Microfinance Focus

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www.microfinancefocus.com Microfinance Focus [ November 2008 ] 1

www.microfinancefocus.com Vol -II, ISSUE - X November 2008

India`s first e-monthly on microfinance www.microfinancefocus.com

In Focus Financial Crisis : Impact On Micro-finance Financial Crisis : A Global Discus-sion

Opinion Global Meltdown and Micro Financing Horizon Webbased Solutions for MIS Special coverage Financial Reporting Standards Initiative

Financial Financial Financial Crisis Crisis Crisis and and and Microfinance Microfinance Microfinance

Interview Mr. Carlos Mario Reyes

On “Financial Education And Mi-

crofinance”

Global Development: Microfinance

The New Realities

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In Focus: Cover Story Financial Crisis and Microfinance 18...Global Financial Crisis : Impact On Microfinance By, Dr. Amrit Patel 21… Microfinance And the Financial Crisis: A Global Discussion

Hosted by: CGAP

Interview 39… Financial Education and its importance for Microfinance An Exclusive interview with Mr. Carlos Mario Reyes, Accion International

Focus Horizon 13..Web-based Solutions: Future of MIS in Microfinance

By, Shumit Vatsal works as a Program Manager at Evolvus Solutions

It is against this background an attempt is made here to highlight in brief the likely im-pact of the crisis, MFIs already experiencing the effects and suggest measures to mini-mize the impact. ...

The back-office MIS is the backbone of any Information System solution and yet it has not re-ceived much attention. MFIs, whether large or small, need to have a strong back-office MIS before attempting to deploy any advanced front-end applications or delivery channels. Delivery channels such as mobile phone microfinance will not be able to create significant impact with-out having a strong and flexible back-office MIS in place….find out the details ...

Focus : learning curve 36… Process Mapping By, MicroSave

08...

Global Development: Microfinance The New Realities By, Garrett Wyse Jerome Peloquin This is a concept paper. It is intended as a prelude to a more in-depth research ef-fort that will present our findings and document our conclusions. The intention here is to engage in a dialog on this portentous series of events. This discussion pre-sents a first-reaction analy-sis of the conditions and possible outcomes of the evolving crisis in global aid and philanthropy. ….

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Opinion 06..GLOBAL MELTDOWN AND MICRO FINANCING Dr Souren Ghosal

05...About the issue

Disclaimer Views expressed in the article/s are author’s own views. It does not necessarily represent those of Microfinance Focus . Microfinance Focus does not take any responsibility of correctness of those data. Readers are free to use the info contained with the written permission of MICROFINANCE FOCUS for educating the stakeholders in the micro finance sector.

© copyright 2008-09 www.microfinancefocus.com

Global financial crisis has spared none – individuals or institutions- rich or poor- developed or developing countries- global or micro institutions- financial or non financials. Each one has been experiencing the heat of its (financial crisis) in one form or the other. ..

Special Coverage 29...Microfinance Industry – Financial Reporting Standards Initiative Survey Results Brief

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( Photo Upper side : right -Mr. Suresh K Krishna ) ( Photo -Lower Side: right -Mr. Ashish Kumar Gupta ) Details are on page 36..

Managing Editor Vikash Kumar EDITORIAL BOARD Dr. N Jeyaseelan Programme Director, Hand in Hand, Kancheepuram Advisory Board Mr. Sitaram Rao, Director Equitas Micro Finance India P. Ltd, Chennai Dr G. Gandhi Regional Head, DHS, New Delhi Mr. Sanjeev Consultant, livelihoods, Lucknow Governing Board Mr. Suresh K Krishna | Chairman MD, Grameen Financial Services Pvt. Ltd Mr. Ashish Gupta COO, Sonata Finance Pvt ltd, Jabalpur Mr. M. V. Raman VP (Marketing), Elitser IT Solutions Pvt Ltd (India) Hyderabad Vikash Kumar Executive Director, Microfinance Focus

© copyright 2008-09 www.microfinancefocus.com

Congratulations

to Microfinance Focus` Board Members

2008 Microfinance Process Excellence Award Winners

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[email protected]

www.microfinancefocus.com

About the issue

Phase of Reconstruction A Grimmer Economic outlook around the world, in this environment where there is heightened levels of angst, stinginess and pessimism, Microfi-nance , an unconventional child of Finance sector will not be an escape in this tough time. Historically, the sector has already proved an unconven-tional banking system based on trust, mostly collateral free loans, to the poor people and had proved that they are bankable. As in cover story, Dr. Amrit Patel mentioned that, “it may be appreciated that MFIs & mf borrowers are not at all responsible for the current global financial crisis. MF borrowers being poor and paying almost market rate of interest on their small loans just to eke a living out of it.” How-ever Liquidity crunch and cost of funds can make them victims of current crisis. And there are immediate concern of many MFIs specially those, who cannot mobilize savings and do not have cushion of equity funding. Passing the increased cost of fund and anticipation of discontinued flow of loan to the borrowers can dampen the portfolio quality. The new Global Dimension has brought rethinking and opportunity to rectify the flaws in the process, system or even belief. In our special paper, “Global Development: microfinance The New Realities”, authors have tried to bring a new perspective amidst in gloomy environment. They suggest that, “the present upheaval in the world’s financial system presents both threat and opportunity. The threat is all too apparent as shrinking stock portfolios diminish donors’ capacity to give. We believe there are great new opportunities as well.” You may want to see the paper closely to ac-quaintance with these new perspectives. I am sure, that Microfinance and its stakeholders must be closely ob-serving the issue, I am happy to bring a basket of special papers, opinion, discussion and interaction on the issue. Hope this will help to reconstruct the ideas and discussion. Microfinance as an industry does not have a central body or mechanism to address compliance or updates to financial reporting standards, SEEP Network is facilitating an appreciable effort to create a uniform “Microfinance Accounting and Reporting Standards”. I understand that, it is better time to introduce such system to facilitate transparency, co-operation and a common platform for MFIs in Global level. We hope that, this issue will be a value addition for you. We are eagerly seeking your feedback and comments. Vikash

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Dr. Souren Ghosal

GLOBAL MELTDOWN AND MICRO FINANCING

It would therefore all the more necessary for India for not only to bail out banks even for redemp-tion of farmers loan but to make available enough liquidity to farmers and artisans at competi-tive rate so that they can pursue their economic activities profita-bly. In this regard micro financing institutions if funded adequately and supported by competent management team along with risk sharing by banks could defi-nitely de-couple India from the present global meltdown.

Opinion

G lobal financial crisis has spared none – individuals or institutions- rich or poor- developed or developing countries- global or micro

institutions- financial or non financials. Each one has been experiencing the heat of its (financial crisis) in one form or the other. It is therefore surprising to observe that an all out effort is going on in devel-oped countries particularly to bailout big banks and no visible effort could be seen to provide succor to small people and micro institutions both manufac-turing and providing financial services to poor people. It would be interesting to note as has been recently brought out by Bank of England that global taxpayers have already paid around $ 8 trillion to bail out big global banks. But currently no such serious big scale efforts have been made even to bail out poor borrowers for their dwelling house mortgage loans. No one can deny that poor people even in rich countries are burnt seriously in the present financial crisis. It should have also been realized that such ef-fects would turn them desperate to indulge in theft and crimes for survival if immediate succor is not provided to them. It has to be appreciated that credit crunch resulting from liquidity crunch – one of the key reason of the present financial crisis- affects poor more ad-versely as most of them are heavily dependent on this. In fact it ripples through the entire economy affecting each and everyone as it raises the cost of credit and makes it scarcer each day and thus makes it difficult to borrow and survive. It obviously ultimately leads to job cuts and consequent unem-ployment. Joseph Stieglitz has rightly said that the present bailout plan of USA is ‘like a patient suffering growing massive blood transfusion while there is internal bleeding, it does not do anything about the basic source of hemorrhaging’. Similarly Paul Craig Roberts of Wall Street Journal has observed that such bailout program should have been thought for helping people with failing mortgages instead of bailing out banks. It is true global financial crisis has not yet directly affected micro financing institutions as has been observed by Jacques Attalli the founder of PlaNet Finance of France. However he also added that the future is uncertain one does not when and where it may happen.

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However there should not be any doubt that global credit crunch would severely affect micro financing institutions as these institutions heavily lean on endowments and bank funds. It is obvious that under credit crunch and resource evaporation under meltdown would not only make availability of such difficult but also costly. It would almost become imperative for states to fund these insti-tutions not only to save the poor but also avoid rising despair and social tension generating heat and social tur-bulence all over. It would therefore be necessary not only to come forward to save these institutions by providing funds and enabling them to help rural and urban poor to pursue their eco-nomic activities and earn their livelihood. In this regard recent Chinese efforts to rejuvenate rural poor by introducing land reforms to vest farmers the right to own land and empowering them to get adequate funds from banks should be commended. As regards India Attali opined rightly that ‘India is a very important country as far as micro finance is concerned as financial inclusion in India is lowest in the world as India has been ranked 50th below countries like china, Kenya and morocco. It would therefore all the more necessary for India for not only to bail out banks even for redemp-tion of farmers loan but to make available enough liquid-ity to farmers and artisans at competitive rate so that they can pursue their economic activities profitably. In this regard micro financing institutions if funded ade-quately and supported by competent management team along with risk sharing by banks could definitely de-couple India from the present global meltdown. The present strategy adopted in India to counter the melt down effect on the economy is to enhance credit avail-ability in the market by initiating measures to improve the liquidity with banks. It has been repeatedly empha-sized by policy makers to release more loans in the mar-ket and that way the present illiquidity in the financial market could be taken care of and emerging recession thereof could be avoided. However it has to be under-stood that there are two types of liquidity: 1. funding li-quidity and the other one is market liquidity. The funding liquidity arises when a trader is unable to fund his deal and therefore is compelled to unwind the deal whereas the market liquidity referrers to ease in trading and high resilience that is where trade has a low bid and low price impact. In simple language it indicates that market func-tion smoothly without any hassle under appropriate mar-

ket liquidity. It is unfortunate that the present scene is that both funding and market liquidity risk have arisen and for that dealers in the market are closing their shops or cutting their production and supply in the market due to market liquidity constrain and along with that to add fire to the fuel banks are also experiencing illiquidity of extreme nature as they have to provide more finance to retrieve trade and commerce and also to meet the grow-ing demands arising from innovative instruments and hedge funds where it has become difficult to honor each other bids on time. It is true the present crisis has arisen mainly due to burst-ing of housing mortgage loans but this has deteriorated further due to large exposure of financial institutions in highly leveraged deals. It obviously resulted in heavy losses to even best managed and well reputed banks of US, Europe and U.K. in fact it led to systemic risk and caused illiquidity spiral. It obviously led to market illiquid-ity and circle of collapse and bankruptcy of financial insti-tutions not only completed in one market or even in one country but almost globally. This would continue until a new equilibrium is created by policy and strategy changes that are now keenly debated and periodically introduced to test the efficacy and ultimate impact to reduce the intensity of fire arising from this turbulence. The present liquidity constraint has affected adversely the asset prices and created downward liquidity spiral which has in turn has adversely affected balance sheets of many banks. It has therefore become necessary for them to de-lever. These are no doubt imperative meas-ures to bring back banks to their normal operating condi-tion but the present crisis has gone so deep that some-thing more might be needed to bring back the confidence of people, and market. ****************

Opinion

This would continue until a new equilib-rium is created by policy and strategy changes that are now keenly debated and periodically introduced to test the efficacy and ultimate impact to reduce the inten-sity of fire arising from this turbulence.

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Global Development: Microfinance

The

New Realities

Garrett Wyse Jerome Peloquin

“This is not the end of history… it is the start. The unrealized fortune is the future.” Garrett Wyse

“Many times in the past we thought the problems of societal conflict and chaos were solved, or, conversely, that the end had come. The future keeps its own counsel.” Jerome Peloquin

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This is a concept paper. It is intended as a prelude to a more in-depth research effort that will present our findings and document our conclu-sions. The intention here is to engage in a dialog on this portentous series of events. This discussion presents a first-reaction analysis of the conditions and possible outcomes of the evolving crisis in global aid and philanthropy. Summary The present upheaval in the world’s financial system presents both threat and opportunity. The threat is all too apparent as shrinking stock portfolios dimin-ish donors’ capacity to give. We believe there are great new opportunities as well. The global development effort from both private and public sources has been experiencing a gradual shift from pure charity and crisis intervention to sus-tenance and capacity development through market driven solutions to poverty. In the last decade, the emergence of the Microfinance sector has further advanced the notion that addressing poverty can be good business. This concept paper puts forward the premise that the developing world presents an enormous oppor-tunity for expansion and market development. The term “economic development,” should be reconsid-ered and replaced with the concept of market de-velopment, since growing markets are the founda-tions of a healthy economy.

It is our premise that the greatest economic poten-tial lies in building the productive capacity of the underdeveloped world. Such an investment should be made, not in large infrastructure projects like dams and bridges, but in the grass roots develop-ment of small- to medium-sized enterprises (SMEs) and in the human capital improvement that will yield tremendous returns. Just as all politics are local, the basis for all economic development is (or should be) local. As Microfinance has proven, investment at the bot-tom of the economic pyramid can be both success-ful and profitable. The collapse of traditional invest-ment vehicles in the developed world presents an unprecedented opportunity. We would now sug-gest a shift in focus from parochial investment in our consumption-driven, low-elasticity economies to the high opportunity, high growth emerging mar-kets available globally. Socially Responsible Investment (SRI) is both good business and good foreign policy and certainly represents enlightened self-interest. As the Mar-shall Plan revitalized Europe, it created a vast mar-ket for American goods and services. So it will be with Asia, Africa and other underdeveloped mar-kets. An investment in Uganda, Liberia, Peru, The Philippines, or any such country today assures mar-kets for America tomorrow. Rationale: The current meltdown in traditional asset class val-ues can be witnessed by the concurrent fall of stocks, bonds, and real estate. This has destroyed the traditional refuges that investors turn to when-ever any one of those markets experiences a down-turn. Bonds are the most common offset of hard times in the stock market. The rapid deflation in the most traditional harbor for sheltering liquidity, the bricks and mortar of real property, has destroyed the value of the most conservative investment This is a frightening prospect for any investor. Still, there is opportunity in change and great change brings great opportu-nity.

Horizon

“As Microfinance has proven, invest-ment at the bottom of the economic pyramid can be both successful and profitable. The collapse of traditional investment vehicles in the developed world presents an unprecedented opportunity.”

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In October, the Dow Jones Average lost 18% of its value in one week. From Wall Street to Main Street, investors have begun to abandon even the most solid blue chip investments. Recently the US Treas-ury found its periodic T-Bill sale so fully subscribed that it is paying zero interest. Investors are so pan-icked that they are literally losing money to park funds in US Government securities. Both Britain and the US are at least partially nationalizing their bank-ing systems to stave off a panic and a total loss of confidence. What is the market telling us? The real return of capital in developed countries has been eroded over time, with technology seemingly reversing this trend--only to be tempered by the tech bubble. What we have witnessed over the past few booms is the repetition of a process whereby the value of a com-modity is artificially inflated and subsequently falls: stocks in the 1920’s and’30’s; oil in the 70’s; tech stocks in late 90’s; real property in the 2000’s. Each of these has been fueled by excessive speculation in their price, with credit fueling the speculation. Now that bricks and mortar are not the islands in the storm, what is? At this writing, America and the global economy is much poorer than it was only a few days ago. All wealth has been diminished. The value of all assets on the books will soon have to be “written down” to reflect the realities of the new economy. This ap-plies to all wealth, not just the investment banks. It applies equally to philanthropies, the big and the small. Given the current state of capital and the meltdown in global financial markets, what will be the future of private philanthropy? Development in Transition Philanthropy as Charity - For the better part of the last hundred years philanthropy has been the princi-pal non-governmental means by which private funds have been used to effect global economic develop-ment and aid. The grace of charity is, a noble act. However, the unintended result of giving can lead to negative consequences, including corruption, dis-torted markets, moral hazard etc. Over time the NGO community has learned that charity can often

be replaced by economic development having the ultimate goal of sustainability and limiting the need for future largess. The Transition to Social Investment - The Rise of SRI (Socially Responsible Investment) – Prior to the re-cent crisis, global development sought to create an asset class, qualified as “Socially Responsible (SR).” This is investment that would wait longer for pay-back than the more traditional three year return. The SRI investor also sought a two level (double bot-tom line) return: concentrating on the financial re-turn but bearing in mind ethical, environmental and social concerns. These values are not mutually ex-clusive. The anticipation of profit provides a founda-tion for investors in the developed countries to en-gage in SRI. It is our belief that within the coming SRI paradigm lies the future of grass roots economic development. Depending upon investment philoso-phy, the acceptance of a reduced capital gain re-turn in exchange for the achievement of some tangi-ble social goal or accomplishment may become part of the emergent SRI ideal. The Nursery of The Merchant Class - The SME (small to medium sized enterprise) is the cornerstone of any economy. It serves the retail consumer; it pro-vides a market for the wholesale distributor; and is the basis for supply chains and commercial infra-structure necessary to a developed economy. The SME is the birthing ground for larger businesses and the creator of jobs that fuel economic growth (in developing nations up to 60 % of economic activity may be in the informal SME sector). The SME is also the breeding ground for local and regional commu-nity leaders. For instance, the American President Harry S Truman owned a small retail store. If the SME is the nursery of a future merchant class then investment in knowledge capacity, human capital and capital goods in the SME sector is mother’s milk, for without knowledge any invest-ment is soon wasted. This is where opportunity for real tangible growth and opportunity lies. The just profit created by a well-managed and productive business is essential to the viability and sustainabil-ity of a developing economy.

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Towards Socially Responsible Capitalism (SRC) - The shrinkage in western economies will cause a retrenching of traditional investment and support from global civil society. It is our contention that this economic pandemic is not a simple venting of air, but a fundamental shift in the way individual investors will view the solidity of any asset class. Capital, stocks, bonds, and real property-- even the banks-- seem to have betrayed us. Investment is based on trust and that trust has been shaken and we will never look at financial institutions the same way again. It is not that the old assets will no longer hold value; it is that traditional assets will not be trusted to maintain that value over the long term and the institutions involved in falsely overvaluing such assets over time may well find it difficult to earn that trust again. Socially Responsible Capital may sound like an oxymoron to some, but without achievement of this economic and cultural virtue, we are doomed to repeated cycles of economic chaos where even the winners lose in the en The realization that the provision of assistance and support to the poor can be a profitable business strategy has gained acceptance in the last decade. Given the diminished condition of global wealth it will become increasingly difficult for less wealthy institutions to justify high levels of charitable dona-tions to the poor in lesser-developed countries. This pending reality has yet to be fully accepted by either donors or the NGO’s they support. Yet it is, we be-lieve, an inescapable consequence of the new eco-nomic realities. Microfinance’s New Asset Class: Emergent Human Capital In the low resource environment of under devel-oped global economies, Human Capital often is the only capital available. Most of this unimproved hu-man capital requires investment to realize its poten-tial and create a viable and sustainable business. Hence the term: Emergent Human Capital, or EMC. It is also true that the greatest leverage point for investment lies here. An investment of 10.00 (USD) may only return 10.50, but the positive externalities can be significant and long lasting. The effects upon

infrastructure, education, health care, income, lon-gevity and even political stability are non-trivial. The success of the MFI sector has led to the realiza-tion that profit can be realized at the bottom of the economic pyramid. We should like to put forward a new, innovative strategy brought on by the exigen-cies of the global economic crisis currently unfold-ing. Our strategic view is that the evolved econo-mies should burnish the misty lens of capital invest-ment planning and refocus upon the tremendous untapped potential for economic growth and pent up demand that exists within the developing world. This is an opportunity not rooted in debt and con-sumption, but grounded in the dynamic possibilities of human capital, on the nascent productive capac-ity and the expanding needs of whole peoples and continents. The traditional accounting model does not recog-nize the intrinsic value of people, except as labor, in the productivity equation. Yet we all realize that without skilled competent management and staff, a business soon consumes itself and its capital. Per-haps we may consider that human capital, or knowl-edge capacity, is a truly worthy investment. The greatest returns are to be found where potential growth is highest, in knowledge capacity and capital goods. This is where returns are based on the accu-mulation of business knowledge and physical assets. Machines and systems are, although enormously powerful, not strategic thinkers and possess little wisdom. It is people that create value; they always will. People are the key component in any system. Human Capital is the lynchpin around which any economy must turn. These insights, we believe, of-fer clarity in purpose, trust in existence, and growth in value. Microfinance as an asset class regularly monitors the vital signs of the micro enterprises loans. Micro-finance, as lender of last resort to the poor, has gained credence over the past number of years. We would argue that as a poverty alleviation strategy is essential. However, as an economic development strategy there are limits. For example we would argue for an extension of the existing lending-only model to include direct guided investment and ex-

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tensive business development services as necessary to bridge the glass ceiling of micro lending. This would also create a true ladder of prosperity for those with the motivation to make the climb. The establishment of a proven and tested asset class where human beings and their activities are the cor-nerstone of the investment would appear, in the present climate, to offer a welcome refuge for wor-ried investors Conclusion We believe that when properly managed investing in the productive activities of people in developing countries i.e. Human Capital, has a proven positive return. When done with consideration for moral, ethical, and environmental concerns, this is a return that is based on true sustainability of the invest-ment as a whole. Where stocks, shares, and compli-cated financial products and services are difficult to understand, investment in people and the busi-nesses they run is not. The capital goods are tangi-ble and given the internet and today’s communica-tions technology, the entrepreneurs are people you can visit and see and hear and touch. We should then redirect at lease a portion of our portfolios to individual tangible productive assets, and knowledge capacity, as microfinance invest-ment funds offer. We should invest in people and their businesses. There is an elegant logic and com-mon sense of one’s savings being someone else’s investment money is simple to grasp, every $10.00

saved here can be invested in someone there. With a well designed and managed model, investment in knowledge capacity and capital goods for an SME business can be measured and evaluated. The op-portunity for return is significant because impact is so much greater at the bottom of the development market. In truth, the unrealized fortune lies in the future and the developing world is surely the future of our planet. ***************************

About the authors: Garrett Wyse is the Vice President for Business Development for Micro Venture Support. He is an economist with a long history of evaluating and reporting on microfinance initiatives in Africa and support for MFI programs in Ireland. He may be reached at: [email protected] Jerome Pelqouin is the Vice President for Profes-sional Services for Micro Venture Support. He is an expert in organizational psychology and change management, with extensive experience in both traditional corporations and microfinance organizations. He may be reached at: [email protected]

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The back-office MIS is the backbone of any Information System solution and yet it has not received much attention. MFIs, whether large or small, need to have a strong back-office MIS before attempting to deploy any advanced front-end ap-plications or delivery channels. Delivery channels such as mobile phone microfi-nance will not be able to create significant impact without having a strong and flexible back-office MIS in place...next page

Web-based Solutions Future of MIS in Microfinance

Shumit Vatsal Evolvus Solutions

“An ideal microfinance software package is required to provide timely and accurate transaction data to rural financial institutions enabling portfolio management, new product development and tracking human resource performance. Acting as a transac-tion backbone, MicroBeans supports scale that is essential for the growth of any micro finance institution. The solution allows data to be captured remotely and transmitted to a backend where data is stored securely and can be retrieved with ease.”

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An ideal microfinance software package is required to provide timely and accurate transaction data to rural fi-nancial institutions enabling portfolio management, new product development and tracking human resource per-formance. Acting as a transaction backbone, Micro Beans supports scale that is essential for the growth of any mi-cro finance institution. The solution allows data to be captured remotely and transmitted to a backend where

data is stored securely and can be retrieved with ease. MIS systems currently used by MFIs can be broadly di-vided into three categories:- Traditional MIS systems The traditional approach to implementing a micro finance information system is to purchase a software package, modify it for your needs, and install it on your system. System integration, Implementation, maintenance, tech-nology upgrades, training and user support are all on-going tasks that represent a significant, recurring invest-ment. The cost can be substantial, far exceeding your initial license cost and monthly fee.

The Web based solution Over the past few years, another option has grown in popularity – the implementation of a web-based solution. When compared with traditional software packages and

Web-enabled solutions, Web-based applications offer more security and accessibility and are far less expensive to set up and manage. Web based solutions offer multiple advantages over the traditional approach Broad accessibility: By leveraging the Internet as its

architecture, Web-based applications support top management’s increasing need for access to infor-mation across multiple locations. Secure access to information is available from any computer with

Web browser software and Internet access. No-install process: In earlier types of client-server

computing, each application had its own client pro-gram which served as its user interface and had to be separately installed on each user's personal com-puter. An upgrade to the server part of the applica-tion would typically require an upgrade to the clients installed on each user workstation, adding to the support cost and decreasing productivity. Web-based applications require no installation, configura-tion or hard drive space, eliminating the time and expense required installing and configuring new soft-ware packages at each workstation. Especially with branches across geographies, it will be a mammoth task for the solution provider to set-up of the soft-ware in all the branches. The ability to update and maintain web applications without distributing and installing software on potentially thousands of client computers is a key reason for their popularity. Also, web-based software minimizes 'roll-out' costs, as

Category of information system Description

Manual System A significant portion of the start-up MFIs still rely on manual systems that involves maintenance of records in forms and ledgers. These organizations are typically NGOs with small micro-credit programs. Obvious disad-vantages are that the manual systems are too laborious and time consuming, higher probability of errors and data manipulation is extremely difficult

Semi-automated system These organizations use spreadsheets to supplement their manual process to maintain their data. Typically, small organizations but bigger than the category that use manual systems

Fully automated system These systems are similar to that of banks and are used by the top ten MFIs in the country.

Table 1.1 shows the three broad categories of information software used by Microfi-nance institutions

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your customers can easily use an industry standard web browser.

No hassle upgrades: Because the vendor handles all

system upgrades and enhancements, the latest up-dates are instantly available to all users whenever and wherever they access the application. The web-based application also allows for instant updates of changes or modifications to your data structure or storage facility, as you are using a centralized web-based application

Cost reduction: Web-based options can reduce or

eliminate many upfront and ongoing expenses such as those associated with deployment, software li-censing, operational and maintenance.

Compatible across operating systems: A significant

advantage of building web applications to support standard browser features is that they should per-form as specified regardless of the operating system or OS version installed on a given client. Rather than creating clients for MS Windows, Mac OS X, GNU/Linux, and other operating systems, the application can be written once and deployed almost anywhere

The choice between web based or traditional software application depends on the centricity of data. Centricity refers to the location of data. Simply defined, centricity refers to whether your data source is bank-centric or cus-tomer-centric. If data are stored at the bank, and the base functionality is to report data in one direction - from the bank to the client, then your application is bank-centric. Therefore, you may be best suited for a web-based (bank-centric) system. Therefore, as opposed to the traditional MIS systems most web-based solutions offer a fixed monthly fee that covers all maintenance, technology upgrades, training and user support. The costs are predictable, the technol-

ogy evolutionary, and it is all done with minimal involve-ment of your IT staff. Offline Component in case of Poor Internet Connectivity The government proposes to offer all citizens of India free, high-speed broadband connectivity by 2009, through the state-owned telecom service providers BSNL and MTNL. However, until then, internet connectivity still remains a distant concept in remote rural locations of India. Due to this infrastructure constraint, web-based solutions require to have an offline component to include branches that lack broadband connection. The two key areas :- Enrolment: Web-based applications have enrolment soft-ware that is deployed in all the desktops in each branch. This application works primarily on the offline mode and to do an enrolment one does not need the internet. At the end of the day, the data captured by the offline mode is sent to a central server using a dial-up internet connec-tion. Internet is only required when the data has to be sent to another location such as the head office. New clients are invited to the branch where the credit officers enroll them by collecting demographics, fingerprints and photographs. Disbursement: The head office will have to send the dis-bursement schedule to the individual branches over email or through post. The credit officer uses a dial-up connection to access his email and prints the demand sheet. Disbursements will happen according to the sched-ule with the supervision of the branch manager. The cus-tomer will have to come to the branch or the credit offi-cer will have to visit the field with the branch manager supervising him. What should Microfinance Institutions look for while choosing a software package? Flexibility of the software: The operations of microfi-nance organizations are dynamic and ever evolving due to changes in client needs, regulatory environments and economic conditions. In order to support the operations

Reduced manpower and time

Systematic maintenance of records and easy generation of reports at any given time

Monitoring and evaluation

Provision of transparency

Integration with other delivery platforms such as smartcards, mobile phones that can provide service at the doorstep of rural women

Table 1.2 highlights the advantages of the MFI using an automated web based software

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of the institution, the information system must also be dynamic. Diversity of business processes and frequent changes in the procedures entails that the information system is flexible and dynamic in nature. Micro finance institutions are moving from their traditional practice of offering only micro credit, to offering the entire range of banking products like insurance and money market mu-tual funds. The microfinance software has the capability to integrate with insurance products like credit-linked insurance, life insurance, disability insurance, accident insurance and weather insurance. Ability to generate detailed reports: The MIS package should automatically be able to generate detailed re-ports. The importance of “the right information” at “the right time’ and the “right place cannot be debated. The information system should be able to capture, create and store information for microfinance institutions to expand operations. Reports should provide information in user-required formats, that facilitates better understanding, setting priorities, objectives and strategy. Cost effectiveness: Costs include expenses on hardware, software, network, infrastructure and human resources. The costs also include the costs in terms of time in oper-ating the software. A MIS software for microfinance must be cost effective and make business sense both in the short run and the long run Transparency: For the purpose of due diligence, equity investors have to ensure that they continuously track the financial condition of the MFI that represents the true health of the organization. Some questions that equity investors require answers for are – Does the portfolio as reported by the MFI reflect its

true value? Have adequate provisions been made for possible

losses? Do management and staff have the proper skills to

originate, monitor and collect loans?

The microfinance software should provide for an investor log in that enables investors with reports/financial per-formance ratios with analysis in the areas of risk manage-ment, liquidity, efficiency and profitability. The software also periodically provides rating based on the financials provided by the MFI. Conclusion Microfinance is a rapidly changing industry. Due to the ongoing evolution of the industry, MFIs face difficulty in defining business objectives, needs, priorities and limita-tions for acquisition of an MIS solution. There is lack of standardization within the microfinance sector, and busi-ness practices of MFIs differ from each other. Conse-quently, software developers face problems in coming-up with an MIS that can be used by most of the MFIs. Microfinance institutions, in order to rapidly scale up their operations, need to invest in relevant technologies after thorough and careful assessment of their current and future requirements. Also capacity within institutions to manage technology is key to successful implementa-tion and operation of its MIS. Investment in MIS should be viewed as a strategic investment for MFIs

Shumit Vatsal works as a program manager at Evolvus Solutions. Evolvus Solutions offers an end-to-end sys-tem called MicroBeans that creates a link for micro-finance clients to step into the formal financial sector. Their MIS solution utilizes smart cards, mobile phones used as point of sale devices, a specialized software application that acts as the front end for mobile phones, a transaction server that stores data securely and connectors to the micro finance institutions' ac-counting and general ledger systems.

Horizon

An excusive Interaction On “ Making markets work For the Poor People” with Dr. Nachiket Mor and Ms Bindu Ananth . Download at: www.microfinancefocus.com

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22...Global Financial Crisis : Impact On Microfinance By, Dr. Amrit Patel

24… Microfinance And the Financial Crisis: A Global Discussion Hosted by: CGAP

Financial Financial Financial Crisis Crisis Crisis and and and

Microfinance Microfinance Microfinance

“MFIs should be prudent and grow slowly during this period. They should remain in close touch with clients, enhance efficiency to counteract rising prices and improve overall compliance and monitoring and en-deavor to remain liquid.”

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Global Financial Crisis Impact On Microfinance

In recent years high prices of food grains, global financial crisis and economic recession have in-deed considerably worsened the life of hun-dreds of millions of poor dependent on micro-finance in Asia, Africa & Latin America. People depending on mf could go from a level of success back to poverty. It is against this background an attempt is made here to highlight in brief the likely impact of the crisis, MFIs already experiencing the ef-fects and suggest measures to minimize the impact. ….next page

Dr. Amrit Patel

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The financial crisis would impact on the liquidity of MFIs; reluctance of finance providers to provide further finance or increasing rates of interest and prescribing stringent terms & conditions of granting loans; slow expansion and growth of micro-finance programs; low level of borrowers’ business and diminishing sales of products; lower rate of savings and repayments; adversely affecting financial sus-tainability of MFIs; frustration of staff etc. Ultimately it would adversely affect fulfillment of Millennium Develop-ment Goals, particularly alleviation of poverty, access to education and health in [i] the region of South Asia, which alone accounts for the most mf borrowers, making up more than half of global demand [ii] country like India which has so far the highest number of 10.5 million mf borrowers and is expected to expand to 50 million clients by 2012, with the outstanding loan portfolio rising to $six billion from about $769 million now. [iii] the Bangladesh Rural Ad-vancement Committee which has disbursed more than $ five billion to nearly seven million poor people. In India and Bangladesh, mf has given hope to hundreds of thousands, especially women, who have built successful businesses that have changed their lives. In Africa, tighten-ing pressures are being felt even in low-end borrowing cir-cles and that such small but essential programs that can make a difference for Africans facing dire poverty are also feeling the effects of the global finance pinch. The efforts of MFIs to assist poor are severely constrained by the tighter credit conditions. As credit tightens and sources of funds from corporations and socially-oriented investors dry up, mf would surely be hard hit, impacting poor people who have no other access to finance. A liquid-ity crisis can be the worst-case scenario with a devastating effect for MFIs and their clients. As banks and financial in-stitutions have inadequate financial resources they cannot provide finance to MFIs to meet with the credit demand of micro-finance borrowers. Micro-finance borrowers and employees are reported to be much worried in Bangladesh in particular [one of the poorest nations in the world]. Its donor-dependent efforts in education, healthcare and fam-ily planning are at risk. Though the cost of funds for MFIs has gone up, MFIs are simultaneously under pressure not to raise lending rates to their borrowers. This situation at some point would make them financially unsustainable. If commercial banks are affected, then the continuation of the mf program at the current level will be affected, leave alone its expansion & growth. Since commercial banks have become much con-scious about their profits, MFIs would suffer, particularly smaller outfits that cannot afford higher interest rates or cannot have access to private equity or venture capital. In

these circumstances, commercial banks are already re-ported either resisting to lend to MFIs or insist upon in-creasing interest rates on loans. On the other side, many MFIs too resist borrowing thereby jeopardizing their pros-pects for growth and success. When borrowers experience that MFIs are slow or are reducing their lending, borrowers would also be unwilling to repay loans, which would have far more disastrous consequences. This would lead to belt-tightening and for poor people it means tightening a belt that is already tight. MFIs Already Affected

It is observed in the case of “SHARE” in India that it is facing reduced access to the funds due to the liquidity crunch. Though in principle, “SHARE” has sanctions to the tune of $155.6 million with lower interest rates, it is faced with a peculiar situation from bankers and financial institu-tions trying to bring in new covenants like raising interest rates exorbitantly and asking for personal guarantees from its directors. The situation is alarming since it affects its credibility and strains the trust built over a period of two decades with its clients, a development which could result in clients not making timely repayments.

The MFIs “ASA” in Bangladesh and “SEF” in South Af-rica, have not yet felt the impact of the crisis. Others are, however, witnessing sharp increases in costs of funds and direct effects on clients’ well-being.

In case of Kashf Foundation in Pakistan, the impact has been the lack of liquidity in the capital markets curtailing its ability to raise additional funds this year. In March 2008, it revised its growth plans from $500,000 to $350,000. Over the past nine months the Foundation has actually grown at 6%. Due to constrained liquidity, the cost of funds has in-creased. At the same time, the energy crisis has spiked the cost of transport and electricity, creating the expectation that salaries will increase in line with inflation. A recent staff survey showed that 50% of its staff is not happy with the salary structure and expected cost of living adjust-

It would adversely affect fulfillment of Millen-nium Development Goals, particularly alleviation of poverty, access to education and health in the region of South Asia, which alone accounts for the most mf borrowers, making up more than half of global demand

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ments. This will impact the loan officer’s productivity with impact on portfolio quality and overall efficiency and sus-tainability. This is linked to increased client exits as busi-nesses fail and its clients’ ability to service loans is con-strained.

In Honduras, the global financial crisis is affecting the “ ODEF”MFI’s clients and the institution itself because many of its clients live in areas dominated by units assembling plants meant for export to the U.S. This sector has been one of the first to feel the effects of the crisis. The crisis has caused a decline in incomes as well as layoffs, diminishing sales in the micro and small businesses that these workers support. This reduces borrowers’ capacity to pay off loans and has caused MFI to make adjustments to existing loans.

In Ghana, although the effect of the crisis on the “ SAT” MFI is very minimal, the “SAT” expects it will have a signifi-cantly negative effect on the availability of funding both from commercial banks & donors for its growth. In Bolivia, “ProMujero” MFI has yet not been affected. But it will soon be affected seriously. It is augmenting reserves in anticipation of a possible increase in loan defaults. The clients will be affected as their sales decline and inventory costs rise. Profit margins will diminish, causing clients to reduce the size of their businesses.

Need For

It may be appreciated that MFIs & mf borrowers are not at all responsible for the current global financial crisis. MF borrowers being poor and paying almost market rate of interest on their small loans just to eke a living out of it. When Governments in developed economies have an-nounced economic stimulus package including bailout of big banks, Governments & Central Banks of developing economies supported by international financial institutions and socially-oriented donors may consider accelerating liquidity in the form of short-term & long-term flow of funds for MFIs on reasonable & flexible terms till the crisis is over.

It is necessary for the Government, country’s Central Bank to act quickly to hold rising bank costs and interest rates and ensure that adequate investment flows in the credit market continue to be available to low-end borrow-ers.

Regulatory & supervisory environment may need to be created so as to enable mf groups to mobilize savings for the purpose of lending. If mf groups had easy access to savings that they could on-lend, they could in essence by-pass this global financial crisis. They would not have to go to the national banks or the international commercial banks for their loan fund. They could go right to the com-munity for savings.

“SKS” Mf, being one of the largest MFIs in India, re-cently raised about $75 million by way of private equity and it aims to more than double its client base to 8 million over the next two years. This is evidence that a well-managed MFI with a strong portfolio of borrowers can grow stronger in a crisis because it finances the needs that are so funda-mental and so basic that demand for them is unaffected. If banks in consultation with MFIs could overcome the jitters, then the case for lending to MFIs for small & high-margin loans with low defaults is stronger than ever. This is actu-ally a good time for banks to increase lending to MFIs, as their business model is of a lower risk than large loans for a few big corporate accounts, which are anyway seeing a slowdown.

MFIs should be prudent and grow slowly during this period. They should remain in close touch with clients, en-hance efficiency to counteract rising prices and improve overall compliance and monitoring and endeavor to remain liquid.

MFIs should restructure and adjust loans at risk best suited to clients, eliminate consumption-based loans, and analyze new loan requests more closely in order to mini-mize the effects of the crisis on their clients. Similarly, fi-nance providers too should restructure loans advanced to MFIs suitably. *****************************

It is necessary for the Government, country’s Central Bank to act quickly to hold rising bank costs and interest rates and ensure that adequate investment flows in the credit market continue to be available to low-end borrowers.

About the Author Dr Amrit Patel is PhD in Banking & Finance, has 25 years experience in Bank of Baroda & since 1995 has been senior consultant Rural/MF with projects funded by World Bank, ADB, IFAD in Azerbaijan, Tajikistan, Kazakhstan, Bangladesh, Uganda. He has contributed over 600 articles/papers in leading financial dailies, journals, Microfinance Gateway.

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Microfinance And the Financial Crisis

CGAP Virtual Conference: November 18-20, 2008 CGAP’s virtual conference welcomed over 600 MFI managers, central bankers, investors and advisers from 34 countries. The 150 entries submitted provided a vivid and powerful report on how the financial crisis is impacting microfinance institutions and their poor clients. The dominos of the crisis – credit crunch, inflation, currency dislocations and global recession – are hitting microfinance in very different ways, depending on location, funding structure, fi-nancial state and the economic health of their clients. While many places seem unaffected today, there is little doubt that that there will be impact: integration of microfinance into the mainstream does have costs.

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M FI managers from Mongolia, India, Rwanda, Mali and Pakistan reported on clients hurt

by inflation and early signals of economic downturn: job losses in the US and Europe have already meant fewer remittances from relatives abroad. Client purchasing power has gone down and cash needs have gone up, causing savings to be withdrawn and sometimes straining repayments. Lessons from previous financial crises show how some nimble clients might even benefit if, for exam-ple, they can adapt their inventory to meet newly frugal customer demands. MFIs whose customers sell com-modities tend to fare better than MFIs providing con-sumer finance to salaried workers or cash-flow based small business lending. On the whole pressure on cus-tomers is expected to translate broadly into higher port-folio at risk. The most immediate concern is how the global liquidity contraction will affect the cost and availability of funding to non-deposit taking MFIs. Money from both domestic and international banks is tighter, slower, more conserva-tive and more expensive. Anecdotal evidence cites rate increases from 1% to 4% in Latin America and South and Central Asia, with some banks pulling out altogether. MFIs are anxious about meeting refinancing needs when loans from foreign banks and MIVs come due in 2009. Those borrowing in foreign currency fear the double hit of both increased interest rates and the costs of having to pay in hard currency with recently weakened local cur-rencies. Declines in MFIs net income from fx losses were cited in the 7%- 43 % range in the past few years, with one Latin MFI reported to have lost 75% in a single year. On top of all this inflation means operating costs are ris-ing, and these costs can’t always be passed on to clients. Institutional investors in microfinance are not seeing significant retail redemptions, but they do expect fund-raising in the coming months to be a tougher sell. Retail investors are cautious and loath to realize losses in exist-ing investments in order to make money available for new microfinance investments. Development Finance Institutions have seen demand for funds from MFIs rise dramatically and many are up to

their lending limits to MFIs. Several are planning a joint emergency liquidity facility, which would be welcome if appropriately structured. The strongest message from the conference was that deposit taking MFIs are well-insulated from refinancing risks. The many savings-led African institutions have little need for external funds. . That said, most deposit taking MFIs mobilize larger de-posits from non-poor customers and these may be more sensitive to the economic downturn. In a world where communications are global and news travels fast and far, there is also a fear that bank failures in the US and Europe will lead to a loss of confidence in local banks and a run on deposits. Large scale savings withdrawals have only occurred in isolated cases where other factors were already at play beyond the financial crisis. Advice to MFIs from conference participants included: increase reserves, cut back on growth and focus on port-folio quality, make sure loan officers are informed and attentive to clients needs, and communicate early and often with lenders and investors. MFIs were also warned that cutting back on lending can undermine repayment; if customers think they won’t get a new loan, why repay the old one? Longer term counsel focused on MFIs accelerating the move to become licensed to mobilize deposits, or at least borrowing locally, improving asset and liability manage-ment, consolidating or diversifying funding sources to a manageable but balanced number, and ensuring sound codes of conduct on a customer education, advice and protection. Many of these changes, participants cau-tioned, will take time, money and expertise that many MFIs lack and will need to build. Overreaction by policymakers was a worry for many. There were concerns that regulators might become excessively conservative (about new licenses for deposit taking, capital requirements or branch expansion). Well-intentioned governments may do things to alleviate the crisis effects that hurt financial access in the long run. These might include debt forgiveness programs, soft loan schemes and unsustainably low interest rate caps. At a minimum, participants felt that progress on helpful poli-cies that stimulate access would falter as governments’ attention focuses on the urgency of stability. On the bright side, some felt that the crisis might advance the cause of helpful deposit taking legislation. Clearly, there is

Note By Elisabeth Littlefield Chief Executive Officer , CGAP

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a need to demonstrate to policy makers that inclusion and stability go hand in hand. Several suggestions for donors were offered. These included ensuring that funding cata-lyzes local funding, promoting transformation of NBFIs, and making sure that donors stand by long time clients to help reschedule loans, recapitalize, or provide emergency funding. But there was optimism amid the anxiety. Per-haps ‘creative destruction’ may have long term benefits for access to finance. Some markets had become over-heated, with sensational growth rates, softening under-writing standards and deteriorating risk-return trade-offs. Slower growth, tighter credit, more conservative policies,

better products and even consolidation of weaker institu-tions into stronger ones may be beneficial in the long run. The crisis may be a booster to actually implement con-sumer protection policies. And at the very least, the crisis has clearly illustrated the value of adopting a deposit-led approach that aims to build access to domestic, local cur-rency financing. Thank you all for your observations and wise counsel. We will do our best to ensure that your input is shared with all those who can help MFIs and their clients weather the financial and economic storms ahead and emerge stronger and healthier than before. *********

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Caveat Generally, most conference participants were eager to discuss the impacts of the financial crisis, but several par-ticipants warned against attributing all MFI issues to the financial crisis. Kelly Hattel, echoing Mohammed Khalid, mentioned the need for the sector not to “be too quick in establishing direct causality between the current finan-cial/economic crisis and MFI problems which might have been pre-existing conditions.” Others also cautioned against making broad generalizations from very specific experiences. Chimaobi Agwu from Nigeria wrote: “Talking about the impact of the financial crisis on MFI's and their clients… depends on the economy in question, the oper-ating and funding structure adopted by the MFI and pro-active measures put in place by the board and manage-ment.” General Impacts on clients Most participants agreed that client impact is varied and not yet visible in most areas. It is expected that rising inflation (especially for food) and other fuel and com-modity price volatility, combined with the effects of re-cession – namely decreased demand for microenterprise products and decreased remittance flows—would be the main cause of client problems going forward. Gerelmaa Yu from XacBank reported that in Mongolia, “[m]any of the clients of cooperatives are herders, who have income from selling of cashmere, meat or skin, market price of which has declined during the last months. With yearly inflation of around 30% the living expenses of herders

like all people increased significantly. In addition the li-quidity shortage has led other banks to stop or restrict loan disbursements in remote areas.” In Pakistan, Syed Moshin Ahmed of the Pakistan Microfi-nance Network commented that: “anecdotal evidence suggests that MF clients who are economically active have been either positively impacted in the first generation affect of inflation or remained neu-tral. The only group that has been affected is salaried urban class and people who have taken loan for con-sumption.” N. Srinivasan also cited the effects from lower lending by MFIs: “New clients have been asked to put on hold their business plans by MFIs in many places. Interest rates are being reset. Many clients might opt for high interest options from informal sources.” Larry Reed from Opportunity International reminded participants that client impact occurred in previous crises. He shared his experiences from past crisis describing scenarios where MFI clients, who were micro entrepreneurs, benefited from an economic downturn. He remembered prices go-ing “up on all items, and especially on basic commodities like food.” As their traditional consumer base spent more on basic commodities, micro entrepreneurs specializing in basic commodities flourished. Micro entrepreneurs focusing on higher end items didn’t do as well, unless they were able to capture higher end consumers who “could no longer afford to shop in the department stores where they normally shopped.” Micro entrepreneurs/clients who were able to take advantage of these market changes were able to “maintain their incomes and pay back their loans,” provided that new entrants didn’t flood the market.

Discussion Brief

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General Impacts on MFIs Many respondents are seeing the effects from the crisis on their markets. Others are expecting delayed impact. Reports from local MFIs varied according to region and type of institution. For example, West African respondents from Benin and Côte d'Ivoire stressed the immediacy of the food crisis, while in MENA, most MFIs have not yet felt the impact of the financial crisis. Many participants from Mexico to the Philippines noted that deposit taking institutions are holding up better than more credit-focused institutions. Philip Asare of Opportunity/Ghana wrote that the impact of the crisis on MFIs “will be dependent on the extent to which their host countries are integrated to the interna-tional financial market …[but]… no matter the degree of linkage, MFIs are likely to suffer one way or the other.” Laura Burnhill from ACCION also commented on the geo-graphic differences in impact: “Much as the impact of the crisis on mainstream economies and f financial sectors continues to spread unevenly, so the impact of the global meltdown on microfinance varies by region. Eastern European MFIs seem to be experiencing deposit runoffs or reductions, whilst Latin American MFIs are reporting more cancelled /non-renewed lines and/or delayed dis-bursements. Asia and Africa each face different chal-lenges as well. One thing seems certain though, despite falling oil prices, commodity prices remain high, credit has been sharply curtailed on many levels and life at the bottom of the pyramid is more squeezed than ever.” Syed Mohsin Ahmed, giving a bird’s eye view of the situa-tion from Pakistan, described the interplay between the effects of the food and fuel crisis, the financial crisis and geo-political variables: “In Pakistan we have our own set of unique crisis though largely insulated from the global financial market meltdown but heavily affected by the recent boom in oil and commodity prices. The above fac-tors along with political and geo-political problems have led to a macroeconomic imbalance in the shape of high fiscal and current account deficit. With inflation, headline at 25% and core at 18.3%, spiking northwards the central bank has been taking policy measures to suck access li-quidity from the market and making rupee dearer.” Cordaid, gathering a group of 15 MFIs, concluded that the impacts of the financial crisis on the operations of MFIs are: (1) reduced demand for loans as client businesses suffer (2) cost of capital has increased – costs that cannot be passed on to clients (3) reduced growth in the sector due to the liquidity crunch and (4) an increase in short-

term loans to finance portfolios. The liquidity crunch will come as there is (1) a decrease in international invest-ment flows (2) a decrease in loans from local banks, espe-cially those with longer tenors (3) foreign exchange losses (4) lowered remittances (5) significant withdrawals of deposits and savings. They also believed that “emerging, small and medium and weaker MFIs are most affected…..[and there is] potential that larger MFIs will acquire small, weaker ones, with potential mission drift.” Overall, participants identified the following impacts (each discussed in the following section): Liquidity crunch Risk of increased PAR Foreign currency exposure is an added risk and cost Other risks to MFIs (commercial bank failure, drop in

remittance fees) Investor inflows Policy implications The Liquidity Crunch Many participants commented that deposit taking MFIs are less exposed to liquidity squeezes. In general most saw material evidence of liquidity tightening, especially on non-deposit taking MFIs that fund themselves primar-ily through foreign debt. In many cases, no changes were seen yet, but there is a great deal of anxiety about what will happen in 2009. Martin Holtmann summarized the sentiment across the industry: “(1) Refinancing risks for MFIs that are mostly funded from external sources such as DFIs, MIVs and local or international financial institutions. While liquidity seems fine through the end of 2008, some organizations are likely to experience problems in refinancing their debt obligations through 2009, especially if they have ac-cepted "hot money" from fickle investors. (2) Liquidity risk for deposit taking institutions. Histori-cally, deposit taking institutions have been more insu-lated from funding problems. However, in the current situation, there are likely to be (hopefully isolated) crises of confidence that could affect some MFIs.” Increased cost and decreased availability of capital from banks and investors Participants generally cited the increased cost and de-creased availability of capital as the biggest challenge facing MFIs. Alex Silva, of the Emergency Liquidity Facil-ity/Omtrix, explained that not all MFIs will be affected equally: “Different types of institutions differ in their vul-

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nerability to the crisis depending on their funding structure. NGOs, in a weaker position if in-ternational flows, in particular lending from MIVs, are curtailed.” In West and Central Africa, however, we heard from several participants (Karara Charles & Diane Bizi-mana from Rwanda and Burundi respectively) that there has been little impact thus far, principally because MFIs are deposit-based. Chimaobi James Agwu from IMFB/Nigeria cited: “that the 800 microfinance banks are un-perturbed by the global happenings due to the viable policy environment and the fact that we are all savings and deposit led with less dependence on government, bank and external funding.” In contrast, in Central America where many MFIs are NGOs that ”have their funding structure concentrated in loans from international sources, local second tier lending institutions, and regional banks,” these NGOs “are in a weaker position if international flows, in particu-lar lending from MIVs, are curtailed.” (Alex Silva/ Emer-gency Liquidity Facility-Omtrix) Syed Moshin Ahmed re-ported that, in Pakistan, the “cost of borrowing has jumped by almost 50%, “liquidity from domestic capital markets has become tighter” and “financing from inter-national sources, especially debt is not allowed by the central bank because of reserve pressures.” Peter Marchetti, FDL/Nicaragua, shared that one of his funders is increasing interest rates on loans by 2%, while Chuon Sophal, TPC/Cambodia, has seen a 1% increase in capital costs. In India, N. Srinvasan reported that: ”In the last sixty days, the liquidity constraints and the heightened

perception of risk has pushed up the rates further (by as much as 200 to 300 basis points). If the MFI is willing to pay this higher rate, it does not mean that loans are avail-able.” N. Jeyaseelan of Hand in Hand/Tamilnadu shared his observation that “banks are taking more time to lend to MFIs. From Romania, George Staicu reported that “an MFI in Kosovo had to postpone loan disbursements….and take drastic measures to restrict some of its administra-tive expenditures. There were days when the MFI's bank account had a bal-ance of just a couple hundreds Euro while the approved loan applications amounting thousands of Euro were on the "waiting list" Els Boerhof, of Goodwell Investments BV, saw this same impact from an investor perspective: “Although India has a strong domestic capital market, liquidity is becoming tighter, especially for smaller MFIs. For us as an equity investor this means that we have to spend more time with (potential) investees and funders to work on com-plete financing package, which includes debt as well. The Central Bank in India is taking action and the government banks are trying to fill the gap which the commercial banks are leaving behind.”” Risk of withdrawals of deposits We also received a number of messages about the risk of bank runs. For example, Daniel Mensah from MicroBusi-ness for Health in Ghana reported that clients are with-drawing savings from credit unions to cover consumption needs. He wrote: “at recent meeting of some of the credit union executives, it was reported that the number of members taking loans or withdrawing their savings is going up.” Laura Burnhill mentioned that ”Eastern Euro-pean MFIs seem to be experiencing deposit runoffs or reductions” and Marc Breij from Cordaid mentioned that a meeting of 15 MFIs believed there was going to be a “significant amount of withdrawals of deposits and sav-ings (in cooperatives)….and [f]light into more ‘secure’ lenders and assets (gold).” Erik Heinen of Oikocredit wrote, “What we have been seeing is that especially MFIs that depend a lot on savings deposits face the risk of a run on the institution. ‘Trust comes on foot, but leaves on horseback’ is an expression we hear a lot these days in the Netherlands and it is true for savings. But so far, we have seen very few MFIs that faced a crisis of trust.”

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“Domestic deposits stand to decline with declin-ing economic activities. Significant number of de-veloping countries finances significant portions of their budgets with foreign aid. As the donors face the heat, their ability to help will definitely de-cline. Declined government budgets will imply declined expenditure and investments. Incomes will be impacted and domestic savings will shrink. Added to the above is the possibility of remit-tances from relatives from abroad to decline as some of our relatives in the developed countries face job losses.” —Philip Asare of Opportunity/Ghana

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Increased Risk of PAR Incentives to repay may be undermined. Participants noticed that they were seeing clients, not expecting MFIs to be able to continue to disburse loans as needed, losing their incentive to repay. Laurence Uwambaje from the National Bank of Rwanda, com-mented that: “The financial crisis reduced the external funds granted to MFIs, and so that reduced the disburse-ment of loans to the MFIs’ clients. This affected the cli-ents confidence about the MFIs’ ability to disburse loans to them as needed. It reduced also the loans portfolio quality because some clients decided to not repay the loans granted to them because they do not hope to re-ceive the next loans. So as response to this, MFI has to do more in managing and increasing effort on monitoring the loans portfolio quality.” Chuon Sophal agreed and stated that his Cambodian MFI’s “PAR ratio increased from 0.63% in Aug, to 0.70% in Sep and to 0.95% in Oct 2008.” Ability to repay is threatened in some places. Participants saw inflation and the global economic slow-down as the key risks to client repayment ability. Many participants, particularly those from MFIs, referred to the increased vulnerability of clients due to the food and fuel crisis and other inflationary pressures. As Fahan Bamba of AE&I Abidjan wrote: “The actual financial crisis may just be an additional crisis to the existing crisis such as social, political and food crisis.” Munhmandah Ochirsharav of Xacbank, Mongolia agreed: “Commodities and fuel prices are increasing dramatically during the last few months here, there’s no certain view that our clients, especially small and micro-entreprenuers are vulnerable on loan repayment.” Gerelmaa Yu, his colleague, added: “Many of the clients of cooperatives are herders, who have in-come from selling of cashmere, meat or skin, market price of which has declined during the last months. With yearly inflation of around 30% the living expenses of herders like all people increased significantly.” The global economic slowdown, on the other hand, will affect client businesses and remittance flows. While many microenterprises are subsistence activities that will be unaffected or even boosted by economic downturn, others may suffer. Martin Holtmann, IFC, noted that MFIs with heavy consumer lending or focus on SMEs (which tend to have bigger repayment problems when the real economy suffers) are the ones most likely to suffer. Alex Silva of ELF also wrote that: “[a]n eventual spreading of the financial crisis to the local economies would have an

impact on the income generation capacity of the MFIs' respective clients which could eventually derive in an increase in portfolio arrears.” The slowdown could also mean a slow down in remittance flows to clients. Adama Kodio, of Milfed/Mali, commented: “A further impact that the financial crisis could have on MFIs in West Africa is the recession which will have a negative impact on re-mittances. Some MFIs capture remittances as medium term savings. Also, a large part of credits given out by these MFIs are consumption loans for relatives waiting for remittances of migrants having left the country re-cently.” Foreign currency exposure is an added risk cost Overall it appears that MFIs that rely on savings or are borrowing in local currency are less exposed than those borrowing in dollars. Julie Abrams from Microfinance Analytics reminded participants of the impact of un-hedged foreign exchange exposure in past years, includ-ing a Latin American MFI that experienced “a 75% decline in net income due to FX losses in a single year” and two Eastern European MFIs that experienced “a 14% drop and a 43% drop” respectively. Mark Flaming commented that: ”It seems reasonable to expect that the impact of the current crisis will fall hard-est on non-deposit taking MFIs that fund themselves pri-marily with foreign debt.” Peter van Dijk underlined the extent of the risk: “To accentuate, in some regions and countries over 70% of (impressive) growth of MFIs comes from foreign debt.” Other risks to MFIs may emerge Julie Abrams pointed out that banks servicing MFIs may also be at risk of failure: “Another area of risk to MFIs that should be considered is risk of bank failure in which an MFI either holds substantial concentration of assets (the MFI's deposits, CDs, investments), and/or liabilities (debt and other forms of credit). In an earlier country-specific economic crisis that included severe currency devalua-tion, an MFI held 18% of its cash, 91% of its investments, and 32% of its short-term funding liabilities in a single bank that went under, despite the fact that it was consid-ered one of the nation's largest banks and presumed to be among the most secure.” Adama Kodio, of Milfed/Mali, also noted that the downturn in remittances will affect MFIs that provide money transfer services and rely on commissions from such services as income. Investor’s inflows to microfinance investment vehicles seem cautious but steady

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On the investor side, Microvest and Calvert have seen their investor bases remain constant. Cecilia Beirne from MicroVest wrote, ”Everyone is increasingly cautious – to free up capital to invest in mf private equity funds some-times requires liquidation of existing investments at a substantial loss – emotionally difficult regardless of the social imperative. But so far we are have not experienced a slow down, especially with respect to equity.” Eliza Erik-son from Calvert, has also not seen large redemptions, and Calvert’s investors “seem content to stay put for a number of reasons: (1) the microfinance/community in-vestment portion is a relatively small piece of their overall portfolio; (2) we provide a fixed return, which provides some stability; and (3) they feel as if lower-income popu-lations are likely to need help now more than ever.” How-ever, she also warned that “while the socially-responsible retail investor base may stay stable, the capital from lar-ger retail investors may not increase in the immediate future.” Erik Heinen from Oikocredit, on the other hand, is experiencing a slowdown in inflow capital. As a result, Oikocredit has changed its investment priorities: “With capital becoming scarce due to excess demand, we have prioritized our lending focusing on tier 2 and tier 3 institu-tions having difficulty to gain access to international capi-tal. We aimed even more for smaller MFIs and MFIs from rural areas. And we became more selective in committing capital.” Marc Breij of Cordaid has had a similar experi-ence. Cordaid has experienced a: “(1) Decrease in invest-ment flows from private, social and commercial investors. This prohibits Cordaid from initiating new investment funds (where we want to play a catalyst role) (2) Decrease in local funding. We see banks originally committing to lever our investment simply withdrawn or increase pric-ing making any lending unattractive) (3) Increase in the number of defaults / rescheduling requests as a result of (i) lack of local funding (ii) eroding margins as increasing interest rates cannot be passed onto clients.”

Donor flows may shrink and be diverted to other sectors Overall aid budgets are likely to shrink in coming years and the priority for donors may shift to agricultureand other emergency support. Xavier Reille notes that “[f]oreign aid has dropped by 8.4% in 2007 and we can ex-pect more aggressive cuts in 2008 and 2009.” Alice Brooks/USAID-Bolivia commented that: “Donors with a varied portfolio of economic growth activitie including support to the microfinance sector are also examining whether they should reshuffle their portfolio to best pro-tect the poor from the crisis. The widely hailed robust, anti-cyclical characteristics of the MF sector may actually work against the sector in this instance, as some donors may reduce support to this sector under the hypothesis that MFIs are better placed to take care of themselves as the crisis unfolds, whereas the most vulnerable sectors will soon be desperately needing increased support.“ Policy Implications may help or hurt The crisis has the potential to trigger changes in regulation, either by dis-tracting regulators from implementing helpful policies or by encouraging them to take more conservative/restrictive approaches to microfinance. Claudio Gonzalez-Vega/OSU cited other ways short term government ac-tions could harm microfinance in the long run: “The risks include interest-rate ceilings, mass loan forgiveness, the encouragement of delinquent borrower associations, the development of credit programs in government agencies that lack financial expertise, and the like. Several of these actions are already observed in a number of Latin Ameri-can countries. On the positive side, the relative stability of deposit tak-ing MFIs may motivate transformation or adaptation of regulatory frameworks allowing strong performing NGOs to mobilize deposits (e.g. current initiatives in Bolivia).” 2. What can the microfinance industry do?

IN Focus

“What MFIs can do to mitigate liquidity risks, my proposition is thus: Be savings led and inspire your clients to save, match savings with loans, avoid funding mismatch, de-velop an array of savings and deposit products, be market and fund driven, never de-pend on bank loans, rely less on donor and oversee funds, do not compete with com-mercial banks, avoid high volume loans, lend short and lend small, slow down on lend-ing-race up to savings.” C.J. Agwu, Agric Banking FMFB, Lagos Nigeria.

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MFIs Overall, participants emphasized the need for MFIs to systematically deal with the effects of the financial crisis. They shared experiences and advice. Mark Breij of Cor-daid outlined suggestions for MFIs wanting to “maintain their operating margins and strengthen their operations during the crisis…: Tighten credit evaluation and utilization check Commit to simple lifestyle – spending for wants and

needs; Adhere to code of ethics; minimize competition in

the sector; Review portfolio; best time to take stock Sustain confidence of MF clients – visibility of the

leadership of the MFI be more transparent; be in touch with the various needs of clients; opportunity

for them Lever with government and NGOs; get other inves-

tors to get in Restrict services, however, health and education are

priority needs of families – MFIs need to address; Recognize the risk / loss upfront than wait for the

loss to happen.” Julia Abakaeva from CGAP had four suggestions: (1) I creasing loan portfolio monitoring (2) focusing on portf lio quality rather than growth (3) working with sharehol ers on short-term liquidity issues and funding plans (4) as a last resort, look at consolidation/merger options with other MFIs. Dealing with liquidity crunch Many respon ers advised that MFIs focus their efforts on developing local funding and local deposits. MFIs were also advised to leverage existing funding conditions by diversifying funding sources (deposits and equity and maturities). If borrowing in foreign currency, some sug-gested MFIs to hedge either explicitly by buying currency swaps or implicitly by depositing money with a local bank and using it as collateral for the loan portfolio. Finally, a number of respondents encouraged MFIs to maintain a small and manageable group of funders. Judith Brandsma commented that: “Non-bank MFIs may also need to strengthen their equity position not only because it may be depleted due to increased provisioning but probably also to ensure continued access to funding whether from IFIs, social- commercial funds or local financiers. The - by some of you - observed 'trend' that IFIs and other financiers ap-pear to be reluctant or unable to lend (or renew loans) also poses interesting questions regarding the sustain-

ability of the non-bank business model.” Judith Brandsma also raised a note of caution to those who were particularly enthusiastic about encouraging MFIs to develop savings products and to work with regu-lators to develop MFI savings agendas. “Can I please ask for caution, for the following reasons: 1. Savings are other (poor) people’s money. 2. Savings are all about con-fidence. 3. Savings are a service (and yes also a source of funds). Mobilizing savings requires a whole new set of skills, systems and procedures and the decision to mobi-lize savings should not be taken lightly.” ….. Discussion summary will continue in Next issue **************

IN Focus

Terminology ( Sourced From CGAP ) Subprime loan A subprime loan is a loan offered at a higher rate of interest for people who do not qualify for prime rate interest rates (the rates charged by banks to their most “creditworthy” borrowers). Often, subprime borrowers are turned away from traditional lenders, because of their low credit ratings or other factors that could suggest that they might default on the loan. Microfinance loans have shown that poor clients can pay back loans at remarkable rates—on average 98%—in the right conditions. Credit Crisis or Credit Crunch A credit crisis, or credit crunch, is a sudden reduction in the gen-eral availability of loans (or credit), or a sudden increase in the cost of obtaining loans from banks. As a result of an increased perception of risk, microfinance institutions may find the costs of loans increasing. Responsible Lending Responsible lending refers to the lending policies and practices of financial institutions that take steps to ensure that clients are treated fairly, and benefit from the loans they receive. Central to the responsible finance concept is a commitment by the lender to avoid over-indebting clients, by offering well-designed products and carefully establishing ability to repay. In recent months, the microfinance industry has promulgated Consumer Protection Principles for minimum agreed standards around the treatment of clients. Major investor institutions have signed up to an agree-ment for six key Client Protection Principles. Other ongoing activi-ties include the work of retail microfinance providers, national associations, the Social Performance Task Force, the "Beyond Codes” Project and Microbanker’s Oath promoted by The Center for Financial Inclusion at ACCION, WOCCU’s International Credit Union Consumer Protection Principles, and CGAP’s Disclosure Guidelines for funds that specialize in microfinance. To add your terms, or comment, contact [email protected]

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Executive Summary From September to October, 2008, the SEEP Network sponsored the survey “Financial Reporting Standards for Microfinance.” The following brief provides a short sum-mary of the results. More than 160 people responded, with strong geographic distribution around the world. Respondents represented a wide range of stakeholders, including MFI directors, industry practitioners, network leaders, raters, MIS software vendors, investors, donors, bankers and researchers. Overall, views expressed concurrence that financial re-porting standards are a priority both for the industry and for individual institutions to address. 87% saw this initia-tive as ‘very important’ or ‘important’ for the industry. Common concerns and priorities were expressed across the spectrum of interest groups, including that this initia-tive needs to:

1) Develop internal consensus within the industry of a common platform for reporting to save microfinance in-stitutions (MFIs), investors, and donors time, and

2) Establish external connection with international stan-dards efforts, such as the International Accounting Stan-dards Board (IASB) International Financial Reporting Stan-dards (IFRS). While there was preponderance among responses that the initiative would be well served by a formal entity, such as a committee, there is not unanimity on its man-agement. The vast majority of respondents (83%) recom-mended instituting a centralized body to lead financial reporting standards for microfinance. Despite this high overall support, there was no consensus on where to house it: 26% suggested IASB and 21% said an independ-ent entity. The most common response (44%) suggested to house it within an existing microfinance support or-ganization - the MIX, SEEP, and CGAP were split almost evenly. One conclusion to be drawn is respondents pro-pose to avoid “re-inventing the wheel” or “duplicating existing effort.”

Microfinance Industry Financial Reporting Standards Initiative

Survey Results Brief

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Reporting Standards A single set of high quality, understandable global accounting guidelines that require transparent and comparable information in general purpose financial and operational statements for microfinance institu-tions.

This document is a co-authorship of the Financial Ser-vices Working Group Sub-Committee. The authors are: Peter Wall (The MIX) Blaine Stephens (The MIX) Steve Wardle (Grameen Foundation USA) Radi Mitov (CHF International) Bill Tucker (The SEEP Network Ruth Dueck Mbeba (MEDA)

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The SEEP Network is prepared to continue to facilitate this collaborative effort, with inclusive communication of other industry representatives. A number of thoughtful comments were provided by respondents regarding how it could operate, which will help the initiative as it moves forward. Resolution as to the entity’s form, membership, and process are identified as next steps. Information on this initiative can be found online, at www.seepnetwork.org. A short concept paper came out earlier in 2008. A report on business model options from standards work in other industries, a corollary to this brief, is also available online. The initiative actively seeks the input, ideas, and time from stakeholders. Initiative Facilitator, Drew Tulchin, can be contacted at [email protected]. The aggregated survey data (with entries listed anonymously) is available upon re-quest. Though the industry is made up of a wide range of stake-holders with diverse opinions, the results of this survey highlight extensive common ground as well as interest in advancing the financial reporting standards initiative for microfinance. The initiative looks forward to colleagues’ continued thoughtful contributions of both ideas and time for the betterment of the industry as a whole. Section 1: Introduction & Background The fast pace of change in the microfinance industry calls for reporting standards that ensure industry develop-ments are quickly translated into comparable informa-tion. New products, operational models and service deliv-ery channels require that standards, particularly for fi-nancial reporting, remain up-to-date and applicable. In 2005, the SEEP Network published the first update to microfinance reporting standards in ten years, a process of consensus that engaged practitioners, donors (including CGAP), investors and other stakeholders. The “Framework” as it is commonly referred to is now consid-ered the “industry standard.” While widely accepted in the industry, acceptable ratios and terms still are not uni-versally adopted. Microfinance as an industry does not have a central body or mechanism to address compliance or updates to finan-cial reporting standards. A number of issues are rising in importance for which a central industry umbrella entity would be well placed to address. These include updating the 2005 standards, responding to the increase in inter-

national investors, aligning national level regulatory re-quirements with international standards, supporting MFI vendors (including raters, MIS software sellers, and con-sultants) to more readily have a “gold standard” for their products, increasing dissemination of performance / management tools such as the SEEP FRAME, and ensuring MFIs can readily adapt to international standards such as IFRS. In the 2007 SEEP Network Conference Annual General Meeting, SEEP Financial Service Working Group members identified financial reporting standards as one of the top needs for SEEP to focus attention. A sub-committee of the Working Group was founded to facilitate what is now called the Microfinance Industry Financial Reporting Stan-dards Initiative. This survey was a major step in the proc-ess of gathering input to chart a path forward. Section 2: Respondents’ Profile The sample of respondents had both breadth and depth. 162 people responded to the survey. They represent a broad cross-section of institutions (see Chart 1). The ini-tiative heard from leading voices in microfinance. Re-spondents’ positions included: Manager/Program Officer (29%), Organizational Head (22%), V.P./Director (16%) and Analyst (9%). Respondents cover the globe; the most common areas of focus were those identifying their work as Global – cover-ing more than one continent (28%), Asia (23%) and Africa (21%) (see Chart 2).

Special Coverage

Respondent Profile Rate

MFI Practitioner 21%

Network / Association 19%

MFI Service Provider 15%

Investor or Commercial Bank 13%

Researcher / Education 12%

Consultant 11%

Donor 8%

Chart 1– Respondents

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Section 3: Opinions on Microfinance Reporting Standards This survey asked questions regarding microfinance in-dustry use of reporting standards and perceptions about its importance. Overall, the data confirm that while the industry’s approach to reporting standards remains frag-mented, there is a consensus that reporting standards are important for the industry. And, there is widespread support for more universal benchmarks and mechanisms to adopt standards. In order to establish effective indus-try-wide reporting standards, the data suggests the mi-crofinance industry must not only focus on generating a common “vision” among major stakeholders on what standards should consist of, but also on building the insti-tution-level capacity necessary to ensure information is effectively disseminated and widely adopted. Most organizations have reporting standards, but the industry’s approach remains fragmented. The vast major-ity of respondents (76%) reported their organization had a specific tool for financial reporting. However, their mo-tivations for reporting standards varied. A weighted scor-ing was taken of respondents’ priority answers as to why they valued reporting tools, listed in Chart 3. Among those using reporting tools, the leading reasons why they used such tools were internal management (40% cited as the top priority, 62% first and second prior-ity combined) and operational control (20% cited as the top priority, 65% chose as the first or second priority). These were followed by the tools’ use to provide infor-mation to investors, regulatory compliance. Next, re-spondents cited the value of standards tools for audit

information and industry comparisons (such as the Mix’s MBB). Lower priorities included that that tools made it easier for the financial sector to understand microfinance and for use to normalize differences between MFIs. Among networks and service providers, use and under-standing of standards tools were notably higher than re-spondents as a whole. This reflects an uneven value placed on standards efforts in the industry, a range of knowledge on the subject, and varied levels of adoption. Though not unexpected, these results confirm while the microfinance industry is making headway in understand-ing and valuing financial reporting standards, progress towards industry-wide utilization remains uneven. The microfinance industry recognizes the importance of reporting standards generally, and universal standards specifically. There is broad agreement among respon-dents that reporting standards are either “very impor-tant” or “important” for the industry as a whole (87%). Respondents expressed support for the establishment of universal standards for the industry, with 81% supporting

Special Coverage

Chart 3: Rank Order: Reasons for Using Reporting Tools 1. Internal Management 2. Operational Control 3. Provide Information to Investors 4. Regulatory Compliance 5. Audit Information 6. Industry Comparisons 7. Easier to Understand MFIs 8. Normalize Differences Between MFIs

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this issue as “very important” or “important”. Barriers to establishing standards must be understood. Respondents were helpful in identifying challenges for this industry initiative to overcome. The most common reasons cited AGAINST universal standards were that different stakeholders want different information (19%) and that the diversity of institutions within microfinance makes universal standards inappropriate (18%). Such observations correctly identify real challenges to both the development of universal standards and convergence around reporting. Strategies to overcome these barriers include dialogue and engagement. First advancements are possible in areas where there is common ground, by focusing on best practice, and acknowledging that this is an on-going process for continued improvement. It is important to note the difference between application of specific ratios in various reports, where different institu-tions have the flexibility to use the information they value, and an over-arching process for industry standards that can interface with other international guidelines. Our colleagues elaborated upon factors limiting reporting in the microfinance industry. The most common re-sponses are identified here, and listed on the accompany-ing Chart 4. Forty-four percent cited lack of universal standards as the primary barrier limiting reporting. Twenty-one percent commented upon divergent busi-ness practices such as differing treatment of loan loss provision, delinquency, write-offs, etc. Twelve percent mentioned the tension Survey respondents were also asked about industry chal-lenges at the institutional level. Firm level challenges include lack of capacity (45%), the high cost associated

with completing multiple reports (14%), lack of transpar-ency (14%), and the need to balance financial and social reporting (9%). See Chart 5 below. The institutional level problems are congruent with the industry wide problems mentioned above. Taken to-gether, they highlight the fact that correct balance is needed when advancing this initiative. It is important to establish and maintain rigorous, industry-wide, universal, global standards as a “gold ring” to reach for. Progress for this initiative must ensure reporting tools are afford-able, internal industry dialogue on-going, communication maintained with external players, information widely disseminated, education available to ensure adoption, and incentives are provided to fuel adoption. Section 4: Establishing an Entity to Lead Standards Ef-forts Wide-spread industry agreement on the importance of reporting standards provides common ground from which diverse stakeholders can work together. The sur-

Example comments from survey respondents: “There must be a thorough discussion among MFIs, regula-tor, investors, donors and auditors on the need of standard reporting. It may not be possible to have one set of report-ing globally because there may be some local issues such as methodology of services, maturity of industry and auditing and taxation acts. Thus, the standard should have some flexibility to adopt as per local requirements.” “Reporting standards need to respect accounting principles and reports need to be TRUE AND FAIR and be complete…”

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vey also enquired how such work should be done. Re-sponses largely supported the idea to establish a formal industry entity, such as a committee, to focus on setting common guidelines, standards and benchmarks for the microfinance industry. Questions remain to be answered as to where the initiative should be housed and how it would effectively operate day-to-day. There is widespread support for establishing a central body to guide industry efforts on microfinance reporting standards.

Eighty-three percent of respondents agreed establishing an entity to guide industry efforts on microfinance finan-cial reporting standards would be a worthwhile addition to the industry. Furthermore, 76% percent agreed that this would be either “very important” or “important” for the industry.

Among those agreeing a committee would be worth-while, the lead reason stated for its utility was to set in-dustry common guidelines and benchmarks (41%). Other value for a committee included bringing together diverse stakeholders (14%), to serve as a watchdog/regulatory body (8%), and act as a global face for microfinance to external parties (7%). Though in the minority, respondents who did not think establishing a committee would be useful provided im-portant information to explain their position. The follow-ing reasons for this stance include: it would be a duplica-tion of existing efforts within the microfinance industry (CGAP and SEEP’s other activities were cited); it would not be possible to forge a consensus because of the di-versity among MFIs; and it would not be an effective body without sanctioning powers. This initiative will de-velop written responses to these reasonable critiques to document the value a new initiative would bring to the industry to have available as a means to foster better discussion. Furthermore, the initiative will coordinate with other industry initiatives to ensure there is no dupli-cation of efforts and to avoid ‘re-investing the wheel.’ Among those agreeing a committee would be worth-while, the lead reason stated for its utility was to set in-dustry common guidelines and benchmarks (41%). Other value for a committee included bringing together diverse

Special Coverage

“Each report adds to the burden of an MFI. With less than adequate MIS, they have to create many of them manually. This takes a lot of time from addressing real issues faced by the MFI. I wish this reporting was made easier for them. There is a huge need for a universal MIS capable of generating universal reports in compliance with the industry's best practices.” “Accountability is a key issue because an MFI may not always validate results reliably and may not be held responsible either.”

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stakeholders (14%), to serve as a watchdog/regulatory body (8%), and act as a global face for microfinance to external parties (7%). Though in the minority, respondents who did not think establishing a committee would be useful provided im-portant information to explain their position. The follow-ing reasons for this stance include: it would be a duplica-tion of existing efforts within the microfinance industry (CGAP and SEEP’s other activities were cited); it would not be possible to forge a consensus because of the di-versity among MFIs; and it would not be an effective body without sanctioning powers. This initiative will de-velop written responses to these reasonable critiques to document the value a new initiative would bring to the industry to have available as a means to foster better discussion. Furthermore, the initiative will coordinate with other industry initiatives to ensure there is no dupli-cation of efforts and to avoid ‘re-investing the wheel.’ The survey data raise both answers and questions about the committee’s structure and logistics. Though respon-dents generally support forming an entity, organizational details must now be resolved to move the process for-ward. There were multiple suggestions regarding where a committee should be housed, with no answer receiving a majority. This is detailed in the Chart 7. Externally: the International Accounting Standards Board (IASB) was the single most popular option (26%), followed by establish-ing an independent entity (21% response). Housing this initiative within an existing MFI institution was the most

common response at 44%. This was split among the MIX at 18%, SEEP at 14%, and CGAP at 14%. Respondents noted important considerations affecting the decision on where to house the entity. Comments emphasized the importance of impartiality, industry con-

nections to on the ground organizations, global reputa-tion, and the host’s core competencies. To gather an in-formed response to these comments, the initiative thus investigated business models of standards bodies in other industries to see how others addressed similar problems. The Business Models Report is available as a corollary work, also available at www.seepnetwork.org. There were multiple suggestions on how best to inform the industry about standards and encourage their wide-spread adoption. The leading methods included train-ings, publications, website, developing useful tools, and helping external auditors. No suggestion received more than 25% of votes. Therefore, a diverse and coherent dissemination strategy, as well as on-going process will be necessary to ensure ‘uptake’ of standards. Leading suggestions on managing information flows from throughout the industry to a central body and then back out included conducting surveys, working with industry coordinating bodies, using an advisory council, and going through MFI associations at the national level.

Special Coverage “If all MFIs are equipped with an effective reporting tool, that will free up much capacity on the MFI level, and allow the network organizations (if applicable) to more easily analyze and consolidate data for better reporting to stake-holders.” “If we are to maintain the integrity of the industry then this is vital. When I talk to individuals about invest-ing in MF they invariably ask similar questions, all of which may be answered with simple, basic, honest reporting. If this is the case, people will tend to be much more forthcoming in supporting institutions and the industry. Where there are unanswered questions and things obviously being avoided then people get rightly nervous and skeptical, which spells disaster for the industry as a whole.” “The industry needs an entity to lead the stakeholder engagement process to develop reporting standards. The committee could play this role.”

“Oversight of reporting standards requires leverage (e.g. ability to assess penalties), otherwise the com-mittee is unlikely to gain credibility.” “There are enough entities working on reporting standards. And, adding another one dealing with it could com-plicate a correct use of information.”

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In conclusion, the initiative thanks the survey respon-dents for providing their time and opinions. The informa-tion gleaned was highly valuable and informative. More time and support will be needed across industry sectors to collectively make these next important steps forward. The Microfinance Industry Financial Reporting Standards Initiative is supported by the SEEP Network. It is cur-rently housed as a Sub-Committee of the Financial Ser-vices Working Group. Project information is available online at www.seepnetwork.org. The project facilitator is Drew Tulchin, Social Enterprise Associates. He can be reached

at [email protected]. We welcome input, com-ments, opinions, and support to advance this for the benefit of the entire industry. The greater data from this survey, provided in anonymous form, is available by re-quest. The SEEP Network is a membership association of inter-national organization that support micro- and small en-terprise development programs around the world. SEEP’s mission is to connect microenterprise practitioners in a global learning community. William Tucker, Executive Director.

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Story Of Seven Social Entrepreneurs From India Get a free copy of the book by signing up www.volstreet.com.

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P rocess mapping is a technique that makes workflows visible. A process map is a flowchart that shows who is

doing what, with whom, when, for how long and with what documents. It shows how operational decisions are made and the sequence of events. Effective process mapping al-lows financial service providers to analyse and improve many important functions and activities within the institu-tion. This toolkit provides a comprehensive overview of why and how to conduct process-mapping using a four-tiered process-mapping framework that encompasses: 1. Flowcharting the processes 2. Describing the processes 3. Analysing the risks in the processes and identifying process improvements Analysing the internal controls and other risk management strategies to manage the risks Benefits MicroSave’s Action Research Partners report extremely positive results from mapping processes. In many institu-tions this may reflect the prior absence of a mechanism to review processes holistically combined with the organic growth of processes over time. The speed at which visible efficiency gains can be realised suggests that significant benefits can be derived from a first round of process map-ping. Benefits reported operate at strategic, managerial and operational levels. Risk Management: Risks are quickly identified and appro-priate responses designed. Risk mitigation tactics can be monitored and assessed. Tanzania Postal Bank, for example, is using process mapping to strengthen their management of credit risk. Human Resource Management: There is usually improved assignment of tasks between individuals. Assessment of process related blockages can lead to reallocation of staff, and process improvements result in more efficient use of staff. Equity Bank were able to reallocate significant num-bers of staff and thus initiate their marketing department.

Standardisation of Practices: Process maps act as reference points for day-to-day work, they are easy to refer to, read and understand. To encourage standardisation, Equity Bank placed process maps on its intranet system and reduced the average transaction time for withdrawals by over 3 minutes to just 4 minutes and 57 seconds. In India, ASP reduced loan sanction time from 99 to 19 days and thus slashed drop-outs by 43%. Feedback Loop: Properly drawn maps identify information flows to and from management and thereby can guide and improve decision-making. Customer Service: Almost all Action Research Partners have reported improvements in service levels. Process mapping improves service levels through examining processes for bottlenecks, delays, preventable errors, role ambiguity, du-plications, unnecessary handovers and cycle time. Kenya Post Office Savings Bank has implemented changes that sig-nificantly reduced congestion in their banking halls. Cost Control: Process mapping enables procedure related bottlenecks to be identified and removed. For Commercial Microfinance Limited (CMF) in Uganda the decision to sim-plify loan application procedures saved staff and clients, time and money. FINCA Uganda also reports improved effi-ciency. Banking and MIS: Process mapping is a frequent starting point for system audits. FINCA Uganda used process map-ping to identify weaknesses in their banking system and to guide system related improvements. CMF were able to document and improve their disaster recovery procedures. Staff Performance and Training: Process mapping enables the creation of performance standards by determining how long a particular process should take and through encourag-ing consistency in application it makes it easier to identify staff performing above or below expectations. Through streamlining processes and removing excessive handovers, it can improve the attribution of performance. As a visual

Focus : Learning Curve

Process Mapping By, MicroSave

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tool, process maps can replace pages of text and signifi-cantly shorten procedure manuals. Equity Bank already uses the first two tiers of the process map – the flowchart and its description to teach procedures to new and existing staff. Reduced Documentation: Most Action Research Partners report significant reductions in documentation. CMF con-solidated information requirements into a single loan agree-

ment, thus reducing duplication of information. New Product Development: Process mapping enables new product procedures to be adapted from existing procedures or developed from scratch, and changed easily before they are written into policies and procedure manuals. FINCA Tan-zania has used process mapping to develop procedures around individual lending products.

To know more about: www. MicroSave.org

Description CO goes to the group meet-ing with collection sheet filled with the names of all group members.

On reaching the meeting, the CO fills the collection sheet in duplicate as per due amounts. The CO then collects the passbooks from the centre leader and fills up as per sched-uled amounts.

While the CO does the documentation, group mem-bers come to the meeting and start collecting the cash (loan repayments and deposits, fines, if any). After all the cash is collected, centre leader counts the cash and hands over amount to the CO.

The CO and the centre chief signs the collection sheet .

The CO counts the cash given by the centre chief. CO makes necessary changes in Passbook and col-

lection sheet, if cash does not tally.

CO prepares the attendance register and group members present in the meeting sign the register.

CO signs attendance register and if any member is absent, writes reason for ab-sence after enquiry from other members.

If a fine has been collected from a member for being late, the CO adds the amount to the previous balance and signs attendance register.

Group members take the oath as listed in the passbook.

Group members leave the meeting. Pass-books are retained by the centre leader.

Risks Risk of errors as variance of due and actual payments to be made are not checked by CO.

Collection sheet is signed by CO and centre leader before due and actual cash is tallied.

Centre leader signs MCS as a routine activity, so the risk control is not done.

There is no insistence by the CO on need for regularity in attendance. Group cohesion and consequently repayments will get affected.

Mitigation Strategy

CO to first collect cash from centre leader, tally amount and then enter data.

Collection sheet to be signed by both after due amount and actual received is tallied.

CO to ensure that centre leader checks total amount before signing.

CO to reinforce value of groups and need for meetings at regular intervals.

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RBS Microfinance Process Excellence Awards 2008

The Royal Bank of Scotland Group (RBS), one of the world’s leading financial services companies and PlaNet Finance India, today jointly

announced the winners for the 3rd edition of the Microfinance Process Excellence Awards. 2008. This year’s awards celebrate the spirit of

socio economic upliftment and poverty alleviation by empowering the entrepreneurial spirit in India’s poor. Instituted in 2004, the

Awards were introduced with the objective of inculcating process excellence and process based management in micro credit institutions

panning rural India.

This year the MPEA drew enormous support from MFIs across India which resulted in over 67 nominations being shortlisted after a strin-

gent selection process. As before, in order to ensure parity and fairness during the selection process, the awards have been classified into

three categories according to the size of competing MFIs – Flint, Flame and Fire. Within these categories the MFIs will be competing on a

regional basis.

This year’s National Awardees include organisations such as Nirantara Community Services, operating from the Bidar district of north Kar-

nataka with plans to expand operations in underserved areas of Maharashtra in next few years, Aarohan Financial Services Limited, that

has successfully demonstrated the ‘differentiation’ in MF industry operating out of a highly competitive region in Kolkata and Sanghami-

tra Rural Financial Services that represents a unique experiment in the microfinance sector with important lessons on how an intermedi-

ary organization can be structured, the impact it could have on the banking system, its own growth and sustainability.

This year’s Regional Flint Award Winners include Margdarshak from Lucknow, an organization that has emerged from being a facilitator to

a direct implementer, Ajagar Social Circle that works extensively with rubber-plantation farmers in the remote parts of Goalpara district

of Assam and Hindustan Microfinance Private Limited, a unique MFI that continues the good work of its parent organisation that is recog-

nised as being the first organised lender in the city.

The regional Flame Awards honored Sonata Finance Private Limited from the North, which created news by establishing a first of its kind

‘merger’ in the microfinance industry and Regional Rural Development Centre that works towards poverty alleviation in Orissa. This year,

the regional Fire Awards winners included ASOMI, one of the largest MFIs in Assam, Saadhana Microfin Society, from Kurnool, an organi-

sation driven by innovative ideas and robust processes and Ujjivan Financial Services Private Limited In Bangalore that works on the fun-

damentals of combining the successful models in micro-finance (Grameen/SHG) with technologies and efficiencies of modern retail bank-

ing.

The Microfinance Process Excellence Awards are considered to be the pioneer in inculcating process discipline in micro credit lending and

in establishing industry benchmarks and elevating the standards of Process Management across MFIs in India. Unlike any other award,

the MPEA is a 6 month long process culminating in the award ceremony. The process involves extensive trainings in Process Management

and Process Mapping and is designed for MFIs to acquire or sharpen their skills in process mapping and optimization (see separate article).

These training sessions, held across the country this year, and conducted by MicroSave, are the hallmark of MPEA.

The jury for this award comprised eminent representatives from the College of Agricultural Banking – RBI, CORDAID, DIA Vikas Capital,

FWWB, IIM Ahmedabad, SADHAN, Unitus Equity Fund and RBS India.

`


An Exclusive

Interview With

Carlos Mario Reyes

Senior Director of Education Cus-

tomer Dialogue Management , Accion International

-Financial Education and Its

Important in Microfinance -

Interview

`


© Microfinance Focus www.microfinancefocus.com

An exclusive interview with Carlos Mario Reyes, Accion International , by Vikash Kumar, Man-aging Editor , Microfinance Focus. Here are the Excerpts…

MFF :What is “Dialogue on Business” programme? What are the subjects covered in these programme etc? Mr. Carlos : Dialogue on Business is a client education program initially started in Latin America and in ten countries, we have now expanded our programs to India and launched it here this November 2009, future plans are to take it to Africa and China. We have 7 Foun-dation Modules for facilitators and 10 entrepreneurial modules micro entrepreneurs. What are the main challenges in designing a useful financial education program for the Micro-entrepreneurs? please share your experiences and strategies? Mr. Carlos: Our experiences in other countries has been fulfilling since the last 10 years, now the roll out of the program in India is the biggest challenge with diverse culture and lan-guages. We plan to have one or two partners in Karnataka and similarly in Andhra Pradesh for 2009, then the focus will shift to one hindi speaking state. The other challenge is to intro-duce financial literacy in India in 2009 beginning. Next page …..

DIALOGUE ON BUSINESS is an educational model oriented to entrepreneurs from the all sectors. It is based on entrepreneurs experience and on their learning modes; it adapts itself to their personal characteristics and to the dynamics of their micro-enterprises. DIALOGUE ON BUSINESS values entrepreneurs knowledge, and based on this knowledge recognizes that the informal sector has its own organizational culture. In this way, it moves away from other educational programs that transfer academic content, or from large enterprises, getting closer to micro-enterprises dynamics, as-suming that "what works for large enterprises also works for small ones". DIALOGUE ON BUSINESS´s model is based on: research, design, field tests and validation of each one of the modules with entrepreneurs of various countries.

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Mff: What is the scope of financial education in India? What are the projects /organization you working with? What is your early experience? Mr. Carlos : We have conducted in depth market surveys in Karnataka and Andhra Pradesh to ascertain the demand for entrepreneurial education. The study showed tremendous potential for such programs especially among NGO’s, financial institutions, Vocational training institutes involved in training entrepreneurs. Nearly 60% of the respondents felt the need for such a ro-bust package of services that ACCION provides through client education such as cash manage-ment, self management of women, feasibility of business and so on. We will be soon launching Financial Literacy program in India in 2009 February the topics will be based on need based de-mands of individuals, self-help groups, family owned businesses, common interest groups for which the contents will be developed from India, which will be user friendly, simple to enable people with minimum literacy levels adapt to learning and make it more enjoyable towards the route to learning on managing finances. The topics will be varied such as how to save, invest, re-mittances, planning money management and so on. MFF: What are the contextual changes you made in the programme to fit into Indian mi-cro-business environment?

Mr. Carlos : Originally the modules were in Spanish and in 2006-2007 we embarked on indian-izing the contents of the modules rather than changing the context. The program needs to keep to standards that we have already been using in other countries. MFF: What is the difference between financial education and financial literacy pro-gramme? Mr. Carlos : It is rather entrepreneurial education and financial literacy program which will teach simple arithmetic tools to calculate day to day savings, making small profits for a small entrepreneur even sitting on the streets, that’s the biggest challenge, entrepreneurial educa-tion is more structured and has workbooks and guidebooks for facilitators to lead towards the route to learning with 13 methodological steps. What are the future plans and goals for in the area of financial education? Mr. Carlos : To superimpose what is already available with other institutions and also taking financial literacy beyond by introducing ore visual aids in the form of banners, awareness cam-paigns, simple booklets. Thank you very much for your time .

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