Drop-outs and Graduates: Lessons from Bangladesh

This paper analyzes the reasons behind client drop-outs in MFIs and suggests ways to overcome this problem.

The paper identifies the following reasons for client drop-outs:

• Replication of microfinance models and products unsuited to the local economic or socio-cultural environment;
• Offering of any product, regardless of clients' choice, due to lack of competition and the demand for credit in the microfinance sector;
• Inappropriately designed products that fail to meet client needs;
• Dissatisfaction among clients with the financial services being offered;
• Clients' belief that other MFIs offer better facilities;
• Loan repayment failure of clients;
• MFI's "graduation" of higher value clients.

Further, the paper suggests that there is more value in retaining customers than in attracting new customers who cost more. Also, retained customers are usually the ones with extensive credit history and who access larger, higher value loans; whereas new customers require induction training and can often weaken the solidarity of groups.

Finally, the paper suggests that MFIs should:

• Pay close attention to the nature and quality of financial services they offer;
• Seek to improve the financial services they offer in order to reduce client dissatisfaction and drop-out;
• Obtain a clear balance between the quality of the services and the cost of provision;
• Utilize market research and product development in order to retain clients and build sustainable institutions.