This post reflects on a question I got from a provider friend last week. It is anchored in the current challenges most businesses are confronted with in the midst of market uncertainties. There are challenges relating to loan portfolio performance, deposits and investments. The loan quality is deteriorating for a number of reasons: individuals, micro and small enterprises have taken a hit from the impact of Covid-19 and with a suffering business, they are concerned with their own survival and not the servicing of loans. Others are in need of additional financing to rise from the doldrums, but the financial service providers themselves are without the much-needed capital to extend facilities. With reduced disbursement and non-payment of loans that are due, portfolio quality and interest generation capacity are affected negatively. Why are savings declining for those who mobilize savings: not all are suffering savings withdrawal but those who have clients that were hard hit by the pandemic – casual staff, restaurant and hotel staff, artisans, teachers of private schools, and cooked foods sellers on school compounds among others – are unable to grow their savings and are withdrawing the little savings that they have, further putting liquidity stress on microfinance providers. Investment accounts are not spared either. So, it is okay for providers to ask if there is a way out!
What is not okay is sitting down, not doing anything about the situation and expecting government and Bank of Ghana to come and solve the problems. Even as I agree that government has a role as in creating the right environment and providing the needed incentives, providers have to rise to the occasion. The leadership comprising the board and management of the microfinance provider institutions will be critical in turning things round. Some ideas are presented for turning the business round. The ideas are built on the case of what is in your hand and what you can do with it. No business will survive as a right, businesses will survive by reason of the decisions they make and actions that are taken.
First of all, seek to objectively understand the current state of your microfinance business- this is not a self-pride or self-pity or theoretical exercise. It is an objective exercise of self-assessment. For a financial services provider this boils down to a simple case of your financial position: financial assets vrs. financial liabilities! Financial liabilities are mostly certainties, but financial assets have uncertainties given that some cannot be realized. The net position is where the business remodelling starts from.
A critical decision point, regarding whether to go forward or retreat has to be made. Remaining stagnant will not be an option. The decision on whether to retreat (dissolution or scale down) or advance will be one of the most difficult decisions the board will ever make and should therefore not be made lightly. In my view the key pillars that will influence the decisions are: markets, products, people, technology and funding.
The market question is answered by the board when it obtains a clear understanding from management of the current and potential market characteristics. What markets are we currently serving and how are these respective markets faring in the current pandemic? Market is defined in this context as the economic groupings that the MFI serves – private sector salaried workers; restaurant and chop bar operators; private schools; spare parts dealers etc- it is critical to group the market into well-defined segments that have identifiable characteristics to support analysis. The respective segments have to be analysed with respect to current performance in the context of Covid-19 and other related uncertainties; size of the market; preferences of the market such as delivery channels; and financial solution needs of the segments. This is the basis of rebuilding – understand the market, market size and needs of the market to determine if there’s is market to be served. This exercise is one of the most critical and should encompass existing and potential markets. Without market, there is no business! The board, management and staff must have this understanding.
Next post, we will discuss how to serve the selected market with products which by the way is “the bundle of solutions” the microfinance provider brings to the marketplace. Till then, stay well and keep doing something right!