MicroFinance South Africa (MFSA) recently conducted research into the behaviours displayed by credit providers and consumers in the lending industry. The research, which provides valuable insight for credit providers, not only identifies current trends and perceptions held by consumers, but also highlights a wealth of opportunities for those in the microfinance arena.
Perhaps one of the greatest opportunities that the research underlined was the need for microlenders to offer an all-in-one lending solution. When asked what respondents were most likely to use their loans for, the most popular responses were: Education financing, business opportunities, consolidation of loans, home/personal improvements, luxuries and emergencies. In light of this it seems evident that microlenders who offer products or services which address several client needs would have an advantage over others. These products could include lending solutions targeted at small business funding, risk management, education funding, insurance or even emergency and funeral funding.
Apart from looking at how borrowers utilise their loans, the research also focused on public perception of both finance houses (unsecured non-bank credit providers) and banks and identified where microlenders can place their focus to ensure they are the preferential choice. Most importantly, banks were identified as being strict and unwavering while finance houses were perceived to be flexible in their terms and conditions. It is this flexibility and ability to give individual attention which microlenders should see as an opportunity to set themselves apart from banking institutions.
Interestingly, focus group respondents also highlighted flexibility as a key reason for remaining at a particular finance house as it was perceived to be an indication of good customer service. In addition, the formation of strong long lasting relationships based on an understanding of clients’ needs was seen to encourage loyalty to one credit provider. Here again smaller microlenders often have the advantage of being able to form personal relationships with clients more easily than larger institutions.
The research also looked at one of the main reasons consumers look to the traits of good customer service, flexibility and established relationships when selecting a credit provider - namely because these are the elements they will rely on during times of stress. Defaulters present in the focus groups indicated that they tended to default on repayments not necessarily as a result of poor debt management but rather due to loss of income/employment and because during these times flexibility on the part of the credit provider was essential. The concept that several borrowers apply for loans as a result of desperation points to the need for microlenders to strive for openness and flexibility and to accommodate borrowers, where possible, in challenging situations.
Apart from the traits mentioned above the research also identified other factors which research respondents named as being pivotal in selecting a credit provider. These included: minimum documentation requirements, no waiting period for approval, loans paid out immediately and fixed interest rates.
The research also indicates that the awareness level of credit providers registered with MicroFinance South Africa or the National Credit Regulator is low. Although clients realise the necessity and importance of credit providers to be registered with both bodies, this is currently not a key driver for choosing a credit provider. Clients are typically accessing funds for emergencies and tend to be desperate. Consumers thus consider registration or non-registration to be less important in the scheme of their needs and as a result continue to approach “loan sharks” for loans despite their knowledge of the risks associated with them.
This instant need for cash in times of desperation is often the main reason why respondents indicated that they still made use of “loan sharks” or “mashonisas”. Ultimately, as a result of the stringent terms and conditions of credit providers and strong relationships formed with “mashonisas” in the community several respondents ended up returning to them in times of need. To ensure that they counteract this microlenders need to promote themselves as a dependable source that consumers can turn to in times of desperation and emergencies for quick and efficient assistance.
However in today’s competitive environment, even if you offer superior customer service, flexibility, personal attention and efficient loan processing – this means nothing if your target market isn’t aware of it. You need to ensure that you are utilising the correct channels for advertising to reach your intended audience. When asked which channels they make use of to gather information on credit providers the respondents pointed to newspaper, the Daily Sun as their main source. Second on the list was word of mouth – again pointing to the importance of having high customer service levels and strongly formed relationships. Other sources consumers indicated they turn to for information on credit providers include: pamphlets, television, radio and commuter advertising. It is worth noting that the internet does not feature on this list indicating that perhaps for microlenders this should not be their sole reliance for marketing purposes.
Ultimately, the research indicates that those in the microfinance arena should focus on offering high levels of customer service supported by flexibility and timeous and efficient loan applications to ensure customer satisfaction. They should also investigate opportunities to offer a one-stop-shop solution to cater to individual needs and focus on delivering services that appeal to those requiring a loan during emergencies. Ensuring that you are marketing and advertising through the most effective channels is also essential to ensure you are reaching your target market and positioning yourself as a front runner in the industry. As competition in the industry increases one cannot overlook any opportunity to secure clients and by understanding consumer behaviour and taking note of possible opportunities, microlenders can position themselves as the preferred source in the lending arena.
The research above was conducted by the MFSA and findings were based on six focus groups conducted in both Gauteng and the Eastern Cape across both male and female black South Africans, aged 25 -65 and from LSM’s 3 to 8. The groups also included both defaulters and those that held current loans at banks and other finance houses (both MFSA registered and non-registered unsecured non-bank credit providers).