Blending of financial and non-financial services

Financial institutions can help to unlock the potential of small and medium enterprises (SMEs) to promote more and better jobs for men and women. By offering business development support to SMEs, alongside standard financial products such as enterprise loans, financial institutions can have a greater impact in their contribution to economic development.

In recent years, financial inclusion advocates have come under criticism that they have over-hyped the contribution of microfinance to job creation. Rigorous research with microenterprise lenders showed that jobs and incomes were being sustained, but not necessarily enhanced by microenterprise lending programmes.

For the past decade, however, the ILO has been promoting an alternative to the minimalist microcredit approach, where providers bundle financial and non-financial services to have a greater impact. This approach recognizes that small businesses are not living up to their potential to contribute to gross domestic product in part due to capacity constraints within those firms. While a lack of access to finance is a key challenge for SMEs, it is not the only challenge, and therefore a more integrated business development approach is required.

One of the flagship projects through which the ILO has promoted sustainable and responsible financial inclusion of SMEs is the PROMISE IMPACT in Indonesia. The project is a partnership between the ILO, the Indonesian Financial Services Authority (OJK), and the Swiss State Secretariat for Economic Affairs (SECO) to improve the supply and quality of financial services to small businesses.


The project is built on the hypothesis that financial institutions can have a greater impact on SMEs if they adopt an integrated approach to business development. Perhaps more importantly, the project is testing if there is a business case for providing more valued and effective services, where they can recoup the costs of providing non-financial services through better loan repayments and more loyal customers.

To test that hypothesis, we are working with 13 financial institutions to test “bundled services”. The financial institutions include rural banks, development banks, and credit and saving cooperatives. To create greater value for clients, and contribute more to enterprise development, our partners agreed to offer business development support to their small enterprise clients, alongside the financial services they were already offering. More than 5,000 small enterprises were randomly selected for the intervention.

A total of 3,333 clients received training and counselling from loan officers who were trained by certified ILO master trainers. Besides training and counselling services for clients, the managers of financial institutions participated in Making Microfinance Work training courses.

At the institutional level, PROMISE IMPACT was able to help financial institutions to become more client-centric. They are now better able to understand the businesses of the clients they are serving. It has helped the financial institutions to develop tailored products and services, and to conduct market research, loan appraisals, and portfolio management.

At the client level, there have been several positive results among various groups of clients. After going through training and counselling, many clients are now maintaining better business records. There was a 46% increase among clients who prepare a cashflow to record financial transactions. There was also a 9.6% increase in clients who have a business plan, and late loan payment were reduced by 7.2%. Most importantly, the monthly profit increased by USD 116.

Overall, the results at the client level are quite positive and the evidence does seem to support the view that integrating or bundling services yield better socio-economic impact. An improvement in business performance including an increase in profit means that small businesses are likely to borrow larger loans in the future. Moreover, with a significant reduction in late repayments, financial institutions are able to save costs, which, in turn, adds to their profits. FSP staff are now more familiar with their clients’ business cycles, they have a better understanding of the nature of their businesses, and they reported that client loyalty and commitment improved, which in turn leads to returning clients in a quite competitive market. As the results were measured immediately after the intervention, it is premature to do a full cost-benefit analysis. However, the evidence and qualitative analysis seem to suggest that providing bundled services makes a strong business case for financial institutions.

Based on the positive experiences of this integrated approach in Indonesia, Social Finance is exploring opportunities to promote this model in other countries.

Other Social Finance work on the topic:

  • From 2008 to 2012, we collaborated with 16 microfinance institutions (MFIs) to test a range of approaches to foster social impact through the delivery of innovative financial and non-financial services. This action research programme, called "Microfinance for Decent Work" addressed a number of decent work objectives, such as eliminating child labour, fostering the formalization of enterprises, reducing vulnerability and enhancing business performance through improved working conditions. The impact studies showed that all innovations had effects on the target outcomes, to varying degrees of intensity and success. In aggregate, the evidence provides a compelling case for intentional efforts to enhance impact.
  • Another MF4DW partner MFI, NWTF from the Philippines, introduced an entrepreneurship training based on the ILO’s Generate and Start Your Business materials. The combination of financial and non-financial services resulted in increased business profit by PHP 2’000 (approx. USD 50) which has almost doubled the baseline profit and also increased ownership of motorized vehicles by 3.5%. Furthermore, incidents of late repayment decreased by 4% and taking out a loan to repay another loan decreased by 10%. More results here.