Designing loan products to meet client needs is fundamental to the success of a micro-finance organization. Understanding cash patterns of borrowers and the profitability of their businesses helps to match the loan product to their business cycles. The loan term and repayment frequency are possibly the most significant variables in micro-finance and should be suited to the borrowers’ needs. The effect of an increased interest rate on the borrower is relatively less significant than increases in other costs. The method of calculating the interest rate and fees significantly influences the price of the loan.
The objective of this lesson is to highlight the effect of credit on borrower activities. Topics covered include:
- Cash Patterns
- Loan Term
- Loan Utilization
- Loan Purpose
- Interest Rate
- Fees/Service Charges
When clients borrow money, they incur both financial and transaction costs. Financial costs include interest, fees, forced savings, group fund and insurance fund contributions. Transaction costs include direct costs such as child care and transportation costs to attend meetings, and other indirect costs such as time away from the business, plus the opportunity cost of savings.
The objective of this lesson is to explain the effective cost to clients of borrowing and the related yield to the lender. Topics covered include:
- Cost components
- Effective cost calculation
- Effective yield to an organization
- Role of savings
This subject is covered in more detail in the separate study guide on Interest rates and self sufficiency, which also includes a financial calculator.
This lesson will provide the tools necessary to determine the break-even point for a borrower activity, for an income-generating project or for a micro-finance organization branch. Profitability can be forecast and managed when one knows: i) at what level of production a business will be able to cover all of its expenses; ii) what minimum product price is needed for the product to be viable at different levels of production; and iii) what happens if the financial estimate of costs and prices are changed.
You will learn how to calculate a break-even point for an income-generating activity and for a branch. Topics covered include:
- Fixed costs
- Variable costs
- Contribution margin
- Required break-even volume / revenue
- Break-even portfolio size
Micro-finance organizations are becoming more and more concerned with financial viability. This lesson discusses the costs and revenues associated with credit activities and the importance of achieving self-sufficiency and high productivity.
Micro-finance organizations are generally involved in two primary activities: credit and savings. For the purpose of this lesson, it is assumed that no voluntary savings are provided by the organization and all savings collected are simply a requirement of receiving credit. Any other activities which occur at the branch are excluded from the analysis which is explained here.
Topics covered include:
- Financial viability
- Operational self-sufficiency
- Cost of capital
- Financial self-sufficiency
- Trend analysis
- Productivity analysis
Generally, the loan portfolio of a micro-finance organization is its largest asset. The loan portfolio enables the organization to continue to provide credit to borrowers and to earn revenue. It is necessary, therefore, to manage the portfolio in such a way as to limit delinquency and loan default.
This lesson demonstrates the importance of accurately measuring the portfolio risk, provides an understanding of how the quality of the portfolio affects the viability of a micro-finance organization, and offers ways to manage the credit operations to minimize the risk to the portfolio.
Topics covered include:
- Portfolio outstanding
- Repayment rates
- Measuring portfolio risk
- Aging analysis
- Loan loss reserves
- Rescheduling/refinancing loans
- The cost of delinquency
- Controlling delinquency
Central to financial management of a micro-finance organization is effective management of its cash flow. Too much cash in a branch or organization results in lost income, while too little cash results in missed loan opportunities, delayed bill payments or high borrowing costs (overdraft charges). It is important to forecast cash needs accurately to reduce the amount of idle funds yet have enough cash available for operations.
All staff members of a micro-finance organization play a role in forecasting cash needs and ensuring adequate liquidity at the branch level. This lesson discusses how to forecast cash requirements and how to calculate liquidity ratios, an effective cash management practice.
The lesson shows you how to manage the flow of cash in a branch including forecasting cash requirements. Topics covered include:
- Forecasting cash flows
- Cash shortage/idle funds
- Liquidity ratios
The purpose of this lesson is to provide an overview of the budgeting process and the purpose for completing a budget. A sample budgeted Income Statement is provided. Implementation and analysis of the budget is described as well as how to calculate budget variance.
You will develop an understanding of why budgeting is important and how each area of the branch is part of the budgeting process. Topics include:
- Benefits of budgeting
- Who completes the budget?
- The budgeting process
- Implementation and Analysis
- Budget variance