Malawi's Financial Landscape: Where Does Opportunity International Bank of Malawi Fit?
The Assessing the Impact of Innovation Grants in Financial Services project (known as the Financial Services Assessment project; hereafter FSA), undertaken by the IRIS Center at the University of Maryland, College Park, together with its partner Microfinance Opportunities, is assessing the impact of grants provided by the Bill and Melinda Gates Foundation (BMGF) for the design and development of innovations in financial services. The FSA project will assess the impact of new financial products, services and delivery systems on poverty alleviation, sustainability and scalability. The approach taken by the FSA project gives new emphasis to issues such as access to financial services and the role of the regulatory environment.
The Financial Landscape study is one in a series of studies assessing the impact of Opportunity International Bank of Malawi's (OIBM) rural service delivery innovation. OIBM received a grant from the BMGF to pioneer a model of rural service delivery in Malawi, which they described as a "scalable, technology-driven, low cost approach to providing a full range of financial services to families living in remote rural areas." The technological components of the innovation, which include satellite branches, mobile bank branches, ATMs, and Point of Sale (POS) devices, will be used to deliver a range of financial products including loans, savings, and insurance to the rural population. The mobile bank was the first of these delivery channels to be rolled out and is therefore the primary focus of the FSA research in Malawi.
The rationale for OIBM's innovation is that only 5 to 10 percent of the rural population in Africa is believed to be reached by microfinance services. For those rural microentrepreneurs who access services, the transaction costs are high, due to transportation costs and the opportunity costs of time. Success for OIBM will depend on how their innovation bears on these issues.
The other studies in the OIBM research series include a quantitative Impact Assessment study, a qualitative Financial Diaries study, and an Enabling Environment study. The findings of the Financial Landscape research will complement the results of the Impact Assessment study and the Financial Diaries particularly as they relate to the use of financial services. The Financial Landscape Baseline study is the subject of this report.
The Financial Landscape research employs qualitative methods to explore household access to financial services. The overall aim of the study is to understand changes in the available financial service options and preferences of financial service customers who are exposed to the financial innovation. The Financial Landscape research relates to impact assessment through the examination of how the innovation fits into the existing financial landscape and by asking: given the parameters of access in this financial landscape, what are the implications for the use of financial services generally and, in particular, the use of the innovation?
Through the use of baseline and endline surveys, the Financial Landscape research examines how the available financial service options change after the introduction of the innovation, and how these changes affect access and choice for different socio- economic groups. The Financial Landscape study places OIBM's innovation in the context of local competition to understand how competitive interactions dampen or multiply the impact of the innovation. In this way, the research helps reveal the value proposition of OIBM's innovation—that is, the unique added value that OIBM offers to its customers via these new services.
The Financial Landscape Baseline study employed focus groups and structured individual interviews to document the range of financial service options in the area and provide insight into the value proposition of the innovation. The research documented which financial institutions, products, and services were available, which ones were preferred by rural customers, and why. It also examined how these preferences have changed over time. The research further identified barriers to financial services access. The study considered the financial landscape—including formal and informal services - from the perspective of both clients and financial service providers, particularly emphasizing clients. The process will be repeated in two to three years to provide an endline—an indication of whether and how the landscape has changed relative to the introduction and operation of the service innovation.
Opportunity International Bank of Malawi (OIBM), headquartered in Lilongwe, is a commercial bank that started operations in 2003. It is a savings-led institution that focuses on serving the low-income market. It currently offers a range of financial products designed to appeal to all segments of the population. At the end of May 2007, OIBM had 70,033 depositors, $7.1 million on deposit, 9,526 borrowers and $5.1 million in portfolio outstanding.
The Baseline research was carried out around the six locations that OIBM intends to serve with the mobile bank. These were: Mchinji and Kamwendo in the Mchinji District, Nsundwe and Nkhoma in the Lilongwe District, and Chimbiya and Dedza in the Dedza District. The research consisted of 17 Participatory Rapid Appraisals (PRAs, a form of focus group discussion) with 145 rural residents and 23 key informant interviews with community members and financial service providers.
Supply-side research showed that the study area is not an empty marketplace nor is it unbanked. A relatively diverse financial landscape was already in place before OIBM entered the market. The supply-side landscape featured two major financial products: savings and loans. However, few of the existing institutions provide both kinds of products to the rural population. As OIBM enters this market, it is uniquely positioned to provide both formal savings and microcredit within a single institution—"one-stop shopping."
Existing savings products that are dominant in this financial landscape include basic savings and fixed-deposit accounts. These products were offered through bank branches located in the larger towns, e.g. Lilongwe, Mchinji, and Dedza. In these areas OIBM will face competition from three commercial banks, as well as the parastatal Malawi Savings Bank, in terms of attracting rural deposits.
On the loan side, the product market was more complicated and divided between microenterprise and agricultural loans. Most of the available agricultural loans are in-kind. Micro-enterprise loans are usually in cash. Group loans predominated, but individual loans were also available. OIBM offers the full selection of loan products: micro-enterprise, agricultural, group and individual loans.
The OIBM mobile bank will give OIBM a presence in more locations than any other lending or savings institutions. Rural penetration may be limited however, because the mobile bank cannot drive off the paved road.
With a range of savings products and financial institutions available to people in this area, a key question is: what do they actually access? The research found that access varies by socio-economic status. The Very Poor only accessed savings products at one parastatal. Whereas the Poor had a wider range of commercial bank and parastatals from which to choose, while the Well-to-Do had the best and most extensive access to the range of products and institutions available in this market.
The Very Poor could access loans from one parastatal and a few NGOs. The Poor were able to access loans from these same institutions, plus OIBM and a second parastatal. As with savings, the Well-to-Do market segment could choose from all available service options.
Access to savings institutions tended to be mediated by physical proximity and cost. Our findings showed that the most accessible and/or cheapest institutions to use at any given time tended to be the most popular. Trends in access to loans over the service area varied considerably. Each lending institution had a different target market and different conditions for eligibility, so there were many variables at work in determining villager access. The transaction costs of accessing financial products were also investigated and it was found that transportation costs and the time to access savings or loans were both very important. Although only a minority of villagers interviewed had financial services, they appeared to be informed about the availability of different financial service institutions and product options. However, they were neither uniformly nor accurately knowledgeable about specific product features. Additionally, we found misinformation about the available financial options in some places, while in others we learned that information about existing financial services and products was not communicated evenly among community members.
The initial evidence from this baseline research suggests several areas where OIBM can add value to this market. The value proposition of OIBM in this context can be considered as follows:
Bringing the bank to the customers—in at least 4 of the 6 mobile bank stops, there were no existing formal financial services with the exception of the Post Office. If OIBM can serve these locations consistently they can build customer trust. In turn, they will be able to attract and retain a loyal customer base by reducing transportation costs and increasing security for clients. This, above all, is what the BMGF-funded mobile bank enables. OIBM offers a complete range of financial products - loans, savings, payment services, and remittances, all of which were demanded in rural areas. OIBM uniquely offers the possibility of "one-stop" shopping.
OIBM can reach the full range of client market segments: the Rich, the Poor and possibly the Very Poor. By diversifying the markets that it serves, OIBM is lowering its risk of lending while at the same time increasing financial inclusion.
OIBM knows how to work with the poor. It was clear from research among villagers that most commercial banks did not provide the customer care for which rural people are looking. Impressions of OIBM tended to be positive in this regard. However, it was not yet clear if OIBM has a competitive advantage over some MFIs that reach Poor and Very Poor people in remote rural areas.
As noted earlier, this report presents the results of the Financial Landscape Baseline. Approximately three years after the completion of this research - around July 2010 - we will return to the same rural areas to carry out a similar study that will constitute the Endline. The intent will be to document changes in access and the makeup of the financial landscape—developments that may correlate with the introduction of the OIBM innovation. In this way, the financial landscape study will provide a window on questions of impact.
In addition, the Endline will provide an opportunity for follow-up on a number of questions raised by the Baseline results, including:
Can OIBM succeed where others have failed? Commercial banks and MFIs had pulled back from some of the areas that OIBM proposes to serve. OIBM faces many of the same challenges that these others faced such as high transportation and communications costs. These challenges speak to the sustainability of the innovation. Additionally, because the OIBM mobile bank cannot leave the paved road, it will be challenged in reaching remote populations. This relates to the potential outreach of the innovation.
Will OIBM's rural expansion lead to "additionality" (i.e., will they bring the "unbanked" into financial services) or will it lead to "substitution" (i.e., will they take customers away from existing providers)? Anecdotal evidence suggests that the substitution had already started. This raises the question of how much of an effect the OIBM innovation will have on the net outreach of financial services in rural areas. Another question is what will happen to OIBM's client base when there is another "new kid in town."
The results of the Financial Landscape study will be paired with the panel Impact Assessment study, which began in early 2008. That study is a quantitative household survey focused on the scalability and impacts of OIBM's innovations. It will address research questions linked to the breadth and depth of outreach, and the impact of microfinance innovations at the household level. It is conducted at two points in time—when the innovation was first launched and again several years later. In addition, the project will include an innovative Financial Diaries study that will be conducted from summer 2008 through 2009. This is the first application of the Financial Diaries methodology to an impact assessment. The Financial Diaries will establish a comprehensive picture of the financial inflows and outflows of poor households by gathering data on income, consumption, savings, lending, and investment. It will identify the causal pathways by which impact occurs within households. Finally, a study of the Enabling Environment will be undertaken to identify and explore the most salient factors in the overall environment (macroeconomic conditions, financial regulations, weather, etc.) that mediate the impact of financial services on household well-being.
These components of the FSA Project will combine different methods at different moments in time to deliver a singular composite portrait of impact—how and why conditions change. The expectation is that the results will contribute significantly to the learning agenda of BMGF and the field of microfinance in general.
