As an inclusive financial institution in the microfinance industry, a large percentage of your new (and existing) clients probably use informal microfinance products – including group savings, ad-hoc daily rate loans and more. Therefore, in order to grow and retain your client base, your products need to offer a compelling value proposition over and above what your clients use right now.
Ghana exemplifies a typical MFI marketplace with entrenched informal services. Informal microfinance has a long-standing place in Ghana, and the lack of a formal financial structure has not historically put a damper on financing for the rural poor. Before institutionalized finance appeared, informal moneylenders provided individualized microfinance such as savings and loans to the overall population.
Today, there’s still an active and mature informal microfinance market. The middlemen traders occupy an essential link in the chain of commerce between rural producers and urban consumers and will always be in the picture. This means that, for local MFIs, the challenge is working with – not replacing – these informal services.
Citi Savings and Loans, a Ghanaian MFI, has taken an innovative approach to overcome this challenge: developing mutually-beneficial partnerships with informal providers that benefit all three parties: the MFI, the provider and the customer.
In Ghana, much of the established informal microfinance is delivered via Susu collectors – one of the oldest financial groups in Africa. Susu collectors provide (for a small fee) an informal means for Ghanaians to securely save and access their own money, and gain limited access to credit. They run their businesses from kiosks located in the market place.
Deposits, often of low but regular value, are usually taken on a daily basis over the course of a month. At the end of this period the Susu collector returns the accumulated savings to the client but keeps one day’s savings as commission. Susu collectors also offer low-value advances or credit in the short term (usually less than a month) that is interest free. If larger sums are required, and they know the client personally, they can offer credit at higher rates than the banks, but without collateral to secure the loan.
Within this demographic, Citi Savings and Loans established a broker-type arrangement. For its clients (primarily small and micro entrepreneurs), Citi guarantees a safe place for their daily deposits. Loans (at 53% APR) enabled Susu collectors to offer more advances than previously, enhancing their local reputation and attractiveness to new customers.
Rather than try to displace informal competitors, Citi Savings and Loans brought Susu into the process, as clients, enabling them to deposit proceeds into the bank, thereby providing benefits to the bank (new customers and new deposits), the Susu (the ability to increase the options they could offer, a formalised banking relationship, and a higher degree of credibility) and the customer (increased security and a wider range of services).
How can you leverage the learning in this example to benefit your own inclusive financial institution? Here are a few recommended steps to strengthen your user value proposition to users, and providers, of informal finance services:
Understand what your target market likes (and doesn’t like) about their informal services
Determine how to replicate this data into your own unique offering
Determine if you can effectively replace the informal service, or should partner with the service
- If partnering makes more sense, articulate the value proposition for this arrangement
Click here to download a detailed informal microfinance case study in Ghana from our library – it illustrates the possibility for formal financial institutions to incorporate informal savings practices within its own banking operations.
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