Recently I was told about a new housing microfinance product that was not finding many clients at a branch where it was being piloted. It could be a case of a product – environment mismatch. The product itself seems relatively sound, but it is being piloted in an area where there is very little evidence of a typical housing microfinance market. I believe that same product piloted at one of the institution’s branches less than 10 kilometers away would have a significantly higher rate of disbursement. Whether the product is weak and misses an existing market or it is strong for the wider market but implemented where there is low demand, the result is the same: A low number of loans disbursed. This can be discouraging during a pilot period, generating skepticism about housing microfinance within the institution as well as from outside observers. The right pilot area is on factor in ensuring a successful pilot.
We use pilots to test the feasibility of a product design concept on a small scale so that we can improve it prior to making significant investment and scaling up. There have been quite a few new housing microfinance products developed in East Africa since 2005, especially following a housing microfinance workshop that was held in Dar es Salaam in May 2008. So far none of the products have moved out of the pilot stage, and some probably never will. Whereas institutions tend to focus on capital as the key to scaling up, a key pre-requisite to achieving scale is understanding the market and developing a product that fits it. Otherwise an institution will be unable to move funds through its housing microfinance portfolio, which could pose a risk depending on the terms of the capital.
During the pilot period, the institution should clearly be able to show that it has found the right match between the product and the market. The selection of pilot area is critical. Some features of a housing microfinance pilot area may include:
1. Population Density: Assuming the product is well-designed, are there sufficient households in the operating area to ensure adequate client intake to determine that the product has been a success (or needs some adjustment)? Short-term success helps any change process or new product. Piloting where there are a lot of households increases the likelihood of short-term victories, allowing a product to gain momentum.
2. Housing Activity: Population size and density are not enough to move a product through the pilot process. There must be evidence of housing activity in the pilot area. Housing microfinance usually finds its market where there is extensive incremental building. A housing microfinance product that is introduced into an area that does not have this kind of housing activity may face an uphill struggle. In the example of the institution with a low number of disbursements at one of its pilot branches, they failed (I believe) to confirm that the type of housing activity within the branch’s operating area corresponds to their housing microfinance product features.
3. Settlement Diversity: Housing is not homogenous, even within one city or region. There may be different settlement patterns and characteristics that impact a housing microfinance product. A pilot area that covers more than one type of settlement gives the institution the opportunity to determine whether the product is flexible enough to cover different housing environments or if there is a niche market that might warrant a specialized product.
4. Accessibility: How will clients access the product? How will recovery take place? Logistics plays a large role in both the cost to the client and to the institution. One housing microfinance product in East Africa was being marketed to an extremely wide area from a single service delivery point. The area is so wide that it is expensive and time consuming for clients to go to a distant branch office to make further inquiries about the product and start the application process. Even if the clients make the effort to access the product, follow-up by staff will be difficult, costly and time consuming. This is never a good thing, but especially not in a pilot period when an institution trying to determine if the product is viable and then demonstrate its viability to funders if capital is needed. The service point during the pilot must be near the market and make it easy for the client to access the housing microfinance service and for the field staff to get to the client.
The key to getting through a pilot stage is not accessing capital. It is having a successful pilot. Success is usually measured by disbursing a given number of loans in the pilot period and those loans resulting in a healthy housing microfinance loan portfolio. The selection of the pilot area is only one of many factors in achieving this success, but it is a significant one. In Part Two, I will discuss how we chose our operating area for our MAKAZI BORA housing microfinance pilot in Dar es Salaam, Tanzania.
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