Sunday, February 1, 2009

Is your MFI ready for a new product?

Typically, new product development is driven by increased competition, client dissatisfaction with current products, (which is expressed via high drop-outs), and client demand for new or different products. In spite of these pressures, the MFI must first assess if it’s ready and/or has the capacity for product development.

Does the product fit the MFI’s strategic vision? For example, a consulting team I worked on provided technical assistance to an urban microfinance bank that with was interested in developing agricultural loan products. The bank was fairly new and still working through some arrears issues with its core urban product. We discovered that introducing an agricultural product would require developing an entirely new rural infrastructure and diverting resources from their urban operations. Consequently, the bank decided this product was not a strategic fit and now was not the time to introduce rural or agricultural lending since they primarily identified themselves as an urban bank.

One of the biggest traps MFIs fall into is having too many products. This can become a problem because resources are finite and product development requires resources. Too many products can cause confusion among staff and can limit the growth of core products, as the abovementioned microfinance bank feared if it developed new agricultural lending products. Creating and managing new products can starve products with the potential to reach scale from the resources needed to do so.

The ability to reach scale is a key issue when designing products for poor and low-income people. Worldwide estimates put the unbanked population of microentrepreneurs at 500 million[1]. Statistics such as these strongly indicate that MFIs should seek the widest outreach possible by offering a manageable number of financial products so they can serve the most poor/low-income people while achieving sustainability.

Is management committed to a client-driven approach? New product development cannot be successful unless it is driven by client needs. Management’s primary responsibility is to serve the needs of its customers.

Does the MFI have the management and systems capacity to develop and manage the new product? If management or systems are stretched thin and can’t monitor and control the new product, the MFI faces reputational, operating, and credit risks – i.e. arrears. Long before implementation of a new product, an assessment of management and systems capacity must be made in order to fully understand the ramifications of introducing a new product. Is the MFI large enough to warrant an additional product? The size of the MFI also has an impact on the number of products that can be effectively sold and managed. The larger and more mature an organization, the greater the ability to manage multiple products and multiple segments.

[1] Weiss, Kirsten. “Interview on Microfinance Commercialization with Mariama Ashcroft.” January, 2009.

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