final report- private rating bank malawi... · with the opening of its first branch in lilongwe....

September 2008

CONTACTS

MicrofinanzaRating srl Corso Sempione, 65 20149 Milan – Italy Tel: +39-02-3656.5019 [email protected] www.microfinanzarating.com

OIBM Private Bag A71

Lilongwe, Malawi Tel:+265 (0) 1 758 403

Fax:+265 (0) 1 758 400 Email: [email protected]

Opportunity International Bank of Malawi – Malawi

Final report- Private Rating

First Rating Validity: 1 year if no relevant changes in operations or within the operation context will happen.

In March 2002, Opportunity International Bank of Malawi Ltd. (OIBM) received a full commercial banking license by the Central Bank of Malawi but only late in May 2003 it became fully operational with the opening of its first Branch in Lilongwe. OIBM is owned jointly by Opportunity Micro-Finance Investments Limited (20.3%), Opportunity Transformation Investments (53.7%), Trust for Transformation (6.2%) and Africap Microfinance Fund (19.8%). The bank provides financial services to a wide range of clients (from micro to bigger enterprises) through a well diversified and innovative products offer: savings, loans (group and individual), advances, insurance, forex currency transactions, electronic banking services (mobile banking, ATM, finger prints identification technologies, etc). OIBM operates through a network of 6 branches, 2 satellites and 3 kiosks distributed in all regions of the country (central, northern, southern). Legal Form Commercial Bank Inception year 2002 licensed, 2003 operational Area of intervention Urban-rural Credit methodology Individual and Solidarity Credit

Loan portfolio evolution and quality

02.000.0004.000.0006.000.0008.000.000

10.000.00012.000.00014.000.00016.000.00018.000.000

Dec06 Dec07 June08

0%

1%

1%

2%

2%

3%

3%

Gross outstanding portfolio PAR 30

Microfinanza Rating 2

Strengths Opportunities

→ Support from OI network → Access to saving mobilization → Skilled and committed management team

→ Strong investment in innovative technologies

→ Product diversification


OIBM headquarters and Lilongwe branch and mobile unit Mobile Unit, Kasungu, Area 25, Limbe, Mzuzu

Malangalanga, Mponela Luwinga, Kanengo, Blantyre

Final opinion OIBM represents one of the leading actors in the microfinance sector in Malawi offering a variety of financial products characterized by high accessibility in urban and rural areas thanks to the support of innovative technologies in which OIBM is increasingly investing. The bank at the same time maintains over the years a good quality of portfolio associated with a geographical expansion oriented, besides to urban areas, to un-served zones through the mobile-banking units. Nevertheless OIBM still presents some weaknesses: along the loan assessment process, in particular at the capacity of repayment evaluation level; in terms of portfolio concentration entailing a quite high risk. The bank’s organizational structure in order to support the expansion phase has still to be strengthened covering some missing positions and improving the middle management capacities representing the weakest layer of the structure. Besides that the reporting system should be adequately and further developed. In such a phase OIBM should analyse the streamlining of its operations through a more efficient allocation of the operating costs and the consolidation of its profitability and productivity which is following a decreasing trend. The needed resources to sustain its growth are expected to come mostly from investments in equity and liabilities besides the planned fast and stable increase of the savings, representing a relevant axis of development.


Growth rates

0%

20%

40%

60%

80%

100%

120%

140%

160%

Dec06 Dec07 June08

Active gross portfolio

Total assets

Active clients (number)

Funding liabilities

Personnel

Equity

Benchmarking

All figures of peer groups are referred to the MicroBanking Bulletin (MBB) database updated as of December 2007. OIBM ratios indicated here do not fully correspond to the ratios presented in the report as they are calculated according to the MBB methodology1. Figures for OIBM refer to June 2008.

The average outstanding balance is higher than all peer groups with a gross outstanding portfolio double the majority of them with the exception of Africa Large Non FSS. Portfolio quality in line with the main peer groups and below the one the Non FSS. With an ROE of -0.6%, OIBM shows profitability levels lower than the main benchmarks but higher than Non FSS. The debt/equity ratio follows a different trend being the one of OIBM only below Non FSS and Profit while the Portfolio yield is in line with the main peer groups. The bank presents double-fold productivity levels compared to peer groups (218 loans per LO) and also double operating expense ratio showing a lower level of efficiency.

1 The MBB adjusts the financial data to produce a common treatment for the effect of: a) inflation, b)subsidies, and c)loan loss provisioning and write-off (see MBB , Appendix I: Notes to Adjustments and Statistical Issues).


Table of contents 1. External Environment and OIBM positioning ..................................................................... 6

Institutional background .............................................................................................................. 6 Political and macroeconomic context .......................................................................................... 6 Microfinance sector ..................................................................................................................... 7 Regulation and supervision ......................................................................................................... 7 OIBM’s market positioning .......................................................................................................... 8

2. Governance and operational structure ................................................................................. 9 Ownership and Governance ........................................................................................................ 9 Organisation and structure ........................................................................................................ 10 Human Resources .................................................................................................................... 11 Internal control and operational risk management ..................................................................... 12 Accounting and external audit ................................................................................................... 13 Management Information System .............................................................................................. 13

3. Lending and saving operations ............................................................................................ 15 Lending products ...................................................................................................................... 15 Lending procedures .................................................................................................................. 16 Collaterals and accessibility ...................................................................................................... 17 Savings and other banking services .......................................................................................... 17

4. Assets structure and quality ................................................................................................. 19 Assets structure ........................................................................................................................ 19 Portfolio structure ...................................................................................................................... 19

5. Financial structure and ALM ................................................................................................. 22 Liabilities and equity structure ................................................................................................... 22 Assets and Liabilities Management ........................................................................................... 23

6. Financial and operational results ......................................................................................... 24 7. Strategic objectives and financial needs ........................................................................... 27

Financial needs ......................................................................................................................... 27 8. Details of the risk factors ....................................................................................................... 29 Annex 1 - Financial statements ................................................................................................. 31 Annex 2 - Financial statements adjustments ........................................................................ 33 Annex 3 - Financial ratios ........................................................................................................... 34 Annex 4 - Definitions .................................................................................................................... 36 Annex 5 - Guidelines of reporting and accounting .............................................................. 37 Annex 6 - Rating Scale ................................................................................................................ 39

OIBM – Malawi – September 2008 Chapter 1


1. External Environment and OIBM positioning Institutional background In March 2002, Opportunity International Bank of Malawi Ltd. (OIBM) received a full commercial banking license by the Central Bank of Malawi but only late in May 2003 it became fully operational with the opening of its first Branch in Lilongwe. The bank started its operations with the aim of serving economically active poor in rural and peri-urban areas and with the support of Trust for Transformation (formerly Opportunity International Usiwa Watha Credit Trust) a NGO operating in the microfinance sector but whose project was liquidated before the creation of OIBM. Opportunity Bank is a member of Opportunity International (OIN) network, a global Christian Micro-enterprise Development organization, and it is owned jointly by Opportunity Micro-Finance Investments Limited (20.3%), Opportunity Transformation Investments (53.7%), Trust for Transformation (6.2%) and Africap Microfinance Fund (19.8%). In the next future a further increase of the share capital is foreseen which will mainly involve the existing shareholders. The bank provides financial services to a wide range of clients (from micro to larger enterprises) through a well diversified and innovative products offer: savings, loans (group and individual), advances, insurance, forex currency transactions, electronic banking services (mobile banking, ATM, finger prints identification technologies, etc). OIBM is expanding its geographical presence and entering into new and unexplored markets through the use of the mobile bank unit (testing the areas’ potential) and the installation of smaller infrastructures such as satellites and kiosk which can be then transformed into full-fledged branch offering all bank’s products. Political and macroeconomic context The president Bingu wa Mutharika, part of the Democratic Progressive Party (DPP) and elected in May 2004, is currently engaged in an intense struggle to hold power due to a fierce resistance from the opposition parties in parliament who are refusing to co-operate in passing any new legislation, including the budget for fiscal year 2008/2009. As a consequence the economic policy will become

increasingly hamstrung by political factors reaching its climax in the next election which will have place in May 2009. Malawi’s real GDP growth has been

highly variable , mainly because of the economy’s dependence on the agricultural sector, which in turn is highly susceptible to drought (2001/02/ and 2005). Real GDP growth fell 5% in 2001, recovered to 7.1% by 2004, fell to 2,6% again in 2005 , and then recovered to 7.9% in 2006, and is estimated to have tailed off to 5.7% in 2007. With the average population growth rate at around 2.5% per year, GDP per head has been increasing only slowly in recent years. Farming generates over 90% of export earnings and 35-40% of GDP and around 85% of the population is represented by agricultural smallholders. More specifically maize is the main staple crop and tobacco is by far Malawi’s largest export, accounting for over 50% of merchandise export earnings, followed by sugar and tea. Good weather led to a bumper maize crop in 2007, and annual inflation averaged a historically low 7.9%. However inflation rose modestly in early 2008 , from7.7% in January to 8.5% in June, due to the negative impact generated by the rising international oil prices. The kwacha remained stable in 2007 , reflecting an extended period of tobacco exports and large maize exports, as well as the weakening of the US dollar. Overall, the MK has proved fairly stable



in the first quarter of 2008, averaging MK140:US$1, which is unusual, as the currency normally depreciates at this time of the year ahead of the opening of tobacco auctions in March and April. The latest Human Development Report2 ranked Malawi 164th out of 177 countries, with a HDI of 0.437, and it is estimated that 65.3% of the population lives below the national poverty line. (UNDP 204-2005). Microfinance sector The Microfinance sector is characterized by a variety of providers which can be summarized as follows: state-owned banks (MRFC, MSB, Malawi Rural Development Fund, DEMAT, SEDOM, etc) and Government-led programs (MARDEF, OVOP, SEDOM, DEMAT) serving mainly rural and agricultural markets; Companies Limited by Guarantee (PRIDE Malawi, FINCA, CUMO, Microloan, MUSCCO, TLF) which are credit-only institutions mainly created by international donors; Commercial Banks which are downscaling (Standard Bank Malawi, NBS Bank, First Merchant Bank now allied with FINCA); Specialized microfinance banks (OIBM) licensed by the Reserve Bank; Credit and Savings Cooperatives and Credit Unions which are collecting members’ share capital and savings and providing other financial services such as credit; Projects and informal suppliers (NGOs, informal money lenders, etc) among which ECLOF, FITSE, NABW; Credit companies mainly offering consumer loans to civil servants (Greenwing, Pelton, Blue Financials). 60% of the MFIs is present through its branches in the central and southern regions while 70% operates in the northern one. Although MFIs have a countrywide coverage (6 branches on average), the outreach in rural areas, where more than 85% of national population is living, is still limited. Lilongwe, Blantyre, Mzuzu and Zomba represent the u rban areas with highest concentration of MFIs . The microfinance market presents the following characteristics : government-owned banks and programmes dominate the sector providing 70% of credit and 80% of savings services (MRFC provides around 60% of the microfinance loans); MFIs are highly dependent on the commercial sector for transaction services and access to finance; a high seasonality and exposure to covariant risk; bad portfolio management; high default rates; inappropriate pricing strategies; high operational and administrative costs. No formal mechanism exists for MFIs to exchange information on borrowers, which represents a sensitive risk in particular in urban areas where there’s the highest concentration of MFIs serving similar segments of clients. In 2000 the Malawi Microfinance Network was established with the objective of facilitating the information dissemination among MFIS, promote capacity building, monitoring performances, etc. The association has currently a membership of around 20 MFIs. Regulation and supervision The legal and regulatory environment has been promoted by a Microfinance Policy and Action Plan approved by the Government in 2002 with the aim of creating a legal and regulatory framework in which the microfinance providers and stakeholders should operate. The Microfinance and Savings and Credit Cooperatives Bi ll , supported by the Reserve Bank of Malawi, is recognizing that microfinance should take also other forms than credit (such as savings, funds transfers and insurance) and identifies 5 institution typologies with different capacity in offering microfinance products (ex. only offering credit). All MFIs and SACCO licensed to operate microfinance should be under the supervision of the Reserve Bank of Malawi. OIBM as a commercial bank has been fully operating under: the Banking Act 1989, the Prudential Guidelines applicable under the Banking Act, the Reserve Bank of Malawi Act (RBM Act). In the recent years the Government of Malawi has taken a certain number of measure s in order to promote the financial sector, characterized by a very low competition degree, among which: the elimination of explicit agricultural subsidies, the elimination of interest rates control, the reduction of banks’ reserve requirements, removal of exchange control regulations and restrictions of capital movements, support to a market-oriented legal system to facilitate the entry of new financial

2 UN Development Programme (UNDP) (2007- 2008).



institutions, the implementation of a MALSWITCH representing a platform for the use of electronic banking. Only the financial institutions licensed and supervised by the Reserve Bank of Malawi and Credit and savings Cooperatives are allowed to provide savings services while all the other formal and informal institutions are only able to collect savings from clients and deposit them in commercial banks in their behalf. OIBM’s market positioning Competition in the microfinance market is highly localized in urban areas such as Lilongwe, Blantyre, Mzuzu and Zomba while rural areas, where also OIBM is operating. Moreover in recent years competition on the microfinance market has seen the entry of new actors such commercial banks downscaling and consumer loans providers. In 2007 Standard Bank of Malawi and NBS Bank using cheap source of capital from IFC and the World Bank, have down-scaled with the aim of improving their margins and of finding an alternative to the upper end market characterized by high competition. The First Merchant Bank also tried to enter the microfinance market through an alliance with FINCA dealing with the lower end market. The commercial banks operating in the microfinance market have lower financial and operating expenses due to their ability to better exploit economies of scale, and if compared with OIBM they have an advantage in term of geographical network and availability of capital resources. Commercial banks more in general compete with OIBM at the larger savers and other commercial services levels. At the microfinance level the main competitors are represented by: Government-led credit scheme (MRFC provides approximately 60% of the microfinance loans), FINCA, PRIDE Malawi. If compared with those last institutions OIBM presents a more inclusive approach providing a higher variety of financial products (savings, credit, insurance, forex currency transactions, etc). The combination of higher competition and absence of an effective information exchange brings about a risk of over indebtedness , with potential negative impact on the portfolio quality of MFIs and affecting in particular urban, consumer lending and credit to enterprises markets. The main competitive advantages of OIBM can be considered the following:

� Varied and innovative offer of financial products supported by innovative technologies � High accessibility (finger prints technology, mobile units, increasing network of ATM, etc); � Support of OI network

Still, the main competitive disadvantages come from: a lower access to financial resources if compared with the other banks, the fact OIBM is not yet fully sustainable and a still incomplete financial services offer (ex. lack of current accounts).



2. Governance and operational structure Ownership and Governance In March 2002, Opportunity International Bank of Malawi Ltd. (OIBM) received a full commercial banking license by the Central Bank of Malawi but only late in May 2003 it became fully operational with the opening of its first Branch in Lilongwe. The bank started its operation with the aim of serving economically active poor in rural and peri-urban areas and with the support of Trust for Transformation (formerly Opportunity International Usiwa Watha Credit Trust) an NGO at that time operating in the microfinance. OIBM’s share capital is currently worth 929,727 and is owned jointly by Opportunity Micro-Finance Investments Limited (20.3%), Opportunity Transformation



Investments (53.7%), Trust for Transformation (6.2%) and Africap Microfinance Fund (19.8%) Further changes in the equity structure are expected for the next few months, as a capital increase is being contemplated in order to finance the growth, but mostly coming from the existing shareholders. OIBM Board of Directors should be composed of five to eleven members (as per policy) with equal voting right and elected for a three-year term. According to the OIBM Board Governance manual equity holders shall appoint representatives to the BoD proportional to their ownership share. The current BoD consists of nine members out of which four are internationals and the rest are residents. According to the above mentioned manual non residents directors should not represent more than 49% (in OIBM 44%) while the residents one should not go below 30% (in OIBM 66%). The bank has recently introduced three new women directors as independent members complying with what written in the policy: having at least 2 women and 2 independent members. The Board meets quarterly and the communication flow is adequate and facilitated by the CEO’s presence on the BoD and frequent email exchanges between the management and members, even if the CEO’s presence as a full-voting member of the BoD is not in line with best practices. A certain degree of risk is related to the different perspective brought in by Africap more oriented to the profitability of the bank versus the one of OI more oriented to the accomplishment of the bank’s mission. As per policy the Board should include members with backgrounds in defined fields (microfinance, finance, accounting, legal, etc.) in order to maintain a high degree of professionalism while also keeping a strong commitment towards the social mission. OIBM Board composition respects such a balance and also presents an active management style of governance , playing a notable role in the operational as well as strategic decisions of the institution partly due to the fact the chairman is resident in Malawi (even though involved in the other OI partners’ Board in Africa). The BoD currently has four committees (Audit & Finance, Human Resources/MIS/Transformation , Credit Risk, Operations) as well as ad hoc committees formed on a need by need basis. The Committee meets quarterly (the day before the general meeting) and the BoD Chairman, the CEO and other members of the Executive Management team are usually in attendance, even if not voting members. Organisation and structure As of September 2008 OIBM operates through a network of 6 branches, 2 satellites and 3 kiosks distributed in all regions of the country (central, northern, southern). Since June 2007 the bank went through a fast geographical expansion with the opening of 2 new branches (Mzuzu, the Mobile Unit covering different), 2 satellites and 1 kiosk. The OIBM expansion is supported by different testing tools of potential markets: installation of kiosks or satellites, use of the mobile units reaching unexplored markets. However such an expansion seems to pose a challenge in terms of organization and staff training (in January 80 people have been hired to cover different administrative and operational positions).

The organizational structure of OIBM has undergone changes at different levels : new positions (loan supervisors, credit risk officers, etc) have been created in the branches, top management positions and responsibilities have

been restructured. The result of such changes seems to be a structure presenting 6 hierarchical layers from loan officers to CEO which are at a certain degree replicating some control functions

BoD

CEO

Marketing and

transformation

Human resources

and

administration

Credit/SME/

Corporate

Microfinance IT/MIS Risks and

standards

Audit

Finance and

treasury



along the loans processing path. However the organisation is still lacking : a dedicated COO/Deputy CEO position currently covered by the Head of Finance and Treasury charged of a high number of responsibilities (planned to be hired before the end of 2008); a management position dedicated to the saving products which are increasingly gaining importance (planned to be hired before the end of 2008). In the future it is foreseen a further revision of the top management responsibilities and in particular of a new Head of Credit position in terms of tasks (i.e. credit sanctioning, selling, etc) and the separation of the COO position who will be in charge of supervising IT, marketing, etc. The Human resources department seems to be understaffed in particular as far as the training capacity is concerned and considering the strong need of formation of the staff recently hired and of the existing staff (middle management is particularly weak). However the bank is planning the construction of an infrastructure dedicated to training (which should have been fund through the support of Africap) and as a consequence the strengthening of the internal training function. The Marketing department has been recently charged of a new “transformation function” consequently increasing the personnel and the positions in the department (ex. transformation officers, transformation and marketing supervisor, promotion assistants etc.). Besides the classical marketing (with a special focus on savings) the department promotes the empowerment of the clients and staff through the implementation of dedicated trainings on different topics such as basic financial management, risk of over-indebtedness, etc. The level of functional decentralization , started in January, in OIBM is increasing with: the strengthening of the internal control at branch level associated with the introduction of several control layers, among which the credit risk officer, who at a certain degree is replicating the same control tasks which should be carried out at different level and in different cases by the Loan Supervisor, Credit Manager and Branch Manager; the approval of loans through the Branch Credit Committee up to a maximum amount of MK 1,500,000 thus including only the OIBM microfinance loans; the rolling out of a decentralized cost control process where department and branches are already budgeting their own costs even though the accounting function is still centralized. Looking at the physical infrastructure hosting the organization, OIBM presents some weaknesses: the Head Quarter whose departments are not well connected, the Lilongwe Branch split in two different buildings. Human Resources As of June 2008 the bank’s staff counts 204 employees (out of which 101 are loan officers) with a staff allocation ratio worth of 49.5% and a growth of 49% of the total staff since December 2007. Such an increase, in particular among loan officers (25%) and other administrative and operational staff (92%), was meant to consolidate the current operations and to support the expansion in new markets but at the same time posed a relevant challenge in term of training of new staff (80 people have been hired in January 2008). OIBM presents a weak middle management due to the lack of skilled people at that level (the bank is requiring at least 2 years of experience) and which is promoted by the bank itself through the reimbursement of further studies costs. The top management team seems instead to be committed and competent showing a good balance between financial and social goals. The turn-over ratio is moderate and stands at 3% for the period July 2007-June 2008 following a declining trend since 2006 (in December 2007 was 8 % while the year before was standing at 27%). The losses ware mainly due to the competition characterizing the market particularly affecting the loan officers and other administrative/operational staff entered with low experience and then grown internally. The phenomenon seems to be less problematic partly thanks the improvements in the HR management policy related to the incentive systems, the review of the salary scale following the salary surveys, etc. Updates and changes are gradually integrated in the 2003 HR policy The recruitment process is initiated by the HR department on the basis of a new staff member need outlined by the Head of a Department or as per organizational plan. A good recruitment plan



is in place and it involves different organization’s positions according to the advertised position grade. Even though the bank requires the presentation of references by any new employees the HR department doesn’t verify systematically their truthfulness thus hindering the effectiveness of the recruitment process. Internal promotion is also available and, although there is no formalized career path, several middle-management positions have been covered by promoted staff. Newly hired staff participates into a 4-week introduction training : 2 weeks on internal policies and methodologies, 2 weeks of attachment.

Several training opportunities are offered to the staff under different forms: encouraging staff to pursue studies through reimbursement of certain education fees and approval of studies leaves; end of the year training plans (reviewed every 6 months) prepared by the heads of department (on the basis of the annual performance assessment results) and consolidated by the HR department associating an overall budget. Considering the increasing number of OIBM staff the HR department presents weaknesses in its training capacity in particular in terms of internal dedicated human resources. A salary scale review (based on job grades), based on the results of a salary survey on microfinance institutions and other private employers, has been implemented in early 2008. Different grades receive an established percentage of the associated market average salaries: senior management receive 100% of it; loan officers only receive 60% and 30% can be obtained under the form of incentive. The incentive scheme has been accordingly revised and in particular for loan officers a set of monthly targets (amount of loans disbursed, PAR, number of clients) has been defined in order to improve portfolio quality and productivity. Such targets are often too aggressive and pushing the loan officers to disburse bigger loans without carefully checking the client repayment capacity. The targets assigned should be realistically reviewed in the next future in order to don’t affect the portfolio quality. An annual performance review is taking place at the end of the year on the basis of the performance targets set together with the superiors. Such an assessment results in the attribution of a score and of achievements categories (ex. above target, on target, near target, below target) which are associated to different salary increases (revised in 2008). The performance review results also inform the elaboration of a training plan as mentioned above. Internal control and operational risk management Within the organization two different functions have been created as internal control and risk management tools: The Internal Audit Department independent and under the direct supervision of the Board (through the Audit Committee); the risk and standard department responding to the COO/Deputy CEO. As of September 2008, the Audit department was composed of one Audit manager, an Audit Senior and 2 Audit assistants. The department seems to be understaffed (low number of senior positions) if compared with the articulated and wide structure of the bank. The related manual has been recently revised and seems to be complete and well articulated even though some of the tools described are not fully in use (ex. Self-assessment). The head of the department is reporting quarterly to the CEO on the status of the activities carried out. The department operates through an Annual Audit Plan, formulated by the Chief IA and approved by the BoD, and through: annual audits for each head office departments, visits to the branch offices (at least one per year), and extraordinary audits requested by management or BoD. Currently branch are visited once a year which is still a quite low frequency, but the IA department is willing to implement 2 audits per branch per year even though the limited number of human resources might hinder its capacity of implementing them. Each department has to fill a risk self-assessment document (introduced by the OI regional office) identifying risks, rating them and describing the actions taken in order to mitigate them (the document should be updated every 3 months even though in reality it is not fully in use). Such a tool is used as a basis for the audit visit and as a monitoring tool of the progress. The branch visit takes 1.5 weeks during which: the



outlined risks are analyzed, 10% of the clients is visited, 10% of delinquent portfolio is visited. Reports are well articulated for each areas of risk analysing causes, potential consequences, responsibilities and action plans for which the branch/department is accountable. Each department/branches is also given an overall audit rating which is corresponding to a risk category (low, medium and high). OIBM has experienced cases of frauds involving staff (through the use of immediate cheque clearance, withdrawal of US$ 10,000 through the creation of fake smart cards) and clients, cases of money laundering, frequent use of same guarantees by several clients. The IA department as per policy has to investigate on the frauds within 14 days after they have been reported. The Audit department is reporting on a quarterly basis to the BoD Audit Committee overseeing the internal audit function. The bank has also created a risk and standard department which should be in charge of global risk management. The department’s functioning and procedures are in the process to be consolidated. Nevertheless this department should play a crucial role in terms of creating a modern risk management framework for the bank, the spread of an adequate risk culture, and support the definition and consolidation of internal reporting and analysis of the evolution of the bank and its risk. At the moment is still mainly focusing on credit risk (including provisioning). Accounting and external audit Deloitte has been OIBM’s external auditor up to 2007 but in 2008 the bank decided to appoint KPMG. OIBM’s accounting policies and reporting are in accordance with the IAS and International Financial Reporting Standards (IFRS) Due to the problems in data reconciliation between Accpac and eMerge (see below) the internal financial statements are only produced on a monthly, quarterly and yearly basis and submitted to the BoD. A financial report is elaborated and submitted on a monthly basis to the Malawi Central Bank using its chart of accounts. Financial statements are also produced for each branch however the allocation of costs among branches is still incomplete (in particular financial cost are not allocated). Management Information System OIBM utilizes eMerge as loan tracking system and AccPac as accounting software. Although the systems are currently integrated, some mismatch errors are produced by eMerge and transferred to Accpac. For this reason the bank is only able to produce monthly balance sheets since needing a quite cumbersome manual reconciliation with eMerge. The IT department has been recently strengthened with the hiring of new personnel and as of September 2008 it is composed of 6 staff members: the head of the department, a manager, a network engineer, 3 support engineers. However such a composition still presents some weaknesses as far as the eMerge support staff is concerned. In the near future in order to comply with a Central Bank report the IT department will have to move in a separate building and the bank is already working on that. The MIS works online and each branch is connected with the Head Quarter but the low connectivity and band-width at branch level is often slowing down daily operations. Besides that another problem affecting the efficiency of branches service delivery is represented by the inadequate number of points of access to eMerge. The bank is aware of the weaknesses and it is actively screening possible solutions (ex. a consultant has been hired for the improvement of the branches band width, new eMerge seats will be purchased, etc). Beside these structural weaknesses, the MIS still presents several inefficiencies in operations and reports generation partly due to a low flexibility of the software and partly due to the limited customization to management information needs. More in general the bank shows the necessity of further train the staff on the use of eMerge and improve the computer skills in particular of newly hired staff. Inconsistencies are still detected among the data of different reports. At the moment security is satisfactory. Backups are made at three different levels, all data: are copied to an offsite server in Blanta (not Accpac); are sent in the evening via VSAT link to Denver (only eMerge); are burnt to DVD and kept offsite. However the system doesn’t allow a real time



backup with eMerge not being able to do daily remote writing. Moreover all branches have a generator and an inverter is maintaining key computers in case of lack of electricity. Passwords to access eMerge have to be changed every 90 days while those ones for Windows are changed every 30 days. OIBM also developed a disaster recovery policy which foresees the use of a recovery server in Limbi, which is planned to be transferred to Lilongwe. The bank has also developed policies regulating the use of computers, internet and email.



3. Lending and saving operations Lending products OIBM provides both Solidarity and Individual Credits to low-middle income people as well as micro-small, medium and large enterprises for different purposes (business , consumption, agriculture) according to their needs and with the aim of improving their living standards. The conditions of loan products are presented in the table below:

Only 8.3% of the portfolio is dedicated to solidarity loans and around 17% to microfinance loans The rest of the portfolio is invested in individual loans targeting higher segments of the market (SME, firms, salaried people, etc.) OIBM offers a good variety of products targeting employee, micro-entrepreneurs, medium entrepreneurs through differentiated methodologies using several collateral requirements such as: salary, deposits, groups guarantee, tangible assets, title deeds, guarantors. More in general OIBM shows to have an innovative approach driven by the will of designing products more accessible to the target clients. Group loans have been developed for groups of farmers (agricultural loan ) and micro-entrepreneurs (Premium Trust Bank- PTB ), representing the lowest segment of the targeted clientele. These products are in fact characterized by: smaller loan amounts and in the case of PTB increasing along the different loan cycles, more flexible repayment frequency and in particular



fortnightly or monthly for PTB and bullet payment for agricultural loans; obligatory savings combined with group guarantee and in the case of the agricultural loan the partial guarantee of the Agro-business buyer (payments are channelled through OIBM). The agricultural loans seems to be quite flexible (thanks to the bullet payment and the possibility of obtaining the necessary grace period but on the other side they are fully secured by the fact that all payments by the buyers are channelled through OIBM’s accounts (as per contract). However the bullet payment of the interest and principal characterizing the agricultural loans is implying a certain degree of risk. OIBM also developed 4 individual loans targeting different market segments. The Individual Micro Credit Loan (IMC) and the SME loans are part of a graduation path for clients coming from groups loans. Loan amounts are increasing from IMC up to SME but in both cases a physical guarantee is required and the loans is for productive purposes. Payroll and Mphamvu loans can be instead used for consumption purposes which should be declared to the loan officers. While the payroll loan is deducted on a monthly basis by the salary the Mphamvu loan presents more flexible characteristics with the possibility of doing monthly, quarterly or bullet repayments. In the case of the payroll loan the employer is legally responsible in case of default. OIBM also developed a loan as a retention tool for “loyal” clients (Mbadawa loans ) with good repayment performance and who are in or above the third cycle as individual borrowers and at the fifth cycle as Premium Trust Bank borrowers. Overdrafts , mainly offered to the same SME’s target (and registered under it) but with a different risk profile, represent the highest share of the portfolio (26.5%). Interest rates and the other fees are continuously monitored by the ALCO and under control of the Central Bank which posing ceiling on the applicable interest rates. The main drivers for the interest reduction along the years of operation are represented by: the increasing competition in particular at payroll level; the reduction of the Central Bank reference rates directly affecting the active and passive interest rates in the economy. Lending procedures The assessment of client capacity of repayment in its implementation presents some weaknesses. More in general loan amounts limits are not always respected in particular for subsequent loans where an increase over the one allowed is often approved by the Credit Committee carrying out a not in depth analysis. Often subsequent loans for groups are approved on the basis of the repayment performance without any further check. However for the first loan the visit by the loan officer and loan supervisor is compulsory and the group has to go through a 4-week training representing an occasion for assessing the single clients. For individual loans this problem is even more critical due to the higher risk exposure of the bank associated to the higher amounts disbursed (in particular for SME/Corporate clients), in this case: cash flows are not always properly analyzed and the business productivity as well. Such a problem is partly due to the incentive scheme targets pushing loan officer to disburse higher amounts and partly to the low institutional experience of OIBM in the SME sector. Both before and after the disbursement of the loan, the monitoring of the client should be systematic . For group loans (PTB) loan officers and loan supervisor visit the group and each clients while after disbursement the loan officer should visit the group at each repayment meeting, which is not systematically implemented. Similar problems are affecting the monitoring after disbursement of individual loans. The approval of loans through the Branch Credit Committee is allowed up to a maximum amount of MK 1,500,000 thus including only the OIBM microfinance loans. The Head Quarter Credit Committee can approve from MK 1,500,000 to MK 10,000,000 and if chaired by the Deputy CEO up to MK 10,000,000. Over that limit approval should come from the Board credit committee. Innovative solutions have been developed to face in ternal obstacles and ease the loan processing . In particular the lack of IDs at national level has been faced through the elaboration of a finger prints identification used at teller and ATM level for all transactions.



Collaterals and accessibility In order to access PTB and agricultural loans, members must voluntarily form into joint liability groups formed of a minimum number of 7 if in urban areas and 10 if in rural areas with a ceiling respectively of 10 and 20 members. In the Agricultural loans additional securities are taken: partial guarantee by the agricultural produce buyer, household and business assets in case the loan amount exceeds US$ 5,000. Obligatory saving are foreseen for each type of loan with the exception of the Payroll, for which the terminal benefits and the employee guarantee (legally responsible in case of default) are requested, and Mphamvu loan which is issued on the basis of a lien on deposit. Collateral policy for individual loans (IMC, SME) is instead requiring a physical collateral covering 150% in the form of a legal mortgage, bill of sales, etc. In case of higher loan amounts (SME loans, and higher IMC loans) the guarantee is evaluated by external and registered evaluators appointed by the clients thus creating problems in terms of misevaluations of the real value of the guarantee (overestimated). More in general problems have been detected at different levels: weak check on the guarantee insurance, overestimation of the goods value by the evaluators hired by the client, weak check on cross-guarantee among clients, etc. The Collection Section , which is part of the Risk and Standard Department, has faced several difficulties: lengthy debt collection process, difficulties in tracing the pledged good, etc. Savings and other banking services Besides lending products, OIBM is mobilizing savings from its clients and within its areas of operations, through a well diversified variety of products mainly in the local currency with the exception of the Forex account. Saving products are marketed and offered also through the mobile banking unit covering potential areas of operation. OIBM is willing to push further the mobilization of saving which is witnessed by the variety of products targeting the different market segments (SME, corporate clients, etc) and in particular the lowest segments through accounts with no minimum balance, not bearing any charges but remunerated. The interest applied varies between 1% and 6% according to the specific characteristics of the products. A forex account is available for those clients working in foreign currencies, such as tobacco farmers. The bank has fixed the minimum balance at MWK 500 (3,6 US$)for the deposit accounts. When such a threshold is reached no fees should be deducted, however some accounts have been anyway charged thus representing a negative incentive to save for the clients. The bank’s offer is anyway still incomplete, in particular for larger clients who are missing the possibility of opening current accounts. OIBM’s savings offer is summarized in table below:3

OIBM is increasingly investing in innovative services such as: finger prints identification which is overcoming the problem related to the lack of ID documents for the majority of the population; the use of mobile banking through the use of a truck and cars which are collecting saving and disbursing loans in areas where OIBM is not yet present; installation of point of sales in rural shops and other commercial centres; development of SMS banking systems; connection to a wide ATM network.

3 Not all details on the different products have been made available



OIBM is also offering other forex currency transaction services (telegraphic transfers, drafts, foreign currency notes, travellers’ cheque, foreign currency cheque, etc), insurance (although at an initial stage).



4. Assets structure and quality

Assets structure OIBM average net portfolio represents 53% of total assets (quite low concentration in the core business), showing a slight decrease if compared with the December 2007 level (58%) but higher levels than December 2006 (47%) and 2005 (28%). The average liquidity level as of June 2008 stands at 14% registering an increase of 2% from December 2007 and exceeding the minimum liquidity level established by the Reserve Bank of Malawi4. Financial Investments account for 17% over total assets, including money market investment and investment in Treasury/RBM bills registering a growth in the last period of analysis (12% as of December 2006). Another quite significant portion of the total asset is represented by the net fixed asset (14% as of Jun 2008) representing the investment in fixed assets (land, building, etc) to support the banks expansion Portfolio structure As of June 2008 OIBM’s outstanding portfolio is worth of MK 2.2 billions (US$ 15.9 millions) , and registered a sound growth worth of 98.5% over the period July 2007-June 2008 (compared to 114.8% and 137.4% respectively of the years December 2007 and December 2006).

The share of Microbanking Products (IMC, PTB also including the agricultural loans and Mphamvu) has shown an increasing trend since December 2006 (12.9%) up to June 2008 when it is representing 18.9% of the portfolio. The group loans are corresponding to a low portion of the

4 The Reserve Bank of Malawi has set the following liquidity guideline: the net liquidity (total liquid assets less suspense accounts in foreign currency and cheques in the course of collection) divided by total deposits must be at least 20%. At the end of 2007 year the bank’s liquidity ratio was 32.7%

Assets structure - June 2008

13%

53%

14%

17%3%

Cash and Banks Net Portfolio Net Fixed Assets

Financial Investments Other Assets



portfolio standing at 8.6% as of June 2008 while the rest of the portfolio is represented by individual (corporate) loans. The overdrafts and payroll loans are respectively accounting for 22.9% and 27.4% of the portfolio, followed by corporate loan (16.3%) and SME loans (13.8%). In the last two periods of analysis (previously detailed data on the portfolio composition have not been made available) the portfolio structure in terms of loans types has not undergone major changes (in terms of microbanking loans versus commercial loans). The average outstanding amount 5 has increased in the last two period of analysis passing from US$407 as of December 2006 to US$ 633 as of December 2007 (US$723 in June 2008), the percentage of such a value on the GDP per capita has accordingly increased to 239% in December 2007 while it was standing at a lower level the year before (173%). Even though no exact data have been made available on the portfolio distribution in the different geographical areas of operation, it is estimated that the portfolio (72.6%) is concentrated in Lilongwe and Limbe branches, being the first areas of expansion. The bank doesn’t collect data and doesn’t produce reports on the distribution of the portfoli o by sectors of economic activities financed , thus implying a certain degree of risk of concentration in specific activities. However the concentration in the agricultural activities (i.e. tobacco production), triggering a higher risk for the intrinsic nature of this typology of business, is kept under control and according to the related policy it should not go over 20% of the total portfolio (previously the ceiling was set at 10%) while maximum 80% of it can be dedicated to tobacco. OIBM is now trying to introduce an exit survey but at the moment no data are available on the clients’ drop-out. The problem of credit concentration seems quite relevant due to the existence of some big loans to large enterprises even if regulatory limits are respected. As of June 2008 the two biggest loans represent together 19.5% of the total outstanding portfolio (separately 11% and 9%) and 44% of the core capital (separately 24% and 20% those loans) which is a quite high level of concentration even if regulatory limits are respected.6 Loan portfolio quality As of June 2008, OIBM shows a good portfolio qualit y with a consolidated PAR 30 equal to 2.6% which has registered an increase of 1.2% if compared with the previous year of analysis (January-December 2007). Corporate and SME loans are accounting for the highest PAR 30 standing in both cases at 1.0% (PAR 30 weighted) and respectively 6.6% and 7.7% (PAR 30) while

0.6% of the total PAR 30 weighted is shared between Payroll loans (0.5%) and IMC loans (0.1%). The group loans (PTB) although representing a very low share of the portfolio (8.3%) are registering a 0 zero PAR 30 weighted and 0.5% of PAR 30.

5 Due to the low reliability of the data related to the amount disbursed during the periods considered, in the following analysis they have been replaced with the outstanding portfolio data 6 Regulatory limit is equal to 25% of total core capital



As of June 2008 OIBM has no restructured loans, nevertheless policies and procedures exists for this kind of riskier loans. Write-off is applied to all loans overdue more than 365 days and has been implemented for a low amount of loans. For the period January 2007 – December 2007, write-off amounts to 1.6 % of the average outstanding portfolio for the period. The accumulated loan loss reserve over the PAR 30 stands at 117.8% as of June 2008.



5. Financial structure and ALM

The debt to equity ratio has a strong seasonal path mainly due to the variations of the deposits’ base. The monthly value of this ratio ranges between 2 and 4.5 while the average annual value ranges from 2.8 in 2006 to 3.5 for the last 12 months with a certain upward trend even if hidden by seasonal fluctuations. The capitalization of the bank is strong and still much higher than the regulatory minimum equal to a CAR (on Risk Weighted Assets) higher than 8%

(it was 34% in December 2007). Liabilities and equity structure As of June 2008 OIBM’s liabilities stands at US$ 22.4 millions out of which US$ 17.7 millions are deposits and US$ 2 millions are loans. Since the beginning the bank had a strong focus on the collection of savings which have always been the main source of financing of its activity. Even if the bank offers different kind of savings products most of them are saving deposits while the remaining are term deposits. Saving deposits cater the lower segment of the market and as of June 2008 represent 74% of the total deposits and 97% of the total savings accounts (total accounts are 138,546) with an average balance of US$ 97. Term deposits have higher access requirements and target enterprises and high income individuals. The term is up to 12 months even if the majority are up to 3 months. The average balance as of June 2008 is US$ 1,100.00. The deposits show a remarkable growth over the years even if with significant seasonal fluctuations. The cost of the deposits has been characterized by a strong decline following the reduction of interest rates applied by the Central Bank. The savings’ cost of fund ratio declined from 14.5% in 2005 to 4.5% as of June 2008 (for the first six months). The concentration of deposits is quite high with the first 10 savers representing 17.3% of the total deposits as of June 2008 and the first one (own by an international NGO) equal to 7.4%. Only 2% of deposits are denominated in foreign currencies (mainly Rand and US$). Loans are mainly used by OIBM to fund the portfolio in USD devoted to agriculture. Moreover credit lines from local financial institutions are used to cover short term liquidity needs.



At the moment OIBM has two loans by the Gates Foundation of US$ 2 millions at a concessional rate of 1% partly covered by a guarantee from the Central Bank. The bank has also received funding from Oikocredit at a commercial rate: a loan has been recently fully repaid in advance and now a new credit line of US$ 3 millions for 3 years at a Libor of plus 3.75% is under discussion. The trend of the total cost of financial resources mimics the one of the savings (see above) with a strong decrease of the cost of fund ratio from 14.2% in 2005 to 4.4% for the last 12 months. As of June 2008, OIBM’s total equity is equal to US$ 6.29 millions, with paid-in capital accounting for 96%. Another 9% is represented by a convertible loan from OTI and the cumulated losses represent 6% (15% in December 2007). ROE at 10% represents a common objective for the shareholders while the high profitability is not pursued. Moreover shareholders (mainly OI) seem to be willing to promote a further increase of subordinated debt in order to sustain the investments in the branch network improvement. Assets and Liabilities Management OIBM has an ALCO meeting once per month. Procedures and some limits in terms of risk exposure have been established even if a global risk management framework is still under construction . Reporting on financial risks and performance is in place even if there are margins of improvement. Liquidity management is quite prudential: the minimum liquidity requirements foresee that an average 10 days liquidity should not go below 20% of short term source of fund and each day should not be less than 10%. The average level of liquidity over assets in the last 12 months has been 13.5% while the same value of liquidity over deposits was 21.5% (but 25% of savings are term deposits). Also the trend of loans/deposits indicates a prudent behaviour (see graph) even if registering an increase and being, over the last months, around 100%. In general liquidity is correlated to the seasonal oscillation of deposits and portfolio . Cash flow statements and projections are available on a daily, weekly, and monthly basis in Excel even if a prices estimation of core deposits is not available. The treasury department invests the liquidity mainly in the money markets and t-bills with a short term horizon (maximum 6 months). Given the strong reduction of interest rates (especially on government debt) the liquidity yield has declined during the last year. The maturity structure of OIBM presents a gap in the first aging categories due the fact that most of its funding liabilities are represented by savings deposits. As of December 2007 up to 6 months there is a liquidity gap and the cumulated maturity gap is equal to 35% of total assets. In terms of interest rate risk the situation is similar even if the higher segment of loans to SMEs is characterized by floating interest rate mitigating the interest rate gap. The bank is exposed to currency risk because of the borrowing in US$ which, due to the operations’ seasonality, might not match with the agricultural portfolio in US$. As of June 2008 the currency mismatch in US$ is equal to 6% of assets or 25% of equity (below the regulatory limit of 35%). Currency mismatch in currencies other than US$ is not relevant.



6. Financial and operational results After the losses of the first years of activity OIBM has approached sustainability in 2007 and during the first 6 months of 2008 has reached unadjusted profitability. While 2006 the institution was still far from sustainability with a ROE of -31.7% and an OSS of 75.3%, in 2007 the results seem improving with a ROE of -2.8% and an OSS of 97.7%. For the period January-June 2008 OIBM seems to reach sustainability even if taxes are not accrued for the period: ROE is equal to 1% and OSS to 101%. The results for the period July 2007 – June 2008 are still negative due to the influence of the results of the last period of 2007. The trend of ROA is similar (on average the leverage increases during the period, see chapter 5, but with a high number of fluctuations) with an increase from -10% in 2006 to -0.8% in 2007 and 0.3% for the first six months of 2008. The trend of adjusted ratios is similar to the un-adjusted one even if adjusted profitability is still negative also for the last six months (AROE -1% and FSS 99.3%). The main components of the adjustments are represented by inflation and provisions (except for the last two periods of analysis). The evolution of the ratios which determines the profitability of OIBM is composed of two different trends: on one side costs and revenues indicators (on average portfolio ) show a strong reduction during the years , on the other side the concentration of the resources in the portfolio (as defined by portfolio over total asset s) is increasing during the years (partly explaining the reduction of both costs and revenues indicators). The dynamic of the profitability is therefore explained by the reduction of the cost and revenues ratios. The worsening of the performance in 2006 compared to 2005 is due the stronger reduction of the revenues ratio compared with the one of the costs ratio, due in particular to the strong reduction of revenues from investments over average portfolio. The step towards sustainability in 2007 instead is due to the strong reduction of the operating expense ratio, much more significant than the one of portfolio yield and of other income over average portfolio. The same trend explains the achievement of profitability during the first six months of 2008. In terms of revenues the two main components are interest and fees on portfolio and other income fees mainly related to foreign exchange transactions. The relevance of the other financial

revenues (40% of total revenues during the last 12 months mainly related to forex transactions) reflects a precise strategy of the bank: to exploit a specific market opportunity related to foreign exchanges in order to cross subsidize the microfinance products. Even if profitable such a strategy creates a certain dependency on this specific market. In terms of portfolio yield the ratio lowers substantially from 57% in 2005 to 31% for the



last 12 months due to the strong and progressive reduction of the interest rates charged on all products. The parallel and even stronger reduction of the other financial revenues on average portfolio is due instead to the strong increase of the active portfolio coupled with a slower growth of other financial revenues if compared to the one of interest and fees on portfolio (+161% from 2005 to 2007 compared to +215%). Revenues from investment after 2005 represent a limited portion of the total revenues. On the cost side the most relevant component is the operating cost ratio which shows a strong reduction from 133% in 2005 to 46% for the last 12 months. These high values are partly explained by the fact the bank has a strong focus on the collection of small savings and on the provision of additional financial services other than credit. Nevertheless even if 1/3 of the costs could be related to savings7 the efficiency is still very limited. Moreover only 17% of the portfolio is devoted to real microfinance loans (individual e PTB) justifying part of the operating costs. Another issue is the very high number of savings and credit products which increase complexity and costs. The provision expense ratio has been historically between 1% and 2% except for the last period when has increased to almost 3%. The trend of the funding expense ratio is quite peculiar with a progressive reduction from 35% in 2005 to 6% for the last period. The drivers behind this trend are related to the reduction of interest rates paid on savings (the cost of fund ratio declined over the same period of about 10%) and the increase of the loans/deposits ratio (from an average value of 50.6% in 2005 to 85% of the last 12 months) which explains a lower incidence of financial costs on average portfolio.

Data on productivity are the results of strong differences among products reducing the significance of the average data. As of June 2008 loan officers’ productivity by products range from 52 for IMC, 55 for SME, 309 for PTB and 786 for payroll loans. While productivity for group loans is satisfactory, data for individual microfinance loans is low. This is partly due to the strong growth of the staff and the frequent and fast promotion of loan officers to other positions to cover the needs of a growing structure. The historical trend of productivity shows a decline since 2006 with productivity for loan officer reduced from 292 in 2006 to 218 in June 2008. In terms of staff productivity the trend is similar from 151 in 2006 to 108 in June 2008 even if during the last six months the increase by 10% of the staff allocation ratio explains the divergent trend of staff and loan officer productivity. Productivity in terms of amount has an opposite trend with a progressive increase during the last periods. OIBM has almost reached sustainability but it has still to be consolidated in the next periods. Moreover adjusted profitability has not yet reached positive values. Operational costs are still high and should partly reduce through an increase in productivity (especially as far as the individual loans are concerned) and through a rationalization of the number of products. The significant part of the portfolio composed of larger loans should facilitate the reduction of operational cost, however a potential deterioration of some of them can have a significant and negative impact on provision expenses and, consequently, on profitability. Microfinance operations are not sustainable on their own and are cross subsidized through other products. Nevertheless a clear analysis in

7 A gross estimation of the impact of the costs of savings based on several case studies.



terms of costs and revenues of each business line should facilitate the streamlining of operations and products and could improve the selection of the investments (til now the availability of grants to test new technologies and products have probably reduced the efficiency of the investment selection and of the related resources allocation process).



7. Strategic objectives and financial needs The main features of the projected institutional, operational and financial development of OIBM are included in the recently developed Business Plan 2008-2010 and were internally elaborated through a bottom-up approach involving all the departments. Financial projections will be updated at the end of 2008 which is representing the first year of the Business Plan. Projections are based on only one growth scenario.

According to the projections 2008-2010, OIBM plans to increase its loan portfolio at a decreasing pace: 60% in 2008 and almost half in the following years (38% and 32% respectively in 2009 and 2019) reaching by 2010 an outstanding net portfolio of US$ 31,9126,000 and with around 72,116 active loans. Customer deposits are expected to grow by 78% from 2007 to the end of 2008 while in June they were already grown by 49%. The Equity growth, which is foreseen to be mainly fuelled by an increase of the Shareholder capital, will register its peaks in 2008 (32%) and in 2010 (40%), and in June 2008 the Equity amount already reached the level projected. The hypothesis of the Business Plan on the evolution of the bank’s profitability seems too much optimistic also given the fact that ROE and ROA were still at negative levels as of June 2008. The debt to equity ratio follows an upward trend due mainly to the increase of the deposits while the other components will register a very low growth. The main strategic axes of OIBM will be the following:

• improve and innovate the products offer (insurance, savings, etc) to better answer the targeted market needs and review of the bank’s cost structure;

• Sustain the geographical expansion through recapitalization (opening of new branches and satellites, transformation of satellites into branches, strengthen the mobile unit, etc).

• Pursue technological innovation at different levels: introduction of mobile banking, improvement of the Electronic Funds Transfer (EFT) system and of the related infrastructure (smart cards, ATMs, POS and a switch), access a new swift bureau (to process more foreign currency).

• Improvement of staff skills and of OIBM capacity to retain talented people through an overall strengthening of HR policies

Financial needs The needed resources are expected to come mostly from investments in equity and liabilities. OIBM has already received a US$ 1 million to face the foreseen liquidity crunches of the three years and accessed the Opportunity Loan Guarantee Fund of US$1 million as standby credit facility. Furthermore the bank is planning to mainly sustain its growth through a fast and stable increase of the savings (around 70% each year), representing a relevant axis of development.



OIBM’s equity increase is going come from an inflow of new capital investment, mainly coming from the already existing shareholders. As of June 2008 the paid-in capital already registered an increase of 57%.

OIBM – Malawi – September 2008 Chapt er 8


8. Details of the risk factors According to our analysis, the main risk factors of OIBM are the following:

OIBM – Malawi – September 2008 Chapt er 8


OIBM – Malawi – September 2008 Annex 1


Annex 1 - Financial statements



Annex 2 - Financial statements adjustments The financial statements in Annex 1 are the result of standard reclassification . They are based on audited financial statements according to international standards, except for the infra-annual FS in the period July 2007 – June 2008, which were not audited. Financial statements have been then adjusted in order to make them comparable to financial reporting and performances of institutions using different accounting standards and operating in different environment and to evaluate the level of sustainability of the institution with market conditions. The main adjustments include:

• adjustment for the accrued interest on delinquent loans > 90 days • elimination of subsidies (donations in kind8 and soft loans9) • provisions are calculated with a standard formula10 • adjustments for inflation • adjustments for write-offs

The bulk of the adjustments as of June 2008 for OIBM are related to inflation (the institution does not include in its financial statements a reserve for inflation) and, for previous periods, also to loan loss provision adjustment. The cumulative effect of all these adjustments reduces the net income in all the periods.

8 Donations in kind are valorized and added to operational expenses. 9 In the income statement it is registered the value of the difference between financial costs of the institutions and financial cost evaluated at the market rate. In particular, in the case of loans in local currency, it is considered 75% of the average lending rate in the national market (IFS Line 60P). In the case of loans denominated in foreign currencies (US$ and Euro), it is considered the average value of LIBOR 1 year plus 3%. 10 Provisions are calculated according to the following formula: Portfolio: 1-30 days 10% Restructured loans 1-30 days 50% 31-60 days 30% > 1 day 100% 61-90 days 50% >90 days 100%



Annex 3 - Financial ratios



Annex 4 - Definitions

Description of the ratio Formula

Profitability

Return on equity (ROE) Net income before donations / Average equity

Adjusted return on equity (AROE) Adjusted net income before donations / Average equity

Return on assets (ROA) Net income before donations / Average assets

Adjusted return on assets (AROA) Adjusted net income before donations / Average assets

Operational self-sufficiency (OSS) (Financial revenue + Other operating revenue) / (Financial expenses + Loan loss provision expenses + Operating expenses).

Financial self-sufficiency (FSS) (Adjusted financial revenue + Other operating revenue) / (Adjusted financial expenses + Adjusted loan loss provision expenses + Adjusted operating expenses)

Profit margin Net operating income / operating revenue

Portfolio quality

Portfolio at Risk (PAR30) Portfolio at Risk > 30/ Gross outstanding portfolio

Provision expense ratio Loan loss provision expenses / Average gross portfolio

Loan loss reserve ratio Accumulated reserve / Gross portfolio

Risk coverage ratio (>30 days) Accumulated reserve / Portfolio at risk >30 days

Write-off ratio Write-off of loans / Average gross portfolio

Efficiency and productivity

Staff allocation ratio Loan officers / Total staff

Loan officer productivity – Borrowers Number of active borrowers / Number of loan officer

Loan officer productivity – Amount Gross portfolio / Number of loan officer

Staff productivity – Borrowers Number of active borrowers/ Number of staff

Staff productivity – Amount Gross portfolio / Number of staff

Operating expenses ratio Operating expenses / Average gross portfolio

Cost per borrower Operating expenses / Average number of borrowers

Administrative expenses ratio Administrative expenses / Average gross portfolio

Personnel expenses ratio Personnel expenses / Average gross portfolio

Financial management

Portfolio yield Interest income from portfolio / Average gross or net portfolio

Funding expense ratio Interests and fee expenses on funding liability / Average gross portfolio

Cost of funds ratio Interest expenses on funding liability / Period average funding liability

Current ratio Short term assets / Short term liability

Debt/Equity ratio Total liability / Equity

Capital adequacy ratio Total equity / Total assets

Outreach Average disbursed loan size Amount issued in the period / Number of issued loans

Average disbursed loan size on per -capita GDP Average disbursed loan size / Per-capita GDP

Other definitions: Funding liability: Liability that finance the loan portfolio and the cash investments necessary to manage the loan portfolio Operating expenses: Personnel expenses + Administrative expenses Recovery from write-off ratio: Income from write-off (payments received from loan already written-off) / Average gross portfolio Restructuring of delinquent loans: includes rescheduling loans (extending the term of the loan or relaxing the schedule of required payments) and refinancing loans (paying off a problem loan by issuing a new loan). Drop-out ratio: calculated as follows: (number of active clients at the beginning of the period + number of new (first time) clients entering during the period – clients written off during the period – number of active clients at the end of the period) / (number of active clients at the beginning of the period).



Annex 5 - Guidelines of reporting and accounting Financial statements OIBM’s financial statements have been audited by Deloitte up to 2007 but in 2008 the bank decided to appoint KPMG

Loan loss provision and write-offs OIBM uses different classification of loans according if they belong to micro or macro typology. The Micro Loans comprise of Premium Trust Banks (PTB) and Individual Micro Credit (IMC) while the Macro Loans comprise Small and Medium Enterprise (SME), Consumer Credit Loans, Mphamvu Loans, Overdrafts, and Agriculture Loans. In accordance with the Reserve Bank of Malawi directives, the Bank reserves the right to apply a subjective standard or criteria to any loan when it is more conservative than the criteria used for the macro loans, therefore OIBM has introduced specific regulations for Micro Loans which are now also in line with OI guidelines. Every quarter loans that are delinquent for more than 365 days or subjectively considered uncollectible are written off against the provisions earlier created. Restructured loans The bank does not permit debt restructuring as a general rule. Debt restructuring is only allowed in exceptional circumstances and under approval of the CEO. All requests should be sent to the Risk and Standards Manager for checking. When the loan is restructured it attracts a penalty of 1%. Insider loans OIBM provides all staff and management with loans of an amount not exceeding the available amount in the employee’s pension fund of minimum 12 months and maximum 48 months, at a monthly interest rate of 1% above the government treasury bill rate. Donations In the table below are listed the donations received by OIBM since 2004:



Details of funding liability As of June 2008, OIBM has the following borrowings:



Annex 6 - Rating Scale

final report- private rating bank malawi... · with the opening of its first branch in lilongwe....

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