Money is a very good servant, but a very bad master.
P.T. Barnum, Founder Member of Barnum & Bailey Circus
It is not what you do, but how much love you put into it that matters.
Mother TeresaBuilding an established and well-being is also called as jihad.
K.H. Said Aqiel Sirajd
The most popular activities of microfinance are saving and loan. These products are simple. They are easy to understand by many poor and easy to do by the manager. But, for microfinance manager, simplicity of a product frequently becomes an obstacle to achieve a successful microfinance activity.
Due to their lack of understanding, many microfinance manager offers current account or transaction account—usually is called as savings or voluntary savings, i.e. an account that it features are deposit and withdrawal can be done every time during cash hour. While for loan product, we can see easily that they offer monthly installment loan. Both products—current account and monthly installment loan—are very interesting for their clients. Their clients did know and familiar with those two popular products and they feel benefited by the products, even better if the MFI charge a low loan interest and give a high savings interest!
What we have been witnessing is many MFI that provides those two simple products facing sustainability problem. The MFI could not mobilize a significant fund from their client in the long run, since their client use the account for transaction only, or just for securing part of their money when they do not need them temporarily, and not as a means to build their asset or improve their well-being. Although we can guest or say that those two simple products are good since they can be used to help the client in securing their money when they do not need it. But the operational cost for that security service is too prohibitive, and de facto that services do not help the client to improve their welfare. Beside that, in many cases that current account product can not be used for business transaction due to incapability and or unreadiness of the MFI or due to inability of the client to use it.
Meanwhile monthly installment loan, frequently become more problem for the MFI, even worse if the tenor is more than one year and with no principal payment (100% balloon payment at due time)! Stuart Rutherford from Safesave says that the poor have multiple financial challenges: 1) simple day-to-day money management; 2) putting together useful lump sums; and 3) risk management and coping with emergencies.
[1] Putting together their money to pay monthly installment is a big challenge and tough for them.
To overcome this problem, the MFI should launch various product that are interesting for their clients, but more than that the products should also improve the client well-being and help the MFI to maintain its’ sustainability and develop its’ organization and expand its’ outreach. The products are:
- Planned savings, for minimal six months with as low as and affordable initial and minimum deposit by the target market, with below the market saving interest or even with zero interest.
- Daily or weekly installment loan, with interest higher than the market and in the installment is included a portion of compulsory savings; and
- Life or loss insurance
[2]those are targeted to fulfill all needs of the poor of useful lump sum, like maternity, education, circumcision, wedding, burial, holiday, increase working capital, buying a consumption product, party, social contribution, etc.
For many people who do not understand microfinance and marketing, those products are not interesting and not pro-poor. But, the truth is this is the actualization of money as education means in microfinance. The core benefit of education (product) is enforcement to learn
[3]. If we just want to get the knowledge, we do not need to go to school or course center. We can learn it by ourselves. If we just want to get the certificate, then we just need to “buy” the certificate and we do not need to go to school, although maybe the institution that sells the certificate is a school. We buy education from school or course center or other places, since we need enforcement to learn from that institution. In the education process they give us a homework, test, quiz, or examination, in order to force us to learn, since naturally we do not want to learn the topic by ourselves.
The same thing happen in microfinance, the actualization of education is not primarily in classical or group education. But in every financial product that is offered by the MFI. The planned savings minimum six months with no interest of lower than market interest is mean to enforce the client to educate them becoming a discipline and independent person. When they want to open a savings account, they should be asked: what is her objective in opening that account, how much is she going to achieve or accumulate during certain period of time. By answering those questions she educate herself to become an independent person, since she dare to plan (decide an action to be done in the future)—a characteristic of an independent person! By regular daily or weekly or periodic deposit, the saver is educated for discipline. So, a really helpful savings product/service is the one that can receive as low as possible minimum deposit affordable by the target community. But, as we all knew, the operational cost to receive cash deposit of IDR 500 (USD 0.05) or UDS 500 is not different. That is why the savings interest should be lower than the market savings interest. The interest difference can then be used to cover the operational cost in order to maintain sustainability of the MFI. If necessary, the plan savings give no interest (zero interest), and charge a service fee to the savers. So, the savers will not receive full amount of money that she deposits. In India, there are people who work as deposit collector. Every saver clients should deposit for 220 days of 5 rupees per day. When it is due, they will deposit 1,100 rupees (about USD 25), but they will receive only 1,000 rupees since they should pay service fee of 100 rupees to the deposit collector.
[4] In Kayu Manis, Matraman, Jakarta, there is a ROSCA that is managed by Ibu Yuli. As a principal, every day she should collect deposit of IDR 2,000 (USD 0.2) from 144 members. But, the member who got her turn gets “only” IDR 286,000, since Yuli collect IDR 2,000 as management and collection fee. Frequently, Yuli receive additional fee of IDR 5,000-10,000 from the member who got her turn.
[5] For you who feel or think that the fee is weird or unfair or rude, please try to save of IDR 1 million in a big commercial bank. Do not do any transaction for a year. See what happens to your saving balance. Do not be surprise if your saving balance does not increase but becoming less than a million rupiah! Maybe you will say, “Ah, that is a big commercial bank. An MFI should help the poor.” Then the question you should answer is, “Who is going to cover the operational cost of the MFI—that its’ field officer collects daily deposit of IDR 1,000—in order to be a sustainable MFI and be able to serve more people?”
The same argument is valid for micro-loan. This product can be use as education means for client by imposing compulsory savings in every loan and the savings deposits should be paid at the same time as the loan installment. In every consulting session for MFI, I always ask to the board and manager: is there any money-lender in their area of operation, how much is their loan interest, and does she has many clients? Usually the answer is yes, the loan interest is 20% per month (or even higher), and she has many clients! Then, I ask: what if their MFI launch the same product, i.e. daily installment loan with 20% interest for 30 days. “Hey, we are not money-lender!” claim them. I continue by saying that I am agreeing, so we should modify the product. I propose that the MFI pay part of the loan interest back to the client if they have pay the loan back and always pay the installment on time. As an example, for loan of IDR 1 million, the client should pay installment of IDR 40,000 in 30 days. If the client paid back the loan on time, the MFI should pay her back, IDR 100 thousand for example, as her compulsory savings that is not allowed to be withdrawn if she is still a client of the MFI, or should get an approval from the board for certain exceptional case. In this way, the client who borrows ten times of IDR 1 million will have a compulsory savings of IDR 1 million within ten months! Indirectly, we enforce the borrower to save and to build her assets. If there is no such enforcement, many of them will be trapped in permanent debt and will never increase their equity! If the borrower could not develop her business, then after she borrows ten times, actually she does not need loan. She can withdraw her compulsory savings, and she can save IDR 40,000 (USD 4) daily! But, if she uses to have a loan—because when she does not have loan she feels that she has no obligation to deposits or because her habit is to borrow as we will discuss in Chapter 9—then she need to borrow her own money using her savings as collateral. The latest condition is also common in commercial bank. It is called cash collateral. After I explain about the product, no one will say that the MFI is same as money-lender. Although some of them are still uncomfortable and feel that the interest is still too high, i.e. 10-15% per month. My answer is the same reflective question, i.e. “Who is going to pay the MFI operational cost in order to be able to sustainable and serve more poor?”
In this way we can actualize the principle of money as education means. Education should not be understood and should be realize as classical or group meeting that frequently fails since many poor can not let their business or income generating activities unattended. For many poor, every time she should leave their business place, it means an opportunity loss, even worse loss of customers! In micro-finance, education should be actualize in the form of product that linked by financial services offered to the clients.
Some of MFI manager are not agree with the idea and they say proudly that they have no difficulties in running a classical education in group. They even say that they have a positive feedback from classical education they held. Participants always ask when the next training is. When I ask how many client do they have at this moment, in average the MFI has about a thousand clients “only.” I just wish they can keep running classical group training consistently when they have five thousand, or ten thousand, or a million clients! I do really hope to become an eye witness the organization of classical group training and the progress of that MFI.
[1] Global Saving, Assets & Financial Inclusion, Lessons, Challenges & Directions, Report from a Global Symposium, June 2007, Singapore,
http://www.globalassetsproject.org/, page 8.
[2] By becoming as an agent of an insurance company.
[3] For a markerter, product is everything that is offered to the market for interest, use, or consumption that can fulfill their needs or wants. A product has five levels: core benefit, basic product, expected product, augmented product, dan potential product.
[4] The complete report can be read in Struat Rutherford, The Poor and Their Money: An essay about financial services for poor people, Institute for Development Policy and Management, University of Manchester, January 1999, page 5-8.
[5] The complete story can be read in Kompas, Sunday, 22 October 2006, page 18, “Sustainable due to Trust,” by Ninuk M. Pambudy.
