5 Lessons in Microfinance from Eastern Europe

By Annie Brown

Microfinance Focus Europe, March 26, 2013: Microfinance Institutions (MFIs) based in Eastern Europe are generally more established and experienced than those in Western European nations. More than 73% of Eastern European MFIs were created between 1980 and 1999. By comparison, the majority of MFIs in Western Europe began lending after 2000.

However, microfinance in Western Europe is quickly catching up. In 2008 alone, 18 new MFIs were established in the region. In order to ensure sustainable growth and avoid oversight, Western European MFIs would be wise to draw on the expertise of their Eastern counterparts. The following are strategies of successful Eastern MFIs that could benefit the emerging sector in the West.

1) Improve Legal Framework for Microlending

Most Eastern European countries have in place appropriate banking regulation with microfinance lending windows. This is not the case in many Western countries, where MFIs must use commercial banks as intermediaries when lending to borrowers. This creates greater inconvenience for both microlenders and borrowers and adds cost.

With less rigid banking regulations and simpler regulations for small businesses, Western European MFIs would be less dependent on commercial banks to make loans. This has already been applied in some Western countries with great success. For example, one French MFI, ADIE, opened a window in the French banking act specifically for microlending. This adjustment removed banks from the lending process, and resulted in an increased number of loans.

2) Build Relationships with Non-Financial Stakeholders

Successful Eastern European MFIs begin building relationships with stakeholders on day one of operations. Common partners are local development agencies and labor offices, because they are concerned with employment rates. Eastern European MFIs often use these agencies as means of acquiring potential customers as well as distributing products and services. Local agencies are examples of non-financial support, which is extremely valuable in supporting an MFI’s mission in the region.

Besides maintaining good relations with local authorities, it is also important to connect with microfinance organizations in other countries. Good relations to foreign MFIs encourage an institution’s development by providing lessons and communication on current events and research. Additionally, international partnership is often required to access public funds. For these reasons, cross-border relationships should be cultivated as soon as possible.

3) Cooperate with Banks

As mentioned in lesson one, dependence on commercial banks as intermediaries can be detrimental to the growth of an MFI. However, cooperation is still encouraged. Concerning sustainable development of an MFI, retaining top customers is of vital importance. Therefore, MFIs must provide products that adhere to client needs at each stage of business development.

Eastern European MFIs frequently team up with commercial banks to offer competitive products such as credit and debit cards. This strategy helps MFIs retain the top 10% of customers, who tend to transfer to the formalized banking sector as their businesses grow. Banks also benefit from this partnership by selling more of their products and therefore will be eager to cooperate.

4) Bring Services to the People

Developing a successful marketing strategy should be a top priority of MFIs. In Eastern Europe, two strategies have proven to be especially lucrative. First, bring your office to the clients. A common mistake of new MFIs is to choose a location that is not accessible to walk-in customers. This limits the client-base. Many Eastern European MFIs are located on street level, in residential areas and close to traffic hubs. At these locations, people can walk-in to the office and take time to get to know an MFI and the services they provide.

Second, encourage staff to leave their comfort zones. Eastern European MFIs have found success by providing monetary incentives to staff members who leave the office and take to the streets to get new customers.

5) Have Efficient Screening Mechanisms

Effective screening mechanisms should be developed as soon as possible in order to reduce costs. Highly standardized application procedures save time and money as well as reduce risk. Fundusz Mikro (FM), Poland’s largest microlender, compares the applicant’s business figures against the statistical average (relative to the size and location of the business). The application is denied if the discrepancy is high. This number, or “honesty indicator”, can be calculated in less than 20 minutes.

FM advises start-up MFIs to test the application process and make corrections as you expand. This is because it is better to make adjustments later than create an over-regulated institution that is unable to adapt to changes in the market and client demographics.

This article was adapted from a GfA study titled Microfinance in Eastern and Western Europe: A Comparitive Analysis, by Christoph Kneiding and Alexander S. Kritikos.

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