Practice that you reach: Explaining limited outreach of Micro Finance Institutions in the Netherlands

Abstract

Abstract

This is a thesis about microfinance in the Netherlands. Microfinance is the practice of lending small amounts of money (microcredits) – often in combination with other financial services like Business Development Services (BDS) – to entrepreneurs who are otherwise financially excluded from access to credits, and who use that money to start or continue a small business. A significant number of small Dutch entrepreneurs are indeed financially excluded, because Regular Financial Institutions (RFI’s) find it too costly and risky to lend them money.

The phenomenon of microfinance transferred from developing to developed countries, but not without problems. The outreach of Dutch Micro Finance Institutions (MFI’s) – organizations specialized in disbursing microcredits – is limited: only 98 microcredits were disbursed by six MFI’s in 2007. It is limited both in comparison to the potential demand for microcredits that Dutch market research finds, and in comparison to the number of microcredits disbursed in other Western-European countries. Although microfinance in the Netherlands is a relatively new phenomenon and Dutch MFI’s experience arrears in comparison to MFI’s in other countries, the finding of limited outreach presents a clear puzzle and is thereby the direct cause for this thesis. The main research question is: ‘Why is the outreach of Micro Finance Institutions in the Netherlands limited?’

While outreach is a key concept in the literature on microfinance, outreach of Dutch MFI’s was never before a topic of academic research. In a practical sense, creating substantial outreach is crucial to the viability of microfinance in the Netherlands. The Dutch government has a significant stake in that viability, because the expected direct and indirect (spill-over) benefits of microfinance-driven entrepreneurship has evoked its interest in microfinance as the newest instrument to stimulate entrepreneurship. That interest translates into policy that involves maintaining a microfinance network, granting subsidies to MFI’s and even running a number of MFI’s.

Governmental subsidies are an example of the credit market interventions needed to help MFI’s to disburse microcredits to financially excluded entrepreneurs. On the other hand innovative practices are needed. What mix of those two options should be applied by MFI’s is part of a normative debate about microfinance. Other parts of that debate are questions about the goals of MFI, which groups MFI’s should target and whether MFI’s should be financially self-sufficient. Exploratory research performed for this thesis shows that none of the Dutch MFI’s is financially self-sufficient, while their innovative practices consist in BDS, client targeting and client selection. It also shows that while outreach is about demand (from potential borrowers) and supply (from MFI’s), a strong demand-side explanations for limited outreach is that Dutch MFI’s have difficulties marketing their products and services – partly because they lack knowledge about the size, nature, needs and location of their target group(s).

In order to find supply-side explanations for limited outreach, qualitative interviews were conducted with a non-random theoretical sample of 19 entrepreneurs. Data from interviews with entrepreneurs that successfully applied for a microcredit (contacted via MFI’s) were compared with data from interviews with entrepreneurs that refrained from applying (contacted via intermediary organizations). Analysis shows that a clear profile, contrasted with the profile of RFI’s, increases outreach MFI’s; and that MFI’s generally disburse microcredits to the ‘right’ people – financially excluded entrepreneurs belonging to the target groups. Potential borrowers highly value the flexible attitude of MFI’s, the specific products and services they offer, and how they offer them. They value them so much that they do not mind the low probability of approval of their application. On the other hand compulsory Business Development Services and slow and long application procedures can be motives to refrain from applying.

This thesis claims that none of the individual explanations for limited outreach of Dutch MFI’s is decisive, but rather all explanations together constitute a comprehensive understanding. At this point the number of Dutch MFI’s is still small, they have a narrow geographical focus and they are young and inexperienced organizations. If they want to increase outreach they will have to refine their strategy about which entrepreneurs they want to reach, and how they plan on reaching them. They consequently have to engage in more focused marketing efforts, helped by findings from this thesis about what attracts borrowers. In addition they should think about the measurement of the impact of their activities, because the Dutch government will want to know whether the resources and efforts allocated to microfinance eventually result in its viability. With regard to the microfinance debate, MFI’s, the Dutch government and Dutch politicians will have to make a range of choices about issues summed up in the conclusion of this thesis. Clear and explicit choices would greatly help microfinance in the Netherlands, and it is the only way to be able to evaluate the viability of MFI’s and of microfinance (policy) in the future.

The task for academics is to continue researching what happens. This thesis has laid the foundation for such research. Three suggestions for future research are: first, to experiment with ways to find more respondents – which proved difficult for this thesis – to conduct both qualitative and quantitative research into microfinance; second, to perform a comparative case study between Dutch MFI’s and to perform a quantitative survey research among small entrepreneurs; third, to perform comparative research on MFI’s in the Netherlands and other Western-European countries – and possibly also the USA. Such comparative research also has value for microfinance in other Western-European countries, since MFI’s in those countries deal with similar problems.