Transcript MICROFINANCE BEST PRACTICES AND PRINCIPLES

Basic Microfinance Definitions
and
Best Practices
Rev.vers.Fin 8/12
Session Objectives
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Establish a common understanding of the basic terms in
microfinance
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Understand the elements that comprise best practices and
principles in microfinance and why these are important.
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Definitions
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Microenterprise Clients
- Typically self employed, low income entrepreneurs
- Include non-agri and agri businesses
- 4 of 10 households depend to some extent on income
from non-agri microenterprise
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Microfinance Services
- Small scale loan and deposit services
- Remittance services
- Micro insurance
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Definitions
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Microfinance loans, per BSP basic guidelines
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Loans are PhP150,000 and smaller
Clients after 2 years can be given up to PhP300,000
Term of not more than 1 year, except some products of housing loan
Loans to microenterprises and other low income groups
Loans to basic sectors such as agriculture, fishery
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Present definition excludes loans whose payments are
deducted from the source, such Salary loans, pension
loans, LGU/bgy loan products and other variants
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Micro deposits are deposits with outstanding balance of
PhP15,000 or below
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Profiling the Micro Business
Owner
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Non-agri Microentreprenuer
Small Farmer
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The Microentrepreneur
Low educational level
Few employees (0-9),
Usually family members
Basic or no business
records
Small volume of
operations
Basic financial skills
Rudimentary / obsolete
equipment
Limited access to formal sources
of credit / No credit history
Family and business are
considered as one
Multiple income-generation
activities
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Limited marketable
collaterals to offer
© Copyright 2003 RBAP. All Rights Reserved.
Active participation in informal
sources of credit
Large, extended
families
PROFILE OF A SMALL FARMER
and the FARM Business
Small scale production
Low educational level
Business subject to
external risks
No marketable
collaterals to offer
Product subject to price
& market risks
Active participation in informal
sources of credit
Few employees
Usually family members
No access to formal sources
of credit / No credit history
Rudimentary / obsolete
equipment
Large, extended
families
Multiple income-generation
activities
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© Copyright 2003 RBAP. All Rights Reserved.
Credit Methodologies
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Group lending (Grameen-like and
solidarity lending)
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Individual lending
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Group Lending
Loans given to groups – that is, either to individuals who
are members of a group and guarantee each other’s
loans, or to groups that then make subloans to members.
Under this system, would-be borrowers form groups
(usually 5 members) and each member agrees to
guarantee the loans of others in the group
If any one individual member defaults on his or her loan,
the other members of the group are required to cover the
short fall.
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Individual Lending
Loans are given to individuals based on their debt
payment capacity and assure lending institutions with
some level of security.
Loans are guaranteed by some form of collateral (soft or
substitute collateral) or a co-signer.
Clients are screened by credit checks and character
references.
Loan size and terms are tailored to business needs.
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MF Best Practices: Context
Reducing
RISK
Providing
Fast &
Quality
Minimizing
COST
SERVICE
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Framework in Formulating
Lending Policies and Procedures
When formulating and assessing whether a policy or procedure is
appropriate or not, ask the following questions: “Will the policy or
procedure…..
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Increase or reduce my risk of lending to this particular client?
Increase or reduce my cost of lending to this particular client?
Improve and speed up customer service?”
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Microfinance Best Practices and
Principles
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Microfinance Best Practices
The practices that MFIs follow in providing financial
services to low-income clients that have led to success and
profit.
Best practices should be reflected from product design
stage to implementation to monitoring.
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Best Practices are reflected in:
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Bank philosophy and image
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Client selection
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Loan policies
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Disbursement procedures, monitoring and
adequacy of internal control
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Client incentives
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Culture of zero tolerance
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MIS
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Loan-loss provisioning
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Bank Philosophy and Image
• Bank must be clear about its objectives for microfinance
• Microfinance must be seen as a profitable business, not a
charitable, service of the bank
• Bank must be able to provide high quality, appropriate,
and friendly service to its microfinance clients
- Clients feel welcome in the bank
- Rapid access, simple procedures
- Frequent contact with clients
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Client Selection
• Clearly defined client group
• Clearly defined geographic areas assigned to account
officers
• Client selection based on rigorous assessment of
character and repayment capacity, not collateral
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Offer Services that Fit the Preferences of
Microenterprise Clients
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Start loans small and short term
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Increase loan sizes of repeat loans based on successful
repayment and improvements in the client’s cash flow
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Unrestrained use of loan
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Be conservative in analyzing the client’s cash flow
when determining how much to lend
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Focus on customer friendly approach
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Streamline Operations to Reduce
Administrative Costs
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Standardize and simplify product documentation and
procedures
- A simple product design will be easier for the clients
to understand and staff to implement
- Product manual is a must to standardize operations,
improve efficiency, and minimize staff mistakes
 Maintain inexpensive offices close to borrowers
 Select staff from the local communities
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Disbursement and Monitoring
• Make Account Officers responsible for loans they have
recommended for approval
• Decentralize loan approval through a branch-level credit
committee
- MFU staff presents and defends his/her loan
recommendation to a credit committee.
• Practice transparency – disclose to clients charges/fees and
effective rates
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Disbursement and Monitoring
• Maintain regular contact with clients
• Delinquency “alarm signals” for effective follow-up
procedures
• Peformance-based staff incentive scheme
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Charge Full-Cost Interest Rates and Fees
• Small loans with frequent payments have higher
transaction costs; charge interest rate on declining
balance of the loan
• Microfinance clients are willing to pay higher rates in
return for good service.
• Practice transparency in pricing; inform clients of the true
cost of the loan. Follow BSP guidelines on pricing
• In time, as banks build scale, interest rates should come
down
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Motivate Clients to Repay
• Reward clients who pay on time, through:
- Interest rebates
- Bigger repeat loan and/or longer terms
- Fast servicing of repeat loans
• Impose a reasonable penalty charge for late payments
• Joint liability with co-borrowers/co-makers
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Zero Tolerance of Loan Delinquency
• Loans with payments delayed by just one (1) day are
considered delinquent
• Portfolio at risk (PAR), not past due ratio, defines
portfolio quality
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Zero Tolerance of Loan Delinquency
• Bank staff takes immediate step to collect from client or
find out reason when a payment is missed
• Willingness to pursue delinquent clients, in some cases,
whatever the cost to establish and maintain zero
tolerance practices
• The culture and discipline of zero tolerance must start
with top management and be communicated down to the
staff and clients.
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Management Information System
• Critical for tracking the performance of the microfinance
loan portfolio.
• At a minimum, should be able to track missed payments,
the account officers responsible for their collection, and
the portfolio at risk (PAR).
• Should be able to show the performance of each account
officer.
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Adequate Loan-Loss Provisioning
and Loan Write-off
Should be based on the aging of the portfolio at risk (PAR). Follow BSP
guidelines.
Example
Age
Loan Portfolio LLP (%)*
Current Loans
PAR 1-30 days
PAR 31-60 days/or
Restructured once
PAR 61-90 days
PAR 61-90 days
PAR Over 90 days/or
Restructured twice
LLP (PhP)
1%
2%
25%
50%
100%
*Based on BSP Circular 409
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Adequate Internal Control
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Pick-up collection of loan payments, a most valued service
demanded by microfinance clients, can lead to internal control
problems and incidences of fraud.
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At a minimum, banks should be able to track missed installment
payments, through their MIS.
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A microfinance supervisor should also verify cases of delayed or
non-payment of installments immediately when they occur.
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Other check points include: loan review and approval by a credit
committee and regular random check of clients by supervisor or
audit personnel.
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Savings Products
• Low minimum balance requirements.
• Regular deposits and higher daily balances are
encouraged by increasing interest rates or rewarding
those with higher balances.
• High quality client service.
• Standardize & simplify product documentation and
procedures.
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Keys to Success in Microfinance
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Strong institutional commitment – with
CHAMPIONS at board & sr. mngt level and at
mid-mngt level
Demand- andmarket-oriented savings and loan
products
Good client service
Good client selection process
Sufficient interest rates to cover costs
Zero tolerance of loan delinquency
Good functioning MIS
Adequate loan-loss provisioning
Adequate internal control measures
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