Last week we called attention to the apparent rapid increase in the volume of non-performing loans in the microfinance sector. A short while before then, the president of the National Association of Microfinance Banks (NAMB) had publicly lamented the huge volume of bad loans now plaguing the sector. While we continue to advocate the need for caution in the management of strategic information on the sector, we express concern about the capacity of relevant stakeholders to appreciate and provide timely and appropriate solutions to such industry-wide problems.
Going by the comments of the NAMB president, and relevant information on the sector, one may come to the conclusion that much is not right with the financial management function in the MFBs. Proper financial management of an MFB requires that the leadership or management be financially literate both at the board and management levels. They are also expected to understand the workings of different operational issues and how they affect financial performance. The effective starting point of this activity is to understand how bad loans come about and how they impact on financial performance.
Bad loans are not only a problem of financial organizations that specialize in making loans or whose main function is the creation of loans. They also affect other organizations, which grant credit in the course of their operations. Credit sales have the same impact as loans or even worse, as some of them do not recognize interest payment. When a trader sells his wares on credit, he has indirectly loaned out part of his capital to the buyer, though mostly and sadly, often without including interest payment. If such credit sales crystallize into unpaid amounts, they become akin to loans granted but not repaid. The impact on profitability and health of both types of operator is clear.
Loan delinquency is dangerous in multidimensional ways. As if the loss of access to one’s funds is not bad enough, delinquency imposes additional problems by affecting revenues, expenses, cash flow and, ultimately, damages profitability. In the first place, additional effort is required to follow up on and collect delinquent loans. This will show up, not only in the loss of valuable man-hours spent in visiting and pursuing delinquent loans, but also in many other unanticipated costs. In most cases, legal services are retained to prosecute cases but often, many creditors also use self-help processes, including loan recovery agents and just anyone who shows capacity for coercive force to recover the loan. Sometimes such self-help efforts backfire and create additional difficulties for the lender.
The reduction in cash flow occasioned by delinquency can affect the ability of the institution to meet its financial obligations. Inability to meet obligations, as and when due, impairs the MFIs’ goodwill, image and freedom. Loans that remain unpaid and therefore outside the control of the lender often become unavailable on a permanent basis. They become bad. The institution may no longer provide adequately for its clients. For such an institution, the journey out of the business has begun. For deposit-taking institutions, like the MFBs in Nigeria, the risk of contagion increases and before long the regulator may be required to pay large sums in insurance costs or to bail out the operators.
Delinquent loans postpone earnings. This is not only through loans that are not paid and relent but also by the loss of interest income on the old non-performing loan. This has grave consequences for the profitability of the institution. One key skill that MFBs must obtain and sharpen is delinquency management. They should be able to compute and assess, at short notice and with little difficulty, the cost of delinquency at any point in time.
When a principal sum has been lost to delinquency, the MFB must be aware of the number of loans it would require to grant in order to earn the amount of principal lost. Similarly, when principal is lost, interest income is also lost. The MFB should also be aware of the additional quantum and number of loans to be booked in order to fill the gap created by the lost principal and revenue.
The foregoing points indicate that the management of delinquency should be given serious attention if we are to maintain comfortable stability and profitability in the microfinance sector. In order to achieve, microfinance institutions need information both of internal and external relevance. This is where the role of management information becomes very germane. Management information systems are simply computerised information database with the capacity to roll out reports on any section of a business. They provide management with relevant feedbacks that help them to manage. Such systems may be expensive from the point of view of small businesses.
And here lies the problem. Most small businesses lack adequate capital to carry out their core business. So it becomes a mere wish to expect them to provide the necessary funds to acquire modern management information systems. In all honesty, most small businesses are still running manual operations. This reflects in the quality and timeliness of the statutory reports they make to regulators and other relevant authorities. For many of these institutions, the bunching together of late reports is the order of the day. They hardly meet deadlines and therefore frequently put all the reports together and dump on their supervising institutions.
The result is a weakening of the capacity of the regulators to effectively manage and promote the industry. A situation in which statutory reports are either delayed or not even produced at all simply means that those mandated to supervise the particular industry are flying with impaired vision, if they could see at all. The consequence of this is that the authorities will not see the dangers ahead when they appear. They will be unable to provide the requisite level of technical and managerial support required by the given industry. This perhaps may explain why some institutions continue to post outstanding results and all of a sudden we hear that they have very major and acute crises often consuming them completely.
Managers of small businesses must first of all acquire relevant computer skills and experience on which improved and rapidly changing technology could be planted. They must make effort to invest in technology, which has become the most efficacious tool of effective management in today’s world.
Emeka Osuji
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