Difficult economic conditions prevailing in a country can pose a challenge to
enterprise development, sustainability and growth processes. Many enterprises
including microfinance institutions will have to face the realities and develop
the needed approach in order to sustain their operations.
The
effect of economic challenges on micro and
small enterprises (MSEs) will include but
not limited to increasing need for
additional working capital to manage the
same size of businesses, reduction in
production or sales volumes, high
production cost and cashflow challenges.
Microfinance
institutions (MFIs) as financiers of microenterprises will face various
challenges just like the enterprises they finance. This is largely because what happens to their
clients in most cases is mirrored in their operations. For instance the
inability of the clients to increase or maintain volumes and values of their
sales can directly affect the repayment of their loans. Low volumes of sales
can also affect the volume of deposits that can be mobilized.
The
challenge for MFIs and other financialinstitutions in difficult economic times
will be evident in decline in deposits mobilization,low loan recovery
rates,high operational or transaction cost as well as high cost associated with
borrowings and difficulty in raising the needed loans to support operations.
The
decrease in deposits and low recovery rates are due to the fact that clients or
micro and small entrepreneurs in view of their need for additional capital will
quickly plough back available money in order to ensure that their enterprises
can operate and generate the returns needed to meet other demands which may
include repayment of loans, savings and household consumption. By this,
therefore, income received from sales is directly used to restock their
enterprises for fear of price changes. In some cases where clients are able to
save, they do that in reduced amounts and such amounts do not stay long with
the MFIs.
Microfinance
operations are naturally expensive. This is due to the very nature of the
microfinance business which involves making small loans and taking small
deposits. The cost of transacting one loan or taking a deposit is very
expensive. Owners and operators of microfinance institutions must not be
oblivious of the challenging economic situation. MFIs must prepare and implement the needed
operational or managerial strategy to ensure that their businesses are able to continue
to provide the needed support to MSEs and still be financially and operationally
sustainable.
WHAT SHOULD MFIs EXPECT
Expensive Operations:
The cost of operating MFIs is likely to
increase due to general increase in prices of goods and services. The cost to
income ratio is an important measure of profitability for MFIs. With the
current economic conditions MFIs will register high “additional” operating
cost. The challenge here is that the interest income which is the main source of
income for MFIs will not proportionally grow in line with the operational cost.
The failure to control the operational cost can, therefore, lead to a high cost
to income ratio and further affect the operational fortunes of MFIs. MFIs will need to implement controls
that will lead to cost reduction. They must pay closer attention to growing and
maintaining quality loans in order to improve their interest income.
High cost of capital:
MFIs
in Ghana incur a high cost in raising funds to support their operations. With
rise in inflation and other factors, MFIs in Ghana will further be required to pay
more for the loans they contract. The high cost of the loans is due to unstable
economic situation which is perceived by investors whether local or foreign as
a high risk. The high cost of capital is, therefore, to compensate for the risk
associated with the entire macro-economic situation and also to protect the
value of their investments placed with the MFIs.
Short terms loans for MFIs:
Aside
the high cost of capital, MFIs will witness that most investors will be willing
to offer short term investments instead of providing long term investments.Shorter
term credits will prevail because most investors are skeptical of the future
developments of the economy that can further affect the value of their funds.
The dangers with shorter term credits for MFIs is that it may affect the cashflow
position of the MFIs. The challenge with short term loans made to MFIs is that
MFIs are unable to fully invest these funds in order to record the needed
returns to compensate for the cost incurred in raising such funds. MFIs can
address this by ensuring to invest such funds in activities that have similar
repayment patterns compared with the borrowed facility.
Reduction in deposit mobilization:
MFIs
will experience reduction in deposits mobilization. Deposits are one of the key
sources of funding for MFIs. MFIs spend to mobilize in order to place the funds
mobilized in loans and other investments. Under difficult economic situations, the
enterprises of client are financially stretched and the income from these
enterprises will dwindle. This is expected to negatively affect the savings
habits of these clients. This, therefore, means that clients will not have
enough income to spend and save. Clients will prioritize their consumption
smoothing needs instead of savings or loan repayments. The other obvious thing
is that because the general cost of items have gone up, microclients will have
to use more of their little income to buy what they need. All these development
have the tendency that will affect the loan repayment potentials of the clients
in questions.
Conclusion
Acknowledging
the current economic challenges as an owner of a MFI is one step to ensure that
MFIs can be able to stay financially sound to support operations and be able to
reach out to targeted clients. The good thing with MFIs and difficult
economic conditions is that, there is much evidence to support the fact that
MFIs have the potential of surviving harsh economic conditions if prudent steps
are implemented. This is made evident by the growth registered by the
microfinance industry during the world economic crisis.
Sustainability
of the MFIs is an important step to ensure that MFIs will be available to
support the economic empowerment of their clients through the provision of
financial and non-financial services.
MFIs
must ensure to prioritize the management of their liquidity. This will include
having to constantly or frequently review
the liquidity positions. This can be performed on weekly basis or at least on
monthly basis. Instead of depending on only one person to make decision on the
liquidity status of the MFIs, it is advisable to use small committees instead
of one man reviews.
MFIs
must reduce or suspend capital investments and rather fund more liquid assets.
This is because MFIs would have challenges with raising funds and, therefore,
must be able to internally make funds available for investments in areas that
will yield better returns to support increase in operational cost. MFIs can
hold on to branch expansion and rather seek to improve the efficiency of their
operations.
MFIs
must ensure to do proper and detailed loan analysis for all their loan requests.
Credit officers or managers should not
only assess the “ability to pay”loans only based on the financial position of
the clients but must include assessing the entrepreneurial competencies of the clients to better make informed
decisions to manage and grow their business enterprise. In addition, MFIs must
ensure to diversify their loan portfolio by ensuring to finance clients
involved in different economic activities instead of financing clients involved
in just one economic activity.
This
is the time MFIs must place priority on efficiency instead of expansion. MFIs
should improve their liquidity management to meet the frequent cash withdrawal
and also aim at lean operations. MFIs must survive to support the micro and
small entrepreneurs and this can be only achieved if owners and managers of
MFIs make inform decisions regarding the day to day operations of their
enterprises.
