Limitations of Current Demand Studies

The earlier, supply-driven microfinance programmes to a great extent leads to the limited earlier writings, research and literature on demand for microfinance (Schreiner and Colombet, 2001, Schreiner, 2001, Helms, 2006). The trends in the microfinance industry has gradually shifted as clients’ financial behaviours and environment in which they live viewed as important factors in identifying financial products and services used b y the poor. Demand-side studies are becoming part and parcel of practitioners’ activities and are gaining ground in the development finance literature (Matin et al., 2002, Meyer, 2002, Zeller and Sharma, 2002b, Churchill, 2002, Honohan, 2005). There are, however, some limitations and gaps that will be discussed in this section.

A number of demand studies have focused on the conceptual understanding of various financial needs of the poor as a result of the outreach problem. Adam and Evans (1999) urge that, apart from microfinance expansion, other factors such as diverse conditions, restricted opportunities, and efficient and equitable participation criteria be taken into consideration by potential clients when deciding to participate in a microfinance programme. Financial demand can be linked to life cycle needs, emergencies, current opportunities, and coping with seasonality of income and expenditure patterns. It can also serve a number of purposes apart from micro-enterprise investment. These may include production expansion, efficient management of asset portfolio s and consumption smoothing (Zeller and Sharma, 2002a, Johnston and Morduch, 2007, Rutherford, 2003, Hasan and Iglebaek, 2004). Perhaps the main finding of conceptual works on demand for microfinance is that the poor need many types of financial products and devices to manage their lives (Churchill, 2002, Harper, 2003, Seibel and Parhusip, 2003, Wright, 2005). Subsequent studies on demand for microfinance primarily cover access to and participation in microfinance programmes by the poor. The main assumption behind these studies is there are barriers, price and non-price, to access to financial services among the poor. Financial exclusion can be a result of those barriers and voluntary e xclusion by the poor themselves (Demirgüç-Kunt et al., 2008). The aforementioned study involves household interviews or questionnaires concerning demographic characteristics of households, their

29 sources and uses of financial transactions, statements related to factors influencing programme participation etc. Bokosi (2004) used household characteristics such as sex of household head, marital status, education of the household head, age of participants, and land-holding size as hypothesized factors influencing demand for microfinance services in Malawi. Additionally, sources of credit, loan types by source, uses of credit, and seasonal pattern in use of credit are tested to the extent of credit market participation.

Zaman (1996) employed a complete village survey to identify determinants o f participation in BRAC microfinance programmes in Bangladesh in addition to land ceilings, occupational criteria and asset valuations. Factors such as number of adult females in households, number of adult males in households, age of household head, avera ge years of education in households, earner ratio3, total amount of land owned, and distance to market- place were integrated into the survey as membership-determining factors. The study found that the earner ratio and female- headed households were the two variables that influenced the decision to participate in microfinance programmes. These two criteria can be used for microfinance targeting criteria so that microfinancial services might reach people who are really in need.

Adams and Evans (1999) tested risk factors for non-participation, employing a survey that contained questions concerning client-related barrier items. The items were insufficient resources, ill- health or vulnerability to crisis, female- head of household, lack of education, and individual or household preference. These kinds of statements or questions shed light on reasons for non-participation and barriers to access to financial services for the poor. However, they do not give a clear picture of the potentia l demanded in terms of value for microfinance services needed by the poor.

Most quantitative and non-conceptual demand studies rely on rough estimations of demand from secondary data on potential poor people and other potential users of microfinance products and proxies. This gives an overall picture of demand for microfinance services that is arguably suitable for macro- level policy, but it may not give a true picture of

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30 demand required for micro-level decision- making due to voluntary and non- voluntary exclusion. Guangwen (2008) assessed the potential size of demand for the microfinance market in China by collecting secondary data sources from government statistics. Daniels (2004) estimated the demand for formal microcredit in South Africa using household indebtedness data from Statistics South Africa’s Income and Expenditure Surveys which are conducted by a government agency. In Germany, Kritikos et al. (2009) explored the demand for microcredit by assessing potential financial needs of retail business owners, foreign business owners, and persons who have previously received private loans.

Some notable exceptions to these trends are the demand studies conducted by Rutherford (2001), described earlier in this section, by Oliva and Agar (2006) and by Johnston and Morduch (2007). In general, these demand studies are conducted by practitioners principally for marketing objectives. Oliva and Agar (2006) designed a questionnaire to assess information on the need for small credit by key stakeholders in the tea sector in Malawi. They then used the information to estimate the demand for microcredit by the poor in the sector. Johnston and Morduch (2007) employed household- level data to assess demand for microfinance in Indonesia. A questionnaire was designed to collect data on credit needs and supply of credit. Detailed qualitative and estimated quantitative findings obtained from household surveys give clearer information on financial behaviours and size of demand for microfinance services by the poor. This specialised household or financial survey has now become very relevant as microfinance is arguably moving towards market- led financial solutions for the poor and excluded (Honohan, 2005).

The discussion in this section reveals the importance of demand in microfinance. The assumptions made about earlier microfinance by donors and governments that the poor and excluded only need micro-credit to form their own businesses, may no longer be applicable and may lead to unsuccessful microfinance programmes. Knowing the characteristics of the demand and the ability to estimate it and satisfy it effectively is vital for effective microfinance programmes.

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