BP1-H1 Workshop Expectations Exercise

Time: 15 minutes

1. Share your names, describe your jobs, and briefly explain why you chose to attend the workshop.

2. Talk informally about your expectations for the workshop. Take notes

from the discussion, and attempt to summarize the group’s expectations. Share the summarized expectations with the group and make changes if necessary.

3. As a group, prepare a drawing which reflects the groups expectations

of the workshop, using the flip chart paper and markers provided. Be Creative!!

4. The group should be prepared to introduce each other to the large

group, and to explain the group’s drawing in plenary. EVERYONE in the group must present someone or some part of the drawing! You all must talk!!

BP1-H2 Business Planning and Financial Projections Workshop

Skills Assessment Name: _________________________ Organization: __________________________ Please answer these questions to the best of your ability, including any formulas or indicators as requested. This is not a test, but it will help us to identify which topics to emphasize during the course. Use the reverse side of this paper if necessary to complete your answers. 1. Name three components of the Business plan

a. c.

b. 2. Explain how portfolio Quality impacts a business plan and the resulting financial

projections? 3. What is an Environmental Analysis? How do you incorporate it into the business plan? 4. What is an Institutional Assessment? How do you incorporate it into the business plan? 5. Provide two measures of profitability and their formulas 6. Have you been involved in developing your institution’s planning process? If yes, please explain the process used and your involvement in the process. Use the reverse side of this sheet to answer.

BP1-H3 Business Planning Workshop Goals and Objectives

Overall goal

Mastering the planning process and using Microfin for operational and financial projections, so as to outline a clear business plan allowing the institution to achieve its social and commercial double mission. Specific objectives

To define the steps of a strategic plan so as to achieve the double mission of microfinance, based on a market approach, and apply these steps to your MFI To conduct research to determine who and where the clients are To analyze the environment and determine the opportunities and threats it provides To assess your own institution, identifying strengths and weaknesses To create a strategy and build an operational plan based on that strategy To design financial products and delivery systems that support the strategy and are achievable given the environment and the MFI’s capacity To generate a financial strategy using Microfin that demonstrates an understanding of how to project income and expenses as well as financial sources and flows.

BP1-H4 Business Planning Course: Indicative Schedule

Session Time SESSION NAME

Day 1 8:00 – 9:30 9:30 – 9:50 9:50 – 11:10 11:10 - 1:10 1:10 – 2:10 2:10 – 3:30 3:30 - 3:45 3:45 – 5:30

1.

2. 3.

4.

4.

Welcome Tea Break Introduction to Business Planning Strategic Planning – Mission, and Market Lunch Strategic Planning – Environment and Institution Tea Break Strategic Planning – Environment and Institution

Day 2 8:00 – 8:30 8:30 – 9:45 9:45 – 10:45 10:45 - 11:00 11:00 – 11:40 11:40 – 1:00 1:00 – 2:00 2:00 – 3:20 3:20- 3:40 3:40 – 4:40 4:40 – 5:00

5. 6.

6. 7.

7.

8.

Review general and of Action Plans Operational Planning and Financial Modeling Model Set Up Tea Break Model Set Up Designing Financial Products Lunch Designing Financial Products Tea Break Marketing Channels and Portfolio Projections (points 1- 8) Summary

Day 3 8:00 – 10:00 10:00 - 10:15 11:15 – 1:00 1:00 - 2:00 2:00 – 2:45 2:45 – 3:30 3:30 – 3:50 3:50 - 5:30

8.

9.

9. 10.

10.

Marketing Channels and Portfolio Projections (point 9-15) Tea Break Institutional Capacity, Loan Loss, Case Loads Lunch Institutional Capacity, Loan Loss, Case Loads Institutional Capacity: Staffing and Operational Expenses Tea Break Institutional Capacity: Staffing and Operational Expenses

Day 4 8:15 – 8:30 8:30 – 10:00

10:00 – 10:30 10:30 – 11:30 11:30 – 1:00 1:00 – 2:00 2:00 – 3:30 3:30 – 3:45 3:45 – 4:15

11.

11. 12.

12.

Review Institutional Capacity: Fixed Assets and Admin Expenses Tea Institutional Capacity: Fixed Assets and Admin Expenses Financing Strategy Lunch Financing Strategy Tea Summary

Day 5 8:30 – 1:00 1:00 – 2:00 2:00 – 3:30 3:30 – 3:45 3:45 – 4:25 4:25 – 5:00

13.

14.

15. 16.

Financial Analysis Lunch Summary and Action Plan Tea Additional Microfin Feature Closure and Evaluation

BP2-H1

Business Planning Framework

STRATEGIC PLANNING OPERATIONAL PLANNING

Mission and Goals Strategy Markets = Clients

Product and Service Definition

Environmental Analysis

Marketing Channels / Credit and Savings

Projections

Competition

Collaborators

Regulatory Factors

Other External Issues

Institutional Assessment

Credit & Savings Program

Board and Management

Human Resources

Administration

Institutional Capacity and Resources

Loan Loss Provisioning

Loan Officer Caseload

Program-level Expenses

Admin-level Expenses

Financing Sources Financing Strategy

Financial Management Financial Management

Strategy Business Planning as an Ongoing Tool

BP2-H2

Introduction to Business Planning Business planning for microfinance institutions can be understood as three closely-related processes: - Strategic planning - Operational planning - Financial modeling. Strategic planning means: - articulating broad institutional goals, - assessing the institution’s performance in achieving its goals, and then - selecting a strategy that enhances the institution’s ability to expand outreach, reach its target clients, guarantee the quality of services so as to satisfy clients' needs efficiently. The idea is to achieve (or maintain) financial sustainability as well as social viability. Operational planning involves creating a framework for implementing this strategy, expressed concretely in detailed financial projections. How a microfinance institution carries out the planning process greatly affects the quality of the plan. Incorporating the perspectives of key stakeholders—such as the institution’s board, staff, and clients—helps ensure that the business plan that results identifies the key issues that must be addressed to achieve broad outreach and profitability as well as social viability. Involving those responsible for implementing the plan helps ensure broad endorsement, essential for successful implementation. The process of developing a business plan, especially creating detailed financial projections, helps an institution to understand the factors that are key in determining its success. These include, for example, the elements that must be considered in designing financial products that both meet clients’ needs and lead to profitability, such as the size and term of loans and the effective interest rate. The business plan, and the financial projections that are an integral part of it, become operating tools for the institution’s managers. By comparing actual with projected results (performing variance analysis), managers can monitor the institution’s progress toward the goals outlined in the plan. In addition to serving its primary purpose as a management tool, a clear plan with well-thought-out financial projections, as well as measurable social goals, strengthens a microfinance institution’s negotiating position with donors, commercial banks, and other investors. The business plan can also be used to provide information to other external audiences, such as shareholders, clients, and regulatory authorities. Finally, a business plan also helps translate the social mission into an institution's strategy and operations, by defining short, medium and long term objectives, and by implementing systems that monitor social indicators.

Introduction to Developing a Strategic Plan There are many ways to develop a strategic plan. The approach here consists of several steps, all of which keep the clients in the forefront during the planning process: • Articulating the institution’s mission and goals, which express its aspirations and intentions: How is the

mission defined? In particular, how are social goals defined? Which changes do we wish to implement? Which values does the MFI uphold?

• Statutes and founding texts: how is the mission displayed and shared? (statutes and founding documents)

• Defining the institution’s markets and clients to clarify whom it seeks to serve: Who does the institution target? What are the needs of target clients? Which services should the MFI offer, and what is the targeted improvement for clients?

• Undertaking an environmental analysis to examine key factors in the broader financial, economic, social, regulatory, political context in which the institution operates, as well as the climate

• Performing an institutional assessment to explore key strengths and weaknesses of the institution, in regards to its social and financial goals

• Based on the results of these analyses, developing a strategy that builds on the institution’s strengths and develops key areas needing improvement, enabling the institution to better serve its clients and achieve profitability.

• Monitoring the achievement of goals: Which indicators are being used? Nature of internal and external reports: Which social and financial data is being used and distributed?

BP3-H1 From Mission Statement to Strategy A key to shaping strategic success is clarity of mission. Individuals need to understand what business the company is in and how its values drive that business. Without such understanding employees will not develop much commitment or loyalty to the organization and its success. A mission statement provides a sense of purpose and incorporates a vision of future accomplishment. With specific reference to: OBJECTIVE

• What is the institution’s objective?

VALUES • Why is this objective important? • What beliefs guide the MFIs behavior /

attitude? CLIENTS • Who does the institution serve?

• What is the institution’s targeting strategy: rural, semi-urban areas or urban areas, client type (women, SMEs, poverty level?), diversity, etc.?

• How does the institution make sure client protection principles are being upheld?

SERVICES PROVIDED • What will the institution DO to meet this objective?

• How will it make sure it satisfies the various needs of its clients, their families and businesses, with adequate, high-quality services?

BENEFITS • How will the organization benefit its stakeholders?

• How will it ensure that its clients are satisfied and receive the maximum benefits out of the services it offers?

• Does it restrict itself to financial impact, or does it also wish to promote its clients' social reinforcement

Strategic planning is more than just an envisioning process. To accomplish anything you need a clear vision of the desired outcomes. It requires the setting of clear goals and objectives during specified periods of time in order to reach the planned future state. Targets must be realistic, objective and attainable. Goals are broad statements of intent that provide guidance as to how the institution plans to pursue its mission. They are outcome or output related. They represent ideals, which are the institutions commitment to a desired future state or condition. Goals represent the organization’s desired destination and the objectives are the strategic steps required to reach

that destination. The time frame for a strategic planning process is normally 3-5 years, so the goals must reflect this time frame and allow for continued efforts on the part of the organization over this period. The goals should address opportunities that will allow the organization to position itself to the future. Once the goals are articulated, a plan of action is required to move toward desired outcomes. This plan of action is composed of supporting objectives and action agendas that define what must be done, when it must be done, who is responsible for doing it and who will verify the completion of the tasks. Together these elements composed the ‘strategy’ in the strategic plan. They answer the question of how the organization gets from the ‘here and now’ to the ‘there and future’. The objectives are specific measurable statements of accomplishments with in a given timeframe. They operationalize a goal. The objectives are sequential and provide the milestones that will permit the organization to determine if the process is on track or if it has derailed at some point. An institutions mission and goals should guide the institutions performance. They reflect the market and other environmental and institutional issues examined. The strategy defined should reflect the institution’s mission and further its goals.

BP3-H2

Strategic planning: integrating SPM into microfinance capacity building - Imp-Act/MicroSave technical note PDF file

BP3-H3 Social assessment tools There are several tools that allow MFIs to verify internally or externally to what extent their mission is aligned with their internal systems and performance.

Resources Depth of analysis Links SPI social audit by CERISE and ProsperA

Audit Depends on the method used (internal audit only, internal audit accompanied by an external resource, external audit) Focuses on 4 social performance dimensions:

- Targeting clients - Quality of services - Benefits to clients - Social responsibility to employees,

clients, the environment

http://www.cerise-microfinance.org

QAT Social Audit by Imp-Act and MFC

Audit Audit accompanied by external resource Focuses on the mission, the systems and procedures set up by the MFI

http://www.mfc.org.pl/

The Smart Campaign’s client protection assessment

Audit Assessment of the application of client protection measures in an MFI’s processes, procedures and activities

http://www.smartcampaign.org/page-daccueil

Social rating Rating If an MFI has no internal auditor, it can request a social rating, which is even more external than an audit. Each rating agency has its own standardized methodology

http://www.ratinginitiative.org

MIX Market social performance reporting

Reporting This is a reporting framework, but an MFI can use it as a guide to identify certain standards assessed internationally to measure the social performance of an MFI and to review the core components of a social audit

http://www.themix.org/social-performance/Indicators

BP3-H4

Markets and Clients -- Key Points Market Segments Institutions can divide current and potential clients into "market segments". A market segment is a group of clients with uniform needs which are different from those of other groups. Distinctions generally made on basis of: • geographic location • demographics • psychographics • behavior

Basic considerations when choosing new markets for microfinance would include: * Number of micro entrepreneurs * projected demand for financial services * Potential market penetration for the MFI * Key market trends Clients The institution should conduct a detailed analysis of current and potential clients. Examination of the following characteristics should be considered. • nature of the enterprises • demand for and use of financial services • purpose of loan • income and assets • diversity of income sources • diversity of financing sources • level of indebtedness (volume and amount of loans from other financial institutions) • work experience • cultural issues concerning control of cash • gender • age • language and literacy • citizenship • reputation in the community • satisfaction in comparison with existing products

BP3-H5 Analyzing a market: example of a typology applied to medium-term loans A typology (i.e., segmentation) is used to identify homogenous groups based on a number of differentiation criteria. Criteria are differentiated based on variables observed (wealth level, life cycle, productive activity systems, access to market, business capacity including size of workforce, emigration, etc.). The difficulty is that of course there isn’t “one” universal typology, but several possible. Generally, three types of criteria commonly influence households financing needs and constraints: • Household wealth, measured through assets and income. Households’ financing needs and available

collateral vary according to their level of wealth. • Production systems, financing needs and risks vary according to the nature of a household’s activities:

agricultural or non-agricultural, but also according to their combination. Systems combining both agricultural and non-agricultural activities are often more efficient when it comes to managing liquid assets and to manage risks.

• Life cycle and gender. Economic capacity, the types of income-generating activities developed, the extent to which the activities can function independently, and the degree of accumulation varies depending on characteristics of the the productive member of the household: gender, age, whether recently settled or established, , etc.

Typologies may be defined according to ‘expert opinion' (village or local authorities that distinguish groups they deem relevant), or based on statistics: surveys of on a large sample of households. Once established, a typology can help better analyze financial needs and constraints for each group.

Family typology and use of medium-term credit in Benin

Typological group Role of medium-term credit in strategies

Risks for each group

1. Young people in the accumulation phase, not pluriactive

Rapid capital accumulation

Fragility related to the small amount of capital

2. Young people in the accumulation phase, pluriactive

As in 1, but with less priority on agricultural equipment

Fragility limited by income from the secondary occupation

3. Established, with complete equipment, large cotton producers

Critical for less well-established households, , useful but optional for the others

Substantial capital but monetary assets still small: possible transitory problems related to cotton

4. Precarious situation, small assets

Essential, but not always a factor in the accumulation of capital

Fragility resulting from small capital and an unfavorable family structure

5. Large families, medium land area, modest capital accumulation

Essential for equipment; usually is well-managed

The absence of investments limits risks; a secondary occupation is common

6. Large families, large land areas, substantial capital accumulation

Medium-term credit rare; used as a last resort

Diversion for other persons; dilution of responsibility

Extract from Professional Agricultural Organizations and Rural Financial Institutions by SupAgro (Wampfler, B., Doligez, F., Lapenu, C., 2009)

BP3-H6 Tools to know your clients/members better IRIS Poverty Assessment Tool - www.povertytools.org The PAT is based on a five-page questionnaire about family structure, education, principal occupations of adults, food security, housing quality, other goods and access to services, etc. and takes into account different dimensions of poverty. Le PAT tries to answer a simple question: who are the MFI’s clients? What is their living standard, compared to non-clients? The basic questionnaire must be adapted to local conditions (specific poverty indicators, choice of assets, important food products in the area, etc.). The PAT leads to the creation of a relative poverty index which attributes a poverty “score” to each household and thus allows the analysis of the poverty status of clients compared to that of non-clients (sorted in poverty quintiles for example). This is an occasional survey, which may be repeated every 2 or 3 years, to monitor the evolution of the MFI’s targeting. It must be conducted by an external assessor on new clients and non-clients. Progress Out of Poverty Index1 - www.progressoutofpoverty.org The Progress Out of Poverty Index (PPI) is a tool measuring the poverty level of groups and individuals. The PPI allows MFI to determine their clients’ needs, which products are the most efficient, the pace at which clients are getting out of poverty and what helps them cross the poverty line faster.

This tool estimates the probability for a client to live under the national poverty line. This line defines the poorest quintile under the national poverty line or below international poverty lines. Even if the PPI is based on a universal method, each PPI is country-specific and was developed on the basis of the most representative national survey of household incomes and expenses for that country.

For each country, the process begins by a national representative survey on income and/or expenses. The survey data are reviewed to sort indicators strongly linked to poverty. These indicators are then carefully tested and examined with local MFI and their representatives. Each of these steps is described in detail below.

The PPI allows managers to:

• Segment clients in separate poverty categories • Integrate financial and social indicators • Establish a link between product offers and delivery channels and poverty levels • Monitor client evolution as they step out of poverty • Evaluate the translation of a social mission into action

More specifically, the PPI can help MFI directors on the following aspects:

• Inform management decisions on processes, programs, products and service delivery • Target clients according to specific products and services

1 Adapted from the Thematic Paper Impact and Social Performance from www.lamicrofinance.org

• Help respond to pressure from competitors by understanding the balance between financial and social returns

• Providing accurate information on social performance to regulation authorities, social investors, donors, and rating agencies in a timely manner.

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BP3-H7

Case Part 4 – Answer Guide

SEDA Markets and Clients: Assignment Response Guidelines For reference when facilitating plenary discussion

Current Market: 1. Describe SEDA’s current market segment(s).

Two geographic locations: Brownstown Market and St. Mary. Economic activities: currently 2/3rds commerce and 1/3rd retail, artisans and urban traders Specifically: 40% small scale commerce of fresh produce, 20% small scale retailers of dry goods, 25% shoemakers, 15% other production based businesses.

2. What is the size of the existing market? What is the potential for growth? What

is the estimated demand for services among this population? There are 50,000 micro entrepreneurs. This number grows by 5-10% per year. Of these, 60% are believed to desire financial services (i.e., 30,000)

3. In SEDA’s markets, are some business sectors more active than others?

Describe the sectors that SEDA might focus on, and explain why. Their current clients are 40% commerce; another 25% are shoemakers. SEDA might focus on these because they can possibly provide specialized products to meet specific needs of these sectors.

4. Do SEDA’s current clients reflect the market identified in SEDA’s mission and

goals? Yes to the mission. But since existing clients are unhappy with the products and services. SEDA’s goals may be in question.

Potential New Markets / Risk identification 1. What are the potential new markets being researched by SEDA? Which of the

areas seems most promising? East End - nearby similar to present program Loganville, a market 40 miles away, on a good road, with a wide variety of economic activities. Mt. Andrews Valley, an isolated area with limited market access.

2. What is attractive about the most promising potential markets?

East End - replication of present project Loganville is close to Agora, has a lot of economic activity, there is a central market where clients come. There are profitable opportunities for new produce in Agora; clients speak the national language. Flood risk in certain areas brings forth the idea of an insurance product; consider migration areas and savings transfer products.

3. What additional information might you need before you made a final

determination about which markets to expand in? The clients’ interest in financial services, their current financial behavior, household activity systems, poverty level (government data? NGOs or multilaterals? ) risk of over indebtedness (identified cases, strong competition, tradition of cross-indebtedness, etc.), other potential competition, potential to attract

and retain qualified staff, forms of social links to support non-material collateral, etc. and more broadly, institutional and environmental analyses.

BP4-H1

Context Analysis -- Key Points Environmental Analysis is the process of examining foreseeable external variables and how they affect and organizations capacity to achieve its goals. The most frequently used method to begin this analysis the SWOT analysis. The social mission will also need to be applied to define necessary resources, while describing how the institution intends to change internally so as to reach its strategic and specific goals. While defining strategic goals, the following questions should be considered: How are changes planned in operations supporting both social and financial goals? One begins to look for Opportunities and Threats in the environment. Ask: How can we take advantage of the external challenges in our environment? And how might environmental issues jeopardize our ability to pursue our goals. Once identified one must develop a plan on how to capitalize on the opportunities and overcome the threats! Some issues that need to be examined are: Market Who are our clients? What do they want? Which of their needs can we fulfill? How do we keep our clients? How can we make sure their rights are respected and we are not making them take uncontrollable risks (such as over-indebtedness)? Who are our potential Clients? How can we satisfy their needs? How can we make sure our services will create value for our clients? Competition Other specialized financial institutions Informal credit schemes Retail suppliers Formal commercial or development banks Technology used (e.g. mobile banking) Collaborators Strategic partners Consultants and other technical assistance providers Institutions with complementary services Regulatory Factors and Other Government Policies Regulations governing MFI activity; respect of prudential standards (Obligations concerning capital amount, etc.) National interest rate and transparency policies Specific laws regarding client protection (e.g. data protection) Capital reserve requirements

Business registration policies Legal system, code of conduct Existence of a credit bureau Economic, social, environmental factors - General economic conditions (e.g., inflation, markets, branch, penetration of financial products, etc.) - General political conditions (e.g. elections) - Safety (risk of theft) - Media context (reputation risk) - Social ties and structure of social organizations (solidarity, recognized authorities, etc.), identification of discriminated groups - Risk of over-indebtedness for clients, frequent multiple borrowing - Infrastructure - Natural environment: potential risks (protection of natural resources, climate change), impact of financial activities (waste, etc.), opportunities (renewable energy, etc.)

BP4-H2 Institutional Assessment -- Key Points

Here on looks at the Strengths and Weaknesses of the organization itself. Asking the crucial questions – Can we meet the needs of our clients with our given resources? What are our strengths and how can we capitalize on them? What are our weaknesses and where do we focus development efforts to transform them into strengths? One therefore begins by looking at the following points! Loan and savings program and other financial and non-financial services Appropriate products Conditions and pricing of the different products available, clearly explained to clients Portfolio quality Pattern of significant growth and increasing profitability Client retention Appropriate and clear loan policies and procedures in order to meet client needs without harming them Board and management issues Vision and policy leadership Prudent financial management Guidance and oversight for manager Clear roles and responsibilities of board and management Effective mobilization of funds: grants/loans from all sources Human resource management Organizational chart and job descriptions Appropriate recruitment and training Sufficient administrative staffing Strong finance and accounting team Strong MIS department Minimal staff turnover Good incentive plan and competitive compensation for staff Regular performance evaluations Administration Strong MIS systems the produces accurate, timely and comprehensive MIS reports Portfolio reports for immediate assessment of every loan Appropriate reports to different levels: board, management, staff Appropriate chart of accounts Adequate fixed assets Formal, comprehensive system of internal controls Formal external audit by reputable firm Financing Ability to mobilize amounts and types of funding needed Increasing reliance on earned income (relative to grants) Priority and ability to become independent and profitable Management and monitoring of financial and social goals Accurate financial information (e.g., financial statements, ratios) Regular review of budgets and cash flow projections Key staff with good financial management skills Strategy for investment management Monitoring and reporting of financial and social goals (to inform employees and managers)

Client monitoring system (profile, satisfaction, change in their living conditions) Monitoring of loan officer productivity and behavior, especially during loan collection processes

BP4-H3 Optional Case Part 7

See Case Study Document for this Hand-out Extract and copy separately ONLY if you choose to hand out exercises separate from the booklet.

BP4-H3

SWOT analysis adjusted for Social Performance

Strengths/Weaknesses

• How clear is the organization about what it wants to achieve in terms of social performance?

• What support does social performance receive from the organization’s governance structures?

• How do the current product range and delivery processes compare with the needs of target clients?

• Does the organization have enough reliable information about its target clients and their needs?

• How does the information system support social performance monitoring? Is there regular, timely, and accurate data?

• How does the human resources (HR) system, including staff composition, the processes of hiring, training and remuneration, incorporate social performance considerations?

• What information is provided by internal control systems, including internal audit, in the context of the organization’s social performance?

• Does the organization have a mission-driven image and culture?

Opportunities/Threats

• What are the risks at the client level? (Client risks = risks to the organization.) How do external factors influence clients’ businesses and lives?

• What are the opportunities and threats in the organization’s external environment, and how do they influence its ability to perform against the broad social goals?

• Are economic, political, regulatory, and social trends analyzed from the viewpoint of their impact on the organization’s ability to reach its target clients and meet their needs?

• What are the opportunities and threats to social performance coming from key external stakeholders: competitors, commercial and social investors, regulators and law-makers, the media, etc.?

Sample SWOT analysis – PAGLAUM Co-operative, the Philippines

STRENGTHS WEAKNESSES • Image of pro-social cooperative

focused on poor areas

• High-quality, non-credit financial services – deposits with low threshold

• Innovative culture: new products and service delivery channels

• Client loyalty due to co-ownership and dividend payments

• Information systems: no information map, delayed client information, delayed production of reports, low quality of data entry

• Internal information download (top to

bottom information flows)

• No performance-based remuneration for staff – people get equal pay for different volume and quality of work

• Lack of understanding of clients’ needs

with negative impact on new product development/modification

OPPORTUNITIES THREATS • Availability of untapped geographical

markets

• Access to financing opportunities through linkages

• Access to training/capacity building

through linkages

• Client over-indebtedness, “credit pollution”

• Increasing competition from NGOs and

MFIs tapping same client segments

• Local crime – security of staff, security of assets (hold-ups and robberies)

• Inflation (leading to increase in

household expenses and possible problems in clients meeting repayments)

• Damage to fishermen’s businesses

due to climate change

Source: Strategic Planning, Guidance Note, ImpAct Consortium (2010)

BP4-H4 Assignment ANSWERS: Environmental Analysis and Institutional Assessment

For use in facilitating group discussion

ENVIRONMENTAL ANALYSIS

Opportunities Threats Competition LEDA is one of strongest; interest rates of competition are comparable with ours.

Several other smaller, newer institutions; two of these work in the same city as us; they both have ambitious expansion strategies; they already have an impact on LEDA (client exit, employee attrition, cases of over indebtedness) many other institutions are considering starting financial services

Collaborators We refer clients to a training institute; FNB provides loan collection and savings services for our clients; we receive TA from Freedom, Int’l; we have good donor relations.

Our clients seemed to be dissatisfied with FNB’s savings services.

Regulatory Factors Government policies not yet specific for micro finance, but recent interest in informal sector; recent legislation for NBFI; NBFI status being pursued by LEDA.

Macroeconomic Factors Inflation stable at 10%; high incidence of poverty in areas where LEDA works; economic growth averaging 2% per year. Loganville’s rural area with outputs for produce farming in the capital Migration area: savings transfers

Flood risk on produce farming area Increase of single-parent households, especially single mothers

INSTITUTIONAL ASSESSMENT

Strengths Weaknesses Credit and Savings Program LEDA only offers one product and clients are

not satisfied with our current product because it does not meet their needs (lack of flexibility for instance)

Board/Management Issues Executive Director well regarded; he is a strong leader; board member involved with NBFI legislation

Executive Director has limited financial skills;

Human Resource Management Staff are competent and dedicated; well-informed about organizational policies; good staff training;

salaries are low and staff are expressing dissatisfaction; limited internal promotion possibilities 3 loan officers went over to competition. Certain clients complained about loan officer behavior.

Administration Annual audit; have identified a potential MIS; LEDA has personnel policies, organogram, and operating procedures.

Weak internal controls; their only MIS is a spreadsheet; operating procedures are out-of-date.

FINANCIAL MANAGEMENT Financial Manager is competent;

Accountant is weak analyzing financial data;

BP4-H5 Defining Strategy A means of addressing critical issues during period of plan in order to achieve program goals. Deciding on the objectives and activities of providing the right products in the appropriate markets in a cost efficient manner in order to achieve the goals of the MFI. The strategy should be derived from comparing:

• mission and goals • assessments of clients and markets • environmental opportunities and threats • institutional strengths and weaknesses

The strategy should address:

• what products to offer in which markets • favorable and unfavorable external conditions likely to be faced • what areas of institutional capacity are key to success • the objectives and activities to be undertaken

Choosing a Strategy Product and Market Options Market Penetration - use current product in current market) Product Development - create new product for the current market) Market Diversification - use current product in a new market) Product Development and Market Diversification - create new product for a new market) Environmental Issues what externals conditions is the MFI likely to face Maximize opportunities Overcome Threats Turn threats in to opportunities Institutional Development Foundation: efficient operations Build on strengths Improve weaknesses Prioritize factors essential to effective and profitable Performance under period of business plan Objectives and Activities for each Goal Objectives for each area of operational planning: * Products and services * Marketing channels * Institutional resources and capacity * Financing * Financial management and monitoring objectives Implementable activities for each key objective

BP4-H5 Optional Case Part 9

See Case Study Document for this Hand-out Extract and copy separately ONLY if you choose to hand out exercises separate from the booklet.

BP4-H6 Strategic Planning Take a few moments to think about Strategic Planning in your institution. You may have one that is well used already, you may have one that has been ‘shelved’, and you may need one. Perhaps the guide below may help you to organize your thoughts! Use additional sheets as necessary. WHO will be on the task force?

What we have Accurate? Current? What we need How we will get it Anticipated Obstacles Plans to overcome

obstacles Mission

Market Research

Environmental Analysis Competition Collaborators Regulation/Policies Macroeconomics

Institutional Assessment

Credit/Savings Ops and other financial and non-financial services Taking into account social performance aspects Human Resources Board & Mgmt Administration Financing

Strategy –

Objectives and Activities

BP4-M1

Assignment ANSWERS: Environmental Analysis and Institutional Assessment For use in facilitating group discussion

ENVIRONMENTAL ANALYSIS

Opportunities Threats Competition LEDA is one of strongest; interest rates of competition are comparable with ours.

Several other smaller, newer institutions; two of these work in the same city as us; they both have ambitious expansion strategies; they already have an impact on LEDA (client exit, employee attrition, cases of over indebtedness) many other institutions are considering starting financial services

Collaborators We refer clients to a training institute; FNB provides loan collection and savings services for our clients; we receive TA from Freedom, Int’l; we have good donor relations.

Our clients seemed to be dissatisfied with FNB’s savings services.

Regulatory Factors Government policies not yet specific for micro finance, but recent interest in informal sector; recent legislation for NBFI; NBFI status being pursued by LEDA.

Macroeconomic Factors Inflation stable at 10%; high incidence of poverty in areas where LEDA works; economic growth averaging 2% per year. Loganville’s rural area with outputs for produce farming in the capital Migration area: savings transfers

Flood risk on produce farming area Increase of single-parent households, especially single mothers

INSTITUTIONAL ASSESSMENT

Strengths Weaknesses Credit and Savings Program LEDA only offers one product and clients are

not satisfied with our current product because it does not meet their needs (lack of flexibility for instance)

Board/Management Issues Executive Director well regarded; he is a strong leader; board member involved with NBFI legislation

Executive Director has limited financial skills;

Human Resource Management Staff are competent and dedicated; well-informed about organizational policies; good staff training;

salaries are low and staff are expressing dissatisfaction; limited internal promotion possibilities 3 loan officers went over to competition. Some clients complained about loan officer behavior.

Administration Annual audit; have identified a potential MIS; LEDA has personnel policies, organogram, and operating procedures.

Weak internal controls; their only MIS is a spreadsheet; operating procedures are out-of-date.

Financial Management Financial Manager is competent;

Accountant is weak analyzing financial data;

BP4-M2

Analyzing the environment

A microfinance institution assesses the context in which it operates through an environmental analysis to gauge how foreseeable external challenges will affect its capacity to achieve its goals. External factors can prove to be either opportunities or threats—opportunities if the institution can position itself to take advantage of changes in the environment, threats if the changes jeopardize its ability to pursue its goals in the way it had planned. By anticipating the effects of external factors, the institution can better position itself to take advantage of its environment. An environmental analysis looks at four factors: • Competition • Collaborators • Regulatory factors • Other external elements. 2.3.1 Competition Competition may be increasing significantly in the markets where a microfinance institution operates. Conversely, an absence of strong competitors might give the institution an opportunity to solidify its market position. If competition is a significant factor, the institution might choose to carry out a careful review of its current and potential competitors, including: • Other microfinance institutions • Moneylenders • Informal credit schemes • Clients’ suppliers • Formal financial institutions.

The presence of a credit bureau or clearinghouse and its operating mode will also determine the MFI’s practices (the MFI will need to participate) and the way it takes into account the risks of multiple borrowing or over indebtedness run by its clients. Without a bureau, we will study the different means according to which this information is shared/can be shared with other financial institutions. 2.3.2 Collaborators The kinds of collaboration that a microfinance institution forms will depend on its needs. If it seeks broad-based institutional strengthening, an affiliation with an international network that provides technical assistance and training could be an important relationship. If legislation prevents an institution from offering savings products, it might choose to collaborate with a local bank that can provide such services. An institution might also collaborate with local government officials or with local institutions offering services that complement its own. 2.3.3 Regulatory factors Regulatory policies can play an important part in shaping a microfinance institution’s environment. For example, restrictive interest rate ceilings can impair an institution’s ability to charge an effective interest rate sufficient to cover its full costs. By contrast, central bank policies that allow a range of licensed financial intermediaries, with capital reserve requirements matched to institutions’ scale, can encourage the development of microfinance institutions. Other policies may affect a microfinance institution’s clients, such as regulations on land ownership, registration requirements for microenterprises, and price controls on agricultural products. Client protection measures should also be included according to the context (national policy on interest rates, transparency, specific laws regarding client protection). 2.3.4 Other external elements A country’s general economic and political conditions have a significant effect on the informal financial sector and therefore on microfinance institutions and their clients. A high inflation rate, civil unrest, and natural disasters can pose serious threats to a microfinance institution’s operations, while a stable economic and political situation provides a positive environment for an institution’s development. It is important to assess social

ties between clients and forms of social organizations in order to know which forms loan collateral can be used, to know acceptable or unacceptable conditions regarding loan collection, etc. Other significant external elements include foreign exchange rates, currency convertibility, national poverty levels, and transportation and communication infrastructure. It is also important to acknowledge potential impact on the environment: potential risks on natural resources, impact on climate change, potential negative impact of financed businesses (waste, pollution), opportunities to support environment protection (renewable energies, etc.).

Performing an institutional assessment The institutional capacity of a microfinance institution is the most crucial factor in its ability to achieve its goals. So every institution should undertake a thorough assessment of where its strengths lie, where it has significant weaknesses, and where it should focus institutional development efforts. This institutional assessment is generally carried out after the market study and the environmental analysis, so that an institution can evaluate its strengths and weaknesses in the light of its ability to meet its clients’ needs in the context in which it operates. There are many ways to evaluate an institution’s resources and capabilities. In the method proposed here the institution assesses its performance in key areas of operations through questions whose answers will help show whether it is following the kinds of practices shown to be most effective for microfinance institutions. Six areas of operations are reviewed: • Credit and savings program • Board and management issues • Human resource management • Administration • Financing • Financial management. • Capacity to monitor the achievement of objectives 2.4.1 Credit and savings program • Are the products appropriate for the market segments that the institution seeks to reach? • How good is portfolio quality, as measured by the default rate and portfolio at risk? • Conditions and pricing of different products are available, are explained clearly to clients and are presented

in an efficient manner (i.e., orally if clients are illiterate). • Is there a clear pattern of significant growth and increasing profitability? • Is there a high rate of client retention? • Are clear and appropriate credit policies and procedures in place? • Does the institution monitor loan officer productivity (such as the number of active clients per loan officer)? • Do credit staff maximize their time with clients relative to the time they spend on administrative work? 2.4.2 Board and management issues • Does the board provide vision and policy leadership? • Does it ensure that the institution’s financial resources are prudently managed by monitoring investment and

operating performance? • Does it provide ongoing guidance and advice to the executive director? • Do board members provide expertise in such key areas as banking, law, accounting, client protection,

monitoring of the MFI’s social goals? • Are the roles and responsibilities of the board and management clearly defined so as to prevent

inappropriate intrusion by the board into operational details? • Does the board participate in setting performance targets and monitoring progress toward them? • If the institution is considering formalization, has the board evaluated the opportunities and risks associated

with the different options available (box 2.1)? • Are the board and the executive director effective at mobilizing funds from domestic and international

sources for concessional and commercial debt and for grants? • Does the executive director provide leadership in implementing the institution’s mission and goals?

• Does the executive director solicit and use inputs from staff at all levels? • Does the executive director have the necessary skills and knowledge (such as a strategic perspective,

management skills, knowledge of credit and finance, and fundraising ability)? 2.4.3 Human resource management • Is there an organization chart, and are there job descriptions for all positions? • Are the positions of credit manager and finance manager filled by qualified staff? • Is there at least one employee whose job description states clearly that he or she is responsible for

monitoring client complaints? (In addition to internal controls) • Are staff recruited and trained to ensure the appropriate skills? (For example, do credit staff have good

communication skills, a basic knowledge of credit, and good business sense?) • Is the level of administrative staffing sufficient but not financially burdensome? In particular, does the

institution have a strong finance and accounting team and management information system (MIS) capability?

• Is staff turnover minimal? • Are incentive systems designed to hold staff accountable and to reward them for good performance? • As greater operational scale is reached, is compensation becoming more competitive with market rates? • Is staff training a serious priority for the institution? What percentage of the total budget does staff training

represent? Are employees well-informed of the MFI’s values and mission? Are they well-trained on policies and procedures to achieve the MFI’s mission and ensure that the institution does not harm clients?

• Is there a clear pattern of promotion from within? • Are performance evaluations based on mutually developed and agreed upon objectives? • Is there a code of ethics that describes acceptable and unacceptable employee behavior, especially toward

clients?

2.4.4 Administration • Does the management information system produce accurate, timely, and comprehensive reports for

accounting and loan tracking? • Are appropriate reports provided to the different levels of users (board, management, and staff) within the

organization? • Do portfolio reports provide an immediate assessment of the status of every loan? • Is the chart of accounts appropriate to the institution’s needs? (For example, does it track income and

expenses by branch, and does it separate grant income from earned income?) • Does the institution regularly assess whether its management information system is sufficient for its needs

today and over the medium term? • Does the institution periodically review its fixed asset base to ensure that it is not becoming obsolete? • Is there a formal, comprehensive system of internal controls in place to prevent corruption and the misuse of

funds? • Is a formal audit performed by a reputable accounting firm each fiscal year? • Has the MFI conducted social audits, or financial or social ratings? 2.4.5 Financing • Is the institution able to mobilize the amounts and types of funding it needs for its current and planned

operations? • Is the mix of funding sources appropriate? How much priority does management give to the necessary

diversification of its funding sources? Does it ensure that there are funding channels based on national or international concessional or commercial resources, or on the mobilization of client savings, etc.?

2.4.6 Financial management • Is reliable information available for assessing the institution’s current financial position, including trends in its

performance indicators? • Are budgets and cash flow projections prepared and reviewed regularly? • Does the institution conduct periodic analysis comparing projected with actual performance (variance

analysis)?

• Do financial statements present an accurate picture of the institution? (For example, are loan loss reserves sufficient to cover projected defaults, are assets valued conservatively, and are nonperforming loans regularly written off?)

• Do key staff have good financial management skills? • Does the institution have a well-thought-out investment management approach? • Is the institution moving steadily toward full, subsidy-adjusted profitability, while serving its target clients with

adequate products? • Does the MFI have key information to monitor the achievement of its social and financial goals? • Is this information available regularly and quickly? • Does it specifically indicate client profile, satisfaction level, and change in clients’ socio-economic situation,

so as to check the achievement of the MFI’s social goals? • Is it available to competent staff (Board, management)? • Is it synthetized in the shape of key indicators or a scoreboard, for an easy check that goals have been

reached?

The purpose of the environmental analysis and institutional assessment is to provide a microfinance institution with a clear idea of where it needs to focus its attention in order to meet its clients’ needs and enhance its profitability. By systematically developing the information needed to assess past trends and current performance, the analyses lay the groundwork for determining what kind of strategy will enable the institution to achieve its goals.

Choosing a strategy

A microfinance institution chooses its strategy for expansion on the basis of the information and perspectives developed in the first four steps of the strategic planning process. Having articulated its mission and goals, defined which markets and clients to target, forecast what favorable and unfavorable external conditions it is likely to face, and gauged its strengths and weaknesses, the institution is ready to decide on a strategy for providing the right products in the appropriate markets in a cost-efficient manner.8 The process of identifying a strategy has four parts: • Defining target clients and understanding their needs • Choosing what products to offer in what markets • Deciding which areas of the institution need to be strengthened to ensure that it can provide the chosen

products in the selected markets • Determining clear objectives and activities for implementing the product, market, and institutional

development goals. 1. Target clients and their needs An institution defines its target clients according to its mission and objectives. The choice of clients must be diversified, in terms of risk management. However, an institution may decide to target its clients according to (rural, urban) geography, activity systems, income, gender, or the rate of social and financial exclusion (youth, clients living with HIV, etc.) After this choice, the MFI must understand its target clients’ needs in terms of financial services, as well as their behavior, attitudes and values, which may influence their use of the MFI’s services. To that effect, a market study is recommended to better circumscribe target clients characteristics in order to offer well-suited products and services. 2. Product and market options An institution can pursue expansion by offering existing or new products in current or new markets. The four possible combinations of these elements represent four options of increasing complexity (figure 2.1). A microfinance institution’s strategy must reflect which option it will pursue first and in what sequence it might add others. MARKET PENETRATION If current products are commensurate with projected client needs and current markets offer the potential for significant expansion, the appropriate strategy would be to expand existing products in existing markets. PRODUCT DEVELOPMENT If current markets offer the potential for significant expansion but existing products cannot meet projected client needs, the strategy should be to enhance current products or develop new products for expansion in existing markets. MARKET DIVERSIFICATION If existing products can meet projected client demand but current markets do not offer sufficient growth potential, the appropriate strategy would be to enter new markets with the current products. PRODUCT DEVELOPMENT AND MARKET DIVERSIFICATION If existing products are insufficient to meet projected client needs and current markets are insufficient to achieve sustained profitability, a microfinance institution must determine which of the first three options to pursue initially and in what order product and market expansion should be pursued. [FIGURE 2.1 Product Market-Matrix] 3. Institutional development To implement an expansion strategy, a microfinance institution will probably need to strengthen certain areas of its operations, as identified by the institutional assessment. In building on its strengths and addressing the areas needing improvement, the institution should focus on the factors that are essential to effective and profitable performance in the current and projected environment. And the institution will have to choose which activities it

will not undertake, because taking on too much could prevent it from implementing any of the desired improvements. 4. Objectives and activities Once a microfinance institution has chosen its strategy for expansion and identified the areas requiring strengthening, it is often helpful to develop objectives and activities for implementing the strategy. Objectives can be articulated for each area of operational planning: • Clients • Products and services • Marketing channels • Institutional resources and capacity • Financing • Financial management. For each objective, activities should be outlined on the basis of the findings of the strategic planning process—the activities the institution intends to undertake to implement its plan. For each objective and activity, the MFI must define monitoring indicators to ensure good financial management and the achievement of the mission. Through financial modeling the institution can assess how realistic the strategy is by analyzing whether the mix of proposed activities is financially achievable in the projected time frame. The strategic planning process culminates in the task of developing and articulating the strategy. The strategy provides the key reference point for operational planning, serving as the link between the two parts of the business planning process. A microfinance institution should review its operational decisions in the light of whether they reflect its strategy and move it further toward its objectives. What information does the MFI need to assess the achievement of its goals?

BP5 – M1 Preparation Prepare and test the computer and the data projector the night before, in the morning and again during the coffee break earlier in the day. Since this is the first session where the data projector will be used it cannot be stressed enough how important that the machinery – computer and projector are functioning. Before this topic, the case study version of Microfin needs to be loaded (LEDACASE.XLS). Save the file under a different name, (TRAINING MICROFIN.XLS FOR EXAMPLE) in order to use this same copy in future sessions of the course. Note that you will switch to other versions of LEDA throughout the course. It will be most convenient to have the transfer files ready to use ahead of time. Each version has a different level of data completed based on the session being presented. After saving it under the new name, ensure that the following conditions are set: • The Model Setup page should be filled in with the case study information. • The product page will have some information also. • Make sure you have AutoSave disabled, so that the save prompt won’t disrupt your

presentations. (You’ll find this option under Tools / Add Ins /AutoSave on the Excel menu)

• Set the zoom for the MODEL SETUP and PRODUCTS pages to 120% so they may be more

easily viewed. (Use View / Zoom on the Excel menu). • Make sure you are in Full Screen mode to maximize viewing area. (You’ll find this under

View / Full Screen on the Excel menu.) • After you have introduced the pop up feature – Disable it. It is not always convenient

when presenting. • Before demonstrating ensure you have date to support displaying a graph. The active

loans graph on Branch Graphs should look like the following when the model has been properly set up

Note to the instructors - Important Instructions about using Microfin presented in this session and the next are based on Microfin's version 3. Later versions are available and offer new features. Instructors will be able to download the last online version from Microfin's website and use it during the session. The training participants should do the same. It will then be necessary for them to adapt the model presentation to the features of the new version. Instructors should prepare in advance so as to make sure they master the new changes implemented in version 3.

EXTRA – TO BE REPLACED BY NEW CGAP Microfin Handbook

BP Handbook -- Annex 1: Installing and Starting Microfin

Software and hardware issues The model has been developed to run on Excel 97 or later versions. Known problem with Excel 97 Both the original release of Excel 97 and the U.S. version of Service Release 1 have a serious recalculation bug that can cause Microfin to generate erroneous calculations. A patch available from Microsoft to correct this bug must be installed in order for Microfin to function reliably. To find out whether this patch, the Excel 97 Auto Recalculation Patch, is needed, start Excel 97 and click on help and then on about Microsoft Excel to display the version information. If the version is simply Excel 97, Microsoft’s Service Release 1 patch for Office 97 needs to be installed. The update file, SR1OFF97.EXE, is available on the Internet at www.microsoft.com, as well as on CD-ROM from authorized Microsoft dealers. Running this patch will modify Excel and change the version number to Excel 97 SR-1. If the version is already Excel 97 SR-1, another small patch may still have to be installed, because Microsoft corrected the recalculation bug after the U.S. version of SR-1 was released.1 In this case there are two options: Installing a small patch file, XL8P3.EXE, available at www.microsoft.com/excel/recalc.htm. (A copy of this patch is included on the Microfin distribution disk. Check for a file of this name in the c:\microfin subdirectory of the hard drive.) Double-clicking on this file will install the patch and display a message indicating that Excel has been successfully patched. Installing the Service Release 2 patch, available at www.microsoft.com. Once it is installed, the version will be Excel 97 SR-2. Once the necessary patch has been installed, start Excel and open the file microfin.exe. While holding down both the CTRL and the ALT key, hit the F9 key. This will correctly calculate the spreadsheet. Thereafter the model can be recalculated by simply hitting the F9 key. Save the spreadsheet back onto the disk. Minimum hardware Requirements Microfin requires at least a 486 computer with 24 megabytes of RAM to run adequately. But the worksheet is large, and recalculation times dramatically improve when it is run on a Pentium or Pentium II computer. When Microfin is used to project activity for individual branch offices, even more RAM will be required—about 6 megabytes more for every additional branch office. But buying additional RAM has become quite affordable (generally less than $50 for 32 megabytes for a desktop computer). There are many ways to find out how much RAM is on your system. An easy way is to start up Excel, click on help, then click on about Microsoft Excel, and finally click on system info. This will bring up a list of technical information, including total physical memory. If the number of kilobytes is more than 24,000, then you have more than 24 megabytes of RAM. As usual with computers the faster the model and the more RAM available the better Microfin will work for you. It is also most convenient to be working with Excel 2000. There have been no known problems with this version.

Installing Microfin Microfin.xls is 8 megabytes, so the file must be compressed in order to be distributed on floppy disks. It is distributed as a self-extracting zip file that must be installed on your hard drive before it can be used. The installation procedure is the same for all versions of the file, whether distributed on a diskette, downloaded from the Internet, or received as an email attachment. Follow these steps to use the model: 1. Start Windows Explorer (if using Windows 95 or 97) or File Manager (if using Windows 3.1). 2. Locate the file called mfininst.exe (short for “Microfin install”). This file will be in your Downloads folder (if received from the Internet or by e-mail). 3. Double-click on the file named mfininst.exe (you may not see the .exe extension, depending on the configuration of Windows Explorer). 4. The installation process will begin automatically. A message box will appear with the following text: You are currently installing the Microfin projection model and help system onto your hard drive. The installation program will suggest these files be installed in the subdirectory “c:\microfin” on drive “c.” You may choose a different drive and directory on the next screen if you wish. The installation process requires 8 megabytes free disk space. Should you have problems with the installation, refer to the user’s handbook. 5. Click on ok and an installation screen will appear, allowing you to change the subdirectory if you wish. Click on the unzip box when you are ready to proceed. 6. When installation is complete, you should see the message “files installed successfully.” Click on ok. The Microfin help system should then load a screen with the message “Installation is complete.” You can explore the help system if you wish. To close the help system when you’re finished, click on the exit button. 7. The file is now ready to use. Starting up Microfin To begin using Microfin, first start up Excel. Then use the File/Open command, locate the subdirectory where Microfin.xls is installed, and click on the file to open it. Microfin will initially run through a series of automated procedures to prepare itself for use. Once the file is open, it is advisable to use the File/Save As command to save the model under a new name (such as LEDA1.xls). Doing so preserves the original file as a backup or for use in developing another set of projections. When the model is run in Excel 97, a message will appear indicating that the workbook was created in an earlier version of Excel and asking whether to save the version in Excel 97 format. No information is lost or changed if the file is updated to the Excel 97 format, but the file can no longer be used with earlier versions of Excel. Microfin is a highly sophisticated model, and every effort has been made to ensure its accuracy and reliability. Nevertheless, neither CGAP nor the model’s developers can be held responsible for any problems caused by flaws in the model or by errors in its use. Useful Excel commands for moving around the model Home Moves the cursor to the far left column Ctrl-Home Moves the cursor to the top left corner of the page Ctrl-PgUp Moves to the previous page in the workbook Ctrl-PgDn Moves to the next page in the workbook

BP6-H1

Model Setup Page Summary - to be adapted according to the version of Microfin you are using

Users must set up the model before beginning the planning and projections. This page allows for input of variables that are used in projections throughout the model. 1. Modeling of individual branches

a) Consolidated or individual branch projections

2. Loan Product Projections Approach a) Project total active clients or new clients

3. Institutional Information

a) Name of institution b) Starting dates for projections c) Fiscal Year Information

4. Inflation Information a) Projected inflation rates b) Indexing rate for financial products (optional) c) Floating Index Base Rate

5. Historical Financial Statements a) Prior Income Statements b) Prior Balance Sheets c) Prior Portfolio Information

6. Financial Ratio Analysis a) Supplemental data for ratio calculation b) Automatic generation of key financial ratios

OPTIONAL - BP6-H2

Case Part 10 - Strategy See Case Study Document for this Handout Extract and copy separately ONLY if you choose to hand out exercises separate from the booklet.

BP6-H2 Balance Sheet Definitions used in the model

Category Description Assets Cash in bank and near cash

Cash assets, liquid assets, near cash and other non−interest-bearing cash products. May include non−interest-bearing balance and savings. For MFIs with a bank status, this account may include investments on the financial market or very short term bonds (a day, a week).

Gross portfolio outstanding

Total value of principal owed by clients on a 12 months term, as outstanding loans. Includes current loans, past-due loans, renegotiated loans, but not defaulted loans. All past-due loans must be considered as short term and must be included in this account. Does not include interest receivable. This amount must be broken down by product and by branch, on the branch projection pages.

Loan loss reserve

The loan loss reserve for the institution as a whole. This information will need to be broken down by branch (but not by product) on the branch projections pages. The value must be entered as a negative number.

Short-term investments

The total value of all interest-bearing short-term investments (with a term of less than 12 months).

Savings reserves

The amount of savings deposits not available for lending. These reserves are monitored independently of other bank accounts or investments, to ensure that they are not used for other purposes.

Other current assets

The value of all miscellaneous current assets, such as accounts receivable and accrued interest, not captured in other categories.

Land

The value of all land as it appears on the institution’s balance sheet.

Buildings (gross)

The gross value of all buildings as it appears on the balance sheet. Depreciation will be considered below, on the accumulated depreciation line.

The gross value of all fixed assets other than

Furniture and equipment

land and (gross) buildings as it appears on the institution's balance sheet. Depreciation will be considered below, on the accumulated depreciation line.

Accumulated depreciation

The total amount of accumulated depreciation as it appears on the institution's balance sheet. This amount must be entered as a negative number. The total will be broken down, for each of the above categories of fixed assets, by branch office and head office on their worksheets.

Long-term investments The total amount of investments that are intended to be held for more than one year.

Other long-term assets (net)

The net value of all major assets that are amortized, such as MIS software.

Liabilities

Accrued expenses

Expenses incurred as of the date of the balance sheet, but not yet paid, such as social benefits for the staff.

Savings deposits Total value of all savings deposits (compulsory and voluntary) held and controlled by the institution. This value will be broken down by product and branch on the branch projections pages.

Short-term loans payable

The value of any loan principal due to be repaid within 12 months from the statement date – on all funds obtained through loans or other borrowing contracts. Includes loans, credit lines, and authorized overdrafts with a pending balance, as well as the portion of long term bonds to be repaid within 12 months.

Other current liabilities

Other short-term liabilities not captured in other categories due to be repaid within 12 months, including taxes and wage costs, salary deductions and other payables. Must also include any short-term portion of prepaid products.

Long-term loans payable

The value of the principal due to be repaid within 12 months from the statement date on all funds obtained through loans or other borrowing contracts and all subordinated debt. This account must not include long-term funding without a specific repayment date, such as long-term subsidized loans from related companies or branches.

Other long-term liabilities Other long-term liabilities falling due in more than one year’s time, including long term

prepaid products, debt linked to pension plans and debt which doesn't directly fund the MFI's financial activities, such as mortgages or other loans for the purchase of capital assets. Long-term concessional loans without a specific repayment date, but which are not subsidies, are also included in this account.

Equity Accumulated donated equity, previous periods

The cumulative value of all grants received from donors before the current fiscal year (see FAQ 5).

Donated equity, current period The value of all grants received from donors during the current fiscal year

Shareholder equity

Value of all investments made by shareholders.

Dividend payments

Cumulative value of all dividend payments made to shareholders (entered as a negative number).

Accumulated net surplus Cumulative value of net income (after paying taxes and before receiving donor grants) of previous and current periods, after deducing dividend payments made to shareholders or members.

Net surplus (deficit), current The value of the surpluses or deficits (excluding grant period income) for the current fiscal year.

BP6-H3 LEDA Ratios - Summary

FY10 FY09

Income Statement Analysis

Return on Total Assets 37.8% 33.5%

Operating Margin (ROA) -3.8% -15.1%

Adjustments to Operating Margin 8.1% 8.0%

Net Margin (Adjusted ROA) -11.9% -23.1%

Profitability

Operational Sustainability 91% 69%

Financial Sustainability 76% 59%

Return on Equity -7.1% -26.4%

Adjusted Return on Equity -22.4% -40.5%

Efficiency and Productivity

Yield on portfolio 44.9% 41.8%

Operating Costs / Avg Portfolio 40.8% 51.8%

Borrowers per Loan Officer 318 289

Loan Portfolio per Loan Officer 48,205 43,111

Average cost of debt 12.4% 12.6%

Overhead percentage 50.1% 52.6%

Loan Officers as percent of total staff 65% 60%

Portfolio Quality Ratios

Portfolio at Risk > 30 days 10.9% 8.0%

Loan Write-off Ratio 1.3% 2.0%

Reserve Ratio 3.6% 4.0%

Growth and Outreach

Percentage growth in portfolio 36.1% 34.7%

BP6 – M1 Model Set Up Page Lecturette Guide

1. Choosing branch, Regional, or Consolidated mode Briefly explain again that Microfin can generate projections at several different levels of detail – by branch, by region, or for the institution as a whole. Show how the structure choice is made from the drop-down list. Select Consolidated Mode and explain why we will be using this mode during the course. 2. Loan Product Projections Approach Microfin offers two approaches for projecting the number of clients for loan products. Either by total number of Active clients or by new clients each month. Your choice will apply to all loan products in all branch/region offices. You may wish to wait until you reach the MARKETING CHANNELS portion of the planning process and then return here to make a decision. If you change your approach later in the planning process, you will need to revise any loan client projections already done at that point 3 & 4. Institutional information and Inflation data Use the down-arrow to move down to the Institutional information section of the page. Point out that the date information is used in monthly column headings and the fiscal year data is used in yearly summary columns (see figure).

Emphasize that projections must be completed in local currency. Microfin does allow for display of real values and for conversion of key financial data to an external currency. Show how the inflation rate is entered and emphasize that Microfin always asks for annualized figures for inflation and interest rates. Also show how the inflation rate may be changed in future months. Use the right-arrow to show how Microfin is structured with 24 monthly columns followed by quarterly columns indicated by the changed color band. Hit the Home key to return back to the Month 1 column. Enter a change in the inflation rate and show how the “#” column indicates the number of changes that have been entered in future months. Explain that the optional indexing section is used if the institution has any financial products linked to an external measure or if it receives loans linked to an external measure. If loans were linked to inflation, the inflation rate would be reentered here. If loans are made in an external currency, the rate of devaluation of local currency

relative to the external currency would be entered here. In addition, the exchange rate can be entered for reference purposes. 5. Historical financial statements Proceed down to this section of the model. Ask: Why do we need this information? Explain that this section serves two purposes. The first is to assess the current financial situation of the institution, and the second is to provide initial balances to begin the projections. Explain that the model uses a specific format for the statements and that there may be a need to rework the financial data from their institution to ‘fit’ the model. There are primarily two reasons for this, first Microfin financial statements may not match the categories in their accounting system and if they are a multi-service institution, they will first need to separate out data pertaining only to their financial services. Show how Microfin splits the financial statements into two columns. Emphasize Recalculation and point out Verification lines. Change the number entered in the Accumulated Donor Equity line of the Balance Sheet to 1,000,000, without hitting F9. Ask: Why isn’t the error flagged? [Answer: Because we haven’t hit F9 yet.] Hit F9 and show how the error is flagged. Page down to the end of the balance sheet and show how the difference is indicated on the VERIFICATION line. Return the correct figure (900,000).

Portfolio Information section Show how the “number of days for at risk calculations” works. Ask: Where does the number come from for the “value of loans written off during period”? (Answer: from the data input into the previous financial statements.) Mention that we’ll review the calculation line later in the course. 5. Financial Ratio Analysis. Ask: What remaining piece of the institutional assessment is related to the financial information we’ve just input into the model? (Answer: Refer to framework – show financial management.) Ask: What is one way we can assess the quality of financial management in the institution? (Answer: by reviewing financial ratios.) Proceed down to the Financial Ratio Analysis section. Very quickly show that once a few additional pieces of information are entered, the page concludes with generation of the financial ratios we introduced earlier, thus providing a means of assessing the current financial status of the MFI before beginning with the actual projections.

Show how the model allows choice of ratio denominator. Show how the TOTAL ASSETS line pulls information from the Balance Sheet above and allows input of data for a third year. Ask if anyone knows why there is a third year column. Show how the next line, AVERAGE TOTAL ASSETS, calculates the annual average; providing the third year data allows ratios to be calculated for two years, thus providing information for trend analysis.

BP6-M2

Balance Sheet Definitions used in the model Category Description Assets Cash in bank and near cash

Cash assets, liquid assets, near cash and other non−interest-bearing cash products. May include non−interest-bearing balance and savings. For MFIs with a bank status, this account may include investments on the financial market or very short term bonds (a day, a week).

Gross portfolio outstanding

Total value of principal owed by clients on a 12 months term, as outstanding loans. Includes current loans, past-due loans, renegotiated loans, but not defaulted loans. All past-due loans must be considered as short term and must be included in this account. Does not include interest receivable. This amount must be broken down by product and by branch, on the branch projection pages.

Loan loss reserve

The loan loss reserve for the institution as a whole. This information will need to be broken down by branch (but not by product) on the branch projections pages. The value must be entered as a negative number.

Short-term investments

The total value of all interest-bearing short-term investments (with a term of less than 12 months).

Savings reserves

The amount of savings deposits not available for lending. These reserves are monitored independently of other bank accounts or investments, to ensure that they are not used for other purposes.

Other current assets

The value of all miscellaneous current assets, such as accounts receivable and accrued interest, not captured in other categories.

Land

The value of all land as it appears on the institution’s balance sheet.

Buildings (gross)

The gross value of all buildings as it appears on the balance sheet. Depreciation will be considered below, on the accumulated depreciation line.

Furniture and equipment

The gross value of all fixed assets other than land and (gross) buildings as it appears on the institution's balance sheet. Depreciation will be considered below, on the accumulated depreciation line.

Accumulated depreciation

The total amount of accumulated depreciation as it appears on the institution's balance sheet. This amount must be entered as a negative number. The total will be broken down, for each of the above categories of fixed assets, by branch office and head office on their worksheets.

Long-term investments The total amount of investments that are intended to be held for more than one year.

Other long-term assets (net)

The net value of all major assets that are amortized, such as MIS software.

Liabilities

Accrued expenses

Expenses incurred as of the date of the balance sheet, but not yet paid, such as social benefits for the staff.

Savings deposits Total value of all savings deposits (compulsory and voluntary) held and controlled by the institution. This value will be broken down by product and branch on the branch projections pages.

Short-term loans payable

The value of any loan principal due to be repaid within 12 months from the statement date – on all funds obtained through loans or other borrowing contracts. Includes loans, credit lines, and authorized overdrafts with a pending balance, as well as the portion of long term bonds to be repaid within 12 months.

Other current liabilities

Other short-term liabilities not captured in other categories due to be repaid within 12 months, including taxes and wage costs, salary deductions and other payables. Must also include any short-term portion of prepaid products.

Long-term loans payable

The value of the principal due to be repaid within 12 months from the statement date on all funds obtained through loans or other borrowing contracts and all subordinated debt. This account must not include long-term funding without a specific repayment date, such as long-term subsidized loans from related companies or branches.

Other long-term liabilities Other long-term liabilities falling due in more

than one year’s time, including long term prepaid products, debt linked to pension plans and debt which doesn't directly fund the MFI's financial activities, such as mortgages or other loans for the purchase of capital assets. Long-term concessional loans without a specific repayment date, but which are not subsidies, are also included in this account.

Equity Accumulated donated equity, previous periods

The cumulative value of all grants received from donors before the current fiscal year (see FAQ 5).

Donated equity, current period The value of all grants received from donors during the current fiscal year

Shareholder equity

Value of all investments made by shareholders.

Dividend payments

Cumulative value of all dividend payments made to shareholders (entered as a negative number).

Accumulated net surplus Cumulative value of net income (after paying taxes and before receiving donor grants) of previous and current periods, after deducing dividend payments made to shareholders or members.

Net surplus (deficit), current The value of the surpluses or deficits (excluding grant period income) for the current fiscal year.

BP7-H1

CLIENT ANALYSIS - WORKSHEET

Think of a group of target clients for you MFI / your region. 1. Describe two activity systems specific to this group: (e.g. what is the nature of

activities? What is the calendar of activities during the year? What is the seasonality of inflow and outflow?

2. What are the risks linked to these activity systems? (e.g. climate risk; health risk;

disorganization of the sector; price instability; market saturation risk) 3. Think of a "typical" household. What are the usual financial needs? (Are the children

attending school? Are there elderly relatives in the household? Are there any family members working abroad?)

4. Which financial products could you offer?

5. Which non-financial products could you offer?

BP7-H2

MICROFIN PRODUCT DEFINITION PAGE OUTLINE - to adapt according to the version of Microfin you are using

Savings Product Definition Compulsory Savings - Linked to the Loan Product Directly

Note: Balances are based on loan activity Control of savings

by the MFI (included in Financial Statements) by group or another institution (not included in Financial Statements)

Interest rate paid

can vary by month

Reserve percentage can vary by month

Indexing of savings held in foreign currency value indexed to inflation

Voluntary Savings

Note: Balances are established on PROGRAM page Control of savings

by the MFI (included in Financial Statements)

Interest rate paid can vary by month

Reserve percentage can vary by month

Indexing of savings held in foreign currency value indexed to inflation

BP7-H2 cont

Loan Product Definition Average loan amount

input by cycle can vary by month can index to inflation

Repayment conditions

Repayment frequency Effective loan term

Input by cycle can vary by month

Grace period

Compulsory savings "Up-front" savings

as percent of requested loan amount as percent of cumulative loans

"On-going" savings as percent of monthly principal payments

Option to eliminate savings in future month Note: can combine savings methods Note: cannot vary percentages in future months

Pricing structure Interest rate method

Declining balance or flat Interest rate

can vary by month Commissions and fees

"Up-front" fees as fixed amount per loan as percent of loan amount

"On-going" fees as fixed amount per month as percent of monthly principal payments

Index to external value loans in foreign currency loans indexed to inflation rate

Analysis

Loan progression over time Average monthly payment by cycle Effective interest rate (nominal and real) Option to use CLIENT COST Worksheet

BP7-M1 Notes for guiding group discussion on Microfin Product and Services Design Step 1: Average loan amount Remind them that the first section “Step 1” is what we looked at earlier when we gave an overview of Microfin. Show how Microfin allows flexibility to specify loan sizes both for loan cycles and to vary by month if desired. Ask: How do average loan sizes within a loan cycle, say first loans, typically change over time? (Possible answers: they increase with inflation periodically; the institution revises them upwards.) Show how the dropdown list allows three options to link loan sizes to inflation. Step 2: Repayment conditions Show how the dropdown list gives a choice of repayment frequencies. Explain that if the product has multiple repayment options they should choose the most common option or choose “monthly payments” and little accuracy will be lost. Ask: What do we mean by effective loan term here? (Answer: it is the amount of time (in months) that it actually takes a client to repay a loan, not the original “contractual” loan term.) For example, if loan contracts are for 6 months but on average it takes clients 7 months to repay loans, then the effective loan term is 7 months. Ask: Why do you think it is important to use the effective loan term rather than the contractual loan term here? (Answer: the loan term will affect the projection of loan repayments as well as the timing of follow-up loans.) Grace Period – the model provides for only a single grace period to be indicated rather than a different one for each cycle. Step 3: Compulsory savings Explain that each product can have a different compulsory savings requirement and it therefore forms part of the loan product definition. Ask: What common approaches are there for defining compulsory savings? Compare participant replies to the options supported by Microfin (% of requested loan, % of cumulative loans). If participants have suggested alternative approaches, explain that Microfin contains only the most common approaches because of the complexity of these calculations. Point out that the FAQs often give solutions to situations that aren’t explicitly covered by the model. If participants mention approaches where savings are held by the participants or by an independent institution, explain that this will be handled later in the savings section. Step 4: Pricing structure Explain the two interest rate methods supported by Microfin. Show how Microfin asks for the interest rate changed in the previous year in order to calculate income on the outstanding portfolio. Explain that if the interest rate is changed in the future, that Microfin will charge the old interest rate to the existing portfolio and the new rate only on loans issued from that month forward. Emphasize that interest rates in Microfin are always annualized.

Show how fees are treated differently depending upon whether the number input is less than 1.00 or greater than 1.00. (See figure below.)

Step 5: Analysis Explain that the final step in the loan analysis uses the data from the Month 1 column to do a number of useful calculations to help determine if the product is well-designed. Show the format of this section. Review each column using the explanation found in the BP Handbook. Make sure participants understand the meaning of the columns. Hit F9 to ensure data is up to date. Ask: Why does the average monthly payment decline in future cycles? (Answer: Because the loan term is getting longer and the loan amount is not increasing very rapidly.) Ask: Does this look like a well-designed product? (Answer: No, because clients should be able to handle larger payments as they remain clients for a longer period and their business grows.) Ask: Why does the effective interest rate decline for future loan cycles? (Answer: There is a fee charged per loan and the loan term is increasing, so the client pays the same costs over a longer period of time, resulting in a lower effective interest rate.) If participants don’t understand what an effective interest rate is, give a brief explanation, i.e., the effective interest rate states the total cost of the loan – interest and fees – expressed as the equivalent interest rate on a declining balance. Tell participants they can refer to CGAP Occasional Paper #1 for more information or they can attend one of the CGAP courses about setting interest rates. Explain that the calculations here in Step 5 are based on the product as defined in Month 1. Any changes made in future months, such as changing the interest rate, will not be reflected here. Don’t mention the Client Cost page at this time. It will be presented on the last day.

Rate charged on future loans

Show effect of numbers < 1 and > 1

Rate charged on existing portfolio is in Init.Bal. column

Explain that a loan can be defined starting in Month 1, even if it isn’t introduced until sometime in the future. This is because “marketing” of the product is done on the Program/Branch page. Thus a loan product can be “defined” as having an average loan size of $1,000,000, but if there isn’t a single client that has one of these loans, it will have no ramifications for the financial projections. Thus, if you are planning to introduce a new loan product in Year 2, it is helpful to define that product as of Month 1 in order to be able to use this analysis table. Savings Input Section (1) Control of savings Ask: What do you think is meant by ‘control of compulsory savings’? (Answer: compulsory savings can be controlled or held by the MFI, or by the group itself as in village banking, or by a third party such as a commercial bank.) Explain that compulsory savings are generated by the model for all three instances, but the savings only shows up on the MFI’s balance sheet if the MFI controls the savings. Ensure that everyone understands the distinction. (2) Interest rate paid Explain that the interest rate must be entered as an annual rate. (3) Percent to be held in reserve Ask: What does the reserve percentage mean? (Answer: it is the amount of savings that must be held in a secure place and is not available for lending or other uses.) Ask: Why should a portion of savings be held in reserve? (Answer: as security for peoples’ savings; this can be mandated by regulators or it may be a management decision.) Explain that if the savings are not controlled by the MFI, they must enter 100% as the “reserve” percentage in order that 0% be available for lending. (4) Indexing of savings Explain that savings can be indexed to an external value, in which case their value will be maintained using the value indicated on the Model Setup page in the Indexing Rate section. Voluntary savings Show how the sections for the voluntary savings products are identical to the compulsory savings section except that it is assumed that the institution controls voluntary savings.

BP8-H1

Lessons from crises in four microfinance markets From, Growth and Vulnerabilities in microfinance (Greg Chen, Stephen Rasmussen et Xavier Reille), Focus Note 61, Washington, D.C.: CGAP, 2010. From 2004 to 2008 microfinance enjoyed unprecedented growth in emerging markets, with average annual growth of 39 percent. Microfinance was promoted by many national governments eager to bridge the financial inclusion gap. Microfinance attracted donors and socially oriented investors thanks to its potential for social and financial returns and it also benefitted from increasing funding. This impressive growth means that millions more poor people are included in the formal financial system. However, in a few countries serious loan delinquency crises create concerns about growth risks and other potential causes of these faltering markets. Nicaragua, Morocco, Bosnia and Herzegovina (BiH), and Pakistan are important microfinance markets in their respective regions. These countries have all experienced a microfinance repayment crisis after a period of high growth within the last two years. CGAP led a study on these four crises which highlights the importance of contextual factors and reveals three major vulnerabilities within the microfinance industry:

i) Concentrated market competition and multiple borrowing, ii) Overstretched MFI systems and controls, iii) Erosion of MFI lending discipline. 2004 to 2008: The Growth Story During this period growth was driven by increasingly competent and confident MFIs with a social mission to increase outreach to the poor and the unbanked. At the same time, there were also strong incentives for MFIs to grow since funding, national influence, and international recognition all flowed to the largest players. Growth Was Led by Credit Services MFI market expansion was driven by MFIs that relied on credit products and credit delivery methods common in microfinance. There are substantial differences in the credit approaches in the four countries, but their most common characteristic was that savings was neither a major service nor a large source of funds (the ratio of savings deposits to outstanding loans in each country remained under 10 percent throughout the period, in sharp contrast to the MIX global average of 46 percent). Fueled by Abundant Funding — Especially Debt During this period donors and social investors began to channel larger amounts of funds to MFIs across the globe, generating a significant supply “push” behind the growth story. The stock of cross-border investments in microfinance saw a seven-fold increase. Their investments were concentrated in a few select countries, including BiH and Nicaragua. Many MFIs relied on debt capital from foreign lenders to support their growth. In addition, MFIs sourced capital on their local markets through commercial banks and local apex funds. The emphasis on MFI borrowing contributed to a rise in financial leverage (the ratio of MFIs’ total assets to their equity base) rising from 3 to 5.5 between 2004 and 2008 in the four countries. Initially, Financial Performance Remained Solid Early in the growth period, MFI financial performance was strong in these four countries compared to global benchmarks. MFIs maintained good portfolio quality, stable net interest margins, and stable or increasing profitability. Combined with higher financial leverage, this performance improved return on equity in Morocco and BiH through 2007. Later, Credit Quality Deteriorated and Growth Slowed After several years of growth, credit repayment problems began. Signs of industry stress were reported among industry players in 2007, but delinquency problems did not appear in MFI reports until early 2008 in Morocco and in the other countries not until late 2008 or early 2009. In three of the countries PAR exceeded 10 percent,

the threshold used here to define a serious repayment crisis. Only BiH reported PAR of less than 10 percent, but this was on account of aggressive loan write-offs. Context Matters… Loan delinquency crises are complex events made more difficult to interpret by contextual forces. The four case studies show that three contextual forces affected the pace and scope of the crises: the macroeconomy, local events, and contagion factors. Macroeconomy: Global Economic Recession In some cases, microfinance borrowers have been affected by the economic downturn, job losses, and declining flow of remittances. The four case studies reveal that the economic recession was an aggravating factor but not a principal cause of the repayment crises. Local Events and Political influences As microfinance grew, it inevitably attracted more attention and sometimes unwelcome attention. Sometimes MFI practices draw criticism (e.g., unsavory loan collection methods). At times this has led to groups of borrowers being organized to speak out against MFIs and to even going so far as to refuse to repay loans. In Nicaragua, the no pago movement organized by a politically influential group of borrowers created a sizeable pocket of delinquency in a northern region. In Pakistan a loan waiver proclamation by a local politician, and the spread of false loan waiver news stories, gave momentum to the mass default there. Contagion Factors Repayment problems in microfinance have typically been more confined events that did not affect markets at regional or national levels. However, when news or rumors spread quickly through media or social channels, the chances of a wider and deeper repayment crisis increase and confidence in the sector can decline. The precipitous takeover of a large MFI in Morocco and the discussion of this in the media signaled that it might not be able to continue to provide loans, dampening incentives to repay. The Heart of the Problems… While many factors influence the course of a crisis, the case studies reveal that three vulnerabilities within the microfinance industry lie at the heart of the problems. Concentrated Market Competition and Multiple Borrowing Growth naturally introduced higher levels of competition in our four case countries, increasing the likelihood that clients would borrow from more than one MFI. In Morocco, the central bank estimated that 40 percent of borrowers had loans from more than one MFI just as the repayment crisis began. There are similar pre-crisis estimates for Nicaragua, BiH, and Pakistan. Concentration is sometimes reinforced by deliberate decisions made by MFIs (strategies that prioritize markets with greater economic activity and higher population density, for example). While the benefits can be substantial for clients, competition can introduce new market dynamics that are not always easy to see.

• Borrowers are less dependent on a single MFI. One of the underlying premises of microfinance is that borrowers repay their loans in order to sustain a relationship that allows them to get another, often larger, loan. This delicate relationship between lender and borrower can be gradually undermined as ever higher levels of multiple borrowing take hold in a crowded market.

• Borrowers can borrow larger total amounts than before. With more choices, borrowers have the

option to increase their total borrowings, possibly beyond their means. In our focal countries borrowers often moved from having no choices of formal credit to having several choices within a few years.

The four case countries illustrate how concentrated lending and competition, particularly when introduced rapidly, can diminish incentives to repay and can weaken the risk-mitigating effects of loan size limits. Subtle changes in repayment incentives and amounts of borrowing can change market dynamics and potentially lead to repayment crises.

Overstretched MFI Systems and Controls As growth kicks in, MFIs are stretched in new ways, and three kinds of capacity gaps were found in our case countries.

• Adding large numbers of staff in a short time can mean new staff are not well prepared for their jobs. MFIs in the four countries added nearly 40 percent new staff each year. Rapid growth requires MFIs to assign staff more quickly into responsible positions, sometimes resulting in less care being taken in recruitment, training, and preparation.

• Rapid growth places a higher premium on a strong middle management cadre. Rapid growth

means senior management must deal with increasing pressures from external stakeholders, such as investors and regulators, even as their operations grow. It puts a premium on capable mid-level managers to oversee more distant large-scale operations. Typically, frontline branch staff are promoted to fill middle-management positions, even though they lack the skills and outlook required for management.

• Growth strains internal controls that are critical to maintain discipline and minimize fraud. Inadequate

internal controls were cited as the most common weakness by MFIs in BiH, Morocco, and Nicaragua. Loosening the enforcement of controls (so as to reach growth targets) and keeping obsolete management information systems can be fatal.

Erosion of MFI Credit Discipline In growing and competitive markets MFIs are likely to take more risks to acquire new customers and expand their product offerings. An MFI manager in BiH recalled, “There was just something in the air to compete. Other MFIs started to come to our region and to take a piece of our pie, so we decided to jump and do the same things.” The attitudes and priorities of MFI managers filtered down to frontline staff who were given short-term focused performance incentives that emphasized growth and market share. In some cases these incentives came at the expense of credit discipline (for example by neglecting customer relationships, even losing the face-to-face relationships with their clients that are critical to credit quality) and contributed to the later delinquency crises. The Role of Market Infrastructure Over the past decade significant investments have been made to develop a robust industry market infrastructure to provide investors and MFIs with accurate and timely information on microfinance performance. It included standards on financial performance, standards for external audits, external ratings, and credit information bureaus (CIBs). Social performance assessment tools are increasingly available and can offer insight into client satisfaction and can improve credit risk management. However, growth has exposed vulnerabilities in microfinance that market infrastructure initiatives must take into account in the future. External Audits. According to MIX, the quality of MFI audits improved as auditors familiarized themselves with the microfinance business and built their expertise in this growing market. Over 250 MFIs now have financial audits compliant with International Financial Reporting Standards. Audits provide a professional review of financial statements, accounting policies, and internal control. But microfinance audits often do not include reconciliation of loan accounts with a meaningful sample of clients; nor can audits adequately assess the underlying quality of many thousands (in some cases millions) of outstanding loans. Essential as they are, audits did little to detect or mitigate the crises in our four focal countries. Ratings. Ratings by mainstream financial sector rating agencies as well as by the four specialized microfinance rating agencies have become common in microfinance. The methodologies used by specialized rating agencies offer insightful assessments of MFI institutional performance. However, MFI ratings preceding the repayment crises in the four focal countries did not emphasize strongly enough the risks and vulnerabilities discussed in this paper. Portfolio Testing. The limitations of standard audits and rating tools to provide advance warning of possible repayment crises mean it is increasingly important for MFIs and their investors to use additional portfolio quality assessment measures. More frequent use of portfolio testing tools, such as those developed by CGAP and MicroSave, would enhance confidence in microcredit portfolio quality (even if they are not cheap).

Credit Information Bureaus. CIBs, which provide credit histories of individual borrowers, are still new in microfinance, and only a handful of countries have well-functioning CIBs serving the microfinance industry. In our four focal markets, only Nicaragua had well-functioning CIBs, but they were separated according to regulated and non-regulated MFIs. In Pakistan, only microfinance banks must submit data to a CIB but this leaves out NGOs that still service the largest number of microfinance borrowers. Morocco and BiH began CIB projects in 2005, but they became operational only after the repayment crises had already started. Conclusion: What Are the Lessons Microfinance Should Take from These Recent Repayment Crises? The four more recent crises discussed in this paper also offer lessons we can use to build a stronger microfinance industry in the years ahead. MFI managers, MFI investors, and policy makers should give more attention to the growth model of microfinance. In the first decade of this century, the focus was on expanding access to services. In the next decade, the focus should be on sustainable growth. To help achieve this we offer three specific recommendations:

• In an increasingly competitive environment, MFIs should balance their growth objectives with the need to improve the quality of services and ensure the long-term sustainability of client relationships. More emphasis will be needed to regularly assess client satisfaction and the behavioral dynamics of markets.

• Credit information bureaus are an essential component of the market infrastructure for microfinance. CIBs alone will not prevent delinquency problems, but they are critical to improving credit risk management and to managing multiple borrowing. Their development and wide use should be accelerated on a global basis even before microfinance markets become highly competitive or over-concentrated.

• Financial access mapping through the provision of reliable information on the geographic and socioeconomic penetration of microfinance services would help identify both underserved and saturated markets. Such data provided on a regular, timely basis can help identify risks and opportunities in certain geographies.

These recommendations on their own would strengthen the microfinance industry in many countries. But there is a wider lesson and call for action. The recent delinquency crises are a reminder that microfinance remains a risk management business. It is important to watch out for these new risks and to work to find the most appropriate mitigation measures.

BP8-H2

MICROFIN PROGRAM/BRANCH PAGE OUTLINE Summary Reports Loan Projection Input Section

Input Initial Balances for the loan product – number of clients per cycle, portfolio balances Input Number of Active loans for the loan product Input Client Retention Rates for the loan product Analyze Graphs for the loan product

Loan Projection Output Aggregate Loan Activity Total Loan Portfolio Total Portfolio Activity By Product Number of Loans Number of Active Loans Portfolio activity Loan Disbursements Total Monthly Repayment Gross Outstanding Portfolio Savings Projection Section Compulsory Savings Voluntary Savings Number of Depositors Average Savings per depositor Aggregates Income Section Total Earned Income

Total Income all products Total by product – interest, commissions and indexing income Other earned income

Financial Costs Interest Paid on Deposits Cost of Borrowed funds Loan Loss Provision and Write Off Portfolio Quality Targets Loan Loss Provision Loan Write Off Ending Loan Loss Reserve Loan Officer Analysis – levels, turnover, promotions, caseload Branches Program/Branch Level Staffing Program/Branch Level Other Operating Expenses Program/Branch Level Fixed Assets

BP8-H3 Presentation Guidelines

Thank you for agreeing to make a short presentation of your work thus far. We realize that your plans are not complete, but everyone will benefit from the discussion that takes place. You may hear some good ideas that you can work into your plan during the next sessions. We ask that you take no more than 5 minutes to present your work on: • The products you have designed so far • The projections for your credit and savings products The best way for you to present your work is to use the projector to: • Show your loan product redesign from the Products page and give a brief explanation of

your decision making process • Move to the Branch Graphs page and show graphs related to your loan and savings

projections, again explaining how you made your decisions At the end of your presentation there will be 5 minutes for questions from the other participants. Your presentation will be followed by a 10 minute exercise in analysis possibly using your model. The facilitation team will assist with the analysis. Thanks for your help!

Draft as of 5/21/14 at 11:05 AM Mats Page 1

BP8-M1 Notes to aid in Microfin Discussions See relevant sections in the CGAP Microfin Handbook

Optional BP9 – H1

COMPLETE AND COMPETE Complete the puzzle below using the clues on the next page. First assign a term to the definition listed. Then write that term in the spaces provided – enter one letter per square, starting from the top most square. The shaded squares will spell out a term that you should be familiar with. When your team has completed the puzzle and knows the hidden term – scream and shout. The first team finished wins the prize! Good luck!

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Optional BP9 – H1 cont. Clues – Figure out a term that best suits the definitions presented here. Then write that term in the spaces provided on the grid above. For example, clue one describes a term of 3 letters, enter those three letters in the spaces in column 1 beginning in the top most square (which in this case happens to be the shaded square).

1 Unpaid principal balance of all loans with payments past due expressed as a percentage of the total portfolio

2 There are no bad ------- only bad loans!

3 A balance sheet entry that represents the amount of outstanding principal that is not expected to be recovered by an MFI

4 The objectives and activities for providing the right products in the appropriate markets in a cost efficient manner in order to achieve the goals of the MFI.

5 Occurs when it is determined that loans are unrecoverable. IN accounting terms, Debit - Loan loss reserve, Credit - Outstanding loans

6 The amount an MFI expects to write off in a year expressed as a percentage of the outstanding loan portfolio

7 when a borrower cannot or will not repay his/her loan and the MFI no longer expects to receive repayment

8 expenses the anticipated loss of value in the portfolio gradually over the appropriate periods in which that asset generates income, instead of waiting until the actual loss of the asset is realized

9 Principal amount of loans balances outstanding

10 the situation that occurs when loan payments are past due, a hidden beast

11 One of LEDA’s goals, getting more clients

12 Loans that have payments which are past due are in ----------

13 Failing to plan is ---- - to fail, Provides a road map to help secure the future of the MFI

14 Categorizing loans in arrears by length of time past due

15 The ------.is key as it is the foundation of any strategic plan for an MFI

16 indicates the recovery performance during a specific period, equals the amount received less prepayments divided by the total amount due this period plus past due from previous periods

Optional BP9-H2

Common Portfolio Management Ratios

Indicator Ratio Measurement

"Arrears Rate" / "Past due Rate"

Amount past due -----------------------

Outstanding Portfolio

How commonplace is non-payment? Measures amount of

loan principal that is due but unpaid

Portfolio at Risk (by age)

Unpaid principal balance of all loans with payments at

least 1, 31, 61 … days past due

------------------- Outstanding Portfolio

How much could you lose if all late borrowers default? Aging

separates more risky loans from less risky. (The longer a loan

goes unpaid, the higher the risk it will never be paid.)

Repayment Rate

Amount received (current and past due) less

prepayments ------------------

Total due this period + past due from previous periods

Shows amount paid compared to amount due/expected during

a specific period.

Does not provide useful information about the

performance of the outstanding portfolio.

Current recovery rate

Amount received this period (P or P+I) -------------------

Amount due this period (P or P+I) under original loan

terms

Can be processed algebraically to predict eventual loan loss

rates. Fluctuates from month to month –is meaningful only for

longer periods.

Annual loan loss rate

Amount becoming unrecoverable during year

------------------------- Avg Outstanding portfolio

Annual cost of default, which must be balanced by higher

interest income.

BP9-H3

Accounting for Loan Loss Provisions and Write-Offs A LOAN LOSS RESERVE It is an accounting entry that represents the amount of outstanding principal that is not expected to be recovered by a micro-finance organization It is recorded as a negative asset on the Balance Sheet as a reduction of the outstanding portfolio or as a liability A LOAN LOSS PROVISION It is the amount expensed on the Income and Expenses Statement.

↑ It increases the loan loss reserve LOAN LOSSES or WRITE-OFFs They occur only as an accounting entry. They do not mean that loan recovery should not continue to be pursued.

↓ They decrease the reserve and the outstanding portfolio Ledgerwood, Joanna. Financial Management Training for Micro-Finance Organizations, 1996, CALMEADOW

A provision records the possibility that an asset in the Balance Sheet is not 100% realisable. The loss of value of assets may arise through wear and tear such as the depreciation of physical assets, loss of stocks, or unrecoverable debts. Provisions expense this anticipated loss of value in the portfolio gradually over the appropriate periods in which that asset generates income, instead of waiting until the actual loss of the asset is realised. Provisions are only accounting estimates and entries, and they do not involve a movement of cash, like saving for a rainy day. Loan loss provisions charged to a period are expensed in the Income and Expense Statement. The corresponding credit

Loan losses or write-offs occur when it is determined that loans are unrecoverable. Because the possibility that some loans would be unrecoverable has been provided for in the accounting books through reserves, loan losses are written-off against loan loss reserves and are also removed from the outstanding portfolio.

Dr Loan loss reserve Cr Outstanding loans

Write-offs do not affect the net portfolio outstanding unless an increase in the loan reserve is made

BP9-H4 Recruitment and incentives Recruitment A recruitment policy must specify the required experience, but also the required values (honesty, commitment towards the target market, willingness to act), personality traits (open-minded, team spirit) and skills (combination of technical and behavioral know-how). Once the ideal characteristics of a loan officer or any other employee have been identified, recruitment techniques can be devised accordingly. Incentives An incentives policy is the key to staff motivation. Here are examples of promising new practices, based not only on growth but also on portfolio quality, with clear rules and well-defined penalties and consequences in case of infringement:

- Using a combination of incentives based on individual performance and group performance. Individual incentives can increase productivity and portfolio quality. But group incentives favor team spirit, loyalty and staff retention.

- Using financial and non-financial incentives. Access to continuing education, a healthy work environment, recognition and social benefits can be as motivating as financial bonuses.

- Ensuring balance between financial and social performance indicators. Incentives can have adverse effects. Each MFI should reflect on the potential consequences of its performance indicators, according to its mission, values and goals.

See also table #2 in Imp-Act's Guidance Note: Staff incentives: Integrating SPM into microfinance capacity building

BP9-H5 Table #2 in Imp-Act's Guidance Note: Staff incentives: Integrating SPM into microfinance capacity building

BP9-M1 Portfolio Review Puzzle Answers

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W P

R L D R P D M

R S I O E O O E A A R

E T T A F V R L R R E

S R E N A I T I R A K P

B E A O L U S F N O E P G E A

P O R T F O L I O Q U A L I T Y

A R V E F S T O L U T R A N M

R R E G S N I E R S N G E

O Y R O N E N N

W A C A I T

E T Y C N R

R E H G A

S T

E1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

3 9 7 8 8 12 7 9 9 11 8 7 4 5 6 13

BP9-M2 Recruitment and incentives Recruitment A recruitment policy must specify the required experience, but also the required values (honesty, commitment towards the target market, willingness to act), personality traits (open-minded, team spirit) and skills (combination of technical and behavioral know-how). Once the ideal characteristics of a loan officer or any other employee have been identified, recruitment techniques can be devised accordingly. Incentives An incentives policy is the key to staff motivation. The following are examples of promising new practices, based not only on growth but also on portfolio quality with clear rules and well-defined penalties and consequences in case of infringement,: - Using a combination of incentives based on individual performance and group

performance. Individual incentives can increase productivity and portfolio quality. But group incentives favor team spirit, loyalty and staff retention.

- Using financial and non-financial incentives. Access to continuing education, a good work environment, recognition and social benefits can be as motivating as financial bonuses.

- Ensuring balance between financial and social performance indicators. Incentives can have adverse effects. Each MFI should reflect on the potential consequences of its performance indicators, according to its mission, values and goals.

See also table #2 in Imp-Act's Guidance Note: Staff incentives: Integrating SPM into microfinance capacity building

BP10-H1

Institutional Capacity Discussion Questions

1. What are some expenses that an MFI incurs? Base your answers on your own experience or use examples from LEDA. List them in the left column below labeled MFI Expense.

2. What is the difference between a program/branch and an administrative/head office

expense? What factors would you use in classifying them? How do they relate to each other?

3. In the right hand column of the table of expenses in question one, classify the expenses listed by writing Program/branch or administrative/head office in the space next to the space listed above.

4. How does your MFI go about the developing its operating budget? How do you

determine how much your MFI will spend in the next year(s)?

5. Discussed how the following are linked to each other: budgets, Institutional Capacity, Operational Planning and Strategy.

MFI EXPENSE Classify

BP10-H2

Presentation Guidelines

Thank you for agreeing to make a short presentation of your work thus far. We all realize your plans are not complete, but everyone will benefit from the discussion that takes place. You may hear some good ideas that you can work into your plan during the next sessions. We ask that you take no more than 5 minutes to present your work using the projector, focusing primarily on your staffing and expense projections. Briefly describe your strategy to support your income and expense projections to date reference your growth strategy, portfolio quality, loan loss and write off procedures, caseloads and other staffing and expense items. GRAPHS - show related graphs, for example -

• Loans and savings projections • expense projections graph, • staffing compositions and ratios graphs, • activity level per loan officer graph, and • operating cost ratio graph

And briefly explain why they look the way they do! At the end of your presentation there will be 5 minutes for questions from the other participants.

BP10-M1

Discussion Questions Answer Guidelines How do your institutions go about the development of an operating budget? Likely they will have department heads generate budgets which will then be consolidated. How does a department head determine the amount he or she will be spending next year? Generally they determine necessary staffing levels based on activity projections, and then determine salaries for each position. For operating expenses, it is common to determine amounts linked to activity levels, e.g., rent per branch office, office material cost per employee, transportation expense per loan officer, etc. What are common ways to distinguish between program costs and admin costs? Participants should give a variety of responses, such as branch-level costs versus head office costs, or allocating a percentage of each line item to different services such that the total sums to 100%. There are many different approaches, some of which are extremely complex. For those interested in more technical details, CGAP Occasional Paper #2 deals with this topic. DEMONSTRATION NOTES - use only as necessary. Participants will remember more IF they figure out the model themselves! Refer to latest CGAP Microfin Handbook for detail. 1. Introduce the Project-level Staffing Section. Use blank Microfin or LEDA9 file. 2. Demonstrate how to generate manual staffing projections Go to the INST.CAP. page, STAFFING INFORMATION SECTION. Show how Microfin allows us to change the title of “loan officers” if our institution uses a different term. Next, the Program/Branch-Level Staffing section allows us to identify up to 10 different staff positions. Remind the participants that these are only the program/branch-level positions (typically those who work in the branch offices). If more positions exist, multiple positions will need to be grouped on a single line. Type in two descriptions on the first lines: Branch Manager and Credit Supervisor. Hit F9 to show how the right-hand column changes. Explain that these titles are now used throughout the model. Switch to the PROGRAM/BRANCH page. Starting at the LOAN OFFICER ANALYSIS section, use the down arrow to move slowly down the page. Mention that we will return to the NUMBER OF BRANCHES section shortly. At the PROGRAM/BRANCH-LEVEL STAFFING section, show how the two titles we entered now appear. Also show how the number of Loan Officers has been drawn down from the early

section. Explain that we begin now by entering the number of existing staff in the JAN 01 column. Enter “1” for the Branch Manager and “1” for the Credit Supervisor. Hit F9 and show how the results are carried forward in the [OUTPUT] section. Explain that we can project any changes in staffing by moving to future months and entering a new number. Demonstrate by typing “2” in the Credit Supervisor line for Month 3 and hit F9 to show the results. Move further down the page to Line 7 and explain how we enter monthly salary and benefit amounts for each staff position. Explain that the amount entered should be the total annual cost of an employee and divided by 12. Include base salary, taxes, benefits, and any average incentive pay in this calculation. (Microfin cannot automatically calculate the incentive pay for loan officers.) Enter 500 for the Branch Manager and 400 for the Credit Supervisor (be sure to skip over the 3 Loan Officer salary lines). Hit F9 and show how the results carry forward in Line 8. Then move to Line 9 and show how the “per person” amounts change as the number of staff changes (Credit Supervisor changes to 800 in Month 3). 3. Demonstrate how to generate automated staffing projections Explain how we can carefully go through month-by-month and do this manually, but Microfin allows options to automate these projections. Return to the INST.CAP. page. Ask: What is the number of Branch Managers typically linked to? [Answer: the number of branches; 1 manager per branch.] Enter 1 in the Branch column. Ask: What is the number of Credit Supervisors typically linked to? [Answer: either number of loan officers or number of borrowers.] Enter 8 in the Officers column. Stress that the logic for each line is there is one [staff position] for every “x” [linking column], e.g., one credit supervisor for every 8 loan officers. Move to the PROGRAM/BRANCH page, move up to Line 2 of the Program Level Staffing section, and hit F9. Show how the “Auto” title now replaces the “Manual” title. Show how the Branch Manager line reads one. Ask: When should this line change? [Answer: when there is a change in the number of branches.] Ask: How does the model know when there is a change in the number of branches? [Answer: The NUMBER OF BRANCHES section that we skipped over previously.] Move up to the NUMBER OF BRANCHES section and type “3” in the Month 4 column. Hit F9 and show how the results change. Delete where we previously changed the number of Credit Supervisors from 1 to 2 and hit F9. Show how the Credit Supervisor line now changes as the number of Loan Officers increases. Ask if everyone understands what is happening. Now move to where the number of loan officers just exceeds 8 and a second Credit Supervisor is hired. Ask: If you have a ratio of one supervisor for every eight officers, is it common to hire a second supervisor right away? [Answer: No, typically the institution will wait until maybe 10 officers.] Move back to the Inst.Cap. page and show how Microfin has a “roundup” column to handle this. Explain how waiting for an additional two officers when the target level is 8 is a “buffer” of 0.25. Microfin will do the division of “number of officers” divided by “officers per supervisor” and if the remainder is less than the round-up buffer, Microfin will hold off on hiring the additional staff person. Without hitting F9, move back to the Program page and find the column where Credit Supervisors moved up. Now hit F9 and show how the hiring is now delayed until there are 10 loan officers.

Explain that Microfin combines the “manual” and “automated” calculations, so that we can override any automated projections if we wish, but that the override must be done month-by-month. That is, we override the automatic calculation only for one month. Change the number of credit supervisors to 10 in Month 3 and hit F9 to demonstrate. Explain that salaries can also be automated. Move to INST.CAP. and show how the SALARY AND BENEFIT ADJUSTMENTS section works by clicking on the box to adjust salaries by inflation. Move to the PROGRAM/ BRANCH page and show in Line 8 how salaries now increase automatically at the beginning of each year. Show how the “additional adjustments” box option of the SALARY AND BENEFIT ADJUSTMENTS section allows salaries to increase or decrease differently from inflation. 4. Demonstrate how to generate operational expense projections Move to the INST.CAP. page and show how the OTHER OPERATIONAL EXPENSES section is structured very similarly to the STAFFING section. Type in “Rent” on the first line and “Transportation” on the second line. Hit F9 and move to the Program page. Enter “500” for the monthly rent, and “100” for the monthly transportation. Hit F9 and show how it carries forward. Explain that we can link these expenses (1) to inflation, (2) to other output lines of the model, or (3) to a combination of both. Move back to the Inst.Cap. page and ask: How is rent typically linked to inflation: monthly or annually? [Answer: annually.] Remind participants that we have already entered inflation rate information on the Model Setup page so what Microfin is asking here is not the inflation rate, but rather to what degree the expense is linked to inflation. For example, if rent goes up fully by the inflation rate once a year, enter 100% in the annual column. If transportation goes up monthly with inflation, but by less than the inflation rate, enter a number such as 80% in the monthly column. If inflation is 10% a year, transportation will increase only 8% a year, and will do so a little bit month-by-month. Move back to the Program page and hit F9 to see the results. Return to the INST.CAP. page and explain that each expense category can also be linked to any of the outputs indicated: officers, program-level staff, borrowers, depositors, or branches. For example, rent would likely be linked per branch. Ask: If rent is 500 per branch, what do we enter in this column? [Answer: 500] Ask: If loan officers typically spend 20 per month in transportation, how do we indicate that here? [Answer: Enter 20 in the Officer column.] Move to the PROGRAM/BRANCH page and hit F9 to show the results. Stress that the logic for this section is always [expense category] has a monthly expense of “x” for every [linking column], e.g., rent has a monthly expense of 500 for every branch. [Note: if there is enough time and the group seems alert, also give an example of how to generate multiple linkages, such as transportation of 20 per officer and 100 per branch to cover both buses and the branch office vehicle.] Hit the GRAPHS button and explain that there are a number of graphs related to staffing and expenses to assist with analysis of the information.

BP11-H1

Analyze your projections Which graphs were most meaningful and why? What output sections were most meaningful and why? Discuss what output/graph you felt was not satisfactory given your strategy and why? What is your operating cost ratio? How can you improve it? DO IT! Strive for 5% increased efficiency by year Five. What are the results!

1

BP11-M1 MICROFIN Technical Notes for guided presentation if needed See latest CGASP Microfin Handbook for most recent and more detailed information To be adapted according to the version of Microfin you are using. Step 1: Basic information on Inst.Cap Page Go to the INST.CAP. page and hit the Fixed Asset button on the toolbar. Remind participants that we divide Fixed Assets between the Program and Admin levels. Warn them to be careful not to double-count their assets. Go to the Program Fixed Assets section and type in “Motorcycles” for one category and “Employee office furnishings” for a second (we will explain our choice of this category shortly). Explain how we need to estimate the future purchase price of these items so Microfin can make the calculations, done through entering a “base” price (or today’s price) and how much this price is likely to change in the future (% inflation). Also, Microfin needs to know the life of this asset if greater than 5 years in order to calculate the monthly depreciation amount. Enter 1000 as a base price for motorcycles and 500 as a base price for employee office furnishings. Have both prices increase by 100% of inflation. Step 2: Initial balances on Program/Branch Page Move to the PROGRAM/BRANCH page and go to the Fixed Assets section. Hit F9 and show how the information we entered now appears. Explain how, as in other sections, we now need to enter initial balances as they appear on the institution’s Balance Sheet.

Enter 5,000 for motorcycles and 3,000 for employee office furnishings. Also enter (3,000) for accumulated depreciation. Hit F9 and show how monthly depreciation is now calculated. Explain that for future replacement

acquisitions to be projected, we need to provide the age of these existing fixed assets. If we bought 3 motorcycles, all at the same time, 3 years ago and they have a useful life of 5 years, we enter “3” and “2” in the QUANTITY and REMAINING LIFE columns respectively. Ask: What should happen at the beginning of Year 3? [Answer: Microfin should project the purchase of 3 new motorcycles.] Go to the Year 3 column, hit F9, and check the results. Move down to the fixed asset cost section and show how Microfin has calculated the future purchase price of these motorcycles. Step 3: Identify any automation linkages

2

Move back to the INST.CAP. page and explain that we now need to provide information for Microfin to calculate the acquisition of additional fixed assets, done through automation linkages. Explain that these linkages work in the same fashion as the other linkages we have seen for staffing and operational expenses. Ask: How shall we determine the future number of motorcycles? [Answer: linked to number of loan officers.] Type “1” in the officers column. Remind them of the logic of “1 [item in row] for every [quantity entered] of [column title].” In this case “1 [motorcycle] for every [1] of [loan officers]. Move to the Program page and show how the model buys new motorcycles each time new loan officers are hired. Now explain that fixed asset schedules can get really cumbersome when we monitor the number of desks, chairs, calculators, and wastebaskets. This level of detail isn’t necessary in these projections. It is therefore more appropriate to enter a group of fixed assets such as “employee office furnishings.” We can then put in the total cost of assets we buy for each employee and link this line item to the future number of employees. Enter “1” in the “staff” column. Step 4: Review projections We have now provided all the key information for automating our projections. We now need to carefully review our projections, make any adjustments, and add in any items that aren’t captured in the automation. Output sections of the ADMIN/HEAD OFFICE page The rest of the ADMIN/HEAD OFFICE page consists of output sections that sum and report on data from elsewhere in the model. Most of the sections are similar to the output sections on the PROGRAM/BRANCH page but report information for the institution as a whole. Following are the output sections on the ADMIN/HEAD OFFICE page: • Loan product output • Savings projections • Income • Financial costs • Loan loss provision and write-off • Loan officer analysis • Program-level staffing • Administrative-level staffing • Program-level other operational expenses • Administrative-level other operational expenses • Program-level fixed assets • Administrative-level fixed assets • Land and building analysis • Other assets analysis • Overhead allocation (a section that appears only in the branch or regional modeling mode) • Tax calculations • In-kind subsidy analysis. GRAPHS

3

The following graphs reflect information for the institution as a whole GRAPHS BY LOAN PRODUCT • Income (graphed separately for each loan product) • Disbursements and repayments (graphed separately for each loan product) AGGREGATE CREDIT ACTIVITY • Number of active loans, by product • Portfolio, by product (nominal and real) • Number of loans disbursed per month, by product • Average overall loan size, by product (nominal and real) SAVINGS ACTIVITY • Number of depositors, by product • Amount of deposits, by product (nominal and real) INCOME AND EXPENSES • Total credit income, by product (nominal and real) • Staffing composition • Caseload per loan officer • Expenses, by category • Cost structure (as a percentage of total assets or of performing assets, depending on the selection

made on the Model Setup page) FINANCIAL ANALYSIS • Operational and financial sustainability • Operating cost ratio • Asset composition • Liability and equity composition • Debt-equity ratio.

CGAP Course - Business planning S 12 - Financing Strategy

BP12-H1a

Financial Strategy Construction Blueprint

Review

YES NO

NO YES

Review

Financial projections on the planning period

Charges + investments + portfolio of expected loans - available resources =

financing requirement. Is this financing requirement realistic?

Strategy for meeting or reducing the financing requirements

− Mobilizing resources (sources, nature, amounts, conditions, availability, conditionalities etc.)

− Efficiency of operations etc.

Acknowledging constraints and possibilities

− Country context − Financial leverage − MFI's management system − MFI's goals etc. − Available and accessible

sources of financing IS THE STRATEGY FEASIBLE?

Write an action plan to mobilize

resources and implement it

CGAP Course - Business planning S 12 - Financing Strategy

BP12-H1b Sources of Financing in an MFI - Worksheet

1. Complete the chart below, identifying sources of funds that fit into either debt or equity financing.

Debt Financing Equity Financing

2. List and discuss some pros and cons for the sources listed.

3. What are the advantages/disadvantages of being financed by debt or by equity? 4. Fit the specific sources of funds listed above in Number 1, in the boxes below. Base your

listings on experiences of your MFI.

Restricted and Unrestricted Sources and Uses of Funds

Restricted Resources

Restricted for Operations

Restricted for Portfolio

Restricted for Other Assets

Unrestricted Resources

Unrestricted Sources

CGAP Course - Business planning S 12 - Financing Strategy

5. What are the advantages and disadvantages of restricting the use of funds available

to an MFI? Which would you prefer to have and why?

6. What can you do to ensure that your MFI does not run out of Money?

7. If you had to use your unrestricted sources of funds to cover financial shortfalls in your program, where would you allocate money – in priority order (1st, 2nd, 3rd)? Why? Operations ____ Portfolio_______ Other Assets______

8. Tell all you know and discuss - Liquidity Management Leverage

9. What do you think are the 3 most important factors to consider when determining your financing strategy?

BP12-H2

CGAP Course - Business planning S 12 - Financing Strategy

Sources of Financing in an MFI

Debt Financing Equity Financing

Savings Compulsory savings Voluntary savings

Retained Earnings On financial products On investments

Loans Concessional loans Commercial loans

Grants (or Donor Equity)

Share Capital of the MFI (capital subscribed by sponsors/investors and members in the case of financial cooperatives)

Restricted and Unrestricted Sources and Uses of Funds

Restricted Resources

Restricted for Operations

Restricted for Portfolio

Restricted for Other Assets

Restricted Grants A percent of Savings Restricted Loans

Restricted Loans Restricted Grants

Restricted Grants

Unrestricted Resources

Unrestricted Sources

income

Unrestricted Grants

Unrestricted Loans

Equity Investments

A percent of savings

Microfin allocates unrestricted funds when needed to cover financial shortfalls first to Operations, then to the Portfolio and lastly to procure other assets.

Leverage compares Debt to Equity. Leveraging allows an institution to access a greater amount of resources in order to provide a higher level of services. If they were limited to only equity financing, most MFIs would likely remain quite small. Second, leverage can influence the ROE that we offer our equity investors. The prudent amount of leverage depends on the strengths of the MFI itself (commercial banks can be leveraged at 9:1) but the recommendation for MFIs is not to exceed 5:1. Liquidity is defined as the ability of a company to pay short term debt obligations as they come due. This can be assessed through cash flow examination using the Current Ratio which measures current assets to current liabilities.

CGAP Course - Business planning S 12 - Financing Strategy

BP12-H3

Financial Flows in Microfin

Basic Approach: Beginning Balance Plus new sources Less uses Ending Balance

Portfolio Financing Month 1 Month 2 Month 3 Month 4 Beginning Balance 50,000 10,000 7,000 - Change in portfolio Plus loan repayments 50,000 52,000 54,000 56,000 Less loan disbursements 90,000 95,000 100,000 105,000 Balance Before use of restricted financing 10,000 (33,000) (39,000) (49,000) Debt Financing of Portfolio Change in available savings - - - - Change in Portfolio loans - 40,000 - - TOTAL CHANGE IN DEBT FINANCING 40,000

Equity Financing Of Portfolio New Restricted Grants for Portfolio TOTAL CHANGE IN EQUITY FINANCING Balance before use of unrestricted financing 10,000 7,000 (39,000) (49,000) Unrest. funds used for portfolio - - 39,000 20,000 Ending rest. resources, portfolio 10,000 7,000 - (29,000)

CGAP Course - Business planning S 12 - Financing Strategy

BP12-H4 In order to improve LEDA’s strategy… Make any further revisions to your projections that are needed in order for the various aspects of LEDA’s strategy to be implemented and so that it is a ‘good plan’ as just discussed 1. We would change Because The change would impact 2. We would also change Because The change would impact 3. And then we would change Because The change would impact 4. Finally we would change Because The change would impact

BP12-M1

Financial strategy

An institution’s financial strategy is the plan it implements to ensure the financial resources it requires to achieve its goals and its (commercial and social) mission are, or will be, available. This strategy consists in the identification of sources and types of funds which meet its financing requirements (activities, portfolio, investments…) adequately, to allow the MFI to achieve its goals. The graph below describes financial strategy:

Review

YES NO

NO YES

Review Financial projections

on the planning period Charges + investments + portfolio of

expected loans - available resources = financing requirement.

Is this financing requirement realistic?

Strategy for meeting or reducing the financing requirements

− Mobilizing resources (sources, nature, amounts, conditions, availability, conditionalities etc.)

− Efficiency of operations etc.

Acknowledging constraints and possibilities

− Country context − Financial leverage − MFI's management system − MFI's goals etc. − Available and accessible

sources of financing IS THE STRATEGY FEASIBLE?

Write an action plan to mobilize resources and

implement it

The financial strategy needs to be: − Appropriate: taking into account the size and nature of financing requirements, the

institution’s objectives and constraints as well as possibilities identified during context analysis;

− Feasible: realistic given the planning period; feasible according to skill-related constraints, to capacity and to cost (institutional assessment) and with acceptable risk, and

− Specific: providing a clear implementation plan so that employees who implement the strategy will know how to do it.

BP12-M2 Illustrative list of Microfinance Investment Vehicles (VIMs) Access Holding, Advans, Grameen CAMF, Hivos-Triodos, I&P, Incofin, Lux MDF, Microcred holding, Oikocredit, Planet Microfund, Procredit Holding, SIDI, Symbiotics DRF, Triodos MF…

BP13 – H1

Think Discuss React Plan Model

June 2011 – 18 months after you started the plan The LEDA founders and Board of Directors have recently met for their annual general meeting. In general all were pleased with LEDA's performance in the past one and a half years. The group felt that growth was good and profitability improving steadily. The credit and savings redesign work of last year was highly praised and the positive results acknowledged. The members were very excited about the number of investors interested in LEDA based on its financial performance. Of major concern, however, was LEDA's outreach, in particular in reaching the urban poor people in Liberty. The Founders and Board members felt that given the continued increase in urban migration and the growing numbers of urban poor LEDA must increase its efforts to reach the people in this market group. After long discussions, it was decided that LEDA should actively target the poorest of the urban poor. A resolution was passed to include this specific issue in LEDA's mission Statement, including recommendations on how LEDA is to achieve this goal. The board decided that LEDA should have an average loan size of S200. (Approximately half of the current GDP of S550) LEDA's goal of financially sustainability remains in place. What do you do? THINK Effects What are the immediate and long term issues that may arise from this incident? Which are most critical? Least Critical? Solutions How would you plan to deal with the issues that arose? DISCUSS What effects will these changes have? How will the results of these changes impact LEDA? MODEL Using Microfin, enter the changes discussed above into your LEDA case. You will be working from June 2011 (from Month 18) implementing the mandate to lower your average loan size to S 200. Change other inputs as you think necessary for LEDA to reach this target group in a profitable manner.

BP13-H2

Think Discuss React Plan Model

June 2011 – 18 months after you started the plan

Today 25% of the LEDA staff resigned with immediate effect. You are unsure of all the reasons for their actions, but you have discovered that they have joined together and formed a new microfinance institution copying almost exactly your business strategies and implementation plan, including your product menu. They are to begin lending operations within the month. Most of the staff who resigned were Loan officers and Branch Manager. Consequently, you have discovered that one of your branches is completely un-staffed today and in fact clients are being met with closed doors. What do you do?

THINK Causes - What might have caused this problem? Which are the most critical? The least

critical?

Effects -What are the immediate and long term problems that might arise? Which are most critical? The least critical? Solutions - How would you solve these problems both in the short term and in the long term? (Solving in order -most to least critical) DISCUSS What effects will these changes have? How will the results of these changes impact LEDA? MODEL Using Microfin, adjust your LEDA business plan to reflect the immediate 25% decrease in your staff. Input all related effects beginning in June 2011 – month 18. Finally input into the model, your solutions. (It may be beneficial to prioritize your inputs based on the importance of the effects and outcomes of your solutions.)

BP13-H3a

Think Discuss React Plan Model June 2011 – 18 months after you started the plan By the middle of the year 2009, LEDA has achieved major successes in developing the institution and reaching a large number of clients. LEDA was growing fast and LEDA’s Executive Director and Senior Management were making ambitious expansion plans into the new markets. Nobody was seriously taking into account the complications with the political situation and the inflation rate seemed to be predictable because it was increasing slowly. However, in June 2009, devaluation, caused by the external political factors and fuelled by the slow reaction of the government, skyrocketed to 40% overnight. This turned out to be a disaster to the majority of LEDA’s clients, as well as to the institution itself. LEDA’s accountant was depressed making her daily calculation of the devaluation losses. But at the Crisis Meeting, the Management agreed that this situation, as tough as it seems, has a way out. They decided to continue lending to their clients as the micro entrepreneurs needed their services even more than ever, but at the same time LEDA staff wanted to do everything to preserve LEDA’s portfolio and minimize the losses caused by the situation. It is predicted that the annual devaluation rate for the next three years will continue at about 40%. What do you do? THINK and DISCUSS Effects: What could be immediate effects of the high devaluation on LEDA’s financial situation? What would be the long term effects of the situation? Which are most critical? Least Critical? Solutions: What are the immediate and long term solutions to these problems? (Solve in priority order as you defined above.) MODEL Using Microfin, enter the changes presented above to the LEDA case. Change other inputs that reflect your solution and planning strategy. Remember, you will be working from June 2011 – Month 18, in an environment with a 40% annual devaluation rate for the next 3 years.

BP13-H3b

Think Discuss React Plan Model June 2011 – 18 months after you started the plan By the middle of the year 2011, LEDA had achieved major successes in developing the institution and reaching a large number of clients. LEDA was growing fast and LEDA’s Executive Director and Senior Management were making ambitious expansion plans into the new markets. Nobody was considering seriously the visible deterioration of the situation of clients and of a portfolio at risk that was slowly increasing. In June 2011, however, the PAR 30 reached 30% and LEDA panicked. The internal auditor set out for the field, realized there was a serious competition issue (rapid development of consumption loans, without control of repayment capacity) and he identified numerous cases of multiple indebtedness in clients, which explained most of LEDA’s portfolio deterioration. This had disastrous consequences for most of LEDA’s clients, and therefore for the institution itself. LEDA’s accountant was depressed making her daily calculation of the losses due to the deterioration of the portfolio quality. Loan officers were overwhelmed by the follow-up of arrears and they lacked incentives to collect loan payments, due to the absence of variable bonuses for PAR 30 over 5%, a ceiling which had been largely exceeded. However, at the Crisis Meeting, the Management agreed that there was a solution to this situation, as tough as it was. The institution decided to implement exceptional rescheduling procedures, along with a strict repayment policy and regular client follow-up (some clients could repay, but since LEDA’s situation deteriorated, they did “just like their neighbors”... Meanwhile, the management contacted competitors to look for common solutions. An idea surfaced: sharing information about indebted clients. At the same time, LEDA’s staff wanted to do everything to preserve LEDA’s portfolio and to minimize the losses caused by the situation. What do you do? THINK and DISCUSS Effects: What immediate effects could a heavy degradation of portfolio quality have on LEDA’s financial situation? What would the long term effects of the situation be? Which are the most critical? The least critical? Solutions: What are the immediate and long term solutions to these problems? (Solve in order of priority as you defined above.) Session 14: MODEL Using Microfin, enter the changes presented above to the LEDA case. Change other inputs that reflect your solution and planning strategy. Remember, you will be working from June 2011 – Month 18, and the context is a portfolio at risk at 30 days of 30%.

BP13-H4

Plan for Peer Review Summarize your plan using the following guidelines. 1. Explain the problem your group experienced. Summarize its causes and effects

2. Summarize your solutions and briefly explain the rationale for the decisions made by the

group. 3. Relate your decisions to the strategic plan. 4. Show us what happened to your plan by using the projector. Plan what graphs you think

best show the impact of the problems and your solutions.

BP13-H5

Group Presentation Guidelines

You have been chosen to present your plan to LEDA Board members and its staff. You will have 10 minutes to present the plan, which they are hearing for the first time. After your presentation the Board and staff will have an opportunity (10 minutes) to ask questions and seek clarification and perhaps recommend further changes. The format below is to help guide your presentation.

Briefly explain your problem to the large group.

Briefly explain the causes and effects to LEDA.

Explain your recommended solutions.

Describe the impact of the changes on your business plan.

Display relevant graphs; explain what happened when you inputted your changes to solve your problem.

BP13-H6 Board of Directors Feedback to the LEDA Business Planning Task Force

You are a member of the Board of Directors of LEDA; the strategic task force created to design a new business plan for LEDA is presenting the plan to you for the first time today. Listen to the presentation from the perspective of a Board Member. What do you think about the plan? ASSIGNMENT 1. Ask questions of clarification about areas that may have struck you during the

presentation. 2. Name two points you agree with and explain why you like them. 3. Name two points that you disagree with and explain why you disagree, make some

suggestions for improvement. 4. Suggest at least two factors that you would like to experiment with on the model. Ask

the Task Force to input these changes into the model and display the results to you.

BP13-H7 Employee Feedback

To the LEDA Business Planning Task Force You are a staff member of LEDA; the strategic task force created to design a new business plan for LEDA is presenting the plan to you for the first time today. Listen to the presentation from the perspective of an implementer of the plan. Do you think you could implement the plan? ASSIGNMENT 1. Ask questions of clarification about areas that may have struck you during the

presentation. 2. Name two points you agree with and explain why you like them. 3. Name two points that you disagree with and explain why you disagree, make some

suggestions for improvement. 4. Suggest at least two factors that you would like to experiment with on the model. Ask the

Task Force to input these changes into the model and display the results to you.

BP13-M1 Discussion Points Navigator and Summary Pages Refer to CGAP Microfin Handbook

Sensitivity analysis

As managers review the financial projections and performance indicators, they may find that certain elements need more work. For example, the projected income and expenses may not yield the institution's profitability target, or the projected rate of growth in lending may exceed the institution's capacity to implement the expanded program. To refine the projections, managers can perform sensitivity analysis, that is, see how changing key variables would affect outcomes. Refining the projections is an iterative process, requiring key staff to undertake successive rounds of: • Evaluating the numbers to determine whether they are consistent with institutional and program objectives • Deciding what changes to seek in the results • Selecting the input variables to modify. In choosing the variables to modify, management might ask such questions as these: • Can client retention rates be increased? • Should effective loan terms be shortened? • Can effective interest rates be raised without losing clients? Can they be lowered without reducing

profitability but with an increase in efficiency? • Can the institution scale up more quickly, by increasing either the number or the average size of loans, so

as to meet client needs more effectively, without straining institutional capacity? • Can the long-term loan default rate be reduced? • Can the loan officers' caseload be increased, without degrading the quality of services and client follow-up? • Can operating costs be lowered without sacrificing quality in operations? Adjusting key variables can reveal which inputs have the greatest effect on projected performance and thus help a microfinance institution arrive at an optimal scenario. Once management, staff, and board are satisfied with the projected scenario, a final budget can be adopted. This budget and the associated performance indicators serve as benchmarks for ongoing monitoring and evaluation of the institution's performance, as discussed in chapter 9.

BP 14: Summary and Action Plan

BP14 – H1 MICROFIN COURSE - SUMMARY SHEET DAY____________ Reflect back on the main messages or learning points for this day. List these points and also list the benefits of applying these concepts to your planning process.

Main Messages/Learning Points Benefits – Why we should use these techniques!

BP 14: Summary and Action Plan

BP14-H2 Planning with Microfin ACTION PLAN

Level of Action What I/we hope to Accomplish When and How

ALONE – things I will do

by myself

Things I need to do with

someone else

WHO:

Things I need to do with a

group

WHO:

BP15: Additional Microfin Features

15-1

BP15-H1

Getting help!

www.microfin.com Information on the most current version of Microfin, bug reports, training courses, and FAQs can all be found on the website. microfin@yahoogroups.com You can send an email to this listserve with any question you have and it will be copied automatically to all other subscribers. This allows anyone who knows the answer to help you. On-line help file Get a complete list of FAQs from the bottom of the Contents page. And don’t forget the CGAP Microfin Handbook

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BP16-H1 Post Test

Name: _________________________ Organization: _________________________ Please use the best of your knowledge to answer these questions. Please mention formulas and indicators if necessary. This is not a formal test: its purpose is to identify topics that will need to be presented with special care and attention during this course. Write your answers at the back of this sheet if you need more space. Name three components of the business plan. A. B. C. Explain the impact of portfolio quality on a business plan and the resulting financial projections. What is a context analysis? How can you integrate it into financial modeling? What is an institutional evaluation? How can you integrate it into financial modeling? Give two measurements of profitability and their formulas. Describe the development planning process.

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BP16-H2 Business Planning for Microfinance Institutions Course

COURSE EVALUATION (Please use a pen)

Please rate by circling one number and comment on the following:

1=Poor 2=Fair 3=Average 4=Good 5=Excellent Content 1 2 3 4 5 Comments: Methods 1 2 3 4 5 Comments: Microfin Model 1 2 3 4 5 Comments: Length of Course 1 2 3 4 5 Comments: Computer Facilities 1 2 3 4 5

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Comments: Trainers & Support People 1 2 3 4 5 Comments: Feedback specifically for ___________ Feedback specifically for _________ Facilities & Logistics during Course 1 2 3 4 5 Comments: Pre course Logistics - organization/communication/travel Comments: 1 2 3 4 5 The course would have been more effective if: Any Other Comments (use additional paper as necessary)

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BP16-H3

Model Setup Page

Financial Products Definition Page

[Products]

Instotutional Res & Capacity Set-up Branch 1 Activity

[Inst.Cap.] [Program]

Head Office Information (Admin)

[Admin]Cost of Funds

Financing Sources[Fin.Sources]

InvestmentIncome Financing Flows and

Investment Strategy[Fin.Flows]

Summary Report

Financial Statements Income Statement

Adjusted Inc Statement

Cash FlowRatio Analysis

Fina

ncin

g

Structure of Microfin

Fina

ncia

l Man

agem

ent

Prod

ucts

[Model Setup]

Inst

.Res

&C

ap /

Mar

ketin

g

Balance Sheet

STRATEGIC PLANNING OPERATIONAL PLANNING

Mission and GoalsMarkets and Clients Products and Services

Environmental Analysis

CompetitionCollaborators

Regulatory FactorsOther External Issues

Institutional Assessment

Institutional Capacity and Resources

Credit & Savings Program Loan Loss Provisioning

Board and Management Loan Officer CaseloadHuman Resources Program-level Expenses

Administration Admin-level ExpensesFinancing Sources Financing Strategy

Financial Management Financial Management

Strategy Business Planning as an Ongoing Tool

Business Planning Framework

Marketing Channels / Credit and Savings

Projections