Rev.vers.Fin 8/12

• Establish a common understanding of the basic terms in microfinance
• Understand the elements that comprise best practices and principles in microfinance and why these are important.
Rev.vers.Fin 8/12

• Microenterprise Clients
Typically self employed, low income entrepreneurs
Include non-agri and agri businesses
4 of 10 households depend to some extent on income from non-agri microenterprise
• Microfinance Services
Small scale loan and deposit services
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Remittance services
Micro insurance
Rev.vers.Fin 8/12

 Microfinance loans, per BSP basic guidelines
 Loans are PhP150,000 and smaller
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Clients after 2 years can be given up to PhP300,000
Term of not more than 1 year, except some products of housing loan
Loans to microenterprises and other low income groups
Loans to basic sectors such as agriculture, fishery
 Present definition excludes loans whose payments are deducted from the source, such Salary loans, pension loans, LGU/bgy loan products and other variants
 Micro deposits are deposits with outstanding balance of
PhP15,000 or below
Rev.vers.Fin 8/12

ver. 04/09
 Non-agri Microentreprenuer
 Small Farmer
Rev.vers.Fin 8/12

Low educational level
Few employees (0-9),
Usually family members
Small volume of operations
Limited marketable collaterals to offer
Basic or no business records
Basic financial skills
Rudimentary / obsolete equipment
Family and business are considered as one
Multiple income-generation activities
Limited access to formal sources of credit / No credit history
Active participation in informal sources of credit
Large, extended families ver. 04/09
© Copyright 2003 RBAP. All Rights Reserved.

Small scale production
Low educational level
Business subject to external risks
No marketable collaterals to offer
Product subject to price
& market risks
Few employees
Usually family members
Active participation in informal sources of credit
No access to formal sources of credit / No credit history
Rudimentary / obsolete equipment
Multiple income-generation activities
Large, extended families
Rev.ver. Fin 08/21/12
© Copyright 2003 RBAP. All Rights Reserved.

ver. 04/09
• Group lending (Grameen-like and solidarity lending)
• Individual lending
Rev.vers.Fin 8/12

ver. 04/09
Loans given to groups – that is, either to individuals who are members of a group and guarantee each other ’ s loans, or to groups that then make subloans to members.
Under this system, would-be borrowers form groups
(usually 5 members) and each member agrees to guarantee the loans of others in the group
If any one individual member defaults on his or her loan, the other members of the group are required to cover the short fall.
Rev.vers.Fin 8/12

Loans are given to individuals based on their debt payment capacity and assure lending institutions with some level of security.
Loans are guaranteed by some form of collateral (soft or substitute collateral) or a co-signer.
Clients are screened by credit checks and character references.
Loan size and terms are tailored to business needs.
Rev.vers.Fin 8/12

MF Best Practices: Context
Reducing
RISK
Providing
Fast &
Quality
SERVICE
Minimizing
COST
Rev.vers.Fin 8/12

When formulating and assessing whether a policy or procedure is appropriate or not, ask the following questions: “ Will the policy or procedure…..
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Increase or reduce my risk of lending to this particular client?
Increase or reduce my cost of lending to this particular client?
Improve and speed up customer service?
”
Rev.vers.Fin 8/12

ver. 04/09
Rev.vers.Fin 8/12

ver. 04/09
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.
Rev.vers.Fin 8/12

ver. 04/09
• Bank philosophy and image
• Client selection
• Loan policies
• Disbursement procedures, monitoring and adequacy of internal control
• Client incentives
• Culture of zero tolerance
• MIS
• Loan-loss provisioning
Rev.vers.Fin 8/12

• Bank must be clear about its objectives for microfinance
• Microfinance must be seen as a profitable business, not a charitable, service of the bank
• Bank must be able to provide high quality, appropriate, and friendly service to its microfinance clients
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Clients feel welcome in the bank
Rapid access, simple procedures
Frequent contact with clients
Rev.vers.Fin 8/12

• Clearly defined client group
• Clearly defined geographic areas assigned to account officers
• Client selection based on rigorous assessment of character and repayment capacity, not collateral
Rev.vers.Fin 8/12

Offer Services that Fit the Preferences of
Microenterprise Clients ver. 04/09
 Start loans small and short term
 Increase loan sizes of repeat loans based on successful repayment and improvements in the client ’ s cash flow
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Unrestrained use of loan
Be conservative in analyzing the client ’ s cash flow when determining how much to lend
 Focus on customer friendly approach
Rev.vers.Fin 8/12

Streamline Operations to Reduce
Administrative Costs ver. 04/09
 Standardize and simplify product documentation and procedures
A simple product design will be easier for the clients to understand and staff to implement
Product manual is a must to standardize operations, improve efficiency, and minimize staff mistakes
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Maintain inexpensive offices close to borrowers
Select staff from the local communities
Rev.vers.Fin 8/12

ver. 04/09
• Make Account Officers responsible for loans they have recommended for approval
• Decentralize loan approval through a branch-level credit committee
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MFU staff presents and defends his/her loan recommendation to a credit committee.
Practice transparency – disclose to clients charges/fees and effective rates
Rev.vers.Fin 8/12

ver. 04/09
• Maintain regular contact with clients
• Delinquency “ alarm signals ” for effective follow-up procedures
• Peformance-based staff incentive scheme
Rev.vers.Fin 8/12

Charge Full-Cost Interest Rates and Fees ver. 04/09
• Small loans with frequent payments have higher transaction costs; charge interest rate on declining balance of the loan
• Microfinance clients are willing to pay higher rates in return for good service.
• Practice transparency in pricing; inform clients of the true cost of the loan. Follow BSP guidelines on pricing
• In time, as banks build scale, interest rates should come down
Rev.vers.Fin 8/12

ver. 04/09
• Reward clients who pay on time, through:
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Interest rebates
Bigger repeat loan and/or longer terms
Fast servicing of repeat loans
• Impose a reasonable penalty charge for late payments
• Joint liability with co-borrowers/co-makers
Rev.vers.Fin 8/12

ver. 04/09
• Loans with payments delayed by just one (1) day are considered delinquent
• Portfolio at risk (PAR), not past due ratio, defines portfolio quality
Rev.vers.Fin 8/12

ver. 04/09
• Bank staff takes immediate step to collect from client or find out reason when a payment is missed
• Willingness to pursue delinquent clients, in some cases, whatever the cost to establish and maintain zero tolerance practices
• The culture and discipline of zero tolerance must start with top management and be communicated down to the staff and clients.
Rev.vers.Fin 8/12

ver. 04/09
• Critical for tracking the performance of the microfinance loan portfolio.
• At a minimum, should be able to track missed payments, the account officers responsible for their collection, and the portfolio at risk (PAR).
• Should be able to show the performance of each account officer.
Rev.vers.Fin 8/12

Adequate Loan-Loss Provisioning and Loan Write-off ver. 04/09
Should be based on the aging of the portfolio at risk (PAR). Follow BSP guidelines.
Example
LLP (PhP) Age Loan Portfolio LLP (%)*
Current Loans 1%
PAR 1-30 days
PAR 31-60 days/or
Restructured once
PAR 61-90 days
2%
25%
PAR 61-90 days
PAR Over 90 days/or
50%
Restructured twice 100%
*Based on BSP Circular 409
Rev.vers.Fin 8/12

ver. 04/09
• Pick-up collection of loan payments, a most valued service demanded by microfinance clients, can lead to internal control problems and incidences of fraud.
• At a minimum, banks should be able to track missed installment payments, through their MIS.
• A microfinance supervisor should also verify cases of delayed or non-payment of installments immediately when they occur.
• Other check points include: loan review and approval by a credit committee and regular random check of clients by supervisor or audit personnel.
Rev.vers.Fin 8/12

ver. 04/09
• Low minimum balance requirements.
• Regular deposits and higher daily balances are encouraged by increasing interest rates or rewarding those with higher balances.
• High quality client service.
• Standardize & simplify product documentation and procedures.
Rev.vers.Fin 8/12

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Strong institutional commitment – with
CHAMPIONS at board & sr. mngt level and at mid-mngt level
Demand- andmarket-oriented savings and loan products
Good client service
Good client selection process
Sufficient interest rates to cover costs
Zero tolerance of loan delinquency
Good functioning MIS
Adequate loan-loss provisioning
Adequate internal control measures
Rev.vers.Fin 8/12