Increasing microfinance efficiency is the biggest challenge for the entire microfinance industry. And to put it simply, it has never been a Child’s play. It requires strategic planning for better sustainability. As a result, despite having several seatbacks, many MFIs are moving forward with new business models and MFI technology. Yet, most microfinance institutions are still biting around the bush. Therefore, they fail to succeed. In this blog, we will discuss a few ways to increase microfinance efficiency.
We all know that microfinance deals with unprivileged people. Therefore, it comes with immense risk. Besides, the industry is constantly changing. In particular, MFIs are changing due to customer demands and a new set of rules from regulatory bodies. Thus, coping up with the challenges of microfinance operations is difficult. But doing both at the same time is even more difficult.
Don’t be hopeless; every problem has solutions. And we have a few tips to increase your microfinance efficiency. Let’s learn how you can drive profit for your microfinance.
Why is Traditional Microfinance Failing?
For many years, microfinance organizations have operated in traditional ways. But most of them failed to sustain. Because it deals with unprivileged people with low incomes. Besides, microfinance operates without any collateral. Furthermore, most MFIs entirely depends on the traditional business model. Therefore, debt management remains a top challenge for MFIs. Eventually, most MFIs fail to continue.
To further elaborate, the traditional business model lacks efficient repayment methods and individual liability contracts. Since the loan amount is very small and borrowers are mostly uneducated, organizations often avoid those two as unnecessary. But an effective repayment method is very important along with the individual contract. Furthermore, the operational cost is very high. In particular, both small and large loans cost you the same in the yearlong collection process. And we all know MFIs mostly provide small loans. So, the operation cost remains high all the time.
How Can We Increase Microfinance Efficiency?
There are several ways we can increase microfinance efficiency. But we are going to discuss two of the most important things reshaping the microfinance industry.
Adapting To New Business Models
The traditional microfinance model did not live up to the expectation. So, adapting to a new business model is the only way out. Today, there are few microfinance business models helping MFIs to sustain themselves. In particular, microfinance business models with savings and insurance.
MFI-Savings Model
In traditional microfinance operations, borrowers could only take loans from organizations. They did not have any opportunity to save any amount. Because most MFIs believe, if they have savings, there will be no need of borrowing money from us. But this is not the actual scenario; instead, it has the opposite impact on the borrower’s behaviour. MFI-savings model increases the client’s commitment. On the other hand, the savings also act as a guaranty towards the debt acquisition. Therefore, this business model helps you increase microfinance efficiency.
Microfinance-Insurance Model
Without any doubt, the Microfinance-insurance model is high-value protection for your MFI. It attracts customers better than other models and increases microfinance efficiency. Like formal banking, insurance was also inaccessible for unprivileged people. But that is also changing with microfinance. Many MFIs around the world have already implemented various types of insurance schemes for their clients. For example, rainfall index insurance is a type of insurance farmers get on plantations and crops according to the weather index.
Therefore, savings accounts and the insurance model both work like safety nets for MFIs. It is just a matter of knowing what savings and insurance model will be beneficial for your MFI. Besides, it would help if you also thought about your client’s benefits. The higher benefits they get from your MFI, the more growth opportunity you have. Eventually, these models increase microfinance efficiency.
Digital Financial Services for Microfinance Efficiency
Without technology, microfinance operation is tough. Even for a medium-sized microfinance organization, handling all the data becomes almost impossible. Moreover, manual functions such as collection, branch reports, microfinance health checkups, etc., require hours of labour. Furthermore, the annual Microcredit Regulatory Authority (MRA) reporting creates a lot of complications for every microfinance organization.
To deal with all those difficulties, digital financial services or microfinance software can help. In particular, it enables you to ease the operation by automating the entire process. Besides, MFI solutions are the only way you can boost your microfinance efficiency.
It helps you automate your collection process, reporting and 24/7 organization’s health checkup. Besides, creating monthly and annual MRA report is just a matter of a few clicks with software. On the other hand, it builds trust among the borrowers and benefits you to increase management efficiency.
Last but not least, MFI software comes with multiple business model integration. So, it helps you integrate any business model that is effective in a particular area. Therefore, if you hire an MFI software, make sure it has the option to incorporate your business model correctly.
In short, there are several ways you can increase microfinance efficiency. But effective business models and technology-based solutions are the two most important ways to help your microfinance organization.
Need a Microfinance Software to Boost Efficiency?
Check Southtech’s Ascend Financials
