to address the risks.
  •  During the Product Development Workshop,  information from the market study are used to develop the “product architecture” – the features of the loan product fit to the needs of the clients and the production cycle of the  commodities identified for financing. It shall also review of the loan process.
  •  The Pilot testing is the phase where the product prototype designed during product development workshop will be implemented in a limited scale, say a branch, to check its applicability. Monitoring and coaching sessions are done during this period to check the development, the variance in the features and processes and other observations that will enhance the product.  Refinements in the features and the process can be done during this phase.
  •  The final phase is the Mainstreaming where the tested products will be installed in all operating units of the financial institution.

Based on our experience, AMF loan products are appreciated by the farmers because the loan term is fit to the production period and the harvest season, and they understand the production cost of each agricultural commodity. On the part of the credit staff, the commodity profile assisted them in speeding up the loan appraisal process. It became easier for them to determine loan amount based on the production activities in the commodity profile.

In mainstreaming AMF, there are several pointers that have to be strictly observed.  Agricultural production should be treated as a separate economic activity that requires a specific loan product. Agribusiness or enterprises that are not directly related to the production process like trading, provision of inputs and the like should be categorized under enterprise or business loan and not as part of AMF. Portfolio management should prescribe percentage allocated for AMF, taking into consideration the suitability of the area to agriculture (irrigated or not), the frequency of natural calamities and other factors.