Do Microfinance Institutions have what it takes to support Entrepreneurs?

Delivering financial literacy tools in the Micro and Small Enterprise Space

“…financial education is just a nice to have.” — Microfinance leader in Myanmar discussing why they don’t provide essential financial literacy training

Quick Read: I know you’re busy, so here are four key points.

  1. It’s dangerous, irresponsible and potentially entrapping to lend to people without also providing financial education.
  2. Old news here, but worth reminding: Kiva (among others) may have lied to you. Microfinance doesn’t really start businesses. But it can help them survive through short-term needs.
  3. Larger individual lending can help start businesses. But it doesn’t prepare them for the reinvestment necessary to help a business survive the medium and longterm, at which point the business will fail. MFI portfolios will be harmed, and poor borrowers fall into debt cycles.
  4. USAID Burma is partnering with Opportunities NOW to provide these essential financial literacy tools to micro and small business owners in Myanmar.

Read on for the long version:

Shwe Zin Win is a 31 year old woman who spends 10–12 hours per day, 6 days a week, working in a factory at a sewing machine in Hlaingthayar, the poorest and most populous township in Yangon, Myanmar. She was interested in exploring Entrepreneurship and jumped at the chance to take the Opportunities NOW STARTUP program.

Shwe Zin Win expressed the value of programs that provide a combination of both capital and training for a business owner. She says,

Members of the ONOW STARTUP program in Yangon, Myanmar
“There are many kinds of things in business that I don’t know — and I want to know. … I learned that I need to keep my customers by giving them promotions and gifts. This program is good for those who can’t do their own business because they don’t have the capital.”

After considering a number of business ideas, Shwe Zin Win went on to launch a clothing business, where she provides fashionable designs for young women like her, having little time to do much shopping outside of the factory in Hlaingthayar. She took a risk to have a chance to escape the factory life.

The STARTUP Program is highly interactive and stresses financial education
“…I learned that I must reinvest my profits in my business…” — Shwe Zin Win, young Myanmar entrepreneur

The idea expressed in that quote is essentially a simple understanding of cash flow. The financial education Shwe Zin Win gained will help keep her business afloat. This bit of information is essential for any business owner.

In the early days of microfinance, tiny loans were lauded for enabling households to become entrepreneurs — these microcredit products were seen as the necessary capital to start thousands of microenterprises. That hasn’t turned out to be all that true in reality, but traditional microcredit has still become an important source for poor borrowers to smooth the troughs of their income. As microfinance has matured, the expected value provided by these products has shifted. Through a microloan, the business can be shielded from being a cash cow in the household’s down times, and should survive and grow in the longer term.

This system addresses the short-term emergency needs of the borrower, but it doesn’t prepare the borrower for the medium and long-term investment needs of the business.

Owners of small and microenterprises in Myanmar have faced an all-too-common financial reality — faced with unforeseen business and personal expenses, or large lump sum purchases, they have been forced to turn to informal money-lenders and pawn shops to fill the gaps in their cash flow. In these times, business owners end up searching for any available capital to meet debt obligations, including taking loans at usurious interest rates, or pawning off the assets that are so often essential to their business. The end result of both scenarios is mounting debt and the loss of the enterprise that was providing the family with much-needed income.

Businesses can’t survive under short-termism.

Microbusiness owners are rarely prepared for when a large purchase is necessary, both in the entirely predictable instances such as when a rental payment comes due, or in the unexpected interruptions such as when machines break down and must be replaced.

At its core, this is what Financial Literacy and Financial Education are about — helping people make better decisions about how they make money work for them.
And it’s all about the concept of Cash Flow.

Microfinance Institutions (MFIs) in Myanmar have found it difficult to address the underlying financial education needs of their borrowers because MFIs have not typically been designed to offer a training platform. This is true for a number of reasons, not the least of which is the incredibly tight margins at which most MFIs must operate. The chief of one of the largest MFIs in Myanmar recently told me,

the traditional MFI model is 25–30% more expensive than the banking model.
The common dynamic on loan disbursement day

When serving tens of thousands of clients, the extent to which MFIs can be expected to deliver the necessary financial education at such a scale is necessarily limited. With few officers, and thousands of clients to be managed on a weekly or biweekly basis, community meetings are necessarily information dumps and administrative tasks.

To illustrate, the chief said,

“We don’t think access to capital will solve everything… but right now financial literacy training is just a nice to have.”

Financial education just a nice to have? In general, the ability of borrowers to effectively manage the borrowed funds has been assumed by the MFI —but this assumption is tragically misplaced and could lead to instability in the microfinance industry. Indeed, how can you say you are concerned about the overindebtedness of your borrowers, while not ensuring they are adequately educated to manage their finances?

The few approaches to financial literacy training are typically lecture-style

Many MFIs in Myanmar have expressed to Opportunities NOW their desire to expand their product lines to include lending directly to individual small business owners. MFIs are exceptionally risk averse, and are quite practiced at shifting lending risk to others. And yet MFIs in Myanmar are beginning to lend directly to individuals for business startup, as opposed to the community-based lending model that provides the necessary social pressure to ensure loans are repaid. Without providing the proper training,

MFIs may become overexposed to many nonperforming loans which are migrating deeper and deeper into risk, and borrowers will end up in a debt cycle, potentially undercutting many of the gains of the MFI’s important and expanding focus on small enterprise development.

However, there is somewhat of an awareness of the threat of individual lending while failing to take the necessary steps to mitigate the higher risk associated with this style of borrowing. But it seems that there are no steps being taken to mitigate that risk. And that’s a problem.

A Solution

For four years, Opportunities NOW has exclusively offered this style of individual product, establishing along the way a strong mentoring methodology which is the essential piece of startup financing. Businesses who have mentors are far more likely to succeed.

Financial Literacy education has been historically weak in Myanmar, so Opportunities NOW has joined with USAID to respond to this burgeoning need in Myanmar. We are leveraging our years of experience supporting Myanmar’s microenterprises to develop a three-prong approach to Financial Literacy Training that incorporates

A business owner uses an ONOW mobile app to track financial health of his business
  • Borrower-driven Personal Development
  • Mobile Technology Tools
  • and Loan Officer Relationships

to guide the individual learner’s decision-making process. MFIs will be trained to allow the Learner/Borrower to converse with a Loan Officer that is intimately familiar with the Borrower’s context. Through this method, the Borrower can gain a fuller understanding of the concepts of Financial Literacy in practical relation to the day-to-day realities of their small business.

ONOW Staff discuss business realities with individual owners

This effort effectively scales ONOW’s experience and understanding to strengthen the product offerings of larger MFIs. It leverages the existing architecture of the Loan Officer system, and doesn’t require the creation of an entirely new training and mentoring apparatus within these established low-margin MFIs.

Follow along as we process our findings over the coming months, and you’ll see the results demonstrate the dual benefit of risk mitigation for MFIs and effective support provided to Myanmar’s micro and small enterprise entrepreneurs!