The Functional Microfinance Bank E-Book

Henry Oster Onyemah

• Herausgeber: Publiseer
• Kategorie: Fachliteratur
• Sprache: Englisch

Veröffentlichungsjahr: 2018

Beschreibung

'The Functional Microfinance Bank' discusses all aspect needed to operate a microfinance institution for optimal performance. With nine chapters highlighting the microfinance bank, the client, the target market, the staff, the loan, the lending methodology, the organizational structure, the management polies and the recovery strategies, this book was borne out of the burning desire to impact passionate microfinancing in the hearts of stakeholders. This book adopts a practical approach for learning with the use of indepth analytic tools, highlighted definitions, articulated case scenario and well selected main and sub headlines. Microfinance institutions need set of tools, people and processes to function effectively. The  book also offers extensive practical approach to staff attitude towards planning and execution. The author's intention is to acquaint readers with events that currently takes place, and the corresponding actions to be taken in order to sensitize the microfinance industry for productivity. Another important mission is to equip readers with adequate knowledge relevant to the industry prompting professional in every practitioners chosen career.

Leseprobe

THE FUNCTIONAL

MICROFINANCE BANK

Strategies for Survival

by

Henry Oster Onyemah

Copyright © 2017 by Henry Oster Onyemah.

For more information about the author, write to the author from: [email protected].

All rights reserved. Except for use in any review, the reproduction or utilization of this work in whole or in part, in any form by any electronic, mechanical or other means, now known or hereafter invented, including xerography, photocopying and recording, or in any information storage or retrieval system, is forbidden without the written permission of the author or the publisher.

Table of Contents

Title Page

Copyright Page

DEDICATION

ACKNOWLEDGMENT

PREFACE

ABBREVIATIONS

CHAPTER ONE: THE MICROFINANCE BANK

CHAPTER TWO: THE CLIENT

CHAPTER THREE: THE TARGET MARKET

CHAPTER FOUR: THE MFB STAFF

CHAPTER FIVE: THE LOAN

CHAPTER SIX: THE LENDING METHODOLOGY

CHAPTER SEVEN: THE ORGANIZATIONAL STRUCTURE

CHAPTER EIGHT: THE MANAGEMENT POLICIES

CHAPTER NINE: THE RECOVERY STRATEGY

BIBLIOGRAPHY

MICROFINANCE QUOTES BY HENRY OSTER ONYEMAH

DEDICATION

This book is dedicated to all who have contributed to the growth of microfinance all over the world. To my lovely wife, Mrs. Onyemah Laura Ijeoma, and my two lovely daugthers; Onyemah Nicole Kamsiyochuckwu and Onyemah Jeanell Chikaima. My other family members and most importantly to the Almighty God in Heaven

ACKNOWLEDGMENT

I owe my profound gratitude to the Holy Spirit who has blessed me with the inspiration to write this book even when i felt discourage to go on with the project. I thank God for bestowing on me extra knowledge, wisdom and understanding.

I am highly indebted to my wife, Mrs Onyemah Ijeoma Laura for her support and motherly role and care.

My family Evangelist Precious Daniel, Onyemah Stella Nkem, Onyemah Augustine and the rest of the family whose names are too numerous to mention. I appreciate you all.

I am also grateful to the works of other Authors and Publishers of various articles, journals and textbook in whose work I read and referenced to make this work a success.

To my reviewers; Mr Adewunmi Oni (Head Micro Enterprise, Lagos State Employment Trust Fund), Mr Olayinka Odutola (DG Association of Enterprise Risk Management Professionals and Mr Samuel Akinsulere (MD Factbase Consulting), I owe you so much and I say a big thank you for your time and effort.

Onyemah Henry Oster

2018

PREFACE

Micro-loans advanced to new and existing clients no matter how good, may likely to go bad due to their unsecure nature. The question in the mind of many microfinance practitioners and experts is, “what must be done to prevent such loan becoming delinquent or lost to the microfinance institution?” The best of all loan can go bad for unpredicted reasons, consequently, microfinance institutions (MFIs) should take precautionary step to make sure loans given out to clients are done in the appropriate manner. Making provision for frequent delinquent and bad loans at the end of every accounting year for the microfinance bank (MFB) should not be an effective way of addressing the deteriorating situation of delinquent loans. A functional structure should be put in place even before the facility is disbursed to prospective clients.

Why should loans given out to help the economically active poor, later turn to be a sorry story for the microfinance institution? One can sit in his corner and adjudge all kinds of attribute to the selfish attitude of borrowers of these money(ies). The truth remains that defaulting customers alone cannot be held accountable for the frequent delinquencies and actual loss incurred by the microfinance institution. Top management and staff attitude, rigid and compromising procedures are part of what drains the microfinance to a halt. Customers don’t just start defaulting. A careful analysis shows that they have a history of the situation in which the microfinance bank is playing it wrong. It only takes them a while to master how to out-wit such MFB which sets in frustration and eventual closure of such institutions. Microfinance institutions play a critical role in incorporating the poor into the financial networks at the global peripheries. This is what it is created for and by so doing, lives are touched, and the economy advances to a level that is self sustainable. For this reason, operators of microfinance institution and similar institutions have been urged to devise effective strategies of managing their respective institutions with clear cut processes of recovering loans from borrowers. This piece of information is important because loan default by customers is one of the major challenges facing the sub-sector. Every microfinance should research on the best way to recover its loans from its customer, if it is done with conformity to the law of the land without the MFI taking laws into their own hand. 

This book is a guide to the already laid down management process implemented in our various microfinance institutions as it gives an insight to the possible ways of recovering already troubled loans.

ABBREVIATIONS

ATM  Automated Teller Machine

BC  Bar Code

BM   Branch Manager

BS   Balance Sheet

CAMEL   Capital, Asset, Management Capability, Earnings, Liquidity and Sensitivity

CAMPARI Character, Ability, Margin, Purpose, Amount, Repayment, Insurance

CBN  Central Bank of Nigeria

CF   Cash Flow

CIBN  Chartered Institute of Bankers of Nigeria

CU  Credit Union

DFS  Digital Microfinance Services

FI   Financial Institution

GLM  Group Lending Methodology

ILM  Individual Lending Methodology

KYCB  Know Your Customer Business

KYC  Know Your Customer

LAR  Loan-at-Risk

MCP  Microfinance Certification Programme

MD  Managing Director

MFB  Microfinance Banks

MFI   Microfinance Institution

MNO  Mobile Network Operators

MSME  Micro, Small and Medium Enterprise

NBFI  Non-Bank Financial Institutions

NCE  Nigerian Certificate in Education

ND  National Diploma

NDIC  Nigerian Deposit Insurance Corporation

NGO’s  Non-Governmental Organizations

OL  Outstanding Loan

OPB  Outstanding Principal Balance

PAR  Portfolio-at-Risk

PEST  Political, Economical, Social and Technological

PI  Par Indicator

PL   Profit or Loss

POS  Point of Sale

Q   Question

RM  Risk Management

RPP  Recovery Pressure Pump

SMS  Short Message System

SWOT  Strength, Weakness, Opportunities and Threats

UPS   Unique Selling Point

WAC  Weighted Asset Classification

CHAPTER ONE: THE MICROFINANCE BANK

Introduction

To fully understand how the microfinance institution (MFI) works, it is important to fully understand the history of microfinance and what it was meant to achieve. What MFBs practice nowadays is no different than rubbing shoulders with commercial banks. Loans granted are no longer getting to the active poor whereas, the main aim is to provide these set of people with small loans, so they can operate their businesses profitably. The trending situation we now have is where loans of large value are granted to some set of people who range from; those that are over-indebted to commercial banks, those whose credit history has been dented and those who seek for loan using limited resources at their disposal to get loans they won’t ordinarily have access to from commercial banks. Microfinance should alleviate poverty but presently has been hijacked as most MFBs seeks to focus more on profit motives rather than social motive thereby relinquishing the double bottom line initially conceived for microfinance operations. They no longer worry about ethics where character becomes a criterion for granting loan, rather they are concerned with meeting disbursement target if client’s repayment capacity is met.

It is not just enough for anyone to work in a microfinance institution. It must come with passion which comes with the knowledge of what transpired in the olden days and how they helped and solved each other’s problem.

Definition: Microfinance Bank

A microfinance bank is an organization that offers different financial services to low income clients with some offering services such as saving, insurance, leasing, loan granting and other financial services that help alleviate the condition of their clients.

Case scenario 1: Making Financial Decision

Two friends were together discussing how to solve their prospective problems. Friend A has a good business concept but has no funds to execute his business plan while, friend B has enough funds at his disposal but, presently has no plan to establish any business hence operates from a surplus unit who intend to keep his money for unforeseen circumstances rising from the fact that he has a good paying job which he does not intend to leave any time soon. Friend B wants to help his friend but is scared he might not recover his money back. This he learnt from experience when he loaned gave money to some of his other friends and family member which he never got back. His biggest challenge presently is, how does he grant his friend loan without having issues soon and what terms would be included in the agreement if he decides to go ahead to lend his friend the money.

On the other hand, friend A is having challenges as to how to manage a new business on loan. He had previously heard people say “it is not wise to start your business on loan, it does not help the business grow quick” where and how is he going to get the funds needed to start up his business, he asked himself?

Q. Is financial intermediary an important factor in micro financing?

Microfinance History

Microfinance practice, back in the days was not this popular until Profession Muhammad Yinus made it a global phenomenon. People and organization started to see and tap into the potentials inherent in the micro financial sector. Then, micro financing used to be for emphatic purposes but now it is mainly profit oriented. Developing nations are un-likely to make significant progress if they don’t embrace micro-financing and therefore the regulatory authorities of different nations are introducing policies to develop the industry. The system will continue to need refinement as so much need to be achieved to tackle the daily problems encountered in owning and maintaining a micro finance institution (MFI).

Microfinance program emanated from developing countries in the 1960s, while the refinement process started from the USA, Bangladesh and some part of Latin America way back from mid-1970 to 1980. The need to support growing economies gave rise to the participation of development organization in contributing to the growth of the micro finance institutions. These organizations include; The World bank group, International Fund for Agricultural Development, United Nations Agencies etc. The early active players in providing micro enterprise activities include the Grameen Bank, Accion International, ASA etc. Though, there have been good recorded of participation by other MFIs from countries all over the world. Microfinance has now become a worldwide movement embarked upon by government of different nations, corporate and multinational corporations, private business entities and individuals with the statistics presently increasing as its adoption rate is constantly growing due to the success record of its impact on the poor.

Informal microfinance groups have been in operation for centuries in underdeveloped nations. Stating that microfinance started in early 1960s does not literally mean it was never in existence, the significance of the period is when it started having it roots in people’s operation, though it had been in existence way back in from the 1800s where village banking had a movement in Germany.

According to the Consultative Group to Assist the Poor (CGAP) report, it is estimated that close to 500 million people have one way or the order benefited from small loans and all this people had access to these funds from close to 10,000 microfinance institutions found all over the world.

Areas of Microfinance

Microfinance is not just about granting loan. It comprises other areas that are as important as loan granting and can in any of the following forms;

1. Micro Credit

2. Micro Savings

3. Micro Insurance

4. Micro Leasing

5. Micro Transfer

Micro Credit

For a micro client, this seems to be the most important aspect as it deals with the provision of credit needed to bring continuity to the business of every micro entrepreneur. It focuses on the finance the clients need to adequately run his business without laying emphasis on other aspect of microfinance. The scheme offers clients below the poverty line access to loans without collateral and who ordinarily do not have access to normal banking services all in a bid to get exposed to business opportunities. To many persons and many MFBs, the word “microcredit” means a lot of things. The term is mostly confused with microfinance as they both serve the same function forgetting that microcredit is just an aspect of microfinance. Identifying which area, a microfinance activity falls is the main reason for labelling the areas of microfinance above. By doing this, we avoid the problems of mis-classifying the cluster and types of microcredit we have or being discussed about.

Micro Savings

Poor people are more interested in saving their money rather than having assess to loans from MFBs. Micro Savings open doors for poor people to invest in themselves and allow them have access to expansion plans which ordinarily would have been costlier if it were to be executed with funds sourced from an MFB. Micro Saving encourage poor and active clients to save money into accounts like what is being practiced in the commercial banks but usually designed for minimum deposits with flexible features.

One of the important aspects of micro savings is that small amounts of funds are kept for future use and this has help to meet unforeseen and unexpected expenses and use those saved funds for future investment. These saved funds also help in settling accumulated bills which pose a big challenge to these set of customers. Many poor clients do not have access to demand account because so many of them are unknowingly excluded from financial activities by financial institution who places more emphasis on large customer base who will likely meet the financial aspect target of the institutions, forgetting that more than close to 3 billion adults do not have any form of bank account. This could have been the best avenue to get poor people involved in financial activities of their economy.

One of the principles of microfinance states that “The poor needs a variety of financial services, not just loans”. Poor people don’t just want loan, they also desire variety of services at affordable prices just like any other average or rich person in the society. It is of importance to adequately educate poor and active clients on the need to open saving account as the benefits outweighs the disadvantages.

Micro Insurance

Insurance in microfinance is introduced to cover risk inherent in microfinance activities and most especially that of the poor client. Insurance is not meant for only the rich alone and this is a misconception that has been accepted to be true, that poor people have no need to insure their businesses. Most MFBs introduce compulsory insurance to their clients and this has reduced the level of loss they would have incurred if they had not taken up the policy. Some of the more complex policies cover loss of life and disability of the client, while the main ones that are of the micro client is one that insures his goods against theft, damage or force majeure. A normal conventional and complete insurance process would involve different processes which involves; claim, premium payment, underwriting, indemnity, reinsurance and policy selection. In micro-insurance, insurance is targeted at low income clients by insurance companies or MFBs who identifies the need to insure their customers against loss that may occur during their businesses. The MFB might take up insurance policies and add it to the client cost of transaction or make it an option for the client to take up the policy as a condition to granting loan to the client. The client or the MFB who acts as an intermediary in dual capacity can stand as the insured while the insurance company stand as the insurer with contract signed by both parties to define the right that each party can exercise. Insurance is not free, and it comes with a price known as premium paid by clients to make good losses that may occur in form of burglary, death and force majeure (Natural disaster). While micro-client sees micro-insurance as expensive it is the responsibility of the MFB to sensitize their respective client about the importance of insurance and how it can mitigate risk for their businesses.

Micro Leasing

This is one of the best ways to adequately manage a micro client that needs finance to purchase equipment for his or her business. This financial solution allows the leased item to be pledged as security for the loan until the customer can pay off the loan. In this arrangement the equipment or asset remains the property of the microfinance until the agreement is fully executed which the customer then becomes the sole custodian of the asset. Leasing usually comes in many forms but the most basic ones are the financial lease and the operating lease. The financial lease also known as hire purchase is executed when a client agrees with the MFB to purchase an asset in the banks name and the asset becomes that of the client at the end of the lease period which the client who is recognized as the lessor takes responsibility for the management and repairs of the assets in case it becomes faulty. The operating lease on the other hand requires the microfinance bank to be responsible for the asset in case of repairs and the lease term is usually short with payment fixed on a regular basis.

Micro Transfer