Microfinance: Theory and Practice
Analysis of a Microfinance Institution:
MIKROFIN Banja Luka The institution's mission, although non-profit, is to fulfill this mission while remaining financially viable. This is common for many microfinance institutions and is a defining point of the microfinance industry. MFI's have to fulfill their social mission, eradicating poverty for low-income active people, while being financially practical. This is why social performance is equally important to financial performance for microfinance institutions.
The products that MIKROFIN provides to its clients are loans divided in four categories:
Fast Loan: This is an individual loan that does not require ownership of a business. The loan amount ranges from BAM 500 - 10,000 (US 370 - 7,380). Repayment terms vary with the size of the loan. For small loans (up to BAM 2,000 or US 1,480), the repayment term is from 1 to 36 months; while for large loans (BAM 2,001 - 10,000 or US 1,480 - 7, 380), the repayment term is from 1 to 60 months. For small loans there are no guarantors required, while for higher loans the guarantors are natural persons and legal entities, as well as pledge. The interest rate for this loan ranges from 18% - 20%.
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Loan for Entrepreneurs: This is an individual loan given to persons who have registered or unregistered businesses. The loan amount ranges from BAM 1,500 - 50,000 (US 1,100 - 36,900) for registered businesses and from BAM 1,500 - 10,000 (US 1,100 - 7,380) for unregistered businesses. The repayment terms are the same as the ones for the fast loans. There are no guarantors for loans up to BAM 20,000 (US 14,750) and repayment term up to 18 months, while for higher loans guarantors are natural persons and legal entities, pledge and mortgage. For this kind of loans there is also a grace period. This is up to 6 months for loans from BAM 1,500 - 5,000 (US 1,100 - 3,687), up to 12 months for loans from BAM 5,001 - 20,000 (US 3,688 - 14,750) and up to 18 months for loans from BAM 20,001 - 50,000 (US 14, 751 - 36,900). The interest rate for this loan ranges from 16% - 18%.
Loan for Agriculture: This loan is given to individual farmers and the amount ranges from BAM 1,000 - 50,000 (US 738 - 36,900). The repayment terms are the same as the other loans and there is a grace period of up to 12 months. There are no guarantors for loans up to BAM 10,000 (US 7,375), while for higher loans the guarantors are natural persons and legal entities, pledge and mortgage. The interest rate ranges from 15% to 16%.
Housing Loan: This loan is given to individuals for purchasing improvements for their homes. The loan amount ranges from BAM 500 - 50,000 (US 370 - 36,900) and the repayment terms are the same as the above loans. The grace period for this loan is 6 months for purchase of apartments. There are no guarantors for loans up to BAM 2,000 (US 1,480), while for larger loans the guarantors are natural persons and entities, pledge and mortgage. The interest rate for this loan ranges from 16% - 20%.
These products are clearly financial and make MIKROFIN a purely micro credit institution. In contrast to other MFI's, whose products include social services not related to loans, MIKROFIN only provides loans to individuals. This limits its scope and vision as an organization and makes it a micro credit only institution.
MIKROFIN, through its network of 33 branch offices, serves clients in the Northeast part of Bosnia Herzegovina, mainly in Republica Srpska. The target clients are low-income individuals who live just above the poverty line. These individuals are active and have or are planning to start their own small businesses. Through the 4 different types of loans presented above, the institution serves small businesses, agriculture and housing. Agricultural loans are very important as about 55% of the country's population lives in rural areas and agriculture is an important industry. Housing loans are equally important as they improve the quality of life for the borrowers. Through these loans, individuals can purchase apartments, or make improvements (e.g. better hydration system) to their homes. Thus the target clientele for MIKROFIN is very broad and covers individuals with small businesses, farmers and individuals who want to get housing. Microfinance in general has been targeting women because they are mainly the ones encouraged to start new businesses and to support their households. In MIKROFIN's case however, the percentage of women borrowers is not very high. In 2007, the percentage of women borrowers is 34,30%, down from 55% in 1999 In the future, the institution aims to become a national player, expanding its outreach to low-income clients throughout the country, as opposed to clients living mainly in its Northeast region. In March 2007, the total number of active borrowers was 40, 806, increasing dramatically from the 28,840 borrowers in December 2006. This huge increase in the client base is an indication of the overall growing process of MIKROFIN.
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Operating Environment The political environment is very unstable since the country is divided into three distinct ethnic groups. Political turmoil has also been observed between the two main government bodies of the country. Corruption has always been a large problem, increasing bureaucracy and making it hard for MFI's to operate efficiently.
The regulations and restrictions for Microfinance institutions in Bosnia Herzegovina are obstacles to the efficiency and productivity of MFI's in the country. The maximum loan size an MFI can give is BAM 50,000 (US 36,900). The laws relating to MFI's are defined in the Law on Microcredit Organizations, and provide regulations for the organizational structure, capital and reserves, and licensing of the institutions. In the Republica Srpska, a microcredit organization must have at least three natural persons or one corporation as founders and it takes 30 days to register. Operating manuals are required, outlining governance and membership requirements. The minimum capital required is around BAM 5,000 (US 3,240). Moreover, auditing reports are required as well as regular onsite visits by Finance Ministry officials.
The major funding sources are commercial bank loans and donations from organizations like the World Bank. From 2002 until 2006 the composition of loans was as following:
Hypo Banka 10%
RS Development and Employment Fund 9%
The fact that the basic funding sources are commercial loans shows that MIKROFIN has an excellent financial performance and an exceptional credit track record that make it profitable for commercial banks to give loans to this institution. The social mission of the institution is what attracts organizations like the World Bank and USAID to give loans and donations.
Governance Recruiting and training is very efficient due to the large number of training workshops and team building events. In conclusion, this organizational structure has benefited the institution in clear decision-making, efficient operations and good organization of responsibilities.
Portfolio at Risk is very low, currently at 0.33%. In its short history, MIKROFIN's portfolio at risk has never been above 3.5%, despite its high growth and increasing competition. This is due to good client selection and strict portfolio management procedures.
Loan Loss Provision Expense ratio was 1.08% in the end of 2006. This is not too low since the loan loss reserve ratio has been growing on parallel with the portfolio at risk.
Loan Loss Reserve ratio is currently at 2.3%. This percentage is the highest in the institution's history and reflects the considerations of higher growth and increasing amount of clients. However, it is still very low which proves the high quality of the portfolio.
The risk coverage ratio is very high at 698.25%. This shows the conservative culture of MIKROFIN and means that it could cover 6 times its portfolio at risk with its loan loss reserves. This is due to the fact that the collaterals and guarantees usually cover more than 100% of the value of the loan.
The write off ratio was at 0.08% in the end of 2006, an extremely low ratio. This represents the excellent portfolio quality of the institution and the rareness of long-term delinquency. Looking at the low portfolio at risk, many would expect the write-off ratio to be very high but that is not the case. All the above portfolio quality indicators show that MIKROFIN is an extremely healthy institution with minimal risk to investors.
The operating expense ratio has been kept under 10% and in 2006 it was 8.47%. This is very low and proves the efficiency of the institution. It can be explained by efficient cost management, fast loan approvals and high productivity of staff and systems.
The Borrowers per Staff ratio is currently at 170, decreasing from 189 in 2006. This is due to 35 new hires in 2006. The ratio is still very high and represents the high productivity of the staff.
The Financial Expense ratio is very low at 4.35% at the end of 2006. This is means that the financial cost of the institution to fund itself is very low.
The Debt/Equity ratio is extremely high at 300.88%. This shows that the institution has easy access to commercial funds, as shown in the funding section above.
The return on assets, at 4.8% is quite low for an institution with so many assets like MKROFIN. This means that the institution does not use its assets very efficiently and could do better in that aspect. The return on equity is at 17.45%, which shows what the institutions profitability would be if it was a for-profit entity.
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Finally, the portfolio yield at 19.9% compared to its average portfolio APR of 19.4% shows that the decreasing interest rates have not provided a significant yield. It does not show a bad portfolio quality since portfolio at risk, write-off ratio and loan loss provision expense ratio have all been excellent.
MIKROFIN is a microcredit institution that is leading the microfinance sector in Bosnia Herzegovina. Its constant product innovations, efficient procedures and operations and low interest rates, accompanied with its exceptional financial performance make it a unique institution to invest in. In the future, increasing competition from commercial banks entering the microfinance industry will pressure the institution to lower interest rates even more. However, MIKROFIN will still remain an industry leader due to its exceptional performance indicators and portfolio quality.
MIKROFIN website, http://www.mikrofin.com/mission.html