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important attribute of good MFI
1. By Roshan Pant
UNIT-4
MICROFINANCE INSTITUTION
IMPORTANT ATTRIBUTE OF GOOD MICRO-FINANCE INSTITUTUION:
It must provides services to the relevant target group. The service which MFI provide must
be appropriate,and has broader scope i.e it must match client demand ,which is offered at lower
price followed by lower transaction cost and there must be rapid availability of loans Its activities
and offered services are not only demanded but also have some identifiable positive impact on
the lives of the custom ers. The scope of services must be consistent with the situationof the
clientele.
Its activities and offered services must not only be demanded but also have some
identifiable positive impact on the lives of the customers
It must be strong, financially sound, and stable. Because the people who belong to the target
group need a reliable supply of financial services. A stable institution is one whose existence and
function is not threatened by a lack of funds for making necessary payments; it must be solvent at
any given moment and also in the foreseeable future. In addition, a sustainable institution must
be able to maintain or expand its scale ofoperations
MFI should not depend on external support but rather should be subsidy independent.
This requires that the revenues from its operations be sufficient to cover all of its costs, including
loan losses, the opportunity cost of equity, and the full, inflation-adjusted cost of debt. This is a
requirement that any mature institution must meet, just like any commercial business. However,
in most practical cases the MFI are often faced with financial crisis.
KEY CHARACTERISTICS OF STRONG MFI’S
Vision : A mission statement that defines the target market and services offered and is
endorsed by management and staff.There is a strong commitment by management to
pursuing microfinance as a potentially profitable market niche (in terms of people and
funds). and there is a business plan stating how to reach specific strategic objectives
inthree to five years.
Financial services and delivery methods: They adopt a Simple financial servicesfit to
local context and in high demand by the clients described in the mission statement.
Decentralization of client selection and financial service delivery is also seen.
Organizational structure and human resources : They have accurate job
descriptions, relevant training, and regular performance reviews.A business plan
spelling out training priorities and a budget allocating adequate funds for internally
or externally provided training (or both). Appropriate performance-based
incentives offered to staff and management
Administration and finance: Loan processing and other activities are based on standardized
practices and operational manuals are widely understood by staff. Accounting systems producing accurate,
timely, and transparent information are taken as inputs to the management information system. Internal and
external audits carried out at regular intervals. Budgets and financial projections made regularly and
realistically.
2. Management information system : They have the provision of Information
Systems providing timely and accurate information on key indicators that are most
relevant to operations and are regularly used by staff and management in
monitoring and guiding operations.
Institutional viability : They are Legally registered and compliance is done as per
supervisory requirements. Clearly defined rights and responsibilities of owners, board of
directors,and management is also the key features.
Outreach and financial sustainability : They have the Achievement of significant scale,
including a large number of underserved clients (for example, the poor and women). They
aim at Coverage of operating and financial costs clearly progressing toward full
sustainability (as demonstrated in audited financial statements and financial projections).
TYPES OF INSTITUTIONS
Formal institutions: In addition to commercial banks, these include state banks, agricultural
development banks, savings banks, rural banks and non-bank financial institutions. They are regulated
and supervised, offer a wider range of financial services, and control a branch network that can extend
across the country and internationally. However, they have proved reluctant to adopt social missions,
and due to their high costs of operation, often can't deliver services to poor or remote populations. The
increasing use of alternative data in credit scoring, such as trade credit is increasing commercial banks'
interest in microfinance.
Formal institutions
_ Public development banks
_ Private development banks
_ Savings banks and postal savings banks
_ Commercial banks
_ Nonbank financial intermediaries.
Semiformal institutions: Informal providers (generally not referred to as institutions) are those to
which neither special bank law nor general commercial law applies, and whose operations are also so
informal that disputes arising from contact with them often cannot be settled by recourse to the legal
system. The most common types of semiformal financial institutions are financial cooperatives and
financial NGOs
Semiformal institutions
_ Credit unions
_ Multipurpose cooperatives
_ NGOs
_ (Some) self-help groups
Informal providers:
These include moneylenders, pawnbrokers, savings collectors, money-guards, Traders, landlords, and the
like (as moneylenders). Because they know each other well and live in the same community, they
understand each other’s financial circumstances and can offer very flexible, convenient and fast
services. These services can also be costly and the choice of financial products limited and very short-
term. Informal services that involve savings are also risky; many people lose their money.
3. Informal providers
_ (Pure) moneylenders
_ Traders, landlords, and the like (as moneylenders)
_ (Most) self-help groups
_ Rotating savings and credit associations (work groups,multipurpose self-help groups)
_ Families and friends
TYPES OF INSTITUTIONS IN NEPAL
Formal Sector
Commercial Banks [Class A and no is 29]
Development Banks including ADB/N and NIDC [Class B and their No is 71]
Finance Companies (FCs) [Class C and their No is 45]
Rural Microfinance Development Banks [Class D and their no is 41]
Semi-Formal Sector
Savings and Credit Cooperatives (SCCs) [2,262 SCCs were registered by mid-July
2002, of which 34 had been licensed by NRB for limited banking activities, 391
were the members of Nepal Federation of Savings and Credit Cooperative Union
(NEFSCUN), 107 were graduated as SFCLs under SFDP, and 82 were promoted
under MCPW].
Financial Intermediary Non-Governmental Organizations (FI-NGOs)/(FI-INGO)
[51/100 in no].
Informal Sector
Savings and Credit Organizations (SCOs) [>20,000]
Self-help Groups [Several]
Landlords, Merchants/Traders, Goldsmiths, Friends and relatives [Several]
Creating a Formal Financial Intermediary
Recently the field of microfinance has focused on the transformation of financial NGOs into formal
financial institutions. This approach involves the transfer of the NGO’s or cooperative’s operations to a
newly created financial intermediary, while the original institution is either phased out or continues to exist
alongside the new intermediary.
In most cases, the original MFI’s assets,staff, methodology, and systems are transferred to the new
institution and adapted to meet the more rigorous requirements of a financial intermediary. The rationale
for developing a formal financial institution is compelling: the potential to access both savings and
commercial funding may help solve an MFI’s funding constraints and increase its ability to provide
additional financial services to the target market.
However, creating a formal financial institution also implies additional costs and restrictions as the
MFI becomes regulated and supervised. Capital requirements may be much higher than anticipated,
and unless the MFI has reached financial self sufficiency it will be difficult (and costly) to attract
4. equity investors and commercial debt . And finally, the MFI must develop the institutional capacity to
manage a number of different products and services, mobilize resources (both debt and equity as well as
human resources), and enhance management information systems to adhere to regulatory reporting
requirements and manage additional products.
The costs to convert into a formal financial institution are often exceedingly high: they include feasibility
and pre-start-up work, capital requirements, as well as the changes in management and systems that
must be implemented.
• Process of Establishment (FIS Act 1998, amended in 2002)
Transforming FINGO into formal MFI
Transfer FINGO’s operations to newly created financial intermediary
FINGO is either phased out or continuing to exist along side the new intermediary
FINGO’s assets, staff, methodology and systems are transferred to new institution
Various means may be used to determine the transfer price, the price mechanism
must be transparent
• Preparation of Necessary Documents
Institutional Charter: Name, Address, Purpose, Products, Authorized Capital, No.
of Directors, Mission Statement
Bye Laws: Rules of operations, Duties of officers, Appointment of Board
Committee, Election of directors, Rules and procedures of transferring shares,
Financial policies
Business Plan: