BASIC ACCOUNT OFFICER’S TRAINING

Basic Microfinance Definitions and

Best Practices

Session ObjectivesSession Objectives

• Establish a common understanding of the basic terms in microfinance

• Understand the elements that comprise best practices and principles in microfinance and why these are important.

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DefinitionsDefinitions

• Microenterprise Clients- Typically self employed, low income entrepreneurs- Include non-agri and agri businesses- 4 out of 10 households depend on income from

microenterprise activities including small scale farm activities

• Microfinance Services- Small scale loan and deposit services- Remittance/Money Transfer services- Micro insurance- Micro Agri Loans & Housing Microfinance Loans

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DefinitionsDefinitions

Microfinance loans, per BSP guidelines Loans are PhP 300,000 and smaller Term of not more than 1 year Loans to microenterprises and other low income groups Loans to basic sectors such as agriculture, fishery

Present definition excludes loans whose payments are deducted from the source, such Salary loans, pension loans, LGU/bgy loan products and other variants

Micro deposits are deposits with outstanding balance of PhP15,000 or below

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Profiling the Microfinance ClientsProfiling the Microfinance Clients

Microentreprenuer Small Farmer

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The Microentrepreneur

Low educational level

Small volume of operations

Few employees (0-9), Usually family members

Rudimentary / obsoleteequipment

Family and business areconsidered as one

Multiple income-generationactivities

Basic or no businessrecords

Limited marketable collaterals to offer

Limited access to formal sourcesof credit / No credit history

Active participation in informalsources of credit

Basic financial skills

Large, extended families

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PROFILE OF A SMALL FARMER PROFILE OF A SMALL FARMER and the FARM Businessand the FARM Business

Low educational level

Product subject to price & market risks

Few employees Usually family members

Rudimentary / obsoleteequipment

Multiple income-generationactivities

No marketable collaterals to offer

No access to formal sourcesof credit / No credit history

Active participation in informalsources of credit

Large, extended families

Business subject to external risks

Small scale production

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Credit MethodologiesCredit Methodologies

• Group lending (Grameen-like and solidarity lending)

• 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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Reducing

RISK

ProvidingFast & Quality

SERVICE

Minimizing

COST

MF Best Practices: ContextMF Best Practices: Context

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Contextual Framework in Formulating Contextual Framework in Formulating Lending Policies and ProceduresLending 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…..

• 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

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:• Bank philosophy and image

• Client selection

• Loan policies

• Disbursement procedures, monitoring and adequacy of internal control

• Client incentives

• Culture of zero tolerance

• MIS

• 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

Client SelectionClient 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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• Start loans small and short term

• Increase loan sizes of repeat loans based on successful repayment and improvements in the client’s cash flow

• Unrestrained use of loan

• Be conservative in analyzing the client’s cash flow when determining how much to lend

• Focus on customer friendly approach

Offer Services that Fit the Preferences of Microenterprise Clients

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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

Streamline Operations to Reduce Administrative Costs

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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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• Small loans with frequent payments have higher transaction costs

• Microfinance clients are willing to pay higher rates in return for good service.

• But in time, as banks build scale, interest rates should come down

Charge Full-Cost Interest Rates and Fees

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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)

*Based on BSP Circular 409

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Adequate Internal Control

• Pick-up collection of loan payments, a most valued service demanded by microfinance clients, can lead to internal control problems and incidences of fraud.

• At a minimum, banks should be able to track missed installment payments, through their MIS.

• A microfinance supervisor should also verify cases of delayed or non-payment of installments immediately when they occur.

• 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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• 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.

Savings Products

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Keys to Success in Microfinance

• Strong institutional commitment – with CHAMPIONS at board & sr. mngt level and at mid-mngt level

• Demand- andmarket-oriented savings and loan product

• 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

Thank You!