A Health Check for Microfinance Banks
Wednesday, September 19, 2007
A small enterprise trader at the Maasai Market in Nairobi who fits the microfinance bank clientele profile. The MFBs have to consciously evaluate their strengths and plummet into a poor clientele with a wit and will to take risk while operating under commercial business principles. 20-September-2007: Recently, Business Daily ran what would easily be referred to as an excellent piece on Microfinance Banking in Kenya, and generally Africa.
Notwithstanding the admiration there is for the current progress that has been made by the parties working on the Microfinance Bank initiative in Kenya, there is a skill-gap that I am certain if filled will guarantee a strong policy environment and ensure we are on the right track in achieving Africa?s solution to poverty.
When one thinks about Microfinance Banking, it is vital that the players (in this case the owners of the MF Banks) are not absorbed in get-rich-quick schemes, but in developing people and their current pecuniary grade.
Once people receive help, then profits will flow into the companies whose mission objective will be based on the people. One fact is very clear the world over; Microfinance Banking done right works to reduce, alleviate and eventually eradicate this ?disease? called poverty.
?It is a powerful bridge from a basic project to a strong institution whose fundamental strength lies in the service it delivers selflessly to the poor.
The MFBs have to consciously evaluate their strengths and plummet into a poor clientele with a wit and will to take risk while operating under commercial business principles.
There are several ways in which we can? prepare the MFBs and policy makers on what to look out for as we get ready to tunnel deeper into this industry.
?It is a process known as Credit Rating.
Credit Rating is a vast topic but let us deal with Credit Rating as it pertains to Microfinance Banks.
The main questions are: Are you currently rated? How will your MF Bank be rated by organisations interested in funding you? How will you know what areas to improve to ensure you are credit-worthy as an MF Bank? And finally, how can you be rated?
We have to understand that a Credit Bureau is different from a Credit Rating Agency.
Whereas the former deals with quantitative data analysis for major commercial banks to include analysis and algorithmic scaling on historical performance (scoring), credit rating gets its hands dirty in taking the time to ascertain the presented documentation and statements to be factual and presents a true credit standing of the MFB or corporation or country.
Basically, credit bureaus are tailored to inform organisations such as banks about individuals while credit rating informs investors about organisations.
There should then be a very clear distinction of the two in policy making.
An annual credit rating review of a MFB should be to the Central Bank as important as annual audits are to management and shareholders of a company.
In lieu of this, credit rating is a health-check of the MFB?s adherence to guidelines and policies under the licensing law.
It is however, important to state that rating does not supersede the supervisory control of the licensing arm, but would be a great plus to include as a requirement in policy making to guarantee adherence.
The credit bureau report should focus on the strength of the individuals to determine portfolio quality which in turn enables the credit rating agencies to determine an MFB?s strength.
In Kenya, credit bureaus are to be licensed under the Banking Act while credit rating agencies are licensed under the Capital Markets Authority.
There are a couple of things that an MFB should look out for in rating reviews.
Most credit rating agencies use one of the five major Universal Rating Standards to rate Microfinance Banks.
International funding organisations, angel investors, locally set up funds or the World Bank will seek the assistance of credit rating agencies to guide them on what would be a quantitative and qualitative review of a good investment.
The things they look for include the legal structure of the MFB? and whether it is licensed to operate in its current capacity.
Another issue is the ownership structure, leadership and the human resource management.? They will seek to know how big is the team? Are you over / understaffed? And are you running a sweatshop or is your staff content with work policies?
Organisational structure is also an important component including the number of executives and whether it is well balanced.
Another aspect is the qualification of the finance team. They would seek to know? the institution?s financial performance and whether the? budgets / forecasts / targets are? to be achieved within a set time?
They will also look into issues on internal controls and audits and management systems.
They will be interested about the controls in place to reduce the internal fraud cases and the policies in place to curb fraud / laundering internally and how the assets are protected among others.
Whereas credit rating agencies in Kenya fall under the Capital Markets Authority in this region, the Central Bank can ensure the regulatory umbrella facilitates for the involvement of credit rating agencies as has become the practice in most countries where MFBs are present.
In Pakistan for instance, where the MFBs are changing the banking ?frame of mind?, the State Bank of Pakistan made it mandatory back in 2003 to rate all MFBs in the country. ?
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