Customer Retention Concept in Microfinance Institutions
Tunde Raji - February 24, 2018

Customer Retention Concept is often handled with levity or virtually overlooked by many Small and Medium Enterprise (SME) with no exception to Microfinance Institutions. Retaining existing customers who are creditworthy is germane in minimizing operating cost and maximizing or increasing the size of an institution’s portfolio.

 

This piece addresses mainly “Customer Retention” from amongst other variables that affects financial performance in microfinance institutions. Other variables that affects financial performance in microfinance institutions includes: effective interest rates, new customers, delinquency & default rate, and loan size & term.

 

The big question now is this: how does your organization retain existing customers? Secondly, when and how often does your organization compute customer retention rate? During the course of strategic financial planning, customer retention rate of microfinance institutions need to be factored-in in order to facilitate growth. Many microfinance institutions have devised means of retaining existing customers. It is important to note that not all loan customers who have fully paid off their loans immediately apply for new loan. Hence, some creditworthy customers rest for a while after repayment of the previous loan until need for a new loan arises. Such creditworthy customers are often referred to as “Resting Customers”. When computing for customer retention, ‘resting customers’ must be included as part of loans to current or previous customers within a specified periodic cycle.

 

In theory and practice, customer retention rate is usually computed in percentage as the number of loans made to existing customers (including resting customers) during a specified periodic cycle divided by the total number of loans paid off during the same specified periodic cycle.

 

In conclusion, before carrying out strategic financial planning, microfinance institutions should involve their staff at all cadre to participate in planning process through questionnaire or opinion poll on suggestions that could positively influence key variables of financial performance as mentioned earlier such as their suggestion on effective interest rates, how to improve loan size and term, how to reduce delinquency & default rates, and how to increase customer retention. Research is evident that contributions and assumptions from other staff outside the management staff strata is vital in effective planning process towards an effective strategic financial planning of any organization that intend to navigate towards potential growth.

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