1. MABS APPROACH TO AGRICULTURAL MICROFINANCE
Module 3, Session 1
Overview of the Client Selection Process

2. Session Objectives By the end of the session, participants are expected to:
Understand Character and Cash flow based lending as primary bases for granting a micro loan;
Be able to list the steps involved in screening microfinance clients.

3. Microfinance Loan Flow Chart
1) Client Orientation
& Application
2) Credit & Background Investigation
3) Loan Approval
The process of Client Selection is where prospective bad borrowers are weeded out. It is for this reason that the conduct of Client Selection is considered the most crucial part of the entire Microfinance Loan Process. The success or failure of a microfinance loan depends greatly on how Account Officers use the tools and follow the steps involved in Client Selection.
In this flow chart, the first 3 processes are the activities done by the bank in selecting its microfinance clients. In pursuing these 3 processes, the bank is always looking out for 2 things in an applicant: character and capacity to pay.
Proceed to next slide and read the bullets….
6) Loan Collection/
Monitoring
5) Loan Release
4) Loan Processing

4. Rationale
The primary basis for evaluating loan applications in microfinance is character and capacity to pay, rather than collateral. This specially applies to NEW LOANS.
This is why microfinancing is often referred to as character and cash-flow based lending.
Read the bullets.

5. Why Character and Cash Flow-based Lending?
Most micro-entrepreneurs have little or no marketable guarantees (land, property, equipment). Registration of collaterals are often more expensive than the actual value of the collateral
Micro-borrowers lack credit history with formal institutions
Micro-enterprises rarely have financial records and never audited ones
First ask the participants….Why is microfinancing considered character and cash flow-based lending?
Solicit answers/ideas from participants to surface the bullets points contained in the slide. As participants give out their answers/ideas, write them in the whiteboard or in a piece of manila paper.
Once the participants are done giving their answers, process them by referring to the bullet points.
Round-up discussion on this slide by proceeding to next slide.

6. Why Character and Cash Flow-based Lending?
The RISKS and COSTS of lending to this market segment are minimized by carefully studying the character and the capacity of the loan applicant.
Given the profile of the microentrepreneurs, focusing on their character and capacity to pay would minimize the risks and costs of lending to a market segment that is traditionally considered to be ”un-bankable” because they don’t have marketable guarantees and formal credit history.

7. What is Character and Cash Flow-based Lending?
Relies on information on the client’s
Stability
Entrepreneurship
Reputation
Repayment Behavior
Relies on information provided by the client and character references
But what do we really mean by character and cash flow-based lending? What specific indicators about an applicant’s character are we really looking for to say that he or she is a person of good character? Show this slide and ask participants if they are familiar with the 4 character indicators.
To help the participants acquaint themselves with the 4 character indicators, relate the topic by asking one of them to pretend as the lender. If that participant were lending money to a friend or to a relative, what will he/she look for? Again, write down their answers in a whiteboard or in a manila paper.
Then round up the discussion by relating the answers of the participant to the bullet points in the next slide.

8. Character Analysis ENTREPRENEURSHIP STABILITY REPUTATION REPAYMENT
(permanence, responsibility towards family and business)
ENTREPRENEURSHIP
(experience, knowledge of his market, ability to grow)
REPUTATION
(standing in the community, ties to community associations and other groups, accomplishments)
REPAYMENT
BEHAVIOR
(how well the client meets obligations of any kind)
Use this slide when processing the answers of the participants in the just concluded mini-workshop.

9. Character and Risks
The more information you have on the applicant’s character, the smaller the risk of lending
STABILITY
ENTRE-PRENEURSHIP
REPUTATION
REPAYMENT
BEHAVIOR
Married
Married wi/
children
Resident for
2 years
Home
owner
Multiple sources of
income
Bus. In operation
For over 5 yrs.
Bus. Operating
For over 2 yrs.
Bus. In
fixed locaion
Keeps financial
records
Bus. In
Commercial area
Bus. In same location
For more than 2 yrs.
Clear explanation of
Bus. expansion
Clearly explains
Use of loan
Client has post-paid
Cellular phone
Children attending
school
RISK
Since managing or minimizing RISK is one of our major objectives in lending, it is really imperative for the account officer to get as much information as he/she can about the applicant in order to establish his or her creditworthiness.
Good reputation confirmed
by peers
Good reputation confirmed
by neighbors
No outstanding loans
w/ fin. Inst/ appliance stores/
Informal sources
Bills paid on time –
confirmed by receipts
Clear from legal cases
at the Barangay
Holds position in
community assoc.
Rent paid on time
Payment paid on due date/
late not more than 3 days
Clear from legal cases
at the court
Good reputation confirmed
by suppliers/landlords
Schools fees
paid on time
Has active
SA/CA acct.
Deposit balances
increasing

10. Good reputation confirmed
Character and Risks
The lesser information you have on an applicant’s character, the greater the risk of lending
STABILITY
ENTREPRENEURSHIP
REPUTATION
REPAYMENT
BEHAVIOR
Bus. In
fixed locaion
Home
owner
Multiple sources of
income
Bus. In
Commercial area
RISK
Clearly explains
Use of loan
Children attending
school
Good reputation confirmed
by peers
Bills paid on time –
confirmed by receipts
Clear from legal cases
at the Barangay
Rent paid on time

11. Tools for Evaluating MF Loans
Credit Investigation/Background Investigation (CIBI)
Cash Flow Analysis
There are two (2) tools available to the bank, most especially to the account officer, in establishing the creditworthiness of a MF loan applicant. These tools are:
(1) credit and background investigation or CIBI ; and
(2) Cash Flow analysis.

12. What is CIBI and Cash Flow Analysis?
CIBI is the process through which the risks of character and credit record of applicants are gathered and assessed. When done well, this process can screen out problematic borrowers.
Cash Flow Analysis is the process of assessing the loan applicant’s income and expenses in order to determine his/her capacity to pay. It is an integral part of the CIBI report.

13. What is CIBI and Cash Flow Analysis?
The CIBI is the most important work of the account officer.*
Technically, CIBI is done during loan application to loan approval. However, due to the loan monitoring function of the account officer, CIBI becomes a continuous process since the bank wants to determine whether or not there will be changes in the client’s situation.
*See handout on the detailed discussion of role of account officers in microfinance operations

14. Importance of CIBI & Cash Flow
Improper CIBI can LEAD to serious
loan delinquency problems.

15. Importance of CIBI & Cash Flow
A thorough CIBI can PREVENT serious
loan delinquency problems.

16. Objectives of CI/BI & Cash Flow
Verify if the information supplied by the applicant in the loan application are true.
Determine the character of the applicant, particularly his/her reputation as a borrower.
Determine the applicant’s capacity to pay.

17. Steps in Conducting CIBI
1. Loan Application
AO interviews applicant and helps fill out the
form. No
Objective
1. Establish if applicant meets
loan eligibility criteria
2. Obtain initial information for
Thorough CIBI
Stop
Yes
2. CI/BI
If applicant is eligible for loan, AO proceeds with the
Interview using CIBI Form Parts I to VII.
AO then conducts the following CI/BI activities:
Conducting credit checking with other MFI’s
Visiting client’s place of business &
interviewing business neighbors
c. Visiting client’s residence &
interviewing residential neighbors
d. Interviewing co-maker/s
e. Interviewing suppliers
f Interviewing barangay officials/organizations
g. Checking proofs of payments
1. Obtain information from third
party to validate correctness/
accuracy of information given
by the client
2. Use data obtained to assess
Character of applicant using
SERR indicators

18. Specific CIBI Activities
a. Credit checking with other MFI’s
Determine if applicant has any current
or previous loan and repayment status of
these loans
b. Visit client’s place of business &
interview business neighbors
Observe the general condition of the
Business and inspect business license,
records and receipts.
Establish client’s reputation among
Business peers

19. Specific CIBI Activities
c. Visit client’s place of residence &
interview residential neighbors
Assess client’s living condition and
whether spouse knows and support the
loan application.
While in the house, check for assets which
can be used as additional guarantee by
the applicants.
Establish client’s reputation among
residential neighbors.

20. Specific CIBI Activities
d. Interview co-maker/s
Determine if co-maker/s is/are willing and
able to guarantee the loan being applied
for by the applicant.
e. Interview suppliers
Determine how good is the applicant in
honoring his/her loan obligations (if any)
and level of business transaction with
the supplier

21. Specific CIBI Activities and duly validated by the AO.
f. Interview barangay officials/
organizations
Check for any complaint made against the
applicant, especially involving the
collection of debt.
g. Check proof of payments
Receipts gathered during visit to the
client’s place of business and residence
should be checked if payments are
on-time or delayed so as to establish
his/her repayment behavior
The CI/BI is discontinued and the loan application rejected, if at any point in
the CI/BI process, any strong adverse finding about the applicant is reported
and duly validated by the AO.

22. Steps in Conducting CIBI2 NO
STOP
YES NO
Determine the client’s
Debt capacity
3. ANALYZE CHARACTER &
CASH FLOW OF THE APPLICANT
USING DATA GATHERED FROM
CLIENT AND REFERENCES
STOP
YES
4. FINALIZE THE CI/BI REPORT AND
MAKE RECOMMENDATION
Prepare loan
recommendation

23. Steps in Conducting CIBI
5. SUBMIT THE CLIENT’S FOLDER TO
THE MFU SUPERVISOR
Loan recommendation is
scheduled for Crecom
deliberation and approval
6. BE PREPARED TO DEFEND YOUR
LOAN RECOMMENDATION TO THE
CRECOM AND TO GATHER OTHER
RELEVANT INFO WHICH THE MFU
SUPERVISOR MAY NEED IN REVIEWING
THE CLIENT’S FOLDER

24. Client Selection Process Flow
Loan Application
STOP PROCESS NO
YES
Do CIBI
Character & Risk
Analysis
STOP PROCESS NO
YES
Repayment Capacity
Analysis
Finalize CIBI
Report

25. End of Presentation
Farmers want continued access to credit services that feature easy access, no collateral and quick disbursement, reasonably priced. They probably do not have many alternatives. The higher the value the borrower places on these services, the higher the chances of successful repayment.

26. Thank you