Microfinance institutions (MFIs) include a range of financial service providers that vary in their legal structure, mission, and methodology. Some operate as NGOs while others operate under a profit-maximizing structure and report to a central bank. All, however, share the common distinction of providing financial services to clients who are poorer and more vulnerable than traditional bank clients.
Financial products offered by MFIs tend to focus more heavily on credit rather than savings, since most MFIs do not possess the appropriate government permissions for receiving funds from the public. MFIs specialize in short-term entrepreneurial loans, although in recent years, some MFIs have diversified to include consumer loans, housing loans, educational loans, and micro-insurance.
Because credit is usually limited to those over the age of 18, many MFIs choose to serve the 18-25 or 18-30 age range of the youth market. They offer start-up entrepreneurial loans or education loans often accompanied by tailored training (in entrepreneurship and financial education) and mentoring services delivered through NGO or youth-serving organization (YSO) partners. Youth loans are distinguished from adult loans by smaller initial loan sizes, flexible loan terms, youth-friendly marketing and branding, alternative delivery mechanisms (including universities, trade schools, and youth clubs), and youth-friendly training packages.
MFIs have a strong understanding of the financial behavior of low-income market segments and are best-suited to conceptualize and design the financial services component of a program. Partnering with the MFI in the early stages of the program will enable the MFI to research the youth market segment and learn together with the other program partners. Partnering early will also allow the MFI to contribute its financial service expertise to the design of a strong, demand-driven financial product, and training package.
If the program is already under way, there may still be opportunities to form a mutually beneficial partnership. In fact, there may even be benefits to delaying involvement of an MFI, particularly in a market that is less open to working with younger clients. For example, an MFI that considers youth clients to be more risky may be more easily convinced to serve them if it sees that the youth program participants have already received high-quality training in business, entrepreneurship, or another related area.
MFIs, unlike most YSOs, typically operate under a cost-recovery business model, meaning that loans and other services must be sustainable. This difference in operating structures can make it difficult for MFIs to work with NGOs, and vice versa. Prior to entering into an agreement with an MFI, a YSO must critically analyze the MFI’s motivation for serving youth as well as its capacity and willingness to invest sufficient resources into the program. An MFI must do the same, ensuring that the YSO shares mutual values and possesses the adequate knowledge and infrastructure to address the training needs of youth clients. Depending on the MFI’s understanding of low-income youth, it may also require substantial training to address its staff’s limitations in understanding and communicating effectively with youth.
MFIs tend to operate on a very limited budget and may also need to better understand the business case for serving younger clients. Although the historical data to establish a business case for serving young people are not yet available, many MFIs currently serving young people do so based on the assumption that they are cultivating a new generation of clients and the possibility of cross-selling to the youth’s family members.
By partnering together, MFIs and YSOs can combine their knowledge and skill sets to provide a comprehensive package of training and financial services that promise greater social and economic outcomes for young people and the communities where they live. These types of engagements also encourage partners to focus on what each does best rather than attempt activities that may not fall within a partner’s core strengths. If successful, partnerships with MFIs can help to increase the overall efficiency of a given program in terms of timing and costs.
Please see the Resources section to find useful tools and publications related to the guidance mentioned in this section.
Microfinance institutions (MFIs) may be hesitant to work with youth due to perceived high risk. Top-level management must understand these risks and commit the adequate staff time and resources to the program. This involves designating a youth product champion within the MFI who guides the entire partnership and product development process.
Because MFIs and YSOs operate differently, it is important to hold several meetings to ensure partners share a common vision and values and to analyze strengths and weaknesses of each organization. Partners should then create a formal MoU outlining project objectives, roles and responsibilities, budget commitments, and timeline.
Partnership negotiations should involve defining the specific youth market segment as well as the corresponding products and services. Using specifics will help an MFI to determine whether or not it has the capacity to either adapt an existing product or design a new product for the specified market segment.
MFIs should be well-versed in the different phases of microfinance product development and commit sufficient time and resources (6-18 months) to properly researching the market and conducting a pilot test prior to rolling out the product. This, however, can be costly and may require fundraising or cost-sharing with the YSO.
Hiring and training the right staff to serve younger clients can be challenging. MFIs often must address a strong staff bias against younger clients by providing training in youth-friendly marketing and customer service. A YSO partner is well-positioned to support this type of activity either through direct staff training or through capacity building of MFI human resources staff.
Please see the Resources section to find useful tools and publications that provide practical guidance on implementing the best practices mentioned in this section.
Making Cents International’s guidelines provide six key principles for developing quality, demand-driven financial services for youth.
Making Cents International designed seven courses to support the development of YFS. These courses include useful tools and resources that can help a microfinance institute (MFI) or youth-serving organization as it researches the youth market and adapts or designs a financial product for youth. The courses also address key challenges, including staffing for effective delivery of YFS.
This case study from CHF International Ryadashares lessons learned in developing a credit product for Palestinian youth.
Fundación Paraguaya has been providing tailored business loans and training to Paraguayan youth for over 10 years. This case study highlights lessons learned from its experiences.YFS Case Study No. 8: MEDA Works with Youth: YouthInvest
In this case study, YouthInvest, a project managed by Mennonite Economic Development Associates (MEDA), shares lessons learned from market research with youth in Morocco.
This case study from Partner Microcredit Foundation shares its experiences developing a youth credit product for Bosnian youth.Making Cents International’s State of the Field Reports
These reports from 2009 (Part II), 2010 (Chapter 3), and 2011 (Chapter 8) share lessons learned and insights into different MFIs working with younger clients.
This paper written by Making Cents International for the Microcredit Summit 2011 presents an overview of the business and social cases for youth-friendly products and services and presents practical guidelines to help institutions begin thinking about developing or adapting financial services for youth.
Nick Cain from online student lender Vittana discusses its work in partnering with MFIs to provide student loans to low-income students in the developing world.
Claudia Pompa from Fundación Paraguaya discusses some of the human resource challenges her MFI faced in implementing its youth loan.
Lara Storm from Pro Mujer in Bolivia discusses the challenges her MFI faced in designing the right products for youth clients.
© 2010-2012 Education Development Center, Inc.