Determining the Size & Risks of the Microfinance Market

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Determining the Size & Risks of the Microfinance Market. Know your market know your clients . Session Objectives. Learn to quantify the size of the microenterprise sector in the target area Learn to assess the risks of the target market. Reference Materials. - PowerPoint PPT Presentation

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  • Determining the Size & Risks of the Microfinance Market

  • Know your market know your clients

  • Session ObjectivesLearn to quantify the size of the microenterprise sector in the target area

    Learn to assess the risks of the target market

  • Reference MaterialsRef 1: NSO, Establishments in the Philippines 2000Ref 2: Raike Quinones, Microenterprise Sector Study

  • Why Measure the Size of the Microfinance Market?The size of the market determines the potential scale of your banks microfinance operations. An estimate of the market size can be used to generate more realistic growth projections.

  • Profile of the ME SectorMicroenterprises (MEs) are defined as those having less than 10 workers.Women comprise around 80% of the micro business operators. A majority of the MEs are registered, usually with the local governments. Unregistered MEs are between 14% - 26% of the total population of microenterprises.

  • Profile of the ME SectorA. Size, Employment, and Income SourceMicroenterprises comprise 91% of the total number of registered establishments in operation in 2000.Numbering 747,740 nationwide, microenterprises: absorb 37% of the workers in the formal sector.provide primary income to at least 30% of the rural work forceProvide secondary income to about 20% of rural householdsA 1998 NSO survey of households in Mindanao reported that 12% of households were engaged in micro business activities.

    */ National Statistics Office (NSO), Establishments in the Philippines 2000

  • Profile of the ME SectorB. Composition of the ME Sector*Majority (52%) are wholesale and retail trade businessesServices sector accounts for 36%Manufacturing activities accounts for 9%

    * Refer to m2s2 Handouts 1 and 2 for details.

  • Market SizeTwo Estimation Procedures

    Comparative Results

  • Estimation Procedure: Based on the Total Number of HouseholdsFind the total number of households from the latest census dataAssume that the number of households engaged in microenterprises as their primary source of income is 10-20% of the totalEstimate the number of households engaged in microenterprises --------------------------------------------------------------------------Example:Total number of households11,485% engaged in microenterprises10% Size of the Microenterprise Sector = Total # of HHs * 10%

  • Estimation Procedure: Based on the Total Number of Registered BusinessesGet the total number of registered business establishments from city/municipal and barangay recordsDetermine the % of registered microenterprises to the total number of registered business establishments Assume that an additional 20% are unregistered-------------------------------------------------------------------------------Total number of registered business establishments1,285% registered microenterprises75% % unregistered20%Size of the Microenterprise Sector = Total No. of Reg. Businesses * 75% * (1 + 20%)

  • Comparative Results of Two Estimation Procedures# Reg.# MarketTotal # No. of MEs Based On Area# HHsBusinessStallsReg. Bus.# HHs# Reg.Bus. Roxas10,1221,4984021,9001,0121,710Cauayan18,5361,9276032,5301,8542,277Alicia11,6361,1555221,6771,1641,509Sta. Ana8,864147235382886344Candaba17,291371754461,729401Guagua19,0732,1956652,8601,9072,574Pulilan13,1004766501,1261,3101,013Bocaue15,2421872974841,524436Arayat19,7655142177311,976658Capas16,2074532767291,621656Floridablanca16,8102,4093922,8011,6812,521Ibaan6,903531150681690613Bauan14,2021,3563001,6561,4201,490San Jose9,6999922031,1959701,076

  • Results of Estimation ProceduresThe results are initial estimates When the result of either estimation procedure shows a very small market potential, consider looking at another area.When there is a large disparity between the results of the two estimation procedures, look at the other characteristics of the area, such as: Are the households generally dependent on wages?Is the area predominantly agricultural? orAre data on the number of registered enterprises incorrect?

  • Assessing Risks from CompetitionThe banks risk from competition can come from:Institutional lenders active in lending to MEs in your target area (such as other banks, cooperatives, NGOs, pawnshops, lending investors)Informal lendersYou will use RMA Tables 5 & 6 to gather information about the competition and the loan and savings products they offer.

  • Assessing RisksRisks from competitionRisks to household incomesRisks to the businessOther risks

  • Give particular attention to Microfinance Institutions (MFIs) that are active in your target area. If the present client outreach of the MFIs already covers most of your target area, consider the following:look for alternative sites for market-testing your microfinance product; ortarget a market niche not being served as yet by the competition. Assessing Risks from Competition

  • Major household income sourcesSeasonal patterns Threats to household income flows: natural calamities, low farm commodity production, low prices, high production costs, unemployment/lay-off of workers, peace and order Risks to MicroenterprisesRelocation of shops/stalls, fire Seasonal income fluctuationsnatural calamities, rainy seasonAssessing Market Risks

  • Other Risk FactorsRate of migration (in and out migration)

    Level of ownership of dwelling

    level of indebtedness of microenterprises

    loan repayment experience of other lenders

    previous or current experience of the bank in lending in the area.Assessing Market Risks

    Enhanced by MLSPineda for MABS*Discuss the objectives.

    Ask participants: Why do you think it is important to measure the size of the MF market? Collate the answers on the board or tear sheet.

    Tell participants: You will learn simple ways of determining the size of the ME market and where risks could be coming from.

    Tell participants: There are two reference materials that they should read so that they can have a broader understanding of the microenterprise sector. Show next slide.Facilitator should point out that the NSO data used here are as of 2000. Data are available for later survey period by NSO, but that the percent share of micro businesses is still dominant.

    If there is internet connection, and participants have their laptop with them, ask them to go to the website of NSO to learn to search for information concerning business establishments. Enhanced by MLSPineda for MABS*Enhanced by MLSPineda for MABS*Explain to the participants that the discussions in the Market Research Module revolves around the microenteprise sector as the general target market for the banks. And that market research will generally be referring to existing microenterprises. Also point out that farming activities by small farmers are also considered micro enterprises, but there is a separate training module for micro agri.

    The main point in this slide is that you must have an idea of the size of the existing market you plan to enter. Having this information will help your bank decide whether the market is big enough to make it worthwhile for your bank to make the investment. Enhanced by MLSPineda for MABS*Let us look at the basic profile of this microenterprise sector in the country. Note that the definition of microenterprises is in terms of the number of workers employed by the business.

    The important points in this slide are: (i) Most micro business operators are women; and (ii) up to one-fourth of the micro business establishments are unregistered. The data on unregistered establishment should be taken into account when estimating the size of the market.

    Before going to the next slides: ASK some trainees to give their observations about microenterprises. They can give examples of the types of micro business establishments they usually see around (such as sari-sari stores, public market vendors, buy and sell, etc). Enhanced by MLSPineda for MABS*This slide tells us that microenterprises are an important sector comprising 9 out of 10 businesses in the country; the sector also absorbs 4 out of 10 workers and is an important source of income in the rural areas.

    Call attention to the result of the 1998 survey in Mindanao: 12% of the households in the region had microenteprirses.

    For details on this slide and the next one, refer the trainees to HANDOUTS 1 and 2 for the session.

    Enhanced by MLSPineda for MABS*Explain the following to the participants:

    Note that half of the micro businesses are in trading. If you take a look at the portfolio of microfinance institutions, you will find that a lot of their borrowers are sari-sari store owners, market vendors, and buy and sell activities. These types of business activities require relatively small amounts to start and very simple management. Moreover, you can easily get in and out of the business activity. There is a connection here with the fact that most of the micro business operators are women. With the simple and small-scale business operations, women can still attend to their obligations to their family.

    However, your bank should try to look for the micro businesses that have processing and manufacturing activities. These are the activities with the potential for growth and using an increasingly larger size of loan to add to their operating capital. Besides, these are the activities that can employ more people outside of the family members.Enhanced by MLSPineda for MABS*Tell participants: Two estimation procedures are contained in the next 2 slides. One is based on the number of households; the other is based on the number of registered businesses.

    The procedures are simple, based on secondary data, and their results will provide you with an initial estimate of the size of the ME market in your target area.Enhanced by MLSPineda for MABS*Ask the participants to compute for the size of the ME sector, based on the sample data (ANSWER is 1,148)Enhanced by MLSPineda for MABS*Ask the participants to compute for the size of the ME sector, based on procedure and the sample data (ANSWER is 1,156).

    Facilitator : What differences do you see in this sample slide for specific places?Enhanced by MLSPineda for MABS*Enhanced by MLSPineda for MABS*The initial estimates gives you a handle on the size of the market for microenterprise finance in a particular area.You can refine these estimates later after you have used the other market research tools you will learn from the course.

    Look at the third bullet and connect this to the last slide which shows which shows large disparity in the two estimation procedures.Enhanced by MLSPineda for MABS*Gathering information about your competitors is an important part of market research. This will provide your bank information on the kind of products, methodology, loan pricing and other value adding services your competitors offer in the same market. The products and services that the competition offers to micro businesses will have to be taken into consideration when you design your banks products.

    Use RMA Tables 5 & 6 to gather information about other suppliers of micro loan and savings products. The more detailed data gathering can be confined to those lenders actively engaged in microfinancing.Enhanced by MLSPineda for MABS* Risks to the bank can come directly or indirectly from different sources, as you can see from this and the following slides.Enhanced by MLSPineda for MABS*Bullet 1: These institutional lenders are serious players in microfinance. They include institutions dedicated to microfinance or those financial institutions that have been increasingly building up their microfinance portfolio to a significant level. In many cases, these microfinance institutions have been in microfinance for many years already, and have the resources to engage in large-scale microfinance operation. These could include pioneers in microfinance, such as NGOs, credit cooperatives.

    ASK PARTICIPANTS: In your banks service areas, give examples of microfinance institutions that your bank would most likely encounter in the market.

    LIST IN THE WHITE BOARD OR MANILA PAPER THE PARTICIPANTS RESPONSES.

    Enhanced by MLSPineda for MABS*You can categorize these market risks into those that can negatively impact on the household income sources, those that pose a risk to the business itself; and risks that affect the stability of the client and payments of loan obligations.

    The slide shows example of the risks that can negatively affect the borrowers ability to repay the loan.

    Enhanced by MLSPineda for MABS*ASK participants: Can you give examples of other risks that could affect the income of the borrowers and the ability of the bank to get back what it lent out?

    List down the participants responses on the board or flip chart.

    END THE SESSION BY SAYING: In the next session, Session 3, you will learn about gathering data and area mapping.

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