Section 1 - Introduction

Purpose

1. To document the visit made by the consultant in connection with ensuring that MIS gathered by
the MCO at LOK, BENEFIT and MIKRA is reported in a timely, accurate and useful manner.

Overall Conclusion

2. The conclusion reached is that all three MCO have Management Information Systems that were
appropriate for their existing business. Their systems are all able to track loans, performance
indicators and outreach indicators in a satisfactory manner.

Timing and Location of Report

3. The visits took place over between the 17th and 27th November 2003 during which the consultant
visited each MCO for a two-day period.

Appendix

4. The appendix benchmarks the respective MCO against a CGAP list containing the minimum
reporting standards for Microfinance Organizations. This list has been adjusted to remove
reference to reports relating to deposits.

Terms of Reference

5. The terms of reference called for a review of the capability and capacity of the existing MIS with
respect to gathering and reporting accurate, timely and useful data. The key activities included: -

a) Reporting of core indicators of institutional performance such as loan portfolio quality,

efficiency, financial sustainability and poverty outreach.

b) Using a common reporting format and standards.

c) Sharing of data with other MCO/MFI.

d) Reporting on Social Performance.

e) Recommending improvements to the existing MIS.

Approach

6. The approach adopted was to

a) Ask general questions to determine the way of processing data and business undertaken.

b) View the Management Information System.

c) Use the checklist for Management of Information Systems for Microfinance prepared by
Andrew Mainhard of DAI in November 1999 to assist with the appraisal of the software.
This was used mainly to act as a benchmark for assessment of the system to highlight any
aspects that had been missed in the evaluation.
 d) Examine the performance indicators and ratios produced and the way in which they
were generated

BENEFIT –MIS Report

Timing of the Visit

7. The visit by the consultant took place over a two-day period from the 17th to 18th November 2003.

Background to Organization

8. BENEFIT is a micro credit organization that was established in 1997 and registered as a MCO in
January 2001. BENEFIT has 5 regional offices and 17 satellite offices. It is a non-profit
organization that is managed by an independent board. It employs 40 staff and has 3,100
clients. BENEFIT operates in eastern and southeastern of Republika Srpska. The goal of the
organization is to become a highly efficient microfinance institution that will be able to provide its
services to a large number of clients.

9. Regional branches are small and have between one and three credit officers working under a
branch manager. Satellites (sub-branches of the regional office) are even smaller and often have
only one member of staff.
10. BENEFIT only has one active product. This is a loan with a minimum amount of KM 500 and a
maximum amount of KM 30,000. Interest is paid at a rate of 1.7% per month on the declining
balance method. A 2% up front charge is made for handling the loan. BENEFIT has prepared a
second product for launch that will be for agriculture loans. This product will be launched on
receipt of funding from the World Bank.

11. As an MCO, BENEFIT is unable to take deposits and it relies upon the following for sources of
funds: -

• Commercial Banks (11.67%)

• World Bank (47.26%)
• Own Capital (36.73%)
• Other short-term borrowing (4.34%)

Approach

12. The approach used was to discuss the existing Management Information System and other
matters associated with the terms of reference with the following staff: -

• Darko Krtinic – MIS Manager (Part Time)

• Milana Mladiv – Accountant
• Mira Nenadic – Manager
• Olga Micic – Financial Manager
• Zoran Zec – Branch Manager from Lukavica
• Natasa Krajisnik – Credit Supervisor
• Milka Seslija – Internal Auditor

13. Periodically during the meeting breaks were taken to make reference to the Management
Information System. Where necessary reports were printed in hard copy for further discussion
and explanation.

MIS System
14. The Management Information System is installed on a PC at each branch and satellite. At least
once a day data is transferred from the satellite office to the regional office and then to Head
Office using dial up modem. Head Office therefore has a complete picture of events in branches
on a central database at the end of each day.

15. The history of the Management Information System was explained in terms of it gradually
evolving over the life of the organization. As the organization has become more complicated so
the system has evolved to meet the requirements. The system has two parts – an accounting
section and a credit section. They are integrated and automatically pass required entries
between each other.

Hardware

16. BENEFIT has 45 computers in 22 different locations. Each office has at least one computer.
Where an office has more than one computer they are networked.

Processing

17. With the exception of one office1 BENEFIT does not directly take cash for the repayment of
loans. The disbursement of new loans and the cash received for the repayments of loans is
undertaken through accounts maintained at Commercial Banks thus avoiding the need for the
branches to process cash. Based on statements received from the bank entries are passed at a
branch level. The results are then sent by modem to Head Office.

18. Therefore processing is done at branches where the transaction takes place and yet monitoring
of transactions can take place at Head Office at the end of each day. The management of
BENEFIT and the MIS Manager are to be congratulated for this approach, which promotes
efficiency by making it easier to enter and access information in a timely manner.

Accounting Package

19. The Accounting system is able to perform the tasks required to deal with BENEFIT’s existing
business of microfinance lending. Revenues, expenditure and cash flows are tracked. The
system is able to produce balance sheet and income and expenditure reports and deal with loan
loss reserves.

20. Interest earned but not yet paid by the customer is estimated at the end of each month in the
following manner: -

a) The system will total the interest due at the next installment for all loans that have loan
installments due before the 15th of the month and take this sum into income.

b) Loans with installments due after the 15th of the month do not have their next installment
taken into income.

c) On the first day of the month the accrued interest calculated in (a) above is reversed. This
ensures that when the customer pays his next installment there is no double counting.

21. While this is not the same as accruing interest for each loan up to the end of the month, for
practical purposes it probably gives a reasonably accurate assessment of interest and is
certainly preferable to making no accrual at all. The external auditors have accepted the
process. This process excludes any loan that is overdue for more that 30 days (although there
are no loans in this category at the present time).

Portfolio Tracking

1
Cash is taken at this office because the local bank is considered to be in difficulties and BENEFIT does not
which to keep funds in the bank.
22. The portfolio tracking system is able to perform the tasks required to deal with BENEFIT’s
existing business. The information on portfolio aging and delinquency is available for Head
Office management, branch managers and individual loan officers to view.

23. The loan repayment schedule is basic. The next repayment date is automatically the same day
the following month even if this is a holiday. If the loan repayment is late there is no penalty by
way of additional interest or charges.

24. A recent development at BENEFIT has been the decision to change from a flat to a declining
balance method of calculation of interest. BENEFIT explained that this change to declining
balance was undertaken because it is fairer to customer and the MCO wished to follow
recommendations given by the Foundation. The effect of the change was to reduce the interest
income. Fortunately additional volumes of lending prevented this from showing as an overall
decline in interest earning. The impact of the change is that the effective rate charged by
BENEFIT on its loans using the declining balance method is 20.4% pa – one of the lowest rates
for MCO in the country. All loans are charged at the same rate regardless of the number of times
a customer has borrowed or the amount of the borrowing.

25. BENEFIT takes a 2% up front fee for the loan granted. It pays tax on this fee. The 2% is
deducted from the loan proceeds at the time of disbursement. The loan agreement mentions this
charge, which is shown as a deduction from the loan amount on the copy of the voucher given to
the customer when he signs for the loan.

26. If BENEFIT charged 22% (instead of 20.4%) for its loans then no tax would be paid and
BENEFIT would be 1% better off.

Deposit Monitoring

27. The software has no ability to handle deposits from customers

Client Information

28. The credit system is able to maintain the normally expected information about clients. The
information is sufficient to meet the needs of the Foundation for Sustainable Development with
regard to performance indicators, outreach indicators and ratios. Actual data stored on the client
includes the following: -

• Loan product.
• Loan ID.
• Branch.
• Finance source.
• Loan officer.
• Type of job (private or company).
• Name of company.
• Register ID of company.
• Personal number (like social security number in USA).
• Customer Name.
• Customer Surname.
• Customer Parent Name.
• Gender.
• Personal Card Number.
• Address.
• Town.
• Phone number.
• Number of created jobs.
• Number of maintaining jobs.
• Type of job (new, present, etc.).
 • Type according the last war (demobilize soldier, invalid, family of soldier died in combat,
other persons, etc).
• Loan Assignment and percentage participation.
• Loan refunded (yes - no).
• Loan amount.
• Loan interest.
• Type of interest.
• Actual period.
• Grace period.
• Date of Loan allowance.
• Refugee status.
• Loan approve (yes - no).
• Type of refunding (Commercial Bank ID).
• Collateral documents.
• Type of Loan payment and account number.
• Customer busy (yes - no).
• Expect place of refunding.

29. Client information is segregated from details of the loan so that it only has to be input once.

Expandability

30. The system is able to meet BENEFIT’s needs in terms of volumes and number of branches for
the foreseeable future.

Flexibility

31. The system has been designed and produced by a part time MIS Manager. He has done well to
produce a system that allows branches to post entries locally and then to be consolidated
automatically at Head Office. However, if the nature of the business changes in the future there
will be additional work to be done on the system. Key areas which are not part of the system at
the moment are as follows: -

a) Deposit Taking Capability – The system does not have a deposit taking capability.

b) Not Multi Currency – A loan that is due to be repaid in Euro is accounted for in the books in
KM. (not a big problem with one loan)

c) Interest Calculation – The system does not accrue interest on loans in terms of the number
of days.

d) Different types of Loan – The system does not cater for additional types of loan product.

e) Flexible Interest Rates – Only one type of interest rate is catered for.

32. The above comments are made for the sake of completeness and should not detract from what
has been achieved in development of the existing system by the MIS Manager who has done
excellent work.

Usability

33. The system is windows based and is user friendly.

Reporting

34. The reports produced by BENEFIT were checked against those suggested by CGAP (excluding
deposit reports). BENEFIT produces the recommended CGAP reports for small microfinance
 companies. BENEFIT has not based its reporting or ratios on any particular methodology (such
as CGAP or Pearls).

35. The ratios and trends required by the Foundation have been largely mechanized. Budget
information is entered into the system so that comparisons can be made automatically against
budget.

36. The reporting meets the requirements of the organization and enables loans to be tracked by
credit officer, branch, regional office or consolidated at Head Office.

Standards and Compliance

37. The consultant was shown the report from the external auditors for 2002. Some adjustments
have been made due to the transfer from fixed to declining balance method of interest
calculation. The auditors confirmed that the books had been kept in accordance with
International Accounting Standards.

38. BENEFIT has an internal auditor that has audit programs that require her to check the accuracy
of the Management Information System.

39. BENEFIT has manuals and procedures covering its operations that incorporate how the
Management Information System should be operated.

Administration and Support

40. The MIS Manager wrote and maintains the system. He is therefore able to enhance and
maintain it as appropriate. However he has no deputy and therefore there is key man risk.

41. The consultant looked at the documentation for the program. On the basis that this is kept up to
date it would be possible for someone else to continue the work if necessary. Nevertheless, it is
a risk to the organization if the MIS Manager was suddenly unable to continue to work. BENEFIT
stated that if it becomes possible to take deposits then they would employ a deputy to assist with
the work of enhancing the program. The deputy would provide backup to the MIS Manager.

42. The system is backed up and stored off site. Key passwords are also stored off site.

Technical Specifications

43. The Management Information System is written in FoxPro. Both the credit system and the
financial system are in-house built. The systems run on a windows operating platform.

Price and Cost

44. This system is low cost having been developed in house.

Loan Collateral

45. Most loans are secured by means of a guarantee using a promissory note. BENEFIT tries to
obtain two to three guarantees for each loan. Each guarantor guarantees the full amount of the
loan. The credit system capable of storing details of the promissory notes given for the loans.

Visits Made by Credit Officers

46. Policy requires the credit officer to visit the customer within 30 days of a loan being given to
make sure that the loan is being used for the purpose stated. Thereafter a visit must be made
every three months. A report on these visits is made and placed in a file. The system is not used
to hold a record of these visits.
Cash Flow

47. BENEFIT is able to produce a system-generated cash flow for each branch and for the
organization as a whole. This is then projected forward to gain a picture of what will happen in
the future.

Credit Information Provided to Branches on a Daily Basis

48. Since branches and Satellites have a fully functioning database at their disposal they are in a
position to “help themselves” to information they need to monitor their portfolio.

Loan Delinquency Provisioning

49. At the time of the consultant’s visit there were no items shown in the Portfolio at risk over 30
days. This shows very aggressive follow up by the credit officers. Provisioning for arrears is
automatic. General reserve is provisioned at the rate of 2% on healthy portfolio while delinquent
portfolio is provisioned at the rate of 60% of the portfolio at risk for 30 days, 80% of the portfolio
at risk for 60 days and 100% of the portfolio at risk for 90 days.

Loan Schedule

50. The credit portfolio system does not maintain a holiday table. Loan repayments are equally
spread throughout the year. A repayment date may therefore be a Sunday or a public holiday in
which case the client is expected to pay the day before the holiday. There is no penalty for being
late with repayments.

Performance Incentive Scheme

51. BENEFIT has an incentive scheme for its loan officers.

Risk Management

52. The following are key risk management areas and have their own MIS requirements: -

a) Asset and Liability Management – There is no formal committee for asset and liability
management. Max Duval of Carl Bro gave a presentation earlier in the year on the subject
of asset and liability management. The presentation was useful and BENEFIT has plans to
take action on this some time next year.

b) Credit Risk – The risk that funds will not be repaid. The credit committees at each branch
undertake this assessment.

c) Interest Rate Risk – Interest rate risk arisen when rates on assets and liabilities are
mismatched. There is no formal asset and liability management committee to determine
these risks and no formal report to determine the risk. However with a single lending rate
to customers and a source of funds that is limited and interest rates that are not likely to be
volatile this is not a priority at present. This situation will change if BENEFIT takes
deposits.

d) Liquidity Risk – Refers to the ability of BENEFIT to meet it immediate demands for cash –
loan disbursements, bill payments and debt repayment. Liquidity refers to the additional
costs of meeting lending requirements. BENEFIT has cash flow management that is able
to estimate future cash needs.

e) Foreign Exchange Risk – not applicable – everything is local currency (except for one loan
given to BENEFIT in Euro which has been converted to KW and yet is to be repaid in
Euro).
Industry Benchmarking / Sharing Information

53. BENEFIT is a member of the Microfinance Project LIP II. It has access to comparative
information that is published in the annual report on the 9 members of the association. This
includes information on operating costs and Balance Sheets. Also published is information on
Outreach Indicators such as loans, the percentage of loans to women and men, purpose of
loans etc.

54. BENEFIT said that the association was useful because it met on a regular basis and provided an
opportunity for members to meet each other. From time to time BENEFIT visits the offices of
other members.

55. Perhaps most useful for comparison purposes was the information sent by LIP each quarter that
compared the Outreach, Portfolio, Profitability, Efficiency and Financial ratios for MIKROFIN,
BENEFIT AND SINERGIJA (the three LIP projects in Republika Srpska).

Performance Indicators

56. The Terms of Reference call for a review of the capability of BENEFIT to gather and report
performance indicators. BENEFIT explained that the indicators used were those required by LIP
as part of the contract between BENEFIT and the World Bank.

57. Each month BENEFIT sends a list of indicators to the Foundation and in return every quarter the
Foundation sends BENEFIT a set of ratios. These ratios are used to benchmark performance.
Failure to meet minimum standard would result in BENEFIT being dropped from the program.

58. To ensure that the required standards are met, it is the practice for BENEFIT to calculate the
ratios each month, benchmark the results against their internal targets (which are set higher than
the level required by LIP) and present the result to the management for review. Every three
months the ratios are checked against those sent by LIP to confirm accuracy.

59. These ratios cover the essential requirements of monitoring the MCO and it is not felt necessary
to add ratios to this list.

Business Strategy

60. The Business Plan for the years 2003 to 2005 was briefly examined. It contained budgets for the
year 2003 and key elements of these were entered into the Management Information System to
allow for comparisons against budget to be automatic.

Service Standards

61. The service standard for BENEFIT is to process all loan applications within 15 days. In reality
this is usually done within 8 days.

Marketing

62. BENEFIT believes that it is not appropriate to spend on marketing when attempting to assist the
poor. They have one billboard near Head Office, utilize radio advertising when opening a new
satellite and otherwise rely on word of mouth and the broachers distributed by credit officers to
surrounding houses when they visit clients.

Internal Auditing of MIS

63. BENEFIT has an internal auditor. An internal audit program is in place. Audits cover checking
the accuracy of the Management Information System.
Audit Trail

64. The Management Information System has an audit trail that is capable of detecting who logged
on, when and at what location.

Ratio Analysis

65. The consultant sat with the Finance Manager and went through the ratios and graphs produced
at the end of September for the Foundation. These indicators are used to measure the
performance of BENEFIT against other MCO in the LIP project. For comparison purposed the
focus was on the trend during the past 12 months. Explanations were given for the movement in
ratios. Key highlights have been: -

a) Additional funding has allowed rapid growth in the number of loans from 2345 to 4262 with
corresponding increase in portfolio outstanding. During this period the Average Loan Size
decreased slightly showing that this growth was not achieved by lending larger sums of
money. During this period staff numbers grew from 32 to 44 to cope with the increased
lending.

b) Adjusted Return on Equity fell from 20.98% to 1.6% between September 02 and
September 03. Reasons for this were given as follows: -

i) Agricultural Loan Shortfall - The branch network had been expanded in anticipation of
receiving a loan for agriculture totaling KM 2,000,000. However so far only KM 500,000
had been received.

ii) Adjustment of Notional Rate of Interest - At the end of September equity was adjusted at
the notional rate of 12% by the Foundation. Management at BENEFIT stated that they did
not agree with this notional rate for two reasons. Firstly they believed the Market Rate
should be 10% in line with the commercial rate for a loan received by Raffaisan. Secondly
it was unreasonable to adjust capital for MCO in the Federation at 10% and those in
Republic Srpska at 12%. BENEFIT called the Foundation in the presence of the
consultant and obtained a verbal agreement that the notional capital would be changed
from 12% to 10% at the end of December 03.

iii) Change In Interest Calculation Method - Interest received on loans decreased as a result
of changing from flat to declining balance.

b) Operational Self Sufficiency – Between the end of Sep 02 and end of September 03 the ratio
of operational self-sufficiency declined from 146.38% to 118.47%. This decrease was
explained in terms of total income being only 87% of what was expected in the plan due to
expected funding for loans not being received and changes in the method of calculation of
interest. It was stated that by the end of the year this ratio would recover.

c) Financial Self Sufficiency – Between the end of Sep 02 and end of Sep 03 this ratio fell from
121% to 98% for the same reasons given above in operational self-sufficiency.

d) Operating Cost Ratio Trend Line – (Operating cost to average net portfolio) end of 02 was
23.96% and end of Sep 03 was 21.96. Operating costs decreased but income decreased
more.

e) Number of Active Clients per credit officer – Between the end of Sep 02 and end of Sep 03 the
number of active loans per credit officer rose from 117 to 164 as a result of more funds being
made available to for lending. BENEFIT stated that the optimum number of clients per
experienced loan officer was 220. Beyond that number it would be difficult for the credit officer
to retain control. There is therefore additional capacity for lending by loan officers should
funding materialize.
 f) Gross Portfolio Outstanding By Loan Officer – Between the end of Sep 02 and end of
September 03 this increased from KW 270,464 to KW 310,185.

g) Total Equity to Earning Assets – At the end of Sep 02 this was 42.51% and at the end of Sep
03 was 35.18%. Last year in Sep BENEFIT capitalization of KW 912,242 (part of the loan was
converted into a grant from the Italian Government). Church World Service gave 126,000 this
year. BENEFIT has also recently received a grant of 619,000 from the Catholic Church via
UNHCR, which was not included in the ratio.

Conclusion

66. Portfolio at risk of zero for 30 days and beyond is an incredible performance indicator and shows
tremendous commitment by loan officers. BENEFIT’s performance and outreach indicators are
designed to meet the needs of the Foundation. Since BENEFIT’s continued support by the
foundation is dependent upon meeting targets BENEFIT is naturally highly focused on these
indicators. For an MCO with one product (shortly to become two products with the addition of
agricultural loans), BENEFIT has an appropriate Management Information System for its needs.

67. BENEFIT is to be commended for changing to the declining balance method of calculation of
interest. Morally BENEFIT has taken the right action to assist the poor. Performance indicators
show that following the change in interest calculation the average size of loan has decreased
and the number of new loans has increased due to additional funding. This is further evidence
that the poorest are being assisted. The consultant hopes that the loss of revenue as a result of
this change in the method of interest calculation will not have a long-term impact on BENEFIT’s
return on equity and operating self-sufficiency when it is benchmarked against similar
organizations who continue to charge a flat rate in which translated to a true rates of interest in
excess of than 40% per annum.

68. During the visit the Management Team quickly responded to the consultant’s questions and then
whenever possible wanted to prove their comments were accurate by producing the evidence.
The comments made by management, the desire to back up their statements by showing the
evidence and the enthusiasm with which the team responded left the consultant with the opinion
that management was highly committed, in control of their loan portfolio, had a highly motivated
social consciousness and knew exactly what was going on in the organization. Their
Management Information System and accompanying indicators are appropriate and meet the
needs of the business.

Recommendations

69. The recommendations made are few and minor in nature: -

a) Security – Passwords for the system should be changed on a regular basis. Consider an
automated system change for all users every one to three months.

b) Adjusted Equity – Follow up on adjustment to equity from 12% to 10% with the
Foundation2. This is especially important following the change in interest calculation to
declining balance method, as BENEFIT needs to enhance its sustainability ratios.

c) Key Man Risk – Keep system documentation up to date to mitigate key man risk.

d) Accrued Interest – Consider developing a more accurate manner of accruing interest on

loans based on date of last payment up to the end on the month.

e) Variable Interest Rates – At present all lending is done at the same rate of interest. If the
impact of changing to the declining basis of calculating interest is hurting the sustainability

2
This is a reference to the adjusted equity rate being 12% in the Republic Srpska and 10% in the Federation as
reported by MIKRA.
 of the organization consider using variable interest rates based on the cycle of borrowing
(higher interest rates for first time borrowers).

f) Marketing – Consider ways of promotion or advertising the low rates on interest being
charged by BENEFIT to build up loyalty and reputation. This can be highly useful in years
to come.

g) Deposits – From a system point of view, start thinking about what needs to be done should
BENEFIT take deposits. This could prove useful if there was a need for this to be done in
the future.
Appendix 1 – Reports Produced (Template Based On CGAP Standards)

BENEFIT
Category Description Yes/No Comment
Loan Activity Reports Loan Repayment Schedule Yes
Loan Account activity Yes
Active loans by Loan officer Yes
Portfolio Quality Reports Delinquent loans by Loan Officer Yes
Summarized Aging of Portfolio at risk Yes
Loan Write off Report Yes
Aging of Loans and Calculation of Yes
Reserves
Income Statement Reports Summary of Income Statement Yes
Detailed Income Statement Yes
Detailed Actual to Budget Income Yes
statement
Adjusted Income Statement Yes
Balance Sheet Reports Summary of Balance Sheet Yes
Detailed Balance Sheet Yes
Cash Flow Reports Cash Flow Review Yes
Projected Cash Flow Yes
Reports for Clients Loan Repayment Schedule Yes
Loan Account Activity Yes
Report by Field Staff Loan Repayment Schedule Yes
Loan Account Activity Yes
Active loans by loan officer Yes
Pending Clients by Loan Officer Yes
Daily Payment Report Yes
Delinquent Loans by Loan Officer Yes
Summary of Portfolio at Risk by Loan Yes
Officer
Staff Incentive Report Yes
Reports for Branch Manager Pending clients by loan officer Yes
Detailed Aging of portfolio at risk by Yes
branch
Delinquent loans by Loan Officer Yes
Delinquent loans by Branch and Product Yes
Summary of Portfolio at Risk by Loan Yes
officer
Delinquent loan History by Branch Yes
Loan Write off and Recovery Report Yes
Aging of Loans and Calculation of Yes
Reserves
Staff Incentive Report Yes
Detailed Account to Budget Income Yes
Statement Report
Reports for Senior Managers Delinquent loans by branch and product Yes
at Head Office
Summary of Portfolio at Risk by Branch Yes
and Product
Loan Write off and Recovery Report Yes
Aging of loans and calculation of reserves Yes
Detailed Income Statement Yes
Income statement by branch and region Yes
Detailed Actual to budget Income Yes
Statement
Adjusted Income Statement Yes
 BENEFIT
Category Description Yes/No Comment
Detailed balance sheet Yes
Cash flow review Yes
Projected Cash flow Yes
Reports for the Board Summary actual to budget Yes
Adjusted Income Statement Yes
Summary Balance Sheet Yes
Cash Flow Review Yes