Determining the Size & Risks Determining the Size & Risks of the Microfinance Marketof the Microfinance Market

“Know your market – know your clients”

Session Objectives

• Learn to quantify the size of the microenterprise sector in the target area

• Learn to assess the risks of the target market

Reference Materials

• Ref 1: NSO, Establishments in the Philippines 2000

• Ref 2: Raike Quinones, Microenterprise Sector Study

Why Measure the Size of the Microfinance Market?

• The size of the market determines the potential scale of your bank’s microfinance operations.

• An estimate of the market size can be used to generate more realistic growth projections.

Profile of the ME Sector

• Microenterprises (MEs) are defined as those having less than 10 workers.

• Women comprise around 80% of the micro business operators.

• A majority of the MEs are registered, usually with the local governments.

• Unregistered MEs are between 14% - 26% of the total population of microenterprises.

Profile of the ME Sector

A. Size, Employment, and Income Source• Microenterprises comprise 91% of the total number of registered

establishments in operation in 2000.

• Numbering 747,740 nationwide, microenterprises:

absorb 37% of the workers in the formal sector.

provide primary income to at least 30% of the rural work force

Provide secondary income to about 20% of rural households

• A 1998 NSO survey of households in Mindanao reported that 12% of households were engaged in micro business activities.

*/ National Statistics Office (NSO), “Establishments in the Philippines 2000”

Profile of the ME Sector

B. Composition of the ME Sector*

• Majority (52%) are wholesale and retail trade businesses

• Services sector accounts for 36%

• Manufacturing activities accounts for 9%

* Refer to m2s2 Handouts 1 and 2 for details.

Market Size

• Two Estimation Procedures

• Comparative Results

Estimation Procedure: Based on the Total Number of Households

1. Find the total number of households from the latest census data

2. Assume that the number of households engaged in microenterprises as their primary source of income is 10-20% of the total

3. Estimate the number of households engaged in microenterprises

--------------------------------------------------------------------------

Example:

1. Total number of households 11,485

2. % engaged in microenterprises 10%

3. Size of the Microenterprise Sector = Total # of HHs * 10%

Estimation Procedure: Based on the Total Number of Registered Businesses

1. Get the total number of registered business establishments from city/municipal and barangay records

2. Determine the % of registered microenterprises to the total number of registered business establishments

3. Assume that an additional 20% are unregistered

-------------------------------------------------------------------------------

1. Total number of registered business establishments 1,285

2. % registered microenterprises 75%

3. % unregistered 20%

4. Size of the Microenterprise Sector =

Total No. of Reg. Businesses * 75% * (1 + 20%)

Comparative Results of Two Estimation Procedures

# Reg. # Market Total # No. of MEs Based On Area # HHs Business Stalls Reg. Bus. # HHs# Reg.Bus.

Roxas 10,122 1,498 402 1,900 1,012 1,710

Cauayan 18,536 1,927 603 2,530 1,854 2,277

Alicia 11,636 1,155 522 1,677 1,164 1,509

Sta. Ana 8,864 147 235 382 886 344

Candaba 17,291 371 75 446 1,729 401

Guagua 19,073 2,195 665 2,860 1,907 2,574

Pulilan 13,100 476 650 1,126 1,310 1,013

Bocaue 15,242 187 297 484 1,524 436

Arayat 19,765 514 217 731 1,976 658

Capas 16,207 453 276 729 1,621 656

Floridablanca 16,810 2,409 392 2,801 1,681 2,521

Ibaan 6,903 531 150 681 690 613

Bauan 14,202 1,356 300 1,656 1,420 1,490

San Jose 9,699 992 203 1,195 970 1,076

Results of Estimation Procedures

• The results are initial estimates

• When the result of either estimation procedure shows a very small market potential, consider looking at another area.

• When there is a large disparity between the results of the two estimation procedures, look at the other characteristics of the area, such as:

•Are the households generally dependent on wages?

•Is the area predominantly agricultural? or

•Are data on the number of registered enterprises incorrect?

Assessing Risks from Competition

The bank’s risk from competition can come from:

• Institutional lenders active in lending to MEs in your target area (such as other banks, cooperatives, NGOs, pawnshops, lending investors)

• Informal lenders

You will use RMA Tables 5 & 6 to gather information about the competition and the loan and savings products they offer.

Assessing Risks

• Risks from competition

• Risks to household incomes

• Risks to the business

• Other risks

Give particular attention to Microfinance Institutions (MFIs) that are active in your target area.

If the present client outreach of the MFIs already covers most of your target area, consider the following:

look for alternative sites for market-testing your microfinance product; or

target a market niche not being served as yet by the competition.

Assessing Risks from Competition

Major household income sources

- Seasonal patterns

- Threats to household income flows: natural calamities, low farm commodity production, low prices, high production costs, unemployment/lay-off of workers, peace and order

Risks to Microenterprises

- Relocation of shops/stalls, fire

- Seasonal income fluctuations

- natural calamities, rainy season

Assessing Market Risks

Other Risk Factors

- Rate of migration (in and out migration)

- Level of ownership of dwelling

- level of indebtedness of microenterprises

- loan repayment experience of other lenders

- previous or current experience of the bank in lending in the area.

Assessing Market Risks