The Functional Microfinance Bank
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The Functional Microfinance Bank


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73 pages

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'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.



Publié par
Date de parution 16 juillet 2018
Nombre de lectures 0
EAN13 9788828357667
Langue English

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Strategies for Survival
Henry Oster Onyemah
Copyright 2017 by Henry Oster Onyemah.
For more information about the author, write to the author from:
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

T his 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

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

M icro-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.

A TM 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

I ntroduction
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
Poor people don t just need loan, they need other services like money transfer platforms to have an inexpensive and convenient way to send and receive money during their businesses.
Most MFBs in partner with other money transfer institutions are offering such services to their clients and this is the best way to gain access in breaking into target market.
While most MFBs cannot operate on an international transfer level from one country to the other, it should be noted that micro lenders are more inquisitive about how they can send and receive cash locally within their jurisdiction without having to open accounts with any financial institution coupled with the problem of having to fill forms due to high level of illiteracy. Another area where local money transfer favours the poor most is when they can receive needed funds at cost effective and efficient rate. Why would poor client want to use local transfers in the first place if it is an expensive process? Key criteria for good transfers comes with privacy, distance and security which is all what poor clients need to encourage them get acquainted with the process. MFBs that involve in local money transfer for their clients generate extra income with less risk without increasing financing needs thereby allowing them gain and retain new clients even when such customers have no bank account with their MFB. In this capacity the MFBs act as intermediary and promote financial inclusion which is enhanced by digital financial inclusion.
Definition: Micro financing
Microfinance is the provision of fund to low income earner to bridge the gap between the poor and the average citizen in a growing or developing economy to promote the standard of living of the citizens and that of its country.
Problems of Microfinance
One of the increasing problems faced by many MFBs bothers on the issue of mission drift. They tend to focus more on profit generation only, rather than concentrating on and actualizing both profit and social goals which brings up the question if truly MFBs are really helping people or they are just concerned about themselves.
In some countries, microfinance activities are well regulated that it becomes difficult for MFBs to introduce or impose obnoxious policies. In the same vein customer take priority to repayment because refusal to repay is seen as grave offence. While this practice seems ok, this is not usually the case in countries where government control in the microfinance sector is very. The good thing about modern day micro financing is that the industry is recording phenomenal increase in innovation with the advent of inclusive banking. The use of electronic banking, mobile banking and every order accessible means is what the sector needs to continually grow. The microfinance industry has for long depended on paper-based method of transaction which some still practice up till date due to high increase of illiteracy found mostly in African countries, while some have evolved along with technological advancement and digital microfinance. The paper-based method is usually associated to credit officers making numerous un-helpful trips to obtain customer detail for loan processing which is usually time consuming. Digital Microfinance application process is always at the tip of a button allowing for swift credit decision and transaction and while it is a fact that microfinance loan increases the chances of income accumulation through access to finance it can also create high indebtedness that may likely increases the chances of poverty for a client over a period. This situation arises when a client has access to funds way above what he originally needs to run his business or below what he needs to run his business.
Digital Microfinance Services (DFS)
The modern day micro financing has broadened reach and at the same time lowered cost attached to delivering microfinance services to potential and existing customer. Unlike in the past where you need to be physically present to transact, micro finance services are very much available through digital means, where innovative technologies are playing a vital role in improving financial inclusion with the designs of product and service tailored towards customers need.
A major problem faced by most MFI s are the increasing need to operate digitally as most are far from realizing the fact that the world has gone global and the need to operate on a digital frequency is quite necessary. Digital finance services in microfinance operations has numerous benefits with the propensity to increase efficiency, outreach and adequately lower cost which is needed to help expand range of products of the MFI. Presently, the most advance digital microfinance services involve the deployment of innovative financial services that comes with the use of mobile phones through mobile applications, internet transaction through online platforms, cards through point of sale (POS) and automated teller machines (ATM), short message system (SMS), bar code and order advance system that can seamlessly deliver financial products and services at lower cost.
Over the years, digital financial service (DFS) operation has been limited to the activeness of commercial banks who invest so much in technology to make sure they reach and acquire their clientele base. The good news now is, MFIs are quickly gaining momentum in acquiring technological advanced tools to serve their poor clients who wants to save their money, receive and send money from and to relatives, pay accumulated bills, pay loans and meet other financial obligations as they fall due even when they are not accessible to the physical structure of their MFB. This would help secure and satisfy their urge for financial transactions which they had always depended on with the use of informal mechanisms. These informal processes are mostly unsecured, inefficient, unsafe and mostly expensive than the formal financial system.
Digital financial services aid financial inclusion because of the endless potential to develop digital solution and tools needed to partner people around the world with different digital channels. Advancement in Financial technology is vital to the achievement of financial inclusion. It not only makes an MFBs product and services easily accessible, it also reduces the cost to client and creates room for affordability. Poor clients desire access to financial products and services known to be gradually gaining momentum than ever, especially for clients that resides in rural locations.

Figure 1: Microfinance Evolution
Reasons for microfinance
The main aim of micro financing is to adequately promote the granting of financial services to low income earners and create an avenue where credit and other financial service is available at a reasonable cost with solution tailored towards needs and demography of the poor. Microfinance will give meaning and purpose if it is made visible for public awareness and impacting sustainable access to wide range of financial services that supports strategies which encourages partnership and innovations needed to build and expand appropriate outreach.
Microfinance loans are administered by these institutions namely;
State governments
Commercial banks
Microfinance Institution and Bank (MFI) and (MFBs)
Non-Government Organizations (NGO s)
Insurance Companies
Informal Money lenders and groups
Pawn Shops in some countries
Transfer payment and communication companies
Non-Bank Financial Institutions (NBFI)
Credit Union (CU) and
Mobile Network Operators (MNOs)
How Microfinance Operate
No financial institution works in isolation, they operate in conjunction with systems, procedure and appropriate manpower and the most important factor which makes it function is determined by the factor played by demand and supply striking the balance needed to make the system work well.
In microfinance activities, the demand for funds is pioneered by actions of borrowers or investor who need fund for immediate funds for execution of their business enterprise. These funds are provided by individuals, private or corporate entities, also known as savers or investors who have no immediate use for such funds and as such keep these funds with the MFBs who in turn lend it out to deserving clients. These savers operate in the surplus unit by coming out to help investors who operate in the deficit unit and with the intervention of MFI s, financial intermediation is made possible. You can imagine what the financial system would look like without the presence of financial intermediaries as there would be dis-equilibrium in between demand and supply of funds. Even when the surplus and deficit unit meet without intermediary intervention, there is bound to be trust and confidentiality problem with high exposure placed on the surplus unit leaving the deficit unit with nothing to lose. Wise fund providers usually invest in projects or proposals with minimal risk even when the interests are much, and therefore they prefer to keep these spare funds with the financial institutions who in turns gives it out as loan to investors not minding the interest rate. Without suppliers of capital, i.e. savers, investors in turn are left to their own resources, in other words, self-finance . The difficulty here is that not every prospective investor has the funds required at his disposal. Investment opportunities are thus restricted by the investor's own capital resources. As a result, investments are only embarked on over a certain period when needed fund has been amassed for the proposed project.
Due to insufficient information and confidence problems, direct financial relationships between savers and investors are only found within social groups, e.g. in village communities or among families and friends. Direct financial relationships afford definite advantages for both parties. A prospective investor can make investments that exceed his personal resources, allowing the accrual of capital to occur with greater flexibility and efficiency. And for the savers it is more convenient to entrust their savings temporarily to an investor than to look for investment opportunities alone. Even if information and confidence problems are mitigated, there are structural obstacles to direct financial relationships stemming from differing preferences of savers and investors regarding the mode of finance. A financial relationship, therefore, presupposes a broad agreement on the amount, term, risk, and expected return between the borrower and the lender.
Benefits of Microfinance
According to the Global Finance Development report of 2014 that says about more than 2.5 billion adults has no access to any form of bank account. It is quit alarming that the number of unbanked adult have recently skyrocket beyond recognition. The true picture is that the financial system has systematically excluded them in having access to finance which they rightly deserve. Microfinance activities provide key strategy that helps active players who live in poverty into becoming financially independent.
Below we highlight the benefits of microfinance;
It is a key strategy to empower individuals economically and financially.
It promotes a high level of sustainable growth for micro, small and medium enterprises (MSME).
Microfinance institutions not only give loans but help monitor and coach micro client on how to manage their business and this is because direct interaction exists between the MFB and the customer.
Commercial Banks grant loans to clients based on availability of asset as collateral while for an MFI, a client with no form of collateral can easily have access to loan if he is able to provide the institution with a favourable cash flow over the period he intends to pay back the loan.
It offers opportunities for job creation and entrepreneurship and at the same time empower literacy education as children are unlikely to be withdrawn from school due to non-availability of funds to pay for school fees.
It provides for families at the appropriate time and makes them feel they are part of a functional financial ecosystem.
It offers flexible repayment plans which is not usually obtained from commercial banks and traditional or non-formal financial institutions
It encourages and promotes present and future investment by making funds available for business endeavours thereby sustaining productivity.
The process is sustainable hence the increase in MFI s all over the world with the availability of small amount of loans to solve rising business issues.
Apart from loans it gives micro entrepreneurs the avenue to save their little monies on a daily to monthly basis because the main concept of microfinance is not to wait for poor client to come to the bank but the bank to go to the customers.
When an economy prospers, the citizen also prospers. In this vein microfinance activity offers viable economic gains to the citizenry as it increases the spending and consumption level.
It reduces vulnerability encountered by poor people who have the acumen and good business plan needed to break through but don t have the finance to carry out the proposed projects.
It gradually reduces economic poverty for every participant with the view that participating in microfinance activities has been able to show significance development over a period.
Consideration for setting up an MFB
Operating a microfinance institution (MFI) is not as easy as most inspiring starters assume. It takes a lot of process which involves proper assessment and feasibility study to make it successful. While the Regulatory and supervisory guideline for MFBs in Nigeria state the requirement for setting up an MFB, one need to understand the rudiment and intricacies involved in the smooth running to continue to stay afloat.

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