FACTORS AFFECTING THE GROWTH OF MFIS I have dealt extensively with issues that affect the growth and profitability of MFIs classified problems experienced by MFIs in terms of strategic, operational, capitalization and marketing issues. In this paper split potential factors that impede growth into three categories, i.e. client related, system related and staff related problems. The rationale for the different classification system was motivated by the more logical classification and the familiarity of the terms in the finance sector, as well as the use of these terms in the risk management field. 1. Client related problems • Client service quality to customer • Client focus • Attraction of low income clients • Retention of existing clients • Lack of information about clients • Educational level of clients • Small and irregular cash flows • Low population density 2. System related problems • Quality of loan books • Fraud • Lack of enough capital to lend to clients • Profit performance • High costs • Poor selection of practices • Unreliable infrastructure • Increased competition • Legislation and regulatory framework • Ownership structure unclear • Inadequate donor funding • National payment system • Interest rates / commissions 3. Staff related problems • Educational level of staff • Skills development of staff • Appropriate staff incentive schemes Client related problems refer to problems relating to the target segment of a MFI. In the case of MFIs, this is possibly the largest distinguishing factor from mainstream lenders. The target markets of MFIs are the poor and often poorly educated, although there are exceptions to such generalizations. The success of MFI growth is higher where service quality to customers is good. Lack of information about clients affects MFIs’ focus that is necessary for development of financial products attractive to low-income clients as well as retaining of the existing clients. Educational level of clients leads to lack of awareness among MFIs’ clients and members on their collective rights, duties and obligations resulting into small and irregular cash flows from clients that affect the institutions growth. Beroff (1999: 22) indicates that the costs of serving sparsely populated areas are higher in terms of transportation and time consumed. Low population density can cost a lender up to20% of loan income to reach his/her clients. Financial sustainability is necessary for expanding outreach growth. System related problems refer to structures and processes within MFIs and how these influence the growth and profitability of institutions. Without self-sufficiency, there is little hope for MFIs to reach greater numbers of poor households (Kimenyi, Wieland & Pischke, 2000: 17). Failure to maintain good quality of loan books lead into delinquency risk, credit risk and payment default risk (Chambo, 2004). Frauds such as corruption, embezzlement, misappropriation and theft of assets (Otero & Rhyne, 1994: 70) have resulted into high administration costs detrimental to MFIs’ growth (Mbwala, 2004). High costs make it difficult for some MFIs to sustain their operations from loan revenues alone. Costs to MFIs affect the rate at which the fund their loan books, salaries of staff and infrastructure expenses, but may be exacerbated by unreliable infrastructure, an inefficient payment system, commissions and poor selection procedures. The increased competition in microfinance sector in Tanzania has resulted in improved quality and quantity of financial services and products offered (Limbu, 2002), but has made the sector difficult for MFIs with high cost of capital burdens. The lack of enough capital to lend to clients is globally one of the most severe problems inhibiting the growth of MFIs (Fitzgibbon,1999 & Mbawala, 2004). To some extent MFIs can use the deposits by clients to increase its loan book, but this option is often limited in poor communities. In order to expand programs, MFIs need access to a stable and an ongoing source of funds for MFIs to achieve sustainable growth (Nelson, Mknelly, Slack & Yanovitch, 1994: 55). There is often a mismatch in the maturity of an MFIs loan and deposit books, making it difficult and risky to grow the loan book. Besides lack of financial sustainability, other problems that contribute to system related obstacles include inadequate donor funding (for donor dependent organizations), an unclear ownership structure, too much donor intervention as well as legislation and regulatory framework that is not conducive to allow sound MFIs to emerge and grow. Staff related problems are probably the most manageable of the problems experienced by MFIs. Educational level of staff and skills development of staff can be supported by appropriate incentive schemes in order to facilitate improved quality of loans books, improved quality of service - which attract new customers and retains existing clients. Good selection practices can be incentivized through a well-structured commission scheme, which in turn would lead to fewer fraudulent practices and increased repayment rates. Allowing staff to attend courses of providing in-house training may increase regulatory and supervisory compliance. MFIs would not be able to deliver financial services efficiently to the poor in lieu of staff efforts (Otero & Rhyne, 1994: 87). Batchelor (1991: 128) found that MFIs with well-motivated staff has an increased chance of growth. Mr. Seng Visen
Posted on: Sat, 11 Oct 2014 02:59:50 +0000
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