Sustainability is an important issue both for microfinance institutions and the clients they serve.  Financial sustainability allows an institution to provide much-needed services to clients over the long-term and even expand to new areas to serve more clients.  Financial sustainability also fosters clients’ trust in an institution.  Clients can feel confident depositing hard-earned savings and taking loans when they know the institution will be around for a long time.  They are also motivated to make timely repayments in order to receive additional, even larger, loans in the future.

To address this issue, some institutions have turned to commercialization. Unfortunately, this decision often involves moving away from serving the poor, as these institutions turn to middle-class markets in the search for financial viability.  Freedom from Hunger, however, sees another option for addressing sustainability. Integrated services provide an opportunity for implementing organizations—whether for-profit or nonprofit—to maintain service to the poor while achieving financial sustainability and even improving performance.

Integrated services make good business sense for a number of reasons:

§         Portfolio quality.  Some microfinance institutions experience high delinquency rates. This is often due to the business risk associated with the loan, the credit risk associated with the client, or the breakdown of selection and collection practices associated with the service-delivery model. Integrated service-delivery models, in contrast, possess several features that can lead to improved portfolio quality:

o       Working capital loans for commercial activities are often emphasized, rather than higher-risk seasonal agricultural lending.  Furthermore, loan cycles are short and require small, regular repayments.  As a result, business risk decreases and cash flow improves. 

o       Screening processes rely on strong rural community interdependence which can strengthen client selection and later provide peer pressure as well as support to maintain high repayment rates.   

o       Health, business and financial education services enhance clients’ health status, business, and personal finance acumen, which in turn improve their capacity to repay loans and accumulate savings. 

o       Field staff’s regular contact with groups and facilitation of both financial and non-financial services enhance effective engagement with clients.

§         Efficiency.  Delivering integrated services in a unified manner reduces the costs of delivering financial and non-financial services, since it only requires one set of staff to provide different services.  In fact, implementing organizations have the potential to achieve full cost-recovery with the financial margin earned from the financial services.  In the case of Credit with Education, staff costs can be lowered still further.  Credit with Education only requires that field staff have the capacity to record and track simple financial transactions and build trust and strong relationships.  As a result, in some cases implementing organizations can tap literate women from the community to serve as field staff rather than relying on higher-paid, technical staff.   

§         Asset utilization. Many institutions have limited capability to transform savings into loans and operating income due to the nature of the products they offer.  Integrated services allow implementing organizations to transform savings and excess liquidity into loans for a poor, often rural, market.  These new clients generate regular income for the implementing organization through interest payments on these redirected savings.

§         Market penetration, membership growth and diversification.  While most institutions require clients to come to a primary service center to conduct their transactions, integrated services typically overcome this outreach limitation by delivering services through a mobile banking system. This decentralized model not only offers the opportunity to provide services to new clients in different markets, it also helps the implementing organization test if there is sufficient demand to open fixed offices in those areas.  In addition, as clients learn to use financial services successfully, many “graduate” to individual loans, take larger loans and access other services the organization provides.  Finally, integrated services are known to improve client loyalty.  As reasons for their loyalty, clients have cited complementary services—particularly education—and the support of an organization that cares about their clients, not just about repayments.  

Using a cost-accounting analysis of the cost of offering integrated services through Credit with Education, Freedom from Hunger found that the integration of education with financial services constituted only 4.7% to 10.0% of total operating costs.  This finding demonstrates that adding a non-financial component to services does not have to add a lot of costs nor materially delay achieving financial sustainability.

To learn more about the contribution of integrated services to financial sustainability, follow the links below. 

§         Freedom from Hunger’s quarterly Credit with Education Status Report provides self-reported data from partner implementing organizations delivering integrated services.  Data include portfolio-quality ratios (portfolio at risk, long-run loss rate), efficiency ratios (number of Credit Associations per field agent, operating cost ratio), sustainability ratio (operating self-sufficiency), retention rate, and average loan size (a proxy for depth of outreach).

§         Teaching Entrepreneurship:  Impact of Business Training on Microfinance Clients and Institutions, a 2006 impact study conducted by Dean Karlan, Assistant Professor of Economics at Yale University, documents institutional outcomes, in particular higher repayment and retention rates, that FINCA Peru experienced as a result of providing complementary business services to its clients.

§         A Business Model for Going Down Market:  Combining Village Banking and Credit Unions, an article in the MicroBanking Bulletin, shares data from a number of credit unions participating in the Credit Union Empowering and Strengthening (CUES) Project of the World Council of Credit Unions.  Greater operational self-sufficiency and return on assets were observed in credit unions offering integrated services as compared to those not offering integrated services.

§         In Impact of Credit with Education on Mothers and Their Young Children's Nutrition: Lower Pra Rural Bank Credit with Education Program in Ghana, research from the Noguchi Memorial Medical Institute shows that the Lower Pra Rural Bank was able to improve operational self-sufficiency while achieving significant nutritional benefits for clients’ children, through integrated service delivery.

§         In The Microcredit Summit's Challenge: Working Towards Institutional Financial Self-Sufficiency While Maintaining a Commitment to Serving the Poorest Families, David S. Gibbons and Jennifer W. Meehan of CASHPOR show that CRECER, an implementing organization offering integrated services in Bolivia since 1990, achieved efficiency and sustainability ratios comparable to or better than organizations that offered little or no education.

§         Cost of Education in the Freedom from Hunger version of Credit with Education, a research paper by Ellen Vor der Bruegge, Joan E. Dickey and Christopher Dunford, presents a detailed cost-accounting analysis, including the assumptions and calculations used to determine the proportion of total operating costs which can be attributed to the integration of education with financial services.