CGAP Training Business Planning for MFIs Participant Materials: Trainer Notes

BP1: Welcome and Introduction

CGAP, Revised July 2013

SESSION 1: WELCOME AND INTRODUCTION

Session Summary Objectives: By the end of the session participants will be able to: State each other’s names, State the training objective and agenda Relate objectives to their own expectations, Time: 90 minutes Materials: Flipchart paper and markers for each group Name tags Name tents (sample included) Masking tape Index cards Computer data projector

Overhead projector Participant materials: CGAP Microfin Handbook Overheads BP1-O1 Workshop Expectations Assignment BP1-O2 Workshop Goals BP1-O3 Workshop Objectives Handouts: BP1-H1 Workshop Expectations Assignment BP1-H2 Pre-Test BP1-H3 Workshop Goals and Objectives BP1-H4 Training Course Schedule BP1-H5 Microfin Handbook



Session 1: Welcome and Introduction Welcome 15 minutes

1. (2 minutes) Representative of sponsoring organization welcomes participants

and opens workshop.

2. (3 minutes) Remarks from official guests; e.g. CGAP representatives, etc.

3. (2 minutes) Introduction of and hand over to facilitators. 4. (8 Minutes) Setting the Stage. Opening remarks by facilitators. Welcome

participants to the course using the following points as a guideline. (adapted from the preface to the CGAP Business Planning and Financial Modeling Handbook version 1)

The past 30 years have witnessed the development of a microfinance sector to

provide financial access to populations excluded from formal financial institutions worldwide. Microfinance institutions serve an ever-increasing number of low-income clients, but the demand for such financial services still far outstrips their capacity. In recent years, the sector has been subject to severe criticism, raising the alarm on questionable practices such as lack of pricing transparency and aggressive collections. Critics warn against increasing risks of over indebtedness and shows that the effects of MFIs' services are sometimes negligible or even negative. In order to achieve sustainable growth and reach its socio-economic goals, the industry must continue to become more professional, in order to reach the double bottom line..

To meet the growing demand, most microfinance institutions strive to increase their outreach. But rapid growth strains an institution’s systems and changes its financial dynamics. Without effective planning and projection tools microfinance institutions can—and often do—undermine themselves, and in doing so, may fail to reach their social and financial goals.

Many microfinance institutions have business plans. They are often over

ambitious, because the underlying projections are insufficiently detailed to reveal the hurdles that the institution must overcome in order to expand. Often they are prepared by outsiders, created in response to requirements of potential funders, and remain on the shelf once funding is received rather than serving as an ongoing management tool.

In the past, many business plans were funded by funders/investors, in particular, to help microfinance institutions reach financial sustainability. However, as concerns around client protection and other sector risks increase, we are reminded of how critical it is to put clients at the center of the industry's decisions.



An in-depth study of clients' needs in terms of financial products and services, and also of the expected profits, must be included in the MFIs' business planning process. This is how an MFI will be able to reach both its financial and social goals.

The Consultative Group to Assist the Poorest (CGAP) designed Microfin and this

course to help microfinance institutions develop their own business plans. This course will provide guidelines for preparing strategic and operational plans and, most especially, detail in how to make accurate financial projections to accompany those plans. Such plans and financial projections are certainly not secure predictions of the future—under the best circumstances they involve assumptions that will always need adjustment in the face of changing realities. But even if good business plans are not crystal balls, the exercise of preparing one, with participation by staff at all levels, can help an institution in three ways:

o The institution’s stakeholders will have to face, and arrive at a consensus

on, key strategic and operational issues that the exercise will bring to the surface.

o If the financial and operational planning is carefully done, the process almost always shows participants the important dynamics of their business that they did not understand before.

o The plan that results can serve as a roadmap to the institution’s goals. With a good map in hand, one that is periodically updated, management will know when the institution is deviating from that path and which direction it needs to move to get back on track.

During this course we will introduce how to develop those plans; we will review some basic concepts of planning and then apply them to microfinance using the Microfin Modeling software. The Microfin computer model, the analysis of your own institutions and the case study of a fictitious microfinance institution will be our major learning tools. We will present the model, discuss its use and work in groups on computers both inputting and analyzing data from the case study. Your active participation in these activities is critical to the success of the course.

We hope that the strategic, operational and financial planning and modeling exercises will help your organizations achieve their operational goals in a sound manner that supports the financial and social longevity and sustainability of the institution. The aim is to ascertain a qualitative change, both in the lives of your clients and in the sustainability of your MFIs.

Before we get started let us find out who is here and why you came!

Participant Introductions and Expectations (75 minutes)

Trainers may substitute other experiential activities that achieve these goals – learning who the participants are and obtaining participant’s expectations as appropriate.



5. (5 minutes) Distribute expectation cards. Ask each participant to write on the card several reasons of why they came to this workshop and to list several points of what they expect to get out of it - to learn or be able to do as a result -of this workshop.

6. (20 minutes) Show BP1- O1 and Hand out BP1-H1, Workshop Expectations Assignment and briefly explain. Explain that in their groups, participants should first introduce themselves by saying their name, describing their job, and briefly what they wrote on the card, explaining why they came to the workshop. Ask each group to then prepare a drawing that reflects the main things that they want to learn and do at the workshop (their expectations). Emphasize that we’re not looking for a drawing of a “planning process” or an organizational chart; we’re looking for a more creative expression, like a happy institution that results from our planning efforts! You may wish to prepare a flipchart with two simple drawings. Direct their attention to the flip chart with the two drawings. On the top half, draw a shape like an organogram, with layers of boxes connected by lines. Draw a big “X” through this drawing. On the bottom half make a simple drawing of a house and a family of “stick people” outside the house.

Divide participants into groups of 4 or 6 people (depending on total group size) by asking them to count off. Tell each group to meet under the sign (previously posted in various corners/spaces of the room) with the number corresponding to the group. (The Ones under the sign that says 1.) Hand out flip chart paper and markers to each group, and explain that they have 15 minutes to complete the process. Supervise small groups as they work, especially in keeping time

7. (20 minutes) Introductions and Presentations. Reconvene the groups and begin presentations. Remind participants of the one rule - everyone must speak! Call each group to the front and post their drawing somewhere in the room. All group members should come forward to present each other and the drawing to the large group.

As expectations emerge from the report back, make notes on the flip chart labeled expectations. When all the groups have taken a turn, ask if there are any other key expectations which have not been included on the flip charts, and write down any responses. Collect index cards to supplement the expectations.

8. (15 minutes) Pre Course Audit/Pretest Explain that in order to fine tune our time together it is helpful for us to understand what you already know. We have designed a pre course audit that we would now like you to complete. Remind participants that if they know all the answers there would be no need for them to attend this course! We hope there are some blank spaces so that we can keep our jobs! Distribute BP1-H2: "Preliminary assessment".



Collect for later analysis for group formation and course emphasis.

9. (5 minutes) Expectations and Schedule

Use overheads BP1-O2 "Overall workshop goals", and BP1-O3 "Specific objectives". Handout BP1-H3 "Workshop goals" and briefly go over the workshop goals, and objectives, tying the sessions into the expectations expressed by participants earlier. If certain expectations will not be met, candidly explain why. Distribute BP1-H4 Training Schedule and review.

10. (2 minutes) Materials Distribute a copy of the BP1-H5, CGAP Microfin

Handbook, which contains detailed information to accompany the course. They have also received a Business Planning Course Binder. Explain that they will receive other materials throughout the week that can be inserted into this workbook.

11. (2 minutes) Workshop Norms and Logistics

Complete a list of ground rules for the workshop by soliciting input from the participants (e.g., start on time, everyone must participate, ask if anything is unclear, no smoking, one person speaks at a time, there are no such thing as a “stupid” question, etc.). Introduce the concept of the “energizer” and determine a way to fulfill this role. For example: “The last person to enter the room is the ENERGIZER of the day.” Explain that when we feel like we’re dragging a bit we should request that we have someone lead a one-minute energizer to perk us up (like tell a joke, lead us in calisthenics, etc.).

Review any logistics (hotel, meals, break times, etc.)

12 (2 minutes) Conclusion. Take any questions that participants have at this point.

Close by pointing out that:

• The participants are a vital part of the learning process. Participants will be able to build upon the experience and knowledge of other participants, and share their own knowledge and experience for the benefit of others.

• Various resources will be available for making learning a continuous process (handbook, exercises, case study, model on diskette, facilitators, etc.).

• Emphasize that we will spend a great deal of time during this course working in small groups on a detailed case study and that much of this time will be spent at computers.

• We will employ the latest in adult education methods for which the foundation is learning by doing. We will not be ‘lecturing’ as you may be accustomed to. We ask that you bear with us and allow the process to run its course. While we are available to answer questions as needed, we do believe that the best remembering comes from your own discoveries!



• Let's get started!! After completion of this session:

• Remember to evaluate the skills assessments/Pretest • The participants should be evaluated on their skills in the use of Microfin, planning

experience, and knowledge of financial management. Make a list of the sub group options.



BP1-M1

SAMPLE NAME TENTS

To Use: Cut along arrowed line, then fold on dotted line. Make sufficient copies (preferably copied on hard paper) for all participants. Distribute to participants and ask participant to write their name in the space provided.

I hear, I forget

I see, I remember

I do, I understand



I hear, I forget

I see, I remember

I do, I understand

I hear, I forget

I see, I remember

I do, I understand

BP 2: Introduction to Business Planning

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SESSION 2: INTRODUCTION TO BUSINESS PLANNING

Objectives: By the end of the session participants will be able to: Explain the purpose and elements of business planning. Link basic business planning knowledge to planning for microfinance Time: 120 minutes Materials: Business Planning Framework prepared on 2 pieces of flip chart paper,

titles and boxes only Flipchart, markers, Masking tape Computer data projector Index cards General Strategic and Business Planning Reference Materials Practical local Examples/References to Planning Process BP2-M1: Examples of strategic objectives Overheads: BP2 - O1 Planning helps…. BP2 - O2 Planning for Outreach, Financial and Social Sustainability BP2 - O3 Business Planning Terminology BP2 - O4 Business Planning Framework (Complete) Handouts: BP2 – H1 Business Planning Framework (Complete) in color if possible BP2 –H2 Introduction to Business Planning Flip Charts Microfin Business Planning Framework At the end of this session, hang up the pre-prepared business-planning framework (titles and boxes which were prepared earlier) in a central place where everyone can see it. This flipchart will be posted on the wall for the remainder of the week, so it should be carefully done. To be large enough to be visible, it should be done on multiple sheets of flipchart paper. Use different colors of markers for the main headings so that they are easily distinguishable, arrows where appropriate, etc. If necessary in your market, the trainer could make and additional flipchart with the terms/steps commonly used before these flip charts to further illustrate how their local experiences fit into the framework used in this course.


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Session 2: Introduction to Business Planning

Importance and Purpose of Planning

1. (2 minutes) Introduce the session. State that we have just discussed the goals and objectives of this course. We are here to apply our planning skills to all aspects of planning most particularly to financial modeling using Microfin. Let's start back at the beginning! What do you know about business planning?

2. (5 minutes) Definition of business planning. To focus the session, distribute index cards and ask participants individually to write their own definition of Business Planning. Review a few answers and explain that they should hold on to their definitions, as we will be redefining them as the course proceeds. Explain that several terms may be used: development plan or business plan. Concepts and contents remain the same, regardless of terminology.

3. (5 minutes) The importance of planning. Ask: Why do you think planning is important? What is the purpose of planning? After a few moments show BP2-O1. Explain that planning provides a framework for change. It is both an operational tool which guides the activities of staff and board, and an evaluation tool which allows individuals to monitor progress in reaching the goals outlined in the plan. Planning will enhance an MFIs' ability to expand outreach, reach its target clients, guarantee the quality of services in response to clients' needs, and increase sustainability. It is not a process to go through simply in order to receive money from funders or investors...

4. (7 minutes) Brainstorm: What are the characteristics/qualities of a good plan? Write answers on flipchart. Answers should include: - It is a process - done over time; - It has all departments involved, - It is developed by a group – not one person in isolation - It is owned by the organization; - It can be enacted with the available resources, - It is a working document – referred to, not shelved; - It is also concrete, measurable and a good read! - Most of all, it draws a clear path for the MFI: by responding to its clients' needs the MFI will achieve its social and financial goals. Summarize brainstorming by highlighting that planning is an iterative process and worked on by a team of people representing various ‘departments’ in the organization.


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5. (2 minutes) Ask: In particular, why is planning important to MFIs? Ensure that the responses are linked to the "double mission" message. I.E. That good planning will allow MFIs to embark on realistic efforts to reach financial sustainability (financial self-sufficiency and capitalization for growth) and their social viability (defined as an institution's capacity to achieve its mission sustainably and to fulfill clients' needs in an appropriate and responsible manner). Show BP2-O2: « Planning, profitability, sustainability, viability».

6. (5 minutes) Business Planning Framework. Ask who has been involved in a Business Planning process by raising his/her hand. Follow on by asking a few persons to describe the particular process they were involved in.

7. (10 minutes) Explain that we will now take a few moments to think more about the planning process. Divide participants into groups of 3, of those that are seated next to each other. Explain that they have 10 minutes to write down the main steps/parts of the Business Planning process. Tell them: Think of the major steps one has to complete when doing a business plan and then ask them to try to put the elements in a chronological order.(What would they do first, second, last, etc.)

(Note: While monitoring the groups, try to get them to focus on broad concepts like mission, SWOT, budgeting, objectives, goals, satisfying clients' needs, etc., and not get into any more detail than this. They should strive for no more than 10 steps to their planning process.) 8. (10 minutes) In plenary, process results, ask in large group what was discussed

in the triads. Begin by asking what things did you consider first? Next? And so on. Keep discussion moving (it is not necessary to obtain an exact order – grouping activities as “first tasks” is fine, remember the participants have already discussed the topic for 10 minutes.) Try to take as many answers as possible. (Co-facilitator can write up main ideas as they come up on a flipchart.) Summarize, acknowledge commonalities and previous knowledge. Ask: What are your comments on the best order to follow for a planning process? Focus the discussion. Note that overall plans often start with “mission” -(what the institutions stands for) and end up with a “strategy” (a plan to achieve the mission). Note that the mission should be internally defined – not externally by someone outside of the organization! Also point out that the process is not linear, some activities occur simultaneously, and some activities are continuous like market research or examining the competition, assessing institutional resources etc. For example, the mission is reviewed after the market research, and SWOT for feasibility prior to final strategy development.

9. (2 minutes) Referring back to the list draw out by asking how we can group these activities. Try to quickly move the group towards Strategic, Operational and


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Financial modeling. If this does not work then move into the next step immediately as always relating to the points on the flip charts.

10. (5 - 10 minutes) Explain that first we need to introduce some key terms and

definitions that we will be using throughout the week. Use BP2-O3, Business Planning Terminology. Through questioning, define the planning terms one-by-one, emphasizing how they differ. For example, using the overhead reveal the term to be defined and ask participants for some ideas, then reveal the working definition used throughout the course.

11. OPTIONAL (10 – 20 minutes) Bridge activity from local reference points to

course framework. Depending on the group and the terms/processes in general use in the region that the course is being offered, trainers may wish to take some time to relate common practices to the definitions above as a lead into the framework that will be used in this course as described below.

12. (10 - 15 minutes) Explain that we will now study the BP Framework used in

Microfin and once again see how it compares to the outlines they have just developed or to other frameworks they may be accustomed to in their countries. State that we recognize that there are many different models available for use in planning. Explain that the approach we have developed and chosen to use in this course is only one approach to business planning. It may have different components or terms but the framework we are presenting includes all the major components needed to formulate a general business plan as well as provides extra emphasis and tools specific to microfinance. Present the Business Planning Framework. Show overhead BP2-O4, Business Planning Framework. Reveal and explain framework for our planning strategy, review components one by one through questioning. Relate to participants’ list and experiences; build on this in the presentation. Emphasize main ideas, particularly stressing the priority given to markets, the focus on CLIENTS as the main theme in our business planning approach, that planning as an iterative continuous ongoing process, completed by a task force, and the usefulness of projections and financial modeling in microfinance. Point out the parallels between strategic components and operational components (e.g., markets and clients influence products and services). However do not go into detail, as this will be done in a later session. Refer to BP2-M1: "Examples of strategic objectives".

13. (5-10 minutes) Hand out BP2-H1

Framework to the participants, filled out and in color if possible, as well as BP2-H2: "Introduction to Business Planning". Give participants a few minutes to review the framework. Facilitate general discussion - Ask: What are your reactions to the framework? How can you apply it in your institution? How


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does this framework compare to your own experiences, differ from what you are familiar with? From typical NGO approaches? Answers: emphasis on markets, consider the institution as a whole, provides an on-going management tool, spells out the essential steps to help define a development plan, has a tool specific to microfinance, links social and financial goals, etc. Take any other questions and comments.

14. (5 minutes) Summary. State that this framework provides an outline of the business planning process that this course presents. The remainder of the course will look at each component of the framework in various levels of detail. The focus will be to practice completing the projections needed for financial modeling in order to complete a business plan for microfinance institutions that will enhance their abilities to be successful, profitable, financially sustainable and socially viable. Bridge to next session.


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BP2-M1 Examples of strategic objectives Examples of strategic objectives1, operationalized with SMART objectives: Specific, Measurable, Achievable, Realistic and Time-Bound

Strategic objectives SMART objectives (to reach within 12 months)

Social objectives

Improve access to services for poor micro-entrepreneurs Increase poor clients in rural area by XX%

Keep poor clients’ satisfaction level in rural areas at XX%

Widen the range of services by introducing X new products; new products make up XX% of the portfolio

Monitor the improvement of clients’ living conditions, measured by the PPI tool (Progress out of Poverty Index2)

Improve the well-being of the families of the institution’s clients for at least 3 years, assessed through the evolution of their poverty levels, measured with the PPI tool (XX % clients are satisfied and XX% clients have been improving their PPI score for 3 years)

Financial Objectives

Improve financial performance with better efficiency Reach a ratio of financial self-sufficiency >100%

Improve cash management through improved internal management

Complementary services for clients

Widen the range of services to include health insurance to improve clients’ capacity to handle health risks

Lead a feasibility study about starting a competent partnership to help the institution develop health insurance.

Help clients manage their business better though specialized training

Institutional improvements

Working with a credit bureau to improve the quality of information on clients and avoid risks of over-indebtedness

Upholding credibility thanks to transparency and sending out quality information and reports

1 Based on Strategic Management Toolkit, Microfinance Centre (MFC) for Central & Eastern Europe and the New Independent States 2 A tool that measures poverty lines of groups and individuals (www.progressoutofpoverty.org)


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Operationalize the mission with Specific Objectives, measurable, realistic, and adequate for a specific time period. Examples of Specific Objectives Social Objectives SMART Objectives (to reach within 12 months)

Reach more poor in rural areas Increase poor clients in rural area by XX%

Satisfy the financial needs of target clients

Keep poor clients’ satisfaction level in rural areas at XX%

Widen the range of services by introducing X new products; new products make up XX% of the portfolio

Improve the well-being of clients’ families

Improve the well-being of the families of the institution’s clients for at least 3 years, assessed through the evolution of their poverty levels, measured with the PPI tool (XX % clients are satisfied and XX% clients have been improving their PPI score for 3 years)


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BP3: Strategic Planning

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SESSION 3: STRATEGIC PLANNING: MISSION, MARKETS AND CLIENTS

Objectives: Participants will be able to: State the components of and write a mission statement Define market and clients for microfinance Identify strategies for planning and apply them to a case study Time: 155 minutes Materials: Projector, Flip chart, markers (one for every five participants),

Masking tape Overheads: BP3-O1 Mission Statement – Key points BP3-O1opt "Deconstruct" the mission BP3-O2 Social performance path BP3-O3 LEDA's Mission BP3-O4 LEDA’s Goals BP3-O5 LEDA serves… BP3-O6 Market Segments BP3-O7 Planning-serving segmentation BP3-O8 Microfinance Client Traits Handouts: BP3-H1 From Mission to Strategy BP3-H2 Strategic planning: Strategic planning: integrating SPM into microfinance capacity building - Imp-Act/MicroSave technical note BP3-H3 Mission implementation evaluation tools BP3-H4 Market and Clients - Key Points BP3-H5 Market analysis: example of segmentation for medium term loans BP3-H6 Tools to know your clients/members better BP3-H7 Case Study Part 4 - Correction of the Exercise Case Study: Parts 1 – 3 LEDA Case Study: History, Mission, Market and Clients Part 4 Exercise


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Session 3: Strategic Planning

Introduction to strategic planning

1. (5 minutes) Introduce and explain the session objectives. Refer back to the

Framework overhead/handout and point out that we will now focus on the strategic planning side of the framework. State: We will go through each component of the framework first defining it and then applying it to a case study, LEDA. We have already learnt that some of us are familiar with strategic planning and have even participated in strategic planning exercises; (from pretest and the previous session) we hope to be able to also learn from your experiences. NOTE WELL: Most of the session is lecturing through Questions and Answers. Keep the session interactive and lively!

Mission and Goals

2. (5 minutes) Ask: What do we do first? Answer Strategic Planning - Formulate a Strategy. Review what strategic planning is; note that the outcome is a strategy that will then need a plan of implementation (the operational plan). Once again, state that planning is an iterative process and that “steps” are not necessarily conducted in a linear fashion. However in the course we will present them one by one and discuss how they overlap and link to one another!

3. (5 minutes) According to the framework, Ask: What is first? Answer: Establish our mission! Ask: What do we mean by mission statement? What are the main elements of a mission statement? What is your mission? Take a few responses and ask for examples of each element. Summarize using BP3-O1 and notes from BP3-H1 as a guide to bring participants to a common understanding as to how the term is used in this course. Remind participants that our mission is our reason for existence!

4. (5 minutes) Write this question and responses on a flipchart. Brainstorm: Why is mission (statement) important? Key answers might include encouraging stakeholder commitment and ownership to the organization, providing focus and direction to the organization during implementation, providing long term commitment or direction by the institution, and explaining the institution's social orientation. Explain that in order for the concept of “mission” to be real within an organization, rather than just words or a catch phrase, it must be implementable. The mission is the entry point, but the institution needs to have the resources and means in place to achieve it.


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Hence the mission is the cornerstone of business planning. The purpose of the remainder of the plan is to help the organization achieve its mission; the organization’s mission sets the stage for all subsequent activities. It is then important to define the mission precisely: Who are the target clients? Which services will fulfill their needs? What are the expected changes for clients? How can the organization make sure they are well served and protected? Which values should the organization promote?

5. OPTIONAL (10 minutes) If possible, trainers should provide some local

examples of mission statements on overhead for review to illustrate the major components. BP3-O1optional: “ Deconstruct “ the mission and ask participants to review page 2 in BP3-H2 “Strategic planning: integrating SPM into microfinance capacity building“.

6. (5 minutes) Ask: What are goals and how do goals relate to a Mission

statement for an MFI? Summarize by stating: Strategic goals are statements that begin to outline HOW an MFI intends to pursue its mission. They are fairly broad statements that highlight what the general plans of the MFI are to achieve its mission. They are often related in terms of outputs or outcomes. The goals will later be broken down into SMART (social and financial) objectives. The activities/processes/systems will allow more specific guidance of implementation and monitoring accomplishments - results and their impact - with more precision. Show BP3-O2 "Social performance pathway", a visual illustration of this theoretical framework.

7. (15 minutes) Ask various participants to describe the mission and goals of their

organizations, and to talk about their experiences or thoughts concerning that mission. Ask: Is your organizational mission clearly stated, precise, and known to all? Is it being fulfilled? Or are you experiencing mission drift? Why or why not? Briefly discuss some of the reasons. Summarize by highlighting qualities of mission statement that help get them fulfilled. Relate to above discussion and include such concepts as: Stakeholder understanding of mission, commitment to success, participatory development, based in reality (not to get donor funds, etc.). Trainer should have relevant local examples available in case there are none from the group. (For example, a case of a well-stated and clear mission, focused on realistic goals, and an (anonymous!) example of a vague, over-ambitious, unclear mission. Mention that there are tools to help MFIs check that their mission and goals are in line with their systems and results. Hand out document BP3-H3 "Social assessment tools" and spend 5 minutes reading a few key issues. Stress that to implement any


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mission, we need to take into account client protection (to ensure no harm to clients, at the very least), hence the possible use of Smart Campaign tools.

8. (8 minutes) Introduce the Case Study. Explain that in this course we will be

practicing our planning and financial modeling skills by using a case study. The MFI in the case study is called LEDA. Show BP3-O3 LEDA’s Mission Statement and BP3-O4 LEDA’s Goals. Review with participants and explain that the case will be further introduced later in this session. Markets and clients

9. (5 minutes) Ask after we have defined our mission and goals what should we focus on next in our strategic planning activities. Answer – Our market, meaning the clients, people or organizations (very small businesses, SMEs, producers' organizations, etc.) whom we wish to serve, and their needs. Defining a market is one of the first steps you will undertake. Ask if anyone can remember who LEDA’s clients are? Take a few answers and show BP3-O4 “We serve ‘low income self-employed in urban areas” Ask for reactions that lead to the question: Does that tell us enough about who LEDA plans to serve? Answer should be no, an MFI must have a more specific picture of WHO it is going to serve the market must be analyzed in more detail. Ask: What else do we need to know? What might you add to this description to present of clearer picture? Quickly write a few new ideas on the overhead. Concentration of clients, where they are, what they need, their gender, types of businesses, socio-economic situation, behavior and attitudes toward financial services, etc.

10. (10 minutes) Refer back to the Framework and explain that we will now look at the most crucial element of our plan - the WHO of our mission statement. Remind (ask) participants that in our approach we focus our plan on our market first and build our strategy around them. Ask: What do we mean by markets? Take a few answers. State there are many definitions that will vary from the economist to the marketer; we will focus on how they are used in Microfin and how we will use these terms in this course. Answer: A market is the set of all actual and potential buyers of a product. A potential market is the set of consumers who have some sort of interest in the product. You may choose to define your market narrowly or broadly, bearing in mind different circumstances for each.


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What do we mean by clients? This would equate with the current and potential market above. Since this is the potential we will look in greater depth at the characteristics of these consumers. (Trainer may provide local definitions as are common if necessary.) Ask: How do we determine who the clients in the markets are? Answer: conduct market research, gather information to determine who we can serve so that we can be profitable and achieve our social mission while seeking profitability. Discuss: What methods can we use to get the information required. For example, surveys/focus groups of existing and potential clients, demographic statistics, etc.

11. (5 minutes) Ask and briefly discuss: Why is an analysis of markets and clients important? Answer: this is a critical element in our formula for success - because without markets there is no growth, and without satisfied clients we have no institution! Explain that through such an analysis, they will be able not only to determine what markets to expand in, but also to fulfill clients' needs better by tailoring products and services to meet client demand and by identifying risks for clients. This analysis can also help MFIs stand apart from competitors while improving their social performance (by targeting a segment of population that was left out, for example). Explain that while markets and clients commonly fit into an environmental assessment in a typical strategic planning process, special emphasis is placed on them in order to underscore their importance to microfinance. We often find that in the ‘sea of replication’ we overlook the specifics of our markets and the related client needs. The success of our MFIs is directly related to satisfying our clients with products and services that they require, value and will pay for.

12. (10 minutes) State: Let us briefly examine a process for analyzing markets and

clients. Let us focus on Markets first. Ask: How do we get more detailed information about Markets? Introduce the concept of market segmentation. Ask participants for definitions. Summarize by saying that - a Market segment is the division of a market into distinct groups of buyers who might call for separate products or marketing mixes based on their unique characteristics.


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Ask: How do you normally segment markets in your institutions? Or how do you think we can easily segment markets? Take answers and reveal BP3-O5 and explain as relevant. (see BP3-M2) Hand out BP3-H4 "Market and Clients - Key Points" and BP3-H5 "Market analysis: example of segmentation for medium term loans". Explain that market segmentation is the process by which an institution collects data about its clients and their needs. This helps identify the niches where needs for products have not been addressed and where client groups can be targeted for a product prototype. State: Therefore we will take this as the first step in our market analysis - to identify all of the organization’s, current, as well as potential markets using the above criteria.

13. (5 minutes) Explain that once you have identified markets for analysis, you must

determine what information should be gathered about that market, and how the information will be gathered. Ask: What might you want to know about a given market? Make a list on a flip chart. Answers should include size, growth potential, breakdown of activity by sector, demand for services, infrastructure, competition, etc. If it is a market you are already serving, you will also want to assess client satisfaction with the existing program. Show BP3-O7 "Planning-serving segmentation" and explain that the answers just provided will segment a market to help in planning

14. (5 minutes) Ask: What about your potential market? What specifically might you want to know about your existing or future clients? Briefly discuss some answers and show BP3-O8 "Microfinance Client Traits" as summary. Note for example that some client characteristics, such as the literacy level, will later influence what the MFI needs to do to define its products (and here, to address client protection principles by making sure, for illiterate clients, that information is delivered in an understandable manner). This may entail costs that need to be taken into account in the planning process. If the institution is already established in a market, it is still necessary to assess current financial behavior (how clients are using available financial services and why) as well as client satisfaction regarding existing products.

15. (5 minutes) Ask: Where/how would you obtain all of this information? Quickly list answers on the flip chart. Answers – document research, file reviews, on-site investigation with, for example, poverty measuring tools (PPI, PAT. Hand out document BP3-H6 "Tools to know your clients/members better" for more information), individual client/employee interviews, group interviews, business associations, etc.


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Remind participants that sound market research includes talking to existing clients. These interviews will help determine if clients are satisfied, if they profit from services or, on the contrary, if they are losing capital or becoming over-indebted. If the MFI is thinking about increasing its number of clients in an area with fierce competition, are there risks of over-indebtedness? Etc. Such information can help determine what products and services to offer. Market research and client needs analysis is an ongoing activity. It takes much time and is carefully planned. (Refer to separate course on the topic of Market Research) To stay competitive an MFI must always know what its customers think and want and how it can attract new customers.

16. (5 minutes) Ask: Once you have obtained all the necessary information

about potential markets and clients, how might you decide initially whether it represents a sound opportunity for your organization? Answer should be that you compare its size and growth potential and expected profits to your own organizational priorities, including your mission and goals and resources, as well as to other factors – such as competition, client buying power, etc. This is how markets and clients relate to mission and goals and other components in the strategic planning process. Hand out BP3-H2 Key points Markets and Clients.

17. (7 minutes) Reintroduce the LEDA case study. Explain that presently, we will

analyze LEDA’s position with regard to Markets and Clients. Refer to Case parts 1 - 3. Give participants time to read case individually. Ask group what their questions are relating to the case.

18. (20 Minutes) Divide participants into small groups of about four each. Ask participants to discuss and complete the assignment that is found in LEDA Case - Part 4). (You may have decided to omit Case part 4 from the case study. If so distribute it now as a handout BP3-H3) (A fun way to divide groups – have each group represent a market segment! For example, write on pieces of paper and have the participants choose from a hat. The number of papers should equal the total number of participants and each segment should be written four times on separate pieces of paper. For groups of 28, have seven market segments (you live in the north east, you live in the city, you live in the south, you are a farmer, you are a retailer, you are a producer, you provide a service. Write each of the segment names on four pieces of paper and put them into a paper bag/hat. Pass the hat around and have each participant pick a piece of paper. Have all the farmers form a group (of four), all those who live in the south form another group of 4, etc…)

19. (10 minutes) Return to plenary. Ask: What did you find out about LEDA’s

market and clients? Who do you think should be LEDA’s market? Ask participants to support their market identification for LEDA through the research done (in LEDA case Part 4). Facilitate a discussion on market and client identification. Try to take answers from several groups and include differences of opinion. Ask if the potential new markets fit with LEDA’s missions and goals. Do not entertain the last question on the worksheet at this point.


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Refer to BP3-M1 Case Response Guidelines.

20. (10 minutes) Summarize the main points (Mission is cornerstone of the MFI and the Market is everything!) from the session and the discussion. Bridge to next session by referring to the final question. Ask: What kind of additional information is required to make final strategy decisions? Take answers and highlight responses that refer to more information on the environment or the institution. Explain that environmental and institutional analyses are the next steps in the strategic planning process. Review, take any questions and link to next session.


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SESSION 4: STRATEGIC PLANNING: ENVIRONEMENTAL ANALYSIS, INSTITUTIONAL ASSESSMENT, STRATEGY

Objectives: Participants will be able to identify environmental opportunities and threats

Identify institutional strengths and weaknesses Identify objectives and activities for LEDA Design a strategy for LEDA Time: 255 (20 min optional for activity 14) Materials: Flip chart, markers, Masking tape, blu tak/sticky stuff

A4 paper of 5 different colors (20-30 pieces each of the four colors, and 30 pieces of white)

BP4-M1 LEDA Case Study Part 7 answer guidelines BP4-M2 Technical Notes Overheads BP4-O1 Context Analysis BP4-O2 Institutional Assessment BP4-O3 Categories of Context Analysis BP4-O4 Categories of Institutional Assessment BP4-O5 Defining Strategy BP4-O6 Choosing a Strategy BP4-O7 Objectives and Activities, definitions BP4-O8 Objectives and Activities, example Handouts: BP4-H1 Context Analysis – Key Points BP4-H2 Institutional Assessment – Key Points BP4-H3 SWOT analysis adjusted to social performance BP4-H4 Optional Case Study Part 7 – Exercise (if removed from case booklet) BP4-H5 Defining and Choosing Strategy BP4-H5opt Optional – Case Study Part 9 – Exercise (if removed from case booklet) BP4-H6 Strategic Planning Action Plan Case Study Parts 5 & 6 LEDA Case Study: Context Analysis and Institutional Assessment Part 7 Assignment - Context Analysis and Institutional Assessment Part 8 LEDA Case: Summary of LEDA Strategic Analysis Parts 9 Assignment: - Developing a Strategy Flipcharts: Exercise Instructions – Color Code Context (title only) Institution (title only)


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Session 4: Strategic Planning continued Environmental Analysis and Institutional Assessment

1. (5 minutes) Introduction. Refer participants to the BP Framework on the wall

and bridge to “context analysis and institutional assessment” as our next step. Ask for a brief explanation of what the two are. Summaries by saying that we need to look both inside and outside our MFI and consider what is going with regard to our plans.

2. (5 minutes) Ask if anyone knows of a common way to examine the environment and institution? The answer we are looking for is SWOT analysis. Facilitate a brief discussion to clarify what a SWOT analysis is and how and why it is normally conducted. State that we will spend the rest of this session practicing SWOT analysis and integrating elements of social context in this analysis. The SWOT analysis will indicate the implications for the MFI and its clients to reach its social and financial goals.

3. (5 minutes) Ask: What is an environmental analysis? And WHY would an MFI conduct one? Answer: an assessment of the socio-economic, political, regulatory, climatic etc. context through which an organization operates, to gauge how foreseeable external challenges will affect an MFI’s capacity to achieve its goals. It is an identification of the opportunities and threats which are posed by the context that may affect the program, its clients, as well as the organization itself. Summarize using BP4-O1: "Context Analysis."

4. (5 Minutes) Ask: What do you understand by Institutional Assessment? Answer: the internal examination of the institution/organization. The evaluation of the strengths and weakness of the MFI with regard to their resources and the markets, clients and environmental factors determined in the previous steps. Summarize using BP4-O2.

5. (15 minutes) Let us think more deeply about these challenges – environmental opportunities and threats and institutional strengths and weaknesses. State that we are going to complete an exercise that will help us sort through our SWOT! We will have an opportunity to list a SWOT for an MFI based on our experiences. This exercise can also be replicated in your boardroom! – We hope you will find it useful. (The technique is a modified storyboard.) Illustrate by example. Explain that we will begin the exercise with something that


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we know. Ask participants where Markets/Clients fit in to this picture? Explain that as we previously mentioned Markets are part of the environment – they are external to our institution! We discussed them separately because of their import to our work. So as an example we will use markets and clients. Ask the participants for an example of Market/Client opportunities and threats that relate to Markets/Clients. Something that will need to be analyzed during our planning activities. Prompt them to think of an example from their own MFI. You can mention opportunities for development in new areas, or opportunities to meet demand which is not covered, such as savings. Competition may pose a threat, with risks of client indebtedness, or client or employee exit in favor of competition. Take two pieces of different colored A4 paper. Write from the suggestions one Client/Market opportunity on one color and on a different color one threat that was mentioned. Post them on the wall. Remember write large and use few words. Explain that the group will be divided in half. Half the group will work on identifying environmental opportunities and threats and the other half on identifying institutional strengths and weaknesses. Each person will write one opportunity and one threat OR one strength and one weakness. All of the papers will be posted on the walls. On a flip chart, write the color code for the exercise, for example Blue = Environmental Opportunity, Pink = Threat; Green = Institutional Strength and red= weakness, etc. Alternatively, handout paper labeled similarly. Also write on the flip chart – WRITE ONE IDEA PER PIECE OF PAPER – WRITE BIG AND CLEAR!

6. (20 minutes) Split the large group into half and each facilitator should work with a sub-group. To the "context" half, give each participant two pieces of A4 paper of two different colored papers. Ask them to individually write one example of environmental opportunity which might be open to a MFI, on each piece of ‘pink’ paper. After 5 minutes distribute the other color (‘green’) paper. Ask them to write one example of an environmental threat which a MFI might face, on this piece of paper. Remind them to use large letters and few words so that their cards are easily legible/readable to others. Also to think of examples from their own MFIs. SIMULTANEOUSLY, To the Institutional half of the group, distribute two pieces of different colored paper, and ask them to individually write one Strength an MFI might have and choose to exploit on one color paper, and on the other color one weakness that an MFI might possess and may need to be addressed. (The directions may be easily confused. Both facilitators should be actively involved, clear directions must be given and the color code flipchart clearly visible


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by all.)

7. (10 minutes) Still in separate halves, tell the participants we will now share our ideas and simultaneously try to categorize them. Each facilitator separately takes a few (10, 5 each color) papers at random from the group and posts them on the wall. Ask the sub-group, if any of the concepts are similar or fit together. Arrange those papers under one another. Ask for a volunteer to organize 10 more pieces of paper (participants should give ideas that are not yet mentioned) – reading them aloud and posting them, related ones underneath each other. Ask someone else to take 10 more and repeat. Facilitator should keep this moving, do not let it get bogged down with a lot of discussion. Remind participants/volunteers that everything does not have to fit together in a category – there is an option for an ‘other/miscellaneous’ category! Also note well – opportunities/threats or strengths/weaknesses may be listed under the same category. This presents an opportunity when processing to remind participants that each situation is unique – a strong board for example may present problems for some MFIs while for others it is a strength! Since there will be some noise in the room it is suggested that the walls used for posting the papers are as far apart as possible.

8. (5 minutes) Once cards have been organized into groups, ask participants to supply a title for each group. For example, write Markets and Clients in large letters on ‘white’ paper and post above the samples you wrote earlier. Do the same for the other groupings, have either the facilitator or participants write a title on the ‘white’ paper and post above the group.

9. (5 minutes) Reconvene large group. Ask members to go to the opposite wall and

look at the list made by the other group for 5 minutes. While the groups are looking at the storyboard, the facilitators should quickly write the Group Titles (the white papers) as a list on separate flipcharts titled – Environment and the other Institution.

10. (5 minutes) Then ask all groups members to return to their seats. First review

the Environmental Categories flipchart. Acknowledge the groupings and which may include the following: funding environment, government policies and regulations, demand for services, natural factors, economic environment, political environment, competitors and collaborators, and markets and clients. Ask if the participants would like to include any other categories or add other significant opportunities and threats to the wall cards. Show and explain BP4-O3 "Categories of Context Analysis.” In summary, remind participants that an opportunity for one MFI may be a threat for another – that is


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why categories can have both.

11. (5 minutes) Next review the Institutional Issues flipchart. Acknowledge the categories and be sure they include/relate to the following: credit and savings products, board issues, management issues, legal structure, human resources, ownership, administration, financing, financial management, etc. Ask if the participants would like to include any other categories or add other significant strengths and weaknesses to the wall cards. Show and explain BP4-O4 in summary.

12. (5 minutes) Ask for final comments and personal experiences to be shared on environmental analysis and institutional assessment. Distribute BP4-H1 "Context Analysis – Key Points" and BP4-H2: "Institutional Assessment – Key Points".

13. (5 minutes) Ask: How does analyzing the environment and institution in these categories fit into our strategic planning process? Facilitate discussion on how this step in strategic planning relates to previous steps by identifying how the environment or institution will hinder/facilitate the organization’s ability to achieve its mission and reach identified clients and be profitable! Note that it may become apparent at some point that the organization might need to review its mission based on the information gathered during the market research, environmental analysis and institutional assessment. Point out that that is why planning is called an iterative ongoing process!

14. (20 minutes) State that we are going to focus on social aspects. They have often been neglected but they are an integral part of the SWOT analysis. Hand out document BP4-D3: “SWOT analysis adjusted to social performance”. Ask participants to read the document and to underline the social aspects in the analysis of the PAGLAUM Cooperative in the Philippines : highlight in particular the cooperative's identified strengths, thanks to its clients' participation and its reputation to favor the poor; opportunities for strategic alliances with local NGOs to develop non-financial services for clients; identified threats in the face of increasing client over-indebtedness, acknowledgment of climate change and overexploitation of fish stocks which are a threat to client fishermen, etc.

15. (5 minutes) Ask and briefly discuss: What obstacles do you fore see that would make carrying out these assessments difficult? What can we do to overcome the difficulties? Answer: the lack of reliable or precise information about the context, the lack of clarity in the MFI's mission, which prevents a match between context analysis and goals to achieve, etc.

16. (10 Minutes) State: Let us apply the techniques of SWOT analysis to LEDA and see how they rate! Refer to LEDA case study parts 5, and 6: "Context Analysis"


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and "Institutional Assessment." Allow a few minutes for individual reading.

17. (20 minutes) Refer to Case Part 7 (or Hand it out BP4-H3). Ask the group to complete the activity in groups of fours. (Divide the group into subgroups of 4. Choose a method of dividing the group that ensures each group has two people who worked on Environmental and two who worked on Institutional in the previous activity. For example, have ‘of the previous halves’ line up across from each other. Make subgroups by choosing two from each line to work together, this way each group has two people who worked on Environmental and two who worked on Institutional in their sub group.) Monitor group work of case problem.

18. (10 minutes) Return to plenary. Facilitate a large group discussion on the priorities identified for LEDA as noted in the subgroup activity. Facilitator should stay focused on the Priority areas. (Remember the participants have already discussed this for 20 minutes.)

19. (10 minutes) Ask: Once opportunities and threats, strengths and weaknesses are identified, what can we do about them? (Answers may include maximizing opportunities, overcoming threats, and turning potential threats into opportunities. Accentuate the positive, eliminate the negative!) While conducting this analysis, it is important to keep in mind the social goals in the institution's mission, so as to understand what the implications will be, both for the MFI and for its clients. Ask for examples. Facilitator should be prepared to provide local examples of an organization overcoming it weaknesses, turning threats into opportunities, for example by building alliances (e.g.: lobbying with national professional associations to change a regulatory framework which is too strict for rural funding, or working in a credit bureau, or sharing information between MFIs to avoid client multiple borrowing). Ask and discuss: What are the implications for LEDA in terms of its previously defined mission and targeted market, as well as to the development of their strategy?

20. (5 minutes) summarize and bridge to next section. Ask for outstanding questions. Ask: What is our next step now that we have examined our external and internal environments? Answer: LEDA has significant information so that they may begin to develop a strategy for planning its operations. Remind participants that things change! - Information must be constantly gathered and analyzed and incorporated into the planning process!


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Strategy 21. (5 minutes) Refer to the Framework and review where we have been and are.

Ask: – What is a strategy? Its Components? How is it done? How is it used? Developing a Strategy involves examining the information and making choices about how we will accomplish our social and financial mission, while making sure clients are protected. It outlines clear objectives and activities needed to achieve our goals. We must also take into account the social mission, to define acceptable deposits and resources, while describing how the institution is planning internal changes to achieve its stated goals and objectives. When defining strategic goals, the following issues need to be considered: How are the changes planned in operations supporting both social and financial goals? At this point, it is important to stress that some elements in the mission are not necessarily explicit. Usually, social goals can be explained. Financial sustainability is usually implicit but financial goals can be defined (for example, affordable services for clients). Finally, client protection goals are most of the time implied. However, they must be a minimum requirement for each MFI.

22. (5 minutes) Put up overhead BP4-O5, Defining Strategy and give a brief lecturette on the topic.

23. (10 minutes) Ask: What do we consider when choosing a strategy? For example, how does market affect your choices? Clients? Environmental Opportunities and Threats? And Institutional Strengths and weaknesses? Take some answers, discuss and summarize main points to be considered using BP4-O6. The strategy should include what products to offer in which markets (responding to and based on assessment of markets and clients as well as other environmental issues), and which areas of institutional capacity must be improved in order to succeed (based on institutional assessment). It is critical to compare and contrast information across categories. For example, what if a certain market looks very appealing but is targeted for aggressive expansion by a competitor? Also, the strategy must ultimately enable institution to reach its mission and goals.

24. (5 minutes) Ask: How are strategies actually expressed? One way is to clearly define objectives and activities for each mission goal for each area of operational planning. A strategy boils down to a list of ACTIONS as to what the MFI needs to DO in order to achieve its goals and mission. Use BP4-O7 and BP4-O8 to explain. Hand out BP4-H4.

25. (15 – 20 minutes) Let us try to individually write a strategy for LEDA. Refer to the case study Parts 1 – 8. Explain that you might need information from all the case study parts to best define your strategy. Note that Case part 8 presents a


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summary of the strategic analysis for LEDA based on the information gathered to date. The assignment is to write a strategy for LEDA using the worksheet in Case Part 9 (Handout BP3-H4 if you have chosen to hand out assignments separately). (This can be done in pairs or triads if trainer feels it is appropriate for the group.) Explain the goal/objective/activity approach using the example that is filled in on the assignment sheet (Case Part 9) and on BP4-O8. Explain that these are the goals that were established in the Mission and Goals step of the planning process, but that now we are adding objectives and activities within each goal. The part of the strategy we are developing now answer the question: What does LEDA need to DO in order to achieve its goals?

26. (10 minutes) Facilitate a discussion on the strategy assignment. Take some

responses; ask for group comments, common responses, differences, etc. Try to bring the group close to the strategy found in the case study (BP5-H1 Case Part 10). Acknowledge that all are right answers, and this is indeed the process necessary to take in your own MFIs to accomplish the strategic planning process.

27. (7 minutes) As a review, ask participants to summarize the steps and purposes

for each in the strategic planning process as we have so far discussed. Summarize all topics related to building a strategy and ask for any questions on the strategic planning process. State that we have only presented in a very abbreviated form the steps one should take to develop a strategic plan. Remind participants that a strategic Plan is not accomplished in a day! Research and analysis take time!

28. (10 minutes) Let us take a few moments to think about how we can institute strategic planning back in our institutions. Hand out BP4-H6 Action. Have participants begin to complete the forms. Give only 5-10 minutes and tell participants to complete think more about it overnight. We will discuss some ideas tomorrow morning.

29. (2 minutes) Ask: Where do we go now? Refer to framework and move the group to Operational Planning. Bridge to next session.

BP 5: Introduction to Operational Planning and Financial Modeling

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SESSION 5: INTRODUCTION TO OPERATIONAL PLANNING AND FINANCIAL MODELING

Objectives: By the end of the session, participants will be able to:

• Explain the purpose of operational planning • Explain how strategic planning, operational planning, and

financial modeling are related • Describe the overall structure of Microfin • Discuss some of the key features of Microfin

Time: 105 minutes

Materials: Flipchart, Markers Computer data projector

BP5-M1 Preparation Instructions CGAP Microfin Handbook

Overheads: BP5-O1 Planning and Financial Modeling Framework BP5-O2 Microfin Overview BP5-O3 Microfin Features BP5-O4 Structure of Microfin (can also be projected from a Microfin page) BP5-O5 Demonstrate…. BP5-O6 Don’ts and Dos Handouts: BP5-H1 Business Planning Framework – Operational and Financial Worksheet BP5-H2 Business Planning Framework Complete BP5-H3 Microfin Features BP5-H4 Structure of Microfin BP5-H5 Don’ts and Dos (should be cut in half and placed on the computers)


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SESSION 5: Introduction to Operational Planning and Financial Modeling

Topic Preparation Since this the first time that participants will work on the computers, great care must be taken to ensure that the computers are all functioning properly, booted up with Microfin open on the desktop. The computer projector also needs to be set up and tested before this session.

1. (5 minutes) As a review, ask participants to summarize the steps in the strategic planning process as we have so far discussed. Focus on the last step – developing a strategy and refer to the practice we did with LEDA and their own MFI to develop a strategy. Bridge into Operational Planning.

Introduction to Operational Planning 2. (8 minutes) Ask: What is operational planning? And why do we need

Another Plan?! How is it different from the Strategic Plan? Summarize answers by explaining that the operational plan provides a structure for implementation of the chosen strategy. The strategy provides an outline of what we are to achieve. The strategy acts as the bridge between strategic and operational planning. Operational planning is the process of thinking through the implementation of the desired goals, objectives, and activities, and planning what actually needs to happen step by step to achieve those goals. Operational planning will help determine whether the strategy is achievable.

3. (10 minutes) Introduction to Financial Projections. Ask: What are financial projections and how do they relate to operational and strategic planning? Answer: Budgets and financial plans express the operational plan in financial terms, they tell how much money we will need to implement our strategic plan and also begin to identify the sources, flows and costs of the funds needed to implement the plan. An operational plan may be great but not so if there are insufficient funds to put the plan into action. Similarly, if the plan fails to ensure financial sustainability, then the MFI will have failed to achieve one of its goals. It will not be able to provide the right services to its target clients and thus will not be able to achieve social viability. This is why the plans are so interlinked and dependent. We must work on them together to achieve the best results. Ask: Who should develop financial plans? Why? Answer should be – Financial Plans should be completed not just by the finance manager but by a team, with broad participation of staff and managers, because plans will be more accurate and realistic, and it is more likely that they will be implemented in the


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same fashion envisioned by all of the MFI's stakeholders and clients.

4. (5 minutes) Distribute BP5-H1 "Planning and Financial Modeling Framework" and ask participants to complete it individually.

5. (10 minutes) Review Answers briefly and highlight the main points as below. • The analysis of markets and clients indicates the nature and conditions of

products and services to offer and where (in which markets) to offer them. They will be tailored to their needs. The analysis indicates who the clients are, how many can we reach, what types of products do they want, etc.

• The analysis of the environment provides additional information on where to provide services, in terms of relevant external factors that will affect the choice of appropriate marketing channels which will focus on defining and projecting credit and savings products. Where is the competition? How do we deal with that – other markets? Products? Who are the collaborators? How can we use them? What are the potential regulatory obligations or opportunities to take into account, etc.?

• The institutional assessment provides information on how to best provide the services by enhancing institutional resources and capacity, so as to improve services and ensure products will have a positive impact on clients. How many Loan officers? What is their caseload? What are their training needs? How can we make sure a critical situation will be handled (vulnerability of certain clients) individually, in case of illness or decease of a client / collectively, in case of crisis of a financed branch? How many administrative staff? Motorcycles? Computers? Rent?

• Financial Sources and Management relates to developing a financing plan and improving financial management. Where does the financing come from? How much does it cost?

6. (5 minutes) Continue to quickly review answers using the Business Planning Framework (BP5-O1) and summarize the relationships between operational planning and financial modeling. Explain that the goals of financial modeling are to develop realistic yet ambitious financial budgets while strengthening the financial management skills of staff. Distribute BP5-H2 Completed Framework. Remind participants that we will now work through the elements of the framework to develop our operational plan using Microfin to model and make our financial projections.

7. (5 minutes) Summary of Business planning and bridge to Microfin. We now have a completed framework that illustrates the flows and relationships among strategic planning, operational planning and Financial Modeling; together they will make up our Business Plan. Ask participants to find the definition of “business planning” which each of them wrote on cards yesterday. Ask for a show of hands as to who would like to change his/her definition based on what they have learned! Give them time to reread their definition, and to revise it if


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necessary. Ask two or three participants to share their definitions, and to say whether their ideas have changed since this was written. A good definition of business planning should include reference to Strategic, operational and financial planning – an example is: A market-led process of strategic and operational planning, incorporating the institution as a whole, which is focused on the “bottom line” and social viability. We are about ready to move on to use Microfin as a planning and financial modeling tool. Microfin is Excel-based software based on the planning process thus far described. It was created specifically for microfinance institutions to assist them in their planning. Before moving on, take any questions on the planning process in general.

Introduction to Microfin

Ensure computers are set up for participants and facilitators also as per instructions in BP5-M1 – trainer’s materials 8. (2 minutes) As an introduction, display BP5-O2, Microfin Overview, review points

briefly. Avoid any detailed explanations or lengthy responses to questions; instead explain that these points will be covered in more detail throughout the course.

9. (5 minutes) Display BP5-O3, Microfin Features. Explain that Microfin has been structured to carefully follow the Business Planning framework presented. Lecturette: Review the features of Microfin. Ask questions first – What do you expect Microfin will have to offer us as a financial modeling tool? Relate ideas in the Business Planning Framework and the strategic planning process. Ask: What are the limitations of financial models? Answer: they are only as good as the knowledge, assumptions, and strategy of those who use them, and they must be grounded in the current reality of the institution. They are only tools to help us along the way. .Refer to trainer notes, the Microfin Handbook and BP5-H4 for points to cover. Hand out BP5-H4 Microfin Features

10. (10 minutes) Structure of the model: Have participants refer to their copy of the

MICROFIN STRUCTURE handout (BP5-H5). Display MICROFIN STRUCTURE either on the projector from Microfin or by using BP5-O4. Briefly explain each box in the structure and its links to operational planning.

11. (5 minutes) Starting up Microfin. Explain that most of the technical details related to running Microfin are stated in the Microfin Handbook and will be reviewed on the last day of the course. Explain that for the moment we will focus


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on what the model can do for us in terms of planning as we wish to master the basics first! Open the model using the projector. Explain that when they first open Microfin, it will run a short macro (or program) to set up the model for use. It is possible they may be asked if they want macros enabled. This is included for virus protection. They will need to enable macros for Microfin to function properly. After the macros the wizard appears. The wizard takes you through 6 set up prompts asking you about language, pop-up menus, tutorials, optional pages and recalculation options. Respond as you wish. Today we will be working in English, with the help options and with manual recalculation! Once the wizard finishes the INTRO page will be displayed.

12. (5 minutes) Project the Intro Page. Show how the page indicates the version

of Microfin as well as the version of Excel that is currently running. Explain that there are many different versions of Excel. Some versions cause major recalculation errors when using Microfin. If they are using Excel 97 and have a version prior to 8.0b, they will receive a warning message. We will provide more information on this later in the course.

13. (5 minutes) Help Systems. Show how the pop-up menus and on line help work. Explain that Microfin has an on-line help system that contains the complete text of the Microfin Handbook. The help system works like most Windows based software. Click on the help button to bring up the Contents page. Very quickly highlight some of the below mentioned points. • show how the outline expands to show sub-steps • Show how green underlined text indicates hypertext links • Show how pictures of Microfin are embedded in the help file. Show how the

cursor changes to a hand as it moves over sections of the help file. • Show how each page contains links to Related information • Click on the Index button on the menu row to show how Microfin help topics

can be searched by topic • Click on the Exit button to leave the help system and return to Microfin

14. (15 minutes) Basic use features. Explain that Microfin is an easy to use Excel

spreadsheet application. Optional Give participants 10 minutes to ‘play’ with the model if convenient. Let them go to the computer stations if they are close at hand. This will give them an opportunity to learn by doing! Summarize in a 5 minute discussion and further demonstration if necessary some of the features as noted below. Remember to ask participants to first present what they discovered. Use BP5-O5 to show main points.


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• Show how the entire model is contained in a single Excel file, with information divided into separate pages which are represented by the tabs running across the bottom of the screen. Move to the Products page by clicking on the tab.

• Show how the links, “go to” buttons and the tool bar work. • Show how Microfin separates input areas (blue and gray color) from output

sections (white color) to make it clear to the user where information is requested. Explain that blue cells indicate “key input” areas, which the user must fill in for the model to be complete.

• Type in 100 in the blue cell for the First cycle line. Explain that Excel spreadsheets are normally set up for automatic recalculation, but because of the large size of Microfin, this feature has been disabled in order to avoid the lengthy recalculation process after every data entry. Show how the Calculate indicator shows up on the bottom status line. Ask: Does anyone know how to recalculate an Excel spreadsheet when automatic recalculation has been disabled? (Answer: Hit the F9 key)

• Hit the F9 key and show how the 100 is carried forward. Explain that the gray cells are “optional input” areas and can be used to fine-tune the analysis. Type 200 into the Month 3 column of the First cycle line and hit F9 showing how the 200 is carried forward.

• Explain that Microfin generates tens of thousands of projection numbers, which can easily overwhelm the user and make it difficult to determine what is actually happening. To make the process of interpretation much easier, Microfin includes a very valuable feature which depicts quantitative information in graph form. Move to the GRAPHS button and show the sample graph of number of active loans by cycle. Click on the dropdown list to show the large number of graphs that Microfin generates.

15. (5 minutes) Project the Navigator Page. Explain its features and ask participants how they think it might be useful. Validate responses.

16. (2 minutes) Microfin Golden Rules. Show BP5-O6. Stress that it is very important to input data properly or the model can be potentially ruined. There are two practices to avoid in this respect. Explain two of the biggest problems however result from not saving your work and from not recalculating. Distribute BP5-H6 (cut in half) and blutak or tape and hang on the computers!

17. (3 Minutes) Ask for any questions and summarize main points. Bridge to next session - With the golden rules in mind – let’s get started!!

BP 6: Model Set Up

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SESSION 6: THE MODEL SETUP PAGE

Session Summary

Objectives: By the end of the session, participants will be able to be able to:

complete the Model Setup page identify and input required institutional and inflation information, enter historical financial statement data and utilize information to complete basic financial ratio analysis

Time: 105 minutes Materials: Flipchart, Markers Overhead projector Computer data projector

BP6-M1 Model Set up Discussion Guide BP6-M2 Balance Sheet Definitions

CGAP Microfin Handbook Overheads BP6 – O1 Basic Rules for Microfin BP6 – O2 Model Setup Page Summary BP6 – O3 LEDA Ratios Handouts: BP6-H1 Model Set up Page Summary BP6-H2 OPTIONAL - LEDA Case Study Parts 10 – Strategy BP6-H3 LEDA’s Ratios Case Study LEDA Case Study Part 10 – Strategy LEDA Case Study Part 11 - Historical Financial Statements and Ratios Flipcharts Computer Groups – List of names and computer stations

BP 6: Model Set Up

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Session 6: The Model Setup Page Understanding the Model Setup Page

Topic Preparation Before this topic, LEDA6.XLS needs to be loaded into the projected CPU. Make sure that “consolidated mode” has been selected on the Model Setup page. Ensure LEDA Historical Financial information has already been entered. Prior to the session, the participants should have been organized into groups of 3 persons. The groupings should be based on results of the Pre Test as well as registration data. Write the group members and their station on a flipchart and set aside until later. Since this the first time that participants will enter data on the computers, great care must be taken to ensure that the computers are all functioning properly Remember to turn off pop-up menus on the projector. Note to the instructors - Important Instructions about using Microfin presented in this session and the next are based on Microfin's version 3. Later versions are available and offer new features. Instructors will be able to download the last online version from Microfin's website and use it during the session. The training participants should do the same. It will then be necessary for them to adapt the model presentation to the features of the new version. Instructors should prepare in advance so as to make sure they master the new changes implemented in version 3. Outline 1. (5 minutes) Review and Introduction. Ask participants to quickly review our

position with regards to the process of business planning. Acknowledge that we are now in a position to use Microfin to assist us in our planning process. Ensure that you review the ‘rules’ again, first by asking participants and them summarizing by using BP6-O1.

2. (5 minutes) Explain that we will now move onto the first part of the model structure - Introduce the MODEL SETUP page. Display the Model Setup Page Summary of components using BP6-O2. Explain that this page requires the input of global variables that will be used throughout the model and contains information that feeds into many other pages of the model. Explain that there are

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six main sections of this page which we will now discuss separately. Handout BP6-H1. (You may wish to also write the 6 areas on a flip chart for reference later in the session.)

3. (10 minutes) Demonstration - components of the Model set up Page. Switch

to the model set up page on the projector, encourage participants to do the same on their computers. Give a brief demonstration on the following points. Remember always ask participants to share what they think or know FIRST – before giving the answers! See BP6-M1 for supporting lecturette notes. 1. Choosing Branch, Regional, or Consolidated mode 2. Loan Product Projections Approach 3. Institutional information 4. Inflation data and Indexing 5. Historical financial statements and Portfolio Information section 6. Financial Ratio Analysis.

4. (10 minutes) Re - introduce the case study. Refer to Case study Part 10 -

Strategy (or distribute BP6-H2). Comment on the assignment previously completed where by the participants developed a strategy for LEDA. Acknowledge that everyone did a great job on the previous assignment and that in the interest of academia we will all need a common starting point. So that we may move forward together and we have taken some previous answers and consolidated them into Case Study Part 10, which will be the strategy that all of us will be using for LEDA in the remainder of this course. Remind them once again that the practice they did will help them understand the LEDA strategy that we have chosen to follow as well as honed their strategy development skills that they may be able to use in their own MFIs. Allow participants a few moments to review the strategy. Take any questions. (Sometimes participants resent doing work that is not ‘used’, take time to explain why we are now using a standard format!)

5. (30 minutes) Case study work on the Model Setup Page. Refer to LEDA Case study part 11. Explain that in the pre assigned computer teams they are to complete case study by entering data into Microfin for LEDA. Remind them to closely follow the instructions in the assignment, and that they need to take turns using the keyboard. Reveal flipcharts with computer group assignments listed and ask groups to proceed to their computer stations. It is critical that groups are monitored by all facilitators present. This is the first occasion of data input for the participants. Remind participants that they can refer to the handbook or the on line help system if they need assistance, that blue and gray cells are for data input and not to forget to recalculate!! Refer to

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common errors below.

6. (5 minutes) Reconvene to one large group. Project the Financial Statements from the completed page. Ask: Did you balance!? (A possible Prize moment!) Explain that we will review the statements momentarily. Lead a brief discussion about Microfin - What was most difficult? Easiest? Problems encountered? Ask for first reactions to Microfin! Review common errors from box below and from observations/ interventions in small group work.

Common errors in this exercise Participants frequently encounter the following problems when entering data on the Model Setup page: • Month and fiscal year entry: They often try to type out the name of the month (e.g., “Jan”) rather

than the number of the month (e.g., “1”) • Uncalculated worksheets: They often forget to hit F9 to recalculate a worksheet and wonder why

their change has not taken effect • Monthly vs. annual rates: They often ask if inflation rates should be entered as monthly rates or

annual rates. Inflation and interest rates in the model are always entered as annual rates. • Protected cells: They are often confused by cells with formulas in the financial statements which are

there to ensure integrity of data in cases where numbers must match those in another area of the financial statements (e.g., accumulated surplus, previous fiscal years). Once the worksheet is completed and recalculated, the amounts should match those in the case study.

• Getting the financial statements to balance: If the data is not all entered correctly, the Balance Sheet will not balance. Check the “Data validation” section at the beginning of the financial statements to check for any errors, e.g., that provisions and depreciation have been entered as negative numbers. Check the last line of the Balance Sheet to determine the size of the error. Generally, if you have the group review their data line-by-line, they quickly find the error.

7. (5 minutes) Ask for questions about LEDA. Ask: Why do we need this financial

data before we start our planning in earnest? What do the statements tell us about LEDA’s performance to date?

8. (5 minutes) Project the portion of the page that produced indicators. Facilitate a

discussion on the following. Ask: Why would the model produce indicators, especially at this point? Why are we interested in Ratios? Possible Answers: Need to have a starting point for reference, will help with institutional assessment. Better than raw data - To analyze trends and useful for comparison within institution or to others in the business. Explain how with the raw numbers we can compare total income with total expenses, and we can look at one expense category in relation to another expense category, e.g., operating costs are 60% of total expenses. Point out that if we wanted to compare trend data from one year to the next, working with the raw numbers becomes difficult. If the institution grows, income will go up and all the expense categories will go up, but it would be difficult to determine if we are getting more efficient or not.

9. (5 minutes) Ask: We saw on the Model Setup page that we could pick different denominators for calculating these indicators. Why would we

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want to choose one over the other? [Answer: It depends on what we want to measure. If we use Total Assets and have large real estate holdings, our numbers will appear very different than if we use Performing Assets. CGAP recommends using Total Assets. Mainly because most of an MFIs Assets are in their portfolio and they do not have a large proportion of their assets in Fixed or other Assets)

10. (10 minutes) Exercise on studying LEDA’s financial indicators. State that we will

now take a few moments to look at LEDA’s ratios. Divide the participants into pairs and hand out BP6-H3, LEDA Historical Financial Statements and Ratios. Explain that this is a summary printout of what they just input into the Model Setup page. Ask them to study the financial ratios and try to assess LEDA’s financial strengths and weaknesses. (Note: It is assumed that participants are familiar with at least some basic ratios from previous courses. If that is not the case, you may need to distribute optional handouts that include the formulas for the ratios. Facilitators must exercise caution in taking too much time to review ratios, this is not a course objective.)

11. (5 minutes) Evaluation of LEDA’s starting financial performance based on

ratios. Display BP6-O3 - ratios. Facilitate a BASIC group discussion of LEDA’s financial ratios. (Do not get involved in too many details at this point focus on the BIG picture.) Ask participants what they noted while studying the financial ratios for LEDA. Answers will include: LEDA is generating more income in FY10, their portfolio quality has gotten worse, they are much more operationally efficient, and they are not as dependent on grants as in FY09. Also note that more information is needed to properly assess LEDA and that it is also useful to compare LEDA with other institutions and industry standards. As available, trainers should try to download benchmark ratios from the latest version of the Microbanker Bulletin for use in this discussion.

12. (10 minutes) Summary and Closure. Ask for any questions on the Set up

Page. Summarize. Focus on some of the following issues, ask: Why certain information is required, how it feeds to other pages, why we need that information before starting on the plan. Also remind participants of the need and reason for the initial financial information. Urge participants to review information on financial statements and ratios this evening as needed. Finally ask: what is the first step in operational planning? Bridge to designing financial products.

BP 7: Designing Financial Products

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SESSION 7: DESIGNING PRODUCTS AND SERVICES

Objectives: By the end of the session, participants will be able to:

• Think about other products and services to provide • Define their loan products by loan amount, repayment

conditions, and pricing • Design savings products • Use Microfin to model savings and credit products projections

Time: 180 minutes Materials: Blank overhead transparencies Markers Computer data projector

BP7-M1 Discussion Guidelines for Product Design Overheads BP7-O1 Designing Successful Products BP7-O2 Designing Savings Products BP7-O3 Loan Product Design Worksheet BP7-O4 Microfin Product Definition Page Layout BP7-O5 Loan Product Definition in Microfin BP7-O6 Compulsory Savings Product Definition in Microfin BP7-O7 Voluntary Savings Product Definition in Microfin Handouts: BP7-H1 Client analysis - worksheet BP7-H2 Loan and Savings Product Definition (2 pages) Case Study

LEDA Case Study Part 12: Products and Services


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Session 7: Designing products and services Key issues in product and service design

1. (5 minutes) Introduction to product and service design: savings, loan, credit

products and other financial products in compliance with relevant regulations (insurance, transfers, bill payments etc.) but also non-financial products and services (training in financial literacy and other areas). Ask: Why do we begin with product design? Summarize answers by stating that: Only by offering products that are adapted to clients' needs and generate positive changes in their lives will an institution be able to retain clients and ensure loan repayment and the use of other products and services. Moreover, efficient products can help minimize financial risk and help reach and maintain financial sustainability. Ask: How do we design financial products? What factors do we consider? Answer: Products must strike a balance between what the client needs and values in financial services and the institution's goal of sustainability. Client needs are assessed through market research with potential clients and satisfaction surveys with current clients or even exit clients. This phase of client insight is crucial to analyze the risks for clients, understand their needs and adapt products to empower clients to enact positive changes (decrease vulnerability and create value for clients) while respecting the MFI's viability goals. Moreover, it is only by meeting clients’ needs that an MFI can hope to attract and retain enough clients. The number and design of products and services an MFI offers should be influenced by its analysis of clients and markets during strategic planning. Remind the participants that a study of LEDA’s markets and clients was completed earlier in the Strategic Planning process. Explain that now, we will more closely examine that information and determine how LEDA can design (and ultimately deliver) products that not only respond to the survey results but also fulfill its Mission and consider its institutional capacity. Operational Planning starts with product design: defining financial products and possibly non-financial products suited to the needs of different clients, businesses or business sectors.

2. (5 minutes) Designing Successful Savings and Credit Products. First ask what are the broad aims/goals of making successful products. Summarize using BP7-O1.

3. (5 minutes) Analyzing client needs to design products. Let's begin by studying in detail client in view of product development. Ask people who have already done


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market research to explain how they used results to define products. Which data was the most useful? Write the answers on sheets and then ask the group if they can put them in categories. In theory, the discussion should mention data that generates a better understanding (1) of the workings of (potential) client businesses, (2) of their needs (both business and household), and (3) inherent risks (thanks to a context analysis). You can highlight that CGAP offers a specific course about designing new products. This course explains market research in detail.

4. (10 minutes) Ask the group: Describe some of the typical businesses of

clients in your MFI. Based on the answers, highlight that our clients are, in fact, working in different types of economic activities, often combining production (agricultural or non-agricultural production), transformation, services (retail, etc.), crafts, employee status, etc. Remind them that each business is specific in terms of seasons, required production factors (e.g. workforce, monetary resources) and cash flow. Often, for microfinance clients, business and household economy are close-knit. "Purely domestic" events that create financial needs, such as marriage, birth, illness or death can influence production activities. Needs for funding are thus incorporated in an “activity system” which must be understood through market research. For each type of activity system and needs, we will need to identify specific risks (climate risks, such as floods for produce farming in LEDA's case; health risks; branch disorganization; price instability; risks of market saturation, etc.). The nature of risks linked to the activity influences the use of financial services and the type of services to offer. Remind them that in certain regions, there may be a risk of over indebtedness. Organizational failures of certain financial institutions, their multiplication in the same areas without coordination, excessive incentives to take out loans etc. may cause over indebtedness for clients. This risk can be analyzed through the quality of MFI portfolios in a region, satisfaction surveys or market research. The MFI will need to take into account these over indebtedness risks if they exist in its region and within its client groups. If the risk of over indebtedness is high, an improvement of the situation will be necessary before launching any new product.

5. (15 minutes) Explain that we are going to reflect on our clients' needs. Divide the participants in groups of 2 or 3 (from the same MFI or region if possible) and ask them to fill out (BP7-H1): “Product Design Worksheet”, regarding client analysis. Then, ask the groups to share their answers. During the ensuing discussion, express the idea that, depending on activity systems, household needs and context analysis, different types of products can be designed: loans for income-generating activities, loans for SMEs, specific loans for a well-identified sector with high added value (for example, produce


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farming with well-identified outlets to supermarkets), emergency loans, "precautionary" savings for the household (illness, death), investment savings (schooling, productive project, etc.), insurance (loan, health, agricultural, etc.), money transfers, bill payments, etc. We can also envision non-financial services based on client traits: financial literacy, entrepreneur support services, training in other areas, etc. State that beyond clients' needs and activities, it is important to understand how the products we offer will help clients create, intensify, or modernize their activities. To summarize this discussion, we must remember that for different activities, MFIs must design different products. In the next activities, we will explain different features of savings and loan products.

6. (5 minutes) What are the key characteristics that differentiate one savings product from another? Show BP7-O2 top. Record key responses on a flipchart. (Answers to include: minimum balance, length of deposit, interest rate and calculation method, accessibility, withdrawal policies

7. (10 minutes) Ask the participants to discuss several scenarios that would result in designing different savings products to meet various client needs? Show BP7-O2 bottom. (Answers could include a discussion on daily earning that are expected and predictable or unpredictable, withdrawals, etc.) . Stress that the traits will differ according to goals (for example, precautionary savings imply strong product liquidity, with possible withdrawals at any time. On the opposite, investment savings can be blocked until the investment - for example for housing). Start a discussion: For clients, what are the advantages of savings compared to loans? Answers: better planning, greater availability, lower cost, less risks of over indebtedness, reduced vulnerability, etc.

8. (5 minutes) Brainstorm the key characteristics that differentiate one loan product from another? Make a list in the left-hand column of the Loan Product Design overhead (BP7-O3). Answers should include minimum and maximum loan size, credit approval terms (in particular, analysis of repayment capacity and acceptable level of indebtedness for clients, in relation to their household's available income and loans in repayment), repayment periods and amounts, grace periods, savings requirements, interest rates and method of calculation, commission or fee, lending methodology (individual loan, group-based lending, revolving credit).


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This is designed to be a quick exercise; trainer must be responsible for keeping things moving, not to engage in discussions, and only to get enough information to illustrate the concept – different products for different clients, and different consequences for clients, especially regarding risks.

9. (10 minutes) State: Now let us focus on developing a credit product to meet the needs of some of our clients as noted above. Show BP7-O3 again. Choose one of the client groups as suggested and use the column just to the right of the list of characteristics and title it the same – for example market vender within a group of women engaged in the same trade. Ask: Describe the characteristics of a loan product that is suitable for a? (For example, a woman who knits by hand from home). As participants respond, fill in the table on the overhead. (If all participants come from the same country, you might use monetary ranges for the loan amounts.)

Now use the next column for another type of business. It is closer to a small business, with different analyses and loan terms: for example a woman who knits with machines and has a shop with 5 employees, or a rural entrepreneur working in the agro-food business who has to invest in food processing or transport, etc. – try to choose a client type that will make for different answers than the first client used. If time allows you could select another client type as an example. NOTE WELL: the types of businesses must be sufficiently different or this exercise will not work well to illustrate that different clients need different products. SAMPLE RESULTS Characteristic Home knitting Rural entrepreneur /

food processing / 5 employees

Loan approval terms

Group-based lending with clear information on loan terms and conditions

Individual loan with clear information on loan terms and conditions and possibly business plan support

Loan analysis Analysis of activity, funding needs repayment capacity, associated risks and adjustment of repaying terms for the group

In-depth analysis, if possible, of company's accounting, repayment capacity and risks specific to the company

Loan amount Loan term short term (6 m/ 1 y) medium term (1 year


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minimum) Repay frequency weekly (sales take

place every day) monthly

Grace period 1 month 2 to 3 months Purpose street vending Collateral Group deposit Good history of

previous loans, company equipment

Interest rates

Note: There may be disagreement about the interest rate that clients can afford. Try to get some of the participants to explain that the interest rate will depend on the level of risk linked to the activity, the context, the market, the MFI's projection and policy, and that it must remain affordable for clients. There are several calculation strategies: Cost-oriented pricing We try to make product prices equal to the sum of direct costs, general expenses and gross margin we seek. This approach is difficult because costs are difficult to determine. Unless you previously made detailed calculations of the cost of products (cost accounting), this pricing approach rests partly on intuition. Competition-oriented pricing Prices are set in relation to competition. This does not mean that prices applied by competition determine the institution's prices completely. However, prices are set only after performing detailed research on price structures and costs of the MFI's main competitors. Demand-oriented pricing This pricing method consists in setting prices according to client's perception of the service's value. In other words, prices are based on what clients are ready to pay for services offered.

10. (5 minutes) Ask participants to spend a minute comparing the columns. Ask for reactions to the chart with regards to loan product design.

11. (5 minutes) Continue the discussion briefly by asking: How might savings and loan products vary due to the size of the business? (Answers might include: as businesses grow, they may need more fixed assets, larger business usually need larger loans and have higher needs for savings products, larger businesses may have better collateral). How might products to start ups be different than loans to existing businesses? Loan size and repayment terms differ because the risk of lending to start ups is higher, guarantees would be different as startups probably don't


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have much collateral, start up business may have less surplus cash for savings.) Ask: What conclusions can we draw? (Answers: Conclude that the products we have just designed are quite different from one another because they are designed around a different segment of the market. different clients require different products

12. (5 minutes) Ask: How do we know if the products also meet the needs of the MFI? Answer: Earlier we said that in addition to clients’ needs we must also consider what the institution can deliver in a financially viable manner. Cost-oriented pricing will help determine financial viability. This determination is primarily based on lending methodology and will be addressed when we get to the section on Institutional Capacity. We should also check that loan officers have the skills to analyze loan application, especially when an MFI begins to make individual loans for small businesses, or to deliver loans for agricultural investment, for example.

13. (5 minutes) Quickly summarize main points of product design. Take questions. Bridge from Concept to application - Now that we have the basic concept behind designing financial products let’s see how we can use Microfin to help us with our product design and projections.

Designing products in Microfin

Topic Preparation Before this topic, LEDA7.XLS needs to be loaded. You will begin the session using the version saved from the last session. At the end of the session you may need to refer to the completed version as above. 14. (5 minutes) Quickly review BP7-O4 Product Definition Page Layout. Present a

brief overview of the Microfin features using BP7-O5, O6 and O7 Loan and Saving Product definition. Hand out BP7-H2.

15. OPTIONAL (10 minutes) IF CONVENTIENT, Have participants experiment with

the page for a few moments.

16. (5 minutes) Ask participants what they discovered from ‘using’ the page. And/or PROJECT the Products page and quickly review some main points. Take any


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burning questions. It is not necessary to answer every question in detail at this point. The session hopes for deductive learning by giving the case study with only a little guidance. There will be another chance to provide detail at the end of the session. Use BP7-M2 as reference as needed.

17. (50 minutes) Case study on Product Definition. Refer to LEDA Case Study Part 12. Explain that participants will be returning to the case study triads to complete the exercise on product definition. Remind them to refer to previous case parts on targets, mission, markets and clients that relate to product development. To get participants started on the right track ask: How many loan products do you think LEDA will be offering in the next 5 years? (Answer: just one.) Ask: Are clients satisfied with the current product? (Answer: No, because the loan ceiling is too small and the loan terms are too long to progress quickly up to meaningful loan sizes.) So begin to design a product that will better satisfy the clients and LEDA. Explain that they will have 50 minutes to complete their work. Remind them to rotate the person in charge of entering data on the keyboard. Groups must be monitored closely due to little information being given in advance. Facilitators must note common problems. It may be necessary to call for a review of common problems after 20 - 30 minutes if the participants seem ‘lost’.

Common errors in this exercise Participants frequently encounter the following problems when entering data on the Products page: • Confusion about Initial Balances Column: Sometimes they don’t enter the

previous product definition in the Initial Balances column and redesign in Month 1. • Poor or no product redesign: Participants sometimes do not redesign the product,

or do so in an inappropriate fashion (see comments below). • Commissions: Participants sometimes enter commissions as 3.0 when they really

want a 3% commission (which should be entered as 0.03). • Savings Reserve rate: Sometimes for compulsory savings they fail to enter a

reserve rate of 100%. • Interest rates: Participants sometimes enter interest rates as monthly figures rather

than annual. • Recommended decisions in Product Definition: To be faithful to the evidence

presented in the case study, groups should redesign the loan product to have shorter loan terms (e.g., 4-6 months for the first cycles and 8-12 months for the later cycles). The loan amounts should also be increased at least in the later cycles.


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Earlier cycle loan amounts should be matched with the changes in loan terms to ensure that the average monthly payment in Step 5 is within the capabilities of the clients. Groups should not drop the solidarity group approach the case study data indicates the methodology is appropriate and is working well. Groups can change the pricing structure of the loan, but must verify that their effective interest rate remains reasonably competitive (the competition currently charges close to what LEDA’s current rate is).

18. (20 minutes) Reconvene large group. Ask for a couple of groups to verbally

describe the products they designed for LEDA and to briefly describe the logic behind their design. Have one group present their product designs if possible. Alternatively, show on the projector the predesigned products contained in LEDA7.xls for illustration as questions arise. Stay focused on product design.

19. (5 minutes) Now take any further questions that relate more directly to Microfin. Provoke with: What did you like about the way the model designs financial products? What was easy to use? Most difficult? What functions of the model do you still have questions about? Review common errors from the box above and any that were noted during the small group work. Use BP7-M2 as reference.

20. (5 minutes) Final summary and closure. Bridge to next session show Microfin structure and show how information from Products pages flow to other pages. Refer to framework and present the next step in the planning process.

BP8: Marketing Channels and Portfolio Projections

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SESSION 8: MARKETING CHANNELS AND PORTFOLIO PROJECTIONS

Session Summary Objectives: By the end of the session, participants will be able to Identify market channels Prepare realistic credit and savings projections based on the

strategic planning process and on accurate input into the Microfin model.

Time: 205 minutes (including 15 optional minutes) Materials: Flipchart Markers Computer data projector BP8-M1: CGAP Focus Note 46 on branchless banking Overheads BP8-O1 Growth Strategy Blank Graph BP8-O2 Program Page Summary outline (alternative flip chart) BP8-O3 Loan Projections Outline (alternative flip chart) BP8-O4 Savings Projections Outline (alternative flip chart) Handouts: BP8-H1 Teachings of recent crises which occurred on four microfinance markets BP8-H2 Microfin Program/Branch Page Outline BP8-H3 Presentation Guidelines Case Study

LEDA Case Study Part 13 Flip Charts Program Page Summary outline (as on BP8-O2) Loan Projections Outline (as on BP8-O3) Savings Projections Outline (as on BP8-O4)


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Session 8: Marketing Channels and Portfolio Projections Introduction to Marketing Channels and Portfolio Projections

Outline 1. (5 minutes) Introduction – We have just completed defining our products and

services. Ask: What will we do next? Answer – decide where/how/when we will deliver these products and to whom. Refer back to the links with Strategic planning, Operational planning and their parallel with financial modeling. Review.

2. (10 minutes) Ask: What are some of the factors we consider when determining savings and credit product delivery and growth? Write answers on flipcharts which should include: target market and clients; client satisfaction; client retention, where the MFI has competitive advantages; the strategy chosen - market penetration, product development, market diversification; risk identification in specific markets (competition, saturation etc.); type of growth, resources available, etc. In order to grow, the MFI must evaluate its capacity to manage additional products or areas. Ask participants: What elements should the MFI take into account? Emphasize the following points in the discussion:

• Skills: Does the MFI need more specialized skills or better-trained loan officers? How much are staff working hours going to increase?

• Management information system to track and manage payments linked to new product(s) (monitor demand; analyze profitability; payment conditions; etc.).

• Risk management (risks on new products, monitoring payments, abusive collection practices, risk of negative impact on clients, cash management, etc.).

• Adapting procedure manuals. • Financial resources: all the elements mentioned above imply an important

financial commitment from the MFI.

3. (10 minutes) Ask: What are some ways that credit and savings products can be delivered? Answer - Services can be delivered in many ways:

• Through existing offices/branches, new offices/branches, • By adopting new technologies: "branchless banking" if regulations allow it


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• By opening windows in other institutions • Through alliances with other institutions (such as a bank, or an insurance

company for micro-insurance), • By using mobile counters.

And once again we need to return to our strategic plan and consider our clients, our environment and our institution before making this decision.

Ask: Which elements from the contextual and institutional analysis we made can help us?

• LEDA already has a decentralized branch system, so the issue will concern new areas.

• Concerning savings, before it becomes a non-bank financial institution, LEDA relies on the network of the national bank (BNL). But we can see that clients are not always satisfied. So, in the short term, LEDA will talk to this bank about how to improve services for its clients.

Ask: What are your thoughts for LEDA? How do you think they could deliver their products?

• In urban areas, LEDA may open new branches (proximity, visibility

regarding competition, etc.). • If LEDA develops in rural areas, it could think about creating a branch in

the medium-sized city Loganville (visibility, safety, etc.) and a network supported by loan officers (traveling on mopeds)

• It can also test remote banking systems. But before implementing them, it is necessary to know the level of technology clients can use, their needs and abilities and if they have access to technology and know-how.

When using Microfin, the only option tested will be the branch opening.

4. (5 minutes) Once we know what product will be delivered, to whom and how,

we can project number of loans. Ask: What is one of the first things we need to think about when we begin projections? Answer: our Growth strategy. Follow up questions: What is a growth strategy? What things do we consider when deciding upon it? (Answers: institution’s capacity, market demand, competition, etc.) Ask participants to think about the growth strategy of their own MFI over the past five years.

5. (30 minutes) Hand out (BP8-H1): “Lessons from crises in four microfinance markets”. Ask participants to read the document in break-out groups. Ask each break-out group to brainstorm about the elements to consider when reflecting on


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Number of loans

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 2 3 4 5

growth strategy. Bring the groups together after 20 minutes and ask each break-out group to prioritize their list and to announce its first 3 elements. Answer: institutional capacities (particularly, depending on its development stage, knowing if the MFI really has the capacity for extensive growth toward new areas), client needs and maintenance or improvement of the quality of services offered, market demand, saturation risks, competition (and aggregate growth rate: has competition increased their number of clients as steeply, and on the same areas, as our MFI?), the institution's development perspectives, etc. As a growth strategy, the MFI can choose to increase its range of products for current clients (diversification of products offered, increase of amounts) and/or to develop in new markets. The MFI must reflect on "reasonable" growth: i.e., which meets client needs while remaining internally manageable and offering perspectives of sustainability. An MFI should not be tempted by accelerated growth which would not be controlled and would rest only on over-ambitious objectives to "win market shares", especially in a context of fierce competition.

6. Optional. (15 minutes) Show BP8-O1 Blank Graph. (Alternatively this can be drawn on a flipchart). Ask participants to describe different Types of Growth Strategy. If feasible ask for participants to represent their MFI’s growth strategy on the graph or flipchart, using different colored pens. Briefly discuss each growth strategy as presented – conditions/why chosen, strengths, weaknesses, results, etc. Ensure the following are included (by way of a summary and again refer to following the strategic plan!):

On a flipchart draw a graph with a single line on it sloping gradually upward (representing modest linear growth), see figure at left.

The upward sloping curve may be justified if the MFI is correcting weaknesses and building a strong foundation to support rapid future growth, but it may also postpone any real results for several years, i.e., the growth may never materialize. (See figure at right)

Number of loans

0

2,0004,000

6,0008,000

10,00012,000

14,000

1 2 3 4 5


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The curve showing growth in early years and then plateau-ing is indicative of a saturated market or a lack of financial resources to fuel growth. (Above left) The wavy growth curve shows an institution which grows in spurts, as new offices are added, or in response to economic cycles or erratic funding. (Above right)

7. (5 minutes) Ask people if they recall what LEDA’s strategy for growth is or what

should be recommended? (Moderate growth in the first 18 months when transforming to an NBFI, time to sort out IS problems, if accomplished then accelerated growth thereafter.) Briefly discuss and bridge to Microfin and how projections are made in the model.

Using Microfin to Prepare Credit and Savings Projections

Topic Preparation Before this topic, Pre load A BLANK MICROFIN.XLS and LEDA8 version, which includes all data from previous sessions. You may choose to do the first demonstration from the blank model. This presentation needs to be adapted according to the version of Microfin you are using.

8. (5 minutes) State: Let us now see how Microfin allows us to project our growth!

Introduce the PROGRAM/BRANCH page. Show BP8-O2, O3 and O4 and BRIEFLY explain the major points of data input and how they result in projecting income. Mention the ‘expense’ side of the page and tell participants that we will look at this in much greater detail a little later on in the course. PROJECT the Income statement flow page of Microfin to highlight the building of the Income Statement by first projecting the income from our products. ALTERNATIVELY - Project the PROGRAM/BRANCH page of Microfin, beginning at the very top of the page. Briefly Review page contents and discuss how the information flows to other pages. PROJECT the Income statement flow page of Microfin to highlight the building of the Income Statement by first projecting the income from our products.

Number of loans

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 2 3 4 5

Number of loans

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 2 3 4 5


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Distribute BP8-H1 "Microfin Program/Branch Page Outline". Use the CGAP Handbook as reference as necessary.

9. (10 minutes) Introduce the Loan Projection Input Section. Ask participants what factors are considered in order to project loan activity? Review the main points again. Project the four steps Microfin uses to complete loan projections (listed at the beginning of the Loan Input section) and on BP8-O3. (It may also be helpful to pre-write them on a visible flipchart for reference later on in the session.) Explain that these steps need to be completed for each product offered by the institution. Step 1: Input initial balances Step 2: Project activity levels – the number of active clients Step 3: Input client retention rates Step 4: Analyze graphs Discuss where this information might come from and/or how would they get this information. Answer: The Strategic plan! Emphasize that we focus on DEMAND - CLIENTS first – and that this step takes time and careful consideration on the part of the planners who must consider many variables including the market, institutional capacity as well as external conditions. Why take time? - Note once again direct links to INCOME! And how this is the beginning of building the Income Statement! Spend 2-3 minutes explaining the concept of and demonstrating some of the Microfin features of each step. Since Client retention rates are important to the success of an MFI, take time to review this point in some detail. Go to the retention page and explain how it works. Remind participants how easy it is to change some assumptions and be able to quickly note the impact of those changes using the graphs and by reviewing the output sections. Use notes in the Microfin handbook and BP8 – M1 as needed and providing as much or little detail as relevant to the group of participants.

10. (5 minutes) Introduce the Savings Projection Section and give a similar brief demonstration of the main features.

11. (50 minutes) Case Study on Preparing Credit and Savings Projections Explain that participants will return to their small groups to work on loan projections for the case study (Case Part 13). Remind them to rotate the role of who inputs the data. Explain that they will have 50 minutes, and that after the case study work, we will ask one or two of the groups to make a short presentation of their work thus far.

When there are about 20 minutes left in the exercise, check the progress of each group. Pick two of the groups and ask them to prepare for a short presentation immediately following the case study. The presentation should show their


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product design, their loan projections, and their savings projections, primarily by reviewing the graphs. Give them a copy of the "Presentation Guidelines" BP8-H3 at the end of this section. Use Import/Export page to extract and transfer the group’s data to a computer that can be used with the data projector or move the CPU or projector as ease and space allows. Participants should be able to project their data when making the presentations.

Common errors in this exercise Participants frequently encounter the following problems when entering data on the Program/Branch page: • Forgetting to recalculate: Participants often forget to hit F9 and get confused by

the numbers. • Protected cells with formulas: Participants often forget that some cells that should

be for “data entry” have formulas to make sure that the sums are correct (e.g., percent of initial balance loans in the sixth cycle).

• Automatic projection of number of loans in Line 12: Participants are sometimes confused by the automatic growth rates that are drawn down from the branch estimation section.

• Growth rates in savings section: Participants often find the growth rates in the savings section confusing, e.g., that the same growth applies until a new number is entered, or that numbers less than 1 are treated as percentages.

• Not adjusting retention rate: LEDA has a poor retention rate and this should improve. Also, loan terms are likely to change which will affect the retention rate. Make sure participants have used the “retention rate analysis page” to determine the length of borrowing time for the average client.

Recommended decisions for Loan and Savings Projections • Moderate growth in first 18 months: LEDA is in the midst of transforming into an

NBFI. This will take effort by the senior staff rather than focusing on growth. Also, LEDA has a poor MIS and needs to direct efforts toward solving this constraint to growth.

• Growth could then accelerate in the next 2.5 years: If LEDA succeeds in these two key challenges, growth could accelerate.

• Total number of active loans: LEDA probably has the capacity and the market to reach close to the 30,000 maximum indicated in the case study.

12. (5 minutes) Reconvene group and briefly discuss the general activity focusing

on the features of Microfin. What did they find most useful? Most FUN?! Least


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Interesting etc.

13. (15 minutes) Small group presentation on Product Design and Credit and Savings Projections. Give the pre-selected group(s) 5 minutes to present their work using the projector. Then take 5 minutes of questions from the participants. Building on the presentation and follow up questions, facilitator should present a brief summary

14. (15 minutes) Sensitivity analysis of the group’s work. Explain that we can now

introduce changes in the data and see what effect those changes have on the overall results. Ask: What parts of the product design would you like to change? Then ask: What results will you see if you change that input? Demonstrate on the model being used. Make the requested changes and test the results using the graphs. Often it is best to change the variables, move to the graph, and then recalculate (hit F9) so the changes are more readily apparent. Alternatively the facilitator can make use of the freeze graph feature available on some of the graphs. Some changes to include: Credit projection changes should focus on: loan sizes and terms by cycle (e.g., try larger loans in the later cycles), growth rates in number of active clients, and retention rates (e.g., what happens when retention rates dramatically increase or decrease). These changes will primarily affect the following graphs: number of loans by cycle, portfolio, average loan size, and average loan term. Savings projection changes should focus on: number of depositors and average deposit. Use the three savings graphs to review the impact of the changes.

15. (15 minutes) Ask participants what they have learned about product design and growth strategies during this session. Ask: What would they like to change in their own plans? Give participants 10 minutes to make any changes to their loan and savings inputs. Retain 5 minutes for any further discussion.

16. (5 minutes) Conclusion. Summarize main points and link to next section.

BP 9: Loan Loss and Case Loads

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SESSION 9: INSTITUTIONAL CAPACITY: LOAN LOSS AND CASELOADS

Session Summary Objectives: By the end of the session, participants will be able to: - calculate loan loss provisions and write-offs, and - establish loan officer caseloads, - use Microfin to model institutional capacity in these areas Time: 170 minutes Materials: Flipchart Markers Overhead projector Computer data projector BP9-M1 Portfolio Review Answer Guide BP9-M2 Recruitment and incentives CGAP Microfin Handbook Overheads BP9-O1 Institution Capacity Page BP9-O2 Puzzle Demo BP9-O3 Loan Loss Provision, Reserve and Write off Definition BP9-O4 Calculation of Loan Loss Provision, Reserve and Write off BP9-O4a Calculation of Loan Loss Provision, Reserve and Write off - answers BP9-O5 Loan Officer Variables BP9-O6 Loan Officer Links Handouts: BP9-H1 Review Exercise – Puzzle and Clues (2 pages) (Optional) BP9-H2 Portfolio Quality ratios - Optional BP9-H3 Loan Loss Provision, Reserve and Write-off Definition BP9-H4 Recruitment and incentives BP9-H5 Table #2, Imp-Act Guidance Note - Staff incentives: Integrating SPM into microfinance capacity building Case Study LEDA Case Study Part 14


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Session 9: Institutional Capacity: Loan Loss and Caseloads Planning Institutional Resources and Capacity

Outline 1. (5 minutes) Review - we have designed our products, projected our activity,

estimated income – ask: Now What? How or can we implement our projections – do we have the resources – to do what we want to do! We begin to look at our institutional capacity in more detail. Ask: What were the priority institutional capacity issues that we identified earlier which LEDA must address? Answers may include: staff training, financial management capabilities, transition to new institutional structure (NBFI), compensation issues, incentive systems adapted so as to achieve the double mission (commercial and social), MIS. ASK: Where were these identified? These issues were addressed in the objectives and activities outlined in the strategy. So what is next? LEDA’s task now is to establish how these priority tasks will be carried out, as well as when each task will be completed and how much it will cost. And finally assess whether it is feasible to continue.

2. (10 minutes) Lecturette: Ask: In the Strategic planning process, what were the main components of the institution that were assessed? Answer: the analysis of institutional capacity focused on financial and non-financial products, board and management issues, human resources, administration, financial management and financing. Explain that the task in operational planning is to examine the areas of the assessment and figure out how to develop the institutional capacity to carry out our plan. We will plan how to build on our strengths and address our weaknesses so that we have the capacity to implement our plan and reach projected activity levels. The financial modeling then helps us organize what is needed and determine how much it will cost. Then we can re-examine the plan and see if it is feasible. For example, LEDA's client retention rate is rather poor (in relation to its loan renewal rate) and it has stated that its current loan product does not meet client needs. Ask: what are some of the things LEDA will need to do to develop in this area?


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Answers: E.g. develop the MFI's capacities to lead a satisfaction survey (client exit interviews, group discussions with former and current clients), study financial behavior to understand how clients make up for LEDA's shortcomings (informal practices, going to the competitors), develop and test new products, integrate some of the data in the MIS to monitor key indicators on a regular basis, such as client retention rate, etc. Summarize that to do this, LEDA will have to invest in client monitoring tools, analyze decision-making processes to ensure the collected data will help bring change about, improve products or develop new ones, train staff, improve its MIS, etc. Ask: In general, what areas does your MFI need to strengthen in order to implement its plan(s)? Take a few answers and conclude by stressing that as participants work through the Institutional Capacity step of the planning process, they need to allocate resources of all kinds (human, material, financial) for the activities identified in the strategic plan. Show BP9-O1 "Institution Capacity Page" – summarizing/emphasizing/explaining - Microfin works with these particular aspects of institutional capacity: portfolio management, loan officer caseloads, program and administrative expenses, fixed asset acquisition and management.

3. (5 minutes) Ask how do these areas relate ‘financially speaking’? Project Microfin Income Statement Flow Page, to show where we are on Program page. We have now projected our portfolio, which means we have income projections. However, the next piece, cost of funds, is incomplete until we finish our financing strategy. The following piece of the Income Statement is “loan loss provisioning.” Explain that as we continue to plan operations we will continue to look at the financial implications, currently on the income statement. In the following exercises we will focus on a few main issues, namely portfolio management and human resource needs.

Portfolio Quality Analysis

4. (3 minutes) Portfolio Quality Projections. ASK: What role does the

portfolio have in our (operational) planning process? To our financial projections/statements? Portfolio is our major asset, it generates our income! The quality impacts our income, rotation of portfolio, costs with regards to collections activities and loss, etc.


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5. OPTIONAL (10 minutes) Review. State before we go into more detail that we will have a quick review. Ask participants to work in pairs or triads to complete the puzzle on BP9-H1. Use BP9-O2 for an example, if needed. (Facilitator can use optional handout BP9-H2 with definitions if needed. Note well it is not the purpose of this course to teach these topics. This step is meant as a QUICK REVIEW only. If more materials are needed for tutorials, please refer to the Delinquency Management and Financial Analysis courses.) Quickly review the puzzle and be sure to award prizes to the winning team!

6. OPTIONAL (5 minutes) REVIEW CONTINUED. Ask the group what they need further clarification on as per the concepts above. Refer participants to other courses/materials for details but ensure that they recall PAR and Loan loss rates as these concepts are drivers in Microfin.

7. (5 minutes) Refer back to the questions of step 4 and request more specific answers. In summary, explain that Microfin uses portfolio at risk and loan loss rates to project portfolio quality and also to generate projections for loan loss provisioning and loan write offs which affect our growth, our financial statements and our ability to be profitable. The loan loss reserve and the gross portfolio outstanding are affected by the portfolio quality and the policies concerning write offs.

8. (10 minutes) If not covered specifically review the three concepts of provisions, reserves and write-offs, using BP9-O3, Reserves, Provisions and Write-offs. Reiterate impact on financial statements and how they impact on the planning activities. Hand out BP9-H3. Ask: Who remembers how to calculate the Loan loss reserve Rate? Summarize by demonstrating how to calculate targeted level of reserves using BP9-O4 and O4a Loan Loss Reserve Calculation, as needed.

9. (5 minutes) Conclude that it is better to make loan loss provisions on a regular

basis in order to have more accurate financial statements and a better picture of the overall health of the institution and that it is essential to look at all the institution’s key portfolio quality indicators and examine its write off procedures in order to have an precise picture of the institutions portfolio. Ask if there are any final questions on this topic of portfolio quality, loan loss provisions, reserves, and write-offs and how they affect the finances of the company and the planning activities. We will shortly see how Microfin handles these concepts.


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Loan Officer Analysis

10. (5 minutes) Ask: What kinds of things did we examine with regards to

human resources in our strategic plan that we want to consider in our operational planning and financial modeling? (Answers should be focused on: Staffing – because it is a critical resource and often the highest expense of an MFI, loan officers in particular are the most significant staffing resource; they work with the clients that we have just projected; they manage the projected portfolio which generates income). It is essential for loan officers to manage to build and maintain a good relationship with clients, hence the importance of clear policies and procedures and of loan officers who are well-trained on these procedures and aware of the MFI's goals and values. The MFI can also, for example, define a code of ethics or code of conduct to guide their work. These elements should be included in operational planning, even if they may not have direct consequences on financial modeling. Client protection or social performance issues may at first require an investment, so as to update policies and procedures (for example, defining a code of ethics or code of conduct, adapting communication for illiterate clients, creating a new product for excluded clients), to update trainings, to organize additional trainings (about the new code or the new products for example). However these policies and procedures will then be integrated in the MFI's operations and will not represent additional costs.

11. (10 minutes) Ask: In your MFIs, can you describe your loan officer hiring

policies? How do you determine the profile of staff to hire (Experience required? Values in accordance to the MFI's mission? Personality traits and skills?) How do you determine the number of loan officers to hire, when they will be hired, how many clients they will handle, when and how they will be trained, etc.?) Facilitate a discussion by taking a few answers and drawing out main points as they relate to the following questions. (Refer to BP9-M2, "Recruitment and incentives ", the same document as BP9-H4). Ask: What does caseload mean? (Answer: the number of clients managed by a Loan Officer.) Ask: What is a typical caseload for a Loan Officer? (Answer: Participants will most likely provide a broad range of numbers, from 100 clients to 500 clients. Try to elicit responses that shown a wide range. Ask: What accounts for the wide range? Or: What factors influence the caseload – the number of loans/clients managed by a credit officer? (Record answers on flipcharts which may include: lending methodology (in particular, participative models where some of the tasks are delegated to clients/members), services provided by the institution (non-financial services such as client training), staff productivity, population density in the areas served, social proximity between loan officers and clients, means of transportation,


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method for tracking overdue payments, portfolio quality (poor portfolio quality will drive loan officers into collection activities), etc.) Further explain that while there may be guidelines for caseload they cannot be simply compared across the board without considering the above factors. Also stress that it is not possible to increase loan officer productivity indefinitely without damaging portfolio quality in parallel (poorer analysis of repayment capacity, less proximity follow-up of clients, poorer client understanding of loan terms and conditions, etc.) Discuss benchmarks from MicroBanking Bulletin if available. Table extracted from MicroBanking Bulletin #19, December 2009 Cost by borrower

(USD) Borrower by employee

Borrower by loan officer

All MFIs (1084) 139 100 245 New (191) 157 70 179 Young (203) 148 103 231 Mature (657) 136 110 262 Banks (82) 305 67 238 Cooperatives (182) 191 81 258 IFNBs (338) 169 92 226 NGOs (389) 83 128 258 Rural banks (84) 105 82 251 Small (553) 181 72 196 Medium(241) 135 114 258 Large (273) 83 156 321 Africa (195) 134 108 288 Sources: 2008 data

12. (5 Minutes) Ask: What other factors are often considered when determining case load projections? Answer to search for are hiring and training procedures. Prompt with the following questions if necessary. Ask: Do loan officers start working with the optimal caseload on their first day of work? Do loan officers start working with clients the first day they are hired? When you need additional staff, should you go out and hire one new loan officer at a time? When you hire a loan officer, does that person work as a loan officer for the rest of their life? Summarize by explaining that you should not under-estimate the fact that loan officers are not immediately fully operational, and that you will need to spend time on their recruitment, training and monitoring.

13. (3 minutes) Summary - Show BP9-O5. Briefly (re)explain the variables that Microfin uses and state that an MFI will need to determine the parameters for


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each variable in order to complete the analysis.

14. (5 Minutes) Ask: How do loan officers impact our projections? Answer: We need sufficient number of Loan officers to provide high standards of customer service while also maintaining high portfolio quality. Our financial situation? Income? Expenses? (Answers: the impact through the outreach and portfolio quality, increased income through higher case loads and/or higher average outstanding balance per client (higher average loan officer portfolio), increase salary and benefit expenses, training expenses, etc. They can also have a negative impact, because of unacceptable collection practices or a bad analysis of repayment capacity, which can lead to client overindebtedness. Thus stress the importance of rigorous recruitment and training — not only on technical questions but also on the institution's ethical values — and an incentive system based on social and financial performance indicators. (Hand out BP9-H4 "Recruitment and Incentives" and also ask participants to read table #2 from Imp-Act Consortium's Guidance Note, BP9-H5 "Staff incentives: Integrating SPM into microfinance capacity building." Explain that caseload is an area that can be manipulated in the model when, for example, an MFI wants to increase its income by x% without increasing staff expenses through hiring additional loan officers or wants to start hiring staff in batches, needs to have shorter time periods between promotion levels. etc.

15. (2 minutes) Summarize by stating that loan officers are the principal linkage between the institution’s income and expenses. Use overhead BP9-O8, Loan Officers are the Primary Linkage between Income and Expenses, to demonstrate these linkages, comparing to the list previously generated by the participants.

16. (5 minutes) Ask for final questions on Portfolio Quality/Provisions/Reserves/ Write Offs and Loan officer Analysis. Bridge to application. Emphasize that following our recommended procedure to planning, Microfin uses a market-based approach to projections and now considers how many loan officers are required to achieve the previously established product targets.

17. (5 minutes) Switch to Blank LEDA.XLS and project the Provisioning and Write-off section on the Institution Capacity and Branch page as well as the caseload section on the Program/Branch page, demonstrating key points and briefly describing how Microfin handles the topics. Use Microfin Handbook as reference.

18. (50 Minutes) Refer to LEDA Case Study Part 14 and explain that they will have 50 minutes to complete the exercise. Remind participants to rotate the person who inputs the data!

Common errors in this exercise


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Participants frequently encounter the following problems when entering data for this section: Loan Loss • There are large spikes in loan loss provisioning: In some instances, large spikes

are normal. They are sometimes related to significant changes in the loan portfolio. Sometimes spikes are due to significant changes in the Portfolio at Risk rate, which cause a large adjustment in the reserve at the next write-off period. The model is calculating as it should; they should consider less dramatic changes in their input variables.

• They forget to enter the initial balance for the loan loss reserve: This results in a very large provision in Month 1.

• There are negative provisions some months: This can be caused either by entering the initial reserve incorrectly or by projecting improvements in the Portfolio at Risk rate, which means the institution does not need such substantial reserves. The model is calculating as it should; LEDA is over provisioned.

Loan Officer Analysis • They enter unrealistically low % caseload figures for entry and intermediate

level officers: This results in excessive hiring in early months and then significant overcapacity in future months as the loan officers are promoted and work with dramatically larger caseloads

• They don’t understand why so many loan officers leave by attrition on Line 19: The calculations are based on person-months. As soon as enough person-months are accumulated, a loan officer leaves and must be replaced. See the Handbook for a detailed explanation

• They project increasing caseloads: This can result in overcapacity in the future, if loan officer productivity is increasing faster than the number of clients.

• They get overly preoccupied with the green “overcapacity” line: They spend a lot of time trying to fine-tune hiring to avoid any overcapacity, but a few months of small overcapacity is not something they should worry about.

Before reviewing participant work, load LEDA9.XLS into Excel. This is a new case study file that ensures that the data entered into the model precisely matches the data expected in these facilitator notes. This is necessary for the correct calculation of number of loan officers. If not done, the facilitator will need to carefully review the numbers generated by Microfin prior to the presentation in order to explain them to the participants. 19. (15 minutes) Ask for groups to feedback their inputs and the rationale for

decisions made. Project LEDA9 and discuss. Focus on analysis and how the model can be manipulated to see different results. Ensure the flow of data and


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the impact of data entry on outputs and graphs are well understood. Project some results on Microfin for further discussion, changing factors as might have arisen in the discussion.

20. (5 minutes) Summarize. Ask for comments on Microfin's ability to project loan officer staffing. Bridge to next session.

BP10: Staffing and Operational Expenses

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SESSION 10: INSTITUTIONAL CAPACITY – STAFFING AND OPERATIONAL EXPENSES PROJECTIONS

Objectives: By the end of the session, participants will be able to: - Project staffing and operating expenses - Use Microfin to add these projections to the Financial plan. Time: 140 minutes Materials: Flipchart, Markers Computer data projector

Index Cards BP10-M1 Technical Notes

CGAP Microfin Handbook - Relevant Sections Overheads BP10-O1 Staffing Projections BP10-O2 Microfin Program/Branch Page Outline Handouts: BP10-H1 Institutional Capacity Discussion Questions BP10-H2 Presentation Guidelines Case Study LEDA Case Study Part 15: Institutional Resources and Capacity (Part II)


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Determining appropriate staffing and expense levels

Outline 1. (5 minutes) Ask: What did we discuss in the last sessions? Answer:

Institutional Capacity. In particular, Portfolio Quality and Loan Officer Case Load and their relationship on the Income Statement. Ask: Why did we focus on these items first? An MFIs’ primary expenses are in protecting the value of its portfolio (its largest asset) and in investments in human resources, namely Loan officers, which are the foundation of the organization. While MFIs need to search for economy in operational expenses, it is important to invest in human resources which will also be an investment in the protection of the portfolio and their clients.

2. (5 minutes) Ask: What other areas might we consider when addressing our Institutional Capacity concerns as identified in our Strategic plan. (Refer back to LEDA if concrete examples are needed.) Answers can include: other staff, acquisition of equipment, consulting costs for Information system, training, new branch office space, etc.) Summarize main points as necessary moving the group to thinking about other staffing and expenses and linking institutional capacity issues with operational financial planning.

3. (10 minutes) Handout BP10-H1. Ask participants to work in groups of 3-4 with their neighbors and discuss the questions on the handout.

4. (5 minutes) Facilitate a discussion that summarizes the main points from the questions. Namely, the development of an operating budget, the concept of separating program/branch and administrative/head office, how they are distinguished and most importantly how they relate to institutional capacity and operational planning and the strategy of the MFI.

5. (5 minutes) Ask for a few examples of the expenses that the group listed. For example – Staff and rent. Ask what factors are considered when budgeting for staff? Answers: work type, work load, who, how many, how long, benefits, promotions, training – ask how is all of that determined? Look for linkages in answers –Staff numbers linked to the number of loan officers, branches, promotions linked to time in a given level, etc. For rent – linked to number of branches, clients, staff, etc. The point here is to try to get the group to understand the process and to begin to introduce how Microfin handles these concepts.

Using Microfin to project staffing and operating expenses

6. (5 minutes) Ask/Review: How do you think Microfin handles the above? Briefly

explain how Microfin separates program/branch and administrative/head office expenses, how the model first focuses on staff as a primary expense and how these are projected, noting the linkages, and how finally Microfin adds other


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operating expenses to complete the budgeting exercise. Show BP10-O1 and relate how Microfin is continuing to build the income statement through these projections.

7. (5 minutes) Introduce the main concepts we will be working with using BP10-O2

"Microfin Program/Branch Page Outline". Go to the model and project the some points and give a very brief lecturette on the pages using the points on BP10-M1. Most errors occur in the linking aspect; this may be the only concept that warrants particular attention as participants are now familiar with how the model works. Ask for questions and review main concepts.

8. (50 minutes) Case study on staffing and other operational expenses. Explain that participants will return to their computer groups to work on the next section of the case study. The assignment is listed in LEDA Case Part 15. Remind them to rotate who is in charge of the keyboard. Explain that they will have 50 minutes. Explain that after the case study work, one of the groups will make a short presentation of their work thus far.

When there are about 20 minutes left in the session, ask one (or two depending on time) of the groups to prepare for a short presentation immediately following the case study. The presentation should show their product design, review loan loss and case load, project their loan projections and their savings projections, primarily by reviewing the staffing and expenses graphs. Give them BP10 – H2, a copy of the Presentation Guidelines sheet at the end of this section. As you monitor the small groups, pay careful attention to their linkage boxes (have they entered appropriate linkage values?). Also review their staffing and expense graphs and make sure that they make sense. Use the import/export page to move the groups’ models to a computer that can be used with the data projector.

Common errors in this exercise • They enter numbers manually in every month: They don’t realize that the [Output]

section will do this for them automatically. • They ask if staff positions can be linked to more than one output: Yes, they

can. • They get ratios reversed for the number of security guards: Remind them of the

logic of “one [staff position] for every ‘x’ [linking category]” • They enter the annual inflation rate in the inflation column for other

operational expenses: Remind them that this should be what percentage of the inflation rate already indicated on the Model Setup page

• They enter inappropriate linkage values: For example, they may say “1” for rent per branch instead of the amount of rent per branch.

• They use the “additional” salary adjustment without also checking the “adjust salaries to inflation” box: The additional adjustment cannot be used independently


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of the inflation box.

9. (5 minutes) Facilitate general discussion. Ask participants what they found most

interesting/useful about this portion of the model? What relationships became obvious? What questions do they have?

10. (15 minutes) Presentations and Sensitivity analysis of the groups’ work. Give the group 5 minutes to present their findings, followed by 5 minutes of questions from the participants. Make sure the participants follow the suggestions outlined on the group preparation sheet.

11. (10 minutes) Facilitator follows one of the presentations with a discussion asking participants for reactions to the plans presented.

12. (5 minutes) Summarize. Ask participants what are the main points of this session. Answers can include: staffing and operational expenses should reflect key issues identified in the strategic plan, it is sometimes necessary to invest in the institution, making efficiency decrease in the short run and improve in the long run; looking for linkages for various staffing and expense categories provides a useful means of projecting future expenses in a growing institution, how easy it is for the strategy to get lost in operational and budgeting efforts and how we must keep our mind on our clients and market throughout.

13. (3 minutes) Ask for a few participants to share their points.

14. (5 minutes) Have each participant write on an index card Five points they hope to incorporate into their MFI’s planning process focus on points that were covered in the last 2 –3 sessions – Growth, Institutional Capacity Loan Loss, Case Loads, Staffing and operational expenses. Briefly review as necessary.

15. (2 minutes) Bridge to next session.

BP11: Fixed Assets and Administrative Expenses

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SESSION 11: INSTITUTIONAL CAPACITY – FIXED ASSETS AND ADMIN PAGE

Session Summary Objectives: By the end of the session, participants will be able to Appropriately manage fixed asset depreciation and acquisition, and

to use Microfin to determine a fixed asset strategy and make administrative expense projections.

Time: 170 minutes Materials: Flipchart Markers Computer data projector

BP11-M1Microfin Discussion Points Microfin Handbook - Relevant Sections

Overheads BP11-O1 Fixed Assets BP11-O2 Exercise on Fixed Asset Management - optional BP11-O2ans Exercise on Fixed Asset Management – Answers BP11-O3 Fixed Asset Planning and Management in Microfin Handouts: BP11-H1 Thought Sheet Case Study LEDA Case Study Part 16: Institutional Resources and Capacity (Part 3)


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Session 11: Institutional Capacity – Fixed Assets and Admin/Head office Page

Fixed Asset Management

Outline 1. (3 minutes) Review previous sessions. We have been thinking about our

institutional capacity and what we must do in order to meet our goals as defined in our strategy. We have just finished going through exercises where we defined our major source of income as well as our major program related expenses. Ask: What is left on our income statement? Administrative expenses and Fixed Assets for both Program/Branch and Administrative/Head office Expenses, and other items such as taxes and in kind subsidies.

2. (5 minutes) Introduction. Ask participants to think back to their lists of

expenses and their explanations for Program/Branch and Administrative/Head office expenses. Ask for some examples of Admin expenses. Expect staff, rent, vehicles, training, fixed assets, taxes, etc. Try to point out that the expenses and the treatment of them by Microfin are similar to the process we completed for the program expenses. The major difference is only in allocating them as Program/Branch or Admin/Head office. Briefly explain the linkages, etc. Again noting that the decisions made for administrative expenses should be based on the issues identified in the Strategic plan. We will be reviewing these issues through the next part of the case study.

3. (5 minutes) ASK: What do we mean by fixed assets? Ask: How important are fixed assets relative to an MFIs’ total assets? An MFI should have minimal amounts invested in FA! What kinds of fixed assets does an MFI need? Distinguish between land, buildings, and other fixed assets. Explain that we will analyze these three groupings separately as happens in Microfin.

Ask: What factors influence fixed asset acquisition in an MFI? Answers: changes in institutional scale, such as buying furnishings for a new branch office; or necessary transportation means for officers in rural areas for example; changes in institutional strategy, such as buying office space instead of renting; changes such as investing in a new management information system, or starting to handle money directly instead of through another institution; and fixed


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assets need to be purchased to replace depreciated fixed assets. Relate to how Microfin handles these factors.

4. (5 minutes) Planning a strategy of fixed asset acquisition. Ask: What is fixed asset management? Answer: addresses the issue of determining if we will have adequate fixed assets to support our activities and adequate financing to purchase these fixed assets. It is equally important to note that the MFI can reflect on means to reduce fixed asset costs, so as to increase efficiency (and later to be able to cover its costs or to reduce the interest rates paid by clients). For example, it may be necessary to have one motorcycle per loan officer in a rural area, while only one motorcycle per branch would be enough in an urban area, where clients are closer or accessible through public transport. Why do you think it is important for us to include fixed asset management (acquisition, depreciation, renewal) in our planning process? Answer: we need develop a plan for future fixed asset acquisition to ensure availability of financing, and we need to calculate depreciation costs for our sustainability calculations.

5. (10 minutes) QUICKLY - Review accounting concepts for fixed assets Ask: How do we account for fixed assets in our accounting system? Answer: They are carried on the balance sheet as an asset, and we calculate a regular depreciation amount which enters on both the Income Statement (as a non-cash expense) and the Balance Sheet (as a negative asset). Show BP11-O1.

Ask: What is depreciation? Discuss how each fixed asset is assigned a defined “useful life” and the value of the asset is systematically decreased, with the decrease being the monthly depreciation expense. Ask: What methods are there for calculating depreciation schedules? Answer: they will probably give several, such as “straight-line”, declining/written down balances, accelerated, etc. Ask: Why are there different approaches for calculating depreciation? Answer: often financial accounting standards dictate appropriate practices. Sometimes method is chosen for tax purposes or to try to best estimate the actual value of the asset at a given point in time.

6. OPTIONAL If needed (5 minutes) Exercise on Fixed Asset calculations. As a quick review - Show BP11-O2, Fixed Asset Calculations, work through the exercise by questioning, with the entire group briefly as a review only. (Refer to Accounting course for details.) Extract information on the process of depreciating and writing off fixed assets. Show BP11-O2 answers.


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7. (2 minutes) Land and Building Analysis. Why do we discuss buildings and land separately from other fixed assets? Review how treatment varies for buildings (longer depreciation period – over 10 years), land (land doesn’t depreciate) so Microfin separates them out from other assets.

8. (2 minutes) Handling other asset categories. Ask: What are other asset categories? Large Purchases, Project the Admin/Head office page. In this section include any major investments that should be amortized over the next five years. Does LEDA have any? Yes an MIS. Rather than entering as a large expense in a single accounting period, we spread this expense out over the projected life of the investment. Explain that for our purposes the concept of amortization is identical to depreciation

9. (5 minutes) Taxes and in kind Subsidies. Explain that the tax section has a single line where the amount of taxes can be entered. Since tax calculations vary so widely, there is no automation provided here; the user needs to determine the amount, and can enter a formula in the cell to calculate the amount based on other information, such as profits or assets. Ask: What are in kind subsidies? And why do we include them in our plan? Ask if LEDA is the recipient of any in-kind subsidies? Answer - Yes from their international partner. State: We must include all costs in our plan to enable us to get a clear picture of the cost of all our resources that we need to implement our plan; therefore we enter any in kind subsidies here.

10. (5 minutes) Summarize that we are about to complete the institutional capacity portion of our operational plan. We will return to LEDA and make some decisions and projections for its fixed assets and administrative expenses. Take any questions.

Using Microfin for Fixed Asset Strategy and Administrative Projections

Topic Preparation – Ensure LEDA11admin is loaded and ready for projection as well as on the participants' computers. 11. (5 minutes) Introduction to Microfin’s Administrative Expenses and fixed

asset sections. Briefly restate that admin/head office expenses are treated as the program/branch expenses were by Microfin. Show BP11-O3, Fixed Asset Planning and Management in Microfin, to explain how Microfin will create a fixed asset strategy in four steps. It can also be replicated on a flipchart for later referral. Explain that in the model, the minimum depreciation period for Microfin is 5


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years. Explain how since depreciation is a relatively minor expense in MFIs, an estimate such as this should not greatly affect our calculations, but does avoid making Microfin any more complex.

12. (45 minutes) Case Study. Participants should be familiar with how Microfin works at this point. With minimal explanation they should be able to go straight to the case study. Refer back to BP11-O3 and point out the pages and steps they will be using during this case study part. Explain that they have 45 minutes to work on the next section of the case study, LEDA Case Part 16. Note that much of Admin/Head office page is filled in already if using LEDA10 admin. They need to review the information as indicated in the case study.

Common errors in this exercise Participants frequently encounter the following problems when entering data for this section: • Linking base price to inflation: They sometimes forget that this should be a

number such as 100% rather than the actual inflation rate. • Initial purchase value on Program/Branch Page: Often, participants think this is

per unit cost, but the per unit cost is entered on the Inst.Cap. page. The amount entered here should be the total purchase value of all items in that category as it appears on the balance sheet.

13. (10-15 minutes) Ask participants to complete BP11-H1 and to be prepared to

present LEDA to the large group.

14. (10 minutes) Reconvene large group and review the exercise. Do not review the operating cost ratio yet. Ask for as many groups as possible to relate their findings.

15. (5 minutes) Now look specifically at the operating cost ratio graph. Ask: What does this represent? Operational Efficiency Ratio = operating costs divided by average outstanding portfolio. Ask: What expenses are included in the numerator? Answer: staff expenses, operational expenses for both program and administration. Why are we concerned with this graph? (Answer: It shows how much we spend to manage our resources.) How would you rate LEDA based on this graph? (Answer: Relative to - Best practice levels are


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generally considered to be in the 15% to 25% range in the long term, LEDA is…...) Is this consistent with LEDA’s strategy? Why does efficiency change over time? Answer: compare growth in expenses to growth in portfolio, if the portfolio grows faster than expenses the MFI becomes more efficient.

16. (15 - 20 minutes) Ask: What can LEDA do to improve efficiency? Ask for a

show of hands as to who successfully increased LEDA’s efficiency (lowered the ratio). Ask for as many groups as possible to relate their findings. Ask for a few examples to illustrate how that was accomplished. Ask them to explain if they feel the new plan is still in line with LEDA’s strategy? Do they think the revised plan was feasible? What were the costs? Input some of the suggested changes in the model to show the effect. Discuss results using the graphs. Look at the expense graph – explain any changes. Staffing? Assets? Always ask the participants to anticipate the impact of the changes before recalculating. Often it is best to change the variables, move to the graph, and then hit F9 so the changes are readily apparent. Ask: What happens to our operational efficiency when we spend money on staff training or development of better information systems, or opening of new branches? (Answer: our efficiency will look worse in the short term because our costs increase in the short term. However, in the future our productivity should increase because of these investments, making us more efficient in the long term and thus more profitable than it would have been without the institutional investments.)

17. (15 minutes) Summary - note main messages. Review both Microfin Issues as well as LEDA issues. Project graphs again and ensure participants understand them. This exercise completes the operational planning and the Income Statement phases. Take any last questions.

18. (5 minutes) Bridge to next session moving on to Financing strategy! Comment that we have completed our operational planning stage and now we need to see how much it will cost to implement and where the financing comes from.

BP 12: Financing Strategy

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SESSION 12: FINANCING STRATEGY: SOURCES AND FLOWS OF FUNDS

Session Summary Objectives: By the end of the session, participants will be able to State sources and types of financing Discuss Liquidity and Leverage and their use in financial strategy

develop an effective financing strategy Use Microfin to prepare their financing strategy. Time: 175 minutes Materials: Flipchart, Markers Computer data projector BP12-M1 Financial Strategy BP12-M2 Indicative list of MIVs Microfin Handbook – relevant Sections Overheads BP12-O1 Purpose of Financing Strategy BP12-O2 Sources of Funds BP12-O3 Restricted/Unrestricted Sources of Funds BP12-O4 Financial Leverage – Optional BP12-O5 Financial Flows in Microfin BP12-O6 Microfin Financial Sources Page Summary BP12-O7 Microfin Financial Flows Page Summary Handouts: BP12-H1a Financial Strategy Construction Blueprint BP12-H1b Financial Strategy – Worksheet (2 pages) BP12-H2 Sources of Financing BP12-H3 Financial Flows in Microfin BP12-H4 To improve LEDA we would change….Worksheet Case Study

LEDA Case Study Part 17: Financing Strategy


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Session 12: Financing Strategy

Financing Strategy

1. (5 minutes) Review where we are in both the framework and the Structure of

Microfin. Introduction to Financing Strategies. Ask: What do we mean by Financing Strategy? Take a few answers and summarize. An institution’s financial strategy is the plan it implements to ensure it has available financial resources to achieve its mission and objectives (commercial and social). Building a financial strategy consists in the identification of sources and types of funds that adequately meet the institution’s financing requirements (activities, portfolio, investments…), to allow the MFI to achieve its goals. Explain/confirm that the development of a financial strategy must take into account all sources and uses of funds. Refer to BP12-M1: “Financial Strategy” and hand out (BP12-H1a): “Financial Strategy Construction Blueprint”. Ask: What are the benefits of determining this strategy? Summarize by showing BP12-O1. Ask: What have we been concentrating on in the last few sessions with regard to finances? (Answer: Expenses, uses of funds) Ask for a review of the uses we have identified so far. Write answers quickly on a flipchart. They should include: - portfolio financing including loan loss - some financial costs (mainly for savings) - staffing expenses - other operational expenses - future fixed asset acquisition, land and building expenses, etc. State: Now we will discuss some final elements of our strategy. We will then look at how Microfin can help us with this matter. Refer to flipcharts of Framework and Project the structure. We will now concentrate on SOURCES of funds and then put them together with USES to construct our final financing strategy.

2. (5 minutes) Ask: What are the two major ways to finance an operation/business? Answers: a business is financed either by DEBT or EQUITY (refer to the balance sheet if necessary). Ask: what does that mean?


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State that there are various and more specific sources of debt and equity financing that we will discuss momentarily. Ask: When considering these types of financing, what would you like to know about these sources of finances? Answers: costs, reliability, availability, restrictions on use. Ask which MFIs have sources of finance that have restrictions on how they are used within the MFI? Ask for some examples and also ask who places these restrictions on the use of the funds? Answers: Imposed by Donors/lenders, regulators, or internally by Management and/or BOD The idea is to highlight how funds received are utilized. For example, if the MFI has received a loan from the bank to buy capital assets, this loan cannot be used to pay wages. The lending bank will ensure that the loan the MFI obtained will be used as stated in the contract. The same can happen with portfolio financing or operational expenses. In Microfin, we can choose the allocation of available resources. Explain that we will take some time to discuss in small groups some issues related to sources and flows of funds to an MFI.

3. (15 minutes) Distribute BP12-H1b “Financial Strategy – Worksheet (2 pages)”. Divide participants into group of 4-6; explain that they have 10 minutes to complete the exercises on the handout.

4. (10 minutes) Review of the exercise. Use BP12-O2 and O3. And Handout BP12-H2. Discuss the following additional points particularly as they relate to Microfin’s handling of the issues. Restricted funds • Should savings be restricted to portfolio financing or allowed as unrestricted

financing? (Microfin allows the user to choose between these two options on the Financial Sources page.)

• Should loans be restricted to portfolio financing or other assets (e.g., mortgages), or whether they should also be allowed as unrestricted. (Microfin allows the user to choose.)

• Should donors impose restrictions on earned income? (This practice is not encouraged, and Microfin does not provide support for it.)


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• How can/should an MFI use it savings? What about the savings reserves? MFIs are required to maintain cash reserves as a percentage of total savings. The savings referred to here is total savings less required reserves.

• Investors and more specifically Microfinance Investment Vehicles (MIVs – see BP12-M2 for an illustrative list) - have multiplied considerably in recent years and allow MFIs to resort to borrowing or to receive equity. Which elements are taken into account for these resources? (Answers: loan conditions, MFI’s capacity to use these funds; for equity investments: shareholders’ expectations, demands for financial returns/growth, governance positioning, etc.). More and more social investors demand that their funds have a clear social return for clients and that client protection principles be respected, at least, and that products and services provided have a positive impact on clients. Social investors include these demands within their funding criteria and can sometimes offer preferential rates (or subsidies) for investments in client protection or for the improvement of social performance.

Use of Unrestricted Funds • Explain that Microfin needs some precise rules to follow when allocating

funds in the model. First all expenses are paid, then if money is left over, new portfolio disbursements are made, and finally if money is left over then other assets are purchased. Refer to BP12-O3 and draw arrows to show the order in which Microfin allocates unrestricted funds – operations, portfolio, and other assets.

Liquidity • What is Liquidity Management and how is it used in an MFI? Policies put in

place to ensure that the MFI has sufficient cash to meet its obligations. (Microfin allows for the establishment of liquidity margins.) The amounts established can be either a flat figure or a percentage of the portfolio, anticipated disbursements, etc. Proceed to explain that Microfin generates projections for the future, and our goal in generating projections is to always avoid a shortage of funds. The model will indicate any shortfall and we will need to either search for new sources of financing to eliminate the shortfall, or to reduce our projected level of activities. In real life, management always has the option to make decisions of their own. For example, they can ask employees to defer their salaries for a week in order not to hold up loan disbursements.)

Leverage • What is it and how can MFIs use it? • What is the advantage of giving a grant as equity? We can use the equity like

a lever to access greater amounts of assets! • Leverage is key for outreach! Donor funds and Retained Earnings won’t get

you outreach in the long run – MFIs will need investments.


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5. (5 minutes) OPTIONAL Leverage example. Show BP12-O4 and explain. Ask: What happens to this institution if a natural disaster occurs and 20% of its loans become unrecoverable? They will have lost 200,000, depleting all of the institution’s equity and a portion of their clients’ savings accounts. High leverage represents a risk for those holding claims to the liabilities of the institutions – savings accounts and loans. This is why leverage ratios are monitored by banking supervisors. Ask: Suppose you need to increase ROE in order to attract new investors. What changes can you make? Answer: You can increase profitability by increasing interest rates within the limit of what is acceptable and bearable for clients or by improving efficiency. This must be the priority, so that clients do not bear the cost of the MFI’s inefficiency. Or you can increase the leverage of the institution by borrowing more money or increasing savings.

6. (5 minutes) Liquidity and Cash flow projections - Microfin Example. Explain that now that we understand sources and uses of funds, potential restrictions on financing sources, and how to put together a mixture of financing sources that meets our institutional objectives, we need to pull all this information together to determine if the funds are going in and out at the required times! Ask: What financial statement usually shows us this? (Cash Flow/Sources and Uses). State: Let us look at how Microfin handles this issue. Show BP12-O5 and distribute BP12-H3, Financial Flows in Microfin and briefly review the way in which the flow statements work when using Microfin. For example, in month 1, there are sufficient restricted funds to meet the increase in portfolio. The initial balance of 50,000 covers the net growth in portfolio of 40,000 leaving a balance of 10,000. In month 2, the portfolio grows by 43,000, depleting the current balance of restricted funds. The institution borrows an additional 40,000 to cover this deficit and ends the month with a balance of 7,000. In month 3, the growth again absorbs the surplus and results in a deficit of 39,000. This month the MFI does not seek out new restricted funds. Instead it uses 39,000 of unrestricted funds to cover the growth. The ending balance of restricted funds is 0. In the final month, again there is a deficit of restricted funds to cover the growth in the portfolio. This time, there are not sufficient unrestricted funds to cover the deficit and the balance comes up negative. Either the MFI must cut back on growth or it must identify new unrestricted or restricted funds to cover the growth.

7. (5 minutes) Summarize the concepts and their import to financial planning. Ask for any remaining questions on Sources of Funds, Leverage, Cash flows, etc and explain that we will now look in greater detail as to how Microfin deals the issues presented.


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Using Microfin to prepare a Financing Strategy

Before this topic, load a blank copy of MICROFIN and load LEDA12. This will ensure that the all data matches at the start of the financing exercises. 8. (3 minutes) Introduce the financing strategy section of Microfin. Refer once

again to the flipchart with the Structure of Microfin, showing that we have nearly completed the planning process. Show how two input pages remain: FINANCIAL SOURCES and FINANCIAL FLOWS and that the remaining pages of the model are all output pages.

Show BP12-O6 and O7, Financial Sources and Financial Flows in Microfin, and explain how the information is divided between these two pages. Demonstrate the Key features of both pages using Microfin. Highlight common errors. Refer to relevant aggregate graphs. Participants should be quite used to how Microfin works at this point so long and detailed presentations are not thought necessary. Should the group require a more detailed explanations of the features on these pages refer to CGAP Microfin Handbook for guidance as needed.

9. (45 minutes) Case study on Financing Strategy Explain that we will now complete the final section of our case study. Explain that we have 45 minutes to work on the case. Refer to LEDA Case Study Part 17: Financing Strategy. This will be plenty of time for them to complete the financing pages and then begin to review their entire plan and begin the process of adjusting the plan.

Common errors in this exercise Participants frequently encounter the following problems when entering data for this section: • Repaying a loan: Payments of loan principal are entered as negative numbers on

the Fin.Flows page. Interest payments are calculated automatically on the Fin.Sources page.

• Initial balances on Fin.Sources page: Participants sometimes enter the approved loan amount in the initial balances cell on Fin.Sources. This should be 0 for new loans that have not yet been received.

• Errors on default financing variables: Often, participants will not enter correct data for the default financing variables, e.g., they do not indicate an interest rate for the default loan.

10. (20 minutes) Ask participants to pair up with another computer triad. Explain that each group is to show the results of their financial strategy to the other group using their own computer graphs and outputs.


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11. (5 minutes) Ask: Are you happy with your plans? Why/Why not? Are they GOOD Plans? Why do you think they are/are not good plans? Take a few answers and list ‘criteria/qualities” of a good plan on a flipchart. Focus answers on the process of developing the plan as well as the components, a plan should be implementable, considered as a whole not in parts, have buy-in from all levels of the organization, adhere to the mission, fit into the macro situation, show a profitable growth, efficient, etc

12. (10 minutes) Ask: If you were evaluating an MFI’s business plan, what factors would you look at? In general, financial sustainability after adjustments, adequate cash flow, positive trends in our key financial ratios, rate of growth that is under control and adapted to the market potential, etc., and specifically what supports those ratios - Total portfolio, number of loans, AROA or Financial Sustainability, Operating Cost Ratio, Equity Multiplier, Effective Interest Rate, Average Loan Size, and Caseload. Summarize by reminding participants that: A business plan must be examined as a whole. Do the various pieces fit together? Is it realistic? Does it take into consideration the operating context? A business plan is more than a set of financial indicators; the strategy must make sense, products and services provided must be adapted to the needs of different segments of target clients, the institution’s strengths and weaknesses must be identified and taken into consideration. It is easy to put together numbers so that a few financial ratios look good, but are the projections realistic? Is it possible to manage this level of growth without harming clients? Are interest rates on loan products bearable for clients? Is the MFI investing adequately in the institution? Are staffing levels adequate?

Conclude that a true evaluation of a business plan must carefully review all areas of the plan, beginning with the mission statement and working through each area of the Strategic Plan. Then all areas of the Operational Plan and Financial Projections should be reviewed to ensure that the plan is realistic and addresses all key issues the MFI is likely to face.

13. (10 Minutes) Ask the participants to rejoin in computer groups, Use BP12-H4. Ask participants to write down 4 things they wish they could change with regard to LEDA in order to achieve better results, why they want to change the input and


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to predict what results they feel the change will have on LEDA.

14. (10 min) Instruct groups to input the changes as written down.

15. (10 minutes) Ask some groups to verbally share one of their choices of change. Briefly discuss asking other group members to comment on the ideas and its projected results. Ask if the results of the changes were as expected? Why/Why not? Input and project interesting changes and discuss results.

16. (10 minutes) Summarize main messages and take any remaining questions. Bridge to the next session.


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BP 13: Financial Management

SESSION 13: FINANCIAL STATEMENTS AND FINANCIAL ANALYSIS

Session Summary Objectives: By the end of the session, participants will be able to:

• assess financial projections as a whole by evaluating a broad range of indicators,

• analyze business plans for MFIs • adapt and use their business plans to changing conditions

Time: 4 hours Materials: Flipchart, Markers Computer Projector BP13-M1 Discussion points for Sensitivity Analysis CGAP Microfin Handbook Relevant Sections Overheads BP13-O1 Summary Page Overview Handouts: BP13-H1 Think - Do - Reduce Average Loan Size BP13-H2 Think - Do - Loss of staff BP13-H3a Think - Do - Devaluation BP13-H3b Think - Do - Portfolio deterioration BP13-H4 Peer Review guidelines BP13-H5 Presentation guidelines (for only the three groups selected to present) BP13-H6 ‘Board’ member listening guide BP13-H7 ‘Employee’ Listening Guide


Session 13: Financial Statements and Financial Analysis

Outline 1. (3 minutes) Project Structure of Microfin, to show that we are in the last phase of

the planning process, Financial Management. Remind participants that all of the information has now been input into the model and these additional pages serve solely to analyze the results. Discuss how if we find something in the plan that we are dissatisfied with (e.g., items from BP12-H9 list of things to change such as insufficient profitability, or too rapid growth) we need to return to earlier parts of the model and make changes.

2. (10 minutes) Reintroduce the Navigator page and review the output by each level of detail. Discuss the use of the page through questioning. Link to and introduce the Summary Report page of Microfin.

3. (5 minutes) Summary Page Show BP13-O1. Explain that this page provides a summary of the financial information showing annual totals for ease of use in trend analysis. Project the Balance Sheet, Income Statement, Cash Flow and ratios produced by Microfin, and show links to the Summary and Navigator pages Ask: How might these pages be valuable to us? Solicit ideas on how it can be used when finalizing our plan.

Case Study on Finalizing the Plan

4. (5 minutes) Discuss how to experiment with program redesign using Microfin Start by explaining how throughout the model we have entered information that self-updates, or calculates automatically. Ask the participants to name some examples (e.g., loan size linked to inflation rate, supervisors linked to loan officers, rent linked to number of branches, etc.

Explain how this aspect of the model allows us to do a great deal of experimentation. In many cases, we can change a single variable and see with a high degree of reliability the impact that change will have on the entire five years of projections. This allows us to test the “sensitivity” of our design to certain variables, e.g., what happens if we change our loan sizes next year? Or if we change our methodology so that loan officers can work with 400 clients instead of 300? We also need to take into account the limits of any software: for example, with Microfin it will be difficult to model the potential portfolio deterioration should there be an uncontrolled increase of loan officer productivity. Therefore we need


to use realistic hypotheses which reflect the MFI’s specificities.

5. (10 minutes) State: Sensitivity Analysis lets us experiment with some inputs and predict what might happen. Refer back to last exercise that was completed BP12-H4. Quickly ask for a list of things that participants thought to change. Write them on flipchart. (Leave space below entry to later write in a different color – what will be impacted.) Now ask for the impact that was observed (outputs, graphs, ratios) Focus on 5-10 items. Write them below the change in different color. Review and solicit comments.

6. (25 minutes) Case study: Finalizing the Plan. Tell participants that this time is

for making any changes in the plan that they see fit. Keeping in mind the components of a good plan that we discussed and LEDA’s mission and resource availability. Encourage participants to be creative and try testing a variety of changes to assess their impact on the final results. Instruct participant to be prepared to present what they think are the most interesting parts of their plans to the entire group.

7. (25 minutes) Ask if everyone is now happy with their Plans!? Ask for several groups to present their revised plan using the projector, verbally summarize products, delivery, costs and financing, project and discuss graphs. Some can report verbally, at least one other should use the projector when presenting (selected for interest of plan to share). Discuss and commend as appropriate. Link key variables to change to achieve desired results.

8. (10 minutes) Conclude that we have accomplished our task and completed great plans for LEDA. Congratulate everyone!! Ask for final comments, questions, reactions to planning and the use of Microfin when planning.

PRELOAD LEDA 13 Final Case Completed into all participant computers. Instruct Participants to use this version for the remainder of this session. 9. (70 minutes) A wrench in the works! State: everyone knows that the best-laid

plans are susceptible to change. We are going to continue to practice using the model based on some other change issues, according to document BP13-M1: “Discussion points for Sensitivity Analysis”. Have participants return to their computer groups. Evenly distribute BP13-H1: “Think - Do - Reduce Average Loan Size”; BP13-H2: “Think - Do - Loss of staff”; BP13-H3a: “Think - Do - Devaluation” or BP13-H3b: “Think - Do - Portfolio deterioration”. Tell groups they will have 45 minutes to effect the situation presented to them in their plans. Remind participants that the changes take place 18 months into the


plan. Relate to the need to keep the plans active and up to date! Approximately 15 minutes before time up, Handout BP13-H4 to all groups to use as guidelines for potential peer review discussions. Monitor groups closely during this period and after about another 7 minutes subtly select one triad for each topic who will present to the large group. Hand out BP13-H5 to this group to help them prepare their presentation. Note well if other situations are more appropriate to your market – for example a natural disaster - flood. Discuss with the Resource Person possible changes in one of the scenarios.

10. (60 minutes) Presentations. Explain that three triads have been chosen to present their work to the large group. One for each scenario. Explain that the triad will give a 10 minute presentation of their business plan, using the projector, to the rest of the group who be acting in two different roles. The members of the triads who worked on the same problem will act as board members of LEDA. The remainder of the group will act as employees of LEDA. Both groups will be given listening guidelines and have a chance to question the presenters on the plan for 10 minutes – after all, you all must own the plan! Begin presentations with the group who is presenting Reduced Loan size. Distribute Handouts BP13-H6 to the ‘Board’ members and BP13-H7 to the employees. Arrange the room so that Board members can sit together and employees are seated together. The three presenters should all be in the front of the room. (A semi-circle without desks works nicely.) The ‘Task Force’ begins the 10 minute presentation and remains ‘up front’ while taking questions from the ‘Board’ and ‘employees’ for feedback and questions for another 10 minutes. Change groups and repeat the entire 20 minute activity for Loss of employees group. Repeat again for Devaluation. Change listening groups each time also.

11. (15 minutes) Final Summary. Main points of plan with significant focus on analysis of plans, tracking changes and their effects, continuous use and refinement of the plan to keep it current. Remember plans are only good is they are used!!

BP 14: Summary and Action Plan

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SESSION 14: SUMMARY AND ACTION PLAN

Session Summary Objectives: By the end of the session, participants will be able to: Summarize the course stating main messages Time: 100 minutes Session topics: Summary Activity Action Plan Materials: Flipchart Markers – at least 12 – 2 per each group

Projector Overheads Handouts:

BP14-H1 Summary Sheet BP14-H2 Action Plan Worksheet (at least twice as many copies as participants

BP 14: Summary and Action Plan

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Session 14: Summary and Action Plan

Outline 1. (5 minutes) Tell participants that we have come to the end of our Business

planning activities. To help with the transfer of training and firmly embed these new ideas we will spend some time thinking about the key learning points and how we can apply them in our MFIs when we return home.

Summary Activity

2. (25 minutes) Divide the group in to five groups. One group for each day or the training week. Ask each group to discuss the activities and main learning points of the day they are assigned. They are to list and be prepared to present the top 5-10 learning points/main messages for that day. Additionally they should work together to come up with the top 5 reasons why to use this information. These should be clearly written on a flip chart. Presentations should be approximately 5 minutes per group. Hand out BP14-H1. The number of points are arbitrary they can be 4 or 8 or 10 – but a number limit should be given to encourage thinking! Facilitator should ensure that the reasons to use the information is discussed and included in the presentation.

3. (30 minutes) Presentations. Each group should present the main messages

and most importantly the ‘top 5 reasons’ for using the information. 4. (5 minutes) summarize ask for any further questions. Action Plan

5. (3 Minutes) Action Plan. State now that we have been reminded of WHAT we know and WHY we should use the information; let us plan HOW we are going to implement the planning techniques we have learned back in our institutions.

6. (20 minutes) Distribute BP14-H2 and ask participants to begin to complete the

worksheet. Participants may work in pairs as appropriate. Have extra copies available as participants may require more than one sheet.

7. (10 minutes) Have participants form groups of 3-4 and briefly discuss their plans with other members of the group.

8. (2 minutes) Conclude. Remind participants that training is only the first step in creating better business plans. As we learned, a plan is only good if it is implemented, we hope that this review and the actions plans that were previously started will be the first step to taking this training home!

BP15: Additional Microfin Features

15-1

SESSION 15: ADDITIONAL MICROFIN FEATURES - OPTIONAL

Session Summary Objectives: By the end of the session, participants will be able: Use other Microfin features Time: 40 minutes Materials: Flipchart Markers Set of Microfin installation disks Projector

CGAP Microfin Handbook Overheads BP14-O1 Other Microfin Features BP14-O2 Getting Help Handouts: BP14-H1 Getting Help


15-2

Session 15: Other Microfin Features

Other Microfin Features

Topic Preparation Before this topic, Go thru the following list of advanced topics and determine which are the most appropriate given issues which have arisen in the course, things that haven’t yet been covered, and the amount of time remaining. You may choose to have participants write questions that they would like answered on an index card at the end of day 4 to help you prepare for this session. Outline 1. (15 minutes) We have practiced and have completed a planning cycle using

Microfin. Through this process we have used most all of the functions and indeed all of the critical ones. There are however many more things that Microfin can do for us! Ask: What else would they like Microfin to do for them? Introduce and link to other features in Microfin. Show BP15-O1. (Amend as is relevant for your group.) Present the most important and relevant of the topics. Be sure to include any other topics that came up during the course. REFER TO CGAP MICROFIN HANDBOOK and the WEB site for technical material to support your explanations. Topics can include but are not limited to: Preparing Branch and Regional Projections, Loan Officer Layoffs Transfers, User Defined Sheet, Indexed Financial Products, Default Financing, Freezing Graphs, Client Cost Page, Retention Rate Analysis, Scenario Manager Page, Transferring data.

2. (3 minutes) Installing Microfin. Get a set of installation disks, and demonstrate

how to install Microfin. 3. (3 minutes) Transferring Microfin data to other computers. Explain that

because Microfin is too large to fit on a single disk, even when zipped, transporting the file can be a problem. The easiest options are computer network, zip drive, and lap link cable.

Explain the how to use the Import/Export Page to move data from one computer to another

4. (4 minutes) Getting assistance with Microfin, show BP15-O2


15-3

Explain that CGAP supports a website for technical assistance: www.microfin.com. Information on the most current version of Microfin, bug reports, training courses, and FAQs can all be found on the website. In addition, there is a Microfin listserve that you can sign up for at: [email protected] You can send an email to this listserve with any question you have and it will be copied automatically to all other subscribers. This allows anyone who knows the answer to help you. And don’t forget the on-line help file. Show how to get a complete list of FAQs from the bottom of the Contents page. Distribute BP15-H1.

5. (2 minutes) Explain that new updated versions are created periodically. Explain

that this information is available through the web page. Explain how to download the latest version of software and where to get new/updated manuals.

6. (10 minutes) Take any further questions and demonstrate the answer using the projector. Quote references in the handbook as appropriate.

7. (3 minutes) summarize and close the session.

http://www.microfin.com/

BP16: Evaluation and Closure

Draft as of 6/23/14 at 16:06 146/P6 16-1

SESSION 16: COURSE EVALUATION AND CLOSING CEREMONY

Session Summary Objectives: By the end of the session, participants will be able to provide

feedback on the course logistics, content, methods and facilitation. Time: 40 minutes Session topics: Course Evaluation Closing Materials: Certificates BP16 – M1 Wallet-sized BP Frameworks Handouts: BP16-H1 Post test BP16-H2 Course evaluation BP16-H3 Microfin Framework


Draft as of 6/23/14 at 16:06 146/P6 16-2

Session 16: Course Evaluation and Closure Preparation You may choose to have prepared laminated wallet-sized frameworks based on the pictures included in BP16-M1. There is also an Excel file labeled Wallet Structure which may be easier to print from. The card may be two-sided, with the BP Framework on one side, and the Microfin flowchart on the opposite. The two sides should be printed in color, put back to back and laminated before distribution. Outline 1. (10 minutes) Post-test. Hand out BP16-H1: “Post Test”. Ask participants to take

10 minutes to complete the form; retrieve them for assessment.

2. (20 minutes) Course evaluation. Ask participants to take 20 minutes to complete the course evaluation, distribute BP16-H2: “Course evaluation.” At the end of the evaluation, hand out BP16-H3: “Microfin framework.”

3. (5 minutes) Closing Remarks. Course organizers, facilitators and/or CGAP

representatives should give closing remarks and thank the participants for attending.

4. (5 minutes) Certificates. Award certificates, photos, wallet frameworks as

prepared.

5. (1 minute) Close the workshop.


3

BP16-M1

STRATEGIC PLANNING OPERATIONAL PLANNING

Mission and GoalsMarkets and Clients Products and Services

Environmental Analysis

CompetitionCollaborators

Regulatory FactorsOther External Issues

Institutional Assessment

Institutional Capacity and Resources

Credit & Savings Program Loan Loss Provisioning

Board and Management Loan Officer CaseloadHuman Resources Program-level Expenses

Administration Admin-level ExpensesFinancing Sources Financing Strategy

Financial Management Financial Management

Strategy Business Planning as an Ongoing Tool

Business Planning Framework

Marketing Channels / Credit and Savings

Projections

Model Setup Page

Financial Products Definition Page

[Products]

Instotutional Res & Capacity Set-up Branch 1 Activity

[Inst.Cap.] [Program]

Head Office Information (Admin)

[Admin]Cost of Funds

Financing Sources[Fin.Sources]

InvestmentIncome Financing Flows and

Investment Strategy[Fin.Flows]

Summary Report

Financial Statements Income Statement

Adjusted Inc Statement

Cash FlowRatio Analysis

Fina

ncin

g

Structure of Microfin

Fina

ncia

l Man

agem

ent

Prod

ucts

[Model Setup]

Inst

.Res

&C

ap /

Mar

ketin

g

Balance Sheet

CGAP

Business Planning

LEDA Case Study

July 2002

July 2002 CS-2

LEDA Case Study

Case Part 1 LEDA History Case Part 2 Mission and Goals Case Part 3 Clients and Markets Case Part 4 Assignment: Clients and Markets Case Part 5 Environmental Analysis Case Part 6 Institutional Assessment Case Part 7 Assignment: Environmental Analysis and Institutional Assessment Case Part 8 Summary of LEDA Strategic Analysis Case Part 9 Assignment: Strategy Case Part 10 LEDA Strategy and Operational Plan

July 2002 CS-3

Case Study Part 1

LEDA History The Liberty Enterprise Development Association (LEDA), a microfinance institution, was established in 1994. LEDA was founded by Judith Money, who had visited a large, world-renowned microfinance institution the year before. She was so inspired by what she saw there that she created a comparable institution to serve the financial needs of poor entrepreneurs in her own country. Liberty is a land-locked country that is known for its mineral deposits and enjoys a modest agricultural output. Liberty has had a stable political system since gaining independence from Britain in 1965, and the currency—the shilling—has also enjoyed good stability domestically and internationally. But poverty levels are high, and the increasing trend of migration from rural to urban areas—especially to the capital city of Agora, located in the Western District of the country—has led to increased levels of poverty for the majority of the population. It is estimated that the informal sector accounts for more than half of the economic activity of the country's one million people. LEDA currently works with the low-income, self-employed, urban poor in the capital city of Agora. Over its six years of operations, there has been little in the way of major changes in approach. LEDA currently offers a single loan product: Clients form solidarity groups of five individuals, and after saving the equivalent of 10 percent of the loan, each client gets a loan of the same size and term, with each group member co-signing for the others. Savings are held by an independent commercial bank that pays 8 percent annual interest to the savers. LEDA charges an interest rate of 42 percent annually on a declining balance, and a commission of 3 percent of the loan amount is deducted up front. Although program expansion has been slower than originally anticipated, LEDA ultimately hopes to become a nationwide institution. Among MFIs in the country, LEDA sees itself as unique in combining a deep commitment to reaching a substantial number of poor entrepreneurs with a goal of becoming increasingly independent of donor funding. LEDA feels it is particularly close to its clients and strives to make strong customer loyalty its mark of distinction. LEDA has a close relationship with an international nonprofit development agency (Freedom International) that provides occasional technical assistance, training, consultants, and networking opportunities. It is October 2000, and the institution is initiating its formal strategic planning process. Judith Money has recently stepped down as chair, but still remains active on the board. LEDA's fiscal year runs from January to December; LEDA's intention is to put the newly developed plan into effect in January 2001. LEDA’s primary motivation for undertaking the planning process is to determine how to reach its expansion goal.

July 2002 CS-4

Case Study Part 2

Mission and Goals • Mission statement: Our purpose is to significantly strengthen the economic base of the low-income, self-employed of Liberty through increased access to lending and savings services in urban areas. We intend to combine cost-efficient methodologies with exemplary customer service, and become a financially self-sustaining institution. • Goals: (what we want to achieve in the next five years) 1. Provide appropriate lending and savings products in urban areas. 2. Expand outreach by providing savings and lending services to a significant

proportion of the households in our market areas. 3. Become a fully financially sustainable, independent microfinance institution,

using cost-efficient methodologies and accessing a broad variety of financing sources.

July 2002 CS-5

Case Study Part 3 Market Research: Clients and Markets

LEDA used a combination of document research, a review of its own files, and onsite investigation to complete the necessary client and market research. A study of all existing clients shows that:

• Existing and former clients tend to be somewhat dissatisfied with LEDA, primarily because they feel that loan terms and sizes are inflexible and not meeting their needs. Loan sizes start at S.100 per individual for first loans and increase by S.100 for each loan until the loan ceiling of S.400 is reached. (The current exchange rate is S.1.00 = US$1.00.) Loan sizes are reviewed each fiscal year and updated for inflation. All loans are 12 months in duration, and clients make monthly payments, with no grace periods.

• A study of client repeat rates has shown fairly low client retention. Seventy

percent of clients completing the first three loan cycles have gone on to the next loan cycle. After completion of the fourth loan cycle, retention drops to 50 percent.

• Many clients indicate that they would place a premium value on more responsive customer service, with more flexibility in the loan amounts and terms (they would accept shorter loan terms in order to get to larger loan amounts more quickly), and more timely disbursement of requested amounts.

• Sectoral breakdown of enterprises is 40 percent small-scale commerce of fresh produce, 20 percent small-scale retailers of dry goods, 25 percent shoemakers, 15 percent other production-based businesses.

For the existing clientele in the Brownstown Market and St Mary areas:

• LEDA currently works with a total of 7,000 clients in these two adjacent areas. The estimated number of microentrepreneurs in the two areas is approximately 50,000. Of these, 60 percent are believed to be interested in financial services.

• Sectoral analysis reveals the following:

Current Clients Additional Demand Commerce 4,200 13,800

Production 2,800 9,200

July 2002 CS-6

• The number of businesses in the two areas appears to be on the rise, partly due to the availability of financial services. Best estimates are that the number of businesses grows by 5-10 percent per year.

Early analysis indicated that the East Side, a district on the opposite side of town, had strong potential for expansion. More in-depth research revealed the following:

• A wholesale market thrives in the center of this district. The estimated number of businesses and demand for credit in the area follow:

Sector Existing Credit Demand Commerce 8,000 5,600 Production 3,000 2,100 Upon considering expansion into the rural areas, early analysis had shown that Loganville was a nearby area with a potentially strong market. Additional investigation revealed that:

• The area lies 40 miles from Agora, on the main highway to the north, and transportation services are very reliable and regular.

• The town population is 500 households. Within a 10-mile radius there are

approximately 6,000 households.

• Most households are involved in a wide variety of activities, including grain production, small-scale livestock husbandry, transformation of agricultural commodities, trading activities, and some artisanal production. Specific activities vary significantly by season.

• There is a large-scale market twice a week in Loganville, where most households in the community come for their commercial activities.

• In additional to a local dialect, virtually everyone speaks Libertine, the national language.

A European donor is interested in providing funding of up to S. 300,000 to an MFI that would agree to work in Mt. Andrew’s Valley, an isolated rural area known for its destitute population. No other institution is currently working in this area.

• The area lies 100 miles north of Agora. Dirt roads provide the only transportation into the valley. Heavy rains make travel on this road unreliable, and sometimes close it for days at a time.

July 2002 CS-7

• There are 3,000 households in the valley, with about 60 percent of these involved in small-scale, seasonal activities, mostly related to crop production and animal husbandry. There is some pottery production and woven mat production.

Clients in urban and rural areas seem to be affected by strong seasonal demand for their products in the months of October through December. There is a lull in activity each April through June due to limited cash circulation in the economy. With respect to client characteristics, education levels are consistently low; about half of those surveyed had difficulty with the written portion of the market survey. There is strong cultural cohesion throughout the country. Most adults have participated frequently in some form of rotating credit and savings associations.

July 2002 CS-8

Case Study Part 4 Assignment: Clients and Markets

LEDA’s Current Market: 1. Describe LEDA’s current market segment(s). 2. What is the size of the existing market for LEDA? What is the potential for

growth? What is the estimated demand for financial services among this population?

3. Are some business sectors more active than others? Describe the sectors that

LEDA might focus on, and explain why. 4. Do LEDA’s current clients reflect the market identified in LEDA’s mission and

goals? Potential New Markets for LEDA 1. What are the potential new markets being researched by LEDA? Which of the

area(s) seem(s) most promising? 2. What is attractive about the most promising potential market? 3. What additional information might you need before you made a final determination

about which markets to expand in?

July 2002 CS-9

Case Study Part 5 Environmental Analysis

LEDA’s board and executive director initiated an environmental analysis that resulted in the following findings:

Competition: • LEDA is one of the most solidly established MFIs in the country.

• There are half a dozen other microfinance institutions operating in Liberty

with more than 3,000 clients. All have entered the market in the last three years. Two of these are in the eastern part of the country. Of the four in the western region, two operate in rural areas (one near Agora) and two work in other parts of Agora.

• The two MFIs working in Agora compete most directly with LEDA; each has

about 5,000 clients and their effective interest rates are lower than LEDA’s. Their strategy is to standardize and automate the lending process to reach substantial scale as rapidly as possible, although LEDA is uncertain about where they plan to expand. Their average loan size is S. 500 with a six-month term, interest of 40 percent on a declining balance, and a 2 percent upfront commission.

• Many of the NGOs that are currently involved in other development activities

such as training and health care are considering entering into microenterprise development.

Collaborators:

• LEDA refers its more advanced clients to a local training institute for business

development services. Some board members are advocating “graduating” its longer-term clients to a local branch of the Liberty National Bank (LNB).

• The Liberty National Bank provides repayment and savings services to

clients, although clients have not been satisfied with its performance. LNB is not very responsive to clients and is very slow in getting information to LEDA.

• LEDA has an ongoing relationship with a North American NGO (Freedom

International) that provides periodic technical assistance and training.

• LEDA has good relations with its key donors. In recent years, relatively little grant money was needed for operations. A funding commitment has been secured for the next two fiscal years, totaling S. 400,000. Discussions are underway with other donors, including one that would provide major funding for work in Mt. Andrew’s Valley.

July 2002 CS-10

Regulatory Factors:

• Financial institutions’ policies and practices do not explicitly exclude small

and microenterprises, but have been primarily focused on medium and large businesses and on the larger-scale development projects supported by the government.

• Government policies have overlooked the microenterprise sector of the

economy, focusing instead on larger-scale “reform” initiatives and major infrastructure programs. In the past two years, under a new minister of finance, interest has been generated in addressing the needs of the informal sector, in particular by providing financial services.

• Recent legislation authorized a new type of legal structure: a “nonbank

financial institution” (NBFI). The legislation allows an NBFI to collect savings from its clients and from the general public. The minimum capital requirement is S. 500,000 and NBFIs must keep 25 percent of deposits in reserve. LEDA has applied for NBFI status, which will most likely become effective in the last quarter of 2001.

Macroeconomic Context:

• The inflation rate has been approximately 10 percent in 2000. In the past

three years it has not exceeded 12 percent. Expectations are that inflation will range between 8 percent and 10 percent for the next three to five years.

• Poverty levels are particularly high in the Western region of Liberty, where

LEDA operates, and especially in the capital city of Agora. Many of LEDA’s current clients are in one of the poorest neighborhoods. In rural areas, subsistence farming provides a minimum livelihood for most families, but not much more.

• The Gross Domestic Product (GDP)—currently S. 500 per capita—has been

slowly growing, but is still substantially below the levels required under a 1997 World Bank restructuring program. Economic growth has averaged 2 percent annually over the last five years.

• An increasing percentage of the population, especially low-income families,

has been migrating to the cities. Single-parent, woman-headed households are on the rise.

July 2002 CS-11

Case Study Part 6

Institutional Assessment LEDA’s board and executive director initiated an institutional assessment process that resulted in the following findings: • As identified in the client research, LEDA’s current loan product is not adequately

responding to client needs. • Portfolio quality is good but could be stronger, with portfolio at risk at 10.9 percent

and defaults at 1.3 percent. LEDA hopes to continue to steadily improve its performance over the next five years and to reach financial sustainability in 2005.

• LEDA’s staff is generally competent and dedicated. Twenty-four of 36 staff members

are loan officers. However, nine of the loan officers have been with LEDA less than one year. All staff members are well-informed about organizational policies, thanks to a strong emphasis on staff training.

• The executive director has been in place for 18 months and is very highly regarded

by both board and staff. Trained as a sociologist, his particular strengths are leadership and development of staff skills. He is a persuasive spokesperson for the institution, but his financial skills are limited.

• LEDA’s financial manager is very competent at overseeing operations and

managing information, although reports are about one month late. However, he could be stronger at analyzing financial data, drawing conclusions, and making sound recommendations, especially as LEDA converts to an NBFI.

• LEDA is audited annually by a reputable firm in compliance with donor

requirements. Recent “management letters,” while generally praising LEDA’s fiscal stewardship, have mentioned the lack of thorough internal control procedures within the growing institution.

• Most program staff members have low salaries, and loan officers are particularly

vocal about their limited pay and increasing workload. They are also frustrated by a lack of internal promotion opportunities, and discouraged by the high salaries of the head office staff.

• In general, LEDA has limited contact with other microenterprise institutions. It does,

however, have a key board member who was involved with important legislation that authorized the creation of nonbank financial institutions.

• Loans are currently tracked on a simple loan tracking program installed in 1996, but

with the increasing client base, the system is getting increasingly difficult to maintain. Staff have researched computerized systems: A local consulting firm has

July 2002 CS-12

developed a solid system for another MFI that could be adapted to LEDA’s needs. The cost is likely to be in the range of S. 50,000 for customization and setup, with an annual maintenance contract of S. 3,000 (at S.250 per month).

• LEDA has personnel policies, an organigram, and operating policies and

procedures. However, these materials have not been revised to consistently respond to changes in the growing institution.

• LEDA implements a systematic annual planning process, incorporates its objectives

into its monitoring system, and has been reasonably successful at attaining targets, although it did not reach its expansion goals as originally anticipated and has had no long-term plan.

• LEDA’s board is generally quite involved and committed to the organization. Many of

the board members bring solid professional expertise to the institution. However, some of the members do not perform effectively, and there has been little rotation of board members in recent years.

• As noted above, LEDA has a firm grant commitment for S. 400,000 over the next

two years. It has managed its current bank borrowing very professionally. Its growing reputation as a rigorous lender and reliable borrower positions the institution to be able to access substantial financing from the local banking sector.

July 2002 CS-13

Case Study Part 7 Assignment: Environmental Analysis and Institutional Assessment

Complete the following table using information from the previous pages of the case study. List all the institutional and environmental issues that were identified through LEDA’s research. When you have completed the table, discuss and make a list the three environmental issues and three institutional issues that you think are priorities for LEDA.

ENVIRONMENTAL ASSESSMENT Opportunities Threats

Competition

Collaborators

Regulatory Factors

Macroeconomic Factors

PRIORITY ENVIRONMENTAL ISSUES FOR LEDA

1. 2. 3.

July 2002 CS-14

INSTITUTIONAL ASSESSMENT Strengths Weaknesses

Credit and Savings Operation

Board/Management Issues

Human Resource Management

Administration

Financing

Financial Management

PRIORITY INSTITUTIONAL ISSUES FOR LEDA 1. 2. 3.

July 2002 CS-15

Case Study Part 8 SUMMARY OF LEDA STRATEGIC ANALYSIS

Markets and Clients

FINDINGS IMPLICATIONS Brownstown Market: • 4,200 clients as of 12/00 (60% commerce, 40%

production) • Estimated demand for financial services: 20,000 St. Mary • 2,800 clients as of 12/00 (60% commerce, 40%

production) • Estimated demand for financial services: 10,000 For these existing markets • Client retention rate: 1st, 2nd, and 3rd loans: 70%;

subsequent cycles: 50% • Major findings of client surveys: (1) clients want

greater amounts and more flexible terms for loans; (2) clients are interested in expanded savings services

East Side: • Approximately 70% of the entrepreneurs

interviewed expressed an interest in market-priced sources of financial services

• Estimated number of businesses/demand for credit:

Commerce: 8,000/5,600 Production: 3,000/2,100

Loganville: • Within a 10-mile radius there are approximately

6,000 households, most of which are involved in a wide variety of income generating activities

Mt. Andrew’s Valley: • 60% of the 3,000 households in this isolated

valley are involved in small-scale, seasonal activities

All areas: • Strong seasonal demand exists for client

products in the months of October through December and lower demand each April through June

• Most adults had participated in rotating credit and savings associations

• New market(s) will be

needed in order to have access to more than 23,000 new clients

• Current product should be redesigned to respond better to client needs and to increase retention rate

• Consideration of how to offer savings services is important

• East Side is promising

market for expansion

July 2002 CS-16

Environmental Analysis

FINDINGS IMPLICATIONS Competition: • 6 other MFIs in country with more

than 3,000 clients, of which 2 also operate in Agora

• Both MFIs operating in Agora offer similar products and services, though in different areas of the city, with effective interest rates comparable to those of LEDA’s; each has about 5,000 clients

• Commercial banks are paying 8% on passbook savings and an average of 12% on term deposits

Collaborators: • Liberty National Bank provides

savings although clients are not satisfied with level of service

• North American NGO (Freedom International) provides periodic technical assistance and training

Regulatory Factors: • New legislation authorizes new legal

structure, “nonbank financial institution” (NBFI), allowing collection of savings from clients & other depositors

• LEDA has applied for the NBFI status, expected to become effective in the last quarter of 2001

Macroeconomic Context: • Inflation rate: 10% in 2000; projected

to be 8-10% for next 3-5 years

• Competition not currently a significant

factor, though MFIs operating in Agora should be monitored, especially their choice of markets—if they enter LEDA’s markets, competition could be serious

• Review of pricing structure may be appropriate (see below)

• LEDA must learn from experience

with LNB in order to provide adequate services

• Current TA needs are being met • NBFI structure offers opportunity for

LEDA to respond to clients’ interest in savings, and provide additional source of lending funds

• Inflation stable, but effect should be

factored into loan amounts

July 2002 CS-17

Institutional Assessment

FINDINGS IMPLICATIONS Credit & Savings Program: • In 2000, portfolio at risk > 30 days has

been 10.9%; default rate 1.3% • LEDA’s current loan product not

responding to client needs, as evidenced by low retention and client feedback

• Effective interest rate is higher than potential competitors’

• Strong interest by clients in expanded savings services

Board/Management Issues: • Strong, involved board brings useful skills

and perspectives although some members are not performing well

• Executive director has strong management and funds mobilization skills, but could improve financial skills (see below).

Human Resources: • Staff has required skills, though significant

percentage of field officers are new to LEDA

• Program staff salaries are relatively low; loan officers are especially vocal about increasing workload and limited pay.

• Admin staff salaries are high relative to country statistics on comparable jobs

Administration: • Loans tracked on old software program–

system increasingly strained Financing: • Good relationships with commercial and

concessional sources • Strong indications for substantial funding

for next 2 years Financial Management: • LEDA is improving its financial sufficiency

and plans to be fully sustainable in 2005. • Financial reports generally not available

until one month later than desired • Executive director and finance manager

must strengthen analytic skills.

• With continued rapid growth,

delinquency needs to be controlled • Need to redesign loan product but

likely not necessary to introduce additional products, review pricing structure to lower effective interest rate is important

• NBFI will respond to client demand for savings services

• Board training and rotation problems

must be addressed • Importance of ongoing staff training • Review of compensation structure

may be needed • Need to explore new MIS • Must continue to build on

relationships with funders • Must continue to monitor profitability • Financial management training must

be provided to senior staff.

July 2002 CS-18

Case Study Part 9 ASSIGNMENT: STRATEGY

Use the summarized analysis on the previous pages as well as earlier parts of the case study to develop an overall strategy for LEDA. Remember that a strategy is defined as a means of addressing critical issues during the period of the plan in order to enable LEDA to fulfill its mission and goals. What must LEDA DO to achieve its goals and mission? Use additional paper as necessary Goal 1. Provide appropriate lending and savings products in urban areas.

Objective A: Provide lending products that attract a growing number of clients that remain in the program.

• Activities:

• Redesign current group lending • Train staff in new loan terms and conditions • Review pricing structure

Objective B:

• Activities:

Goal 2: Expand to reach a significant proportion of the households in our

market areas.

Objective A:

• Activities:

July 2002 CS-19

Objective B:

• Activities: Goal 3: Become a fully financially sustainable, independent microfinance

institution accessing a broad variety of financing sources.

Objective A:

• Activities:

Objective B:

• Activities:

July 2002 CS-20

Case Study Part 10 Strategy and Operational Plan

Based on the strategic analysis summarized previously, LEDA adopted the following strategic statement: “Over the next three to five years, LEDA will pursue both product development and market diversification, while strengthening staff capacity and other key institutional resources. Our credit product will be redesigned to meet the needs of repeat clients, with the aim of increasing client retention. We will become a nonbank financial institution (NBFI) by the end of 2001 and will begin mobilizing savings from our clients. Ongoing staff training, a review of staff compensation levels, and MIS development will also be pursued. By the end of the year 2005, we aim to have at least 20,000 active clients and to be fully profitable after adjustments for subsidies.” OBJECTIVES AND ACTIVITIES Goal 1. Provide appropriate lending and savings products in urban areas.

Objective A: Provide lending products that attract a growing number of clients that remain in the program.

• Activities:

• Redesign current group lending • Train staff in new loan terms and conditions • Review pricing structure

Objective B: Develop voluntary savings products that respond to client needs and that over time can serve as a source of portfolio financing.

• Activities:

• Complete transformation to NBFI effective by end of FY 2001 • Develop savings product parameters for passbook savings and term

deposits • Train staff to implement program • Educate clients about pending savings services

July 2002 CS-21

Goal 2: Expand to reach a significant proportion of the households in our market areas.

Objective A: Expand market penetration in Brownstown Market and St. Mary areas, and open new branch in East Side.

• Activities:

• Market redesigned product in current market areas • Open a new branch in East Side late in FY 2001

Goal 3: Become a fully financially sustainable, independent microfinance

institution accessing a broad variety of financing sources.

Objective A: Achieve financial self-sufficiency.

• Activities: • Review and revise pricing structure to achieve profitability. • Strengthen financial management capabilities. • Achieve significant operational scale (see above). • Improve institutional efficiency.

Objective B: Obtain appropriate, diversified financing for operational expansion

and for portfolio expansion through grants, earnings, and concessional and commercial loans.

• Activities

• Obtain capital grants and debt (concessional and commercial) to fund portfolio growth (based on financial projections).

Objective C: Increase institutional capacity to meet expansion goals. • Activities

• Review salary structure. • Train staff in new loan terms and conditions and in savings mobilization. • Strengthen financial management skills of executive director and finance

manager. • Develop detailed financial projections (to follow).

Objective D: Increase capacity to effectively and efficiently track portfolio information. • Activities:

• Continue research on new MIS: develop detailed user specifications; select loan tracking system; install new system in 1st quarter of 2001.

July 2002 CS-22