4.2.1 The Business Case for YFS has evolved in recent years to look beyond simple product profitability
Making Cents International convened YFS experts from seven countries and 17 institutions at the 2009 and 2010 Conferences to ask probing questions about what drives a financial institution to serve youth. At the time, all of the participants stated a commitment to promoting YFS at their institutions based on assumptions that YFS would generate long-term customer loyalty and cross-selling opportunities. Although none of them actually had data to prove this. Participants did, however, state that data to support these assumptions could solidify the business case and convince more financial service providers (FSPs) to make the investment. This is particularly relevant for microfinance institutions, (MFIs) which are less able to cross-subsidize due to higher operating expenses than banks. The challenge, however, is finding an institution that is both willing to share its data and provide at least five, if not 10-20 years’ worth of reliable figures. As a first step, Making Cents conducted a small study of Fundación Paraguaya’s youth loan portfolio to better understand youth loan performance as it compares to adults. The study revealed some promising results, outlined in the text box below.
Fundación Paraguaya 1 is an MFI that provides a range of microfinance and non-financial services to low-income Paraguayans. Twelve years ago, it began to serve youth, ages 18-25 with start-up business loans and tailored business training. Analyzing youth performance over two years revealed two promising findings. First, it found that while first-time youth borrowers tend to start out with lower loan sizes, roughly half the average amount taken out by non-youth clients aged 25-65, within two years these same youth clients had the highest average loan size growth by almost 90 percent. Non-youth segments grew their loan sizes only 24 percent on average. Secondly, it found that youth present a similar portfolio risk to adults, particularly at PAR >60 days, (1.86 percent vs. 1.14 percent) and beyond. Interestingly, the PAR >1 and >30 days is much higher than the non-youth portfolio, 9.6 percent vs. 4.6 percent and 4.0 percent vs. 1.56 percent. A parental guarantee, which is a unique requirement of the youth loan, comes into effect after 60 days and is attributed to managing the increased risk of default among youth. The results of this study provide promising evidence that young people, with appropriately designed financial products and support services, can grow into successful entrepreneurs and become valued clients of financial institutions. For the complete report, please see http://www.youtheconomicopportunities.org/resource/144/growing-potential-microfinance-plus-approaches-cultivating-new-generation-young-clients.
Instead of providing youth credit, Enlace, a Salvadoran MFI, opted to design a youth savings product first. This required a different approached to establishing the business case for YFS, particularly because Enlace is unable to capture deposits from the public and thus had to work through informal savings groups. This approach raised the importance of analyzing the total value of the client, or looking at how financial education and support services can be seen as integral parts to the longer-term sustainability or profitability of a particular product. This example illustrates the increasingly complex nature of the business case for YFS, particularly, how an institution must look at quantifying the value of non-financial services as a means to generate future financially capable future youth customers.
The SEEP Innovations in Youth Financial Services Practitioner Learning Program (PLP) has analyzed the business case with its partners in Nepal, El Salvador, Uganda and Sri Lanka. As each partner began to look at how to scale each of its unique YFS products and services, they also discussed together how to create replicable business models. Enlace, a group-lending MFI, offers savings and loans to youth aged 12 to 24. Enlace partnered with CRS to combine and adapt its group lending methodology with CRS’ Savings and Internal Lending Communities (SILC), an informal savings group methodology, for youth. Since savings are preferred by youth as a starting point for engaging in financial services, Enlace set out to analyze how it might be able to sustainably offer the savings groups to youth. Management examined the financial sustainability, using an Activity-Based Costing (ABC) tool (for an example visit http://www.cgap.org/publications/microfinance-product-costing-tool), of the savings groups together with the youth loans to develop a plan to achieve sustainability within one to one-and-a-half years. Ultimately they created a model that would maintain at least 3,000 active youth clients in savings groups, 900 of whom will access loans averaging $300 each. Enlace also found ways to decrease the cost of mobilizing and administering savings groups by creating financial incentives for community leaders who form and mobilize savings groups. In addition to serving youth with demand-driven financial services, Enlace sees this investment in savings culture as an investment in its future depositors since it plans to transform into a deposit-taking institution. For the full case study please visit http://www.youtheconomicopportunities.org/resource/498/reaching-sustainability-case-study.
- 1. Fundación Paraguaya is a financially self-sustaining social enterprise, which promotes entrepreneurship in urban and rural areas through three inter-related strategies: 1) A Microfinance Program aimed at smaller microentrepreneurs and emerging microentrepreneurs, who are generally neglected by other microfinance institutions; 2) An economic education program for children and youth (Junior Achievement); and 3) A financially self-sufficient and award-winning agricultural high school, which teaches organic agriculture and entrepreneurial skills to low-income youth from rural areas, transforming them from poor farmers into rural entrepreneurs.