Group
II: INSTITUTIONAL
CAPACITY DEVELOPMENT OF
MICROFINANCE INSTITUTION Members: Mr.
Mohammad Nazirwan (Indonesia) Mr.
Shabbir Ahmed Chowdhury (Bangladesh) Mr.
Pearson Kalungulungu (Zambia) Mr. Luis Miguel Artieda (Peru) Ms.
Nevine Badar El-Din (Egypt) Ms. Natalia Ita Septiana (Indonesia)
1.
Organization and Governance The
first step every Microfinance Institution (MFI) should take in order to
develop its capacity to meet its clients needs, in a sustainable and
profitable basis, is to clearly establish/define its Strategic Guideline
and institutional structure that would enable the
achievement of such capacity. Establishing
the institutional Strategic Guidelines is critical because it allows the
MFI to organize all its activities around a few clear, solid and
coherent statements. Those statements are the output of a process known
as Strategic Planning, in which the institution analyses the critical
factors surrounding its business, both internal (strengths and
weaknesses) and external (opportunities and threats). Once
having analyzed these factors, strategic guidelines are established so
as to take advantage of the strengths and opportunities, minimize the
weaknesses and overcome the threats. Basic structures are described as
follows. Strategic
guideline: -
Vision:
Represents the higher long-term goal the institution wants to achieve.
It can be conceptualized as the institutional dream or as the way
MFI’s founders hope it would be in the future. key
question: “What is the future position and status I want for my MFI?” -
Mission: More
specific than the vision, it encloses, in general, the scope of action
and the methods the institution is going to use in order to fulfil its
vision. key
question: “What should my MFI do in order to reach that condition?” -
Objectives:
Even more specific than the mission, objectives should describe the main
institutional action plan aimed at accomplishing the mission. For each
action plan measurable indicators on the fulfilment of specific goals
should be defined. It
is important to point out that in the definition of the Strategic
Guidelines, the reality of the MFI clients should be taken into
consideration. For that reason, it is crucial to perform a Market
Survey, in order to validate its assumptions and consequently be ensured
that the stated vision, mission and objectives correspond to market
reality.
Institutional Structure Having
stated the Strategic Guidelines and analysed the market, the MFI should
analyse if its structure is the most appropriate one, otherwise, the MFI
should consider either changing its structure (if possible) or
redefining its strategic guidelines. Before
analysing the specific structure or organization type, it is necessary
to evaluate the current MFIs’ regulatory
status for its appropriateness. Indeed, one of the main concerns
about Institutional Structure is regulation. Regulated Institutions are
normally allowed to raise funds from a wide range of sources (public
funds, private funds, capital markets, and savings, among others). On
the other hand, Non Regulated Institutions are mostly only dependent on
few sources.
Regulated
institutions needs to accomplish a number of strict rules and indicators
which would otherwise be impossible to meet in certain markets because
of the lack of information. For that reason, especially in the poorest
markets, Non Regulated institutions have some advantages over Regulated
Institutions. After
validating the institutional regulatory status, it is necessary to
explore the specific type of
organization in order to equip it with all the elements the MFI
have analysed up to this point, such us its Strategic Guidelines, its
target market and its regulatory status. Every
specific type of organization has different characteristics in terms of
flexibility in the decision making, adaptability to the changing
situations, readiness to perform internal control actions, among others.
Some of the more common types of organization are the divisional shape,
flat, networking and star structure.
Good Corporate Governance The
concept of Good Corporate Governance relates to how to fulfil the duties
assigned to each leading position inside the MFI, in order to achieve a
high level of efficiency and transparency needed to meet the
institutional goals on a sustainable basis. Once
the MFI strategic guidelines and institutional structure are
established, it is necessary to clearly and transparently define the
role and responsibilities of the MFI’s main decision makers. It is
also necessary to establish the policies and procedure to properly
testing and selecting those positions, which are described below:
2. Financial
Methodology The financial sector approach is the most effective
platform to poverty alleviation and developing the needs of our
communities. In
general microfinance approaches include: -
Minimalist approach (financial intermediation) where
mainly only financial services are offered. -
Maximalist (financial intermediation and social
intervention) where both financial and non financial (health,
illiteracy, etc.) services are offered. The minimalist approach offers
cost advantages for the MFI and allows it to maintain a clear focus,
whereas the maximalist approach responds effectively to the demand of
the client in that the MFI may develop a simple product that can be
easily managed and understood by the clients. The range of products and
services that are commonly provided and their delivery channels are as
follows: Financial
and social services can be delivered through: -
Individual Depends
on the MFIs and clients needs, this approach is usually based on a
personal knowledge of the borrowers, where simple collaterals, like
cheque or ID is sufficient as a form of guarantee for the loan. The loan
size and terms are to be set according to the business needs and cash
flow of the borrower. -
Group Based
on ROSCA Idea, group guarantee is considered instead of other
collaterals In this context, institutional transaction cost is reduced
granting that should any member defaults all other members will also
lose access to repeated loan. -
Solidarity Group Micro
entrepreneurs form a group to guarantee each other. The group should
select its own members and leader with no external influence. Similarly,
if any member defaults all the other members will also lose access to
repeated loan. Financial Product and Services -
Loan (money borrowed for income generation). -
Savings (for investment, retirement, seasonal
variations) - Insurance (death, health, etc.) -
Remittance (payment services including the transfer
of funds from one area to another to minimize risk on the client). -
Payments(MFI must have a relationship with at least
one bank to provide this service) -
Financial product and services that do not require
ongoing subsidies.
Social
Development Services These
are services that focus on improving the well-being of micro
entrepreneurs and they are likely to require ongoing subsidies. Among
these services are: -
Training (for all levels of management, staff and
clients) -
Health and HIV services ( health awareness and its
impact on micro credit) -
Education (illiteracy eradication) -
Disaster management services (awareness in case of
disasters, like earthquakes, etc.)
Loan Loan is simply the disbursement of an amount of money
for the client for income generation. This could be done with a
subsidised interest rate (below market rate) or market interest rate. Setting the interest rate appropriately is important
for the sustainability of the MFI as the interest calculated has to
cover all costs of the MFI. Loan Types: This
refers to where the loan shall be channelled. -
Working capital -
Investment -
Housing loan -
Consumption loan -
Emergency loan Loan terms The
loan term is one of the most important variables in microfinance. It
refers to the period of time which the entire loan must be repaid. It
could be a short term (up to 1 year) or a long term (1-5 years)
depending on the MFI loan term policy and the type of product offered. Loan size The
loan size usually depends on the client’s capacity and type of
product. A suggested loan size for poverty lending is set between US$ 50
and US$ 300, while that for micro entrepreneurs is set around US$ 6000. Repayment There
are many variations to calculate repayment periods, as it will depend on
the product the institutional approach and policy. Depends on the
agreement between the client and MFI, a daily term maybe arranged.
However, weekly repayment has proven to be efficient in the group
lending approach, where the payments are made in the weekly group
meetings, while monthly payment may be more appropriate for individual
lending. Seasonal repayments are likely to be implemented with
agricultural loans. Disbursement and
collection This
can be done either by the officer at the field technique where the loan
officer collects and disburses the money for clients in their premises
or by the office technique where the customer goes to the MFI to collect
and repay his loan. Eligibility criteria: -
Clear understanding of the debt capacity -
Capacity to utilize the loan -
Track record of the customer -
Type of the business -
Collateral -
Group collateral -
Information sharing and Credit Bureau
Saving In
general, there are two generic saving products that are popular in
microfinance: -
Compulsory -
Voluntary Compulsory
saving Compulsory account must link to credit which
including: - Pre credit Savings a period of time - Post credit saving Amount: - No
limitation but it should be incentive-based. - There should be a minimum balance. Savings withdrawal: -
at the end of credit dues -
according to MFI policies and procedures Interest Rate: -
No interest -
Below market rate -
Market rate Voluntary
Savings Voluntary savings are mostly provided by regulated
MFI or member based services such as cooperative, credit union etc. The
services include: -
Checking accounts. -
Time deposits. -
Savings Checking
Accounts: -
individual and business entity -
minimum balance -
no limit of maximum balance -
no limit of withdrawal and deposit -
interest rate (market) based on the balance -
cheque book -
signature verification -
can be a part of clearing house (depending on the
regulation system Time
Deposit: -
individual entity -
maturity 1, 3, 6,12, 24, 36 months -
interest rate according to maturity (market rate) -
Incentives (prize, lottery, death benefits) -
Minimum balance -
No limit on maximum balance -
Penalty system for withdrawal before due or maturity -
Signature verification and identification Pass
Book Savings: -
Individual and entity -
Interest rate (market) based on balance or fixed
rate -
Minimum balance -
No limit as maximum balance -
No limit of withdrawal -
Incentives (prize, lottery, death benefits) -
Identification (signature and fingerprints)
3.
Risk Management and Internal Supervision Risk Management Risk
management is a systematic approach to identify, measure, monitor and
manage business risks in an institution, while internal control
comprises the institutional mechanism to monitor risks before and after
operation. As
a part of the financial system, microfinance exposure to risk may not be
as complicated as banking or other financial institution. However,
several risk factors that would affect the sustainability of MFI,
including: -
Operational risk: exposure
of risks in the event of failure in system, human
error (either intentional or unintentional), natural disaster and so
forth. -
Credit risk: exposure of
risks because of clients’ failure to comply with the credit
contracts condition. These
risks could appear from institutional side such as improper selection,
violating the procedures, fraud, lax monitoring, or from the clients’
side, such as moral hazard, other conditions beyond clients’ control.
Credit risk is the key risk that MFIs must manage to be sustainable;
therefore it is very important that MFIs monitor their portfolio quality
closely and take appropriate action where necessary.
-
Exchange rate risk: risks
due to fluctuation in exchange rates between countries.
These risks appear when the source of funds are in the form of
foreign currencies -
Liquidity risk: risks
which emerge when the MFI has a shortage of cash
(cash flow problem) that causes it to fail to meet with the demand of
client (saving and deposit withdrawal) and other financial obligations.
It is important for MFIs to maintain adequate cash reserves to protect
themselves against such crisis. -
Political risk: risks
resulting from political instability in a country.
These risks are mostly out of the control of MFI and clients -
Interest rate risk:
financial loss from changes in the MFI interest rates
as a result of differences in the timing of rate changes and the timing
of cash flows. MFIs greatest interest rate risk arise when the cost of
funds increases faster than adjustment in lending rates. Therefore,
prompt adjustment of interest rates according to specific market needs
would help to avoid exposure to such risk. Risk
management framework: -
Identify and assess risk. -
Develop own strategy to measure risk. -
Design procedure to mitigate risk. -
Assign responsibility. -
Evaluate results. -
Revise policies and procedures. Internal Control and Supervision Internal
control refers to certain procedures and activities which are designed
to control internal activities and verify the efficiency and
effectiveness of any financial operation to assure the reliability and
completeness of financial and management information that comply with
applicable laws and regulations, and suggest corrective measures for any
such discrepancies. Methodology -
Onsite supervision through direct interaction with
field staff or clients -
Off site supervision through reporting system -
Internal audit (a routine ex-post appraisal of an
MFI operation and financial report. Technique Various
internal control techniques can be implemented, eg sampling, cross
checking, interviews, comparisons, observation and unscheduled visits Internal audit
organization: -
Separate unit report directly to BOD -
Dedicated and experienced staff reporting directly
to management. Role
and function of the internal auditor: -
To maintain the procedures in order and make sure
that the financial information is accurate. -
To make sure that the internal and external
regulations are implemented. -
To ensure progress towards goals and objectives -
Present to BOD and provide suggestion and solution
and corrective measures to them.
4. Marketing There are seven steps in the marketing and product
design process, as follows: -
Define and segment market -
Assess market attractiveness -
Assess competitive advantages -
Define product design -
Develop product operational plan -
Pilot test -
Revise and commercialise
Market
Segmentation and Targeting In
segmenting the market MFI should identify and state which target market
that it intends to serve. Segmentation
can be done through: Poverty concept: -
Below the poverty line: Destitute and ultra poor -
With in the poverty line: Labouring poor -
Above the poverty line: Self employee poor and
economically active poor Micro enterprise: -
Start up micro enterprise -
Existing micro enterprise -
Growing micro enterprise -
Graduate micro enterprise (SME) Geography: -
Urban -
Sub-urban -
Rural Gender: -
Women -
Men Other -
Post conflict -
HIV -
Minority and ethnic
Market
Segment Attractiveness The attractiveness of a market segment include: -
Segment size in terms of number of potential clients
in a given geographic location. -
Growth opportunities for clients within a segment -
Location of clients within the segment -
Distances between clients – densities -
Accessibility of clients throughout the year -
Fitted with organization vision and mission -
Existence of other providers and support services
(communication, electricity, etc.) An
MFI could measure the attractiveness of each market segment by using
various variables. Shown below is how an MFI in East Africa measures the
attractiveness of a market segment.
Source:
Micro Save Africa Each attractive segment is score for its competitive
and comparative advantage as illustrated by the example below.
Source:
Micro Save Africa The
MFI in this case has a strong competitive and comparative advantage in
this market segment because: -
There are no competitors -
The MFI has prior experience with the client base -
The segment fits into the MFI’s vision and
mission. The MFI is therefore likely to decide serving this
segment. Positioning
Customers
looking for goods and services have particular needs that are important
in deciding whether or not to buy.
Positioning a product or service enable customers to make a quick
connection between what they need and what product or service the MFI
offers, e.g., “I need a quick loan, I will go to Micro bank because
they offer quick loans”. Effective positioning has four steps, as follows: -
Identify the priorities of a customer -
Select one or two of these priorities -
Design your products or services around these
priorities -
Communicate messages to your target customers about
how you can meet their priorities better than any other
competitor.
Effective
positioning requires one further activity, actually delivering the type
and quality of service that you have communicated to your customers.
Marketing
Research Market
research is the process of collecting information about customers, the
market, and the MFI strengths and weaknesses so as to better understand
the marketing process. Market research is essential for an MFI in order to
obtain information on: -
Market environment -
Customer needs -
Competition and substitutes used by customers -
Organization strengths and weaknesses This
information will help an MFI to have a well planned and monitored
strategy required to achieve its objectives. Sources of information for an MFI may include: -
Internal records, such as loan ledgers, customer
files, etc. -
Filed officers -
Competition -
Economic publications -
Clients, etc. Market research methods include: -
Surveys, which involves conducting interviews guided
by a questionnaire. -
Participatory rural Appraisal (PRA), -
Participatory Learning Action (PLA) and -
Focus Groups, which involves holding group
discussions with clients to obtain information on a topic of interest.
5.
Funding Funding
is one of the main concerns every sustainable MFI have to address in
order to develop its institutional capacity to serve its clients,
achieve its goals and be sustainable. Indeed, funds are needed to
support the MFIs core activities, such as:
Use of Funds
-
Loan portfolio: This is the principal use for MFIs’
resources because it allows them to accomplish its role as financial
intermediaries, which mobilize and efficiently allocate funds in order
to foster development. Loan portfolio products include all the financial
products considered in the “Financial Methodology” section of this
document. -
Investment: Capital needed to increase the physical
efficiency of the MFI, including improvement in infrastructure,
equipment, security systems, in one word, the viability of the
institution itself. -
Human Resources Development: Capital needed to
increase the human efficiency of the MFI, including all hierarchy
levels). -
Operation and administration costs in the case of
subsidized loans.
Sources of Funding As show in the table below funding can be generated
from both internal and external sources. Internal sources are needed to
give long-term sustainability to the MFI. External sources are also useful and, specially for growth strategies.
Funding
from internal sources is related with long-term sustainability because
its shows that the MFI is capable to support a significant part of its
business with self-generated resources. This gives them protection
against instability related to donors or other external sources.
Furthermore, in many cases, external sources are not enough,
specially
subsidized
funds and grants. In such cases, savings represents an efficient funding
alternative because its costs are bellow the market’s active rates. If
the MFI relies only on subsidized funds and grants, it is endangered of
collapsing in the case of sudden absence of such funds. For that reason,
the more accessible MFI could be to the market and savings, the more
plausible it would be to achieve profitability, and thus sustainability
and the chance to keep accomplishing its long-term strategic guidelines
which mainly aimed at fostering social and economic development.
6.
Management Information System (MIS) Microfinance institutions, whether manually or
computerized, deal with large amounts of important data and information,
such as client information, financial transactions, portfolio statistics
and so forth all of which must be maintained, manipulated and managed
for decision making, monitoring and supervision. Management information
system (MIS) is a system which involve in generating and manipulating
data to become valuable information for an organization.
In many ways, MIS is a factor for the success of MFI. Through
good MIS, MFI will be able to access and analyze information more
efficiently and to streamline and shorten the flow of information for
timely decision-making. There
is a lot of information generated by MFI, although not all of these are
important. Basically, MIS
should provide information on: -
Accounting system that provide daily transaction,
profit and loss, balance sheet, cash flow which are required by MFI for
monitoring and supervising as well as decision making -
Loan portfolio including number of borrower, loan
outstanding, calculation of portfolio at risk (PAR), loan provision,
loan size, loan disbursement, report on write off loan, recovery loan
sheet, number of borrower/credit staff and portfolio/staff etc. -
Saving report (particularly for MFI which provide
savings services). Information
would needed encompass the number of saver and amount of saving for each
type of saving account -
Impact database particularly on clients’ economic
well being (income, saving, socio-condition and so forth) before and
after joining the microfinance program -
Other information such as number of employee, number
of networks and information on fixed assets including buildings,
vehicles, equipments etc.
Flow
of Information and Reporting System In
general, the flow of information is initially generated by field
offices, before it transfers to regional office, and in many cases,
directly to the head office, particularly for small MFI.
At the regional office, information from field offices is
consolidated before it is delivered to the head office.
Furthermore at the head office, information is analyzed for
internal purposes before being sent to external bodies.
Similarly
to other financial institution, reporting system in microfinance can be
done daily, weekly, monthly, quarterly and annually. The rule of thumb
is that the more important the information, the more frequent it should
be provided.
Users of MIS
Practically, MIS is designed for internal and
external purposes. Internally,
MIS will help front line staff to monitor loan portfolio, client records
and understand the business. For
the manager, MIS is a perfect devise for monitoring and supervising
activities. In addition,
MIS is also important for external parties such as government,
regulators, donors and other stakeholders.
Internal: -
Frontline workers -
Mid level management -
Top management (BOD) External: -
Government -
Donors - Central bank
7.
Human Resource Development and Training Human
Resource Development is a part of capacity development. Capacity
development refers to the development and enhancement of the already
existing capacity of the MFI for better performance. Capacity refers to
the ability of MFI and the staff in the organization to perform
function, solve problems and define and achieve their objectives
effectively, efficiently and in a sustainable manner, Human
resource management plays one of the most important roles in
microfinance. The result of the activities of the MFI are accomplished
through its the staffs. Management of human resources thereby plays a
very crucial role in MFI. It activities should be treated as an
investment. HRM in a wider context encompasses the following:
Career Development
MFI
need to attract bright people. This will enhance productivity and
efficiency of the MFI. In order to attract the high flyer, the MFI
should have career development path for the staff. Publicizing the
career path is very important for the new recruits to remain loyal to
the MFI. MFI should possess career path for its staff and disseminate
them through training, meetings and publications.
Benefit
and Condition Like
career path, the MFI should develop a personnel handbook where the
benefits like salary package and other conditions like health, provident
fund, gratuity, life insurance and leave etc. should be clearly defined.
Reward
and Punishment The
personnel handbook should clearly specify the rewards and punishments.
The transparency will motivate staff for doing good work and deter them
from doing anything wrong.
Pension
Policy Pension
policy is seen as an incentive by most of the staff joining an MFI. The
personnel policy should therefore clearly spell out such policies.
Training Training
is seen as a most important vehicle for achieving the goals of the
organization. Training is generally in house and on the job (OJT). Both
are important to an MFI. Training should be organized for the Board of
Directors, Staff members and clients. They are conducted by using
different methodologies and the level of the training differs from each
other. Training for the Staff: The following level of training can be thought: -
Orientation/Induction training: This training should
be given to the staff just after recruitment and before the deployment.
So that they have some understanding of the organisation and programs. -
Basic training: After joining, the staff in the
field are to be sent for basic training after 6 or 12 months. Basic
training may be given on “basic” microfinance practices such as
savings and credit management, operation and management of microfinance. -
Development training: After the basic training,
staff should be given training on development. The course may cover
contemporary development issues, target clients, development approaches
etc. This may be offered a year after the basic training. -
Advance training: Courses like financial management,
sub sector analysis, macro economic issues, financial ration analysis
etc. may be given in the second or third year depending on the
organization policy. -
Professional training: Professional training are
given to make staff more professional in the MF business. Courses like
Gender, Portfolio and delinquency management, business development,
marketing, strategic planning, PRA and product development etc. may be
given to staff depending on the organizational policy and procedure. For the Management, the following training may be
offered: -
Business strategy: This course may cover subjects
like strategic thinking for the business (microfinance) and future
projection. On specific business, it may focus on feasibility study,
product, marketing, competition, pricing, raw materials etc. -
Strategic planning: This is for identifying the
strategic issue of the organization, such as “How it will look like in
the coming future?” -
Good corporate governance: Here too, the
participation of management and staff is also important. However the
management should take a priority in undergoing such training. -
Gender training For client/ program participants: -
Training on Feasibility study: The target client
should need to know the skill on how to make a feasibility study of a
project before taking credit fro MFI -
Training on Business and marketing plan: Business
and marketing planning is a most important skill a client should posses.
The MFI should provide such training to its clients so that they are
able to face the problem and overcome them. -
Basic Accounting Training: Accounts keeping by the
client is very important. The client should be able to understand the
concepts of cash in-flow and out-flow, receipt and expenditure. -
Production and sub sector training: Borrower invests
their money in different sub-sector like poultry, fisheries, livestock
and in agriculture. They should be provided with the skill and
management training on the above subjects so that they could generate
higher income and also create employment in the market -
Family program training, health & nutrition, HIV
training, gender training etc: Other than these, there may be lot of
other courses the clients should be provided with so that they can
maintain their health and use the surplus of the business in an
intelligent way.
8.
Technical Assistance Technical assistance involves capacity building of
an organization and may be short-term of long-term. Technical assistance
is very critical for new organizations that need to build viable
microfinance programs. It is important to include a budget on capacity
building in an MFI’s business plan. An
external consultant is normally engaged to assist an organization in
institutional development and program design and implementation. MFI may require technical assistance in various
specific areas, including: -
Strategic and business planning -
Marketing, market research, product development -
Institutional evaluation and assessment -
Impact assessment -
Policy and procedures manuals (personnel, credit and
savings, internal controls and accounting) -
ICT including MIS |