Youth under the age of 30 comprise over 50% of the global population. However, when thinking about offering financial services targeted at this age group, financial service providers (FSPs) often overlook this up-tapped reservoir, particularly in rural areas.
MEDA's YouthInvest project worked closely with Moroccan Microfinance Institutions (MFIs) – Fondation Ardi, Attadamoune and INMAA – to explore questions around the feasibility of integrating youth into their portfolios and whether this made good business sense. Through intensive discussions with MFI management and tailored frontline staff training, we discussed the benefits of working with youth, as well designing new financial credit products that would enhance the MFIs' bottom line.
So how do you make a business case to MFIs to better serve youth?
We considered 4 drivers when guiding institutions in discussions around sustainably reaching out to this market segment:
Operational Sustainability: Operational profitability remains stable (or better) when targeting youth. Our case study on designing sustainable youth products highlights that both return on assets and financial self-sufficiency remain stable or improve when an MFI targets youth more actively.
Strong Portfolio: MFIs can maintain a healthy portfolio with a low PAR30. The business case provides evidence that targeting youth does not necessarily translate into a deterioration of the quality of the institution's portfolio.
Low Cost Youth: The cost of youth clients (and youth-friendly products) are comparable to the cost of adult clients. Loan Officers are able to integrate youth into their client portfolios without additional costs.
Cross-Selling potential: Youth access spin-off financial services and attract more clients to the MFIs. This creates significant opportunities for fostering client loyalty, thus helping MFIs to build up a client base that it can service with a variety of products, depending on their changing needs.
While the YouthInvest project came to a close right at the launch of the new financial products with our Moroccan MFI partners, we were able to see some of the positive outcomes broken down per driver.
We used the financial self-sufficiency (FSS1) as a measure of financial sustainability or profitability with our partners. You see in the table below the change in FSS % over the two quarters. Note that Ardi and INMAA have achieved financial self-sufficiency above 100%. Attadamoune and especially INMAA, in particular, both small MFIs, have been able to increase FSS as they target more youth clients.
Attadamoune's Portfolio At Risk (PAR) rates for youth dropped from 4.0% at the beginning of 2013 to 0.3% at the end of the first quarter of 2014. This was quite promising considering the 4% rise in the share of youth in its current portfolio during the same time period.
INMAA saw its youth PAR decrease over the course of the past year from 4.7% to 1.7%. Youth PAR is slightly more elevated than the adult rate, but it follows the same tendency as the adult PAR. The slim gap between youth and adult PAR rations indicates that youth are not inherently riskier than adult clients.
Below we see that the average youth portfolio (in Moroccan Dirhams, or MAD) remains stable or grows with the increase of youth in the MFI's portfolio. For instance, the average youth loan portfolio of a LO from Attadmoune grew by roughly 4,000 MAD from the end of 2013 to March 2014. Youth are absorbed by loan officers into their portfolio. The average youth loan portfolio at INMAA remained constant despite an increase of 106% in its field staff. (See the Loan Officer Case Study for insights from loan officers absorbing these new youth clients into their portfolio).
58% of youth self-reported that they had brought in at least one new client to their respective MFI, 50% of Ardi's youth clients recommended the MFI to people in their networks who then received a loan from Ardi. This was also the case for 60% of youth clients of Attadamoune and 73% of youth clients of INMAA.
The road ahead?
For the MFIs, youth represent significant opportunity to establish long-term relationships, future client loyalty and cross-selling opportunity. As the microfinance sector rests at the crossroads of social innovation and profit, to remain competitive they must respond to the demands of this budding market potential. Failing to do so will result in missing an opportunity and long-term profits. Promoting greater financial inclusion of youth is a strategic fit, for both the financial institutions and other stakeholders, to work towards as a new business outcome.
1FSS is a subsidy-adjusted indicator often used by donor-funded microfinance non-government organizations (NGOs). It measures the extent to which an MFI's business revenue—mainly interest received—covers the MFI's adjusted costs. If FSS is below 100 percent, then the MFI has not yet achieved financial break-even (CGAP).