Some success habits of leading MFIs (1)

The times are changing very rapidly. Some of the things we did routinely without legal consequences are now matters of deep interest to the authorities. So, surviving the times requires not only adapting to the new realities but much more than that. It calls for innovative thinking. In the last piece on this page we spoke about disruptive innovation, insisting that the time for such innovation is now. Dynamic enterprises have to create and innovate for that seems to be the only way out of the red ocean that the Nigeria business environment has become. Surviving the times also calls for dynamism and adherence to certain time-tested principles. For microfinance institutions (MFIs), the need to work smarter is even more urgent.

A time like this calls for a review and redesign of the financial products offered by these institutions in order for them to meet the changing needs of their clients. For one, MFIs should refine and modify their loan facilities to reflect the times. Loans booked in good times must wake up to the needs of bad times. Owing to the general economic decline in Nigeria and its likely contractionary impact on economic activity, there is likely to be considerable decline in output. This will not discriminate between big and small clients, though the impact would be more on the small ones. The current declining output of the economy will create some issues with regard to the pattern of cash flows of clients of MFIs. One of the key success factors in effectively managing a lending operation is to understand and recognize clients’ cash flows.

Loan products must be designed in such a way as to meet the needs of clients at all times. The cash flow is an important measure of the goodness of the health of any business entity. It also shows the flow of funds to individuals or households. It is necessary at this time, when economic indices are in a flux and looking mostly south, to review the structure of existing loan facilities of MFIs to see how they fit current realities. By the nature of cash flows, some of it occurs at regular intervals while others are irregular in coming. Irregular cash flows are not supportive of a good planning culture. They create uncertainties around the repayment of loans. Disregarding the character of cash flows opens up the loan OSUJIbook to a lot of uncertainties, including delinquency.

Hard times as those we are currently in will surely accentuate the irregularity of irregular cash flows and degrade the regularity of regular ones. When this happens, delinquency is usually the next challenge that follows. MFIs should brace up for increasing delinquency in their loan books as the current economic squeeze progresses. The current economic downturn will certainly impact cash flows and repayment capacities. There may be need for MFIs to redesign their loan facilities in light of current market realities.

In order to design loan products that meet the needs of clients, the first thing successful lenders do is to focus on the cash flow of the potential clients. This means that current borrowing and repayment patterns must be combined with some prognosis of future borrowing possibilities, to arrive at what should be considered a viable loan facility. It is a waste of valuable time and other resources to make loans to clients whose cash flows cannot support or cover the periodic repayments. This is why credit facilities must take into consideration such factors as the seasonality in cash flows.

Some businesses get their inflows during the dry season. Others have good cash flow in the rainy season. Loan facilities that are not based, as much as possible, on the cash flow patterns of clients may face repayment problems. Of course, cash flows need not arise only from the particular business being financed. Loan officers must recognize all inflows of their client in judging the cash flow of the business.

Successful lenders also ensure that loan size is related to the needs of the client. A loan that is short of the client’s requirement is a potential time bomb that may explode in the lender’s face in due course. This is so because when the loan is short of requirement, the chances of diverting it to uses other than those for which it was made become higher. This is one of the occasions in which lender’s expertise and the character or integrity of the borrower come into play. The lending officer must find out the true requirement of his client. Many borrowers, out of fear of being turned down, are ready to accept an amount that is inadequate for comtheir needs. This is dangerous for both lender and borrower. Experienced loan officers always get out the true financial requirement of the business they are funding. It is also the responsibility of the borrower to be bold and honest in stating his true loan requirement.

Successful lenders choose loan terms with utmost care. A loan term or tenor is the period during which the entire loan should be used and repaid.

The term of a loan affects its repayment, and much more. A loan may become unsuitable for the business intended to be financed because the term is wrong. The term of a facility affects the repayment plan set out by the lender. It also has considerable impact on the financing cost to the client. If the client’s need is for a 24-month credit line and he gets one for 12 months, then the repayment plan is already threatened. This is so because the project may not be yielding returns by the time the repayment begins to fall due. Arrears of payment and punitive late payment charges may damage the credit. This is more so for microfinance loans made to individuals, groups or organizations whose fragility is taken for granted.

To a large extent, cash flows determine the capacity of an entity to service its loan obligations. If properly understood, they should determine the appropriate loan amount and its tenor. It is a success factor to make loans based on a proper understanding of clients’ cash flow position.

Dr Emeka Osuji, author of Microfinance and Economic Activity: Breaking the Poverty Chain, is Senior
Fellow, School of Business Admin, Pan Atlantic
University, Lagos.
eosuji@pau.edu.ng
@Emyosuji