Roadmap to funding for financial institutions

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Understanding the technical, financial, social and operational requirements you must meet to secure funding for your financial institution

Access to capital: a key challenge for financial institutionsAs a financial institution in a frontier market, your business connects individuals in your community to the financial services they need to build a brighter future and protect them from risk. Yet—like many financial institutions—you may lack access to the capital that your business needs to grow and serve more individuals.

It’s possible to access the funds you need to expand your reach into new territories or to grow your loan portfolio through a relationship with a microfinance investment vehicle (MIV), such as a development finance institution or an international creditor. Many MIVs are interested in making debt, or even equity investments in businesses like yours.

However, there is a great deal of competition for a limited pool of available capital, and the process of applying for funding from an MIV can be complex. In this white paper, we aim to help you understand which legal, technical, financial, social and operational aspects of your business a funder will evaluate when it considers providing capital for your growth.

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The search for funding: where to startFor a financial institution, the challenge of accessing capital starts with identifying a partner that is interested in providing funding to your business.

Funders range from commercial investors seeking a market-rate return on investment, to development finance institutions and non-profits who emphasise social impact.

Your first challenge is to attract the attention of a lender or funder that will be a good fit for your institution and your business model. A good place to begin is to make sure that your institution has created a profile on MixMarket.org and that you have submitted the most up-to-date financial information for your institution. MixMarket is often the first place that a funder will go to learn about the microfinance market in your country, and you want to make sure that you are visible when funders are looking.

Attending regional microfinance and financial inclusion conferences is a proactive approach to finding funding. Representatives from development organisations and MIVs attend such events to find investment opportunities. Organisations that host microfinance conferences and events include:

GlobalMicrofinance GatewayConsultative Group to Assist the PoorGlobal Impact Investing NetworkInternational Conference on Responsible and Inclusive FinanceMondato Summit

AsiaAsian Development BankMicrofinance Council of the PhilippinesSouth Asia Micro-entrepreneurs Network (SAMN)

Latin AmericaFOROMICREDCAMIFBanco Interamericano de Desarrollo (BID)

AfricaADA (African Microfinance Week)African Development BankMaking Finance Work for Africa

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One of the most important factors a funder will look at is the quality of your loan portfolio. Funders want to see low numbers for your Portfolio at Risk (PAR) over 30, 60, 90 and 180 days.

Funders will usually want to see that less than 5% of your loan portfolio is more than 30 days in arrears.

You should be able to prove that your loan loss reserve is proportionate to the arrears level of your loan portfolio.

Another important metric is how much debt you write off each year—this should ideally be below 2% of your loan portfolio.

Most countries have industry umbrella organisations such as trade associations and practitioner networks. Maintaining membership with these umbrella organisations is key because funders will often approach the networks when first considering investment in a new market. Networks will often have knowledge of which funders are working in the market and may connect financial institutions and funders if there is a potential fit. Membership gives

you access to these opportunities and the other services these associations provide such as software vetting and industry best practices.

Members of your business network like your contacts in the public, commercial banking or non-government sectors can introduce you to MIVs that focus on your country or market segment.

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Due diligence: What funders wantOnce a funder decides that it is interested in providing credit to your business, it will begin a comprehensive due diligence assessment. Its aim is to understand your financial institution and assess if it is a good investment. Depending on the funder, it will evaluate your business from a range of perspectives, including:

• financial health and sustainability• the quality of your management team and corporate governance• business model• your social mission and impact• business processes and system• regulatory compliance

Passing due diligence is all about winning your potential funder’s trust and confidence. Truthfulness and transparency are as important to funders, lenders and investors as the numbers you show them. Since they are lending and investing money on behalf of others, MIVs are cautious and will carefully check your facts and figures.

Financial criteriaTo be considered as an attractive investment, your financial institution should show solid historical performance and potential for growth.

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• annual audited financial statements for the last three years• your latest monthly or quarterly management accounts• operational, profitability costs and ratios• your ratios against the limits set by your local regulator• details on loans outstanding from other lenders • details on any collateral pledges• detailed data on key performance indicators such as:

• Gross Loan Portfolio (GLP)• average loan size• outstanding and disbursed loans• average maturity of loans• market share by assets, by GLP, by number of clients• PAR levels – PAR30, PAR60, PAR90, PAR180• Risk Coverage Ratio • number of rescheduled loans • monthly productivity of loan officers• interest rate – based on outstanding portfolio • details of funding

Your reports and statements should follow the international accounting standard for your country – usually Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). You should also adhere to international definitions and standards when calculating PAR and other core metrics.

Your financial statements should show that:

• your financial institution is not overly leveraged and has capacity to take on more debt• your cash flow covers your short and long-term liabilities• your core business model is sound – i.e. you display a positive operating margin or a trend toward

profitability. Note: profitability requirements vary according to what type of funding you are seeking (debt versus equity) and what type of funder you are seeking investment from (socially focused versus profitability focused)

• You use your assets efficiently to carry out your mission through your business model. This means that your loan or financial services portfolio should comprise the clear majority of your assets. The benchmark is at least 70%.

• Funders look at whether you have taken loans in hard currencies such as US dollars or euros to lend in a volatile local currency. This can add to the financial risk in your business. If you do this, potential lenders will look closely into how you manage your currency risk. Are you hedging your exposure? What is your Open Foreign Currency Position (the difference between your foreign currency assets and your foreign currency liabilities)?

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A financial checklistFunders and investors will usually ask you to produce:

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Mission, model and managementIn addition to the financial health of your business, funders and investors are usually interested in your financial institution’s purpose, culture, business model and operations.

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Before you seek funding, you should capture key corporate information in a convenient format, such as a PowerPoint presentation or a Microsoft Word document. Some examples of the information that a funder might ask for include:• Your mission: Why does your financial institution

exist? Who are your customers and how do you serve them?

• Your history: Outline the major milestones in your business’s lifespan, from the day it was founded.

• Your customers: Who do you target with your products and services? For example, what is the split between men and women in your customer base, and between rural and urban customers?

• For what purpose are they borrowing money? • Products and services: Describe the financial

products and services you offer. • Your operations: How many branches and credit

officers do you have? What is the cost of running each branch?

• Your business plan: What are your growth ambitions? Where do you see your business in a year and in five years in terms of the size of your loan portfolio, workforce, product range and number of branches?

• People and culture: Who are the founders of the company, what is their vision and what have they done in the past? Who works for the company and what sort of culture does it have? Is Key Person Risk adequately addressed?

Processes and systemsFunders gravitate toward financial institutions that have robust business processes and systems in place. This gives them confidence in the financial information that you provide to them, and in the way that you run your business.

Automating business processes by putting the right core banking software in place can give you an edge when you are seeking funding.

Here are some areas to consider:

Transparency Do you have a real-time view of your portfolio across your branches and can you produce this data at a click without needing to manipulate it in a spreadsheet? Many financial institutions still follow multi-step processes to consolidate portfolio data across multiple branches and loan officers and rely on historical reports that are three to four weeks behind the latest events in the business. Today’s cloud-based core banking solutions for financial institutions allow you to view and consolidate transactions in real time.

Managing fraud and human error Do you have systems, policies (such as segregation of duties) and processes in place to reduce the impact of fraud and human error? Software can help you to strengthen your business process by removing manual processes where human error can occur or where data can be tampered with. It can also enable you to create approval processes and audit trails, so that employees can be made accountable for their actions.

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Operational efficiency Have you streamlined your business processes to keep your costs down? Are you using an automated system to boost productivity, reduce the need to store and manage paper, and simplify data capture? Such tools enable to you record transactions in an electronic database, impose tighter financial controls and give your team access to the information they need to do their jobs well.

Resilience and scalabilityFunders want to know that your business is future-proof. This means demonstrating that your operations and processes can cater for growth and absorb shocks. An important component of this is showing that you can grow revenues and profits, while your keeping costs under control. Technology plays a vital role in growing your business without adding proportional overhead. Analysing your data, meanwhile, can help you stay ahead of changes in your market so that you can adapt faster than your competitors.

Social impact The importance that a potential funder places on your social impact metrics varies, depending on their mandates and investors. Some funders and investors may be interested in working with financial institutions that address a social problem or opportunity, for example, helping entrepreneurs access capital for growth or supporting rural women with loans.

Most will require you to, at least, comply with international ethical, environment and social standards. You should be able to produce certificates demonstrating compliance with these standards during the due diligence process. Some of the social impact metrics in which funders may be interested include:

• how many end-customers you are reaching• direct and indirect jobs that your business creates• your impact on important issues such as financing small-scale farmers, supporting female entrepreneurs,

funding education or serving refugees

A Poverty Measurement ToolTools such as the Poverty Probability Index (PPI) can enable your organisation to measure and demonstrate its impact in helping to address poverty and financial inclusion. The tool – which integrates into Oradian’s cloud-based core banking software – uses 10 questions about a household’s characteristics and asset ownership to compute the likelihood that the household is living below the poverty line. With the PPI, you can identify the clients who are most likely to be low income or vulnerable to poverty and share that information with your potential funder.

Compliance, certification and corporate governanceFunders will expect your organisation to comply with local regulations and follow best practices in corporate governance

Examples of best practice include having a strong leadership team that is overseen by a Board with independent and non-executive directors. Showing that your financial institutions is led by experts can help boost your attractiveness to an external investor.

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Compliance checklist

Potential funders may ask you for copies of the following contracts and certificates:

• certificate of incorporation• share certificates• proof of registration with your regulatory body• shareholder agreements• outstanding loan agreements• supplier agreements• quarterly reports that you are required to submit to your regulatory authority • environmental and social compliance certificates• audited financial statements including a certified balance sheet and profit and loss accounts• an auditor’s report indicating that you comply with the prudential ratios defined by the regulator• an auditor’s report commenting on the adequacy of your procedures, policies and controls for anti-money

laundering and combating of financing of terrorism • copies of statutory reports you file with your regulator

Digital transformation: an important step toward funding If your financial institution plans to apply for external funding, you can start preparing by shifting from manual processes and legacy technology to a modern, cloud-based banking platform, which will allow you to plug into digital financial services and to take advantage of industry trends. The Oradian toolset enables you to grow and gain business benefits by becoming more efficient, making informed decisions and reaching more clients.

In addition to helping you craft a technology strategy to address your business, goals, challenges and opportunities, the Oradian team can help you review your processes and operations. Oradian can identify which areas of your business and which processes can be improved and how, using global best practices.

With the right platform in place, you can make informed decisions with accurate real-time reporting.

In just a few clicks, you can consolidate data from all your branches and create reports that follow best practice. No more end-of-the month processes, waiting for reports to be done manually. You have accurate on-time reports all the time, which will impress a potential funder.

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About OradianOradian is a financial inclusion company serving financial institutions in remote, hard-to-reach communities.

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Oradian builds a cloud-based toolset that smart financial institutions plug into to know and control their portfolios.

Oradian’s toolset enables financial institutions to become more efficient, make informed decisions and serve more clients. Oradian provides access to its toolset on a subscription basis, making it possible for financial institutions to access leading technology.

Today, Oradian’s community is made up of more than 70 visionary financial institutions in Southeast Asia, West Africa and East Africa. Using Oradian’s toolset, our customers are providing access to financial services to over two million individuals.

For more information:

Visit our website at oradian.com or send us an email at hello@oradian.com.

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