Best Practices, Challenges and

Issues in Microfinance

“Basics of Microfinance Training Program”

(Organized by ADRA-Nepal)
(July 24 – August 1, 2006)
 Need of following Best Practices

 Subsidized funds are declining

 Competition among MFIs is increasing

 Apply appropriate lending methodologies

 Build effective Management
Information System (MIS) Go v
inst ernanc
ituti
ona e and
Reach large number of clients l lin
kag
e
(Vision for growth)

Promote savings, diversify Tar

get
savings products clie
nts
p rop
erly
Offer services that fit the clients
needs, diversify loan products
Best Practices Hu
ma
De n Re
Simplify loan products to vel s
opm ource
reduce operational cost ent
Motivate clients to repay loans,
focus on high repayments

Attain financial sustainability by

charging sufficient interest rates

Involve clients when designing

services / products
 Challenges
 During 1980s to 1990s there was a
conventional belief amongst bankers and to
some extent amongst the “development
credit providers” too. The challenges are
given below
 Poor people do not repay loans

They can not pay higher interest rates

MFIs can not recover cost, can

function only as long as there is grant
Challenges
MFIs can not access
commercial funding

MFIs can not access equity investments

 The challenges coming from the first two
conventional beliefs were overcome as Grameen
Bank, Bangladesh and ACCION International and
Bancosol in Latin America achieved the high
repayment of over 95%.

The achievement in this area was primarily

because of;

 Properly designing the loan products

 Training the clients on the credit program
 Strong monitoring system
 Simple repayment procedures.
 The challenges coming from the third conventional
belief that MFIs can not cover costs needed a basic
understanding within the industry on level of cost
recovery.
 During 1990s there was general consensus that cost
recovery has following three levels:
 Subsidy Dependent
 Operational Self-sufficiency
 Financial Self-sufficiency

 During last part of 1990s and 2000s, a substantial

number of microfinance programs were able to cover
their operational and financial costs. An example of
Association for Social Advancement (ASA),
Bangladesh of being able to cover the costs of a
branch within 9 months of its operation.
 The challenges coming from the
conventional belief that MFIs can not
access commercial funding and MFIs can
not access equity investments still remains
as major challenges to a majority of MFIs.
 Issues
 The issues in microfinance differ from the
perspective of the person/institution who views it.
For a gender activist the main issue will be equity
and control over the resources, for practitioner it
may be sustainability and /or improper regulation,
for promoters it may be penetrating depth and /or
increasing breath.

Here are some of the issues.

 ss Insurgency
c ce
g a it a l
v id in c ap
Pro FIs to Macroeconomic stability
of M
Programs that distort the market

Infrastructure
General
Issues Reaching in hills and remote areas

Regulation

Dev. Industry standard for Nepal

Inclusiveness

Capacity building
Issues in MFIs Management
 Institutional Capacity Issues:
 Business Planning
An MFI needs to be able to translate its strategic vision
into a set of operational plans

 Product Development
An MFI must be able to diversify beyond its original
credit products and price them on the basis of operating
and financial costs and demand in the marketplace
 Human Resource Management
Acquisition
Motivation
Maintenance/skill upgrading
Contd…
 Management Information systems
As MFIs grow one of their greatest limitations is often
their Management Information System. It is imperative
that an MFI have adequate information systems
financial and human resource management

 Efficiency and Productivity Enhancement

MFIs must be able to operate in a way that best
combines standardization, decentralization, and
incentives to achieve the greatest output with the least
cost
 Contd…
 Financial Management
Improvements in accounting and budgeting are often required to
monitor loan portfolio quality, donor subsidies, and the growing
volume of operations. Additional skills are required in:

Portfolio risk management: appropriate risk classification, loan

loss provision and write-offs

Performance management: profitability and financial viability

Liquidity and risk management: effectively administering portfolios

largely based on short term loans

Asset and liability management: appropriate matching of

amortization periods in relation to the loan portfolio and asset
management and capital budgeting processes that are inflation
sensitive
 Let us identify various
issues that your institutions
are facing during the course
of MF service delivery
 “Discuss and identify various issues
related to the management of MF services
in your institutions and list them
according to their priority”

Time: 30 Minutes
Group Presentations:
Time: 10 Minutes to each group
 Summary of Presentation:

Combine the issues of all the groups

and present a consolidated list of
issues