Download - Sri Lanka Microfinance Forum - Funding

Volume 3, January 2010

Funding for MFIs

Where to open the tap?

SPECIAL FEATURES IN THIS EDITION

Exclusive Interview with NDTF 4 Microfinance Impact on Shelter 5 Market Research Product Development 6 Liquidity Risk Management for MFI 7

Sri Lanka Microfinance Forum ISSN 2012-5666 Volume 3, January 2010

Sri Lanka Microfinance Forum

WORD OF THE EDITORS

In the next issue we would like to discuss about Microfinance Associa-

tions and their role. We therefore encourage all microfinance practi-

tioners, regulators, promoters or other stakeholders to send us their views, opinion and experiences

Networking has become one of the major factors for the success and

growth of the microfinance sector in a country or region. Strong regional

and country-level assocations en-

able microfinance practitioners to exchange their experiences, build

common performance standards, and influence policy makers to fa-

cilitate the growth of microfinance sector, etc. SEEP, BWTP, WWB, INAFI and

Pakistan Network are some of the success stories in the microfinance

sector. What is the situation in Sri Lanka? Do we need an association?

Does it provide a platform to Sri

Lankan MFIs to share their experi-ences? Is it a collective body of

MFIs? What is their role? These are few questions raised by stake-

holders in the sector. Therefore we would like to provide a space for you in the next issue to express

your views on this regards. Please send your comments, sug-

gestions and experience to [email protected]

IN THE NEXT SLMF ISSUE: MICROFINANCE ASSOCIATIONS – WHAT IS THEIR ROLE?

LOCAL NEWS

DEAR READER

Thank you all for the comments and valuable feedback given for the first

and second editions of SLMFF, which encouraged and motivated

us to continue with this task of edu-cating, enhancing and disseminat-ing information for the betterment

of the sector. Within the last few months we were

able to bring various local and inter-national microfinance practitioners, consultants, networks, regulators,

donor agencies to a common plat-form and to discuss various issues

we had in the sector, share the ex-periences and enhance our knowl-

edge. We are very thankful to all those who shared their experience with us.

We would like to present you the third edition of the Sri Lanka Micro-

finance Forum, which will focus on the topic of funding for MFIs in Sri

Lanka. At the moment funding is one of the most important topics in the microfinance sector and there-

fore we tried to discuss about the funding for MFIs in different as-

pects and share different views.

Introduction of interest rate ceiling by NDTF is one of the major aspects

being discussed in the sector. SLMFF was able to interview Mr.

Piyadasa, the director credit of NDTF to share their views behind

this move. We take this opportu-nity to thank Mr. Silva and Mr. Piyadasa of NDTF for their support

and contribution. We would like to thank Mr.

Charitha Ratwatte from Sri Lanka Business Development Centre, Ms. Nadeera Ranabahu, Mr. Niraj

Kumar and Mr. Chandrasena for contributing with articles to this

issue. Of course we would also like to thank the board of advisors for

their valuable advice and support. In addition to that we would like to

share some views expressed through the poll conducted by

SLMFF last month. It was revealed that, 44% who have replied are

technical service providers and 33% are MFIs. 44% said that ease of ac-cess to local debit funding is good

and ease of access to international equity funding is very bad while

55% mentioned that ease of access

to international debit funding is bad. It can be highlighted that 66%,

55% and 55% pointed out that sav-ings regulation, exchange control

regulation and international cur-rency funding are three major areas

to be improved respectively. And also it can be noted that 88% ex-pressed that the interest rate ceiling

would make more difficult for MFIs to sustain.

This issues consists some of the views expressed by pioneers in the

industry as well as some case stud-ies. We hope you will enjoy reading

this issue. For subscription, queries, com-

ments, article contributions in any language, and others, please write to [email protected]

We wish you a HAPPY NEW YEAR

and wish the Microfinance Sector a prosperous and great year ahead.

Yours sincerely, Niroshani Sawanawadu and

Imran Nafeer

Niroshani Sawanawadu

ICT / Microfinance Consultant

NEWS ROUND

HNB opens its first Micro Banking unit dedicated to microfinance: The HNB micro banking units at

Kurunduwatte in Nawalapitiya Electorate fulfills the promise of

Pubuduwa by making financial services accessible to people in rural areas. The concept behind this ini-

tiative is to offer a comprehensive package of services including finan-

cial assistance, technical know-how and marketing arrangements for

rural community

Sinhala ad Tamil translations of Sri Lanka Microfinance Industry

Report 2009 now available: For the first time a comprehensive industry

report about the Sri Lankan microfi-nance sector is available in English,

Sinhala and Tamil language. The reports can be downloaded from

http ://ww w.mic rofi na nce .l k/gtzpublic.php Printed copies of the reports may be

obtained from the ProMiS office, Level 16, East Tower, World Trade

Centre, Colombo 1.

(www.microfinance.lk)

New company to cater to Micro-Finance in Sri Lanka

A new financial institution, Global Trust Financial Services Limited,

will be set up shortly in Sri Lanka to cater to a huge demand for micro-

finance, estimated to be around LKR125 billion. According to the

Managing Director Susantha Fer-nando the company is seeking ap-proval from the Central Bank (CB)

to operate as a finance company. S o u r c e : h t t p : / /

www.sunda ytimes .l k/091018/FinancialTimes/ft40.html

(Continued on page 3)

Imran Nafeer

Microfinance Consultant


NEWS ROUND (CONT’D)

Management Development Train-

ing of Trainers—was held at Co-lombo from 16th to 21st November

2009. This workshop was conducted by Centre for Microfinance Leader-

ship, WWB for selected participants from South Asian MFIs.

For the first time in Sri Lanka Social

Performance Management work-shop was conducted from 25th to

28th November 2009. This is con-

ducted by Development Facilitators with the Special support from GTZ

ProMis project and EDA Rural Sys-tems (Pvt) Ltd in India. Participants

from 8 MFIs participated for the workshop.

(Continued from page 2)

Training on;

1: Financial Analysis & Accounting for MFI’s (Dated: Feb 4-6, 2010, Colombo)

2. Internal Controls & Risk Based

Internal Audit (Dated: Feb 8-11, 2010, Colombo)

Contact: [email protected],

Visit: www.nimbusconsulting.net Nimbus Consulting

Training on MFI Valuations and Investments 08 Feb 2010 - 10 Feb 2010, India

Microfinance Summit Nepal 2010 14 Feb 2010 - 16 Feb 2010, Nepal

Investment Readiness Training for MFIs 10 Feb 2010 - 12 Feb 2010, India

LOCAL AND INTERNATIONAL TRAINING COURSES AND EVENTS

Grameen Phone goes to stock mar-ket. Grameenphone is 38-percent-owned by Grameen Telecom, a subsidiary of micro-finance giant Grameen Bank, which was set up by

2006 Nobel peace prize winner Muhammad Yunus. It has around

21 million of Bangladesh's fast growing 46 million cellular sub-

scriber base. It is also the country's largest private company in terms of revenue. Dhaka Stock Exchange

president Rakibur Rahman said Grameenphone's IPO was the larg-

est in the country's history, dwarf-ing the previous record set by a

private bank by more than four times. (http://www.dailymirror.lk/DM_BLOG/

Sections/frmNewsDetailView.aspx?

ARTID=63614)

SMS-based Microfinance System Unveiled: A new system has been unveiled that claims to let MFIs run

their entire operations via mobile phones and a single laptop. ‘Frontli-neSMS: Credit’ system combines

SMS-aggregating software and mobile commerce offerings to let

MFIs deliver and track loans via handsets. It is based on Frontli-neSMS, a free, open source software

that turns a laptop and mobile phone into a central communica-

tions hub. Once installed, the pro-gram taps the GSM wireless tele-

phone network to enable users to send and receive text messages with groups of people through mobile

phones.

According to its Website, "FrontlineSMS:Credit aims to make

every formal financial service avail-able to the entrepreneurial poor in

160 characters or less". The new venture is building a series of free

and open source financial modules that will allow FrontlineSMS to communicate with mobile payment

systems in real time. The founder says this will turn FrontlineSMS in

to a microfinance management information system, a payroll center for SMEs, a collection and distribu-

tion center for microinsurance pre-miums and payouts, and a hub for

individual credit histories and scores.

http://www.finextra.com/fullstory.asp?id=20616

Credit bureau for MFIs in making in India: Twenty five microfinance institutions have formed a trust

called Alpha, which will put to-gether a credit bureau called High

Mark dedicated to the microfinance sector. Alpha is headed by Vijay Mahajan,

chairman of BASIX, and P N Vasudevan managing director of

Equitas Microfinance. Source: http://www.dnaindia.com/money/

report_credit-bureau-for-mfis-in-making_1296640

RBI against interest rate cap on loans to poor: While the Reserve Bank of India (RBI) and senior gov-ernment officials are concerned over the steep rates of interest charged

by microfinance institutions, the

central bank has ruled out any cap on rates.

The issue of high interest rates charged by microfinance institu-

tions has escalated as there have been instances of multiple lending

in some pockets of south India. There are chances that once the Microfinance Bill is passed, it may

impose restrictions on the lending rates by microfinance institutions.

"The new draft of the Bill is about to be finalised by the law ministry. The Bill may lay the power to the

government to give directions on interest rates if required," says an

official who has been involved in preparing the draft Bill.

Source: http://www.dnaindia.com/money/report_rbi-against-interest-rate-cap-

on-loans-to-poor_1298716 IMF announces project to study financial access for poor: The Inter-national Monetary Fund announced

a worldwide project to collect data on access to financial services in a bid to help policies aimed at reduc-

ing poverty. Under the project, the IMF will

collect data from countries on loans, deposits, debt securities and insur-ance on a regular basis to help de-

termine priorities for policies on broadening access to financial ser-

vices. Source: http://ae.zawya.com/

Story.cfm/sidANA20091005T095448ZFLX91/IMF%20announces%20project%

20to%20study%20financial%20access%20for%20poor

INTERNATIONAL NEWS


DISCUSSION FORUM

The National Development Trust Fund (NDTF) was formed in 1991 as

a government body, and managed by a Board of Directors. A guaran-

tee company in the same name was incorporated in 2003 with broad

and corporate of objectives which has obtained funds from the Asian Development Bank (ADB) to on

lend to Microfinance Institutions (MFIs). It exercises autonomy in

Microfinance operations.

NDTF has been very helpful in developing the microfinance sector

in Sri Lanka by extending credit and non credit assistance. With the pro-vision of funds for Microfinance

Institutions (MFIs), the sector has been able to develop and has

reached a strong potential now. Currently NDTF is working with

250 partner organizations. How-ever, recently NDTF has introduced an interest rate ceiling of 15%

(declining balance) to on lend loans by MFIs. As this step came very

unexpected, some practitioners of the Sri Lankan microfinance sector

have expressed their concerns over this step.

As the Sri Lanka Microfinance Fo-

rum (SLMFF) wants to present a discussion platform to explore and address current needs and issues of

the sector, we talked to Mr. Pi-yadasa, Director Credit of NDTF to

get an insight about this interest rate cap.

SLMFF: What is the purpose of this interest rate cap?

NDTF: This decision was taken in early July 2009 according to the

government policy to reduce the interest rate to the end borrower.

We are serving to poorest of the country and micro enterprises. A

poor person who is doing a micro enterprise is not able to pay a large

interest rate to MFI. Partner Organi-zations charge an interest rate around 20% flat or 30% declining

balance. There is no uniformity. A small entrepreneur should earn a

net surplus of 30% just to pay back the interest. Since the return is not that enough to earn profits they face

difficulties to sustain their business. Our intention was mainly to give

compensation to the small entrepre-neurs (end user of our funds).

SLMFF: How have been the reac-tions so far of the MFIs that are

borrowing from NDTF?

NDTF: There are mixed reactions but I would like to say that the im-pact is not that severe. Specially few

large MFIs who are having different credit lines have informed us their difficulties in working with NDTF

funds at lower rate. However except a few MFIs others are continuously

obtaining refinance facilities from NDTF to on lend their beneficiaries

at less than 15% per annum. Small Partner Organizations (PO) are ok with this interest rate. Our objective

is to improve these small village level organizations. Large MFI

should not think increase of interest rate is the only solution, they can take action to reduce their opera-

tional cost and they can obtain NDTF assistance indirectly in areas

like training.

Some MFIs have already come up with initiatives to effectively utilize

our funds. They have segregated their loans such a way that they will

give the first loan using NDTF funds and the other loans from

other credit lines.

SLMFF: What is the effective date of this interest cap?

NDTF: 01st of July 2009

SLMFF: Does it apply only to new loans or both new and existing loans?

NDTF: Only to new loans

SLMFF: Does this interest rate cap apply to the whole loan portfolio of

the borrowing MFIs or only to the part that is financed by NDTF?

NDTF: Only to funds provided by NDTF. NDTF is the only govern-

ment body working in this sector and it is a government policy to reduce the interest rate.

SLMFF: Why do you think in the circumstance given that margin of 8% is sufficient for a MFI to be sus-

tainable?

NDTF: In case of large MFIs this 8% interest spread in marginal as they extend other assistance to benefici-

aries their operational cost is high. But it is enough for small village organizations. MFIs should try to

implement their credit program in effective and efficient manner so

that they can reduce their opera-tional cost. Although the immediate impact is high in the long run this

will create a healthy and efficient microfinance sector in Sri Lanka.


EXCLUSIVE INTERVIEW WITH NATIONAL DEVELOPMENT TRUST FUND

L.A. Piyadasa

Director Credit

National Development Trust Fund (NDTF)

“There are mixed reac-tions but I would like to say that the impact is not that severe. Specially few large MFIs who are hav-ing different credit lines have informed us their difficulties in working with NDTF funds at

lower rate. ”

Charitha RatwatteCharitha RatwatteCharitha RatwatteCharitha Ratwatte

Sri Lanka Business

Development Centre

“...we do not need any new

laws. The current lack of

funding for MFI in Sri

Lanka would be less of an

issue if only the existing

laws were fully imple-

mented.”

DEPOSIT MOBILIZATION BY MFI

Microfinance Institutions (MFI) have to mobilize deposits from their

members in order to build a respon-sible credit culture, invest and on

lend these funds, in order to gener-ate micro enterprises among their

membership. The Banking Act in terms of the

Banking Amendment Act, no 33 of 1995, amending the original Bank-

ing Act, no. 30 of 1988, in terms of the proviso to section 76(A) (1) (e), provides that, the Monetary Board

of the CBSL, may by letter, permit entities which are:- not a Licensed

Commercial Bank, not a Finance Company, not a Co-operative Soci-

ety, not a Building Society, to accept

deposits from their members, invest and on lend these funds to their

members, if they are established under any law and are not for profit

institutions. The CBSL has to make regulations

by subsidiary legislation, as em-powered by the Banking Act, to make rules under which this Pro-

viso becomes operable. This Provi-sion was enacted specifically to

catch the existing lacuna, at that time, in the regulatory framework.

It is understood that Sarvodaya SEEDS has obtained a letter from

the Monetary Board of the CBSL, in terms of this proviso and that

Arthacharya Foundation has ap-

plied for a letter some time ago and has been informed by the Monetary

Board of the CBSL, that their re-quest is ‘under consideration’.

The legal mobilization of deposits

remains an issue for many microfi-nance providers. If this situation improves, also an important source

of funding for MFI opens up. To achieve this, we do not need any

new laws. The current lack of fund-ing for MFI in Sri Lanka would be less of an issue if only the existing

laws were fully implemented.

Charitha Ratwatte Sri Lanka Business Development Centre


Microfinance is the most important

innovation in the field of ‘Financial

Development and Economic

Growth’ during the last Century. It

has been widely accepted as an

effective instrument of sustained

economic growth through rural

development and poverty reduction

by promoting investment in small

enterprises both rural as well as

urban areas. More recently, the

development economists laid em-

phasis on microfinance as an eco-

nomic development approach in-

tended to benefit low-income peo-

ple and better way to achieve Mil-

lennium Development Goals

(MDGs) including reducing pov-

erty, supporting gender equity,

encouraging more equitable income

distribution, developing the private

sector and promoting participatory

development.

While the shelter is the prior basic

needs, MF should have impact on

housing development of Borrowing

Households (BHHs). However,

researchers in their impact assess-

ment studies have not so far, paid

their attention to shelter impact of

MF. With this gap, MF and Shelter

is the new field to the microfinance.

It is, therefore, important to evalu-

ate the shelter improving capacity

of micro-credit programmes. Pre-

sent study is intended to analyse

how effective MF programmes in

improving the shelter conditions of

(BHHs) of Southern Province in Sri

Lanka.

The study is based on the survey of

about 405 microfinance recipients of

four national level leading MF insti-

tutions (MFIs): Thrift and Credit

Cooperative Societies (TCCSs) from

financial cooperatives, Samurdhi

Banking Societies (SBSs) from Gov-

ernment supported institutions,

Ruhuna Development Bank (RDB)

from semi-government and Sarvo-

daya Economic Enterprise Develop-

ment Societies (SEEDS) from Non-

Governmental Organizations. For

analysis purpose, a comparison

group of households (CHHs) has

been selected from the existing

recipients whom duration of mem-

bership with MF is not longer than

one year to compare their shelter

status with that of existing members

whom membership duration with

MF programmes is longer than one

year. Latter group of BHHs sub

divided into two as BHHsG2

(duration of membership with MF

ranges between 1-4 years) and

BHHsG3 (duration of membership

with MF is longer than 4 years).

Three indicators: living space, Shel-

ter condition and current market

value of a dwelling house are used

for assessing the impact. Average

Treatment Effect (ATE) of all vari-

ables is estimated for both the

groups of households (CHHs and

BHHs).

Based on data analysis, the author

founds that Micro-credit has bene-

fited the Borrowing Households to

improve their shelter status in terms

of all the indicators of housing con-

ditions (except roof condition),

living space and market value of a

dwelling house. For example, ATE

(difference in mean value) of living

space in dwelling houses of a

BHHG3 is 124.4 sqft. which 20.3%

is grater than that which of CHHs.

Meanwhile, by 85.1 percent of

BHHsG3 have a dwelling house

with the sidewall condition of ce-

ment plastering, but the percentage

share of houses with cements plas-

tered sidewalls has decreased to

71.5 percent for BHHsG2 and it

steadily decreased further to 42.3

percentages for CHHs. Further-

more, while only 9 percent of

BHHsG3 and 15.1 percent of

BHHsG2 have houses with the floor

of cow-dung, the percentage share

increases to 30.9 percent for CHHs

have cow-dung floor. Finally, Re-

gression analysis on market value of

dwelling houses has evident that, if

other variables in the model held

constant, one unit increase in credit,

would expect that 4.1 units increase

in value in a house of BHHsG3. In

contrast, one unit increase in credit

would result only a 2.2 increase in

housing value of BHHsG2. On the

basis of this analysis it can be con-

cluded that although the microfi-

nance practitioners lukewarm in

financing the housing loans directly

as their little economic of scale, MF

has indirectly evolved with better

impact on shelter of BHHs with

compared the CHHs.

The complete study can be obtained

from the author.

A.J.M.Chandradasa

Senior Lecturer

Department of Economics

University of Ruhuna

[email protected]

MICROFINANCE AND SHELTER: AN IMPACT ASSESSMENT OF MICROFINANCE PRO-

GRAMMES OF SOUTHERN PROVINCE IN SRI LANKA

„Micro-credit has benefited the Borrowing Households to improve their shelter status in terms of all the indicators of housing conditions (except roof condition)“

A.J.M.Chandradasa

Senior Lecturer

Department of Economics

University of Ruhuna

Wish you a

HAPPY NEW

YEAR

2010

CASE STUDIES

Sri Lanka Microfinance Forum Page 6

The views expressed here are those

of the author and do not necessarily

reflect views of PLAN Sri Lanka.

In the current business environment,

“customer orientation” throughout

the product cycle is indispensable

for mere survival in the competitive

market. With this current change of

focus, concepts such as product-

driven; where producing goods and

selling it afterwards through various

strategies, has evolved to customer-

driven; where customers’ prefer-

ences and needs are identified prior

to the development of goods and

services. The trend is also emerging

in the microfinance sector, where

Microfinance Institutions (MFIs)

develop client centered financial

products tailored to its clientele. In

addition, there is a compelling need

for the MFIs to be more client re-

sponsive due to the fact that many

MFIs are losing a substantial num-

ber of clients every year –primarily

because the MFI’s products do not

suit them (Hulme, 1999). So, where

does market research fit in this con-

ceptual scenario? What are the bene-

fits of customer driven services to

MFIs? What is the process and tech-

nique of market researching? How it

can be applied to the Sri Lankan

context? These are some of the is-

sues which are explored in this arti-

cle.

Market research (MR) is defined as

an activity designed to understand

the needs and preferences of exist-

ing and potential clients of a MFI,

besides the operational environment

and financial landscape (Wright,

2000). This definition also provides

answers to the very first question of

many practitioners; what are the

benefits of customer-driven product

development to MFIs? As the de-

scription indicates, market research

provides information on developing

new products, refining existing

products, and improving marketing,

promotion and delivery systems by

identifying client perspectives and

financial landscape.

Though MR reminds us of a compli-

cated research process, it is in fact

not, and can be managed by small

and medium scale MFIs too. Mar-

ket research process starts with the

identification of a research issue

through a series of secondary data

reviews. These findings are used to

formulate research objectives and a

MR plan which is followed by data

collection.

It is interesting to note that common

qualitative data gathering tech-

niques such as Focused Group Dis-

cussions (FGDs) and Participatory

Rural Appraisals (PRAs) are exten-

sively used to collect data. Thus, it is

worthwhile to explore how and

which way these tools have been

utilized to derive information rele-

vant to financial product develop-

ment. PRA tools such as seasonality,

life cycle, time series and wealth

ranking have been modified to iden-

tify financial dynamics, patterns,

needs, and wealth status of custom-

ers. Attribute and institutional rank-

ing techniques assist in determining

financial service use, options, prefer-

ences and opportunities within com-

munities. In addition, FGD/PRAs

are utilized to identify gender issues

and household control of resources

depending on the objective.

Qualitative data are analyzed

against the “8Ps” of marketing;

Product design, Price, Promotion,

Place, Positioning, Physical Evi-

dence¸ People and Process prefera-

bly by a multi disciplinary team

which includes representatives from

all departments, such as Frontline

staff , MIS, Accounting, Marketing,

Operational, HR, etc. The analysis

results in an initial product concept

which is then revised using a series

of FGDs and if required supple-

mented with a quantitative pilot test

to come-up with a finalized product.

If market research is followed in the

step-wise manner as described, it

reduces a lot of complications of

MFIs and results in a comprehensive

financial product.

MR is practiced widely among MFIs

across the globe including in coun-

tries like Kenya, Bangladesh,

Uganda, South Africa, India; where

there are microfinance market lead-

ers as well. For example through

refining savings products according

to MR findings, MFIs such as ASA

in Bangladesh, and Postal Bank in

Tanzania have achieved remarkable

success in savings mobilization. In

addition, institutions such as Equity

Bank in Kenya, FINCA in Uganda

have experienced higher client re-

tention rates for their loan products

(Wright, 1999 & Coetzee, 2002).

But, interactions with many Sri

Lankan microfinance practitioners

have revealed that they heavily rely

on the experience of field officers for

refining and introducing new finan-

cial products rather than undertak-

ing a comprehensive market re-

search, assuming that the staff un-

derstand client’s needs and prefer-

ences since they are the closest peo-

ple in contact with them. Others

simply develop products based on

organizational priorities and global

trends. In this context, it will be

worthwhile to examine possible

reasons why market researching is

not practiced extensively in Sri

Lanka.

In Sri Lanka, one of the main rea-

sons could be seen as the financial

cost involved in MR especially in

primary data collection. Many MFIs

perceive that the immediate return

from MR is not significant when

compared to the cost incurred.

However, this thinking fails to rec-

ognize the long term benefits of

market research. For example, in

addition to the direct benefit of im-

proving all the aspects of a particu-

lar financial product, primary data

collected from clients assist in im-

proving services, managing cash

flow according to the seasonal needs

and identifying strengths and weak-

nesses of competitors.

Although one may argue that it is

more efficient to use secondary data

rather than primary data, since it is

much easy and cheaper to collect,


MARKET RESEARCH FOR FINANCIAL PRODUCT DEVELOPMENT

MICROFINANCE TECHNIQUES

Nadeera Ranaban Microfinance Specialist

Plan Sri Lanka

„Sri Lankan microfinance practitioners have re-

vealed that they heavily rely on the experience of field officers for refining

and introducing new financial products rather than undertaking a com-prehensive market re-

search, assuming that the staff understand client’s needs and preferences

since they are the closest people in contact with

them.“

Volume 3, January 2010 Page 7

LIQUIDITY RISK MANAGEMENT (PART 1 & 2)

Dear reader, this article is part of a

series of articles on liquidity risk

management. The article consists of

4 sections:

1. Definition and Rationale

2. Liquidity Risk Management

Policy

3. Measuring and Monitoring

Liquidity Risks

4. Managing Liquidity.

The current edition of the SLMFF

will show you the first two parts of

the article: Definition and Rationale

and Liquidity Risk Management

Policy. We are very thankful to Mr.

Niraj Kumar, who is an expert in

the field of risk management, that

he has agreed to contribute these

articles to the Sri Lanka Microfi-

nance Forum.

Part 1 Part 1 Part 1 Part 1

DDDDefinition and Rationale

While most of the MFIs are over-

whelmingly grappled with the

credit risk management, the liquid-

ity risk management often gets

ignored, despite of the fact that it is

equally potent risk that could wipe

out an MFI in no time. Experience

demonstrates that financial institu-

tion failures result more often from

liquidity crises than any other fac-

tor.

Liquidity refers to the ability of an

institution to honour all commit-

ments of payment as they fall due by

using any one or a mix of the follow-

ing way: (a) current cash inflows, (b)

stock of cash holdings, (c) borrow-

ing cash, and (d) converting liquid

assets into cash. Liquidity risk is the

possibility of negative effects on the

interests of owners, customers and

other stakeholders of the financial

institution resulting from the inabil-

ity to meet current payment obliga-

tions in a timely and cost-efficient

manner.

Liquidity risk management is a

proactive and comprehensive ap-

proach that includes framing and

regularly revisiting the liquidity

management policy, establishing

mechanism for continual identifica-

tion and monitoring liquidity risks

and takes necessary steps to meet

the following objectives:

• Honour all cash outflow

commitments (client de-

mand for loans and savings

withdrawals, to pay the

institution’s expenses, pay-

ments to suppliers, credi-

tors, etc.) on a daily and

ongoing basis,

• Minimize the cost of fore-

gone earnings on idle cash,

• Satisfy minimum reserve

requirements and other

regulatory liquidity stan-

dards,

• Avoid additional cost of

emergency borrowing and

forced liquidation of assets.

Liquidity is a double edge sword. If

an institution is unable to meet its

obligations of payment due to

shortfall in liquidity, it sparks a

series of events and loss of confi-

dence among different stakeholders

that can be lethal, regardless of the

size of the shortfall. On the other

hand, too much liquidity could also

make an institution bankrupt, as idle

cash does not earn enough to cover

funding and administrative costs.

The challenge therefore is, to main-

tain a fine balance between having

too much and too little liquidity.

However, it is not only about deter-

mining a single optimal level of

cash to hold but it is about making a

reasonable compromise between risk

of a liquidity shortage and risk of

low profitability.

Part 2

Liquidity Risk Management Policy

The first step towards proactive

liquidity management is to draft a

well-defined policy on managing

liquidity and review it periodically.

An indicative list of areas of liquidity

management in which policies

should be framed is given below:

Defining institutional arrangements

and responsibilities of the people

involved in liquidity risk manage-

ment.

• Define acceptable liquidity

instruments (for example, in

cash or marketable securi-

ties). Regulatory restrictions

(if any) should also be taken

into account while deciding

mode of liquidity.

• The optimal amount of li-

quidity to be maintained

(considering local regulatory

requirements), and the trig-

gers that prompt action (see

Table 1).

• Liquidity ratios that need to

be monitored and its trigger

point (see Table 1).

• General methodology of

liquidity management: How

will it be monitored, the time

frames to be used in cash

flow analysis, and the level

of details.

• The risk appetite of the insti-

tution or the level of risk it is

willing to take in minimizing

cash to enhance profitability.

Specifically, the policy

should establish minimums

and maximums for total cash

assets and for the amount to

be kept on-site.

• The authority limits of the

personnel involved in ap-

proving cash transactions/

transfers.

• How excess funds are to be

handled, such as who has

access to them and where

they are to be kept or in-

vested.

• Limits for the maximum

amount to be invested in any

one bank or instrument, to

limit the exposure to any

source/instrument.

• Who may access or establish

a line of credit for short-term

liquidity needs and what are

acceptable reasons or scenar-

ios for accessing the line of

credit.

BEST PRACTICES

Volume 2, August 2009

„Targets need to be thought out carefully. They may create incentives that become detrimental for the sector......“

Niraj Kumar Freelance Consultant

India

Niraj is a Freelance Consultant and Trainer in microfinance. An MBA by training, he has

extensive experience (more than ten years) of working in microfinance sector in South Asia, South-East Asia and

Africa. He has visited nearly 70 MFIs in these regions on wide range of assignments, including credit rating, insti-

tutional assessment, strategy & systems development, formulating business plan, research study and training.

He is also a seasoned trainer, certified by CGAP and Asian Development Bank Institute (ADBI) & Tokyo

Development Learning Cen-tre, World Bank (TDLC). He has developed several train-ing modules in microfi-

nance management and delivered about 100 training modules and trained over 1500 microfinance profes-

sionals across Asia and Africa. Currently he is also associated with ADBI-TDLC as ‘Regional Tutor’ for its

distance learning course on ‘Microfinance Training of Trainers’. In past, he has worked for ‘EDA Rural

Systems’ and one of its group companies - ‘Micro-Credit Ratings Interna-tional Ltd’ (M-CRIL), based

in India. [email protected]


SLMFF: What are the future plans of NDTF?

NDTF: We are aware that the MFIs need a healthy interest margin for

them to extend non commercial assistance to beneficiaries. This is not an ordinary lending scheme.

MFIs involve with other costs too. They extend non credit financial

services to enhance their credit programs, procedures and systems to improve the operations, services

such as trainings, mobilization of people and mobilization of field

staff.

We are planning to expand our non-credit assistance to overcome these

difficulties. We have already esti-mated to allocate a considerable

amount from the 2010 budget for capacity building of MFIs and other

assistance programmes designed to develop skills and awareness of beneficiaries.

For the next year we have targeted

to enroll new 200 partner organiza-tions working in village level.

We will have meetings with the microfinance network and some of the MFIs to get their views for us to

design a package of assistance. With all the positive changes we

are hoping to become the core insti-

tution for the microfinance sector in

Sri Lanka and with this expansion

plans we hope in the near future

interest rate may decide by the

market forces.


You can participate

Send your comments, news, articles, and

opinions to

[email protected]

The Sri Lanka Microfi-nance Team wants to

express its thanks to the Advisory Board Members:

Chandula Abewickrama

Charitha Ratwatte Dr. Dagmar Lumm

Dulan de Silva Dr . Nimal Fernando

Nimal Martinus Nina Nayar

Shaklila Wijewardana

The Advisory Board is not responsible for the content of the Sri Lanka Microfinance Forum. The role of the advi-

sory Board is to provide comments and suggestions

to the editors.

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Contact

[email protected]


International Standard

Serial Number ISSN 2012-5666

Contact:

[email protected]

Translations into Sinhala

and Tamil of the Sri Lanka

Microfinance Forum

provided by:

GTZ PROMIS—Promotion

of the Microfinance Sector

www.microfinance.lk

[email protected]

EXCLUSIVE INTERVIEW WITH NATIONAL DEVELOPMENT TRUST FUND (CONT’D)

MARKET RESEARCH FOR FINANCIAL PRODUCT DEVELOPMENT (CONT’D)

secondary data can give researchers

only a certain degree of insights and

can assist in narrowing the research

objective. Hence, relying only on

secondary data is not recom-

mended. For example, data col-

lected from field staff might not

include how they interact with the

customers and their lapses in the

delivery of services. Therefore, to

avoid selective and biased data and

to take comprehensive decisions, it

is always necessary to supplement

secondary facts and figures with

primary data.

Another reason, also associated

with the cost, is the standard man-

agement information system (MIS)

of the MFIs. If the products differ

from place to place with market

research, the institution needs loca-

tion wise customization of the MIS.

In addition, operations, and admin-

istrative practices may also differ

based on the findings. However,

modification of these systems and

procedures according to the re-

search findings will result in more

efficient and effective service deliv-

ery.

Last but not least, the technical

capacity of the MFIs to undertake

market research also limits the prac-

tical application in Sri Lanka. Com-

pared with other South Asian coun-

tries, in Sri Lanka there is only a

limited number of accredited tech-

nical experts on financial product

development. As an example, there

aren’t any Sri Lankan accredited

service providers listed under Mi-

crosave resource pool. This limits the

practice of market research and

indicates that the area needs further

enhancement.

How can market research be under-

taken in an effective and efficient

manner in the Sri Lankan context?

For market research to be cost effec-

tive, MFIs should prioritize the list

of problems to be addressed, and

focus on the most salient issue first.

This clear focus will assist in deriv-

ing sound recommendations.

In addition, the most effective strat-

egy in practically applying market

research is to develop a resource

pool within the organization cover-

ing all the different organizational

departments and disciplines. Fo-

cusing on capacitating regional

level staff can be more effective

than building a pool of technical

experts at the head office level,

since local level staff can carry out

market research at regular intervals

as an internal process to improve

service delivery.

Often findings and recommenda-

tions in MR don’t bring about dras-

tic changes to the existing systems

and procedures, but slight modifi-

cations and improvements which

can be done easily and at a low cost.

When MFIs have to implement

costly market research recommen-

dations such as customization of

MIS or procedural improvements,

external financial support can be

utilized. Usually, technological

improvements and capacity build-

ing of staff on best practices of mi-

crofinance such as market research

are areas where there are significant

investments too.


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