1. Understanding Microfinance Best Practices through Loan Product Features and Policies

2. Important Considerations in Lending Operations
RISK
COST
SERVICE

3. 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.

4. LOAN FEATURES PRACTICES & PRINCIPLES OBJECTIVE IN LENDING
1. Loan Purpose
Client Selection
- Additional working capital for micro-enterprise operations
- Micro-enterprise operation must be generating daily or weekly income
Reduce Risk
2. Loan Amount
Start small and increase gradually
Be conservative in analyzing client’s cash flow
Increase loan size based on repayment behavior and repayment capacity

5. LOAN FEATURES PRACTICES & PRINCIPLES OBJECTIVE IN LENDING
3. Loan Term
Short-term, from 3 to 6 months
Micro-enterprise operations are characterized by fast rotation of business/goods, hence, working capital has a fast turnover
3 to 6 months loan term is not too short nor too long to extend credit to a client who lacks credit history
Reduce Risk
4. Frequency of Payment
Small and frequent amortization payments
Weekly for new clients; semi-monthly or monthly for mature, valued clients who have established a good repayment record
Easier on client’s pocket
Quality Service

6. LOAN FEATURES PRACTICES & PRINCIPLES OBJECTIVE IN LENDING
5. Interest Rate / Service Charge
Sufficient to cover all cost and provide good profit
Bank’s microfinance Operation is a business, not a charitable service
Interest rate charged by the bank is still lower and cheaper compared to those of informal lenders
Reduce Risk
Quality Service
6. Guarantee / Collateral
Substitute collateral
Co-maker; serialized assets, stock inventory, savings hold-out
Low-income households have little, or no assets at all
Perception of low-income clients that formal financial institutions are only for those who can offer hard collateral (CM/REM)

7. LOAN FEATURES PRACTICES & PRINCIPLES OBJECTIVE IN LENDING
7. Savings
Client-friendly design
Low opening amount and maintaining balance; small regular deposits
For mature, valued clients with good repayment record, transition from mandatory to voluntary savings
Reduce Risk
Minimize Cost
Quality Service
8. Client Eligibility Criteria
Client Selection
Clearly defined target market
1. Micro-entrepreneurs with daily or weekly income
2. Micro-enterprise operation is at least 1 year
3. Resident of the community for at least 2 years (if
renting) and 1 year (if owns the house)
4. Can offer at least 1 Co-maker & willing to save
5. No delinquent account with the bank, or other financial
institutions, or collection case with commercial
establishments, or collection case filed with the
barangay courts

8. Best Practice / Principle
Other Microfinance Best practices that should be observed by Institutions
Procedure/ Policy
Best Practice / Principle
Rationale
1. Bank Philisophy and Image
Provide high quality, appropriate and friendly service to micro-entrepreneurs
- Clients should feel welcome in the bank
- Rapid access
- Simple procedures
- Frequent contact with the client
Microfinance operations is a business, not a charitable service
Bank has clear objectives for its microfinance operation
Viability and sustainability of operations

9. Best Practice / Principle
Other Microfinance Best practices that should be observed by Institutions
Procedure/ Policy
Best Practice / Principle
Rationale
2. Disbursement and Monitoring
Decentralize loan approval at the branch-level credit committee
As much as possible, MF staff should come from the community
Clearly defined geographic areas assigned to account officers
Account officers are responsible for loans they have recommended for approval
Frequent contact with clients
Delinquency alarm signals are consistently followed
Performance-based incentive scheme for the MF staff
Minimize Cost
Quality Service

10. Best Practice / Principle
Other Microfinance Best practices that should be observed by Institutions
Procedure/ Policy
Best Practice / Principle
Rationale
3. Culture of Zero Tolerance
Loans with payments delayed by just one (1) day are considered delinquent
Portfolio at Risk (PAR), not past due define portfolio quality
Pursue delinquent clients, whatever the cost, to establish and maintain zero tolerance
The culture of zero tolerance, or strict credit discipline, should start with top management and communicated to the staff and clients
Reduce risks
Minimize costs

11. Best Practice / Principle
Other Microfinance Best practices that should be observed by Institutions
Procedure/ Policy
Best Practice / Principle
Rationale
4. Management Information System (MIS)
Critical for tracking the performance of the microfinance portfolio
At a minimum, should be able to track missed payments, account officers responsible for their collection, and portfolio at risk
Should show the performance of each account officer
Reduce risks

12. Best Practice / Principle
Other Microfinance Best practices that should be observed by Institutions
Procedure/ Policy
Best Practice / Principle
Rationale
5. Loan Loss Provisioning (as mandated by Bangko Sentral)
Acceptable and sound banking practice to cushion probable losses
Based on the aging of portfolio at risk (PAR)
Current Loans %
1 – 30 days %
31 – 60 days/restructured once %
61 – 90 days %
More than 90 days/
restructured twice %
Promote portfolio quality

13. Best Practice / Principle
Other Microfinance Best practices that should be observed by Institutions
Procedure/ Policy
Best Practice / Principle
Rationale
6. Internal Control
Pick-up collection of loan payments (a valued service demanded by microfinance clients) could lead to internal control problems
Bank should be able to track missed payments through MIS
MFU Supervisor should verify cases of delayed/non-payment of installments immediately when they occur
Other checkpoints:
- Loan review & approval by CreCom
- Regular random check of clients by MFU
Supervisor or audit personnel
Reduce risks
Quality service

14. Keys to Success in Microfinance
Strong institutional commitment
Demand-oriented loan and savings products
Good client service
Good client selection process
Sufficient interest rates to cover costs
Zero tolerance against delinquency
Good MIS
Adequate loan-loss provisioning
Adequate internal control measures