Pricing and Marketing Issues in Microfinance

Presentation by Motaz El TabaaExecutive Director ABA

Chairman Egyptian Microfinance Network Chairman Global Microfinance Network

What is Microfinance

The provision of Financial services to lower income people mainly poor and very poor.

“Microfinance is a way to extend same rights and services to low income households that are available to everyone else. It protects people against shocks and allows the majority of the population to become part of country’s economic activity. It can help to build markets and show that profits and principles can reinforce each other.

Kofi Anann, UN Secretary General, 10 October 2005”.

What is Microfinance

• Microfinance offers poor people access to basic financial services such as loans, savings, money transfer services and microinsurance.

• People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.

Who are Microfinance Target Clients

• The population of the earth is estimated at 7 Billion, out of which 5 Billion are living in Africa and Asia.

• Poor people who live under $2/day estimated at 3.5 Billion and extremely poor who live under $1/day at 1.2 Billion, 90% of which are located in Africa and Asia.

Household Life Cycle: Financial Needs

Birth (C,S,I)

Household Formation (c,s)

Death (C, I)

Education (C,S)

ONGOING FINANCIAL NEEDSWorking Capital (C,S)Productive Assets (C,S)Investments (S,C)Asset protection (I)Health (C,S,I)Shocks (C,S,I)

Old Age (I,S)

Marriage Ceremony (C,S)

Pricing and Sustainability

• Correct pricing is essential to the viability of any financial institution.

• Responsible Microfinance should consider Institutional and Financial Sustainability.

• Sustainability should not be a reason to cover inefficiency.

• Microfinance is much more expensive than commercial banking.

Pricing Bases• Cost based – prices are based on the cost of the

product plus a margin.• Competition/Market based – prices are based on

the prices charged by competitors• Demand or Value-based – prices are based on an

assessment of the value of the product to the customer

(Microfinance Institutions through a package of financial & non-financial services and commitment establish the value to customers)

Combining the Three Approaches to Pricing

Combining the three approaches provides a three-step process to pricing financial services:

1. Price to cover the full cost of delivering the product/service

2. Compare this price with that of the competition to see if it can be raised

3. Assess demand for MFI’s USPs (8 Ps of marketing!) and see if the price can be raised further.

Where Do MFI’s Products should Lie?

Quality product Convenient, service-oriented environment

Price

Pricing Methods

• Conventional Finance :

- Interest Rate (Fixed/Indexed) - Interest Method (Flat/Declining) - Timing / Frequency - Ongoing - Upfront – In arrears - Commissions & Fees - Penalties

Pricing Methods

• Islamic/ Shariah Complying Finance :

- Mosharka & Modarba Participate in profit & loss

- Morabha & Istesnaa & Salam Cost + Predetermined profit

- Igara Cost + Profit margin

Margin is determined by committee as reference with an absence of reliable Islamic Interbank Benchmark

Islamic Microfinance pricing Concerns

• Products are of higher risk• Implementation is difficult• High level of uncertainty/expectation• Higher delivery and operational cost• Penalties not permitted which increase risk• Margins are usually higher and set in line with

interest guidelines

Do we need to consider MarketingIn Microfinance

• Despite dealing with poverty MFIs need to enhance its marketing effort to achieve its goals.

• Marketing is an essential part of the MFIs strategic plan.

• Increase of competition led MFIs to change their concept from “Product Priority” to “Client Priority” , thus placed marketing on the top.

Do we need to consider MarketingIn Microfinance

• All managers recognised the strategic need for improved marketing function – particularly with growing competition. Few felt they has adequate understanding of marketing

• Market-led approach allows banks/MFIs to:– Identify different client needs– Tailor products/delivery systems to meet those needs– Examine cost-effective ways of serving niche markets

The market-led approach

– Good for low-income clients who will receive more appropriate products communicated and delivered in a high quality and cost-effective manner

– Good for the MFIs that adopt it because drop-out rates fall, income streams increase and sustainability is easier to achieve ….

Marketing – Micro Environment

Markets size, growth, segments

Stakeholdersopportunities, problems

Marketing Firmseffectiveness of branding strategy

Distributionservice delivery channels, costs, efficiency

Competitorswho are they, strategies, market share

Customers needs, buying processes, perceptions

Marketing Communications Mix

SalesPromotion

Public Relations

Advertising

Personal Selling

Direct MarketingMust give consistent,

clear compelling company & product messages

Do MFIs Need to Worry About Branding?

• Does a brand matter if…?

– You have limited competition– Small client base – No marketing department– You are an NGO– Belong to an international network that does

branding for you

Branding will help

– Differentiate the institution– Unify the organisation and guide internal

initiatives– Enhance marketing effectiveness– Build client value– Strengthen against bad times– Increase institutional profitability

Putting all Together

• Your Corporate Brand, Product Strategy and Product Delivery and Customer Service Strategy are held together and directed by an Institutional Marketing Strategy

• This plan helps to focus corporate marketing for the next 2-3 years

• Includes overall objectives, sub-objectives and activities to accomplish strategy

Maintain Mission & Strategy• It is crucial to ensure that

the Marketing is consistent with strategic goals and initiatives

• The brand must be aligned with the mission, vision and values of the organization

• Pricing Strategy is reflection to Mission & Vision

Brand

Mission, Vision & Values

Strategy

Thank you

Motaz El Tabaamtabaa@aba-sme.comwww.aba-sme.com