MICROFINANCE MANAGEMENT

UNIVERSITY OF BAMENDA
HIMS
mBA
 CHAPTER ONE

STALIZER FACT:
Banking the unbanked

2
 Banking the unbanked

Introduction: Access to finance and economic

development

Review of access to financial services

Solutions proposed: Mr. Mohammud Yunus Jobra in

Bangladesh (1976)

3
 Access to finance and economic development

An extensive number of economic studies demonstrate that

there is a casual relationship between financial deepening and
economic development (Schumpeter, 1911)

1- FIRST APPROACH: The impact of credit in economic growth has been

extensively analyzed by King & Levine (1993) Demirguç-Kunt, and Loayza (2000)
that show that credit is the explanatory variable in economic growth, especially in
countries with underdeveloped capital markets

2-SECOND APPROACH: The development of capital markets is a second

explanatory variable for economic growth analyzed by Levine & Zervos (1998),
Levine (1991), Bencivenga & Smith (1991) and specially Rojas-Suarez & Weibrod
(1994)

3-THIRD APPROACH: Explains economic growth not only in relation to the

development of the banking sector, but also to its stability in the provision of
financing as an explanatory variable on the levels of economic development:
Freixas (1997), Rochet (1997), the Interamerican Development Bank (2005) and
Garrido (2005)

4
 Review of access to financial services

According to the World Bank (Beck, Demirgüç-Kunt, Levine, 1999), in the 24 most
developed countries, the average credit to the private sector as a percentage of
GDP was 84% between 1990 and 1999; while it was 33.6% in the 79 developing
countries analyzed

Table 1: Financial development by region, 1990-99- Interamerican Development

Bank, IPES 2005.

Private sector Credit and market

Number of credits (percent of capitalization GDP per capita,
Region countries GDP) (percent of GDP) 1995 (US$)
Developed countries 24 84 149 23.815
East Asia and Pacific 10 72 150 2.867
Middle East and Northern Africa 12 43 80 4.416
Latin America and Caribbean 20 28 48 2.632
Eastern Europe and Central Asia 18 26 38 2.430
Sub-Saharan Africa 13 21 44 791
Southern Asia 6 20 34 407

5
 Review of access to financial services

The factors that explain the lack of access to financial services

are related to the demand, regulation, and supply

1- Price
SUPPLY OF
FINANCIAL
2- Distribution networks SERVICES:
INADEQUATE
BUSINESS
3- Risk methodologies and database analysis MODEL

4- Regulatory framework

5- Lack of trust in the financial system and

financial education

6
 Review of access to financial services

1-Prices for basic financial services are higher in developing

nations that in developed countries

Table 2: Interest rates differences and efficiency by region, 1995-2002 , IPES 2005-
Data from IMF and Bankscope

Interest rate Operational Costs Private sector

Number of differences (percentage of credit (percentage
Region countries (percentage) assets) of GDP)
Sub-Saharan Africa 32 10,6 5,1 15
Eastern Europe and Central Asia 23 8,8 5 26
Latin America and the Caribbean 26 8,5 4,8 37
East Asia and Pacific 16 5,1 2,3 57
Southern Asia 5 4,6 2,7 23
Middle East and Northern Africa 13 4 1,8 38
Developed countries 30 2,9 1,8 89

7
 Review of access to financial services

However, Prices for basic financial services do not refer not to

only interest rates but also to:

1- Minimum balances
Prices are too
high mostly
2- Maintenance costs of accounts, debit and due to
credit cards
inefficient
business
3- Transfer and withdrawal commissions models and
lack of
competition in
4- Other commissions the financial
industry and a
value
5- Interest rates management
strategy

8
 Review of access to financial services

2-Distribution networks are too limited because traditional

banking branches are too costly, so alternative distribution
networks are needed to serve the population

Table 3: Density of bank branches and financial deepening: Based on data from Beck,
Demirguc-Kunt y Martinez Pereira, 2006

Geographic Area Number Bank branches Bank branches Number of Number of

of per 100,000 per 1000 KM2 loans per 1000 deposits per
Countries people people 1000 people

United States 1 30,86 9,81 N/A N/A

Western Europe 10 44,66 61,25 470 2.197
Asia 10 8,13 18,57 110 715
Eastern Europe 9 7,39 6,83 87 1.040
Latam 17 7,02 5,20 120 490
Africa 5 2,06 0,57 30 146

Source: World Bank, 2005

9
 Review of access to financial services

3-Credit risk analysis methodologies are not adapted to

developing nations economies where informal activities are so
relevant

Only include stable and taxable cash flows (wages)

Do not include informal sources of revenue

Focus on already banked customers

Do not include socio-demographic variables

Are too slow and costly

Require guarantees not adapted to the informal economy

Better use of technology and data is required in

order to improve risk methodologies and obtain
faster results
10
 Review of access to financial services

4-The regulatory framework can increase costs that affect the

ability of financial institutions to offer financial services to the
non affluent population

Most common regulatory obstacles in Latin America are:

1- Taxes on transactions

2- Supervision Costs

3- Inadequate system of guarantees

4- Government forced investments in non profitable activities

11
 Features of Financial Avenues
Micro & Small Enterprises (MSEs) in India
Social contract
– easy payback
Collective possibility
institutional Informal Fluctuating
strength as systems – interest
collateral money lenders rates
Innovation is
helping them
Micro-Finance Useful for groups and
Interest Rates

reach newer
Institutions collectives
markets

Limited
Market platforms
(Crowd funding)
understanding and
unpredictability
Special Purpose
Units (SIDBI,
NABARD)

Lot of paper work

Banks & NFIs and collateral
needs

Accessibility
 COURSE OUTLINE
• CHAPTER 1: STALIZER FACT: Banking the unbanked
• CHAPTER 2: Conceptual issues and scene setting MFIs
• CHAPTER 3: HISTORY OF MFIs
• CHAPTER 4: Microfinance as a small loan business
• CHAPTER 5: Business Vs Social Approach to MF Development
• CHAPTER 6: Outreach & Promotion Plan in MFIs
• CHAPTER 7: Savings Operating Policies in MFIs
• CHAPTER 8: Loans Appraisal Guidelines in MFIs
• CHAPTER 9: Microfinance Best Practices
• CHAPTER 10: Delinquency Management in MFIs
……………TOO BIG….. Uba, MACROECONOMICS-DR SUNDJO
14 May 2019
FABIEN, ENS L100 13
YOUR HUMBLE SERVANT "THE NEVER
TO BE FORGOTTEN HIS EXCELLENCY
FABIEN SUNDJO"
 15

• Fabien SUNDJO-Academic portfolio

• Double B.Sc. One in Economics and another in Political Science
all from University of Yaoundé II-Cameroon
• A certificate on Leadership: A Training offered and sponsored by
the British Conservative Party held in Abidjan-IVORY
COAST.
• A certificate on Statistics and Policy making: A Training offered
and sponsored by the South African Gov’t, held in
JOHANNESBURG
• M.Sc. from University of Lome (Togo) Under the auspices of the
World Bank scholarship through the NPTCI program
• Ph.D. from the Kenya school of Monetary studies (Nairobi).
Under the auspices of the Bill Gate scholarship through the
AERC program.
• Currently a Political science student University of Yde II
(Cameroon) at Masters Level
 16

• Fabien SUNDJO: Professional portfolio

• Lecturing at the Pan African Institute of Development Buea ( Health
economics, Agricultural Economics, Total Quality Management, Doing
Business in Africa etc at the Graduate level)
• Lecturing at the ICT University Yaoundé ( Human Resource
Management at the MBA program)
• Lecturing at ST. MONICA University ( Business Forecasting , Global
Marketing, Entrepreneurship and Small Business, Managerial
Economics at Graduate level)
• Lecturing at the University of Bamenda –ENS , HICM AND FEMS
(International economics, Macro economics, Quantitative Methods,
Rural economics, History of economics thought
• Lecturing at the ROME Business School ( Research methods and Q.M)
• Lecturing Advanced International Finance at the Forensic Accounting
Ph.D program at Tween Square Academy ABUJA-NIGERIA
• AFRICAN UNION: HQ: ADDIS-Ababa: Monitoring & Measuring
Regional Integration
 17

• Fabien SUNDJO: ACADEMIC HONOURS

• May 10-11, 2019,: Invited as speaker at the international conference on Population

studies organised at the Peking University Beijing, China
• invited as QUEST speaker at the
November 20-21 2018:
international conference on the ‘uncertainty and
Complexity of Migration’ at the British Academy, London
under the University of Southampton, London, UK.
• April, 8-9, 2019: Invited as Quest speaker at the
international conference on Child Labour at the
Australian APEC Study Center, RMIT University
(AASC)
• 11-12 April 2019: Invited as Quest speaker at the 7th
Annual TARC Conference, University of Exeter, UK
 18

• Fabien SUNDJO: CARRIER &

FUTURE PERSPECTIVES
• I AM AN ECONOMIST BY TRAINING
• BUT A POLITICAL SCIENTIST BY
CALL
FUTURE PESPECTIVES
BY GOD GRACE, I AM A VERY, VERY
& VERY BIG MAN TOMOROW
WISDOM CORNER
Everything is possible if a man believes
Mark 9:23
 CHAPTER 2
CONCEPTUAL ISSUES AND
SCENE SETTING

19
 MICROFINANCE
Definition
It refers to the provision of financial services to
low-income clients.
 MICROFINANCE
Definitions
It refers to the provision of financial services to
low-income clients.
 MICROFINANCE
Definitions
It refers to the provision of financial services to
low-income clients.
Credit
Savings/Deposits
Insurance Plans
Money Transfer
 MICROFINANCE
Definitions
It refers to the provision of financial services to
low-income clients.
 MICROFINANCE
Definitions
It refers to the provision of financial services to Microfinance: who
low-income clients. are the targeted
clients?Low
Income &
Ultra poor at
the BOP

How can
microfinance
improve
their lives?

BOP
 MICROFINANCE
Definitions
It refers to the provision of financial services to
low-income clients.

Purchasing Power Parity (PPP)

based on the law of one price: the theory states that, in ideally efficient
markets, identical goods should have only one price.
 BOTTOM OF THE PYRAMID
Definitions
It refers to the provision of financial services to
low-income clients.
Poor = those living in households where the per capita expenditure
is less than $1 per day, in developing and transitional economies

world’s 4 billion poor—people

who live on far less than $2 a day

BOP
 BOTTOM OF THE PYRAMID
Definitions
It refers to the provision of financial services to
low-income clients.
C. K. Prahalad and Stuart Hart, The Fortune at the Bottom of the Pyramid,
Strategy + Business, Issue 26, 2002
There Is Money at the BOP
The dominant assumption is that the poor have no purchasing power and therefore do
not represent a viable market.

2005 is the UN’s Year of

Microcredit
 ONE COMMON DENOMINATOR OF
MICRO-FINANCE CLIENTS
• "The poorest of the poor
• "The poor, but economically active,
• Individuals running micro- small businesses which
require loan capitals of between xxxx and xxxx
• ….It is however important to recognize that, not all
institutions operating within the micro-finance sub-
sector define their clients the same.

28
 Microfinance Institutions (MFIs)

• What is a MFI???????????????..............................
• ……………………………………
• MFIs range in size and type from local savings
cooperatives to large (divisions of) commercial
banks
• Mission can be one or all of:
– Financial intermediation
– Economic development
– Poverty alleviation
– Women’s empowerment
 MICROFINANCE INSTITUTIONS (MFIS):
NEW TOOLS

• These institutions commonly tend to use new methods developed over the last 30
years, taking little or no collateral.

• These methods include:

(i) group lending and liability, (ii) pre-loan savings requirements, (iii) gradually
increasing loan sizes, and (iv) an implicit guarantee of ready access to future loans if
present loans are repaid fully and promptly

• Microfinance envisions a world in which low-income households have permanent

access to a range of high quality financial services
 MICROFINANCE: WHAT IS IT?

Often perceived as… …whereas objectives are

• Micro-credit • Suite of financial services

– Thrift / savings
– Credit
– Insurance and Investments
– Transfer Payments and
Remittances

• Group lending • Group and individual lending

• Social/charitable activity • Sustainable activity

31
 CHAPTER 3
HISTORY OF MFI

32
 HISTORY OF MICROFINANCE
• 1950s – 60s: Microfinance begins as highly subsidized rural credit programs
in rural areas, part of larger development projects
• 1970s – 1980s: Spurred by the idea of solidarity group lending, and two
notable success stories (Bangladesh and Bolivia), microfinance repayment
performance improves globally
• 1990s – present: As estimates of global repayment rates hover around 95%,
many microfinance institutions (MFIs) commercialize into for-profit
companies or become “real” banks
• 2003: Microcredit Summit campaign reports microfinancial services reach 41
million poor people worldwide (> 9 million in India)
 SOLIDARITY GROUP LENDING
• No traditional collateral, only “social collateral”
• Repayment enforced by mutual liability, or peer-pressure
• “If you don't pay back your loan, I can't get mine!”
• Many varieties and operational models
 “FLAVOURS” OF MICROFINANCE
• Grameen Model: Pioneered by Grameen Bank in Bangladesh in the late
1970s, now extends world-wide through grameen replicators.
• Village Banking: Developed by John Hatch in Latin America in the mid-80s,
focus is on forming independent village banks.
• Self-Help Groups (SHGs): Savings-led approach pioneered by Myrada and
PRADAN in India in the mid-80s. Similar to Village Banking, focus is on
developing community-run Self-Help Groups.
• Individual Lending: Single client method (with or without collateral),
suitable for larger loan amounts and more affluent clients. Currently in
Eastern Europe and Latin America.
TRADITIONAL MODEL $$
Info
• Non-governmental
organizations (NGOs)
provide microfinancial Groups
services as part of their
social agenda
• Donors make grants to NGOs
NGOs, which provide for
loan capital and
operational expenses
• Donors rarely expect
repayments – focus was
not on sustainability Donors
 SELF-HELP GROUPS (SHGS)
• Semi-autonomous rotating savings groups
• Formed, trained and initially managed by some promoting
agency (usually NGO)
• Members save fixed amount at regular meetings
• Capital lent to other members for some purpose
• SHGs can be federated
into higher-level NGO
structures (clusters and
Federation
federations) Bank

• Each group has 15-30

Cluster Cluster
members, with up to a
100 groups in
Groups
Federation
 SHG-BANK LINKAGE MODEL $$
• SHGs are linked to regional Info
rural banks (RRBs), in some
cases via promoter
SHGs
• SHGs open savings
accounts and receive loans
• NABARD refinances bank
loans to SHGs at favourable
interest rates
RRBs Promoter
• Profitable for both RRB and
NABARD (use SHG as
retailer)
• NABARD provides limited
assistance to “promoters” NABARD
COMMERCIAL MFI MODEL $$
• As microfinance proves Info
profitable, NGOs spin-off or
transition to commercial for- Groups
profits (MFIs)

• Receive loans and

investments from donors, MFIs
international banks and
social venture funds
• In India, primarily Grameen
replicators (but some
promote SHGs also)
Banks / Investors
 History of Micro Finance

• Mr. Mohammud Yunus started a series of experiments

lending to poor households in the nearby village of
Jobra in Bangladesh (1976) .

• Successful functioning of households in Jobra motivated

the Bangladesh Bank, the Central Bank of Bangladesh,
to set up a special branch that catered to the poor of
Jobra.
 History of Micro Finance

• After a successful trial project in North-Central

Bangladesh, micro finance was expanded by the bank
nation wide
 Founding of Grameen bank by Mr. Mohammud
Yunus in Bangladesh

• Government surveys found over 80 percent of the

population living in poverty in 1973–1974 in Bangladesh
(Bureau of Statistics ,1992)
 THE CASE OF CAMEROON:
CONTRIBUTING FACTOR
• the route of formal MF activities can be traced back
in 1963 following the creation of the first cooperative
savings and loans institution (Credit Union), at
Njinikom in the North West region of Cameroon by a
Roman Catholic clergy.
• Development of MFIs and their activities remain blurred until
the early 1990s when President Paul Biya in order to
incorporate the elites and various interest groups into his New
Deal Policy passed the remarkable law No. 90/053 of 19
December 1990 relating to freedom of associations, and Law
No. 92/006 of 14thAugust 1992 relating to cooperatives,
companies and common initiative groups.
42
 THE CASE OF CAMEROON:
CONTRIBUTING FACTOR
• linked to the banking crisis in the late 1980s that resulted
to the closure of branches of commercial and
developmental banks in rural areas and some cities.
• Many top executives lost their jobs, some were
dismissed. Some of these executives and employees
formed cooperative credit unions that function like mini
banks.
• With growing interest in the sector in the absence of
effective governance mechanism, the Ministry of
Finance took over control (initially placed under the
ministry of Agriculture) hence development of new text
43
 THE CASE OF CAMEROON:
CONTRIBUTING FACTOR
• Finance Ministers from the Economic and Monetary
Community of Central Africa (CEMAC) by 2005 will publish
a new regulation which will be effective from April 14, 2005
in which MFIs is classified into three categories:
1) First category includes MFIs accepting savings and credits just
from their members.
2) Second category includes MFIs accepting credit and savings
from members and non members and
3) The third category, MFIs granting just credits to the general
public. They extend credit to third parties without collecting
savings.
• Since after the classification, commercial banks involvement
in Micro Finance in Cameroon has increasingly become 44
 THE CASE OF CAMEROON:
CONTRIBUTING FACTOR
• The Cameroon Micro Finance landscape is out rightly
dominated by category I institutions that control the
greatest section of the market in terms of number of
institutions and outlets with CAMCCUL the market
leader controlling an outright 55% of the overall
market.

45
 CHAPTER 4
MICROFINANCE AS A SMALL
LOAN BUSINESS

46
 MICROFINANCE AS A SMALL LOAN
BUSINESS: CONSEQUENCES
• Loans are small
• Lending is risky – clients have very little collateral
• Very costly to ensure that loans are used for the
purpose for which they have been lent.
• Too costly to evaluate loan applications
• Too costly to administer
• Too costly to disburse
• Too costly to collect repayments
 SOLUTIONS

• What can we do?

 WHAT IS SPECIAL ABOUT LOANS?

• Why do borrowers need loans?

– Smooth out consumption
– Investment in small business
– Deal with unexpected emergencies, e.g. health, tuition
payments, burial fees.
– Anything else?
• How might you (the mf borrower) deal with such
contingencies if there are no microfinance
institutions?
 INDIGENOUS SOLUTIONS AND
INTERVENTION
• Indigenous Solutions
– Ask (extended) family members
– Save ahead of time so as to have enough money when
funds are needed
– Go to money-lender
• Externalities or why we might need microfinance
– Insufficiency of local capital
– Scale problems – cost of capital is too high because of
small scale of local operations
– Inability to save because of low and volatile incomes
– Behavioral and social issues
DIMINISHING RETURNS TO CAPITAL

Output

Capital
 CAPITAL SHOULD FLOW TO THE POOR

• Diminishing Marginal Returns to Capital implies:

– Enterprises with little capital should earn higher returns to
their investments than enterprises with a lot of capital.
– Poorer enterprises should be able to pay banks higher
interest rates than richer enterprises.
– Hence capital should flow from rich depositors to poor
entrepreneurs.
– Capital should flow from rich countries to poor countries.
– Capital should flow rich to poor borrowers within a given
country.
 WHY RESOURCES DON’T FLOW TO
POORER COUNTRIES: ONE ANSWER
• Risk:
– Investing in India, Kenya or Bolivia is much riskier,
especially for global investors without the time and
resources to keep up-to-date on shifting local conditions
– Lending to cobblers and flower-sellers is, again, riskier for
the same reasons that lending to large, regulated
corporations.
– But why can’t cobblers and flower-sellers offer higher risk-
adjusted rates of return to lenders?
 WHY RESOURCES DON’T FLOW TO
POORER COUNTRIES: ANOTHER ANSWER
• Perhaps poor borrowers can pay high interest rates,
but government-imposed interest rate restrictions
prevent banks from charging the interest rates
required to draw capital from developed to
developing countries and from cities to villages.
• If so, then the answer is political. Advocates should
convince governments to remove usury laws and
other restrictions on banks, thus allowing capital to
flow where it is needed.
• However, usury laws have their supporters (Who?)
 IS THERE CAPITAL RATIONING?

• Paula and Townsend (2004) surveyed 2880 rural and

semi-urban households in central and northeastern
Thailand.
• One-third of the households in their survey stated that
they would like to change occupations. Of these, most
would like to open a business. Many of these households
report that they don’t start a business because of non-
availability of funds.
• 54% of entrepreneurial families want to expand their
business; but most of them report that they don’t have
enough money to do this.
 IS THERE CAPITAL RATIONING?

• The average annual income of business owners in the sample

is three times higher than that of non-business owners.
• What can we infer from this? Can we infer that starting a
business increases family income? Perhaps..
• Or, perhaps, the more entrepreneurial families have already
started businesses and the higher income is due to their greater
entrepreneurial ability.
• Paula and Townsend do find that, even after accounting for
entrepreneurial ability (using several measures of talent),
poorer households are less likely to start new businesses.
• This suggests that credit rationing is an impediment to higher
incomes.
 CAUSES OF CAPITAL RATIONING

• Adverse Selection
– Lenders do not have enough information to be able to
easily determine which customers are likely to be more
risky than others.
– Banks would like to charge riskier customers more than
safer customers to compensate for the higher probability of
default.
– But they don’t have this information.
– Hence they have to charge higher rates for everybody.
– This drives safer customers out of the credit market.
 CAUSES OF CAPITAL RATIONING

• Moral Hazard:
– Banks are unable to ensure that customers are making the
full effort required for their investment projects to be
successful.
– Sometimes borrowers abscond with the bank’s money;
banks are not able to monitor such possibilities cheaply.
– Judicial systems in developing countries are often weak,
thus making it difficult for lenders to retrieve their funds.
 INFORMATION ASYMMETRY

Decision to take loan Loan usage loan repayment

Adverse Moral hazard

selection

59
 ADVERSE SELECTION: INCOMPLETE
INFORMATION PROBLEM (BEFORE THE
LOAN)

Don’t know Interest rate

Client’s type reflects proba of default

Need to increase interest

Safer clients drop out
rate

Providing credit can

become
impossible

60
MORAL HAZARD: HIDDEN ACTION
PROBLEM (AFTER LOAN)

Can not observe what client is doing

Strategic unwillingness
Bad loan usage
To repay

61
 WOULD INTEREST RATES BE TOO HIGH?

• The reasons given above mean that break-even

interest rates can be high.
• But if the principle of diminishing marginal returns
holds, this may not be a big problem.
• On the other hand, this principle might not hold
because production functions might include scale
economies.
• Hence, poorer entrepreneurs operating at smaller
scales might have lower returns to scale compared to
richer entrepreneurs operating at larger scales.
PRODUCTION FUNCTIONS WITH SCALE
ECONOMIES
Output

Capital
 ARE SUBSIDIZED LOANS THE ANSWER?

• The reasons discussed above means that some

deserving borrowers will not obtain loans. Could this
be resolved through subsidized loans?
• Often, subsidized loans do not work, reasons.
• subsidized banks push out informal credit suppliers.
ARE SUBSIDIZED LOANS THE ANSWER?

• Credit is no longer allocated to the most productive

recipients, but rather on the basis of political or social
concerns.
• Good projects, thus, still continue to go unfunded.
• Bankers’ incentives to collect savings deposits were
diminished by the flow of capital from the government,
which subsidized the loans. Hence poor households did
not have convenient access to banking services, either.
• State banks were pressured to forgive loans just before
elections and to provide the powerful, rather than the poor,
with access to cheap funds.
• Banks had no incentive to build tight, efficient institutions.
 ARE MONEYLENDERS MONOPOLISTS?

• It has been argued that moneylenders have local

monopolies because they have access to information about
local conditions as well as the creditworthiness of local
borrowers. Hence potential competitors cannot break into
local markets.
• Since monopolists will lend, as long as the return on the
marginal loan is greater than the marginal cost, they will
earn positive profits on infra-marginal loans.
• In competitive markets, average profits will be zero. Hence
interest rates will be lower and more borrowers will get
loans. Monopoly is, thus, inefficient.
• Furthermore, it has been argued that moneylenders prevent
the use of innovative technologies that would reduce the
demand for moneylenders’ services.
 COMPETITION AS A RATIONALE FOR
INTERVENTION

• Why don’t moneylenders have more competition?

• Are initial investment needs too high/too risky? Or is
there no better alternative to money-lending?
• If moneylending is characterized by monopolistic
competition, banks might be able to operate more
efficiently by operating on a larger scale and using better
lending technologies.
• This could bring more financial resources into local
markets, thus pushing down interest rates and increasing
efficiency.
• Expanding the reach of the market for loans might also
reduce discrimination on the basis of race, gender,
ethnicity, social class and religion.
 IS MICROFINANCE SIMPLY
MICROCREDIT?
• As we mentioned before, one of the reasons that
people borrow is that, at times, because of cashflow
volatility, their cashflows are insufficient for their
needs at that time.
• Borrowing means a large inflow at the time of need,
followed by periodic outflows that represent
repayment.
• However, there are two other potential solutions to
this problem.
MICROFINANCE AS ACCESS TO BANKING

• One solution proceeds as follows:

• Whereas in borrowing, the inflow precedes the
outflows, what if the outflows precede the inflows?
• This is saving. In saving, the individual sets aside
small amounts of money to create a pool of money
that can be used when needed.
• With borrowing, there are moral hazard and adverse
selection costs; with saving, these costs are avoided
because the individual is lending to him/herself.
• Transactions costs are also avoided.
 MICROFINANCE AS MICROINSURANCE

• The second potential solution is to reduce the

volatility of cashflows.
• This can be done through insurance. For farmers,
crop insurance could be used to smooth out inflows.
• Shepherds/cowherds could have their animals
insured.
• Health insurance could be used to smooth out
unexpected cash outflow requirements.
 CHAPTER 5
Business Vs Social Approach
to MF Development
Business Vs Social Approach to MF
Development
• Defining Business approach:
• Business is about implementing planned and specific activities in
order to make profits or surplus. The latter facilitates the business or
the activities as a going concern. People do not go into business just
for its own sake, but because they want to use such business to add
value to their lives. A business approach therefore emphasizes the
need to fully cover costs.
• A ‘social welfare approach’ :
• Social welfare on the other hand involves provision of services free of
charge or at minimal cost.
• But if there is no surplus or profit to sustain continuity of services then
the risks of discontinuity are high and real.
• A social welfare approach emphasizes the immediate needs of the
clients as opposed to the profits of the organization.
•
Business Vs Social Approach to MF
Development
• Given these two definitions, then it is obvious that there
will always exist tensions between these two approaches
and any MFI will have to take a stand as to the approach
to take knowing the full consequences. One thing is for
sure; a business approach will meets the long-term needs
of the clients best because it ensures that the MFI will still
be providing services to clients in the future.
•
A social welfare approach will not allow MFIs to provide services
to large numbers of people in the future for several reasons:

• Because MFIs will have a continuous dependence on donors.

• Donors change their priorities from time to time and so funding may
not come through for MFIs when they need.
• Microfinance is popular now among the donors, but in a few years
time they may want to put their money elsewhere, either with another
sector or in another country.
• Donor finance will never be sufficient to provide access to all poor
people. To reach vast numbers of the poor, MFIs will have to develop
policies and track records that enable them to access commercial
funding.
If MFIs therefore choose to take the social approach they will not be
able to offer financial services yet clients will continue to need micro
enterprise finance services in the future. In addition, people will always
need a secure place to store their savings.
MFIs need to ensure that they will still be there in the
future for their clients, and they can do this by covering
their costs. MFIs can cover their costs;
• By using a methodology that enables them to reach many
people. This reduces per unit costs through economies of
scale.
• By vigorously seeking to control costs.
• By vigorously seeking to control delinquency.
• By charging interest rates and fees that cover costs.
Experience has shown that the poor can pay high interest rates
that enable MFIs to cover their costs. Evidence of this is visible
through;
• Informal credit markets that exist in practically every
society and these informal credit markets (moneylenders)
lend at far higher rates than MFIs.
• Demand for loans, which is always greater than supply.
• Most people repeatedly returning for more loans.

• And so it appears that access to loans is far more

important than the cost.
 MFI costs are normally classified into;
• 1) Operating Costs: Costs incurred in the day to day
operations of an MFI. Examples: rent, salaries, office costs,
maintenance and depreciation of equipment, motor vehicle
running expenses.
• 2) Financing Costs: Costs incurred by borrowing funds to
finance the loan portfolio. Includes actual cash paid for interest
and other charges on money borrowed by the MFI and any
interest paid on savers’ deposits. These costs are directly
related to how the loan portfolio is funded and the size of the
portfolio.
• 3) Loan Loss Provision: The amount of money expensed by
an MFI to cover loss on loans that are believed to be non-
recoverable. Estimated annually using the experience of the
MFI.
MFI costs are normally classified into;
• 4) Imputed cost of Capital : Assignment search this ….

• In conclusion:

• it should be noted that credit staff that are overly sympathetic to the

clients may be socially inclined and by extension may have a problem

implementing commercially viable microfinance.

• But this does not in anyway suggest credit staff should not care about

client needs, but rather ensure such care does not interfere with
implementation of the rule.
 CHAPTER 6
Outreach & Promotion
Plan
Outreach & Promotion Plan

• Outreach and promotion is the process of informing the

potential target clients of the MFI existence, services and

procedures.

• Such a message should be designed in such a way as to

evoke positive response from potential clients who identify

that their needs will be met by the services being offered.

• Sometimes the message is actually designed and

disseminated in a way that it resurrects dormant needs

therefore forcing people to seek fulfillment in the MFI services.
Outreach & Promotion Plan

• Outreach and promotion can make or break an MFI.

• Sometimes it is not so much the message, but the perception of the
people that matters.
• Every care should be taken so that there is no misconception
whatsoever on the part of the people because if this happens it is
almost impossible to change it.
• What this means is that before even designing the message, the MFI
must clearly define how it wants to be perceived; for example
 “a trusted partner”,
 “an organization that keeps its promises” or
 “an organization that does not tolerate default” etc
• It is important to note that outreach and promotion message should
never be standard for all clients and all areas because of changes
that occur in different people and different areas.
The following steps may guide development of outreach and
promotion programs in a given MFI;
• Step 1: Area Survey:
• Loans Officer obtains an area Map from the concerned
authorities.
• With the Branch manager and other loan officers, they
divide the area among the number of Loans officers within
the Branch.
• Loans officers visit their areas making an inventory of all
visible businesses and taking time to familiarize
themselves with the area and the people.
• If need be, the areas may be demarcated.
The following steps may guide development of
outreach and promotion programs in a given MFI;
• Step 2: Preparation of the message
• The loans officer with the guidance of the Branch Management prepares the
key message to communicate to potential clients. The message should
encompass the following:
• Introduction
• Name of Officer
• Name of Organization
• Background information on the respective institution
• Services offered by the institution
• Discussion on credit products
• Collateral/guarantee mechanism for the products
• Loan sizes
• Registration of groups with relevant government departments
• Meeting frequency and their importance
• Branch/Field office contact
The following steps may guide development of
outreach and promotion programs I a given MFI;
• Step 3: Preparation of promotional materials
• The loans officers prepare materials co communicates the
promotional message. An important consideration to be
made is the literacy level of audience.
• The following are some of the materials useful for the
exercise.
• Prepared flip charts and/or cards with key messages
arranged chronologically
• Field not book
• Leaflets and Brochures of the respective institutions
• Rural Press
 The following steps may guide development of
outreach and promotion programs I a given MFI;
• Step 4: How to call/organize promotional meetings
• Public Meetings
• The savings and loan officer will;
• Use relevant government agencies, local administration, and any other administration
as appropriate to call meetings but make sure the difference between the institution
and the political organizations is made very clear.
• Call the meetings directly using posters (English, Local languages where applicable)
• Identifies venue, time and date.
• One to One Meetings
• Savings and credit officer will;
• Prepare key message to communicate
• Identify the time and date to visit
• Carry leaflets and brochures
• Then make visits to a cross section of entrepreneurs to explain his/her institutional
activities and use them to pass on the information to others and inform those who are
interested how to enlist, and direct them to the Branch/field office for more
assistance.
 The following steps may guide development of
outreach and promotion programs I a given MFI;
• Step 5: How to deal with existing/informed clients
• Respond to enquiries (at Branch Office Level)
• Work with existing group members and officials to
outreach potential clients
• If image is dented, correct image or re-organize fragile
groups - Maintain good public relations
 CHAPTER 7
Savings Operating
Policies
Guide for Developing a Delivery Process
• Do low-income groups of people save? Yes, poor people
like and are willing to save. Indeed researches in many
parts of the developing world indicate that more poor
people do save than borrow.
Some of the things that are of concern to
the poor in regard to savings are
• 1)Safety for their money
• 2)Convenience – in deposits and withdrawals
• 3)Simplicity in management of the savings and its
documentation
• 4)Flexibility in terms of ability to save small amounts and
its accessibility
• 5)Easy documentation – they treasure, simple language,
simple applications, passbooks, etc.
• 6)Interest earnings are considered important – but not in
the same level with safety and other preferences as
stated above.
The following questions then need to be answered and
used for the design of the delivery system:
•
What are the benefits of savings?
•
How do people save in Cameroon?
•
Why are savings necessary?
•
Who is required to save?
•
When will saving begin?
•
To what use will the savings be put?
•
How much must one save?
•
How frequently will savings be made?
•
Will there be interest on savings? How will it be
distributed?
•
Where will the savings be kept and how will they be
managed?
The following questions then need to be answered and
used for the design of the delivery system:
•
Under what circumstances can one
withdraw one's savings?
•
What will happen to one's savings if one is
incapacitated or dies?
•
How much must one save in order to qualify
for a loan?
•
What will be the ratio of savings to the loan
amount one can borrow?
CHAPTER 8
Loans Appraisal
Guidelines
Loans Appraisal Guidelines
• 1)Group assessment

• 2) The Client

• 3) Business assessment

• 4) Market Assessment

• 5) Security
Loans Appraisal Guidelines
1)Group assessment
• Verify past group records (Watch for backdated records to
avoid being cheated!)
• Verify whether the registration certificate is genuine.
• Attach list of initial and current members with the ID Nos.
• Probe further to establish stability of the group.
• Observe whether the group rules and regulations
constitution are being adhered to
1) Group assessment
• Verify past records on group activities.
• Level of participation
• Attendance at group meetings
• Conducting of group meetings
• Enforcement by the group on rules and regulations.

• Verify the existence of the following records;

• Correspondence
• Minutes
• Members attendance

• Collections: Savings o Merry-go-round o Fines &

penalties
 1) Group assessment
• Observe how officials conduct the following:
• Handle meetings
• Enforce rules and regulations
• Roles and responsibilities of officials
• Promote individual member participation
• Handle disputes, discipline
• Investigate on positive and negative aspects on why group
officials have been in office for too long (relate it to the
constitution)
• Verify from the minutes and impromptu visits
• Attach list of members and their individual activities i.e. Name,
type of Business, Location etc.
• Probe members randomly (not officials) and verify from past
 2) The Client
• Name and Date of Birth – verify from available identification
papers
• Age: (Take caution on dangers of lending to very young and
very old clients though, not all such clients in this category
are risky).
• Marital Status: Be careful about singles without dependants.
Experience has shown that married people are more stable
and reliable. Where one has many dependants, there is risk
of diversion of funds, hence default.
• Nationality: Where there is suspicion there is need for
verification from independent sources.
• Residence: Investigate and verify from group members/other
sources.
 2) The Client
• Length of Residence: Length of stay in the residence will indicate stability of the

client; i.e. a person, who has stayed in an area for a longer period, indicates stability.

• Home district: For future reference in case a client absconds

• Year started business: Number of years in business will give an indication of

experience of clients in business generally.

• No. of years in current business: Will give an indication of business stability and

experience of client. Investigate change of business and diversification to avoid

experiencing new business ideas.

• Ownership: Use the licenses to verify ownership of business or any other available.

The same information can be obtained from neighboring businesses and also
impromptu visits.

• NB: Partnership may be difficult to handle in case of default

 3) Business assessment
• Establish permanency of the business premises e.g. if rented how long and is there
a lease agreement.
• If open air, do they pay daily rates, ownership of space & If it’s owned there should
be evidence of ownership.
• Probe to establish the growth of the business and entrepreneurial capability in
relation to current capital.
• Verify and relate the information given to size of the enterprise and the expenses.
• Verify whether the sales are:
• Daily
• Weekly; Compute into monthly sales
• Bi weekly
• Monthly
• Verify frequency of purchases and relate it to sales and profits.
• Profit margin: Net profit x 100
------------------- Sales turnover
• Net profit=Gross sales less expenses.
4) Market Assessment

• Observe if the business has no fixed location and verify

with records.
• Verify by – investigating & probing (to establish the level
of income, and buying habits, taste and even occupation
of customers).
• Observe and Probe (to establish turnover and the cash
flows of the business to enable you establish how the
client will repay the loan).
• Eg such as any potential risk to supplies (fish vending
being dependent on good fishing - what happens when
the weather is bad and fish are scarce?);
• production (who operates the business when the client is
sick or away?
 5) Security
• Refer to client assessment; e.g. is the client honest?,
ability of the business to repay the loan - Credit history etc.
• Cash collateral: Savings requirement (%)
• The group: Refer to group assessment: Willingness & ability,
quality of the group to guarantee the client.
• Pledges: Acceptable pledges
• Tangible business assets
• Client household goods (verify ownership).
• Commercial plots
• Share certificates e.g. Shares quoted in the stock exchange.
• Third Party: For third party guarantee pledges must be listed in
a sworn affidavit through a deed of guarantee.
•
CHAPTER 9
Microfinance Best
Practices
Microfinance Best Practices

• Best practices and principles, are the common practices,

policies and principles followed by successful
microfinance institutions (MFI), all over the world -- in
providing financial services to low-income households
• KEYS TO SUCCESS IN MICROFINANCE
Microfinance Best Practices
• BEST PRACTICES is reflected in the micro finance
institution’s…..
• Image and Philosophy
• Client Selection
• Loan Policies
• Disbursement and Monitoring
• Client Incentives
• Culture of Zero Tolerance
• MIS
1. MICRO FINANCE INSTITUTION
IMAGE AND PHILOSOPHY
• Reliability and quality of service are key.
• One of the most important “best practice” principles is that of the
image and philosophy of the micro finance institution. Successful
institutions provide good quality services that are reliable and timely.
• Provision of a financial service, not a government funded loan or
social service.
• The institution must look at MF, primarily, as a π business, not as a
social commitment.
• Clients must also understand that MF is a financial service and not a
government/donor funded loan or some social service .
• Otherwise, the staff in the micro finance institution will not be serious
about loan collection, and the clients will not be serious about
repayment.
1. MICRO FINANCE INSTITUTION
IMAGE AND PHILOSOPHY
• Clients need to see that this is a long-term relationship with the micro
finance institution.
• Well-run financial institutions develop a long-term financial service
relationship with their client that continues throughout the life of the
client and his/her family.
• Rapid access
• The first loan should be disbursed within one week after receipt of the
loan application. Subsequent loans should be disbursed within a day,
if not hours after the filing of the repeat loan application.
• Keep it simple
• Minimize the client’s costs (in terms of both time and money spent
when applying for a loan) by simplifying the loan application method.
The process should be simple without too much paperwork.
•
1. MICRO FINANCE INSTITUTION
IMAGE AND PHILOSOPHY
• Spend time with clients
• The institution’s Loan officers should spend most of their working time
out in the field, talking with prospective clients or monitoring existing
clients.
• Make clients feel welcome
• Develop a public image of being friendly and approachable by poor
people. Clients need to feel welcome in the micro finance institution.
• Standardize and simplify product documentation & procedures
• to have simple and standard approaches to providing loans. Simple
loan policies and procedures will make it easier for the clients and
staff to understand the institution’s microfinance program.
2. CLIENT SELECTION
• Clearly defined client group
• A clearly defined target market such as ‘non-agricultural
businesses with at least one year experience that have
lived and worked in the community for at least 3 years’
would be an example of a target market.
• As much as possible, avoid lending to start-up
businesses. The rate of failure among start-up businesses
is high. It is believed that 9 out of 10 new businesses fail.
• Clearly-defined geographic areas assigned to credit
officers
• It is generally much easier to assign geographic zones to
loan officers to improve follow-up and the efficiency of
your staff.
2. CLIENT SELECTION
• Client selection based on character assessment and
repayment capacity, not collateral.
• The individual’s reputation in the community and the cash
flow of the business are more important than traditional
collateral. Examining a potential client’s character and
their repayment capacity is crucial. Proper client selection
should be based on thorough credit investigation and
background investigation (CI/BI) and analysis of the
client’s debt capacity or cash flow.
• Over-reliance on collaterals, on the other hand, can lead
to improper client selection. Collaterals tend to create a
false sense of security in the lender. However, foreclosed
properties could fluctuate in value or be difficult to sell
when the economy slows down.
3. LOAN POLICIES
• Start loans small and increase lending based on successful
repayment and improvements in the client’s cash flow
• The step lending approach of starting out with smaller, short-term
loans generally less than 6 months and usually less than 4 months
(for first time borrowers) is a sound approach. Increase the amount
and term of the loans gradually as the client becomes known to the
micro finance institution.
• Be conservative in analyzing the client’s cash flow when determining
how much to lend
• We generally recommend that, for first-time borrowers, loan payments
should not exceed 25-35% of the client’s net income. But can
increase overtime as the micro finance institution gets to know the
client’s business better.
•
3. LOAN POLICIES
• Look at potential risks to supply, production and sales
• such as any potential risk to supplies (fish vending being
dependent on good fishing - what happens when the
weather is bad and fish are scarce?);
• production (who operates the business when the client is
sick or away?
• sales or customers (what happens when there is more
competition, a new store opening up across the street, or
temporary closing of the public market?).
 3. LOAN POLICIES
• Sufficiently high interest rates to make a good profit
• Because microfinance loans are small with frequent installment
payments, the transactions costs are high compared with those
of regular commercial loans.
• The interest rate for microfinance loans, therefore, should be
higher.
• Micro enterprise clients are willing to pay higher rates for a good
service.
• Most rural micro finance institutions charge a monthly interest
rate of 2-3% per month and service charges of at least 2-3%
deducted up front.
• The costs to the borrower are generally substantially less than
the 8-10% interest per month usually charged by the money
lenders.
4. DISBURSEMENT AND MONITORING
• Make Loan Officers responsible for loans they have
recommended for approval.
• Loan officers need to be held responsible for recommending and
approving loans. They should be the ones to conduct the client
intake, recommend the loan, and be involved with the follow-up. This
level of accountability reduces the risk of late payment. Loan officers
will be more careful in recommending loans for approval if they know
that they will be made directly responsible for collection, if any of the
loans they have recommended become delinquent.
• Involve the Loan Officers staff in the loan approval process
• Successful microfinance institutions decentralize their loan approval
in their branches through a branch-level credit committee made up of
loan officers and their supervisor, instead of the branch manager
alone.
4. DISBURSEMENT AND MONITORING
• Continuous contact with clients
• Regular contact with the clients should be maintained by
the loan officers. This practice not only enables the loan
officers to regularly monitor the condition of the client’s
business; it also strengthens the MFI-client relationship.
• Delinquency alarm signals
• Successful micro finance institutions also have in place a
series of “alarm signals” that are used to follow-up and
increase pressure on problem clients. These include
immediate follow-up the day a payment is missed or at
least the following morning. As well as follow-up visits by
the supervisor and manager when payments are missed
by 3 days and 7 days respectively.
4. DISBURSEMENT AND MONITORING
• Performance-based staff incentive scheme
• Successful MFIs also provide monetary incentives to their
staff based on their individual performance. Performance
is usually measured in terms of the number of accounts
supervised by the loan officer, size of the loan officer’s
loan portfolio, and the quality of their respective loan
portfolio, which is normally measured by the portfolio-at-
risk ratio (PARR).
5. CLIENT INCENTIVES
• Successful microfinance institutions provide Incentives to
their good clients by providing larger repeat loans
(depending on their debt capacity) and rebates on interest
rates or fees.
• These are done to encourage on-time installment
payments.
• On the other hand, late payments are also penalized by
imposing penalty charges for late installment payments.
6. CULTURE OF ZERO TOLERANCE
AGAINST LOAN DELINQUENCY
• Loans with payments delayed by just 1 day is considered delinquent
• Zero tolerance means that no level of loan delinquency, even how
small, is acceptable. The most important aspect of the culture of zero
tolerance is that the entire loan is considered to be delinquent even if
an installment payment is delayed by just 1 day.
• The micro finance institution must be willing to pursue delinquent
clients, in some cases, whatever the cost to establish and maintain
zero tolerance
• The micro finance institution should be willing to show it can be tough
in running after delinquent accounts, even to the point of filing cases
against selected delinquent borrowers in court, however costly, if only
to stress the point that the MFI is serious in collecting delinquent
accounts.
6. CULTURE OF ZERO TOLERANCE
AGAINST LOAN DELINQUENCY
• The culture of zero tolerance should start with the top
management
• Clients should not be expected to acquire a strong credit
discipline if the loan officers tolerate delayed installment
payments. And loan officers cannot be strict with their
clients in loan collection if the top management, itself,
tolerates delayed installment payments. The top
management should be blamed if loan delinquency
becomes widespread due to a break-down in credit
discipline.
 7. MANAGEMENT INFORMATION SYSTEM
• Critical for tracking the performance of the microfinance loan
portfolio
• The most critical information needed includes the total number
of borrowers, total amount of outstanding loans, the portfolio at
risk ratio (PARR), and the income generated from the portfolio.
• Should be able to track missed installment payments and the
loan officers responsible for their collection
• Should be able to show the performance of each Loan officer
• A good MIS should also be able to track the performance of
each Loan officer. This is needed especially when the micro
finance institution wants to implement an incentive scheme to
reward good-performing Loan officers.
CHAPTER 10
Delinquency
Management
 DELINQUENCY DEFINED

Example # 1

• A doctor told a couple that they could expect their

child to be born on November 7th, 2001. As
November 7th happened to be the wife’s
birthday, the scheduled date of child birth given
by the DOCTOR was indeed a source of joy for
the couple
DELINQUENCY DEFINED

Example # 1

• The child, however, had its own agenda and plan

and it was born only on November 18th, 2001.
The couple named the baby as “Richard
Delinquent”, as it did not keep up its scheduled
date of arrival into this world
 DELINQUENCY DEFINED

Example # 2

• The Grand J. Express, which connects Bamenda

to Buea is a very prestigious agency. The station
master was heard remarking, “ The engine driver should
really be congratulated for being on-time and that is why I
have 33 for him”.
• A bystander sarcastically replied, “Mr Station Master,
please remember that the bus coming in now is a
delinquent train that it is exactly 4 hours late”
DELINQUENCY DEFINED

• Delinquency is a condition,
• that arises when an
• activity or situation
• does not occur at its scheduled (or expected)
date
• i.e., it occurs later than expected
 DELINQUENCY DEFINED

Let us look at the earlier Examples

• Non-arrival of a bus at the scheduled time

• No birth of a baby at the scheduled date (9
Months and 7 days)
• No loan payments by a client as per the
scheduled date
 DELINQUENCY DEFINED

What is happening here?

• Obligations have not been discharged or activities

have not occurred as per the scheduled date or
time
 DELINQUENCY DEFINED

All of the above have one major aspect in

common

• All activities talk of a scheduled date and without

this scheduled or expected date, it would not be
possible to classify any of these activities as
DELINQUENT
• Hence, a major condition for defining
delinquency is the presence of a pre-agreed
schedule
 DELINQUENCY DEFINED

All of the above have one major aspect in

common (Cont…)

• Therefore, in micro-finance too, irrespective of

the type of activity (credit, savings, insurance
etc), it is very important that there is a pre-
agreed schedule concerning these activities.
Otherwise, it would be impossible to even
identify delinquency
 CREDIT RELATED DELINQUENCY

• The outstanding portfolio or the principal amount of

loan outstanding is the most important and largest
asset for an MFI as it generates Income (Interest
and Fees).
• In other words, it is the main product of the
business demanded by clients and it is the reason
for an MFI being in existence.
• Hence, ensuring that this asset is safeguarded
(from delinquency) is very crucial for any micro-
finance institution.
DEFINITION OF DELINQUENCY

• Delinquency is a situation that occurs when

loan payments are past due
• Delinquent loans are loans in which any
payment is past due
• Delinquent loans are also called as loans in
arrears
• Delinquent payments are also called as
payments in arrears
DEFINITION OF DELINQUENCY

• In other words, a borrower who does not make the

scheduled repayment on the due date is
considered to be in arrears.
• Even if a part payment has been made, the
borrower is still considered to be in arrears.
• At any one time, if the actual outstanding balance
is greater than the scheduled outstanding balance
then the participant is deemed to be in arrears (or
delinquent).
DEFINITION OF DELINQUENCY

• For example, If 10 installments of $ 100 each

were due as of yesterday and 9 installments of $
100 have been paid back as of today (by the
borrower), then, as per today, the loan is
delinquent loan which has one installment that
has not been paid back.
 DEFINITION OF DELINQUENCY

• Similarly, if an installment is due on the 5th of May,

1999 and if it is not paid on that date (by the
borrower), then on the 6th of May, the loan should
be classified as a past due loan.
 DEFINITION OF DELINQUENCY

DEFAULT

• Likewise, a clear definition of default is also

required.
• In best practices parlance, a borrower who has not
made three consecutive payments is considered
as a defaulting borrower.
• Even, if the participant is making interest payments
but 3 principle repayments remain overdue (either
partially or fully), then the loan is still classified as a
default loan.
DEFINITION OF DELINQUENCY

DEFAULT (Cont…)

• ANOTHER DEFINITION OF DEFAULT IS AS

FOLLOWS - A SITUATION THAT ARISES
WHEN THE BORROWER WILL NOT MAKE
HIS/HER PAYMENT AND THE MFI NO
LONGER EXPECTS TO RECEIVE THIS
PAYMENT.
Delinquency Management

• Delinquency is now a universal problem for established

and upcoming MFIs and therefore identifying its causes is
part of a critical process of dealing with it.
• Delinquency is a deviation from the expected behavior,
and in the case of credit it starts when the amount due is
not settled in full.
• It is a direct measure of risk exposure for the lender.
• All lenders would wish to keep delinquency at zero levels,
but this may not be possible all the time because of
various factors within the organizations and/or their
environments. It is a major challenge facing many MFIs
today.
Some of the effects of Delinquency
include;
• Reduces net cash flow
• Lowers profitability through lost revenues
• Raises cost of lending
• Reduces customer’s or client value
Preventing Delinquency
• And so given the damaging effects of delinquency the MFI
should focus efforts in preventing it as its treatment is
more difficult.
Prevention would be achieved through;
Provision of total quality services
Careful screening
Detailed orientation of loan officers and clients
High disincentives for defaulting
Proper implementation of policy & procedures
Accurate and timely information
In cases of serious defaults try the
following;
• Check levels of compliance with policies & procedures
• Review credit system
• Design incentives and tolerance levels for MFI
expectation
• Separate bad and performing portfolio for easier tracking
and decision-making • Set deadlines
• Reshuffle and/or retrench loan officers
• Discontinue bad clients as they complete loans
• Review information system
Signs of Delinquency
• Delinquency is a process that starts long before it
becomes evident. Depending on how it is handled,
delinquency can be averted.
• The institution, particularly the field staff, should be
vigilant and watch out for these signs, so that they take
requisite action to stem their evolution into full-fledged
delinquency.
Signs of Delinquency
1) Lateness or absenteeism:
This is a red flag and credit staff should be watchful of clients who are
routinely late or absent from meetings. These clients demonstrate
weak commitment to the institution and have the potential of defaulting
on their loans. Credit staff should also ensure that the group
constitution clearly spells out the penalties for lateness or absenteeism,
as well as giving guidelines for how long this situation can be tolerated.
2)Irregular Loan Repayments or Savings Contributions:
When a client begins submitting loan repayment installments
irregularly, or makes incomplete payments, this is another warning sign
of potential delinquency. Similarly, if a client makes partial payments
on mandatory savings contributions, this is an indicator that there may
be something amiss. When this situation arises, field staff need to
begin immediate investigation to establish whether the client is
encountering any problems that might compromise the performance of
the portfolio.
Signs of Delinquency
3) Poor Group Leadership:
Weak group leadership can contribute to delinquency,
because those holding offices in the group will not have will
to follow-up on their delinquent colleagues.
4) Conflicts in the Group: Group conflict points to weak
group cohesion. If group cohesion has been compromised,
then the peer pressure mechanism, which is the primary
mechanism that field staff rely on for follow-up at the group
level, is compromised.
In other instances when there is conflict, some clients will
deliberately refuse to repay their loans to punish the
colleagues with whom they may be in conflict.
 Signs of Delinquency
5) Refusal to Participate in Other Group Activities:
Many groups that are funded by MFIs have other activities that they run, e.g.
merry-go-rounds. If some group members stop participating in group
activities without explanation, this is an indication that these clients may not
be altogether committed to the group or its activities, including its relationship
with the MFI.
6)Late Disbursement of Loans:
The institution itself can contribute to delinquency. MFIs place a lot of
emphasis on client discipline in adhering to the policies and procedures of
the institution and meeting eligibility criteria to access financial services.
However, the same MFIs sometimes fail to uphold their end of the bargain
when it comes to loan disbursement. Because of institutional inefficiencies,
loans are sometimes disbursed late. This sends a very negative signal to
clients, who feel betrayed when they do not receive their loans on time.
Clients often do not feel obligated to repay their loans on time if the funding
institution has not upheld its end of the bargain.
Signs of Delinquency
7) Poor Record Keeping:
When a group’s or CO’s records are not up to date there is
cause for concern, and the CO or CO’s supervisor should
be vigilant and insist on bringing records up to date,
crosschecking against their own records to see whether
entries tally. Records that are not well kept could be hiding
delinquency or the onset of delinquency. It is therefore
critical that field staff insist on up to date records and make
a special effort to ensure record keeping is carried out
routinely and accurately.
Causes of Delinquency

• Delinquency is now a universal problem for established

and upcoming MFIs and therefore identifying its causes is
part of a critical process of dealing with it.
• Experience has shown that there are three major causes
of delinquency:
• i) Institution-related causes (80%)
• ii) Client-related causes (15%)
• iii) Externally driven causes (5%)
Institution-Related Causes of
Delinquency
• 1) No clear Vision and Mission:
• Some of the upcoming and even established MFIs do not have a
clear vision and mission, and therefore have no clear focus on their
objectives and the activities needed to achieve them.
• Consequently they have no clear policies and procedures to guide
them in their objectives, creating room for default to creep in.
• 2) Poor communication during Outreach and Oromotion:
• O&P is the beginning of the marketing process for the institution and it
is critical that potential clients understand the institution’s products
and services, their benefits.
• For example, clients should understand that the funds they access
from MFIs are loans not grants, and should be paid back according to
a schedule.
• Client failure to uphold their obligation will lead to penalties both for
the individual and the other members of the group.
Institution-Related Causes of
Delinquency
• 3)No sufficient business and loan appraisal:
• Many MFIs leave the responsibility of business and loan appraisal to
their clients while the clients do not have the requisite skills to carry
out proper appraisals and in many cases will recommend loan
amounts that the individual’s business is not able to absorb. MFIs
should take on the responsibility of carrying out appraisals & invest in
training their staff to carry out appraisals.
• 4)Quantity vs Quality:
• There is a great deal of institutional pressure for operations staff to
reach more and more clients and a lot of emphasis is placed on
numbers.
• In striving to reach these quantitative targets, little attention is paid to
the quality of those numbers.
• Microfinance operations need to balance numbers with quality, and
where targets have been set at unrealistic levels, staff should point
this out giving justification for their stance.
Institution-Related Causes of
Delinquency
• 5)Too much emphacy on sustainability
• As institutions strive to become sustainable, many have
stretched the sustainability concepts beyond the normal
expectations and as a result, have marginalized the staff
development process.
• This has resulted in recruitment and maintenance of
inefficient staff hence increases in delinquency.
• 6)Management Information Systems problem (MIS)
• MIS is the most important tool for managing operations
• The lack of it or inefficient systems in others has led to
inaccurate and/or late information leading to wrong
decisions.
• As a result, opportunities for default have been created.
Institution-Related Causes of
Delinquency
• 7) Information asymmetry btw MFIs:
• Lack of sharing of information among credit providers has
created loopholes for clients to cheat and obtain multiple
loans, which later become burdensome in payback.
• This means clients will be forced to make choices to pay
to other institutions while they default in others based on
perceived threats or benefits.
• 8) Too Rapid expantion
• Even though few practitioners admit that rapid expansion
is a serious cause for default, experience has shown that
it leads to poor marketing, inadequate preparation of
clients and minimal time for follow-up hence increase in
arrears and defaults.
Exogenous-Related Causes of
Delinquency
• Even though it is clear that exogenous factors such as:
(i) political
(ii) economic instability and
(iii) cultural inhibitions can cause serious defaults,
it is important to remember management is about that
which is within the institution’s control and ability.
MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS
1)Portfolio in Arrears Rate

Although this measure is the one most

commonly used among microfinance
programmes, it understates the risk to the
portfolio
Portfolio in Arrears Amount Past Due
= Outstanding Portfolio
1)Portfolio in Arrears
• Although this measure is the one most commonly used
among microfinance programmes, it understates the risk
to the portfolio because it only counts the payments as
they become past due, not the entire amount outstanding
(balance) of the loan actually at risk.
• For example, suppose a borrower with a six-month loan of
$300, with monthly repayments, misses the first four
monthly payments, totaling $200 in principal.
• According to formula a), only $200 would be in arrears, or
at risk.
• What about the remaining $100 of the loan that has not
yet come due? Should it be treated as part of a healthy
portfolio? Is it not really at risk as well?
 MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS
2) portfolio at risk
The portfolio at risk formula, which is used by banks and
other formal financial institutions, corrects for many of the
weaknesses described above
• PAR attempts to measure the default risk in a
portfolio by using past as well as future data.
• Its estimation is based on the key question that, if
all delinquent borrowers are to completely
default, then how much do we stand to loose?
MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

PAR

This formula measures the percentage of the

portfolio at risk or contaminated by late
payment.
Unpaid Principal Balance of Loans
Portfolio at
with Payments Past Due
risk (PAR) =
Outstanding Portfolio
MEASURING DELINQUENCY – KEY
BEST PRACTICES INDICATORS

Differences between PAR and Arrears Rate

• The key differences between the two portfolio

quality measures given below
Differences between PAR and Arrears Rate
S No Portfolio at Risk Arrears Rate
1 Provides a measure of the default risk Provides a measure of the default risk based
based on the Future (Outstanding of all on the past (just over dues of delinquent
borrowers with over dues) borrowers)
2 Tells us how much money (or % of Tells us just how much money (or % of
outstanding portfolio) will the MFI lose, outstanding portfolio) will the MFI lose, if
if each and every borrower were to the current over dues are not settled
default in the future
Differences between PAR and Arrears
Rate
defining “past due”:is it one day after the due date of a
payment, 30 days after this due date, or one day past
the final due date of the loan?
• The definition should reflect the time frame in which risk increases,
considering the type of loan (working capital, fixed asset, commerce,
manufacturing, and so forth), loan term, payment schedule, and the
institution’s past experiences.
• For example, a borrower with a sixmonth loan and monthly payments
may fall 10 days behind on a payment without the delay signifying any
real risk to the recovery of the loan. Including that loan as part of the
contaminated portfolio would exaggerate the actual level of risk to the
portfolio. If a market vendor with a two-month loan and weekly
payments falls behind by 10 days however, that probably indicates a
problem that puts the recovery of the payment in doubt, and
increases the risk of not recovering the outstanding portion of the
loan. In the latter case, the loan should be considered past due.
• One rule of thumb is to consider loans past due when a payment
completes one entire cycle without being made or, in most cases,
when two payments are past due.
EXAMPLE
• Calculate delinquency. For example, let's say your
portfolio is $2,000,000 and delinquent accounts are
valued at $200,000. The delinquency percentage is
$200,000 / $2,000,000 or 10 percent.
• Interpret the results. In our example, 10 percent of the
loan portfolio is past due at least 30 days on their
account.
 Chapter 11
PERFORMANCE
INDICATORS IN
MICROFINANCE
Learning Goals
• What are the different measures of an MFIs performance?
• How can these financial ratios be used to evaluate a
microfinance institution?

• Caveat: Some of the ratios discussed here are more

appropriate to MFIs that are mainly involved in micro-
credit.
• Much of this material is taken from the Technical Guide
published by MicroRate and the Inter-American
Development Bank, as well as from Armendariz and
Morduch, Economics of Microfinance
Four categories of indicators
• Portfolio Quality
• These ratios measure the quality of the MFIs loan portfolio. MFI
portfolios are generally of better quality than those of commercial
lenders.
• Efficiency and Productivity
• These ratios measure the efficiency with which the MFI conducts its
operations. MFI rates of efficiency are much lower than that of
commercial banks because their operations are highly labor-intensive.
• Financial Management
• These ratios ensure that there is enough liquidity to meet an MFI’s
obligations to disburse loans to its borrowers and to repay loans to its
creditors.
• Profitability
• These ratios summarize the overall performance of the MFI.
Portfolio Quality
• Portfolio at Risk
• Provision Expense Ratio
• Risk Coverage Ratio
• Write-Off Ratio
Portfolio at Risk
• PAR = Outstanding Balance in Arrears over 30 Days plus
Restructured Loans/ Total Outstanding Gross Portfolio
• It shows the portion of the portfolio that is “contaminated”
by arrears and therefore at risk of not being repaid.
• This ratio is relatively manipulation-free, compared to
ratios such as the repayment rate which may not take into
account loans that are past due.
• In cases of agricultural loans, where there might be
balloon payments, PAR 30 ratios may be irrelevant
because there is no warning of non-repayment until the
event actually occurs.
Loan Loss Provisions
• A loan provision records the possibility that an asset in the
balance sheet is not 100% recoverable. Provisions
expense this anticipated loss of value in the portfolio
gradually over the appropriate periods in which that asset
generates income, instead of waiting until the actual loss of
the asset is realized. Provisions are only accounting
estimates and entries, and they do not involve a movement
of cash, like saving for a rainy day.
• Loan loss provisions charged to a period are expensed in
the income and expense statement. The corresponding
credit accumulates over time in the balance sheet as
reserves shown as a negative asset. The accounting
transaction is: Debit Loan loss provision; Credit Loan
loss reserve
Provision Expense Ratio
• Ratio = Loan Loss Provisioning Expenses/ Period
Average Gross Portfolio
• The Loan Loss Provisioning Expense is an income-
statement number, not a balance-sheet number.
• It represents the charge to income that is taken to take
into account future loan losses.
• For non-regulated MFIs, this may be at the discretions of
the MFI and thus may be underestimated.
• Even where regulatory guidelines are satisfied, an MFI
could show profits by scaling back on provision expenses.
Risk Coverage Ratio
• Ratio = Loan Loss Reserves/ Outstanding Balance on
Arrears over 30 days plus Refinanced Loans
• This shows what percent of the portfolio at risk is covered
by actual loan loss reserves.
• Refinanced loans are added to the denominator because
a non-performing loan can be converted into a performing
loan by the simple device of allowing the borrower to
extend the payment period or by refinancing it.
Write-off Ratio
• Ratio = Value of Loans Written Off/ Period Average Gross Portfolio
• This ratio represents the loans that the institution has removed from
its books because of a substantial doubt that they will be recovered.
• Loan losses or write-offs occur when it is determined that
loans are unrecoverable. Because loan loss reserves
already provided for possible losses, loan losses are
written off against loan loss reserves and are also
removed from the outstanding portfolio. The accounting
transaction is: Debit Loan loss reserve; Credit
Outstanding loans
• Write-offs do not affect the net portfolio outstanding
unless an increase in the loan reserve is made. When
write-offs are recovered, they are booked in the income
and expense statement as miscellaneous income.
Efficiency and Productivity
• Operating Expense Ratio
• Cost Per Borrower
• Personnel Productivity
• Loan Officer Productivity
Operating Expense Ratio
• Ratio = Operating Expenses/Period Average Gross Portfolio
• Operating Expenses include Personnel Expenses,
Administrative Expenses, Depreciation and any other expenses
necessary for the operation of the MFI.
• Interest and provision expenses, as well as extraordinary
expenses are not included.
• This ratio measures the institutional cost of delivering loan and
other services.
• Operating Expense Ratios are related to loan size and portfolio
size.
• Similarly, rural MFIs have higher operating expenses, since
their clients are more dispersed.
• Hence one should be careful in comparing this ratio across
MFIs.
Cost per Borrower
• Ratio = Operating Expenses/Period Average Number of
Borrowers
• This measures the cost of maintaining an active borrower.
A borrower is an individually identifiable person who has
at least one current outstanding loan. All borrowers in a
group loan are counted separately.
• Since the size of the portfolio is not included in the
denominator as in the Operating Expense Ratio
calculation, MFIs with larger loans do not automatically
appear more efficient.
• Pawn loans and consumer loans are excluded from the
denominator, since they require far less screening and
analysis efforts. (Why?)
Personnel Productivity
• Ratio = Number of Borrowers (excluding Consumer and
Pawn Loans)/ Total Staff
• Since MFIs are very labor intensive, this is a very
important measure of efficiency.
• Low staff productivity often is due to excessive paperwork.
• A variant of this ratio is the loan officer productivity ratio,
where the denominator includes all personnel whose main
activity is the direct management of a portion of the loan
portfolio; it does not include administrative staff or
analysts who process loans without direct client contact.
Financial Management
• Funding Expense Ratio
• Cost of Funds Ratio
• Debt/Equity Ratio
Funding Expense Ratio
• Ratio = Interest and Fee Expenses/ Period Average Gross
Portfolio
• This ratio measures the total interest expense incurred by
the institution to fund its loan portfolio. The difference
between the portfolio yield and the funding expense ratio
is a measure of the net interest margin.
• The funding expense ratio plus the provision expense
ratio plus the operating expense ratio determines the
minimum lending rate an MFI must charge to cover tis
costs.
• If the MFI uses non-debt sources of finance, obviously this
ratio underestimates the total cost of funds.
Cost of Funds Ratio
• Ratio = Interest and Fee Expenses/ Period Average
Funding Liabilities
• The denominator contains all funding liabilities of the MFI,
including deposits, commercial funds, subsidized funds
and quasi-capital. It does not include accounts payable,
since these are short-term obligations not directly related
to the lending operations of the MFI; neither are mortgage
loans obtained to finance the MFIs buildings, for the same
reason.
• This ratio measures the average cost of the company’s
borrowed funds and shows whether it has access to low
cost funding sources, such as savings.
Debt-Equity Ratio
• Ratio = Total Liabilities/Total Equity
• Total liabilities include everything the MFI owes to others.
• This ratio measures the overall leverage of the institution.
Traditionally, NGO MFIs have low debt-equity ratios, since
their ability to obtain commercial debt is limited.
• Most MFIs have lower leverage than commercial banks.
Profitability /Sustainability
• Profitability Ratios
• Return on Equity
• Return on Assets
• Portfolio Yield
• Sustainability Ratios
• Operating Self-Sufficiency
• Financial Self-Sufficiency
Return on Equity
• Ratio = Net Adjusted Income Before Donations (after
taxes)/ Period Average Equity
• This ratio measures the profitability of the institution.
• This is more important for for-profit institutions. For non-
profit institutions, it can be used as a measure of
commercial viability.
• When comparing across MFIs, differences in accounting
policies have to be taken into account.
Return on Assets
• Net Adjusted Income Before Donations/Period Average
Assets
• This is an overall measure of profitability that reflects both
the profit margin and the efficiency of the institution, as
can be seen from the following identity.
• ROA = Net Adjusted Income/Revenue x Revenue/Assets.
Portfolio Yield
• Ratio = Interest and Fee Income/ Period Average Gross
Portfolio
• This measures how much money the MFI actually
collected from its clients.
• A comparison between the portfolio yield and the average
effective lending rate gives an indication of the MFI’s
efficiency in collecting from its clients.
• Since portfolio yield is a cash measure, it is not affected
by accrual accounting practices that might mask bad
loans.
Operational Self-Sufficiency
• OSS = Operating Revenue/(Financial Expense + loan-
loss provision expense + operating expense)
• Revenues come from interest and fees paid by borrowers,
as well as income from investments and from other
services (e.g. sales of insurance products)
• The denominator measures the cost of raising capital.
• It includes the interest and fees that the institution pays to
commercial banks, shareholders and the other investors.
• It includes interest paid to depositors.
• The loan-loss provision is the amount set aside to cover the cost of
loans that are not expected to be recovered.
• Operating Expenses include rent, staff wages and transport costs
among others.
Operational Self-Sufficiency
• A value of 100% or more for OSS indicates full
operational self-sufficiency; such an institution does not
need outside support.
• A value under 100 indicates that the MFI relies on
continued outside funding to maintain its current level of
operation.
• However, some of the operations of the MFI may be
subsidized. In order to adjust for this, we have the
financial self-sufficiency ratio.
Financial Self-Sufficiency
• FSS = Adjusted Operating Revenue/(Financial Expense +
loan-loss provision expense + operating expense + expense
adjustments).
• Operating Expenses are adjusted for subsidized cost-of-funds
and for in-kind donations.
• Cost-of-funds are computed at market rates and the
difference is added back to the financial expense.
• The market rate used should be the prime rate, adjusted for
the riskiness of microloans.
• In-kind donations add in the cost, or fair market value, of
goods and services that the MFI does not pay for but that are
important to the operation of its business. This could include
technical advice, training, rent, use of transport and so on.
• If FSS is below 100, the institution is considered subsidy-
dependent.
CHAPTER 12
Social Performance Standards
 In the microfinance arena, success of a
microfinance institution (MFI) has long been
associated with financial performance
outcomes measured by loan portfolio quality,
operating efficiency, and profitability.

Yet, these indicators tell only part of the

performance story in microfinance….
 Measuring the double bottom
line
There is a growing recognition that MFIs
should be held accountable for the
achievement of social outcomes as well as
their financial performance.

The development of ways to measure that

social performance has been the focus
since 2005 of a global industry-wide Social
Performance Task Force (SPTF).
 The SPTF
Composition: consists of over 350 leaders from all over the world from
every microfinance stakeholder group: practitioners, donors and investors
(multilateral, bilateral, and private), national and regional networks, technical
assistance providers, rating agencies, academics and researchers, and
others.

Objectives:
• Promote and support the management of social performance of MFIs
• Work towards developing standards and guidelines for social performance
• Assess the market demand for social performance information – who
wants the information and what information is considered most relevant?
• Advocate the value, importance and imperative of social performance in
the MF industry
• Coordinate/Communicate/Disseminate information about global activities
related to SP via the SP Resource Center
 SPTF
Governance
The SPTF is governed by a 13 Member Steering
Committee, with members from every region and a fixed
number of representatives from each of the major
stakeholder categories:

• 2 MFIs: 1 NGO and 1 NBFI or bank

• 2 NGO networks
• 3 MFI networks: 1 Global, 1 Regional and 1 National
• 2 donors
• 2 social investors
• 2 from social performance support organizations

For more info please visit: http://www.sptf.info/page/steering-committee

 MIX (Microfinance Information Exchange, Inc.)

As the leading business information provider

dedicated to strengthening the microfinance sector,
MIX has been charged by the SPTF to be the
information platform where the social performance
indicators will be collected, analyzed and publicly
displayed
 Basic information about MIX

About MIX: MIX is a non profit organization focused on strengthening

microfinance institutions by improving transparency and the
flow of information within the sector.

Our sponsors: - CGAP - Citi Foundation

- Deutsche Bank Americas Foundation - Omidyar Network
- Bill & Melinda Gates Foundation - IFAD
- Open Society Institute & the Soros Economic Development Fund

And others, including the Michael & Susan Dell Foundation

for the Social Performance Standards Program
 MIX role as a reporting agency:
MIX collects, analyzes, and disseminates
general business information, financial and
operational data on MFIs, as well as general
business information on funders – investors and
donors – and service organizations, such as
networks, rating agencies and other market
facilitators
Networks of MFIs

Donors and
Commercial Investors

Clients of
MFIs MFIs

Regulators

Rating
Agencies
 MIX agenda on Social Performance Standards

• Be a leader in the process of creating a core set of indicators for the

microfinance industry to report on social performance

• Collect data on the social performance indicators and make them

available publicly

• Improve social performance benchmarks which will eventually be

integrated into the MicroBanking Bulletin benchmarks

• Disseminate and promote information sharing and news about social

performance reporting and standardization.
 MIX and the SPTF
MIX is a member of the steering committee of the SPTF
and is also leading the SP indicators group within the SPTF.
The role of this group consist of:

• Develop a system for verification of social indicators

• Identify technical assistance needs and identify funding

sources

• Promote reporting of social indicators to the MIX

 Why do we need standardized
indicators to measure the social
performance of an MFI?
 To determine whether microfinance institutions are meeting the social goals set
out in their missions

 To improve both financial and social performance of an MFI

 To provide tangible indicators of achievement and attract funding from donors

and social investors

 To increase the level and quality of information transparency in the microfinance

industry

 To benchmark an MFI’s performance against peers

Which criteria did the SPTF follow in the selection
of the social performance indicators?

Indicators had to be:

 Relevant

 Easy for the MFI to obtain

 Easy to verify

Not confidential for the MFI

THE SPS REPORT
 What is social performance?

Social performance is the effective translation of an institution

mission into practice in line with accepted social goals that relate to:

 Reaching poorer and excluded clients

 Improving the lives of clients and their families
 Widening the range of opportunities for communities

Social performance encompasses the entire process by which impact is

created. It includes analysis of an institution’s declared objectives, the
effectiveness of its systems and services in meeting these objectives, related
outputs and outcomes (such as reaching larger numbers of very poor
households) and success in effecting positive changes in the lives of clients
(impact).
 Social Performance Indicators Framework
Intent Internal Outputs Outcomes Impact
systems/activities

[---------------------------- PROCESS---------------------------- - - -- ] [-------------------------------- RESULTS -----------------------------]

Strategies Policies & Achievement of
Intent & Systems Compliance social goals

Q1–Mission & Q3–Range of Products and Outreach

Q8– Social responsibility to
Social Goals Services Q11- Geographic outreach
clients
Q2- Governance (financial & non-financial) Q12- Women outreach
Q9-Cost of services to clients
Q4–Training of staff on Q13- Clients outreach by
Q10–Social responsibility to
social performance lending methodology
staff
Q5–Staff performance Q15 – Social responsibility to
Indicators

appraisal and incentives Outputs and outcomes

the community
Q6–Market research on Q17-Products
Q16–Social responsibility to
clients Q18–Employment (Family &
the environment
Q7–Measuring client Hired in credit supported ents.)
retention Q19–Children in School
Q14–Poverty assessment (girls/boys)
Q20–Poor and very poor clients
Q21–Clients in poverty
Q22–Clients out of poverty

MFIs that want to update their profile on MIX Market with the social performance indicators are expected to be able to report
information on the 13 indicators contained in Part I of the report (indicators highlighted in red)
 MFIs that have reported ( Feb – May
2009)
• The report was sent on February 2009 to all MFIs
registered on MIX Market

• In 3 months since the launch of the reporting form, over

70 MFIs have already reported on SP indicators

• The reports which have already been reviewed by MIX

are published on MIX website at this address:
http://www.themix.org/standards/social-performance

• The report is currently available in 3 languages: English,

French and Spanish. It will also be available in Russian,
Chinese and Arabic in the near future.
How to ensure quality of the data reported:

Besides performing consistency-check of the data reported by the MFIs, MIX

is also engaged to provide deeper information of the data in the following
ways:

• Interview the MFIs that have reported to acquire a deeper knowledge about
the information provided. Articles are published on the new SPTF indicators
blog (ran in 3 languages: English, Spanish and French) and on the newsletter
about SP reporting.
For more info visit: http://www.themix.org/standards/social-performance

• Ask MFIs to provide written documents in support of the information provided

to be posted on MIX website.
 External data validation
Social ratings are the principal instrument that
provide detailed information about the data reported
by the MFIs. Moreover they are a valuable instrument
for data validation and for identifying areas that need
improvement

To know more about social rating agencies you can

visit:

http://www.microfinancegateway.org/p/site/m/template.
rc/1.11.48260/1.26.9233/

Rating Fund:
Benchmarks and diamonds system

 When a considerable number of MFIs will have reported and a

consolidated system of data verification will be in place MIX will start to
create benchmarks on social performance

 Given the qualitative nature of the data, benchmarks will necessarily have
a strong focus on the country and working environment in place

 In the future social performance will be integrated to financial

performance in the diamond system of transparency
MIX next steps on social performance for the year 2009

- Participation at the SPTF Meeting in Madrid (1-5 June, 2009)

Goals of the meeting: Hear the voice of the MFIs and regional, national networks about the process
of data reporting; address issues regarding improvement of MFIs’ MIS; assess areas of social
performance where MFIs need more technical assistance; define a clear process for SP data
validation

- Launch of the SPTF Blog on social performance indicators and

newsletter (June 2009)

Goals: create a platform of information, analysis, exchange of experience and best practices about
social performance management of the MFIs reporting on the indicators to MIX

- Implementation of MIX Market 2.0 including data on SP (Autumn 2009)

Goals: integrate social performance data into the new MIX Market website (2.0) which will allow to
display SP data from MFIs on our database; create a database with country data regarding social
performance to serve as a background for the data reported by each MFI
 PROFITABILITY & SUSTAINABILITY:
WHAT WORKS FOR MICROFINANCE INSTITUTIONS

Presented By
Bunmi Lawson
MD/ CEO, Accion Microfinance Bank Ltd

CBN ANNUAL MICROFINANCE CONFERENCE

7/02/2012
 Why Do Microfinance Institutions Exist?
• To provide a panacea to poverty
• To provide access to funding to the poor for income
generating purposes
• To provide a range of financial services to the poor
• To bank the unbankable and underserved
• To make a profit
 Triple Bottom Line (TBL)
• TBL argues that companies should be preparing three different (and

quite separate) bottom lines. One is the traditional measure of corporate

profit—the “bottom line” of the profit and loss account.

• The second is the bottom line of a company’s “people account”—a

measure in some shape or form of how socially responsible an

organisation has been throughout its operations.

• The third is the bottom line of the company’s “planet” account—a

measure of how environmentally responsible it has been.

 Triple Bottom Line (contd.)
• A triple bottom line enterprise seeks to benefit many constituencies, not exploit

or endanger any group of them.

• In some ways, the TBL is like the balanced scorecard as it operates on the same

principle of :what you measure is what you get, because what you measure is
what you are likely to pay attention to.
Triple Bottom Line

Environme
nt

Social

Profit
 Well defined mission

For example in this mission statement -

“ To economically empower
micro-entrepreneurs and low income earners
by providing financial services
in a sustainable, ethical and profitable manner”
 Bottom Line 1 – Profit
• Some people infer that Microfinance should be non profit as profit making is

seen as profiting from the poor

• There is the worry that an excessive concern for profit in microfinance will lead

MFIs away from poor clients to serve better-off clients who want larger loans

• Profit focused microfinance may lead to over-indebtedness of poor clients

• M. Yunus rightly says that the lure of profits has, in some cases, attracted

players with questionable motivations and with practices that must be

condemned.
 The benefit of making profit
• Attracts Capital

• Attracts better and more qualified Board for good

Governance

• Attracts better qualified and competent/ committed staff

• Generates additional resources

• Enables the MfB Reach more people in its social mission

• Empower more people

 Non- Profit
• Not sustainable short term life
• Can only make small size loans
• Usually small without reaching scale
• Threat of insolvency if donation flow is cut off
• Poor customer service
• Low innovation
• Less transparent than For- Profit
• Poor use of technology
• Profit is good for the Microfinance Institution
 How profitable should Microfinance Banks be?
• How Profitable?
• A balance must be struck between making a profit and social issues
that are pertinent to the existence of the customer/ business
• What is acceptable in the Environment/ Market of
operation?
 How profitable should Microfinance Banks be?
• What are the costs of operations? Are they efficient?
• Microfinance is a high cost business. As a business model, its greatest challenge is

to lower the operating costs in order to reduce the cost of service borne by
borrowers.

• Since operating expenses are the main component of interest rates, identifying

their drivers and quantifying them constitute the first steps in finding ways to
improve efficiency of microfinance institutions worldwide.

• The fixed cost of processing loans of any size, the assessment of potential

borrowers, their repayment prospects, administration of outstanding loans,

collecting from delinquent borrowers, all affect the costs of operations
How profitable should Microfinance Banks be?
• What are the funding costs?
• How expensive is it to get funding?
• Cost of funding may be related to interest rates charged
• Source for cheaper funds/ grants, etc
• Subsidized loans
• Non – Interest loans
• Increase in savings deposit
• “As MFIs, we have always stated that the growth of the base (of customers) will be
critical to the reduction of costs. In addition, we can reduce costs if cheaper source
of funds are made available to us,” Vijay Mahajan (President, Microfinance
Institutions Network).
How profitable should Microfinance Banks be?
• ROI benchmarks with competitors in the same market
• What ROI attracts additional investments?
• Beware of Mission Drift
• Pressure to expand outreach can pose a dilemma to MFIs. The concern is that

efforts to reach a significant scale by securing financial sustainability may

lead to a tendency to provide larger loans to less poor clients and to employ
stricter loan screening procedures. In other words, scale-up could lead to a
drift from an MFI’s poverty alleviation mission.
 Generating profit in a Microfinance Bank
• Income
• Appropriate pricing policy
• How many competitors and similar products are in the market and in what price structure?
• A complete understanding of production costs, profit objectives, customers, competition, and
other market information helps you determine the pricing strategy that best fits your product
and company.
• What Interest rates to charge? Flat, declining, mixture of both.
• What fees to charge? Administrative/ transaction, Service fees, etc
• With this information, you know the minimum interest rate you can charge to break even and
the maximum interest rate you can charge based on an estimate of customer demand.
• Competition and profit objectives factor in to determine the interest rate chargeable
DETERMINANTS OF PRICE?
Price Ceiling (“What will the market bear?”)

? ?
?
Final Price (How does the company
position its product/service? ?
Acceptable
Price ?
Range ? ?
?
? ?
? ?
Price Floor (“What are the company's costs?”)
 Generating profit in a Microfinance Bank
• Income contd.
• Pricing Strategies
• To determine the interest rates to be charged, the MFI will need to factor in the effects of

competition and profit objectives. This is difficult due to the subjectivity and estimates
involved. To ease subjectivity, most companies subscribe to one of five main pricing
strategies:
• Premium pricing
• Value pricing
• Cost/plus pricing
• Competitive pricing
• Penetration pricing
Generating profit in a Microfinance Bank

Strategy Substitutes Entry barriers Price Economies of Goal

sensitivity scale
Premium None Very high None None High per unit
margin
Value Few High Low Low Profit

Cost/plus Some Medium Medium Medium Market share and

profit
Competitive Many Low High High Protect market share

Penetration Many Low High High Market growth and

leadership
 Generating profit in a Microfinance Bank
• Income contd.
• What do customers need? (Adequate product development)
• What value and benefits do customers perceive in the product and how willing are
they to pay for it?
• What can customers affect?

• Increasing competition in the microfinance sector, means that customers can switch

to other providers if their needs are not being met.

• Our approach should be towards researching and responding to customer needs

with a strong, well-defined corporate brand, which is key to reaching and retaining
more target clients.
 Generating profit in a Microfinance Bank
• Income contd.
• What resources do we have?
• Good Governance – Qualified & Experienced Board
• generates investor goodwill and
• governance plays a critical role in the performance of MFIs . The independence
of the board and a clear separation of the positions of a CEO and board
chairperson have are crucial to the success of the organisation.
 Generating profit in a Microfinance Bank
• Income contd.
• What resources do we have?
• Human Resource
• After recruitment, the training & capacity building figure out as a predominant
factor in preventing turnover in an MFI.
• HRD should align with Business Strategy - The Human Resource person must be
involved at the strategic level of decision making.
• Churchill (1997) report on Managing growth: The Organizational Architecture of
Microfinance Institutions signifies that the foundation of any MFI lies at the locus of
interaction between the institution and its customers. The role of front line staff
assumes critical importance.
 Generating profit in a Microfinance Bank
• What resources do we have?
Human Resources contd.
• Train staff on core ideology, mission and vision
• Mentorship/ On the job training
• Continuous professional development
• Senior Managers development
• MFIs that have the capacity—including a proven lending methodology, a well-managed staff

learning program, an effective information system, access to large volume of loan capital, and the
administrative capacity to process volumes of applications efficiently; are probably ready to
achieve economies of scale in operation.
 Generating profit in a Microfinance Bank
• Income contd.
• What resources do we have?
• Scale/ Outreach
Minimum number of Clients needed to be profitable
Customers willing to pay N100/ transaction
Cost of business = N1,000,000
You must have at least 100,000 clients to be profitable
• Mass Market Strategy
• Breakeven point
 Generating profit in a Microfinance Bank
• Reducing Cost
• Scale
• reduce cost per borrower
• Reduce dependence on donor funds
• Design determines cost – design the product with cost reduction in mind
• Standardize processes
• Retention of customers reduces cost
• Lower cost of customer acquisition
• Reduced use of resources based on good repayment / behavior
 Generating profit in a Microfinance Bank
• Reducing Cost
• Reduce overheads
• Procurement Costs
• Better customer service leads to more sales
• Retention reduces cost
 Generating profit in a Microfinance Bank
• Cost - Reducing Cost
• Streamline processes
• Efficiency
• Using and improving on technology available
• Balance control Vs service efficiency
 Generating profit in a Microfinance Bank
• Reducing Cost
• Invest in new and relevant technology
• Technology driven Vs manual
• POS
• ATM
• Mobile Banking
• Core banking software
• Automate key processes: accounting, HR etc
• Risk Management
 Social assessment score card
Objective of most Microfinance Banks is to address poverty and help increase
income .

S = Social Mission AMfB has

developed its Social
and Environmental
O= Outreach
Assessment Score
Card
C = Client Service

I = Information, Transparency & Consumer

protection

A = Association with the Community

L = Labour
 Social Mission
Performance Indicators
1. Define Social Mission
2. Evidence of Commitment to Mission
• Staff: Board: Strategic Plan
3. Evaluation of Mission Fulfillment
- What should be evaluated/monitored
4. Client Outreach
• % Category of Client
• % Income to GDP
• Average Loan Size
• Increase in income over 5 years
 Outreach
Performance Indicators
1. Geographical Coverage – Local Government and Growth in Numbers.
2. Depth of Reach
• % Female
• % Male
• % Education Level
• % Without Prior Banking
3. Products and Services – Simple, Easy & Friendly
 Client Service
Performance Indicators
1. Client Retention
2. Benefit to Long Standing Customers
 Information Transparency & Consumer Protection
Performance Indicators
1. Transparency
• Disclosure of loan terms to clients
2. Disclosure of Accounts on the Mix
3. Website
4. Consumer Protection
5. Code of Conduct for Board & Employees
SMART Campaign- aligning behind six key principles of consumer protection
 Association with the Community
Performance Indicators
1. Defined Corporate Social Responsibility Project
• Positive impact on clients

• Benefit to Immediate Community

• Benefit to larger community

2. Leadership role in NAMB

 Association with the Community contd.

3. Environmental impact
• Exclusion List
• Firearms
• Alcoholic beverages
• Tobacco
• Gambling, Casinos
• Radioactive Materials
• Harmful Child labour
 Labour Climate
Performance Indicators
1. Staff Retention %

2. Training Cost as a % of Salary

3. Compensation Bench Mark

4.Staff Feed Back mechanism

 Key pitfalls for Microfinance Banks
• Weak Board/ Governance
• Balance of Control
• Weak Management
• Poor Salary Scales
• Poor recruitment practices
• Lending Methodology
• Less than N250,000 loan to low income should be at least 80%
• Weak Risk Management Methodology
 Key pitfalls for Microfinance Banks contd.
• PAR Delinquency Management
• Strict compliance to repayment terms –
• from one day, charge penalties
• Reward good clients
• Weak Technology
• Invest in Technology over cars, buildings, etc
• Weak Branding Methodology
• Awareness
• Communication Gaps and Inadequate Awareness
Profitability and sustainability of MFB 2009: MIX
• Falling returns especially from East and
Southern Africa. Drop in revenues

• Steady rise in PAR which has raised red

flags amongst institutions.

• Operating Expenses remain the highest

in the world. (19%)

• Financial expense are amongst the lowest

globally, due to strong deposit base.

• Low Levels of Financial intermediation

correlate with poor performance

• Social mission still remains a challenge.

(i.e. Poverty alleviation, Women
empowerment , Endorsing the Client
Protection Principles-CPPs and
incentives/benefits)

• Social Performance integrated into the

Strategic Planning process
Profitability

What are the two key profitability

ratios?

Operating Return on Assets (ROA)

Operating Return on Equity (ROE)
Profitability: Return on Assets (ROA)

Measures the capacity of the MFI’s assets to generate

profits

Indicator:

Net Operating Income

Average Assets
Profitability: Return on Assets (ROA)

Industry Averages
All FSS Africa LA Asia Banks NGOs
MBB 0.6% 2.6% (1.1%) 1.7% 0.2% 0.8% 0.8%

ACCION 5.1% 4.94% 0.6% 5.9% N/A 6.1% 1.8%

ACCION > 3.0%
CAMEL

AMfB
Profitability: Return on Equity (ROE)

Measures MFI’s ability to increase equity base via

earnings from operations

Indicator:

Net Operating Income

Average Equity
Profitability: Return on Equity (ROE)

Industry Averages
All FSS / Africa LA Asia Banks NGOs
OSS
MBB 3.2% 11.9% (3.2%) 7.2% 2.3% 5.8% 2.4%
ACCION 20.2% 22.6% (0.3%) 22.8% N/A 24.6% 6.3%
Partners
ACCION > 15.0%
CAMEL

AMfB
Profitability: Operating Self-Sufficiency

Averages
Reg. NGOs LA Africa All Partners
Op Rev / (Fin + Op 105% 119% 116% 110% 115%
Expenses)

ACCION CAMEL Recommended Range

MFIs
Operating Revenue/(Financial + Operating > 100%
Expenses)

AMfB
Profitability: Operating Self-Sufficiency

Industry Averages
All FSS Africa LA Asia Banks NGOs

Op Rev / (Fin + 124% 137% 117% 123% 123% 132% 132%

Op Expenses)
ACCION Network
Op Rev / (Fin + 115% >120% 110% 116% 105% 119%
Op Expenses)

AMfB
Efficiency & Productivity

Operating Efficiency:

• How much is being spent to maintain the outstanding

portfolio?

• The efficiency of an MFI can be controlled: how much is being

spent on what?

• Important variables include: Staffing, administrative

expenses, client base

Productivity:

• Personnel expense is usually the largest operating expense.

Larger caseload = greater efficiency!
Operating Efficiency

Definition: Measures the MFI’s efficiency

level

Indicators:

Operating Expenses
Average Portfolio
or
Operating Expenses
Average Assets
Profitability: Operating Efficiency

Industry Averages
All FSS Africa LA Asia Banks NGOs

MBB 19.2% 16.3% 31.7% 19.5% 16.0% 16.4% 23.5%

ACCION 27.6% 23.7% 42.0% 25.0% N/A 26.9% 30.0%

Network
ACCION < 20%
CAMEL

AMfB (Portfolio)

AMfB (Assets)
Comments
CHAPTER 13
Women and Microfinance
Learning Goals
• Why are most microfinance borrowers women?
• Is targeting women efficient?
• Does targeting women help self-sustainability goals?
• Does microfinance help women achieve equality in the
home?
• How can microfinance help promote social capital and
women’s empowerment?
• Is the focus on women too restrictive for the future of
microfinance?
History
• When Grameen Bank started, most borrowers were men; just
44% of clients were women in Oct. 1983
• In 1986, the number was about 75%; in 2008, it was 95%.
• 100% of Grameen USA’s clients are women.
• Women’s roles have become more important in the wake of
other accompanying socioeconomic transformations
• fertility rates in countries like Indonesia, Bolivia and Bangladesh have
plummeted
• Female illiteracy rates have also dropped sharply
• These countries are heavily involved in microfinance.
• This implies that microfinance can extend and develop these
transformations.
• However, the data on the development and efficiency fronts
are not necessarily consistent.
Commercialization and Gender
• Evidence shows that as the microfinance industry
commercializes, the number of female clients drops.
• Women tend to be among the poorest of an MFI’s clients.
• In Frank’s (2008) study, NGOs that converted to RFIs
(regulated financial institutions) tended to have a smaller
proportion of women borrowers.
• In their study, loan size also tended to increase after
conversion. There is evidence elsewhere also that loan
sizes to women borrowers are smaller.
• Bauchet and Morduch (2010) find a negative correlation
between operational self-sufficiency (i.e. profitability) and
the percentage of women borrowers served.
Gender and repayment rates
• On the other hand, there is strong evidence (Armendariz
and Roome, 2008) that women are better about repaying
loans.
• In the 1995 Khandker at al. study, 15.3% of male
borrowers struggled to repay loans, while only 1.3% of
women were having difficulties.
• Another study (Kevane and Wydick, 2001) found that
female borrowing groups misused funds less often.
• How do we explain these results? Is there something
special about women that leads to greater efficiency in the
use of capital and/or lower monitoring costs? Does this
mean that loans are better given to women than to men?
Gender and Repayment Rates
• Women seem to take less risks. If so, the higher repayment rates of
women may simply reflect project risk.
• Women may have difficulty finding capital. Hence they may be willing
to borrow in environment such as joint liability groups where
monitoring costs are low, which may lead to higher repayment rates.
That is, women may be willing to pay an additional tax in the form of
unproductive time attending group meetings etc because their
opportunity costs of time are lower and their alternative sources of
capital are fewer.
• For cultural reasons, women may also find it difficult to find jobs;
hence they may work around the house rather than in other and
varied locations; this may make it easier to monitor them.
• The choice of investment projects, such as tending to goats, sewing,
baking goods or keeping a small shop may be easier to monitor.
• If so, higher repayment rates may not be due to gender.
Gender Differences in Rates of Return
• Although repayment rates are lower, there is some evidence that
average returns to investments by men are higher. This may explain
Bauchet and Morduch’s findings of negative correlation between
profitability and focus on women.
• De Mel, McKenzie and Woodruff (2009) find that mean returns to
capital are higher for men than for women in Srilanka.
• They find that this is due to the nature of investments made by
women, which tend to be less productive. Again, the reason for such
investments may be cultural.
• There is also evidence that even when men and women both invest
in the same activity, e.g. farming, men have higher returns.
• However, the return for this is that men’s farms have greater inputs.
It seems that the woman’s land is starved of required inputs relative
to the man’s. This is, obviously, economically inefficient.
• On the other hand, a Guatemalan study finds no difference between
men and women in economic responses to credit access. They are
both efficient in generating employment. There may be cultural
differences that explain this geographical variation.
 Microfinance and female empowerment

• What we see, then, is that there may be inefficient allocation of capital

and other resources to women. They may also have reduced (and
inefficient) access to jobs.
• Microfinance might even the playing field in giving them more access to
such resources. If so, economic efficiency could be increased.
• In addition, microfinance may help to reduce the cultural factors that
induce such inefficient resource allocation in the first place.
• Browing and Chippori (1998) suggest that bargaining power in a
household is driven by the abilty of women to credibly threaten to leave
the household. Access to microfinance can improve the efficacy of their
threats and thus improved access to resources.
• There is also evidence that women’s decisions tend to be biased in favor
of higher expenditure on children’s health and education (Blumberg,
1968). Child survival probabilities are also tied to women’s control of
income. Thus microfinance could reduce the prevalence of inefficient
gender attitudes and social norms.
• The evidence on whether microfinance actually translates into greater
women’s empowerment is more mixed.
Microfinance and female empowerment

• Rankin (2002) argues that microfinance may entrench gender

roles.
• Some studies show that men, and not women control the
microenterprise investments and income.
• Even when women maintain control, they may be encouraged
to take up investments like sweater knitting that maintain
traditional gender roles.
• Increased income could lead to a decreased role for women.
For example, lower caste Muslim women in India tend to work
with their husbands in the fields; however, once they become
richer, they tend to go into seclusion in the house.
• Hence gender-separating practices have high income
elasticity.
• Thus, many microfinance programs such as BRAC and Pro
Mujer also include education about legal and social rights and
basic health practices as part of their implementation.
 Gender focus in Microfinance

• Many microfinance programs focus entirely on women

because of various assumptions:
• Women are important in poverty alleviation and hence for economic
development
• Women form a large proportion of the poor
• Women spend more of their income on their families and hence a
focus on women improves the welfare of the whole family
• A focus on women empowers women
Gender focus in microfinance
• Some arguments against a focus on women are:
• women-focused microfinance does not automatically lead to
empowerment; the underlying problem has to do with cultural
norms.
• Loans to women are less profitable. Also, some social education
that is bundled with microfinance adds to the cost and reduces
sustainability possibilities.
• Focusing on women can raise tensions in the home.
• Microcredit to women places yet another obligation on an already
borrower, already overburdened with familial responsibilities.