Sound practices are the ways of planning and doing things at policy, governance, managerial and operational levels that help Microfinance Institutions and other players in the microfinance industry to become more effective, efficient and to register enhanced performance. For the last 26 years, AMFIU has been at the forefront of promoting those aspects that cause Microfinance Institutions to be sustainable and their support partners to be more effective in moving the industry forward.
Sound practices are broadly categorized as follows:
- Double Bottom line
- Governance and management
- Market driven operations
- Asset and Liability management
- Double bottom line
The strategic focus of Microfinance Institutions should usually be built around the double-bottom line of serving the poor and making profits for sustainability and growth. Vision and Mission statement and strategies/ instruments to make them operational are the ways to ensure good strategic direction. Basing on the premise that only financially sustainable institutions can provide financial services for low income people continually, issues like sustainability focused planning, suitable structures, investment in scale and efficiency, monitoring of critical sustainability measures, product costing and pricing as well as institutional independence are key. Pricing is not considered only in terms of costing (cost coverage and margin) but also in terms of the market sustainability, client needs satisfaction, institutional survival and growth. As microfinance institutions target double bottom line results, social performance is essential to ensuring that social impacts are considered and measured. As such microfinance institutions need to improve the quality and appropriateness of financial services offered, improve the economic and social conditions of clients and ensure social responsibility to clients, employees and the community they serve. This will enhance the social returns of microfinance institution.
- Governance & Management
The problems of excessive external control, micro management by the board and possible inappropriate pecuniary interest by board members can to some extent be avoided in business oriented microfinance institution structures governed by board members who are not financially needy. Governance is further strengthened by clear and effective tools that guide the microfinance institution. Management should exercise some form of independence in decision making which should be guided by well-developed policies that include personnel, accounting/finance, internal controls, and savings and credit (operations) policies among others.
- Market Driven operations
Customer care provides both a challenge and an opportunity to the microfinance institutions. Its a challenge because customers always expect more care. If a microfinance institution doesn’t look after customers, someone else will. It’s an opportunity for a microfinance institution to be better than its competitors and to attract more customers. Products that are valued and demanded by customers and improving them from time to time is key to the sustainability of the microfinance institution. Providing full information on the products that you are offering through consumer education helps the microfinance institution to get new ideas as well. The products and services you offer must give you high/enough profits. Innovating delivery mechanisms to allow your institution reach more clients cost-effectively with suitable services would put your institution ahead of competition. Microfinance institutions should recognize the significance of the product development process in determining successful products. This is because Microfinance is a proper business whose customers have learnt to assert themselves and require value- for –money. It is therefore important for microfinance institutions to offer products that are appropriate to their needs.
- Asset and liability management
Every microfinance institution must prudently manage its assets and liabilities. The major asset of any microfinance institution is its loan portfolio. It is therefore important to have a good loan tracking and portfolio management system that enables the microfinance institution to plan and monitor all aspects of its performance and growth. As in the wider banking world, asset/liability management also looks at maximizing the spread or the positive difference between interest rate on earning assets and the cost of funds. It is clear that any action that increases return, increases the risk structure. Assets and liability management involves understanding the trade-off between the risks and return. Liability management, too, is a critical function of a Microfinance Institution. The growth and survival of any Microfinance Institution depends on the effectiveness of its liability management. As a financial institution, every microfinance institution is in the business of obtaining/borrowing and lending money. Thus, long-term institutional health depends on the extent to which both sides of the balance sheet are well managed.