Arguments For and Against Integrating Financial and Nonfinancial Services

There are many opportunities for “economies of scope” in serving the diverse yet interlocking needs of the poor, and many microfinance providers have seized these opportunities in various ways, summarized in my last post (# 64). However, far more microfinance providers do not seize these opportunities. Why?

There should be efficiencies in operations and even synergies of benefits to be gained by integrating different services intended for the same people. Perhaps another service or two can be delivered along with microfinance, perhaps by the same field agent. Among microfinance practitioners and donors, however, there is a strong bias against integration. This is a reaction to the history of problems in “integrated rural development” programs and other idealistic models of multi-intervention responses to the interlocking needs of poor communities. Drawing on the perspective of the for-profit business world, the microfinance community holds that specialization in one type of development service is necessary for development effectiveness, service efficiency and institutional sustainability. “Let bankers be bankers,” says one commentator, and let others with different skills and experience take care of the other needs and wants of a community. Why should those setting out to create a microfinance institution feel compelled to offer services other than those that microfinance specialists know well how to offer? The question is logical, and the logic can appear persuasive.

Microfinance is not alone in this logic. Other sectors may be less adamant but are no less uncomfortable about trying to be “all things to all people” and all their problems. This is the perspective of professionals seeking to focus on what they have been trained to do best. There is a different and broader perspective, however; that of the program designer who gives priority to a development objective, such as alleviating the burdens of poverty on women and children. This designer is not satisfied with planning for economies of scale for a single service, because there is obvious need, even consumer demand, for multiple services. The designer is trying to achieve “economies of scope”—packaging two or more services together to minimize delivery and management support costs and to maximize the variety and combined magnitude of benefits for people’s multiple needs and wants.

Sometimes a package of two or more services has to be provided just to enable microfinance to work properly. The HIV/AIDS epidemic in Africa persuaded some die-hard microfinance specialists to offer preventive health education to both clients and staff, if only to protect the bottom lines of their microfinance operations. This is an extreme example, but it mirrors the decisions of many microfinance providers who recognize the devastating impact of serious health problems on their clients’ ability to take loans and repay and save.

Unified vs. Parallel Delivery of Multiple Services

In my last post (# 64), I offered the typology of integration designs: linked, unified and parallel. In each type, the organization is committed to full financial self-sufficiency of the microfinance operations, but satisfying the broader needs of the clients is just as important, it seems. Where they differ is in their deployment of managers and field staff. Only the “unified” providers are using the same managers and field agents to deliver both microfinance and nonfinancial services, and only they regularly achieve full recovery (from the clients) of all costs for the full range of services. But the parallel and linked service-providers, being willing to rely, in large part, on external funding, offer a broader range of services to their clients.

The advantages and disadvantages of the parallel (and linked) scenarios are:

  • Advantage: wider potential range of services and therefore impacts for clients and society
  • Advantage: staff can specialize by service sector and therefore be more expert in their work; greater effectiveness
  • Disadvantage: two or more staffs are required to provide services in two or more development sectors; financing of nonfinancial services depends on at least partial funding from sources external to the nonfinancial service-delivery (user fees are seldom sufficient to fully cover costs)—“external” funding in the past has often come from grants, but increasingly it comes from cross-subsidy by the financial services;
  • Disadvantage: coordination of staff (or organizations) representing different service sectors poses a significant challenge to management to assure the health services have access to clients of the financial services and vice versa.

The advantages and disadvantages of the unified scenario are:

  • Advantage: potential for full cost-recovery with income from credit operations; one staff can provide services in two or more development sectors
  • Disadvantage: narrower potential range of services, mostly or entirely education
  • Disadvantage: recruitment, training and supervision of multi-tasked field staff and supervisors demand extra commitment and skill from management.

In summary, the major challenge to the parallel scenario (where the same organization is responsible for parallel delivery of different services) is the sustainable financing of the nonfinancial service; whereas, the major challenge to the unified scenario is the management of field staff tasked to deliver different-sector services. It might appear that the linked scenario escapes both of these problems, and in theory it does. In practice, the linked scenario is very hard to maintain over time and over large service areas. Totally independent organizations have different missions, strategic plans, managers and revenue sources. Those differences are likely to limit overlap of target populations and service areas and also to pull the organizations apart over time, ending the linkage agreement. The linked scenario in practice is the one least likely to reach major scale and be sustainable. Nonetheless, it worked many years for BRAC and the Government of Bangladesh. If health service providers (especially government agencies that cover whole nations and therefore all the microfinance clients in that nation) come to see microfinance providers as delivery channels they can link to in order to significantly improve reach and impact of what they do, then the linked model for microfinance-health service delivery is likely to become more common and effective.

A microfinance institution considering delivery of additional services in nonfinancial service sectors should ask itself the following questions:

  • What additional services are required by the institution’s own development objectives?
  • What additional services are required to satisfy the needs and wants of the intended clientele?
  • What are the feasible options for providing additional services that meet both institutional objectives and client objectives? Links to other, nonfinancial service providers? Creation of a separate institution to provide nonfinancial services? Creation of a separate nonfinancial service unit within the institution itself? Unification of the nonfinancial services with the existing financial service delivery system? Combinations of the above?

The unified delivery option is the most demanding, but it also may be the only option or the one most likely to be sustainable in the long term. Even then, unified delivery is advisable only when the institution wants to add one or more forms of education to microfinance services for relatively large borrower groups that meet regularly with field agents of the institution.

The education should adhere to principles of effective adult learning, but the content can be varied or singular and drawn from structured curricula or facilitated exchanges of knowledge among the clients themselves. A mix of approaches (as in Credit with Education) can be used. But the education program, whatever it is, must be manageable by the same people, clients and staff, who are involved in the management of the financial services.

Is the unified, self-financing scenario possible? Is it feasible? Is it effective? The answers appear to be “yes” to all three questions when applied to certain types of microfinance and certain types of education delivered together.

Integration is only for those whose objectives call for providing multi-sectoral services to address multiple needs/wants of their clients. Unified integration is only for those with the need and the will to lead and manage staff toward long-term independence from operating grants. As an organization considers the unified option, it should understand why this option is more demanding and be realistic in assessing its commitment.

In the next posts, I will review the evidence that integration of microfinance with various health and nutrition interventions actually leads to better health and nutrition practices and greater use of vital health products and services.