In a recent post (# 69), I introduced the Microfinance and Health Protection (MAHP) initiative led by Freedom from Hunger with five microfinance institutions (MFIs) in Benin, Bolivia, Burkina Faso, India and the Philippines. You can go back to that post to learn about what this initiative involved (MFIs providing health education, health savings and loans, and/or facilitated access to health care and products) and the health impacts that were documented. Here I summarize the operations research led by Myka Reinsch and published in Enterprise Development and Microfinance (Reinsch et al., 2011). That journal requires payment for access to the full paper, but there is an earlier version you can access here. Myka explored the business case for microfinance providers to offer their clients healthcare financing, actual health services and health-related products.
The following is mostly excerpted from the journal article. I won’t subject you to the same level of excruciating detail that I plunged into in my last post (# 73)! My purpose there was to demonstrate the sophistication of the cost analysis we did for Credit with Education. Trust me—Myka took that sophistication to a much deeper level.
Through the MAHP initiative, Freedom from Hunger and the five MFIs endeavored to see whether they could develop practical, scalable and high-impact health-protection products that could be financially sustainable over the long term and replicable by other MFIs. A variety of health-protection products was developed and tested, and most of these were deemed successful enough by each MFI to warrant continued scale-up and expansion more than seven years after the beginning of the initiative. Evidence to date indicates that such products have strong potential to be sustainable over the long term and to directly and indirectly enhance the financial bottom line of MFIs.
Net Financial Costs
One of the criteria for the MAHP product innovations was that they be sustainable—the components would either pay for themselves or could otherwise be financially sustained on an ongoing basis by the MFIs. In some cases, these products can become profitable, actually generating net income for the MFIs. Although not all of the MAHP services tested are financially self-sustaining, some practitioners may be surprised to learn how little the non-revenue-generating health services examined actually cost. Our analyses revealed that their average marginal cost to the MFI in 2008–2009 was US$.29 per client per year, and their average total cost to the MFI (including allocations and overhead) per client, per year was $1.59. As a result of these net costs, the MAHP MFIs’ estimated “loss” in Profit Margin ranged from 0 to 5 percentage points with an average drop of nearly 2 points, from 23.58 to 21.67 percent. All five MFIs had assumed full ownership of the new services and were bearing their cost by 2010.
Competitive Advantage and Other Benefits
Microfinance and health-protection products and services may potentially be even more affordable for MFIs when taking into account their impact on client growth and retention. Anecdotal evidence, cost data and preliminary cost/revenue modeling begin to show the tangible financial gain that health protection products can generate via their indirect impacts on client growth and retention. While some MFI staff observed anecdotally that the health protection services resulted in significant client growth and retention, we were not able to reliably measure this change or empirically attribute causality. However, in examining costs and profit ratios, we calculated that even a 1 percent improvement in client growth or retention could reduce the average annual per-client cost for MAHP products and services from $.29 to $.05 (in terms of average marginal cost) and from $1.59 to $1.34 (in total costs, including allocated overhead). If as much as 5 percent client growth or retention were attributable to these products, then they would become marginally profitable, on average. Further implementation experience and research are needed to more confidently estimate the percentage of client growth and retention that can be expected from the offering of such services. But quantitative and qualitative research so far suggests that this may be a relevant and realistic contribution to MAHP product “earnings.”
While additional research is needed, the impacts from potentially larger loan sizes due to better client health and financial position following use of the MFI’s health products and services, as well as from improved staff morale due to increased client satisfaction, would have an undeniably positive financial effect on the MFI. These other indirect benefits may further diminish the net cost to the MFI from offering health products and services.
The five MFIs, Bandhan, CARD, CRECER, PADME and RCPB have been satisfied with their health protection products and are assuming the net costs associated with continuing them and even scaling up. Other MFIs may well be interested, too, because:
- Health-protection products can be inexpensive for the MFI to provide—some products can earn net profits, while others can be absorbed as marketing or operating expense with minimal impact on overall MFI profit margin.
- Health-protection products can differentiate an MFI in a crowded market, help attract new clients and enhance loyalty, leading to increased competitive advantage that has an indirect but quantifiable impact on MFI net earnings.
Influence of a Good Business Case on MFI Management Adoption of Health-Protection Options
The leaders of the five MAHP MFIs each have their own specific reasons for continuing to pursue and scale up their health protection products. All of them view ill health as a major factor in the lives of their clients and an important reason for loan default. While all five leaders entered into the MAHP initiative with a strong orientation toward social mission, they now also perceive a solid business value in offering health protection products.
However, it became clear that the MFI leaders and their management teams chose to offer health-protection products almost regardless of the details of costs and their effects on profits. Their primary concerns were about the marginal out-of-pocket cost and operational impacts of each product. Despite their evident success as microfinance businessmen, understanding the full cost (including allocated costs of management, supervision, administration, etc.) and its true effect on profit margin just did not seem as important to them as their perception of the clients’ need for the product and their institutional commitment to provide benefit to their clients and their families and communities. To paraphrase more colloquially: they saw the major health problems of their clients and wanted to help in any way that would not result in losing their shirts financially. In short, their social motives were at least as prominent in their management decision-making as their financial motives. Yet these socially motivated decisions turned out to be good business decisions as well.
There are a couple of important lessons learned here. First, focusing on the clients and their needs can be good business for MFIs. No huge surprise there. Second, an MFI leader’s decision to offer non-financial services is not predictably influenced by a good business case. Freedom from Hunger has repeatedly seen MFI leaders accept or reject adoption of non-financial services without reference to the business case for or against. Much more influential is the leader’s balance of social and financial motives. Now that is a surprise! Or is it?