Microfinance

A bad idea that we simply cant let go

There are lots of micro financing groups in my home area, literally you would expect the residents of such an area to be getting rich and richer but practically many are disappearing into Diaspora every now and then and the reason is they have a micro loan debt that they have failed to pay back. They are forced to disappear for fear of being thrown into the dungeons. I don’t blame them because I personally don’t want to be thrown in there and I don’t think there is any one with such a wish. But who is to blame? Is it the growing micro-finance institutions or the people that are tired of being poor and want something in their sight that has a taste of good life in it?  Since micro-finance first came to public attention in the 1980′s, the usual story line has been that creation and expansion of micro-enterprises are funded by micro-finance, producing additional income that lifts the borrowers’ households out of poverty. But is it true?

If, most ( if not all) micro borrowers use their loan proceeds for non-business purposes, as proved by research over the past years off course,
If recent analysis has cast doubt on some of the older research studies that found that micro-credit increases household income,

And if the  new generation of more rigorous randomized studies on micro-finance are yet to find evidence that micro-credit raised household income and consumption,

Then we are left with no option but to conclude that micro-credit could be a bad idea that we simply can’t let go.

Why??

In my experience with micro-finance I’ve always been inquisitive about whether micro-credit raises incomes as praised by its pros. Micro-finance does some things that are very important to poor people, helping them to cope with poverty. Its easy to cope with poverty if you have something giving you hope for the better. It’s like betting, the possible win amount makes you think the bargain is fair to some extent, and you easily forget about losses in stakes. When you take a travel through the financial life of the poor, there is a high-resolution picture of how low-income households actually use financial services. The picture proves that the problem with being poor is not just that income is low, but also that the stupid low income tends to be irregular and exposed to interruption attacks resulting from several issues factoring in the lives of the poor.  Such lifestyle forces them to borrow abnormally to cope with poverty. The problem is the financial tool they need to run such a life is just not in place at a local level. The low life financial tools are just un-trusted. Now this is exactly where micro finance squeezes its self into the poor man’s life. Micro finance is a little more un-flexible but it has a strong foundation, with more trustworthy modern management tools to support the abnormal borrowing habits of the poor. But why does poverty persist among these borrowers? Apparently, it’s due to the high interest rates attached to loans granted by the micro financing institutions. However that’s not only it, social stigma from failed attempts at entrepreneurship, institutional constraints on lending practices, and the inability to recover quickly from setbacks such as natural disasters and personal loss such as the death of a household earner weigh heavily on the side of the poor in managing funds from these institutions. We can not blame them because at the heart of finance lies risk management. 

If you look at the rate at which these micro lending institutions are growing, you may be left with questions like, with the high lending rate, how come? But we react this way only because our own basic consumption needs are slightly if not hardly threatened. In other words these poor people have no other option. They take the credit forcefully but the force is unconscious. They see the micro-finance problems from a very different angle and honestly it’s a lot more difficult to display the arguments on their opposite side of things for them to see. Considering the intentions of micro-finance those pushing for its success are disappointed but if their customers are not complaining why should they?

Micro-credit only helps poor people deal with their problems I once alongside my sister took a micro loan from one of the institutions, to implement one of her dream projects. I will create a scenario to try and explain my findings;

You will borrow 30 dollars, and invest it. The 30 dollars will return 5dollars in 30 days as profits. Now for your up-keep in a month you spend 2 dollars, and the institution requires 3 dollars as profit on the 30 dollars, which is paid in a month. But you are required to pay in installments daily hence in this case that will be 1.1 dollars every day. Now at the end of the loan period if your business is regular you will have managed to live a smooth life on 2 dollars from the profit and sold your business empty to repay the loan. You close your business at the end of the loan period, and maintain a clean name at the credit bureau, making yourself able to get another loan, and the cycle repeats itself, if you choose to take another. This is clear “debt dependent petty trading.”

Micro-finance institutions make decisions based on sound analysis. They operate in abnormally risky markets, hence there is need to mitigate risk. Micro finance has such a huge market that you almost never have to advertise .usually the loans are repaid at extremely high rates year after year, when the main motive to repay is not collateral or group pressure, but rather their desire to keep future access to loans which is very and I repeat, very,  likely.

Money lenders
The rich people today are running out of investment ideas and many fear loss. Some resort to money management with a bank as there future target and some of these are not even professionals. These use innovative and often contractual techniques to provide loans to people who would otherwise not qualify for typical loans from banks. Such individuals render government regulation very difficult and due to the fact that they pursue profits their growth is very fast and above all irresponsible. They have led the way in making tens of millions from micro lending with negligible effects on the overall development. Many entrepreneurs are following their example since entry into the micro-credit industry is easier once a base of consumers has been established. As a result, villages have up to ten micro creditors offering loans.
There is a lot of competition among the Money lenders for the few that are willing and able to get a loan from them. Some of these financing forms go to the extent of making there interest rates negotiable thus pulling as  many as possible to at least see if they are in position to get some money from them. One thing these borrowers forget to notice is the irresistibility of such money alongside the marketing agents of the respective institutions. Money, says the famous proverb, makes money. Thus without money it’s difficult to get money. When you have got a little, it’s often easy to get more. The problem always arises with the quest to get that little, and this quest is implanted in every human being that is fighting for good life. This character is what the micro finance marketing agents graze on to ensure one gets a loan from them. After you place ink on the doted line, they shake your hand ….pleasure doing business… bla… bla
But I some how like the charity character that is involved in the micro finance approach. The lending is directed to specific individuals or groups of individuals, who really need it to an extent that they see it as a favor.  And if you try to go deep into trying to understand micro-finance, you get confused at some moment because its aims are unclear as regards to what happens in its practical world. Its development is completely irregular and not easy to understand, it runs contrary to development history, which starts with savings, it’s not smooth at all. It’s based on lending, not savings, and use inappropriate Asian models. Actually without poverty micro-finance can not thrive.

Micro-finance is pretty attractive if you listen to stories but statistical analysis shows the real impact on the poor. Inevitably, some customers will thrive, others will be unchanged, and some may slip backwards. Its impact is poorly measured, and opinion is based on heartwarming stories of success, not on rigorous assessments of reality.

There are success stories to support the fact that micro-finance satisfies its claims, and there are statistical data that proves the whole idea of micro-finance wrong. There is no clear judgment on whether micro-credit raises incomes and consumption. If the unreasonable expectations placed on micro-finance are actually realistic as proved by success stories, then I think Micro-finance has not failed yet, but the micro-finance industry, in large part, has as proved by the statistical data.

THE UGANDA COMMODITIES MARKET

Making money in the Uganda commodities market is not easy. About ninety percent of commodities traders lose money rather than make it. One reason why commodities trading in Uganda is difficult is because there is no right time of when to enter or exit the market (i.e. you cannot time the market). But it’s never late to try out re-engineered approaches to winning in the Uganda commodities market. For starters, it is crucial that you understand the market. You must also learn how economics can affect prices of commodities. There are many ways to invest in commodities, including the futures market, buying the actual commodities (gold and silver are examples of easy-to-store commodities), Commodity ETFs (exchange traded funds) and stocks whose business model involve commodities. This article will focus mainly on the commodities futures market. You must decide what futures contracts you want to buy, study the charts very carefully and develop your trading strategy.

Develop a well balanced commodities portfolio.

Don’t try this if you are a novice or don’t have a lot of money to work this. Buying commodities in Uganda is extremely risky, therefore you will need to make sure you are willing to take the risk. If you want to be a successful commodities trader, in places like Uganda, you will need to have a balanced allocation of your finances to differing commodities. For example, have a certain portion allocated in precious metals, another in energy, and maybe another portion in agriculture. This way you will be playing your game like a professional and hedging your bets so that if one sector is not performing well, another sector or two will make up all or half of the total loss.

Test your trading strategy by executing paper trades.

 This should follow a lot of time spent in studying the charts. You will have created a trading system, which includes your entry and exit signals. But since you haven’t tested it in the marketplace, there will be need to know how your strategy will fare in the market, before you risk your capital. Take advantage of paper trades and learn more about your system’s strengths and weaknesses. This way you will be able to see where you would have made money if at all you had thrown in your bet. However the efforts now should be centered on areas where you would have lost. In unpredictable markets like Uganda, knowing or having expert knowledge and ability to spot a possible loss is a lot more valuable than spotting a possible win. If there is any invisible hand trying to steer the economics other than the forces of demand and supply, such knowledge and expertise will help you get out of the net easily.

Learn trading strategies from successful futures traders.

As an investor you need to be very rational, in all your strategies. Trading in the Uganda commodities market is very subjective, in that what one trader capitalizes on does not necessarily work for another trader. Hence it’s good to read how traders develop and trade their strategies. Learn how their systems made them money. Then with a rational mind incorporate some of their trading ideas into your own system.  

Consider hiring a professional commodities trading advisory firm. A good number of these firms exist in Uganda hence you need to make sure you do some good research on them before you hire one. There are several goods in taking this route, for example you don’t have to invest a lot of your money in differing commodities. These firms will help you spot the best market and then throw in just enough with out having to consider hedging by investing in other sectors too. Besides that these firms also can also negotiate for lower commissions on return than if you were to buy futures contracts on your own. The professional commodities trading advisory firm’s funds investment management team is more apt to pick commodities that will make you money. The team also has a large pool of money to work with, hence they can buy more futures contracts and if such an investment fund makes a hefty profit, you will benefit as well.

Do not buy the hype.

To make money simply buy low and sell high. As a trader you should not get over excited when the prices go up, and scared when they go down. If you buy the hype you will end up buying high and selling low. That is a loss

Study the prospectus

 In finance, a prospectus is a disclosure document that describes a financial security for potential buyers. Before you buy shares into futures funds you need to study this document carefully. Remember history does not count in commodities markets. A given futures fund’s good performance last year does not guarantee another good performance this year.

Study both the fundamental and technical analysis.

Make sure you understand both concepts really well before investing significant amounts of money in commodities markets in Uganda. If you are not sure of the bet then a small stake would be better and then raise it with experience gained.

HOW TO CHARGE HIGH AND SALE MORE.

The modern techniques of overcoming price objections

A lady customer once got me by surprise and gave me the nastiest memory of my salesmanship memories ever. She was a good customer that never gave me hard time to serve until the time of clearing her bill. She could not believe the change that I presented to her was all that was left, that she demanded to know why my prices were that high. With a big smile that quickly faded out, I lost all confidence and ended up saying “I do not know”

True I did not know since I was not among the price decision making panel at my work place. I did not care much until the second time another customer this time a man asked the same question “why are your prices this high?’He woke me up out of my reveries demanding to know if my chairs in which he was seated were made of gold “even if your chairs are made gold can you really charge me this high?” I lost all confidence again and another customer that had come as a friend left as an enemy.  I was not to blame for the high prices but at this moment I made up my mind that I needed a study on how to answer such questions.

“Your price is too high” are five words that seem to strike terror in the hearts of so many salespeople. But it really need not. Consumers are born with this phrase engraved into their brains. No matter what business you are in, people will always tell you that your prices are high. I’ve almost never heard, “Wow! Your prices are very cheap.” Have you? If you have, raise them now. Continue raising them until you hear them say “your prices are high.”

Every salesperson and many others within selling organizations have heard this lament.

Whether at the start of the sales process or as a final objection to closing the sale, to succeed as a salesperson you need to learn to respond to this inevitable objection. Even the prospect who is ready to buy will present the price objection to obtain a discount. Knowledgeable buyers know that there is often a standard discount for which they qualify. For example, when checking into a hotel, the smart buyer will ask if this is the best price while signing the registry, knowing that this question will likely lead to a discount as a result.

Often, the desk clerk has discount authority, and simply asking will result in a lower rate.

In business transactions, however the price objection is just often a request for more information to defend the purchase and is, therefore, an opportunity to sell the value of the product or service. This justification may be to satisfy senior management or the buyer’s own sense of getting the best possible price.

However there is chance that you will respond to the wrong price objection. Hence the need to know the different kinds of price objection. There are six fundamental perspectives regarding price. These include;

• v  PRICE in relation to COMPETITION in the industry

• v  PRICE in relation to an APPROVED BUDGET

• v  PRICE in relation to BUYER EXPECTATIONS

• v  PRICE in relation to A PROCESS ALTERNATIVE

• v  PRICE in relation to A PERCENTAGE OF THE PRODUCT PRICE (FOR

CONTINUING SERVICES) 

•  PRICE in relation to “CUSTOMERS DOING-IT-THEMSELVES”

Each perspective must be understood, and the sales response to each should reflect that understanding. Responding to a price objection that does not currently exist in the prospect’s mind may simply raise that specific objection unnecessarily.

When faced with a price objection, the first challenge is to learn precisely which price objection is relevant. The best approach to the objection is simply to ask questions to further refine the prospect’s perception. One of my favorite responses to this query is simply “are you sure?” The phrases “Tell me more” or “Explain,” will usually elicit the information needed to respond positively to the price objection.

PRICE VERSUS COMPETITION

The most common assertion you’re likely to hear in the marketplace is that your price is too high compared to competition. Assuming that the marketing organization has properly priced the product or service, the challenge now is to discover the differences between what’s being offered by the competitor and your proposal. Frequently, the competition’s price is lower because the product or service is less robust. Sometimes, it is related to a time-specific “special of the day.” In either case, this is enough information to respond positively to the objection: “Your price is too high!”

PRICE VERSUS APPROVED BUDGET

Sometimes a client develops a budget based on old or unreliable data. If the prospect learned about your company through word of mouth, she may have been told about a less expensive solution provided by your company to a friend. Her situation, however, may require a more expensive solution. If a budget was established based on the friend’s solution, then this situation needs to be explored. This process will result in reducing the proposed solution, or acceptance of the higher price for the original solution. In either case, the key to responding to the price objection is to ask questions and gain more information.

Probing questions will reveal how the prospect established the budget. If the basis was inadequate data, there is an opportunity to address the issue of value you are providing.

Value is based on three propositions:

v  Your proposed solution will increase revenue for the firm.

v  Your proposed solution will reduce costs.

v  Your proposed solution will avoid additional costs in the future.

Each of these basic propositions may be present in your sales situation, and there may be the added psychological buying needs of status, image, and similar intangibles. The important concept to keep in focus is the need to determine how the budget was developed and to provide additional information that increases the value as well as the budget. If this objective cannot be met, then the challenge is to reduce the scope of the proposed solution to fit into the approved budget.

PRICE and the BUYER EXPECTATIONS

Price expectations are often unrelated to value or competition but are simply an intuitive feel for what a product or service should cost. This can be a difficult objection, since the perception must be addressed, and it may be cultural or psychological, and unrelated to value.

Travel is a case in point. Prices for all goods and services are considerably higher in Japan and Paris than in the United States. Most travelers have difficulty accepting these high Prices, and you will often hear people complain about these prices and vow never to return to those places again.

(Source “the American consumer report”)

When selling business services in this situation, you might need to introduce the Market place to validate the prices. Pointing out that your prices are competitive with other products or service providers, although risking introducing a competitor, is the only recourse. When this step is necessary, the strategy is to provide pricing relative to competitors whose higher prices or lower quality are well known in the marketplace, and against whom you compete very effectively.

PRICE and the PROCESS ALTERNATIVE

There is often a process alternative for the prospect, and your price is being compared to that situation. Buying computer software to do a task may be compared to a manual method. This type of situation is common in business when a system is already in place, such as a customer service department, and a new solution is being proposed (CRM) which will alter the basic business process and produce benefits in addition to higher costs.

Once again, the key to success in overcoming the price objection is to explain and demonstrate the additional value of the proposed solution.

In the example cited, the new CRM solution will perform new tasks that are not currently being implemented. The impact of this enhanced service may be a higher price. Probing questions will reveal the potential for increased revenue and profits as a result of a higher level of service to the customer. The system will also likely avoid the higher costs that occur when the additional tasks are not performed.

For example, post installation and warranty communications will not only increase customer satisfaction, but also identify problems early in the life cycle of the product or service. Early identification will lead to early resolution and, a delighted customer who will be a stronger reference account for your firm. Quantifying these data will overcome the objection of the higher price by demonstrating the greater value.

PRICE in relation to A PERCENTAGE OF THE PRODUCT PRICE (FOR

CONTINUING SERVICES)

Sometimes the maintenance or continuing support costs become greater than the original cost of the product. When the cost of continuing warranty support exceeds 10 percent of the initial cost of the product, there is likely to be price resistance. This is an important marketing issue, and the product-pricing decision makers will balance these factors when creating the product marketing plan. A higher initial price will impede the initial sale while a lower initial price will help to sell the product. The trade-off is the continuing warranty and support cost. If it is too high, the customers will not commit to service, and the result will be customer satisfaction issues in the event of future problems. If the cost is too low, it will be difficult to provide continuing quality support on a subsidized basis. There are many variables that can impact the cost of continuing support services, and they are not all within the supplier’s control.

If the price objection is heard with respect to continuing services after the warranty period, then an approach that could be explored is that of the total cost of ownership. Using the timeframe of the normal life cycle of the product, add the initial cost plus the continuing cost for the term of the product life cycle. Then, use this calculation to relate to the value of the product or service.

Another consideration here is the customer’s own accounting system. Sometimes the initial cost is capitalized and depreciated as an asset and the continuing warranty and service costs are expensed as incurred during the operating period. The prospect may have limited flexibility with the operating budget and more options with the capital equipment budget. This case would suggest bundling the continuing costs into the initial costs and providing no additional cost warranty for the life cycle of the product. These options are dependent upon accurately identifying the relevant price objection.

PRICE VERSUS “DO-IT-YOURSELF”

The comparison of the price versus “do-it-yourself” often denies the cost of labor of the participant and the extended time involved for a person to accomplish the proposed solution. A simple example is lawn care. Certainly everyone can do this task at less expense than an outside service, yet few persons enjoy spending time on this chore. Those who choose to do it themselves place less value on their time, or truly enjoy this activity, than those who contract their lawn maintenance.

In selling to the education marketplace, and especially the universities, this is a difficult price objection. The university often directs graduate students to perform tasks that they are able to accomplish but that are not the best use of their time and talent. Yet, their services are “free” to the university. If the graduate student could be performing other work, which would provide income to the university, this approach to demonstrating value might be a solution.

Another situation, which is perhaps easier to address, is in the commercial environment. If a prospect indicates that she can “do-it-herself,” the challenge is to help her understand the value of her time. Then, you can compare the value of her time used to perform the task with the price of the service you’ve proposed.

In the simple example noted earlier, the business executive or sales representative who spends time on lawn maintenance can be approached logically. The first step is to evaluate the professional’s time. It is likely that this professional’s time is valued at more than $50 per hour. The time required by the professional to perform this task is four hours per week. The cost of the lawn service is much less than $200 per week. So, if the professional can employ himself for these four hours on productive tasks, there is a net advantage to outsourcing the lawn maintenance task. In addition, there are psychic rewards for the professional who does not enjoy lawn maintenance chores.

Every salesperson will regularly be confronted with the statement: “Your price is too high!” Then, selling begins. The challenge is to gain additional information through questioning, identifying the appropriate price objection, and responding with information supporting the quoted price. A rush to confront the price objection risks responding incorrectly, and thereby introducing another and different price objection.

“A Thought on Price”
by John Ruskin, English Philosopher, 1819-1900

“It is unwise to pay too much, but it’s also unwise to pay too little. When you pay too much, all you lose is a little money. But when you pay too little, you stand a chance of losing everything, because the thing you bought is incapable of doing what you bought it to do. The common law of business balance prohibits paying a little and getting a lot – it just cannot be done

 So, when you deal with the lowest bidder, it is wise to put a little something aside to take care of the risk you run. And, if you do that, you can afford something better.”

 Quick references;

Why Your High Prices May Really Be Too Low

Managing Retail Price-Point and Margin Pressures by Ted Hurlbut

Price Objections: Why Customers Think Your Price is Too High by Mark Hunter

High Food Prices: 10 Questions Answered

2009 Report on American Consumers by Roger E. Bohn and James E. Short. Global Information Industry Center University of California, San Diego