One misconception about microfinance institutions is that, because they are NGOs with a core social mission, they do not compete in the same way as traditional for-profit companies. This is, of course, not the case. Just like any other business, MFIs must strive to offer the best product, best service, and, ideally, serve communities with a sizable demand for microfinance. This gives you a competitive edge over other MFIs in the area. When considering expansion, an MFI needs to consider the conditions of the region and understand the economic profile of the people in the community. I just got back from spending four days on another island, tagging along on a market research trip to evaluate and assess the potential for expansion in the province. First, how big is the market?
Let’s begin with a fictional province called Steintopia, a wonderful place (aside from all the poverty) that is 2,500 square kilometers in size. To estimate the number of potential clients in Steintopia, you begin with population estimates from the Census performed by the Philippine government. The most recent version is 2007, and it gives the population by municipality and barangay (village). Each municipality has between 10 and 50 barangays. Each barangay has between 100 and 10,000 inhabitants, with an average population of ~1,500, for a total of 1MM people. 50% of those people are women, and 60% are between the ages of 18 and 65 – the target population of NWTF clients (though there is no upper limit). This leaves you with 300,000 women in the target age bracket. Next you screen for need. An estimated 40% of those women live below the poverty line. Others are part of what is called the “vulnerable non-poor” – just above the povery line – which is served by other microfinance institutions. NWTF, however, targets the poorest women, and aims for 90% of incoming clients to be below the poverty line (it is currently at a respectable 78%). So 40% of 300,000 gives you ~120,000 potential clients. Within this population, ~25% are either unable, possibly due to disability, or unwilling to take a loan. Therefore, 75% are eligible, giving you a total 90,000 women, aged 18-65 that are living below the poverty line and are willing to take a loan. Out of 1,000,000 people in Steintopia, 90,000 people over a 2,500 km area are potential NWTF clients. From there, you would cut it by municipality to give the number of branches. Each branch covers ~2,000 clients, so it would take 45 branches to cover the entire region. The actual number is much smaller, of course. The next part of the study colors in the nuance in this calculation.
Next, you want to find out what services the people values. Using that information, you can tailor a loan package that will have the greatest appeal for potential clients. The best way of getting that information is by talking to the clients themselves. So you organize a focus group and ask them questions. It is actually surprisingly easy to find participants. We would drive the van around for 20 minutes looking for dirt roads and what looked like squatter communities. Once we found a place, we’d get out of the car and split up. Within five minutes, we’d find someone who belonged to another MFI and send them to round up their friends. Within a half hour, we’d have six women together, discussing microfinance.
We were after two things. First, what is important to these prospective clients? Second, what are the other guys offering? I will cover these two things in another post.