CASE STUDIES IN DONOR GOOD PRACTICES 34275 No. 8 July 2003 Donors as Silent Partners in MFI Product Development: MicroSave-Africa and the Equity Building Society in Kenya by Kim Craig and Ruth Goodwin-Groen This case study describes how donors successfully supported MFI product development. Initiated by Swisscontact (a nongovernmental organization), led by Micro-Save Africa (a donor-funded project providing product development services), and supported by DFID, EU, UNDP, and AfriCap, Equity Building Society's product development capacity has grown rapidly. Overview By December 2002, Equity Building Society (EBS) EBS Changed by Focusing on Clients emerged as one of Kenya's leading microfinance insti- "MicroSave-Africa helped us to discover that our products tutions, with over 155,000 savings clients and 41,000 did not meet our clients' needs. [It also] helped us identify borrowers. Although once insolvent, EBS transformed competitors, make charges transparent and provide itself into a profitable financial-service provider by information for clients on our products, repayment rigorously focusing on the needs of its clients--in schedules and statements. We worked with MicroSave- particular, by developing a wide range of market-based Africa on financial modeling, product design, costing and pricing.... financial products and services. "Our savings clients increased from 61,000 in 2000 to Strong technical training laid the groundwork for EBS's 155,000 in 2002, and as of June 30, 2003, we [had] over strategy of customer-oriented product development. The 182,000 deposit accounts." NGO Swisscontact awarded EBS an initial grant of James Mwangi, Finance & Operations Director, EBS US$150,000, with which it hired MicroSave-Africa in October 2001 to intensely train EBS's staff in product development. Applying what it learned, the staff Central to the effort was the strong leadership of CEO embarked on a systematic program of product develop- John Mwangi, and Finance and Operations Director ment, tailored to the needs of its clientele. The resulting James Mwangi. They redirected EBS's mission to focus, popular products have effectively reduced EBS's client for the first time, on microfinance clients. EBS evolved drop-out rates, attracted new clients, and expanded its from a building society dedicated to financing outreach. The transformation from a product-led to mortgages, to a financial institution committed to market-led institution has also improved EBS's institu- providing a variety of flexible and responsive financial tional stability and financial sustainability. services to low-income clients. In 1999, EBS started to work with international Setting the Stage partners--initially with the Micro-Enterprise Support EBS was established in 1984 as a registered building Programme (MESP) of the European Union (EU) and society, and was insolvent within a decade. In a 1993 the MicroStart program of the United Nations institutional rating of EBS, the Central Bank of Kenya Development Programme (UNDP). Partnerships with noted inadequate board and management supervision, as Swisscontact and MicroSave-Africa (a donor-funded well as unsatisfactory asset quality. EBS's capital had provider of product development services) followed in become fully eroded by accumulated losses, and its 2001. More recently, EBS has established partnerships deposits were being used to meet daily operating with the UK Department for International Development expenses. Time had come to turn the institution around (DFID) and the AfriCap Microfinance Fund (AfriCap). and refocus its mission. Page 2 A DIRECT Case Study Building Product-Development Capacity · refine existing products In October 2001, Swisscontact contracted MicroSave- · develop and improve its operating systems Africa to train the staff of EBS in microfinance market The improvements in EBS's product development led to research. According to Ralph Engleman of Swisscontact even more fundamental changes in how it does business. in Nairobi, one of Swisscontact's goals was to help EBS In particular, a recent focus on strategic marketing is refine its product portfolio. Together, they decided proving extremely useful in increasing its market share, MicroSave-Africa was the region's best technical-service enhancing operational efficiency and maximizing the provider. Some 26 EBS staff members, including return on its assets. Finance and Operations Director Mwangi, attended the market-research and fieldwork training in product As of December 2002, the audited financial statements development. The goal was to build EBS's internal of EBS showed a profitable institution with over capacity to refine and develop its products. 155,000 depositors, using five different savings products. Deposits were valued at approximately US$ After the training, EBS established a product develop- 27.5 million (2.1 billion Kenyan shillings), and its loan ment team of seven staff members. Their commitment portfolio at approximately US$ 14.4 million (1.1 billion during training convinced MicroSave-Africa to enroll Kenyan shillings). Outstanding loans from EBS were EBS as an Action Research Partner (ARP). MicroSave- held by 41,000 borrowers. By June 2003, these numbers Africa, with funding from various donors, provides its jumped to 180,000 depositors and 56,000 borrowers, ARPs with additional technical services free of charge. who were served by 12 branches and 24 mobile units. EBS itself is covering its other program-related The institution had 2,469 shareholders, 256 staff expenses. members, and 8 directors. As an ARP, EBS agreed to: · commit senior-management time to the program · nominate a "product champion" to supervise and guide its action-research program · provide reports on the progress it was making on an agreed work plan every two months In return, MicroSave-Africa agreed to assist EBS in: · developing a process by which it could cost products · providing quality control for an EBS study, which also looked at its success factors and problem areas · reviewing its portfolio of products against client demand · creating and adopting new products through a systematic product development process Mundoro Mobile Banking Unit, Thika Branch, April 3, 2003. To accomplish these commitments, MicroSave-Africa Photograph by George Maina, courtesy of EBS. provided EBS with further training, specifically in: · product-development market research In early 2003, external funding to EBS began to be · pilot tests of products coordinated through a steering committee of EBS's funders (donors and investors) and MicroSave-Africa. · product monitoring and final evaluation External funding (from Swisscontact, DFID, EU, and AfriCap) has concentrated on capacity building and The results were striking. EBS's Research and Product (from UNDP) on systems development. This method of Development department became more effective and managing its funding has helped increase the efficiency productive, launching new efforts to: of all EBS's programs. · cost new products A DIRECT Case Study Page 3 What Factors Led to Success? strategy to reprice and repackage existing products 1. Donors left product development to the managers before embarking on the development of new ones. of EBS. Donor involvement in product development at EBS has focused exclusively on helping it obtain quality Benefits of Product Development for EBS training and other technical assistance. Actual product EBS is already reaping the benefits of its product devel- development and delivery are left to EBS management. opment. These include increased staff satisfaction, custo- Donors also do not push EBS to offer products and mer loyalty, developmental impact, and profitability. services or work in new regions before it is ready. "EBS is in the driver's seat," observes MicroSave-Africa Stability. EBS's new, wider range of products have Director Graham Wright. proven highly popular among clients. Consequently, EBS enjoys greater client retention, increased new-client Donors Appreciate the Approach of MicroSave-Africa numbers, improved outreach and higher long-term sustainability. "The long-term viability of MFIs, as with all businesses , depends on the wider environment in which they operate-- not just on the level of the legal and regulatory framework Efficiency and productivity. EBS's new training and but also on more sector-specific information, business client focus has improved its management's view of services and resources. MicroSave, with DFID's support, is costs and cost control, which has resulted in increased addressing a critical gap in the sectoral support efficiency and productivity. EBS management has also: infrastructure needed to build a client-driven industry. Its · established performance benchmarks for individuals, research, development and support work addresses the branches and the institution as a whole practical business needs of MFIs looking to take a market- driven approach..." · focused staff evalution on rewarding performance set up a new organizational structure that has steered Dr. David Ferrand of the DFID office in Nairobi · EBS through its client-focus transition and will lead it into the future. 2. Product design is driven by client demand. The poor are not homogeneous. Therefore, the challenge is to Profitability. EBS responded to market and field develop a variety of flexible financial services to meet research by revising its price structure by: the diverse needs of the poor--that is, with terms · decreasing its interest rate on fixed deposits and suitable to client cash flow. Such tailored products offer simultaneously matched competing rate, making the the poor the most help in managing the risks they face in product profitable. their daily lives. · revising the structure and marketing of its loans. · tracking its interest-rate margin on a weekly basis. 3. EBS put the basic institutional capacity in place needed to embark on product development. The · adjusting its account chart to reflect income and commitment of the EBS board and management ensured costs on a product-by-product basis. that adequate staff and systems were allocated to the product development process. Moreover, management understood the capacity issue and realized it would need additional staff and systems to implement changes. The early assignment of a "product champion" was a crucial part of the additional staff. 4. EBS followed a systematic product development process. The methodology of MicroSave-Africa helped EBS avoid common pitfalls, such as higher-than- anticipated setup costs, products with limited demand, and a staff insufficiently trained to market and deliver new products. Most important, they avoided product proliferation. EBS and MicroSave-Africa chose a Page 4 A DIRECT Case Study These changes produced a 35% increase in deposits and · Help identify and connect the client institution to a 47% increase in loans in just one year. Together with quality technical expertise other capacity-building measures, they resulted in a · Look for partners that explicitly seek feedback from remarkable 104% increase in pretax, year-over-year clients when designing products profits in 2002, even though total assets only increased by 37% for the same period. · Support the organizational changes necessary for market-led product development, such as staff train- Benefits of Product Development ing and information systems improvements for EBS Clients · Initiate and encourage information exchange between financial institutions and donors to maximize the Wider variety and flexibility of products: EBS now replication of successful product development efforts offers a diversified product menu tailored to client needs. · Take a patient, long-term approach to funding that For example, its Jijenge (meaning "build yourself") rewards institutional performance and outreach product is an increasingly popular, contractual savings plan. It allows a customer to commit to save a specific · Recognize that refining or introducing new products amount of money within a certain period for a specific is a complex process that takes time purpose, such as school fees or business expansion. The client, not EBS, determines both the amount and the References EBS PRODUCT MENU timeframe. Anyango, Ezra, and Marguerite S. Robinson. Assessment of Action Savings Clear product Research Partners: Equity Building Society). Nairobi, Kenya: Ordinary Savings Account terms: Market MicroSave-Africa, September­October 2002. Business Savings Account research made EBS Coetzee, Gerhard, Kamau Kabbucho, and Andrew Mnjama. Super Junior Investment Account realize it needed to Understanding the Re-birth of Equity Building Society in Kenya. Jijenge Account Nairobi, Kenya: MicroSave-Africa, August 2002. Call and Fixed Deposits remedy the misper- Equity Building Society. Annual Report and Accounts, 31 December Loans ception that its loan 2002. Audited by M/S Mungai and Associates, Nairobi, Kenya. Education Loans prices were too Business Loans high. This was Helms, Brigit, with input from CGAP staff. Why Donors Need to Medical Loans largely because Understand Product Development. CGAP Donor Brief No. 8. Development Loans EBS stated its rates Washington, DC: CGAP, November 2002. Salary Advance on an annual, MicroSave-Africa. ARP Progress Report: January­March 2002. Farm Input Advance declining-balance Wright, Graham A.N., David Cracknell, Leonard Mutesasira, and SAKO Plus Loan (pilot) basis, while its Rob Hudson. Strategic Marketing for Microfinance Institutions. competition used a Nairobi, Kenya: MicroSave-Africa, March 2002. flat, monthly interest rate on the original balance. Wright, Graham A.N. "Market Research and Client-Responsive Consequently, EBS's rates, which were actually lower, Product Development." MicroSave-Africa essay. Nairobi, Kenya: appeared higher. The remedy was that EBS began using MicroSave-Africa, 2001. "client language," printed brochures outlining product Wright, Graham A.N., Monica Brand, Zan Northrip, Monique Cohen, changes, and prominently advertised its fees. Michael McCord, and Brigit Helms. "Looking before You Leap: Key Questions that Should Precede Starting New Product Improved access. EBS' commitment to its customers is Development." MicroSave-Africa essay. Nairobi, Kenya: MicroSave- Africa, 2001. evident in its expanded operating hours. No longer following traditional banking hours (9:00­ 15:00), it opens at 8:30 and closes at 16:00. Websites and Contacts EBS contact: James Mwangi, ebs@nbnet.co.ke Conclusion MicroSave-Africa contact on EBS project: Graham Wright, graham@MicroSave-Africa.com While product development is not an obvious donor activity, EBS's experience illuminates some important MicroSave-Africa web site: www.MicroSave-Africa.com lessons for donors looking to support such efforts by MFIs. It is vital for a donor, as a "silent partner," to: