Page 1
Volume 3, January 2010
Sri Lanka Microfinance Forum ISSN 2012-5666
Volume 3, January 2010
Funding for MFIs Where to open the tap?
SPECIAL FEATURES IN THIS EDITION Exclusive Interview with NDTF Microfinance Impact on Shelter Market Research Product Development Liquidity Risk Management for MFI
4 5 6 7
Page 2
Sri Lanka Microfinance Forum
WORD OF THE EDITORS DEAR READER
Niroshani Sawanawadu ICT / Microfinance Consultant
Imran Nafeer Microfinance Consultant
Thank you all for the comments and valuable feedback given for the first and second editions of SLMFF, which encouraged and motivated us to continue with this task of educating, enhancing and disseminating information for the betterment of the sector. Within the last few months we were able to bring various local and international microfinance practitioners, consultants, networks, regulators, donor agencies to a common platform and to discuss various issues we had in the sector, share the experiences and enhance our knowledge. We are very thankful to all those who shared their experience with us. We would like to present you the third edition of the Sri Lanka Microfinance Forum, which will focus on the topic of funding for MFIs in Sri Lanka. At the moment funding is one of the most important topics in the microfinance sector and therefore we tried to discuss about the funding for MFIs in different aspects and share different views.
Introduction of interest rate ceiling by NDTF is one of the major aspects being discussed in the sector. SLMFF was able to interview Mr. Piyadasa, the director credit of NDTF to share their views behind this move. We take this opportunity to thank Mr. Silva and Mr. Piyadasa of NDTF for their support and contribution. We would like to thank Mr. Charitha Ratwatte from Sri Lanka Business Development Centre, Ms. Nadeera Ranabahu, Mr. Niraj Kumar and Mr. Chandrasena for contributing with articles to this issue. Of course we would also like to thank the board of advisors for their valuable advice and support. In addition to that we would like to share some views expressed through the poll conducted by SLMFF last month. It was revealed that, 44% who have replied are technical service providers and 33% are MFIs. 44% said that ease of access to local debit funding is good and ease of access to international equity funding is very bad while 55% mentioned that ease of access
to international debit funding is bad. It can be highlighted that 66%, 55% and 55% pointed out that savings regulation, exchange control regulation and international currency funding are three major areas to be improved respectively. And also it can be noted that 88% expressed that the interest rate ceiling would make more difficult for MFIs to sustain. This issues consists some of the views expressed by pioneers in the industry as well as some case studies. We hope you will enjoy reading this issue. For subscription, queries, comments, article contributions in any language, and others, please write to microfinance.forum@gmail.com We wish you a HAPPY NEW YEAR and wish the Microfinance Sector a prosperous and great year ahead. Yours sincerely, Niroshani Sawanawadu and Imran Nafeer
IN THE NEXT SLMF ISSUE: MICROFINANCE ASSOCIATIONS – WHAT IS THEIR ROLE? In the next issue we would like to discuss about Microfinance Associations and their role. We therefore encourage all microfinance practitioners, regulators, promoters or other stakeholders to send us their views, opinion and experiences Networking has become one of the major factors for the success and growth of the microfinance sector in a country or region. Strong regional and country-level assocations en-
able microfinance practitioners to exchange their experiences, build common performance standards, and influence policy makers to facilitate the growth of microfinance sector, etc. SEEP, BWTP, WWB, INAFI and Pakistan Network are some of the success stories in the microfinance sector. What is the situation in Sri Lanka? Do we need an association? Does it provide a platform to Sri
Lankan MFIs to share their experiences? Is it a collective body of MFIs? What is their role? These are few questions raised by stakeholders in the sector. Therefore we would like to provide a space for you in the next issue to express your views on this regards. Please send your comments, suggestions and experience to microfinance.forum@gmail.com
HNB opens its first Micro Banking unit dedicated to microfinance: The HNB micro banking units at Kurunduwatte in Nawalapitiya Electorate fulfills the promise of Pubuduwa by making financial services accessible to people in rural areas. The concept behind this initiative is to offer a comprehensive package of services including financial assistance, technical know-how and marketing arrangements for rural community
Report 2009 now available: For the first time a comprehensive industry report about the Sri Lankan microfinance sector is available in English, Sinhala and Tamil language. The reports can be downloaded from http : //w w w . mi c rofi na nc e .l k/ gtzpublic.php Printed copies of the reports may be obtained from the ProMiS office, Level 16, East Tower, World Trade Centre, Colombo 1. (www.microfinance.lk)
A new financial institution, Global Trust Financial Services Limited, will be set up shortly in Sri Lanka to cater to a huge demand for microfinance, estimated to be around LKR125 billion. According to the Managing Director Susantha Fernando the company is seeking approval from the Central Bank (CB) to operate as a finance company. h t t p : / / S o u r c e : w w w .sun da yti mes .l k/0 9 1 0 1 8 / FinancialTimes/ft40.html
Sinhala ad Tamil translations of Sri Lanka Microfinance Industry
New company to cater to MicroFinance in Sri Lanka
(Continued on page 3)
NEWS ROUND LOCAL NEWS
Page 3
Volume 3, January 2010
NEWS ROUND (CONT’D) (Continued from page 2) Management Development Training of Trainers—was held at Colombo from 16th to 21st November 2009. This workshop was conducted by Centre for Microfinance Leader-
ship, WWB for selected participants from South Asian MFIs. For the first time in Sri Lanka Social Performance Management workshop was conducted from 25th to 28th November 2009. This is con-
ducted by Development Facilitators with the Special support from GTZ ProMis project and EDA Rural Systems (Pvt) Ltd in India. Participants from 8 MFIs participated for the workshop.
INTERNATIONAL NEWS Grameen Phone goes to stock market. Grameenphone is 38-percentowned by Grameen Telecom, a subsidiary of micro-finance giant Grameen Bank, which was set up by 2006 Nobel peace prize winner Muhammad Yunus. It has around 21 million of Bangladesh's fast growing 46 million cellular subscriber base. It is also the country's largest private company in terms of revenue. Dhaka Stock Exchange president Rakibur Rahman said Grameenphone's IPO was the largest in the country's history, dwarfing the previous record set by a private bank by more than four (http:// times. www.dailymirror.lk/DM_BLOG/ Sections/ frmNewsDetailView.aspx? ARTID=63614) SMS-based Microfinance System Unveiled: A new system has been unveiled that claims to let MFIs run their entire operations via mobile phones and a single laptop. ‘FrontlineSMS: Credit’ system combines SMS-aggregating software and mobile commerce offerings to let MFIs deliver and track loans via handsets. It is based on FrontlineSMS, a free, open source software that turns a laptop and mobile phone into a central communications hub. Once installed, the program taps the GSM wireless telephone network to enable users to send and receive text messages with groups of people through mobile phones.
According to its Website, "FrontlineSMS:Credit aims to make every formal financial service available to the entrepreneurial poor in 160 characters or less". The new venture is building a series of free and open source financial modules that will allow FrontlineSMS to communicate with mobile payment systems in real time. The founder says this will turn FrontlineSMS in to a microfinance management information system, a payroll center for SMEs, a collection and distribution center for microinsurance premiums and payouts, and a hub for individual credit histories and scores. http://www.finextra.com/ fullstory.asp?id=20616 Credit bureau for MFIs in making in India: Twenty five microfinance institutions have formed a trust called Alpha, which will put together a credit bureau called High Mark dedicated to the microfinance sector. Alpha is headed by Vijay Mahajan, chairman of BASIX, and P N Vasudevan managing director of Equitas Microfinance. Source: http:// www.dnaindia.com/money/ report_credit-bureau-for-mfis-inmaking_1296640 RBI against interest rate cap on loans to poor: While the Reserve Bank of India (RBI) and senior government officials are concerned over the steep rates of interest charged by microfinance institutions, the
central bank has ruled out any cap on rates. The issue of high interest rates charged by microfinance institutions has escalated as there have been instances of multiple lending in some pockets of south India. There are chances that once the Microfinance Bill is passed, it may impose restrictions on the lending rates by microfinance institutions. "The new draft of the Bill is about to be finalised by the law ministry. The Bill may lay the power to the government to give directions on interest rates if required," says an official who has been involved in preparing the draft Bill. Source: http:// www.dnaindia.com/money/ report_rbi-against-interest-rate-capon-loans-to-poor_1298716 IMF announces project to study financial access for poor: The International Monetary Fund announced a worldwide project to collect data on access to financial services in a bid to help policies aimed at reducing poverty. Under the project, the IMF will collect data from countries on loans, deposits, debt securities and insurance on a regular basis to help determine priorities for policies on broadening access to financial services. http://ae.zawya.com/ Source: Story.cfm/ sidANA20091005T095448ZFLX91/ IMF%20announces%20project% 20to%20study%20financial% 20access%20for%20poor
LOCAL AND INTERNATIONAL TRAINING COURSES AND EVENTS Training on; 1: Financial Analysis & Accounting for MFI’s (Dated: Feb 4-6, 2010, Colombo) 2. Internal Controls & Risk Based Internal Audit (Dated: Feb 8-11, 2010, Colombo)
Contact: info@nimbusconsulting.net, Visit: www.nimbusconsulting.net Nimbus Consulting Training on MFI Valuations and Investments 08 Feb 2010 - 10 Feb 2010, India
Microfinance Summit Nepal 2010 14 Feb 2010 - 16 Feb 2010, Nepal Investment Readiness Training for MFIs 10 Feb 2010 - 12 Feb 2010, India
Page 4
Sri Lanka Microfinance Forum
DISCUSSION FORUM EXCLUSIVE INTERVIEW WITH NATIONAL DEVELOPMENT TRUST FUND
L.A. Piyadasa Director Credit National Development Trust Fund (NDTF)
“There are mixed reactions but I would like to say that the impact is not that severe. Specially few large MFIs who are having different credit lines have informed us their difficulties in working with NDTF funds at lower rate. ”
The National Development Trust Fund (NDTF) was formed in 1991 as a government body, and managed by a Board of Directors. A guarantee company in the same name was incorporated in 2003 with broad and corporate of objectives which has obtained funds from the Asian Development Bank (ADB) to on lend to Microfinance Institutions (MFIs). It exercises autonomy in Microfinance operations. NDTF has been very helpful in developing the microfinance sector in Sri Lanka by extending credit and non credit assistance. With the provision of funds for Microfinance Institutions (MFIs), the sector has been able to develop and has reached a strong potential now. Currently NDTF is working with 250 partner organizations. However, recently NDTF has introduced an interest rate ceiling of 15% (declining balance) to on lend loans by MFIs. As this step came very unexpected, some practitioners of the Sri Lankan microfinance sector have expressed their concerns over this step. As the Sri Lanka Microfinance Forum (SLMFF) wants to present a discussion platform to explore and address current needs and issues of the sector, we talked to Mr. Piyadasa, Director Credit of NDTF to get an insight about this interest rate cap. SLMFF: What is the purpose of this interest rate cap? NDTF: This decision was taken in early July 2009 according to the
government policy to reduce the interest rate to the end borrower. We are serving to poorest of the country and micro enterprises. A poor person who is doing a micro enterprise is not able to pay a large interest rate to MFI. Partner Organizations charge an interest rate around 20% flat or 30% declining balance. There is no uniformity. A small entrepreneur should earn a net surplus of 30% just to pay back the interest. Since the return is not that enough to earn profits they face difficulties to sustain their business. Our intention was mainly to give compensation to the small entrepreneurs (end user of our funds). SLMFF: How have been the reactions so far of the MFIs that are borrowing from NDTF? NDTF: There are mixed reactions but I would like to say that the impact is not that severe. Specially few large MFIs who are having different credit lines have informed us their difficulties in working with NDTF funds at lower rate. However except a few MFIs others are continuously obtaining refinance facilities from NDTF to on lend their beneficiaries at less than 15% per annum. Small Partner Organizations (PO) are ok with this interest rate. Our objective is to improve these small village level organizations. Large MFI should not think increase of interest rate is the only solution, they can take action to reduce their operational cost and they can obtain NDTF assistance indirectly in areas like training.
Some MFIs have already come up with initiatives to effectively utilize our funds. They have segregated their loans such a way that they will give the first loan using NDTF funds and the other loans from other credit lines. SLMFF: What is the effective date of this interest cap? NDTF: 01st of July 2009 SLMFF: Does it apply only to new loans or both new and existing loans? NDTF: Only to new loans SLMFF: Does this interest rate cap apply to the whole loan portfolio of the borrowing MFIs or only to the part that is financed by NDTF? NDTF: Only to funds provided by NDTF. NDTF is the only government body working in this sector and it is a government policy to reduce the interest rate. SLMFF: Why do you think in the circumstance given that margin of 8% is sufficient for a MFI to be sustainable? NDTF: In case of large MFIs this 8% interest spread in marginal as they extend other assistance to beneficiaries their operational cost is high. But it is enough for small village organizations. MFIs should try to implement their credit program in effective and efficient manner so that they can reduce their operational cost. Although the immediate impact is high in the long run this will create a healthy and efficient microfinance sector in Sri Lanka. (Continued on page 8)
DEPOSIT MOBILIZATION BY MFI Microfinance Institutions (MFI) have to mobilize deposits from their members in order to build a responsible credit culture, invest and on lend these funds, in order to generate micro enterprises among their membership. Charitha Ratwatte Sri Lanka Business Development Centre “...we do not need any new laws. The current lack of funding for MFI in Sri Lanka would be less of an issue if only the existing laws were fully implemented.”
The Banking Act in terms of the Banking Amendment Act, no 33 of 1995, amending the original Banking Act, no. 30 of 1988, in terms of the proviso to section 76(A) (1) (e), provides that, the Monetary Board of the CBSL, may by letter, permit entities which are:- not a Licensed Commercial Bank, not a Finance Company, not a Co-operative Society, not a Building Society, to accept
deposits from their members, invest and on lend these funds to their members, if they are established under any law and are not for profit institutions. The CBSL has to make regulations by subsidiary legislation, as empowered by the Banking Act, to make rules under which this Proviso becomes operable. This Provision was enacted specifically to catch the existing lacuna, at that time, in the regulatory framework. It is understood that Sarvodaya SEEDS has obtained a letter from the Monetary Board of the CBSL, in terms of this proviso and that Arthacharya Foundation has ap-
plied for a letter some time ago and has been informed by the Monetary Board of the CBSL, that their request is ‘under consideration’. The legal mobilization of deposits remains an issue for many microfinance providers. If this situation improves, also an important source of funding for MFI opens up. To achieve this, we do not need any new laws. The current lack of funding for MFI in Sri Lanka would be less of an issue if only the existing laws were fully implemented.
Charitha Ratwatte Sri Lanka Business Development Centre
Page 5
Volume 3, January 2010
CASE STUDIES MICROFINANCE AND SHELTER: AN IMPACT ASSESSMENT OF MICROFINANCE PROGRAMMES OF SOUTHERN PROVINCE IN SRI LANKA Microfinance is the most important innovation in the field of ‘Financial D ev el opment a nd Ec onomi c Growth’ during the last Century. It has been widely accepted as an effective instrument of sustained economic growth through rural development and poverty reduction by promoting investment in small enterprises both rural as well as urban areas. More recently, the development economists laid emphasis on microfinance as an economic development approach intended to benefit low-income people and better way to achieve Millennium Dev el opment Goals (MDGs) including reducing poverty, supporting gender equity, encouraging more equitable income distribution, developing the private sector and promoting participatory development. While the shelter is the prior basic needs, MF should have impact on housing development of Borrowing Households (BHHs). However, researchers in their impact assessment studies have not so far, paid their attention to shelter impact of MF. With this gap, MF and Shelter is the new field to the microfinance. It is, therefore, important to evaluate the shelter improving capacity of micro-credit programmes. Present study is intended to analyse how effective MF programmes in improving the shelter conditions of (BHHs) of Southern Province in Sri Lanka. The study is based on the survey of about 405 microfinance recipients of four national level leading MF insti-
tutions (MFIs): Thrift and Credit Cooperative Societies (TCCSs) from financial cooperatives, Samurdhi Banking Societies (SBSs) from Government supported institutions, Ruhuna Development Bank (RDB) from semi-government and Sarvodaya Economic Enterprise Development Societies (SEEDS) from NonGovernmental Organizations. For analysis purpose, a comparison group of households (CHHs) has been selected from the existing recipients whom duration of membership with MF is not longer than one year to compare their shelter status with that of existing members whom membership duration with MF programmes is longer than one year. Latter group of BHHs sub divided into two as BHHsG2 (duration of membership with MF ranges between 1-4 years) and BHHsG3 (duration of membership with MF is longer than 4 years). Three indicators: living space, Shelter condition and current market value of a dwelling house are used for assessing the impact. Average Treatment Effect (ATE) of all variables is estimated for both the groups of households (CHHs and BHHs).
is grater than that which of CHHs. Meanwhile, by 85.1 percent of BHHsG3 have a dwelling house with the sidewall condition of cement plastering, but the percentage share of houses with cements plastered sidewalls has decreased to 71.5 percent for BHHsG2 and it steadily decreased further to 42.3 percentages for CHHs. Furthermore, while only 9 percent of BHHsG3 and 15.1 percent of BHHsG2 have houses with the floor of cow-dung, the percentage share increases to 30.9 percent for CHHs have cow-dung floor. Finally, Regression analysis on market value of dwelling houses has evident that, if other variables in the model held constant, one unit increase in credit, would expect that 4.1 units increase in value in a house of BHHsG3. In contrast, one unit increase in credit would result only a 2.2 increase in housing value of BHHsG2. On the basis of this analysis it can be concluded that although the microfinance practitioners lukewarm in financing the housing loans directly as their little economic of scale, MF has indirectly evolved with better impact on shelter of BHHs with compared the CHHs.
Based on data analysis, the author founds that Micro-credit has benefited the Borrowing Households to improve their shelter status in terms of all the indicators of housing conditions (except roof condition), living space and market value of a dwelling house. For example, ATE (difference in mean value) of living space in dwelling houses of a BHHG3 is 124.4 sqft. which 20.3%
The complete study can be obtained from the author.
Wish you a HAPPY NEW YEAR 2010
A.J.M.Chandradasa Senior Lecturer Department of Economics University of Ruhuna chandra@econ.ruh.ac.lk
A.J.M.Chandradasa Senior Lecturer Department of Economics University of Ruhuna „Micro-credit has benefited the Borrowing Households to improve their shelter status in terms of all the indicators of housing conditions (except roof condition)“
Page 6
Sri Lanka Microfinance Forum
MICROFINANCE TECHNIQUES MARKET RESEARCH FOR FINANCIAL PRODUCT DEVELOPMENT The views expressed here are those of the author and do not necessarily reflect views of PLAN Sri Lanka.
cated research process, it is in fact
tries
not, and can be managed by small
Uganda, South Africa, India; where there are microfinance market lead-
In the current business environment,
ket research process starts with the identification of a research issue
ers as well.
through a series of secondary data reviews. These findings are used to
to MR findings, MFIs such as ASA in Bangladesh, and Postal Bank in
formulate research objectives and a
Tanzania have achieved remarkable
MR plan which is followed by data collection.
success in savings mobilization. In addition, institutions such as Equity
“customer orientation” throughout the product cycle is indispensable Nadeera Ranaban Microfinance Specialist Plan Sri Lanka „Sri Lankan microfinance practitioners have revealed that they heavily rely on the experience of field officers for refining and introducing new financial products rather than undertaking a comprehensive market research, assuming that the staff understand client’s needs and preferences since they are the closest people in contact with them.“
for mere survival in the competitive market. With this current change of focus, concepts such as productdriven; where producing goods and
and medium scale MFIs too.
Mar-
selling it afterwards through various
It is interesting to note that common
strategies, has evolved to customerdriven; where customers’ preferences and needs are identified prior
qualitative
to the development of goods and services. The trend is also emerging
Rural Appraisals (PRAs) are exten-
data
gathering
tech-
niques such as Focused Group Discussions (FGDs) and Participatory
in the microfinance sector, where
sively used to collect data. Thus, it is worthwhile to explore how and
Microfinance Institutions (MFIs) develop client centered financial
which way these tools have been
products tailored to its clientele. In addition, there is a compelling need
vant to financial product development. PRA tools such as seasonality,
for the MFIs to be more client responsive due to the fact that many
life cycle, time series and wealth
utilized to derive information rele-
MFIs are losing a substantial num-
ranking have been modified to identify financial dynamics, patterns,
ber of clients every year –primarily because the MFI’s products do not
needs, and wealth status of custom-
suit them (Hulme, 1999). So, where does market research fit in this con-
ing techniques assist in determining financial service use, options, prefer-
ceptual scenario? What are the benefits of customer driven services to
ences and opportunities within com-
ers. Attribute and institutional rank-
MFIs? What is the process and tech-
munities. In addition, FGD/PRAs are utilized to identify gender issues
nique of market researching? How it can be applied to the Sri Lankan
and household control of resources depending on the objective.
context? These are some of the issues which are explored in this article.
Qualitative data are analyzed against the “8Ps” of marketing;
Market research (MR) is defined as an activity designed to understand
Product design, Price, Promotion, Place, Positioning, Physical Evidence¸ People and Process preferably by a multi disciplinary team
the needs and preferences of existing and potential clients of a MFI, besides the operational environment
which includes representatives from
and financial landscape (Wright,
all departments, such as Frontline staff , MIS, Accounting, Marketing,
2000). This definition also provides answers to the very first question of
Operational, HR, etc. The analysis
many practitioners; what are the
results in an initial product concept which is then revised using a series
benefits of customer-driven product development to MFIs? As the de-
of FGDs and if required supple-
scription indicates, market research provides information on developing
to come-up with a finalized product. If market research is followed in the
new products, refining existing products, and improving marketing,
step-wise manner as described, it
mented with a quantitative pilot test
like
Kenya,
Bangladesh,
For example through
refining savings products according
Bank in Kenya, FINCA in Uganda have experienced higher client retention rates for their loan products (Wright, 1999 & Coetzee, 2002). But, interactions with many Sri Lankan microfinance practitioners have revealed that they heavily rely on the experience of field officers for refining and introducing new financial products rather than undertaking a comprehensive market research, assuming that the staff understand client’s needs and preferences since they are the closest people in contact with them. Others simply develop products based on organizational priorities and global trends. In this context, it will be worthwhile to examine possible reasons why market researching is not practiced extensively in Sri Lanka. In Sri Lanka, one of the main reasons could be seen as the financial cost involved in MR especially in primary data collection. Many MFIs perceive that the immediate return from MR is not significant when compared to the cost incurred. However, this thinking fails to recognize the long term benefits of market research. For example, in addition to the direct benefit of improving all the aspects of a particular financial product, primary data collected from clients assist in improving services, managing cash flow according to the seasonal needs and identifying strengths and weaknesses of competitors.
promotion and delivery systems by
reduces a lot of complications of MFIs and results in a comprehensive
Although one may argue that it is more efficient to use secondary data
identifying client perspectives and financial landscape.
financial product.
rather than primary data, since it is
MR is practiced widely among MFIs Though MR reminds us of a compli-
across the globe including in coun-
much easy and cheaper to collect, (Continued on page 8)
Page 7
Volume Volume 3, 2, January August 2009 2010
BEST PRACTICES LIQUIDITY RISK MANAGEMENT (PART 1 & 2) Dear reader, this article is part of a series of articles on liquidity risk management. The article consists of 4 sections: 1.
Definition and Rationale
2.
Liquidity Risk Management Policy
3.
Measuring and Monitoring Liquidity Risks
4.
Managing Liquidity.
The current edition of the SLMFF will show you the first two parts of the article: Definition and Rationale and Liquidity Risk Management Policy. We are very thankful to Mr. Niraj Kumar, who is an expert in the field of risk management, that he has agreed to contribute these articles to the Sri Lanka Microfinance Forum.
Part 1 Definition and Rationale While most of the MFIs are overwhelmingly grappled with the credit risk management, the liquidity risk management often gets ignored, despite of the fact that it is equally potent risk that could wipe out an MFI in no time. Experience demonstrates that financial institution failures result more often from liquidity crises than any other factor. Liquidity refers to the ability of an institution to honour all commitments of payment as they fall due by using any one or a mix of the following way: (a) current cash inflows, (b) stock of cash holdings, (c) borrowing cash, and (d) converting liquid assets into cash. Liquidity risk is the possibility of negative effects on the interests of owners, customers and other stakeholders of the financial institution resulting from the inability to meet current payment obligations in a timely and cost-efficient manner. Liquidity risk management is a proactive and comprehensive approach that includes framing and regularly revisiting the liquidity management policy, establishing mechanism for continual identifica-
tion and monitoring liquidity risks and takes necessary steps to meet the following objectives:
•
• •
•
Honour all cash outflow commitments (client demand for loans and savings withdrawals, to pay the institution’s expenses, payments to suppliers, creditors, etc.) on a daily and ongoing basis,
•
Define acceptable liquidity instruments (for example, in cash or marketable securities). Regulatory restrictions (if any) should also be taken into account while deciding mode of liquidity.
•
The optimal amount of liquidity to be maintained (considering local regulatory requirements), and the triggers that prompt action (see Table 1).
Minimize the cost of foregone earnings on idle cash, Satisfy minimum reserve requirements and other regulatory liquidity standards,
•
Liquidity ratios that need to be monitored and its trigger point (see Table 1).
•
General methodology of liquidity management: How will it be monitored, the time frames to be used in cash flow analysis, and the level of details.
Avoid additional cost of emergency borrowing and forced liquidation of assets.
Liquidity is a double edge sword. If an institution is unable to meet its obligations of payment due to shortfall in liquidity, it sparks a series of events and loss of confidence among different stakeholders that can be lethal, regardless of the size of the shortfall. On the other hand, too much liquidity could also make an institution bankrupt, as idle cash does not earn enough to cover funding and administrative costs. The challenge therefore is, to maintain a fine balance between having too much and too little liquidity. However, it is not only about determining a single optimal level of cash to hold but it is about making a reasonable compromise between risk of a liquidity shortage and risk of low profitability.
Part 2
•
The risk appetite of the institution or the level of risk it is willing to take in minimizing cash to enhance profitability. Specifically, the policy should establish minimums and maximums for total cash assets and for the amount to be kept on-site.
•
The authority limits of the personnel involved in approving cash transactions/ transfers.
•
How excess funds are to be handled, such as who has access to them and where they are to be kept or invested.
•
Limits for the maximum amount to be invested in any one bank or instrument, to limit the exposure to any source/instrument.
•
Who may access or establish a line of credit for short-term liquidity needs and what are acceptable reasons or scenarios for accessing the line of credit.
Liquidity Risk Management Policy The first step towards proactive liquidity management is to draft a well-defined policy on managing liquidity and review it periodically. An indicative list of areas of liquidity management in which policies should be framed is given below: Defining institutional arrangements and responsibilities of the people involved in liquidity risk management.
Niraj Kumar Freelance Consultant India „Targets need to be thought out carefully. They may create incentives that become detrimental for the sector......“
Niraj is a Freelance Consultant and Trainer in microfinance. An MBA by training, he has extensive experience (more than ten years) of working in microfinance sector in South Asia, South-East Asia and Africa. He has visited nearly 70 MFIs in these regions on wide range of assignments, including credit rating, institutional assessment, strategy & systems development, formulating business plan, research study and training. He is also a seasoned trainer, certified by CGAP and Asian Development Bank Institute (ADBI) & Tokyo Development Learning Centre, World Bank (TDLC). He has developed several training modules in microfinance management and delivered about 100 training modules and trained over 1500 microfinance professionals across Asia and Africa. Currently he is also associated with ADBI-TDLC as ‘Regional Tutor’ for its distance learning course on ‘Microfinance Training of Trainers’. In past, he has worked for ‘EDA Rural Systems’ and one of its group companies - ‘MicroCredit Ratings International Ltd’ (M-CRIL), based in India. writeniraj@gmail.com
Page 8
Sri Lanka Microfinance Forum
Translations into Sinhala and Tamil of the Sri Lanka Microfinance Forum provided by:
You can participate
GTZ PROMIS—Promotion of the Microfinance Sector www.microfinance.lk info@microfinance.lk
Send your comments, news, articles, and opinions to microfinance.forum@gmail.com
EXCLUSIVE INTERVIEW WITH NATIONAL DEVELOPMENT TRUST FUND (CONT’D) (Continued from page 4)
YOU WANT TO ADVERTISE? Contact microfinance.forum@gmail.com
SLMFF: What are the future plans of NDTF? NDTF: We are aware that the MFIs need a healthy interest margin for them to extend non commercial assistance to beneficiaries. This is not an ordinary lending scheme. MFIs involve with other costs too. They extend non credit financial services to enhance their credit programs, procedures and systems to improve the operations, services
such as trainings, mobilization of people and mobilization of field staff. We are planning to expand our non -credit assistance to overcome these difficulties. We have already estimated to allocate a considerable amount from the 2010 budget for capacity building of MFIs and other assistance programmes designed to develop skills and awareness of beneficiaries. For the next year we have targeted
to enroll new 200 partner organizations working in village level. We will have meetings with the microfinance network and some of the MFIs to get their views for us to design a package of assistance. With all the positive changes we are hoping to become the core institution for the microfinance sector in Sri Lanka and with this expansion plans we hope in the near future interest rate may decide by the market forces.
MARKET RESEARCH FOR FINANCIAL PRODUCT DEVELOPMENT (CONT’D) Sri Lanka Microfinance Forum International Standard Serial Number ISSN 2012-5666 Contact: microfinance.forum@gmail.com
(Continued from page 6)
efficient and effective service deliv-
research is to develop a resource
secondary data can give researchers only a certain degree of insights and
ery.
pool within the organization covering all the different organizational
can assist in narrowing the research objective. Hence, relying only on secondary data is not recommended. For example, data collected from field staff might not include how they interact with the customers and their lapses in the delivery of services. Therefore, to
The Sri Lanka Microfinance Team wants to express its thanks to the Advisory Board Members: Chandula Abewickrama Charitha Ratwatte Dr. Dagmar Lumm Dulan de Silva Dr . Nimal Fernando Nimal Martinus Nina Nayar Shaklila Wijewardana The Advisory Board is not responsible for the content of the Sri Lanka Microfinance Forum. The role of the advisory Board is to provide comments and suggestions to the editors.
avoid selective and biased data and to take comprehensive decisions, it is always necessary to supplement secondary facts and figures with primary data. Another reason, also associated with the cost, is the standard management information system (MIS) of the MFIs. If the products differ from place to place with market research, the institution needs location wise customization of the MIS. In addition, operations, and administrative practices may also differ based on the findings. However, modification of these systems and procedures according to the research findings will result in more
Last but not least, the technical capacity of the MFIs to undertake market research also limits the practical application in Sri Lanka. Compared with other South Asian countries, in Sri Lanka there is only a limited number of accredited technical experts on financial product development. As an example, there aren’t any Sri Lankan accredited
departments and disciplines. cusing
on
capacitating
Fo-
regional
level staff can be more effective than building a pool of technical experts at the head office level, since local level staff can carry out market research at regular intervals as an internal process to improve service delivery.
service providers listed under Microsave resource pool. This limits the
Often findings and recommendations in MR don’t bring about dras-
practice of market research and
tic changes to the existing systems
indicates that the area needs further enhancement.
and procedures, but slight modifications and improvements which
How can market research be undertaken in an effective and efficient manner in the Sri Lankan context? For market research to be cost effective, MFIs should prioritize the list of problems to be addressed, and focus on the most salient issue first. This clear focus will assist in deriving sound recommendations.
can be done easily and at a low cost. When MFIs have to implement costly market research recommendations such as customization of MIS or procedural improvements, external financial support can be utilized. Usually, technological improvements and capacity building of staff on best practices of mi-
In addition, the most effective strat-
crofinance such as market research are areas where there are significant
egy in practically applying market
investments too.