Training in Support of Microlending ClientsMicrolending has been much in the news over the last several years. In fact, Muhammad Yunus, the best known proponent of microlending through the Grameen Bank which he founded in Bangladesh was awarded the Nobel Peace Prize in 2006.
2006 was also the year that Dean Karlan, an economics professor at Yale, and Martin Valdivia, research director a Grupo de Análisis para el Desarrollo, issued a paper (pdf) reporting their research indicating that "microfinance institutions can improve client outcomes cost effectively by providing entrepreneurial training along with the credit." Specifically, clients who received training showed improved business knowledge, practices, and revenues.
Karlan and Valdivia also found that the client training has a positive impact on the microfinance institution itself. Both repayment and client retention improved, which meant higher profitability.
Another key finding was a negative correlation between the interest a client expressed in receiving training and the magnitude of the impact of the training on the client's business practices and results. Karlan and Valdivia note that this result suggests that microfinance institutions should be wary of charging a fee for training, since a fee may especially deter the clients who would benefit most.
The training Karlan and Valdivia evaluated was delivered to clients of FINCA Perú, a small non-profit microfinance institution. Some of the clients were in three particularly poor districts of Lima; others were in the area of Ayacucho, the capital of the Andean province of Huamanga.
In Lima 98% of FINCA's clients are literate; in Ayacucho the client literacy rate is approximately 85%. Most of the Lima clients have finished secondary school, and 40% have some post-secondary schooling; in Ayacucho only about 30% of clients had finished secondary school. This difference in the level of formal schooling led the researchers to use somewhat different training programs in Lima and Ayacucho:
The training materials in Lima were organized in two modules. The first module introduced attendees to what a business is, how a business works, and the marketplace. Clients were taught to identify their customers, competitors, and the position of the business in the marketplace and then learned about product, promotional strategies and commercial planning. The second module explained how to separate business and home finances by establishing the differences between income, costs, and profit, teaching how to calculate production costs, and product pricing.The research was carried out by assigning clients randomly to treatment and control groups.
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In Ayacucho, the training program was grouped into 3 modules with topics less advanced than those taught in Lima. ... Module 1, “Manage Your Business Money,” begins by defining the differences between money for personal expenses and for the business. Women are taught how to calculate profits and about the use of profits for the household and business. Sessions cover how to handle selling to customers on credit, how to record business expenses, how to prevent losses, and the importance of investing in the business. ...
Module 2, “Increase Your Sales” begins by providing an overview of five key elements in sales: 1) customers, 2) business product or service, 3) product placement, 4) pricing, and 5) marketing. Many of the following sessions are dedicated to providing women with practical means of applying these concepts. ...
The third module, “Plan for a Better Business,” teaches members how to incorporate planning into their business. Sessions begin by presenting why planning is beneficial and what traits characterize a successful business. Attendees are instructed on how to solve business problems and how to introduce new products or changes. Later sessions teach the tools needed to prepare a sales plan, calculate business and loan costs, search for new resources, and handle unexpected problems and opportunities.
The treatment groups received thirty to sixty minute entrepreneurship training sessions during their normal weekly or monthly banking meeting over a period of one to two years. Control groups remained as they were before, meeting at the same frequency but solely for making loan and savings payments.Karlan and Valdivia note that follow-on research is needed to evaluate the degree to which the positive impacts of training are sustained.