Search for a Sustainable Business Development Service ModelJuly 14, 2020
In the last two decades, new thinking and practices have emerged around the design and delivery of non-financial services like Business Development Services (BDS) or Enterprise Development Services (EDS) that are offered to Micro Small and Medium Enterprises (MSMEs) by governments and non-profits in developing economies. Typically, these services comprise of training targeted at improving individual skills and processes/performance of enterprises, creating market linkage, and providing other specialised services. Often, experts and practitioners debate over what BDS means, why it is needed, and how to deliver these services, for example, whether the state or non-profits should pay and provide the service or if the private sector should deliver it as a market function, at a cost. And given such differing viewpoints, some variation can be seen in the types of BDS model that exist. Despite a variation, few things are common across all BDS models such as training, business improvement, and market linkage support, which brings some level of agreement in terms of the ‘what’ and ‘why’ of BDS. However, the ‘how’ part of the BDS debate delves into the topic of sustainability and is much more complex.
Few BDS models lend interesting insights on some proven pathways for effective service delivery. For example, in Bangladesh, Katalyst’s success is credited to the continued scale-up investment support of multiple donors (donor-subsidised model). Similarly, in Nepal, the success of Micro Enterprise Development Project (MEDEP) in developing micro-enterprises led to the replication and adoption of the model by the Ministry of Industries, Commerce and Supplies (MEDPA) to address the issue of rural poverty through enterprise creation (state-subsidised model). Whereas, in Sri Lanka, Berendina’s success is touted for its innovative way of embedding non-financial services, with EDS vouchers, as a part of its microcredit service to MSEs that enables partial cost recovery (revenue model). Searching for a similar demand-driven model for delivering non-financial services, UKaid Sakchyam Access to Finance programme has been working with three partner-Microfinance Institutions (MFIs) to introduce EDS in select districts of Province 1, 2, Bagmati Province and Province 5.
The Market Place: Revenue and Subsidy Trade-off
In a typical marketplace, there are service funders, providers and recipients. Donors have traditionally assumed the role of BDS designers/facilitators, leaving the public/private sector to assume the role of service providers and MSMEs as the recipient of the service. Donors and funders face a perpetual dilemma when designing a BDS model because of the constant trade-off between subsidising and charging for the service. From an equity perspective, subsidies are often required and lower the cost of delivering services however, subsidies aren’t sustainable over time. Alternatively, fees can ensure the commercial viability of the service but given the resource-strapped nature of MSMEs, they may not be able or willing to pay, which can lead to reduced demand for such services.
Equity and market failure issues like the high cost of production/servicing and low demand for product/service serve as the basis for Market for Poor (M4P) interventions. Sakchyam tries to address these issues to make the financial market work for the poor. For example, Sakchyam’s financial inclusion intervention aims to expand and deepen access to finance, especially for the under/unserved groups living at the bottom of the socio-economic pyramid. When providing services to low-income individuals, households, and MSEs, financial institutions inherently face the high cost of servicing and low rate of service fee recovery. Through cost and risk-sharing mechanism, Sakchyam has been supporting financial institutions to develop and expand financial services. Among its partners, a few MFIs are keenly exploring ways to embed fee-based non-financial services in their micro-credit service. They are motivated to expand their revenue base but are often held back by legal/regulatory obstacles such as restriction on charging customers service fees. MFIs are yet to demonstrate real outcomes related to non-financial services, but, from a regulatory standpoint, this is often justified as a simple control placed to discourage profit-seeking behaviour and curve financial mismanagement to minimise unnecessary oversight burden for regulators. By providing a standard justification and not considering the changing context, are we forfeiting an opportunity to innovate i.e. not thinking beyond short-term gains and failing to see non-financial services as a long-term investment opportunity to develop a market for BDS?
Space for Innovation
Sakchyam has been supporting Mahila Sahayatra Laghubitta Bittiya Sanstha Ltd., Mahila Samudayik Laghubitta Bittiya Sanstha Ltd., and Nerude Laghubitta Bittiya Sanstha Ltd. to develop and embed EDS within their micro-credit service. In the three years’ engagement, we’ve seen two promising but too-early-to-tell prospects for innovating around non-financial services in Nepal.
First, BFIs are increasingly warming up to the prospect of developing non-financial services. For instance, besides the above mentioned three MFIs, two partner banks – Siddhartha and Machhapuchchhre – have designed and delivered Business Literacy Training that is tailored for their MSME clients since late 2019. The banks have independently sought and collaborated with Upaya to custom design a training module that primarily focuses on empowering MSE clients with knowledge of business registration, tax implications, and basic book-keeping.
Second, this burgeoning interest among financial institutions emerged organically and was very much demand-led. In early 2017, MFIs approached Sakchyam to explore different ways to support their clients. During a year-long deliberation, Berendina’s team visited and interacted with the MFIs to recommend and structure EDS that was suitable for Nepal. In a cross-learning exposure visit, three MFIs also visited Sri Lanka to observe Berendina’s EDS implementation work. Similar to Berendina’s EDS program, the MFIs structured and embedded EDS within their microcredit service, offering business training and market linkage support to borrowers with certain loan threshold. So far, the MFIs have collectively delivered more than 1,200 training to 16,000+ individuals while two MFIs are exploring avenues for market linkage for agri-business clients.
Putting Horse before the Cart
These are, but, early developments and the long-term impact is yet to come about. But we know that an effective non-financial service goes hand-in-hand with financial services, which Sakchyam helped financial institutions expand and deepen through partnerships with more than 40 financial institutions in Nepal. We express this optimism not without recognising the fact that there are still many sectoral limitations that need to be improved. But to move forward, we need to have a comprehensive understanding of the available BDS providers, market functions that are still needed, and who are willing to fund. Prospective designers and facilitators, who are searching for a sustainable BDS model can no longer overlook two aspects i.e. investing in service scale-up and aligning regulators and service providers. A real mindset shift is especially needed among both regulators and MFIs i.e. thinking beyond short-term profits and investing in non-financial services to develop a market for BDS, in the long-run. Regulators too must remain attuned with MFIs to develop supportive policies that help create space for innovation.
Text by Swadeepa Bohara