Dropouts and Graduates: What Do they Mean for MFIs?

This paper stresses the need for the microfinance industry to become more market-driven in its approach. It emphasizes the value of retaining existing customers, rather than attracting new ones who cost more. The paper goes on to suggest solutions for the same.

The paper further highlights the usual problems that drive customers away. These include:

• Inappropriately designed products that fail to meet the needs of the customers;
• Replicated models and products from foreign environments unsuited to local economic or socio-cultural conditions;
• Unwillingness of MFIs to recognize that there are seasons when savings services, not loans, are required, particularly in rural areas.

The paper cautions MFIs against losing clients through:

• Client dropouts leading to:
  • Group destabilization and stress on group guarantees;
  • Replacement of old experienced members by expensive and less experienced members;
  • Reduction in the loan size and overall interest income for the institution.
• Client graduation leading to:
  • Loss of income for MFIs as it is these clients who often take larger loans to expand the working capital of their businesses or to finance asset acquisition.

Finally, the paper suggests that:

• To develop permanent sustainable organizations, MFIs should improve their services to reduce client dissatisfaction and client desertion;
• MFIs should pay close attention to the nature and quality of their financial services;
• MFIs must return in order to retain clients and build sustainable institutions.