BP1-H1
Workshop Expectations Exercise
Time: 15 minutes
1. Share your names, describe your jobs, and briefly explain why yo...
BP1-H2
Business Planning and Financial Projections Workshop
Skills Assessment
Name: _________________________ Organization...
BP1-H3
Business Planning Workshop Goals and Objectives
Overall goal
Mastering the planning process and using Microfin for ...
BP1-H4
Business Planning Course: Indicative Schedule
Session Time SESSION NAME
Day 1
8:00 – 9:30
9:30 – 9:50
9:50 – 11:10
...
BP2-H1
Business Planning Framework
STRATEGIC PLANNING
OPERATIONAL
PLANNING
Mission and Goals Strategy
Markets
= Clients
Pr...
BP2-H2
Introduction to Business Planning
Business planning for microfinance institutions can be understood as three closel...
• Based on the results of these analyses, developing a strategy that builds on the institution’s strengths
and develops ke...
BP3-H1
From Mission Statement to Strategy
A key to shaping strategic success is clarity of mission. Individuals need to un...
that destination. The time frame for a strategic planning process is normally 3-5 years, so
the goals must reflect this ti...
BP3-H2
Strategic planning: integrating SPM into microfinance capacity building - Imp-
Act/MicroSave technical note
PDF file
BP3-H3
Social assessment tools
There are several tools that allow MFIs to verify internally or externally to what extent t...
BP3-H4
Markets and Clients -- Key Points
Market Segments
Institutions can divide current and potential clients into "marke...
BP3-H5
Analyzing a market: example of a typology applied to medium-term loans
A typology (i.e., segmentation) is used to i...
BP3-H6
Tools to know your clients/members better
IRIS Poverty Assessment Tool - www.povertytools.org
The PAT is based on a...
• Help respond to pressure from competitors by understanding the balance between financial
and social returns
• Providing ...
BP3-H7
Case Part 4 – Answer Guide
SEDA Markets and Clients: Assignment Response Guidelines
For reference when facilitating...
and retain qualified staff, forms of social links to support non-material collateral, etc. and more broadly,
institutional...
BP4-H1
Context Analysis -- Key Points
Environmental Analysis is the process of examining foreseeable external variables an...
Business registration policies
Legal system, code of conduct
Existence of a credit bureau
Economic, social, environmental ...
BP4-H2
Institutional Assessment -- Key Points
Here on looks at the Strengths and Weaknesses of the organization itself. As...
Client monitoring system (profile, satisfaction, change in their living conditions)
Monitoring of loan officer productivit...
BP4-H3 Optional
Case Part 7
See Case Study Document for this Hand-out
Extract and copy separately ONLY if you choose to ha...
BP4-H3
SWOT analysis adjusted for Social Performance
Strengths/Weaknesses
• How clear is the organization about what it wa...
Sample SWOT analysis – PAGLAUM Co-operative, the Philippines
STRENGTHS WEAKNESSES
• Image of pro-social cooperative
focuse...
BP4-H4
Assignment ANSWERS: Environmental Analysis and Institutional Assessment
For use in facilitating group discussion
EN...
Administration
Annual audit; have identified a potential MIS;
LEDA has personnel policies, organogram, and
operating proce...
BP4-H5
Defining Strategy
A means of addressing critical issues during period of plan in order to achieve program goals.
De...
BP4-H5 Optional
Case Part 9
See Case Study Document for this Hand-out
Extract and copy separately ONLY if you choose to ha...
BP4-H6
Strategic Planning
Take a few moments to think about Strategic Planning in your institution. You may have one that ...
Objectives and
Activities
BP4-M1
Assignment ANSWERS: Environmental Analysis and Institutional Assessment
For use in facilitating group discussion
EN...
Administration
Annual audit; have identified a potential MIS;
LEDA has personnel policies, organogram, and
operating proce...
BP4-M2
Analyzing the environment
A microfinance institution assesses the context in which it operates through an environme...
ties between clients and forms of social organizations in order to know which forms loan collateral can be used,
to know a...
• Does the executive director solicit and use inputs from staff at all levels?
• Does the executive director have the nece...
• Do financial statements present an accurate picture of the institution? (For example, are loan loss reserves
sufficient ...
Choosing a strategy
A microfinance institution chooses its strategy for expansion on the basis of the information and pers...
will not undertake, because taking on too much could prevent it from implementing any of the desired
improvements.
4. Obje...
BP5 – M1
Preparation
Prepare and test the computer and the data projector the night before, in the morning and
again durin...
Note to the instructors - Important
Instructions about using Microfin presented in this session and the next are based on
...
EXTRA – TO BE REPLACED BY NEW CGAP Microfin Handbook
BP Handbook -- Annex 1: Installing and Starting Microfin
Software and...
Installing Microfin
Microfin.xls is 8 megabytes, so the file must be compressed in order to be distributed on floppy disks...
BP6-H1
Model Setup Page Summary - to be adapted
according to the version of Microfin you are using
Users must set up the m...
OPTIONAL - BP6-H2
Case Part 10 - Strategy
See Case Study Document for this Handout
Extract and copy separately ONLY if you...
BP6-H2
Balance Sheet Definitions used in the model
Category Description
Assets
Cash in bank and near cash
Cash assets, liq...
Furniture and equipment
land and (gross) buildings as it appears on
the institution's balance sheet. Depreciation
will be ...
prepaid products, debt linked to pension
plans and debt which doesn't directly fund the
MFI's financial activities, such a...
BP6-H3
LEDA Ratios - Summary
FY10 FY09
Income Statement Analysis
Return on Total Assets 37.8% 33.5%
Operating Margin (ROA)...
BP6 – M1
Model Set Up Page Lecturette Guide
1. Choosing branch, Regional, or Consolidated mode
Briefly explain again that ...
relative to the external currency would be entered here. In addition, the exchange rate
can be entered for reference purpo...
BP6-M2
Balance Sheet Definitions used in the model
Category Description
Assets
Cash in bank and near cash
Cash assets, liq...
Furniture and equipment
The gross value of all fixed assets other than
land and (gross) buildings as it appears on
the ins...
than one year’s time, including long term
prepaid products, debt linked to pension
plans and debt which doesn't directly f...
BP7-H1
CLIENT ANALYSIS - WORKSHEET
Think of a group of target clients for you MFI / your region.
1. Describe two activity ...
BP7-H2
MICROFIN PRODUCT DEFINITION PAGE OUTLINE - to adapt
according to the version of Microfin you are using
Savings Prod...
BP7-H2 cont
Loan Product Definition
Average loan amount
input by cycle
can vary by month
can index to inflation
Repayment ...
BP7-M1
Notes for guiding group discussion on Microfin Product and Services Design
Step 1: Average loan amount
Remind them ...
Show how fees are treated differently depending upon whether the number input is less than
1.00 or greater than 1.00. (See...
Explain that a loan can be defined starting in Month 1, even if it isn’t introduced until
sometime in the future. This is ...
BP8-H1
Lessons from crises in four microfinance markets
From, Growth and Vulnerabilities in microfinance (Greg Chen, Steph...
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
CGAP Training Business Planning for MFIs Participant Materials: Handouts
Upcoming SlideShare
Loading in...5
×

CGAP Training Business Planning for MFIs Participant Materials: Handouts

1,374

Published on

Published in: Education
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
1,374
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
118
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

Transcript of "CGAP Training Business Planning for MFIs Participant Materials: Handouts"

  1. 1. BP1-H1 Workshop Expectations Exercise Time: 15 minutes 1. Share your names, describe your jobs, and briefly explain why you chose to attend the workshop. 2. Talk informally about your expectations for the workshop. Take notes from the discussion, and attempt to summarize the group’s expectations. Share the summarized expectations with the group and make changes if necessary. 3. As a group, prepare a drawing which reflects the groups expectations of the workshop, using the flip chart paper and markers provided. Be Creative!! 4. The group should be prepared to introduce each other to the large group, and to explain the group’s drawing in plenary. EVERYONE in the group must present someone or some part of the drawing! You all must talk!!
  2. 2. BP1-H2 Business Planning and Financial Projections Workshop Skills Assessment Name: _________________________ Organization: __________________________ Please answer these questions to the best of your ability, including any formulas or indicators as requested. This is not a test, but it will help us to identify which topics to emphasize during the course. Use the reverse side of this paper if necessary to complete your answers. 1. Name three components of the Business plan a. c. b. 2. Explain how portfolio Quality impacts a business plan and the resulting financial projections? 3. What is an Environmental Analysis? How do you incorporate it into the business plan? 4. What is an Institutional Assessment? How do you incorporate it into the business plan? 5. Provide two measures of profitability and their formulas 6. Have you been involved in developing your institution’s planning process? If yes, please explain the process used and your involvement in the process. Use the reverse side of this sheet to answer.
  3. 3. BP1-H3 Business Planning Workshop Goals and Objectives Overall goal Mastering the planning process and using Microfin for operational and financial projections, so as to outline a clear business plan allowing the institution to achieve its social and commercial double mission. Specific objectives To define the steps of a strategic plan so as to achieve the double mission of microfinance, based on a market approach, and apply these steps to your MFI To conduct research to determine who and where the clients are To analyze the environment and determine the opportunities and threats it provides To assess your own institution, identifying strengths and weaknesses To create a strategy and build an operational plan based on that strategy To design financial products and delivery systems that support the strategy and are achievable given the environment and the MFI’s capacity To generate a financial strategy using Microfin that demonstrates an understanding of how to project income and expenses as well as financial sources and flows.
  4. 4. BP1-H4 Business Planning Course: Indicative Schedule Session Time SESSION NAME Day 1 8:00 – 9:30 9:30 – 9:50 9:50 – 11:10 11:10 - 1:10 1:10 – 2:10 2:10 – 3:30 3:30 - 3:45 3:45 – 5:30 1. 2. 3. 4. 4. Welcome Tea Break Introduction to Business Planning Strategic Planning – Mission, and Market Lunch Strategic Planning – Environment and Institution Tea Break Strategic Planning – Environment and Institution Day 2 8:00 – 8:30 8:30 – 9:45 9:45 – 10:45 10:45 - 11:00 11:00 – 11:40 11:40 – 1:00 1:00 – 2:00 2:00 – 3:20 3:20- 3:40 3:40 – 4:40 4:40 – 5:00 5. 6. 6. 7. 7. 8. Review general and of Action Plans Operational Planning and Financial Modeling Model Set Up Tea Break Model Set Up Designing Financial Products Lunch Designing Financial Products Tea Break Marketing Channels and Portfolio Projections (points 1- 8) Summary Day 3 8:00 – 10:00 10:00 - 10:15 11:15 – 1:00 1:00 - 2:00 2:00 – 2:45 2:45 – 3:30 3:30 – 3:50 3:50 - 5:30 8. 9. 9. 10. 10. Marketing Channels and Portfolio Projections (point 9-15) Tea Break Institutional Capacity, Loan Loss, Case Loads Lunch Institutional Capacity, Loan Loss, Case Loads Institutional Capacity: Staffing and Operational Expenses Tea Break Institutional Capacity: Staffing and Operational Expenses Day 4 8:15 – 8:30 8:30 – 10:00 10:00 – 10:30 10:30 – 11:30 11:30 – 1:00 1:00 – 2:00 2:00 – 3:30 3:30 – 3:45 3:45 – 4:15 11. 11. 12. 12. Review Institutional Capacity: Fixed Assets and Admin Expenses Tea Institutional Capacity: Fixed Assets and Admin Expenses Financing Strategy Lunch Financing Strategy Tea Summary Day 5 8:30 – 1:00 1:00 – 2:00 2:00 – 3:30 3:30 – 3:45 3:45 – 4:25 4:25 – 5:00 13. 14. 15. 16. Financial Analysis Lunch Summary and Action Plan Tea Additional Microfin Feature Closure and Evaluation
  5. 5. BP2-H1 Business Planning Framework STRATEGIC PLANNING OPERATIONAL PLANNING Mission and Goals Strategy Markets = Clients Product and Service Definition Environmental Analysis Marketing Channels / Credit and Savings Projections Competition Collaborators Regulatory Factors Other External Issues Institutional Assessment Credit & Savings Program Board and Management Human Resources Administration Institutional Capacity and Resources Loan Loss Provisioning Loan Officer Caseload Program-level Expenses Admin-level Expenses Financing Sources Financing Strategy Financial Management Financial Management Strategy Business Planning as an Ongoing Tool
  6. 6. BP2-H2 Introduction to Business Planning Business planning for microfinance institutions can be understood as three closely-related processes: - Strategic planning - Operational planning - Financial modeling. Strategic planning means: - articulating broad institutional goals, - assessing the institution’s performance in achieving its goals, and then - selecting a strategy that enhances the institution’s ability to expand outreach, reach its target clients, guarantee the quality of services so as to satisfy clients' needs efficiently. The idea is to achieve (or maintain) financial sustainability as well as social viability. Operational planning involves creating a framework for implementing this strategy, expressed concretely in detailed financial projections. How a microfinance institution carries out the planning process greatly affects the quality of the plan. Incorporating the perspectives of key stakeholders—such as the institution’s board, staff, and clients— helps ensure that the business plan that results identifies the key issues that must be addressed to achieve broad outreach and profitability as well as social viability. Involving those responsible for implementing the plan helps ensure broad endorsement, essential for successful implementation. The process of developing a business plan, especially creating detailed financial projections, helps an institution to understand the factors that are key in determining its success. These include, for example, the elements that must be considered in designing financial products that both meet clients’ needs and lead to profitability, such as the size and term of loans and the effective interest rate. The business plan, and the financial projections that are an integral part of it, become operating tools for the institution’s managers. By comparing actual with projected results (performing variance analysis), managers can monitor the institution’s progress toward the goals outlined in the plan. In addition to serving its primary purpose as a management tool, a clear plan with well-thought-out financial projections, as well as measurable social goals, strengthens a microfinance institution’s negotiating position with donors, commercial banks, and other investors. The business plan can also be used to provide information to other external audiences, such as shareholders, clients, and regulatory authorities. Finally, a business plan also helps translate the social mission into an institution's strategy and operations, by defining short, medium and long term objectives, and by implementing systems that monitor social indicators. Introduction to Developing a Strategic Plan There are many ways to develop a strategic plan. The approach here consists of several steps, all of which keep the clients in the forefront during the planning process: • Articulating the institution’s mission and goals, which express its aspirations and intentions: How is the mission defined? In particular, how are social goals defined? Which changes do we wish to implement? Which values does the MFI uphold? • Statutes and founding texts: how is the mission displayed and shared? (statutes and founding documents) • Defining the institution’s markets and clients to clarify whom it seeks to serve: Who does the institution target? What are the needs of target clients? Which services should the MFI offer, and what is the targeted improvement for clients? • Undertaking an environmental analysis to examine key factors in the broader financial, economic, social, regulatory, political context in which the institution operates, as well as the climate • Performing an institutional assessment to explore key strengths and weaknesses of the institution, in regards to its social and financial goals
  7. 7. • Based on the results of these analyses, developing a strategy that builds on the institution’s strengths and develops key areas needing improvement, enabling the institution to better serve its clients and achieve profitability. • Monitoring the achievement of goals: Which indicators are being used? Nature of internal and external reports: Which social and financial data is being used and distributed?
  8. 8. BP3-H1 From Mission Statement to Strategy A key to shaping strategic success is clarity of mission. Individuals need to understand what business the company is in and how its values drive that business. Without such understanding employees will not develop much commitment or loyalty to the organization and its success. A mission statement provides a sense of purpose and incorporates a vision of future accomplishment. With specific reference to: OBJECTIVE • What is the institution’s objective? VALUES • Why is this objective important? • What beliefs guide the MFIs behavior / attitude? CLIENTS • Who does the institution serve? • What is the institution’s targeting strategy: rural, semi-urban areas or urban areas, client type (women, SMEs, poverty level?), diversity, etc.? • How does the institution make sure client protection principles are being upheld? SERVICES PROVIDED • What will the institution DO to meet this objective? • How will it make sure it satisfies the various needs of its clients, their families and businesses, with adequate, high-quality services? BENEFITS • How will the organization benefit its stakeholders? • How will it ensure that its clients are satisfied and receive the maximum benefits out of the services it offers? • Does it restrict itself to financial impact, or does it also wish to promote its clients' social reinforcement Strategic planning is more than just an envisioning process. To accomplish anything you need a clear vision of the desired outcomes. It requires the setting of clear goals and objectives during specified periods of time in order to reach the planned future state. Targets must be realistic, objective and attainable. Goals are broad statements of intent that provide guidance as to how the institution plans to pursue its mission. They are outcome or output related. They represent ideals, which are the institutions commitment to a desired future state or condition. Goals represent the organization’s desired destination and the objectives are the strategic steps required to reach
  9. 9. that destination. The time frame for a strategic planning process is normally 3-5 years, so the goals must reflect this time frame and allow for continued efforts on the part of the organization over this period. The goals should address opportunities that will allow the organization to position itself to the future. Once the goals are articulated, a plan of action is required to move toward desired outcomes. This plan of action is composed of supporting objectives and action agendas that define what must be done, when it must be done, who is responsible for doing it and who will verify the completion of the tasks. Together these elements composed the ‘strategy’ in the strategic plan. They answer the question of how the organization gets from the ‘here and now’ to the ‘there and future’. The objectives are specific measurable statements of accomplishments with in a given timeframe. They operationalize a goal. The objectives are sequential and provide the milestones that will permit the organization to determine if the process is on track or if it has derailed at some point. An institutions mission and goals should guide the institutions performance. They reflect the market and other environmental and institutional issues examined. The strategy defined should reflect the institution’s mission and further its goals.
  10. 10. BP3-H2 Strategic planning: integrating SPM into microfinance capacity building - Imp- Act/MicroSave technical note PDF file
  11. 11. BP3-H3 Social assessment tools There are several tools that allow MFIs to verify internally or externally to what extent their mission is aligned with their internal systems and performance. Resources Depth of analysis Links SPI social audit by CERISE and ProsperA Audit Depends on the method used (internal audit only, internal audit accompanied by an external resource, external audit) Focuses on 4 social performance dimensions: - Targeting clients - Quality of services - Benefits to clients - Social responsibility to employees, clients, the environment http://www.cerise- microfinance.org QAT Social Audit by Imp-Act and MFC Audit Audit accompanied by external resource Focuses on the mission, the systems and procedures set up by the MFI http://www.mfc.org.pl/ The Smart Campaign’s client protection assessment Audit Assessment of the application of client protection measures in an MFI’s processes, procedures and activities http://www.smartcampaign.o rg/page-daccueil Social rating Rating If an MFI has no internal auditor, it can request a social rating, which is even more external than an audit. Each rating agency has its own standardized methodology http://www.ratinginitiative.org MIX Market social performance reporting Reporting This is a reporting framework, but an MFI can use it as a guide to identify certain standards assessed internationally to measure the social performance of an MFI and to review the core components of a social audit http://www.themix.org/social- performance/Indicators
  12. 12. BP3-H4 Markets and Clients -- Key Points Market Segments Institutions can divide current and potential clients into "market segments". A market segment is a group of clients with uniform needs which are different from those of other groups. Distinctions generally made on basis of: • geographic location • demographics • psychographics • behavior Basic considerations when choosing new markets for microfinance would include: * Number of micro entrepreneurs * projected demand for financial services * Potential market penetration for the MFI * Key market trends Clients The institution should conduct a detailed analysis of current and potential clients. Examination of the following characteristics should be considered. • nature of the enterprises • demand for and use of financial services • purpose of loan • income and assets • diversity of income sources • diversity of financing sources • level of indebtedness (volume and amount of loans from other financial institutions) • work experience • cultural issues concerning control of cash • gender • age • language and literacy • citizenship • reputation in the community • satisfaction in comparison with existing products
  13. 13. BP3-H5 Analyzing a market: example of a typology applied to medium-term loans A typology (i.e., segmentation) is used to identify homogenous groups based on a number of differentiation criteria. Criteria are differentiated based on variables observed (wealth level, life cycle, productive activity systems, access to market, business capacity including size of workforce, emigration, etc.). The difficulty is that of course there isn’t “one” universal typology, but several possible. Generally, three types of criteria commonly influence households financing needs and constraints: • Household wealth, measured through assets and income. Households’ financing needs and available collateral vary according to their level of wealth. • Production systems, financing needs and risks vary according to the nature of a household’s activities: agricultural or non-agricultural, but also according to their combination. Systems combining both agricultural and non-agricultural activities are often more efficient when it comes to managing liquid assets and to manage risks. • Life cycle and gender. Economic capacity, the types of income-generating activities developed, the extent to which the activities can function independently, and the degree of accumulation varies depending on characteristics of the the productive member of the household: gender, age, whether recently settled or established, , etc. Typologies may be defined according to ‘expert opinion' (village or local authorities that distinguish groups they deem relevant), or based on statistics: surveys of on a large sample of households. Once established, a typology can help better analyze financial needs and constraints for each group. Family typology and use of medium-term credit in Benin Typological group Role of medium-term credit in strategies Risks for each group 1. Young people in the accumulation phase, not pluriactive Rapid capital accumulation Fragility related to the small amount of capital 2. Young people in the accumulation phase, pluriactive As in 1, but with less priority on agricultural equipment Fragility limited by income from the secondary occupation 3. Established, with complete equipment, large cotton producers Critical for less well-established households, , useful but optional for the others Substantial capital but monetary assets still small: possible transitory problems related to cotton 4. Precarious situation, small assets Essential, but not always a factor in the accumulation of capital Fragility resulting from small capital and an unfavorable family structure 5. Large families, medium land area, modest capital accumulation Essential for equipment; usually is well-managed The absence of investments limits risks; a secondary occupation is common 6. Large families, large land areas, substantial capital accumulation Medium-term credit rare; used as a last resort Diversion for other persons; dilution of responsibility Extract from Professional Agricultural Organizations and Rural Financial Institutions by SupAgro (Wampfler, B., Doligez, F., Lapenu, C., 2009)
  14. 14. BP3-H6 Tools to know your clients/members better IRIS Poverty Assessment Tool - www.povertytools.org The PAT is based on a five-page questionnaire about family structure, education, principal occupations of adults, food security, housing quality, other goods and access to services, etc. and takes into account different dimensions of poverty. Le PAT tries to answer a simple question: who are the MFI’s clients? What is their living standard, compared to non-clients? The basic questionnaire must be adapted to local conditions (specific poverty indicators, choice of assets, important food products in the area, etc.). The PAT leads to the creation of a relative poverty index which attributes a poverty “score” to each household and thus allows the analysis of the poverty status of clients compared to that of non-clients (sorted in poverty quintiles for example). This is an occasional survey, which may be repeated every 2 or 3 years, to monitor the evolution of the MFI’s targeting. It must be conducted by an external assessor on new clients and non-clients. Progress Out of Poverty Index1 - www.progressoutofpoverty.org The Progress Out of Poverty Index (PPI) is a tool measuring the poverty level of groups and individuals. The PPI allows MFI to determine their clients’ needs, which products are the most efficient, the pace at which clients are getting out of poverty and what helps them cross the poverty line faster. This tool estimates the probability for a client to live under the national poverty line. This line defines the poorest quintile under the national poverty line or below international poverty lines. Even if the PPI is based on a universal method, each PPI is country-specific and was developed on the basis of the most representative national survey of household incomes and expenses for that country. For each country, the process begins by a national representative survey on income and/or expenses. The survey data are reviewed to sort indicators strongly linked to poverty. These indicators are then carefully tested and examined with local MFI and their representatives. Each of these steps is described in detail below. The PPI allows managers to: • Segment clients in separate poverty categories • Integrate financial and social indicators • Establish a link between product offers and delivery channels and poverty levels • Monitor client evolution as they step out of poverty • Evaluate the translation of a social mission into action More specifically, the PPI can help MFI directors on the following aspects: • Inform management decisions on processes, programs, products and service delivery • Target clients according to specific products and services 1 Adapted from the Thematic Paper Impact and Social Performance from www.lamicrofinance.org
  15. 15. • Help respond to pressure from competitors by understanding the balance between financial and social returns • Providing accurate information on social performance to regulation authorities, social investors, donors, and rating agencies in a timely manner.
  16. 16. BP3-H7 Case Part 4 – Answer Guide SEDA Markets and Clients: Assignment Response Guidelines For reference when facilitating plenary discussion Current Market: 1. Describe SEDA’s current market segment(s). Two geographic locations: Brownstown Market and St. Mary. Economic activities: currently 2/3rds commerce and 1/3rd retail, artisans and urban traders Specifically: 40% small scale commerce of fresh produce, 20% small scale retailers of dry goods, 25% shoemakers, 15% other production based businesses. 2. What is the size of the existing market? What is the potential for growth? What is the estimated demand for services among this population? There are 50,000 micro entrepreneurs. This number grows by 5-10% per year. Of these, 60% are believed to desire financial services (i.e., 30,000) 3. In SEDA’s markets, are some business sectors more active than others? Describe the sectors that SEDA might focus on, and explain why. Their current clients are 40% commerce; another 25% are shoemakers. SEDA might focus on these because they can possibly provide specialized products to meet specific needs of these sectors. 4. Do SEDA’s current clients reflect the market identified in SEDA’s mission and goals? Yes to the mission. But since existing clients are unhappy with the products and services. SEDA’s goals may be in question. Potential New Markets / Risk identification 1. What are the potential new markets being researched by SEDA? Which of the areas seems most promising? East End - nearby similar to present program Loganville, a market 40 miles away, on a good road, with a wide variety of economic activities. Mt. Andrews Valley, an isolated area with limited market access. 2. What is attractive about the most promising potential markets? East End - replication of present project Loganville is close to Agora, has a lot of economic activity, there is a central market where clients come. There are profitable opportunities for new produce in Agora; clients speak the national language. Flood risk in certain areas brings forth the idea of an insurance product; consider migration areas and savings transfer products. 3. What additional information might you need before you made a final determination about which markets to expand in? The clients’ interest in financial services, their current financial behavior, household activity systems, poverty level (government data? NGOs or multilaterals? ) risk of over indebtedness (identified cases, strong competition, tradition of cross-indebtedness, etc.), other potential competition, potential to attract
  17. 17. and retain qualified staff, forms of social links to support non-material collateral, etc. and more broadly, institutional and environmental analyses.
  18. 18. BP4-H1 Context Analysis -- Key Points Environmental Analysis is the process of examining foreseeable external variables and how they affect and organizations capacity to achieve its goals. The most frequently used method to begin this analysis the SWOT analysis. The social mission will also need to be applied to define necessary resources, while describing how the institution intends to change internally so as to reach its strategic and specific goals. While defining strategic goals, the following questions should be considered: How are changes planned in operations supporting both social and financial goals? One begins to look for Opportunities and Threats in the environment. Ask: How can we take advantage of the external challenges in our environment? And how might environmental issues jeopardize our ability to pursue our goals. Once identified one must develop a plan on how to capitalize on the opportunities and overcome the threats! Some issues that need to be examined are: Market Who are our clients? What do they want? Which of their needs can we fulfill? How do we keep our clients? How can we make sure their rights are respected and we are not making them take uncontrollable risks (such as over-indebtedness)? Who are our potential Clients? How can we satisfy their needs? How can we make sure our services will create value for our clients? Competition Other specialized financial institutions Informal credit schemes Retail suppliers Formal commercial or development banks Technology used (e.g. mobile banking) Collaborators Strategic partners Consultants and other technical assistance providers Institutions with complementary services Regulatory Factors and Other Government Policies Regulations governing MFI activity; respect of prudential standards (Obligations concerning capital amount, etc.) National interest rate and transparency policies Specific laws regarding client protection (e.g. data protection) Capital reserve requirements
  19. 19. Business registration policies Legal system, code of conduct Existence of a credit bureau Economic, social, environmental factors - General economic conditions (e.g., inflation, markets, branch, penetration of financial products, etc.) - General political conditions (e.g. elections) - Safety (risk of theft) - Media context (reputation risk) - Social ties and structure of social organizations (solidarity, recognized authorities, etc.), identification of discriminated groups - Risk of over-indebtedness for clients, frequent multiple borrowing - Infrastructure - Natural environment: potential risks (protection of natural resources, climate change), impact of financial activities (waste, etc.), opportunities (renewable energy, etc.)
  20. 20. BP4-H2 Institutional Assessment -- Key Points Here on looks at the Strengths and Weaknesses of the organization itself. Asking the crucial questions – Can we meet the needs of our clients with our given resources? What are our strengths and how can we capitalize on them? What are our weaknesses and where do we focus development efforts to transform them into strengths? One therefore begins by looking at the following points! Loan and savings program and other financial and non-financial services Appropriate products Conditions and pricing of the different products available, clearly explained to clients Portfolio quality Pattern of significant growth and increasing profitability Client retention Appropriate and clear loan policies and procedures in order to meet client needs without harming them Board and management issues Vision and policy leadership Prudent financial management Guidance and oversight for manager Clear roles and responsibilities of board and management Effective mobilization of funds: grants/loans from all sources Human resource management Organizational chart and job descriptions Appropriate recruitment and training Sufficient administrative staffing Strong finance and accounting team Strong MIS department Minimal staff turnover Good incentive plan and competitive compensation for staff Regular performance evaluations Administration Strong MIS systems the produces accurate, timely and comprehensive MIS reports Portfolio reports for immediate assessment of every loan Appropriate reports to different levels: board, management, staff Appropriate chart of accounts Adequate fixed assets Formal, comprehensive system of internal controls Formal external audit by reputable firm Financing Ability to mobilize amounts and types of funding needed Increasing reliance on earned income (relative to grants) Priority and ability to become independent and profitable Management and monitoring of financial and social goals Accurate financial information (e.g., financial statements, ratios) Regular review of budgets and cash flow projections Key staff with good financial management skills Strategy for investment management Monitoring and reporting of financial and social goals (to inform employees and managers)
  21. 21. Client monitoring system (profile, satisfaction, change in their living conditions) Monitoring of loan officer productivity and behavior, especially during loan collection processes
  22. 22. BP4-H3 Optional Case Part 7 See Case Study Document for this Hand-out Extract and copy separately ONLY if you choose to hand out exercises separate from the booklet.
  23. 23. BP4-H3 SWOT analysis adjusted for Social Performance Strengths/Weaknesses • How clear is the organization about what it wants to achieve in terms of social performance? • What support does social performance receive from the organization’s governance structures? • How do the current product range and delivery processes compare with the needs of target clients? • Does the organization have enough reliable information about its target clients and their needs? • How does the information system support social performance monitoring? Is there regular, timely, and accurate data? • How does the human resources (HR) system, including staff composition, the processes of hiring, training and remuneration, incorporate social performance considerations? • What information is provided by internal control systems, including internal audit, in the context of the organization’s social performance? • Does the organization have a mission-driven image and culture? Opportunities/Threats • What are the risks at the client level? (Client risks = risks to the organization.) How do external factors influence clients’ businesses and lives? • What are the opportunities and threats in the organization’s external environment, and how do they influence its ability to perform against the broad social goals? • Are economic, political, regulatory, and social trends analyzed from the viewpoint of their impact on the organization’s ability to reach its target clients and meet their needs? • What are the opportunities and threats to social performance coming from key external stakeholders: competitors, commercial and social investors, regulators and law-makers, the media, etc.?
  24. 24. Sample SWOT analysis – PAGLAUM Co-operative, the Philippines STRENGTHS WEAKNESSES • Image of pro-social cooperative focused on poor areas • High-quality, non-credit financial services – deposits with low threshold • Innovative culture: new products and service delivery channels • Client loyalty due to co-ownership and dividend payments • Information systems: no information map, delayed client information, delayed production of reports, low quality of data entry • Internal information download (top to bottom information flows) • No performance-based remuneration for staff – people get equal pay for different volume and quality of work • Lack of understanding of clients’ needs with negative impact on new product development/modification OPPORTUNITIES THREATS • Availability of untapped geographical markets • Access to financing opportunities through linkages • Access to training/capacity building through linkages • Client over-indebtedness, “credit pollution” • Increasing competition from NGOs and MFIs tapping same client segments • Local crime – security of staff, security of assets (hold-ups and robberies) • Inflation (leading to increase in household expenses and possible problems in clients meeting repayments) • Damage to fishermen’s businesses due to climate change Source: Strategic Planning, Guidance Note, ImpAct Consortium (2010)
  25. 25. BP4-H4 Assignment ANSWERS: Environmental Analysis and Institutional Assessment For use in facilitating group discussion ENVIRONMENTAL ANALYSIS Opportunities Threats Competition LEDA is one of strongest; interest rates of competition are comparable with ours. Several other smaller, newer institutions; two of these work in the same city as us; they both have ambitious expansion strategies; they already have an impact on LEDA (client exit, employee attrition, cases of over indebtedness) many other institutions are considering starting financial services Collaborators We refer clients to a training institute; FNB provides loan collection and savings services for our clients; we receive TA from Freedom, Int’l; we have good donor relations. Our clients seemed to be dissatisfied with FNB’s savings services. Regulatory Factors Government policies not yet specific for micro finance, but recent interest in informal sector; recent legislation for NBFI; NBFI status being pursued by LEDA. Macroeconomic Factors Inflation stable at 10%; high incidence of poverty in areas where LEDA works; economic growth averaging 2% per year. Loganville’s rural area with outputs for produce farming in the capital Migration area: savings transfers Flood risk on produce farming area Increase of single-parent households, especially single mothers INSTITUTIONAL ASSESSMENT Strengths Weaknesses Credit and Savings Program LEDA only offers one product and clients are not satisfied with our current product because it does not meet their needs (lack of flexibility for instance) Board/Management Issues Executive Director well regarded; he is a strong leader; board member involved with NBFI legislation Executive Director has limited financial skills; Human Resource Management Staff are competent and dedicated; well- informed about organizational policies; good staff training; salaries are low and staff are expressing dissatisfaction; limited internal promotion possibilities 3 loan officers went over to competition. Certain clients complained about loan officer behavior.
  26. 26. Administration Annual audit; have identified a potential MIS; LEDA has personnel policies, organogram, and operating procedures. Weak internal controls; their only MIS is a spreadsheet; operating procedures are out-of- date. FINANCIAL MANAGEMENT Financial Manager is competent; Accountant is weak analyzing financial data;
  27. 27. BP4-H5 Defining Strategy A means of addressing critical issues during period of plan in order to achieve program goals. Deciding on the objectives and activities of providing the right products in the appropriate markets in a cost efficient manner in order to achieve the goals of the MFI. The strategy should be derived from comparing: • mission and goals • assessments of clients and markets • environmental opportunities and threats • institutional strengths and weaknesses The strategy should address: • what products to offer in which markets • favorable and unfavorable external conditions likely to be faced • what areas of institutional capacity are key to success • the objectives and activities to be undertaken Choosing a Strategy Product and Market Options Market Penetration - use current product in current market) Product Development - create new product for the current market) Market Diversification - use current product in a new market) Product Development and Market Diversification - create new product for a new market) Environmental Issues what externals conditions is the MFI likely to face Maximize opportunities Overcome Threats Turn threats in to opportunities Institutional Development Foundation: efficient operations Build on strengths Improve weaknesses Prioritize factors essential to effective and profitable Performance under period of business plan Objectives and Activities for each Goal Objectives for each area of operational planning: * Products and services * Marketing channels * Institutional resources and capacity * Financing * Financial management and monitoring objectives Implementable activities for each key objective
  28. 28. BP4-H5 Optional Case Part 9 See Case Study Document for this Hand-out Extract and copy separately ONLY if you choose to hand out exercises separate from the booklet.
  29. 29. BP4-H6 Strategic Planning Take a few moments to think about Strategic Planning in your institution. You may have one that is well used already, you may have one that has been ‘shelved’, and you may need one. Perhaps the guide below may help you to organize your thoughts! Use additional sheets as necessary. WHO will be on the task force? What we have Accurate? Current? What we need How we will get it Anticipated Obstacles Plans to overcome obstacles Mission Market Research Environmental Analysis Competition Collaborators Regulation/Policies Macroeconomics Institutional Assessment Credit/Savings Ops and other financial and non-financial services Taking into account social performance aspects Human Resources Board Mgmt Administration Financing Strategy –
  30. 30. Objectives and Activities
  31. 31. BP4-M1 Assignment ANSWERS: Environmental Analysis and Institutional Assessment For use in facilitating group discussion ENVIRONMENTAL ANALYSIS Opportunities Threats Competition LEDA is one of strongest; interest rates of competition are comparable with ours. Several other smaller, newer institutions; two of these work in the same city as us; they both have ambitious expansion strategies; they already have an impact on LEDA (client exit, employee attrition, cases of over indebtedness) many other institutions are considering starting financial services Collaborators We refer clients to a training institute; FNB provides loan collection and savings services for our clients; we receive TA from Freedom, Int’l; we have good donor relations. Our clients seemed to be dissatisfied with FNB’s savings services. Regulatory Factors Government policies not yet specific for micro finance, but recent interest in informal sector; recent legislation for NBFI; NBFI status being pursued by LEDA. Macroeconomic Factors Inflation stable at 10%; high incidence of poverty in areas where LEDA works; economic growth averaging 2% per year. Loganville’s rural area with outputs for produce farming in the capital Migration area: savings transfers Flood risk on produce farming area Increase of single-parent households, especially single mothers INSTITUTIONAL ASSESSMENT Strengths Weaknesses Credit and Savings Program LEDA only offers one product and clients are not satisfied with our current product because it does not meet their needs (lack of flexibility for instance) Board/Management Issues Executive Director well regarded; he is a strong leader; board member involved with NBFI legislation Executive Director has limited financial skills; Human Resource Management Staff are competent and dedicated; well- informed about organizational policies; good staff training; salaries are low and staff are expressing dissatisfaction; limited internal promotion possibilities 3 loan officers went over to competition. Some clients complained about loan officer behavior.
  32. 32. Administration Annual audit; have identified a potential MIS; LEDA has personnel policies, organogram, and operating procedures. Weak internal controls; their only MIS is a spreadsheet; operating procedures are out-of- date. Financial Management Financial Manager is competent; Accountant is weak analyzing financial data;
  33. 33. BP4-M2 Analyzing the environment A microfinance institution assesses the context in which it operates through an environmental analysis to gauge how foreseeable external challenges will affect its capacity to achieve its goals. External factors can prove to be either opportunities or threats—opportunities if the institution can position itself to take advantage of changes in the environment, threats if the changes jeopardize its ability to pursue its goals in the way it had planned. By anticipating the effects of external factors, the institution can better position itself to take advantage of its environment. An environmental analysis looks at four factors: • Competition • Collaborators • Regulatory factors • Other external elements. 2.3.1 Competition Competition may be increasing significantly in the markets where a microfinance institution operates. Conversely, an absence of strong competitors might give the institution an opportunity to solidify its market position. If competition is a significant factor, the institution might choose to carry out a careful review of its current and potential competitors, including: • Other microfinance institutions • Moneylenders • Informal credit schemes • Clients’ suppliers • Formal financial institutions. The presence of a credit bureau or clearinghouse and its operating mode will also determine the MFI’s practices (the MFI will need to participate) and the way it takes into account the risks of multiple borrowing or over indebtedness run by its clients. Without a bureau, we will study the different means according to which this information is shared/can be shared with other financial institutions. 2.3.2 Collaborators The kinds of collaboration that a microfinance institution forms will depend on its needs. If it seeks broad-based institutional strengthening, an affiliation with an international network that provides technical assistance and training could be an important relationship. If legislation prevents an institution from offering savings products, it might choose to collaborate with a local bank that can provide such services. An institution might also collaborate with local government officials or with local institutions offering services that complement its own. 2.3.3 Regulatory factors Regulatory policies can play an important part in shaping a microfinance institution’s environment. For example, restrictive interest rate ceilings can impair an institution’s ability to charge an effective interest rate sufficient to cover its full costs. By contrast, central bank policies that allow a range of licensed financial intermediaries, with capital reserve requirements matched to institutions’ scale, can encourage the development of microfinance institutions. Other policies may affect a microfinance institution’s clients, such as regulations on land ownership, registration requirements for microenterprises, and price controls on agricultural products. Client protection measures should also be included according to the context (national policy on interest rates, transparency, specific laws regarding client protection). 2.3.4 Other external elements A country’s general economic and political conditions have a significant effect on the informal financial sector and therefore on microfinance institutions and their clients. A high inflation rate, civil unrest, and natural disasters can pose serious threats to a microfinance institution’s operations, while a stable economic and political situation provides a positive environment for an institution’s development. It is important to assess social
  34. 34. ties between clients and forms of social organizations in order to know which forms loan collateral can be used, to know acceptable or unacceptable conditions regarding loan collection, etc. Other significant external elements include foreign exchange rates, currency convertibility, national poverty levels, and transportation and communication infrastructure. It is also important to acknowledge potential impact on the environment: potential risks on natural resources, impact on climate change, potential negative impact of financed businesses (waste, pollution), opportunities to support environment protection (renewable energies, etc.). Performing an institutional assessment The institutional capacity of a microfinance institution is the most crucial factor in its ability to achieve its goals. So every institution should undertake a thorough assessment of where its strengths lie, where it has significant weaknesses, and where it should focus institutional development efforts. This institutional assessment is generally carried out after the market study and the environmental analysis, so that an institution can evaluate its strengths and weaknesses in the light of its ability to meet its clients’ needs in the context in which it operates. There are many ways to evaluate an institution’s resources and capabilities. In the method proposed here the institution assesses its performance in key areas of operations through questions whose answers will help show whether it is following the kinds of practices shown to be most effective for microfinance institutions. Six areas of operations are reviewed: • Credit and savings program • Board and management issues • Human resource management • Administration • Financing • Financial management. • Capacity to monitor the achievement of objectives 2.4.1 Credit and savings program • Are the products appropriate for the market segments that the institution seeks to reach? • How good is portfolio quality, as measured by the default rate and portfolio at risk? • Conditions and pricing of different products are available, are explained clearly to clients and are presented in an efficient manner (i.e., orally if clients are illiterate). • Is there a clear pattern of significant growth and increasing profitability? • Is there a high rate of client retention? • Are clear and appropriate credit policies and procedures in place? • Does the institution monitor loan officer productivity (such as the number of active clients per loan officer)? • Do credit staff maximize their time with clients relative to the time they spend on administrative work? 2.4.2 Board and management issues • Does the board provide vision and policy leadership? • Does it ensure that the institution’s financial resources are prudently managed by monitoring investment and operating performance? • Does it provide ongoing guidance and advice to the executive director? • Do board members provide expertise in such key areas as banking, law, accounting, client protection, monitoring of the MFI’s social goals? • Are the roles and responsibilities of the board and management clearly defined so as to prevent inappropriate intrusion by the board into operational details? • Does the board participate in setting performance targets and monitoring progress toward them? • If the institution is considering formalization, has the board evaluated the opportunities and risks associated with the different options available (box 2.1)? • Are the board and the executive director effective at mobilizing funds from domestic and international sources for concessional and commercial debt and for grants? • Does the executive director provide leadership in implementing the institution’s mission and goals?
  35. 35. • Does the executive director solicit and use inputs from staff at all levels? • Does the executive director have the necessary skills and knowledge (such as a strategic perspective, management skills, knowledge of credit and finance, and fundraising ability)? 2.4.3 Human resource management • Is there an organization chart, and are there job descriptions for all positions? • Are the positions of credit manager and finance manager filled by qualified staff? • Is there at least one employee whose job description states clearly that he or she is responsible for monitoring client complaints? (In addition to internal controls) • Are staff recruited and trained to ensure the appropriate skills? (For example, do credit staff have good communication skills, a basic knowledge of credit, and good business sense?) • Is the level of administrative staffing sufficient but not financially burdensome? In particular, does the institution have a strong finance and accounting team and management information system (MIS) capability? • Is staff turnover minimal? • Are incentive systems designed to hold staff accountable and to reward them for good performance? • As greater operational scale is reached, is compensation becoming more competitive with market rates? • Is staff training a serious priority for the institution? What percentage of the total budget does staff training represent? Are employees well-informed of the MFI’s values and mission? Are they well-trained on policies and procedures to achieve the MFI’s mission and ensure that the institution does not harm clients? • Is there a clear pattern of promotion from within? • Are performance evaluations based on mutually developed and agreed upon objectives? • Is there a code of ethics that describes acceptable and unacceptable employee behavior, especially toward clients? 2.4.4 Administration • Does the management information system produce accurate, timely, and comprehensive reports for accounting and loan tracking? • Are appropriate reports provided to the different levels of users (board, management, and staff) within the organization? • Do portfolio reports provide an immediate assessment of the status of every loan? • Is the chart of accounts appropriate to the institution’s needs? (For example, does it track income and expenses by branch, and does it separate grant income from earned income?) • Does the institution regularly assess whether its management information system is sufficient for its needs today and over the medium term? • Does the institution periodically review its fixed asset base to ensure that it is not becoming obsolete? • Is there a formal, comprehensive system of internal controls in place to prevent corruption and the misuse of funds? • Is a formal audit performed by a reputable accounting firm each fiscal year? • Has the MFI conducted social audits, or financial or social ratings? 2.4.5 Financing • Is the institution able to mobilize the amounts and types of funding it needs for its current and planned operations? • Is the mix of funding sources appropriate? How much priority does management give to the necessary diversification of its funding sources? Does it ensure that there are funding channels based on national or international concessional or commercial resources, or on the mobilization of client savings, etc.? 2.4.6 Financial management • Is reliable information available for assessing the institution’s current financial position, including trends in its performance indicators? • Are budgets and cash flow projections prepared and reviewed regularly? • Does the institution conduct periodic analysis comparing projected with actual performance (variance analysis)?
  36. 36. • Do financial statements present an accurate picture of the institution? (For example, are loan loss reserves sufficient to cover projected defaults, are assets valued conservatively, and are nonperforming loans regularly written off?) • Do key staff have good financial management skills? • Does the institution have a well-thought-out investment management approach? • Is the institution moving steadily toward full, subsidy-adjusted profitability, while serving its target clients with adequate products? • Does the MFI have key information to monitor the achievement of its social and financial goals? • Is this information available regularly and quickly? • Does it specifically indicate client profile, satisfaction level, and change in clients’ socio-economic situation, so as to check the achievement of the MFI’s social goals? • Is it available to competent staff (Board, management)? • Is it synthetized in the shape of key indicators or a scoreboard, for an easy check that goals have been reached? The purpose of the environmental analysis and institutional assessment is to provide a microfinance institution with a clear idea of where it needs to focus its attention in order to meet its clients’ needs and enhance its profitability. By systematically developing the information needed to assess past trends and current performance, the analyses lay the groundwork for determining what kind of strategy will enable the institution to achieve its goals.
  37. 37. Choosing a strategy A microfinance institution chooses its strategy for expansion on the basis of the information and perspectives developed in the first four steps of the strategic planning process. Having articulated its mission and goals, defined which markets and clients to target, forecast what favorable and unfavorable external conditions it is likely to face, and gauged its strengths and weaknesses, the institution is ready to decide on a strategy for providing the right products in the appropriate markets in a cost-efficient manner. 8 The process of identifying a strategy has four parts: • Defining target clients and understanding their needs • Choosing what products to offer in what markets • Deciding which areas of the institution need to be strengthened to ensure that it can provide the chosen products in the selected markets • Determining clear objectives and activities for implementing the product, market, and institutional development goals. 1. Target clients and their needs An institution defines its target clients according to its mission and objectives. The choice of clients must be diversified, in terms of risk management. However, an institution may decide to target its clients according to (rural, urban) geography, activity systems, income, gender, or the rate of social and financial exclusion (youth, clients living with HIV, etc.) After this choice, the MFI must understand its target clients’ needs in terms of financial services, as well as their behavior, attitudes and values, which may influence their use of the MFI’s services. To that effect, a market study is recommended to better circumscribe target clients characteristics in order to offer well-suited products and services. 2. Product and market options An institution can pursue expansion by offering existing or new products in current or new markets. The four possible combinations of these elements represent four options of increasing complexity (figure 2.1). A microfinance institution’s strategy must reflect which option it will pursue first and in what sequence it might add others. MARKET PENETRATION If current products are commensurate with projected client needs and current markets offer the potential for significant expansion, the appropriate strategy would be to expand existing products in existing markets. PRODUCT DEVELOPMENT If current markets offer the potential for significant expansion but existing products cannot meet projected client needs, the strategy should be to enhance current products or develop new products for expansion in existing markets. MARKET DIVERSIFICATION If existing products can meet projected client demand but current markets do not offer sufficient growth potential, the appropriate strategy would be to enter new markets with the current products. PRODUCT DEVELOPMENT AND MARKET DIVERSIFICATION If existing products are insufficient to meet projected client needs and current markets are insufficient to achieve sustained profitability, a microfinance institution must determine which of the first three options to pursue initially and in what order product and market expansion should be pursued. [FIGURE 2.1 Product Market-Matrix] 3. Institutional development To implement an expansion strategy, a microfinance institution will probably need to strengthen certain areas of its operations, as identified by the institutional assessment. In building on its strengths and addressing the areas needing improvement, the institution should focus on the factors that are essential to effective and profitable performance in the current and projected environment. And the institution will have to choose which activities it
  38. 38. will not undertake, because taking on too much could prevent it from implementing any of the desired improvements. 4. Objectives and activities Once a microfinance institution has chosen its strategy for expansion and identified the areas requiring strengthening, it is often helpful to develop objectives and activities for implementing the strategy. Objectives can be articulated for each area of operational planning: • Clients • Products and services • Marketing channels • Institutional resources and capacity • Financing • Financial management. For each objective, activities should be outlined on the basis of the findings of the strategic planning process— the activities the institution intends to undertake to implement its plan. For each objective and activity, the MFI must define monitoring indicators to ensure good financial management and the achievement of the mission. Through financial modeling the institution can assess how realistic the strategy is by analyzing whether the mix of proposed activities is financially achievable in the projected time frame. The strategic planning process culminates in the task of developing and articulating the strategy. The strategy provides the key reference point for operational planning, serving as the link between the two parts of the business planning process. A microfinance institution should review its operational decisions in the light of whether they reflect its strategy and move it further toward its objectives. What information does the MFI need to assess the achievement of its goals?
  39. 39. BP5 – M1 Preparation Prepare and test the computer and the data projector the night before, in the morning and again during the coffee break earlier in the day. Since this is the first session where the data projector will be used it cannot be stressed enough how important that the machinery – computer and projector are functioning. Before this topic, the case study version of Microfin needs to be loaded (LEDACASE.XLS). Save the file under a different name, (TRAINING MICROFIN.XLS FOR EXAMPLE) in order to use this same copy in future sessions of the course. Note that you will switch to other versions of LEDA throughout the course. It will be most convenient to have the transfer files ready to use ahead of time. Each version has a different level of data completed based on the session being presented. After saving it under the new name, ensure that the following conditions are set: • The Model Setup page should be filled in with the case study information. • The product page will have some information also. • Make sure you have AutoSave disabled, so that the save prompt won’t disrupt your presentations. (You’ll find this option under Tools / Add Ins /AutoSave on the Excel menu) • Set the zoom for the MODEL SETUP and PRODUCTS pages to 120% so they may be more easily viewed. (Use View / Zoom on the Excel menu). • Make sure you are in Full Screen mode to maximize viewing area. (You’ll find this under View / Full Screen on the Excel menu.) • After you have introduced the pop up feature – Disable it. It is not always convenient when presenting. • Before demonstrating ensure you have date to support displaying a graph. The active loans graph on Branch Graphs should look like the following when the model has been properly set up
  40. 40. Note to the instructors - Important Instructions about using Microfin presented in this session and the next are based on Microfin's version 3. Later versions are available and offer new features. Instructors will be able to download the last online version from Microfin's website and use it during the session. The training participants should do the same. It will then be necessary for them to adapt the model presentation to the features of the new version. Instructors should prepare in advance so as to make sure they master the new changes implemented in version 3.
  41. 41. EXTRA – TO BE REPLACED BY NEW CGAP Microfin Handbook BP Handbook -- Annex 1: Installing and Starting Microfin Software and hardware issues The model has been developed to run on Excel 97 or later versions. Known problem with Excel 97 Both the original release of Excel 97 and the U.S. version of Service Release 1 have a serious recalculation bug that can cause Microfin to generate erroneous calculations. A patch available from Microsoft to correct this bug must be installed in order for Microfin to function reliably. To find out whether this patch, the Excel 97 Auto Recalculation Patch, is needed, start Excel 97 and click on help and then on about Microsoft Excel to display the version information. If the version is simply Excel 97, Microsoft’s Service Release 1 patch for Office 97 needs to be installed. The update file, SR1OFF97.EXE, is available on the Internet at www.microsoft.com, as well as on CD-ROM from authorized Microsoft dealers. Running this patch will modify Excel and change the version number to Excel 97 SR-1. If the version is already Excel 97 SR-1, another small patch may still have to be installed, because Microsoft corrected the recalculation bug after the U.S. version of SR-1 was released.1 In this case there are two options: Installing a small patch file, XL8P3.EXE, available at www.microsoft.com/excel/recalc.htm. (A copy of this patch is included on the Microfin distribution disk. Check for a file of this name in the c:microfin subdirectory of the hard drive.) Double-clicking on this file will install the patch and display a message indicating that Excel has been successfully patched. Installing the Service Release 2 patch, available at www.microsoft.com. Once it is installed, the version will be Excel 97 SR-2. Once the necessary patch has been installed, start Excel and open the file microfin.exe. While holding down both the CTRL and the ALT key, hit the F9 key. This will correctly calculate the spreadsheet. Thereafter the model can be recalculated by simply hitting the F9 key. Save the spreadsheet back onto the disk. Minimum hardware Requirements Microfin requires at least a 486 computer with 24 megabytes of RAM to run adequately. But the worksheet is large, and recalculation times dramatically improve when it is run on a Pentium or Pentium II computer. When Microfin is used to project activity for individual branch offices, even more RAM will be required—about 6 megabytes more for every additional branch office. But buying additional RAM has become quite affordable (generally less than $50 for 32 megabytes for a desktop computer). There are many ways to find out how much RAM is on your system. An easy way is to start up Excel, click on help, then click on about Microsoft Excel, and finally click on system info. This will bring up a list of technical information, including total physical memory. If the number of kilobytes is more than 24,000, then you have more than 24 megabytes of RAM. As usual with computers the faster the model and the more RAM available the better Microfin will work for you. It is also most convenient to be working with Excel 2000. There have been no known problems with this version.
  42. 42. Installing Microfin Microfin.xls is 8 megabytes, so the file must be compressed in order to be distributed on floppy disks. It is distributed as a self-extracting zip file that must be installed on your hard drive before it can be used. The installation procedure is the same for all versions of the file, whether distributed on a diskette, downloaded from the Internet, or received as an email attachment. Follow these steps to use the model: 1. Start Windows Explorer (if using Windows 95 or 97) or File Manager (if using Windows 3.1). 2. Locate the file called mfininst.exe (short for “Microfin install”). This file will be in your Downloads folder (if received from the Internet or by e-mail). 3. Double-click on the file named mfininst.exe (you may not see the .exe extension, depending on the configuration of Windows Explorer). 4. The installation process will begin automatically. A message box will appear with the following text: You are currently installing the Microfin projection model and help system onto your hard drive. The installation program will suggest these files be installed in the subdirectory “c:microfin” on drive “c.” You may choose a different drive and directory on the next screen if you wish. The installation process requires 8 megabytes free disk space. Should you have problems with the installation, refer to the user’s handbook. 5. Click on ok and an installation screen will appear, allowing you to change the subdirectory if you wish. Click on the unzip box when you are ready to proceed. 6. When installation is complete, you should see the message “files installed successfully.” Click on ok. The Microfin help system should then load a screen with the message “Installation is complete.” You can explore the help system if you wish. To close the help system when you’re finished, click on the exit button. 7. The file is now ready to use. Starting up Microfin To begin using Microfin, first start up Excel. Then use the File/Open command, locate the subdirectory where Microfin.xls is installed, and click on the file to open it. Microfin will initially run through a series of automated procedures to prepare itself for use. Once the file is open, it is advisable to use the File/Save As command to save the model under a new name (such as LEDA1.xls). Doing so preserves the original file as a backup or for use in developing another set of projections. When the model is run in Excel 97, a message will appear indicating that the workbook was created in an earlier version of Excel and asking whether to save the version in Excel 97 format. No information is lost or changed if the file is updated to the Excel 97 format, but the file can no longer be used with earlier versions of Excel. Microfin is a highly sophisticated model, and every effort has been made to ensure its accuracy and reliability. Nevertheless, neither CGAP nor the model’s developers can be held responsible for any problems caused by flaws in the model or by errors in its use. Useful Excel commands for moving around the model Home Moves the cursor to the far left column Ctrl-Home Moves the cursor to the top left corner of the page Ctrl-PgUp Moves to the previous page in the workbook Ctrl-PgDn Moves to the next page in the workbook
  43. 43. BP6-H1 Model Setup Page Summary - to be adapted according to the version of Microfin you are using Users must set up the model before beginning the planning and projections. This page allows for input of variables that are used in projections throughout the model. 1. Modeling of individual branches a) Consolidated or individual branch projections 2. Loan Product Projections Approach a) Project total active clients or new clients 3. Institutional Information a) Name of institution b) Starting dates for projections c) Fiscal Year Information 4. Inflation Information a) Projected inflation rates b) Indexing rate for financial products (optional) c) Floating Index Base Rate 5. Historical Financial Statements a) Prior Income Statements b) Prior Balance Sheets c) Prior Portfolio Information 6. Financial Ratio Analysis a) Supplemental data for ratio calculation b) Automatic generation of key financial ratios
  44. 44. OPTIONAL - BP6-H2 Case Part 10 - Strategy See Case Study Document for this Handout Extract and copy separately ONLY if you choose to hand out exercises separate from the booklet.
  45. 45. BP6-H2 Balance Sheet Definitions used in the model Category Description Assets Cash in bank and near cash Cash assets, liquid assets, near cash and other non−interest-bearing cash products. May include non−interest-bearing balance and savings. For MFIs with a bank status, this account may include investments on the financial market or very short term bonds (a day, a week). Gross portfolio outstanding Total value of principal owed by clients on a 12 months term, as outstanding loans. Includes current loans, past-due loans, renegotiated loans, but not defaulted loans. All past-due loans must be considered as short term and must be included in this account. Does not include interest receivable. This amount must be broken down by product and by branch, on the branch projection pages. Loan loss reserve The loan loss reserve for the institution as a whole. This information will need to be broken down by branch (but not by product) on the branch projections pages. The value must be entered as a negative number. Short-term investments The total value of all interest-bearing short- term investments (with a term of less than 12 months). Savings reserves The amount of savings deposits not available for lending. These reserves are monitored independently of other bank accounts or investments, to ensure that they are not used for other purposes. Other current assets The value of all miscellaneous current assets, such as accounts receivable and accrued interest, not captured in other categories. Land The value of all land as it appears on the institution’s balance sheet. Buildings (gross) The gross value of all buildings as it appears on the balance sheet. Depreciation will be considered below, on the accumulated depreciation line. The gross value of all fixed assets other than
  46. 46. Furniture and equipment land and (gross) buildings as it appears on the institution's balance sheet. Depreciation will be considered below, on the accumulated depreciation line. Accumulated depreciation The total amount of accumulated depreciation as it appears on the institution's balance sheet. This amount must be entered as a negative number. The total will be broken down, for each of the above categories of fixed assets, by branch office and head office on their worksheets. Long-term investments The total amount of investments that are intended to be held for more than one year. Other long-term assets (net) The net value of all major assets that are amortized, such as MIS software. Liabilities Accrued expenses Expenses incurred as of the date of the balance sheet, but not yet paid, such as social benefits for the staff. Savings deposits Total value of all savings deposits (compulsory and voluntary) held and controlled by the institution. This value will be broken down by product and branch on the branch projections pages. Short-term loans payable The value of any loan principal due to be repaid within 12 months from the statement date – on all funds obtained through loans or other borrowing contracts. Includes loans, credit lines, and authorized overdrafts with a pending balance, as well as the portion of long term bonds to be repaid within 12 months. Other current liabilities Other short-term liabilities not captured in other categories due to be repaid within 12 months, including taxes and wage costs, salary deductions and other payables. Must also include any short-term portion of prepaid products. Long-term loans payable The value of the principal due to be repaid within 12 months from the statement date on all funds obtained through loans or other borrowing contracts and all subordinated debt. This account must not include long-term funding without a specific repayment date, such as long-term subsidized loans from related companies or branches. Other long-term liabilities Other long-term liabilities falling due in more than one year’s time, including long term
  47. 47. prepaid products, debt linked to pension plans and debt which doesn't directly fund the MFI's financial activities, such as mortgages or other loans for the purchase of capital assets. Long-term concessional loans without a specific repayment date, but which are not subsidies, are also included in this account. Equity Accumulated donated equity, previous periods The cumulative value of all grants received from donors before the current fiscal year (see FAQ 5). Donated equity, current period The value of all grants received from donors during the current fiscal year Shareholder equity Value of all investments made by shareholders. Dividend payments Cumulative value of all dividend payments made to shareholders (entered as a negative number). Accumulated net surplus Cumulative value of net income (after paying taxes and before receiving donor grants) of previous and current periods, after deducing dividend payments made to shareholders or members. Net surplus (deficit), current The value of the surpluses or deficits (excluding grant period income) for the current fiscal year.
  48. 48. BP6-H3 LEDA Ratios - Summary FY10 FY09 Income Statement Analysis Return on Total Assets 37.8% 33.5% Operating Margin (ROA) -3.8% -15.1% Adjustments to Operating Margin 8.1% 8.0% Net Margin (Adjusted ROA) -11.9% -23.1% Profitability Operational Sustainability 91% 69% Financial Sustainability 76% 59% Return on Equity -7.1% -26.4% Adjusted Return on Equity -22.4% -40.5% Efficiency and Productivity Yield on portfolio 44.9% 41.8% Operating Costs / Avg Portfolio 40.8% 51.8% Borrowers per Loan Officer 318 289 Loan Portfolio per Loan Officer 48,205 43,111 Average cost of debt 12.4% 12.6% Overhead percentage 50.1% 52.6% Loan Officers as percent of total staff 65% 60% Portfolio Quality Ratios Portfolio at Risk 30 days 10.9% 8.0% Loan Write-off Ratio 1.3% 2.0% Reserve Ratio 3.6% 4.0% Growth and Outreach Percentage growth in portfolio 36.1% 34.7%
  49. 49. BP6 – M1 Model Set Up Page Lecturette Guide 1. Choosing branch, Regional, or Consolidated mode Briefly explain again that Microfin can generate projections at several different levels of detail – by branch, by region, or for the institution as a whole. Show how the structure choice is made from the drop-down list. Select Consolidated Mode and explain why we will be using this mode during the course. 2. Loan Product Projections Approach Microfin offers two approaches for projecting the number of clients for loan products. Either by total number of Active clients or by new clients each month. Your choice will apply to all loan products in all branch/region offices. You may wish to wait until you reach the MARKETING CHANNELS portion of the planning process and then return here to make a decision. If you change your approach later in the planning process, you will need to revise any loan client projections already done at that point 3 4. Institutional information and Inflation data Use the down-arrow to move down to the Institutional information section of the page. Point out that the date information is used in monthly column headings and the fiscal year data is used in yearly summary columns (see figure). Emphasize that projections must be completed in local currency. Microfin does allow for display of real values and for conversion of key financial data to an external currency. Show how the inflation rate is entered and emphasize that Microfin always asks for annualized figures for inflation and interest rates. Also show how the inflation rate may be changed in future months. Use the right-arrow to show how Microfin is structured with 24 monthly columns followed by quarterly columns indicated by the changed color band. Hit the Home key to return back to the Month 1 column. Enter a change in the inflation rate and show how the “#” column indicates the number of changes that have been entered in future months. Explain that the optional indexing section is used if the institution has any financial products linked to an external measure or if it receives loans linked to an external measure. If loans were linked to inflation, the inflation rate would be reentered here. If loans are made in an external currency, the rate of devaluation of local currency
  50. 50. relative to the external currency would be entered here. In addition, the exchange rate can be entered for reference purposes. 5. Historical financial statements Proceed down to this section of the model. Ask: Why do we need this information? Explain that this section serves two purposes. The first is to assess the current financial situation of the institution, and the second is to provide initial balances to begin the projections. Explain that the model uses a specific format for the statements and that there may be a need to rework the financial data from their institution to ‘fit’ the model. There are primarily two reasons for this, first Microfin financial statements may not match the categories in their accounting system and if they are a multi-service institution, they will first need to separate out data pertaining only to their financial services. Show how Microfin splits the financial statements into two columns. Emphasize Recalculation and point out Verification lines. Change the number entered in the Accumulated Donor Equity line of the Balance Sheet to 1,000,000, without hitting F9. Ask: Why isn’t the error flagged? [Answer: Because we haven’t hit F9 yet.] Hit F9 and show how the error is flagged. Page down to the end of the balance sheet and show how the difference is indicated on the VERIFICATION line. Return the correct figure (900,000). Portfolio Information section Show how the “number of days for at risk calculations” works. Ask: Where does the number come from for the “value of loans written off during period”? (Answer: from the data input into the previous financial statements.) Mention that we’ll review the calculation line later in the course. 5. Financial Ratio Analysis. Ask: What remaining piece of the institutional assessment is related to the financial information we’ve just input into the model? (Answer: Refer to framework – show financial management.) Ask: What is one way we can assess the quality of financial management in the institution? (Answer: by reviewing financial ratios.) Proceed down to the Financial Ratio Analysis section. Very quickly show that once a few additional pieces of information are entered, the page concludes with generation of the financial ratios we introduced earlier, thus providing a means of assessing the current financial status of the MFI before beginning with the actual projections. Show how the model allows choice of ratio denominator. Show how the TOTAL ASSETS line pulls information from the Balance Sheet above and allows input of data for a third year. Ask if anyone knows why there is a third year column. Show how the next line, AVERAGE TOTAL ASSETS, calculates the annual average; providing the third year data allows ratios to be calculated for two years, thus providing information for trend analysis.
  51. 51. BP6-M2 Balance Sheet Definitions used in the model Category Description Assets Cash in bank and near cash Cash assets, liquid assets, near cash and other non−interest-bearing cash products. May include non−interest-bearing balance and savings. For MFIs with a bank status, this account may include investments on the financial market or very short term bonds (a day, a week). Gross portfolio outstanding Total value of principal owed by clients on a 12 months term, as outstanding loans. Includes current loans, past-due loans, renegotiated loans, but not defaulted loans. All past-due loans must be considered as short term and must be included in this account. Does not include interest receivable. This amount must be broken down by product and by branch, on the branch projection pages. Loan loss reserve The loan loss reserve for the institution as a whole. This information will need to be broken down by branch (but not by product) on the branch projections pages. The value must be entered as a negative number. Short-term investments The total value of all interest-bearing short- term investments (with a term of less than 12 months). Savings reserves The amount of savings deposits not available for lending. These reserves are monitored independently of other bank accounts or investments, to ensure that they are not used for other purposes. Other current assets The value of all miscellaneous current assets, such as accounts receivable and accrued interest, not captured in other categories. Land The value of all land as it appears on the institution’s balance sheet. Buildings (gross) The gross value of all buildings as it appears on the balance sheet. Depreciation will be considered below, on the accumulated depreciation line.
  52. 52. Furniture and equipment The gross value of all fixed assets other than land and (gross) buildings as it appears on the institution's balance sheet. Depreciation will be considered below, on the accumulated depreciation line. Accumulated depreciation The total amount of accumulated depreciation as it appears on the institution's balance sheet. This amount must be entered as a negative number. The total will be broken down, for each of the above categories of fixed assets, by branch office and head office on their worksheets. Long-term investments The total amount of investments that are intended to be held for more than one year. Other long-term assets (net) The net value of all major assets that are amortized, such as MIS software. Liabilities Accrued expenses Expenses incurred as of the date of the balance sheet, but not yet paid, such as social benefits for the staff. Savings deposits Total value of all savings deposits (compulsory and voluntary) held and controlled by the institution. This value will be broken down by product and branch on the branch projections pages. Short-term loans payable The value of any loan principal due to be repaid within 12 months from the statement date – on all funds obtained through loans or other borrowing contracts. Includes loans, credit lines, and authorized overdrafts with a pending balance, as well as the portion of long term bonds to be repaid within 12 months. Other current liabilities Other short-term liabilities not captured in other categories due to be repaid within 12 months, including taxes and wage costs, salary deductions and other payables. Must also include any short-term portion of prepaid products. Long-term loans payable The value of the principal due to be repaid within 12 months from the statement date on all funds obtained through loans or other borrowing contracts and all subordinated debt. This account must not include long-term funding without a specific repayment date, such as long-term subsidized loans from related companies or branches. Other long-term liabilities Other long-term liabilities falling due in more
  53. 53. than one year’s time, including long term prepaid products, debt linked to pension plans and debt which doesn't directly fund the MFI's financial activities, such as mortgages or other loans for the purchase of capital assets. Long-term concessional loans without a specific repayment date, but which are not subsidies, are also included in this account. Equity Accumulated donated equity, previous periods The cumulative value of all grants received from donors before the current fiscal year (see FAQ 5). Donated equity, current period The value of all grants received from donors during the current fiscal year Shareholder equity Value of all investments made by shareholders. Dividend payments Cumulative value of all dividend payments made to shareholders (entered as a negative number). Accumulated net surplus Cumulative value of net income (after paying taxes and before receiving donor grants) of previous and current periods, after deducing dividend payments made to shareholders or members. Net surplus (deficit), current The value of the surpluses or deficits (excluding grant period income) for the current fiscal year.
  54. 54. BP7-H1 CLIENT ANALYSIS - WORKSHEET Think of a group of target clients for you MFI / your region. 1. Describe two activity systems specific to this group: (e.g. what is the nature of activities? What is the calendar of activities during the year? What is the seasonality of inflow and outflow? 2. What are the risks linked to these activity systems? (e.g. climate risk; health risk; disorganization of the sector; price instability; market saturation risk) 3. Think of a typical household. What are the usual financial needs? (Are the children attending school? Are there elderly relatives in the household? Are there any family members working abroad?) 4. Which financial products could you offer? 5. Which non-financial products could you offer?
  55. 55. BP7-H2 MICROFIN PRODUCT DEFINITION PAGE OUTLINE - to adapt according to the version of Microfin you are using Savings Product Definition Compulsory Savings - Linked to the Loan Product Directly Note: Balances are based on loan activity Control of savings by the MFI (included in Financial Statements) by group or another institution (not included in Financial Statements) Interest rate paid can vary by month Reserve percentage can vary by month Indexing of savings held in foreign currency value indexed to inflation Voluntary Savings Note: Balances are established on PROGRAM page Control of savings by the MFI (included in Financial Statements) Interest rate paid can vary by month Reserve percentage can vary by month Indexing of savings held in foreign currency value indexed to inflation
  56. 56. BP7-H2 cont Loan Product Definition Average loan amount input by cycle can vary by month can index to inflation Repayment conditions Repayment frequency Effective loan term Input by cycle can vary by month Grace period Compulsory savings Up-front savings as percent of requested loan amount as percent of cumulative loans On-going savings as percent of monthly principal payments Option to eliminate savings in future month Note: can combine savings methods Note: cannot vary percentages in future months Pricing structure Interest rate method Declining balance or flat Interest rate can vary by month Commissions and fees Up-front fees as fixed amount per loan as percent of loan amount On-going fees as fixed amount per month as percent of monthly principal payments Index to external value loans in foreign currency loans indexed to inflation rate Analysis Loan progression over time Average monthly payment by cycle Effective interest rate (nominal and real) Option to use CLIENT COST Worksheet
  57. 57. BP7-M1 Notes for guiding group discussion on Microfin Product and Services Design Step 1: Average loan amount Remind them that the first section “Step 1” is what we looked at earlier when we gave an overview of Microfin. Show how Microfin allows flexibility to specify loan sizes both for loan cycles and to vary by month if desired. Ask: How do average loan sizes within a loan cycle, say first loans, typically change over time? (Possible answers: they increase with inflation periodically; the institution revises them upwards.) Show how the dropdown list allows three options to link loan sizes to inflation. Step 2: Repayment conditions Show how the dropdown list gives a choice of repayment frequencies. Explain that if the product has multiple repayment options they should choose the most common option or choose “monthly payments” and little accuracy will be lost. Ask: What do we mean by effective loan term here? (Answer: it is the amount of time (in months) that it actually takes a client to repay a loan, not the original “contractual” loan term.) For example, if loan contracts are for 6 months but on average it takes clients 7 months to repay loans, then the effective loan term is 7 months. Ask: Why do you think it is important to use the effective loan term rather than the contractual loan term here? (Answer: the loan term will affect the projection of loan repayments as well as the timing of follow-up loans.) Grace Period – the model provides for only a single grace period to be indicated rather than a different one for each cycle. Step 3: Compulsory savings Explain that each product can have a different compulsory savings requirement and it therefore forms part of the loan product definition. Ask: What common approaches are there for defining compulsory savings? Compare participant replies to the options supported by Microfin (% of requested loan, % of cumulative loans). If participants have suggested alternative approaches, explain that Microfin contains only the most common approaches because of the complexity of these calculations. Point out that the FAQs often give solutions to situations that aren’t explicitly covered by the model. If participants mention approaches where savings are held by the participants or by an independent institution, explain that this will be handled later in the savings section. Step 4: Pricing structure Explain the two interest rate methods supported by Microfin. Show how Microfin asks for the interest rate changed in the previous year in order to calculate income on the outstanding portfolio. Explain that if the interest rate is changed in the future, that Microfin will charge the old interest rate to the existing portfolio and the new rate only on loans issued from that month forward. Emphasize that interest rates in Microfin are always annualized.
  58. 58. Show how fees are treated differently depending upon whether the number input is less than 1.00 or greater than 1.00. (See figure below.) Step 5: Analysis Explain that the final step in the loan analysis uses the data from the Month 1 column to do a number of useful calculations to help determine if the product is well-designed. Show the format of this section. Review each column using the explanation found in the BP Handbook. Make sure participants understand the meaning of the columns. Hit F9 to ensure data is up to date. Ask: Why does the average monthly payment decline in future cycles? (Answer: Because the loan term is getting longer and the loan amount is not increasing very rapidly.) Ask: Does this look like a well-designed product? (Answer: No, because clients should be able to handle larger payments as they remain clients for a longer period and their business grows.) Ask: Why does the effective interest rate decline for future loan cycles? (Answer: There is a fee charged per loan and the loan term is increasing, so the client pays the same costs over a longer period of time, resulting in a lower effective interest rate.) If participants don’t understand what an effective interest rate is, give a brief explanation, i.e., the effective interest rate states the total cost of the loan – interest and fees – expressed as the equivalent interest rate on a declining balance. Tell participants they can refer to CGAP Occasional Paper #1 for more information or they can attend one of the CGAP courses about setting interest rates. Explain that the calculations here in Step 5 are based on the product as defined in Month 1. Any changes made in future months, such as changing the interest rate, will not be reflected here. Don’t mention the Client Cost page at this time. It will be presented on the last day. Rate charged on future loans Show effect of numbers 1 and 1 Rate charged on existing portfolio is in Init.Bal. column
  59. 59. Explain that a loan can be defined starting in Month 1, even if it isn’t introduced until sometime in the future. This is because “marketing” of the product is done on the Program/Branch page. Thus a loan product can be “defined” as having an average loan size of $1,000,000, but if there isn’t a single client that has one of these loans, it will have no ramifications for the financial projections. Thus, if you are planning to introduce a new loan product in Year 2, it is helpful to define that product as of Month 1 in order to be able to use this analysis table. Savings Input Section (1) Control of savings Ask: What do you think is meant by ‘control of compulsory savings’? (Answer: compulsory savings can be controlled or held by the MFI, or by the group itself as in village banking, or by a third party such as a commercial bank.) Explain that compulsory savings are generated by the model for all three instances, but the savings only shows up on the MFI’s balance sheet if the MFI controls the savings. Ensure that everyone understands the distinction. (2) Interest rate paid Explain that the interest rate must be entered as an annual rate. (3) Percent to be held in reserve Ask: What does the reserve percentage mean? (Answer: it is the amount of savings that must be held in a secure place and is not available for lending or other uses.) Ask: Why should a portion of savings be held in reserve? (Answer: as security for peoples’ savings; this can be mandated by regulators or it may be a management decision.) Explain that if the savings are not controlled by the MFI, they must enter 100% as the “reserve” percentage in order that 0% be available for lending. (4) Indexing of savings Explain that savings can be indexed to an external value, in which case their value will be maintained using the value indicated on the Model Setup page in the Indexing Rate section. Voluntary savings Show how the sections for the voluntary savings products are identical to the compulsory savings section except that it is assumed that the institution controls voluntary savings.
  60. 60. BP8-H1 Lessons from crises in four microfinance markets From, Growth and Vulnerabilities in microfinance (Greg Chen, Stephen Rasmussen et Xavier Reille), Focus Note 61, Washington, D.C.: CGAP, 2010. From 2004 to 2008 microfinance enjoyed unprecedented growth in emerging markets, with average annual growth of 39 percent. Microfinance was promoted by many national governments eager to bridge the financial inclusion gap. Microfinance attracted donors and socially oriented investors thanks to its potential for social and financial returns and it also benefitted from increasing funding. This impressive growth means that millions more poor people are included in the formal financial system. However, in a few countries serious loan delinquency crises create concerns about growth risks and other potential causes of these faltering markets. Nicaragua, Morocco, Bosnia and Herzegovina (BiH), and Pakistan are important microfinance markets in their respective regions. These countries have all experienced a microfinance repayment crisis after a period of high growth within the last two years. CGAP led a study on these four crises which highlights the importance of contextual factors and reveals three major vulnerabilities within the microfinance industry: i) Concentrated market competition and multiple borrowing, ii) Overstretched MFI systems and controls, iii) Erosion of MFI lending discipline. 2004 to 2008: The Growth Story During this period growth was driven by increasingly competent and confident MFIs with a social mission to increase outreach to the poor and the unbanked. At the same time, there were also strong incentives for MFIs to grow since funding, national influence, and international recognition all flowed to the largest players. Growth Was Led by Credit Services MFI market expansion was driven by MFIs that relied on credit products and credit delivery methods common in microfinance. There are substantial differences in the credit approaches in the four countries, but their most common characteristic was that savings was neither a major service nor a large source of funds (the ratio of savings deposits to outstanding loans in each country remained under 10 percent throughout the period, in sharp contrast to the MIX global average of 46 percent). Fueled by Abundant Funding — Especially Debt During this period donors and social investors began to channel larger amounts of funds to MFIs across the globe, generating a significant supply “push” behind the growth story. The stock of cross-border investments in microfinance saw a seven-fold increase. Their investments were concentrated in a few select countries, including BiH and Nicaragua. Many MFIs relied on debt capital from foreign lenders to support their growth. In addition, MFIs sourced capital on their local markets through commercial banks and local apex funds. The emphasis on MFI borrowing contributed to a rise in financial leverage (the ratio of MFIs’ total assets to their equity base) rising from 3 to 5.5 between 2004 and 2008 in the four countries. Initially, Financial Performance Remained Solid Early in the growth period, MFI financial performance was strong in these four countries compared to global benchmarks. MFIs maintained good portfolio quality, stable net interest margins, and stable or increasing profitability. Combined with higher financial leverage, this performance improved return on equity in Morocco and BiH through 2007. Later, Credit Quality Deteriorated and Growth Slowed After several years of growth, credit repayment problems began. Signs of industry stress were reported among industry players in 2007, but delinquency problems did not appear in MFI reports until early 2008 in Morocco and in the other countries not until late 2008 or early 2009. In three of the countries PAR exceeded 10 percent,

×