MICROFINANCE sector has witnessed significant growth in the past five years or so. Financial institutions and NGOs are playing an active role in the fight against poverty via microfinance. With the increase in the available funds, the microfinance institutions (MFI) are in a better position to serve their respective clients and increase their outreach. However, the main cause of concern is the lack of vision on part of the institutions in working towards becoming self-sufficient and flexible organizations catering to the demands of the community.
But before discussing improvements needed in the working of MFIs, it is important to state the key principles of microfinance:
* provision of a reliable service at a reasonable price to clients so that it adds value to the customer and the MFI;
* product should be based on the client’s needs and MFIs should alter their products portfolios according to the needs of clients;
* transactional costs should be reduced and the risk associated with loan disbursement and collection should be eliminated/reduced (depending on the risk);
* MFI focus should be on managing risk and achieving operational and financial self- sustainability
Microfinance is an intricate sector and requires a clear strategic vision. It should be considered an integral part of the economy which can fuel growth by boosting other sectors. Thus, the primary issue concerning MFIs is the existence of a clear strategic vision and mission.
Strategically, the MFIs exist for mobilizing funds to the poor for poverty alleviation and at the same time working towards becoming self -sufficient and effective organizations.
Research and innovation: In essence, microfinance is an evolving field and change is predominant in relation to the changing needs of clients and the community. Thus, research and innovation is vital. Recently, the Institute of Management Sciences (Peshawar) established a centre of microfinance.
Lack of research has plagued all segments of our economy. It is imperative that we start early in the field of microfinance. There are a number of crucial aspects that need a significant amount of research and in-depth analysis. The breadth of services that an MFI offers is pretty much a portfolio.
The management and diversification of the portfolio with respect to changing demands of community and mitigation of risk are important aspects that need a fair bit of research. This aspect of microfinance is under the realm of project evaluation, risk management and portfolio management.
Similarly, there are issues such as the portfolio at risk (PAR) calculations and maintenance through best practices. The MFIs need to experiment with various combinations in collaboration with academicians. The group size (the number and the issue of flexible versus stipulated group size), the average size of loan, specified period for loan disbursement and collection, the issue of emergency loans versus general loans are all factors that need a serious think over.
The microfinance instruments are intricate products that need adjustments and customization in response to the changing environment.
The client exit research study which deals with the issue of individuals exiting the group has gained focus. Outreach is not the only issue. Client satisfaction is a bigger issue. The exit of clients should be studied in terms of voluntary and involuntary exits so as to check on the efficacy of the funds disbursed.
It is time that instead of focusing only on the amount of funds disbursed; we focus on the outreach, the effects on the living standard and the satisfaction of clients, and development of communities so as to gauge the real efficacy of microfinance instruments.
The MFIs, the academicians, the regulatory agencies and the supporting agencies should take a proactive approach towards the issue and work towards responding to the needs of clients so as to adjust the strategy, vision and mission with the prevailing environment.
Capacity-building is perhaps one aspect that cannot be over-emphasized. The MFIs should become self-sufficient, independent of the funding agency that helped its establishment and early growth. Self-sufficiency in relation to the MFIs is both financial and operational efficiency.
The loans by these MFIs are similar to commercial loans as they bear certain service charges. The determination of these charges is important as they should be such that they provide value to the clients and at the same time help the institutions to work towards sustainability.
These MFIs have certain amounts of short-term and long-term investments arising from surplus cash inflows. The management of these in terms of risk and return is vital. Portfolio and Fund management is vital in this case.
Maximization of return given a certain level of risk is the objective. MFIs are involved in Treasury transactions with commercial banks. The return on these investments is a major source of cash flow which helps in achieving financial and operational sufficiency. Thus, it is important to understand that management of these investments is as important for an MFI as any commercial organization.
The microfinance sector also requires high calibre professionals so that functions such as finance, marketing, human resource, operations etc. could be appropriately handled. Similarly, internal audit is an important aspect. The operations and the funds need to be clearly monitored and controlled in order to become efficient operationally and financially!
In light of this, the problem at present is the lack of awareness among people about the importance and power of microfinance both as sector and as a career option. The intricacies involved in this field are many and requires the contribution of practitioners, professionals and academicians.
There has been a positive trend of late. Professionals from various fields are joining the microfinance sector in various capacities and are actively contributing to the upheaval of the sector.
It is important to understand that there are three types of risks associated with the clients of an MFI, namely economic, death and health risk. As with any other organization and sector there is the need to mitigate these risks. MFIs such as the KASHF Foundation in Lahore, are working actively towards reducing these risks.
The economic risk is a two fold battle. First of all, the character appraisal of the client is important. It is a crucial step as you need to serve people who are credible as to reduce the risk of default. Additionally, there is the need to have a sound monitoring and savings programme that will help the client to be economically stable and thus repay the loan at the specified time.
Death risk is being dealt with through the Life Insurance Policy. The Health risk is dealt through health training. Another viable aspect is to use the health insurance policy as well as the life insurance policy. As with all commercial ventures, the clients are extremely important to the company’s well being. Same is the case with the MFIs. There is the need to value your clients and to smother the risk associated with the chances of their default.
The marketing function is as important to an MFI as to any business organization. Greater emphasis should be placed on increasing the level of awareness of people so as to shed the social and cultural taboos associated with the practice of microfinance.
An in-depth analysis is required in order to prove that such programmes empower people and make them self-dependent individuals rather than sidelining them from the society.
