Microfinance: Strategy and Business Development

“ Microfinance “ refers to the
provision of financial services such
as loans and savings to small and
medium sized entrepreneurs and
businesses that lack access to banking and related services due to the high transaction costs associated with them.
In other contexts, it could
also include the provision of insurance and training to the same.These services could be drawn through relationship based
banking or group based models, with the latter being more common in East Africa.
Microfinance is certainly a good
investment in a region that is still
developing so long as it is executed properly.
The purpose of this article is to
guide entrepreneurs interested in
investing in microfinance. The
market is immensely large among
the newly employed, middle and lower income borrowers and the
unbanked. Women’s groups or ‘chamas’ are also becoming increasingly becoming popular.
The economic market condition is
in expansion. The projected
business scale is among several of similar or mostly larger scale and there is low failure rate in the industry. Most microfinance companies scale up and become banks within 7 to 20 years.
Execution
1#. The Financing
When thinking about starting a microfinance company, you need to acquire seed funding first.  You may need about half a million shillings and above depending on your target market and your projected financials. Some questions you could ask yourself at this point are:
- How many groups or
individuals are you targeting?
- How much would you be
willing to offer to each individual
or group?
- What is the maximum
amount that you are willing to
offer?
- What is the creditworthiness
and therefore risk of the individual
or group you are dealing with?
- How much interest rate are
you going to offer to your clients?
2#. Secondly you need to register
your company under the Registrar
of Companies. This will cost about
Kshs 20,000.
3#. You also need office space at a
location where your clients will be
able to reach you conveniently.
Basic office furniture and
stationery may be needed. You may however start with a small
‘warehouse’ for keeping the items you need as collateral.
3#. You may develop an online
presence by developing a website
and placing the company name and contact information with online directories.
Website development may cost
between Kshs 12,000 to 20,000.
This step isoptionalbut has been
found to be very useful.
4#. Embark on a vigorous and
extensive marketing campaign for
the target market involving the use of pamphlets, posters, newspaper advertising and
the word of mouth.
5#. There are short term loans,
payday loans and generally loans
offered for different items. Where you are safeguarding items as collateral, offer
a loan that is about 30 to 50
percent of the value of the item
taken as collateral. Items taken as
collateral should have a resale
value- a receipt is often a good indicator.
The recipient of the loan has to consent the loan received and the ‘financier’ has a right to retain the item upon defaulting of the recipient.
All these should be indicated in
writing in a document that is legally admissible in a court of law.
6#. Depending on the amount you
are offering, you may need to
carry out a valuation of the prospective clients assets to determine their creditworthiness. This happens when you are dealing with large amounts
for which you cannot take items
as collateral. You may charge an
assessment fee.
Remember that you or more or less a bank; you are doing this to reduce risk and avoid bad debts. A higher interest rate is often
used to compensate this higher
risk (within legal limits of course).
Remember that you have to
comply with all state, usury lending and credit laws.
To register a company it costs Kshs
20,000,Launch a website Kshs 20,000,Basic Office Stationery
Kshs 20,000,Small Office/Warehouse rent p.m Kshs 25,000
Salesmanship and advertising
(including talk time, MPESA costs
and allowances) Kshs10,000.
Use an optimum interest rate of 10 to 15 percent per 2 weeks to a
month.
Reinvest part of the profit into the
business to increase the capital
base of the business so as to help the business grow faster.

By Eric Rono
Graduate of the University of Nairobi
Eric Aloysius Finance Group
ronkibbz@gmail.com