Microfinance Credit Risk Management in low trust environment (2)

Regarding the operational component of factors affecting credit risk, we need to add two more elements; namely: Weak Management Information System and Concentrated Lending. Management Information System (MIS) consists of a computerised database of information, which provides information, by way of reports, on any aspect of an organization. It is fed with information from various departments and it then processes this information into reports as management may require.

The importance of adequate information, provided in a timely manner cannot be overemphasized. The MIS therefore plays a very important role in the achievement of the management and administrative goals of any organization. As the saying goes, information is power. Without it we are like pilots without radars – we practically fly blind. All levels of management in a corporation rely on reports from the MIS to help them in the evaluation of business issues and making useful decisions.

A Management Information System is however not cheap stuff. In the first place, it is important to note that Management Information Systems are not just a collection of computer systems in an organization. The MIS includes the computers and all other parts of the entire system of collecting, storing, analysing and disseminating information in the organization. It is a major cost item, and this probably is the reason why some organizations continue to operate mostly manually, with little or no MIS infrastructure.

However, the benefits of adequate information as may be provided by a modern, effective MIS cannot be compared to the cost of it. Every forward-looking organization must invest substantially in its MIS.

Many microfinance institutions in the country are already very weak, financially speaking. They are not only poorly capitalized but also extensively shackled by the consequences of poor credit culture – loan delinquency and the shallowness of pocket. Under these conditions, they are unable to procure standard MIS for effective operation.  They are also unlikely to be effective in the outreach component of their mandate. To reach the poor, microfinance institutions need to go out to where the poor are domiciled. Their predominant location is the rural areas. So we have the current situation where most operators are located in the urban centres and unable to maintain contact with the poor in the rural areas.

The success of microfinance programmes are measured by a number of variables including outreach, efficiency and sustainability. A poorly capitalized institution will neither meet the needs of its clients nor effectively serve the collective purpose for which it exists – national poverty reduction. At the end of the day, failure may spark off a fresh round of hardship for those they are supposed to protect from it. The introduction of commercial microfinance seems to have its own draw backs. Of course it comes with increased inflow of investment capital funds. However, it also tends to shift focus away from outreach to efficiency. There appears to be some research evidence to the effect that outreach and efficiency seem to have a trade-off between them.

Expectedly, those who brought in the additional investment funds for commercial microfinance are not charities. They are motivated purely by the same profit motive that drives every firm. Thus, commercial microfinance institutions need to effectively manage the funds at their disposal and hence focus more on efficiency. Unfortunately, many do not see the importance of serious investment in technology to drive their expanding operational horizons. They tend to undercut their capacity to be efficient.

However, I believe the regulators and even the operators themselves are aware of the optimal investment required in that area for effective operation and would not encourage the formation of bubbles that could hurt everyone.

Concentrated lending is the other element of Operational Risk that we need to mention. Some operators not only have their loans concentrated in very few hands, they also lend to very few sectors. Some are breaching their single obligor limits regularly and lending only to a few clients and sectors. There is virtue in diversification of obligors and loan beneficiaries both in terms of client and sectors of the economy. Every lender should know this maxim. The wisdom for loan portfolio diversification is found in the fact that even in a recession, some sectors of the economy are still better than others. Some are more affected than others and since it is hard to say who comes out better from an economic crisis it is better to diversify one’s risks than be lured by quick returns only to lose at the end.

Emeka Osuji