Sri Lanka Microfinance Forum - Funding

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This is the third issue of Sri Lanka Microfinance Forum, a quarterly newsletter which focuses on educating people on best practices, highlighting international standards, making awareness on new trends, highlighting the strengths and weaknesses in the sector and most importantly creating a communication platform for all the stakeholders in the sector


  • Page 1 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

  • Page 2 Sri Lanka Microfinance Forum


    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




    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

    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


    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.


    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

  • Page 3 Volume 3, January 2010


    Management Development Train-

    ing of Trainerswas 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 MFIs (Dated: Feb 4-6, 2010, Colombo)

    2. Internal Controls & Risk Based

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


    Visit: 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


    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. (



    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


    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.

    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:


    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.


    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:




  • Page 4 Sri Lanka Microfinance 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-


    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.

    (Continued on page 8)


    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-



    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

  • Page 5 Volume 3, January 2010

    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


    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


    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


    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.


    Senior Lecturer

    Department of Economics

    University of Ruhuna



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


    Senior Lecturer

    Department of Economics

    University of Ruhuna

    Wish you a HAPPY NEW




  • Page 6 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 MFIs 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-


    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


    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 clients 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


    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,

    (Continued on page 8)



    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 clients needs and preferences

    since they are the closest people in contact with


  • Page 7 Volume 3, January 2010 Page 7


    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


    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-


    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


    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

    institutions 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-


    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-


    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/


    How excess funds are to be

    handled, such as who has

    access to them and where

    they are to be kept or in-


    Limits for the maximum

    amount to be invested in any

    one bank or instrument, to

    limit the exposure to any


    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



    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


    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.

  • Page 8 Sri Lanka Microfinance Forum

    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


    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.

    (Continued from page 4)

    You can participate

    Send your comments, news, articles, and

    opinions to

    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.



    Sri Lanka Microfinance Forum

    International Standard

    Serial Number ISSN 2012-5666


    Translations into Sinhala

    and Tamil of the Sri Lanka

    Microfinance Forum

    provided by:

    GTZ PROMISPromotion

    of the Microfinance Sector



    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-


    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

    arent 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


    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 dont 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.

    (Continued from page 6)


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