Managing Risk and Creating Value with Microfinance - Case Study Example

2 May Introduction The success of any Microfinance (hither in after referred as MFI) lies with its efficient financial statements, which report the top management or board of directors about the performance of the MFI. With these well-structured financial reports that have been developed in tune with the provisions of Generally Accepted Accounting Principles (GAAP), a MFI may design a financial performance monitoring system. This will help the Board of MFI to do an exhaustive inventory of present reporting requirements. The Board may also pay specific attention to how well management is employing information to feedback about its operations, to propose new strategies and to make decisions. Operating and financial statements of MFI will report on a quarterly / monthly basis, including a set of carefully selected indicators for identifying progress against financial goals of the MFIs social objectives and operations plans. These financial and operating reports should give the top management of MFI an exhaustive and focused portrait of MFIs progress as regards to its triple bottom line. In this study, I will be analysing in detail about whether proper methods and techniques of Financial Statements preparations are used in Microfinance Institutions in order to help the CEOs with data pertinent to day-to-day operations and decision making. (Goldberg & Palladini 30) 2. “Purpose of the study “ “The purpose of the study “is to observe whether proper methods and techniques of Financial Statements preparations are used in Microfinance Institutions in order to help the CEOs with data pertinent to day-to-day operations and in decision making. Thus, the main aim of this research study is to make recommendations for appropriate financial standards, keeping in mind the professionals in the sector who may be required to have a preface to the implications and the depth of such financial standards. 3. Theoretical Background of the Topic A MFI is required to prepare financial reports for adherence with regulatory needs and for submitting financial reports to external stakeholders, which include shareholders, lenders, etc. For supervising deposit taking MFI, regulators have specific requirements and MFI may not have adequate time, staff and resources to comply with such regulations. This again corroborates that MFI should pay more attention to prepare its financial statements with the above specific requirements well within the time limit. (Ledgerwood & White 313). CAMEL system was first perused by the bank regulators in North America to assess the managerial and financial soundness of the commercial financial institutions in U.S.A. MFI are using the CAMEL appraisal norms and grade five provinces of managerial and financial performance. It includes the following Asset quality Capital Adequacy Management Liquidity management Earnings Employing the original CAMEL’s conceptual framework, “ACCION international structured its own apprising strategy.” “The ACCION CAMEL model assesses the analogues five provinces but the ratings and indicators mirror the conditions and challenges of the microfinance industry. “ACCION CAMEL methodology needs the MFI to offer the following information: Cashflow and budget projections Financial statements prepared in accordance with GAAP Portfolio aging schedules Funding sources Operations and staffing Microeconomic data With the above information from the financial statements of MFI, the ACCION CAMEL makes the following fine-tuning: 1) loan write-offs, 2) loan loss provision 3) Impacts of inflation 4) explicit and implicit studies 5) accrued interest income . Further, it rates and analyses twenty-one major pointers with every pointer accorded with a separate weighting. (Goldberg & Palladini: 13). Management Information System (MIS) is one another area that is required to be fortified in the microfinance sector and Information Technology can make a huge difference in this province. Now, there are available IT solutions, which comprehensively address MIS requirements. (Srinivasan 115). 3. Significance of the study It is observed that understanding of financial concepts and the state of the data management system among MFIs is rather inadequate and poor and hence there is a need to build large number of strong MFIs which will not be accomplished, unless and until efficient and strong financial systems of MFIs are not in place. Hence, this research study stresses that MFI should develop and focus their attention to develop strong financial statements, which would facilitate the top managers to make day to day decisions and to introduce corrective actions if needed at the appropriate time. 4. Findings and Discussion This research study is meant for microfinance practioners having some fundamental knowledge with financial statements and accounting terms. It is find that understanding of financial concepts and the state of the data management system among MFIs is rather inadequate and poor and hence there is a need to build large number of strong MFIs which will not be accomplished, unless and until efficient and strong financial systems of MFIs are not in place. To revamp the existing financial reporting of MFI, it is suggested that The ACCION CAMEL model should be used by all MFI to assess the analogues five provinces and at the same time, the ACCION CAMEL model’s ratings and indicators would mirror the conditions and challenges of the microfinance industry. Management Information System (MIS) is one another area that is required to be fortified in the microfinance sector and Information Technology can make a huge difference in this province. Now, there are available IT solutions, which comprehensively address MIS requirements. Hence, it is suggested that MFI should use IT softwares for MIS purposes so that it will be facilitate the managers to find instant solutions to the issues and to avert any future losses. Many global proposals have been undertaken to encourage framing of reliable financial standards, which includes governance and accounting standards to compare MFI operating in various atmospheres and across the globe. 5. Summary There is an immediate need to enhance transparency in the existing MFI system through information exchanging and reporting mechanisms, which include the development of standards and their use by MFIs and there is a further need to assimilate MFI into the overall financial system. 6. Conclusion The materialisation of microfinance financial metrics as a major hot topic of deliberation mirrors the progress of microfinance into as a major fomralised and sophisticated industry. As of date , MFI which consisted of institutions that devoted to operate along cannons of reliable financial standards and with those governing formal financial institutions without missing the focal point of its financial reporting standards. A major obstacle for standards initiatives in MFI appears to lie at the stage of data collection. For the majority of the MFI, some major “housecleaning” is required to be carried out before any reliable data could be collected and used in the financial statements that would compel managers to use it for the decision-making purpose. (Sa-Dhan13). 7. Recommendations. The existing reporting of financial standards of MFI should be enhanced to include the following: To enhance the transparency in the financial system through sharing of information and dissemination mechanisms, which include the development of new financial standards and their usage by MFIs. To integrate MFI into the aggregate financial system of the MFI industry. To make comparative analysis by employing an adequate tool by providing across-industry common performance measures. MFI can use this comparative analysis to identify major areas of their operations that need improvement or attention. (Sa-Dhan 11). Works Cited Goldberg Mike & Palladini. Managing Risk and Creating Value with Microfinance. New York: World Bank Publications, 2010. Ledgerwood Joanna & White Victoria. Transforming Microfinance Institutions: Providing Full Financial Services to . New York: World Bank Publications, 2006. Sa-Dhan. August 2003. Introduction to Microfinance Standards.2nd May 2011< www.sa-dhan.net/Adls/Microfinance/.../TrackingFinancialPerformance.pdf> Srinivasan N. Microfinance in India: State of the Sector Report 2008. New Delhi: SAGE Publications, 2009. Read More