1 microfinance best practices and principles. 2 session objective identify the elements that...

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1 Microfinance Microfinance Best Practices and Best Practices and Principles Principles

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Page 1: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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Microfinance Microfinance Best Practices and PrinciplesBest Practices and Principles

Page 2: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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Session Objective

• Identify the elements that comprise best practices and principles in microfinance

• Explain why MF best practices and principles are important to incorporate in microfinance product design.

Page 3: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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Main Objectives in Lending Operations

Reducing RISK

ProvidingFast & Quality

SERVICE

Minimizing COST

Page 4: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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Assessing our Lending Policies & Procedures

When assessing whether a policy or procedure is appropriate or not, ask the following questions:

“Will the policy or procedure…..

• 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?”

Page 5: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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Microfinance Best Practices & Principles

• 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.

Page 6: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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GROUP EXERCISE

• Divide participants into 4 to 5 groups.• Each group will receive a stack of meta cards

with lending practices and principles written on them.

• First task is to segregate those cards that don’t belong to the elements of best practices and principles.

• Each group will pick up 2 cards that don’t belong and explain why they don’t belong.

• Second task is to explain the rationale behind the best practice/principle picked by the facilitator from correct answers identified by the group.

Page 7: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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B. Other Microfinance Best practices that should be observed by Institutions

Procedure/ Procedure/ PolicyPolicy

Best Practice / PrincipleBest Practice / Principle RationaleRationale

1. Bank Philosophy and Image

Provide high quality, appropriate and friendly service to micro-entrepreneurs - Clients should feel welcome in the bank - Rapid access - Simple procedures - Frequent contact with the client

Microfinance operations is a business, not a charitable service Bank has clear objectives for its microfinance operation

Quality Service

Viability and sustainability of operations

Microfinance Best Practices & Principles

Page 8: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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B. Other Microfinance Best practices that should be observed by Institutions

Procedure/ Procedure/ PolicyPolicy

Best Practice / PrincipleBest Practice / Principle RationaleRationale

2. Loan Disbursement

and Monitoring

Decentralize loan approval at the branch-level credit committeeAccount officers are responsible for loans they have recommended for approval Clearly defined geographic areas assigned to account officers to avoid overlaps and competition for clients among AOs.Frequent contact with clients Closely monitor delinquent accounts and apply measures as indicated in the delinquency alarm signals

Reduce Cost Quality Service

Microfinance Best Practices & Principles

Page 9: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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B. Other Microfinance Best practices that should be observed by Institutions

Procedure/ Procedure/ PolicyPolicy

Best Practice / PrincipleBest Practice / Principle RationaleRationale

3. Zero Tolerance against Delinquency

Loans with payments delayed by just one (1) day are considered delinquent, and bank staff takes step immediately to collect. Portfolio at Risk (PAR), not past due, define portfolio quality Pursue delinquent clients, whatever the cost, to establish and maintain zero tolerance The culture of zero tolerance, or strict credit discipline, should start with top management and communicated to the staff and clients “DELINQUENCY ALARM SIGNALS” are consistently followed

Reduce risk Minimize cost

Microfinance Best Practices & Principles

Page 10: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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B. Other Microfinance Best practices that should be observed by Institutions

Procedure/ Procedure/ PolicyPolicy

Best Practice / PrincipleBest Practice / Principle RationaleRationale

4. Management Information System (MIS)

Automated MIS is key to tracking the performance of the microfinance portfolio MIS reports are tools for monitoring by top and middle level management & supervisors At a minimum, should be able to track missed payments, account officers responsible for their collection, and portfolio at risk with aging MIS report should show the performance of each account officer

Reduce risk

Microfinance Best Practices & Principles

Page 11: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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B. Other Microfinance Best practices that should be observed by Institutions

Procedure/ Procedure/ PolicyPolicy

Best Practice / PrincipleBest Practice / Principle RationaleRationale

5. Loan Loss

Provisioning

Adequate provisioning is a sound banking practice to cushion probable losses Provide loan loss provision based on BSP requirements (BSP Circular 409) Current Loans 1% 1 – 30 days 2% 31 – 60 days/restructured once 20% 61 – 90 days 50% More than 90 days/ restructured twice 100%

Promote good portfolio quality

Microfinance Best Practices & Principles

Page 12: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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B. Other Microfinance Best practices that should be observed by Institutions

Procedure/ Procedure/ PolicyPolicy

Best Practice / PrincipleBest Practice / Principle RationaleRationale

6. Internal Control Pick-up collection of loan payments (a valued service demanded by microfinance clients) could lead to internal control problems Bank should be able to track missed payments through MIS MFU Supervisor should verify cases of delayed/non-payment of installments immediately when they occur Other checkpoints: - Loan review & approval by Credit Committee - Regular random check of clients by MFU Supervisor or audit personnel

Reduce risks

Microfinance Best Practices & Principles

Page 13: 1 Microfinance Best Practices and Principles. 2 Session Objective Identify the elements that comprise best practices and principles in microfinance Explain

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Keys to Success in Microfinance

Strong institutional commitment Demand-oriented loan and savings products Good client service Good client selection process Sufficient interest rates to cover costs Zero tolerance against delinquency Good MIS Adequate loan-loss provisioning Adequate internal control measures