BASIC ACCOUNT OFFICER’S TRAINING Basic Microfinance Definitions and Best Practices

Session Objectives Establish a common understanding of the basic terms in microfinance Understand the elements that comprise best practices and principles in microfinance and why these are important. ver. 04/09

Definitions Microenterprise Clients - Typically self employed, low income entrepreneurs - Include non-agri and agri businesses - 4 out of 10 households depend on income from microenterprise activities including small scale farm activities Microfinance Services - Small scale loan and deposit services - Remittance/Money Transfer services - Micro insurance - Micro Agri Loans & Housing Microfinance Loans ver. 07/12

Definitions  Microfinance loans, per BSP guidelines Loans are PhP 300,000 and smaller Term of not more than 1 year Loans to microenterprises and other low income groups Loans to basic sectors such as agriculture, fishery  Present definition excludes loans whose payments are deducted from the source, such Salary loans, pension loans, LGU/bgy loan products and other variants  Micro deposits are deposits with outstanding balance of PhP15,000 or below ver. 07/12

Profiling the Microfinance Clients Microentreprenuer Small Farmer ver.0 7/12

The Microentrepreneur Low educational level Small volume of operations Few employees (0-9), Usually family members Rudimentary / obsolete equipment Family and business are considered as one Multiple income-generation activities Basic or no business records Limited marketable collaterals to offer Limited access to formal sources of credit / No credit history Active participation in informal sources of credit Basic financial skills Large, extended families ver. 07/12

PROFILE OF A SMALL FARMER and the FARM Business Low educational level Product subject to price & market risks Few employees Usually family members Rudimentary / obsolete equipment Multiple income-generation activities No marketable collaterals to offer No access to formal sources of credit / No credit history Active participation in informal sources of credit Large, extended families Business subject to external risks Small scale production ver. 07/12

Credit Methodologies Group lending (Grameen-like and solidarity lending) Individual lending ver. 07/12

Group Lending Loans given to groups – that is, either to individuals who are members of a group and guarantee each other’s loans or to groups that then make subloans to members. Under this system, would-be borrowers form groups (usually 5 members) and each member agrees to guarantee the loans of others in the group If any one individual member defaults on his or her loan, the other members of the group are required to cover the short fall. ver. 07/12

Individual Lending  Loans are given to individuals based on their debt payment capacity and assure lending institutions with some level of security.  Loans are guaranteed by some form of collateral (soft or substitute collateral) or a co-signer.  Clients are screened by credit checks and character references.  Loan size and terms are tailored to business needs. ver. 07/17

Reducing RISK Providing Fast & Quality SERVICE Minimizing COST MF Best Practices: Context ver. 07/12

Contextual Framework in Formulating Lending Policies and Procedures When formulating and assessing whether a policy or procedure is appropriate or not, ask the following questions: “Will the policy or procedure….. Increase or reduce my risk of lending to this particular client? Increase or reduce my cost of lending to this particular client? Improve and speed up customer service?” ver. 07/12

Microfinance Best Practices

The practices that MFIs follow in providing financial services to low-income clients that have led to success and profit. Best practices should be reflected from product design stage to implementation to monitoring. ver. 07/12

Best Practices are reflected in: Bank philosophy and image Client selection Loan policies Disbursement procedures, monitoring and adequacy of internal control Client incentives Culture of zero tolerance MIS Loan-loss provisioning ver. 07/12

Bank Philosophy and Image Bank must be clear about its objectives for microfinance Microfinance must be seen as a profitable business, not a charitable, service of the bank Bank must be able to provide high quality, appropriate, and friendly service to its microfinance clients - Clients feel welcome in the bank - Rapid access, simple procedures - Frequent contact with clients

Client Selection Clearly defined client group Clearly defined geographic areas assigned to account officers Client selection based on rigorous assessment of character and repayment capacity, not collateral ver. 07/12

Start loans small and short term Increase loan sizes of repeat loans based on successful repayment and improvements in the client’s cash flow Unrestrained use of loan Be conservative in analyzing the client’s cash flow when determining how much to lend Focus on customer friendly approach Offer Services that Fit the Preferences of Microenterprise Clients ver. 07/12

Standardize and simplify product documentation and procedures - A simple product design will be easier for the clients to understand and staff to implement - Product manual is a must to standardize operations, improve efficiency, and minimize staff mistakes Maintain inexpensive offices close to borrowers Select staff from the local communities Streamline Operations to Reduce Administrative Costs ver. 07/12

Disbursement and Monitoring Make Account Officers responsible for loans they have recommended for approval Decentralize loan approval through a branch-level credit committee - MFU staff presents and defends his/her loan recommendation to a credit committee. Practice transparency – disclose to clients charges/fees and effective rates ver. 0/12

Disbursement and Monitoring Maintain regular contact with clients Delinquency “alarm signals” for effective follow-up procedures Peformance-based staff incentive scheme ver. 07/12

Small loans with frequent payments have higher transaction costs Microfinance clients are willing to pay higher rates in return for good service. But in time, as banks build scale, interest rates should come down Charge Full-Cost Interest Rates and Fees ver. 07/12

Motivate Clients to Repay Reward clients who pay on time, through: - Interest rebates - Bigger repeat loan and/or longer terms - Fast servicing of repeat loans Impose a reasonable penalty charge for late payments Joint liability with co-borrowers/co-makers ver. 07/12

Zero Tolerance of Loan Delinquency Loans with payments delayed by just one (1) day are considered delinquent Portfolio at risk (PAR), not past due ratio, defines portfolio quality ver. 07/12

Zero Tolerance of Loan Delinquency Bank staff takes immediate step to collect from client or find out reason when a payment is missed Willingness to pursue delinquent clients, in some cases, whatever the cost to establish and maintain zero tolerance practices The culture and discipline of zero tolerance must start with top management and be communicated down to the staff and clients. ver. 07/12

Management Information System Critical for tracking the performance of the microfinance loan portfolio. At a minimum, should be able to track missed payments, the account officers responsible for their collection, and the portfolio at risk (PAR). Should be able to show the performance of each account officer. ver. 07/12

Adequate Loan-Loss Provisioning and Loan Write-off Should be based on the aging of the portfolio at risk (PAR) *Based on BSP Circular 409 ver

Adequate Internal Control Pick-up collection of loan payments, a most valued service demanded by microfinance clients, can lead to internal control problems and incidences of fraud. At a minimum, banks should be able to track missed installment payments, through their MIS. A microfinance supervisor should also verify cases of delayed or non-payment of installments immediately when they occur. Other check points include: loan review and approval by a credit committee and regular random check of clients by supervisor or audit personnel. ver. 07/12

Low minimum balance requirements. Regular deposits and higher daily balances are encouraged by increasing interest rates or rewarding those with higher balances. High quality client service. Standardize & simplify product documentation and procedures. Savings Products ver. 07/12

Keys to Success in Microfinance Strong institutional commitment – with CHAMPIONS at board & sr. mngt level and at mid-mngt level Demand- andmarket-oriented savings and loan product Good client service Good client selection process Sufficient interest rates to cover costs Zero tolerance of loan delinquency Good functioning MIS Adequate loan-loss provisioning Adequate internal control measures

Thank You!