Effective management of the loan portfolio and the overall credit function is fundamental to an MFC’s soundness. Loan Portfolio Management (LPM) is the process by which risks that are inherent in the credit process are managed. The review of the LPM process is so important that it must be one of the primary oversight and management activities to be carried out by the Boards and Managements of MFCs.
WHAT IS A CREDIT STRATEGY?
A credit strategy is an MFC’s overall game plan for reaching its target market through defined channels, turning them into key partners of the business with an array of value-added credit offerings. The credit strategy of a microfinance company contains the company’s value proposition, key sectors to serve, various customer segments and other high-level elements in the credit delivery process.
Most importantly, a credit strategy seeks to shape and adapt to events in the market. A credit strategy is a means of giving coherence and direction to the microfinance business. A good credit strategy can turn the activities of the credit function into purposive actions. Because executing a strategy involves coordinating different efforts, it usually gives rise to actions.
If the business environment changes, the very things that made your company’s credit strategy successful can make it fail. A business without a credit strategy but is good at operations may do well for a while. But sooner or later, it will fall victim to a competitor or changes in the environment. On the other hand, a good credit strategy does not guarantee success. All it can do is to shift the odds in a company’s favor. Excellence in the development of credit strategies cannot be an end in itself, but a basis for building competitive advantage. It is therefore obvious that MFCs need to pay attention to the operationalization of their credit strategies to build sustainable competitive advantage.
SO WHY DOES YOUR MFC NEED A CREDIT STRATEGY?
- To set direction and priorities
MFCs need a credit strategy because it sets the direction and establishes priorities for the company and the credit function. The strategy defines the MFC’s view of success and prioritizes the activities that will make this view a reality. The credit strategy will help every member of staff know what they should be working on, as well as when and how to execute key credit-related activities. Stemming out of the business model, MFCs must develop a game plan that outlines how the company intends to select its customer segments. It must also include which market-driven value offerings it intends to serve at a price, and the various channels to reach the identified segments. Besides, the credit strategy must also outline key activities such as market assessment, loan client acquisition, appraisals, disbursement, monitoring and recovery.
Without a clearly defined and articulated credit strategy for the credit function, MFCs may find out that the priority initiatives that drive the highest success in the loan portfolio management are being given secondary treatment, which in the long run will affect the loan portfolio quality.
- To promote ownership
As MFCs, if it is evident that members of the credit unit work to achieve different aims, or move in different directions in the delivery of their credit management duties, then the company needs a credit strategy. A well outlined strategy promotes ownership among members of the credit function. Team members responsible for the various credit functions have more clarity on their line of duties. This promotes ownership as the collective performance and actions will lead to an effective delivery of credit.
A well implemented credit strategy will facilitate efficient upscaling: that will include the establishment of new branches, increase in loan clients served, whilst an improvement in loan portfolio quality will suggest profitability of the company.
- To contextualize decision-making
If the MFC’s Board of Directors or management team has trouble saying no to new ideas or potential initiatives in the selection of market and delivery of credit, you need a strategy. Why? Your credit strategy will have already prioritized the activities necessary for business growth in your existing market.
Management and staff responsible for the credit function are likely to come across new opportunities in the market and would like their MFCs to take advantage. Not all the opportunities identified may merit the allocation of the organization’s resources but a good credit strategy will put the decision into context and the right course of action will be taken. Priorities make it easier to say no to distracting initiatives, especially when thorough analysis have not been conducted on these new ideas.
- To drive alignment
Many MFCs have hard-working people putting their best efforts into areas that have little to no effect on strategic success. Such MFCs are essentially majoring in the minors when it comes to credit management because their activities are not aligned with the priorities of the established strategy.
Your credit strategy serves as the vehicle for answering this question: “How can we better align all our resources to maximize our strategic success?” Personnel can be well deployed to proven markets to develop and increase revenue through the sale of financial products.
MFCs have limited people and financial resources. A well-developed strategy will for example maximize MFC’s returns. With a number of outlined priorities and actions, MFCs will dedicate their best resources to serve and satisfy the needs of well-selected segments.
- To communicate the message
Many owners and managers of MFCs walk around with a virtual strategy locked in their heads—they know where their organization needs to be and the key activities required to get there but they are the only people in the companies who have the vision. Unfortunately, in most MFCs, the credit strategy is not documented on paper and is not communicated adequately. As a result, few staff members act on the strategy.
When your staff, key partners, and even customers know where you are going, your MFC attracts even greater opportunities and people tend to help you maximize your chances of meeting other objectives.
By Ernest Senyo Dzandu