Experiment: Franchising Microfinance

June 2005

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India c. 2005

32,000 rural branches 98,000 primary agricultural cooperative societies (PACS)14,000 cooperative bank branchesThousands of mutual funds sellersNon-banking finance companies (NBFCs)154,000 post office outlets

World Bank Access Study:41% of rural households have bank account21% have access to credit from formal source

30% marginal farmers have bank account13% have access to credit from formal source

High demand. How do private banks reach rural areas?

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Problem #2 – plenty of $$$, not enough MFIs

Private banks see partnership model as a way to use MFIs to build rural reach

But only 50 MFI partners, total MFI clients = 1-2 million

Total demand = 75-100 million households

How can we expand MFI penetration to channel money from private banks into rural areas?

Can this expanded MFI distribution network eventually take deposits and recycle money within rural communities?

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What constrains MFI expansion?

- Lack of huge subsidies for expansion

- Need for local understanding from district to district

- Organic branch-by-branch expansion model

- Systems not designed to manage nationwide presence

- MFIs hire loan officers, not branch managers

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Is franchising a solution?

Franchising:

An arrangement between a franchisor (a manufacturer, a wholesaler, or a service sponsor) and a retail franchisee, which allows the franchisee to conduct a given form of business according to a given pattern of business and under an established name.

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Can microfinance be franchised?

Can running a branch-level microfinance operation make money?

Can we quickly teach unskilled people to lend money?

Do we need staff who are socially-motivated?

How much control does an MFI really need to have?

Can entrepreneurial fire drive growth and innovation?

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Successful franchises

McDonalds (fast-food)

25 years to reach 6000 outlets (>21,000 today)

Curves (gym for ladies)

8 years to reach 6000 outlets (>8,000 today)

New locations per year – 1,570 (’94-’04)

New members per year – 731,200 (’94-’04)

Revenues – >US$ 1 billion

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The concept

1) Find 10-20 rural entrepreneurs (franchisees)

2) Show them that running a branch can be profitable

3) Sell them the business package and training (how to open and run an MFI branch as a bank agent)

4) Provide on-going monitoring and support, plus the link to private banks for on-lending funds

5) In return, take an up-front fee and a share of income

6) Do this with as many franchisees as possible at once

Select Franchisee, train and equip: Systems, training, lending funds, monitoring

Qualified rural entrepreneurs (Franchisee)

Up-front fee, Revenue sharing

Franchisor (Leading MFI)

Towards increased geographical reach

Commercial Banks

Lending Funds: Franchisor negotiates lending funds

External Investors

Equity Funds: Access through credibility of franchisor

CGAP funding to develop model

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Constraint on MFI Growth Possible Franchising Solution

Lack of startup/expansion capital Franchise model attracts capital from entrepreneurs and investors

Need for local understanding Entrepreneurs are rural and will build MF operations in own locales

Organic, branch-by-branch growth Franchisees make profits for franchisor from day one. Incentive = open as many franchisees as possible at once

Systems can’t handle wide network Franchisor business model becomes training and monitoring, not operations

MFIs hire loan officers, not branch managers

Find franchisees to run branch operations, let them hire loan officers

Why franchising might work

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Define the business model

Start with a strong MFI (franchisor)

Convert processes and systems into a business package

Develop a training program

Figure out which entrepreneurs would be eligible

Develop franchise agreements

Identify and select pilot entrepreneurs

Run a pilot, and conduct independent evaluation of results

Project plan

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For Franchisee

Driven purely by entrepreneurial motivations

Franchisees access funds through franchisor’s relationships with banks

Incentive to grow rapidly to recover their initial franchise purchase payment

Potential to enable thousands of rural entrepreneurs to become lending agents in

their own locales

Model advantages

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For MFIFranchisees help expand brand to new areas

Franchisor incentivized to build systems to maximize the number of franchisees and hence expand rapidly

Additional source of revenue for franchisor

Option to expand products to include savings, insurance, money transfers, and others

Potential to enable thousands of rural entrepreneurs to become lending agents in

their own locales

Model advantages

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Regulatory Framework

Support Infrastructure

Low ProfitPerception

MgmtSystems

SkillsGovernance

CapitalInappropriateProducts and

Staff Orientation

POOR CLIENTS

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CostConvenience

BANKINGBranches,ATMs, etc.high cost

Main Constraints for Banks