Goals of the Workshop

Microfinance and HIV/AIDS: Defining Options for

Strategic and Operational Change

A Workshop for MFI

Managers and Decision Makers

Goals of the Workshop

• Help participants identify myths and learn the facts about HIV/AIDS

• Help participants recognize the impact of HIV/AIDS on MFIs and their clients

• Show participants how to hone in on and monitor internal and external factors affected by HIV/AIDS

• Help participants understand the institution’s options for responding to the disease

• Provide participants with strategies to mitigate the internal institutional and external risks of operating in a high prevalence HIV/AIDS country or region

• Prepare for action with an increased strategic understanding that will lead to operational change.

Overhead: Options

• Option One: Ignore the crisis.

• Option Two: Buffer clients against the effects of the disease (refined/modified or new products, insurance-type support for staff, linkages to HIV/AIDS support organizations).

• Option Three: Mobilize to protect and buttress communities (work with AIDS orphans and community health programs).

• Option One: Ignore the crisis “Business as usual.”

• Option Two: Buffer clients against the effects of the disease (refined/modified or new products, insurance-type support for staff, linkages to HIV/AIDS support organizations) “Financial-services orientation with eye to client/household needs.

• Option Three: Mobilize to protect and buttress communities (work with AIDS orphans, community health programs, and so on) “Activist.”

Overhead: Options Clarified

Overhead: MFI Financial Costs Related to Responses to HIV/AIDS

CGAP Business Planning FrameworkCGAP Business Planning Framework

Strategic PlanningStrategic Planning Operational PlanningOperational Planning

Mission and GoalsMission and Goals

Markets and ClientsMarkets and Clients

Environmental Analysis• Competition • Collaboration• Regulatory factors• Other external issues

Environmental Analysis• Competition • Collaboration• Regulatory factors• Other external issues

Products and ServicesProducts and Services

Marketing channels/ Product and service

projections

Marketing channels/ Product and service

projections

Institutional Assessment• Boards and management• Credit and savings

program• Human resources• Administration

Institutional Assessment• Boards and management• Credit and savings

program• Human resources• Administration

Institutional Capacity and Resources

• Loan loss provision• Loan officer caseload• Personnel expenses• Administrative expenses

Institutional Capacity and Resources

• Loan loss provision• Loan officer caseload• Personnel expenses• Administrative expenses

Financing SourcesFinancing Sources Financing StrategyFinancing Strategy

Financial ManagementFinancial Management

Strategy Business Plan as an Ongoing Tool

CGAP Business Planning Framework

Strategic PlanningStrategic Planning Operational PlanningOperational Planning

Mission and GoalsMission and Goals

Markets and ClientsMarkets and Clients

Environmental Analysis• Competition • Collaboration• Regulatory factors• Other external issues

Environmental Analysis• Competition • Collaboration• Regulatory factors• Other external issues

Products and ServicesProducts and Services

Marketing channels/ Product and service

projections

Marketing channels/ Product and service

projections

Institutional Assessment• Boards and management• Credit and savings

program• Human resources• Administration

Institutional Assessment• Boards and management• Credit and savings

program• Human resources• Administration

Institutional Capacity and Resources

• Loan loss provision• Loan officer caseload• Personnel expenses• Administrative expenses

Institutional Capacity and Resources

• Loan loss provision• Loan officer caseload• Personnel expenses• Administrative expenses

Financing SourcesFinancing Sources Financing StrategyFinancing Strategy

Financial ManagementFinancial Management

Strategy Business Plan as an Ongoing Tool

Strategy Business Plan as an Ongoing Tool

Strategy Business Plan as an Ongoing Tool

Overhead: Importance of Client Loyalty – An Example of a Repeat Borrower

Key Client Segments

(A) First Time Borrower

(B) Repeat Borrower with Low Loyalty and Small Loan Size

(C) Repeat Borrower with High Loyalty and Small Loan Size

(D) Repeat Borrower with Low Loyalty and Large Loan Size

(E) Repeat Borrower with High Loyalty and Large Loan Size

1. Average loan outstanding per year

$200 $200 $700 $700

2. Number of years likely to remain a client

1 4 1 4

3. Multiply 1X2 200 800 700 2800

4. Average profit margin

1% 5% 1% 5%

5. Multiply 3X4 LOSS $2 $40 $7 $140

Overhead: Increased Household Financial Pressure

(a)

(b)

(c)

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Up to 10 years 12 months 6 months 12 months +

Dea

th/

Bur

ial

(1)

(2)

(3)

Incr

ease

d Fi

nanc

ial P

ress

ure

on H

ouse

hold

s

Source: Development Alternatives Inc. 2003; updated 2004.

(a)

(b)

(c)

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Up to 10 years 12 months 6 months 12 months +

Dea

th/

Bur

ial

(1)

(2)

(3)(a)

(b)

(c)

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Up to 10 years 12 months 6 months 12 months +

Dea

th/

Bur

ial

(1)

(2)

(3)

Incr

ease

d Fi

nanc

ial P

ress

ure

on H

ouse

hold

s

Source: Development Alternatives Inc. 2003; updated 2004.

Overhead: Major Risks to Microfinance Institutions

Financial Risks Operational Risks

Strategic Risks

Credit Risk•Transaction risk•Portfolio risk

Liquidity Risk

Market Risk•Interest rate risk•Foreign exchange risk•Investment portfolio risk

Transaction Risk•Human resources risk•Information and technology risk

Fraud Risk

Legal and Compliance Risk

Governance Risk•Ineffective oversight•Poor governance structure

Reputation Risk

External Business Risk•Event risks (political, macroeconomic, natural disaster, health/epidemic)

Overhead: Impact of HIV/AIDS on a Microfinance Institution

HIV/AIDS in the Workplace

Declining profits/sustainability

Declining profits/sustainability

Increasedstaff turnover

Increasedabsenteeism

Loss of tacitknowledgeLoss of skills

Decliningmorale

Health & safety

Insurance cover

Medical assistance

Funeral costs

Increased costs Decliningproductivity

Increased demandsfor training & recruitment

Declining reinvestmentin MFI Declining reliability

HIV/AIDS in the market— declining number of clients, business investment, and labor pool

Overhead: Cost of DelinquencyItem CalculationInitial Loan Amount 1000Interest Rate 15% flatLoan Term 25 weeksWeekly payment Interest 6 Principal 40 Total 46Payments received 14 weeksPayments overdue 11 weeksLost Income and Principal Income 66 Principal 440 Total 506Expected Revenue per 1000 loan 150Variable costs per 1000 loan 90Expected Net Revenue 60Actual Income Received 84Cost per loan 90Actual Net Revenue Received -6Number of loans Required to Earn Lost Principal 7.3 loans of 1000Lost Principal/Net Revenue per 1000 loans 440/60Number of loans Required to Earn Lost Principal 8.4 loans of 1000Lost Principal and Income/Number of 1000 Loans 506/60

Overhead: Financial Products for Different Stage of HIV/AIDS

Prod

ucts

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Up to 10 years 12 months 6 months 12 months +

Dea

th/

Bur

ial

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Key

Emergency Loan: ▲Housing Loan: ■ Preventative Health: ●Cash Advance: Salary-based Loan: >Period of difficulty with contract:▐

Prod

ucts

Economic Recovery

Care for Orphans StageBedridden StageFrequent

Hospital Visits Stage

Early StageAsymptomatic Stage

Up to 10 years 12 months 6 months 12 months +

Dea

th/

Bur

ial

▲▲▲▲▲▲▲▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐

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● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ▐ ● ● ● ● ●

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Key

Emergency Loan: ▲Housing Loan: ■ Preventative Health: ●Cash Advance: Salary-based Loan: >Period of difficulty with contract:▐

Overhead: Importance of Identifying the Impact of HIV/AIDS on MFI Operations

“Long-term sustainable responses will only be achieved if all stakeholders (leadership, managers, personnel, shareholders) within [MFIs] are convinced of the real business rationale for action. In particular, a committed and knowledgeable leadership is paramount.”

“A clear understanding of the specific impacts of HIV/AIDS on a company and of the context in which these occur is a critical factor in the development of effective and appropriate policy and program responses.”

Source: UNAIDS, et al., The Business Response to HIV/AIDS: Impact and Lessons Learned

Overhead: Board Member ResponsibilitiesBoard Member Responsibilities Enhanced Responsibilities in an

HIV/AIDS ContextFiduciary •Ensure the financial health of the MFI•Safeguard the interests of all the institution’s stakeholders (particularly when MFI intermediates funds from commercial banks or depositors or has outside private investments)•Serve as a check and balance to instill confidence in the company’s investors, staff, customers, and other key stakeholders that managers will operate in the best interests of the institution.

Fiduciary•Monitor the overall financial health of the MFI, ensuring that the MFI is managing its liquidity and safeguarding institutional equity in an environment with increased

pressure on the bottom line and profitability.

Strategic•Participate in the organization’s planning process, including development of its three components: a strategic plan, an operational plan, and an annual budget—focusing predominantly on the strategic plan•Review and annually assess progress toward stated strategic goals•Monitor progress toward annual quantitative objectives of the operational plan and budget, reviewing both expenditures and revenue•Monitor financial projections, including, at a minimum, loan disbursements, loan portfolio, active clients, and deposits (if applicable).

Strategic•Ensure that the new operational plan and budget consider the potential costs and financial impact of HIV/AIDS

•Monitor financial reports and ratios, analyzing trends that

may be affected by HIV/AIDS.

Overhead: Board Member Responsibilities Continued

Board Member Responsibilities Enhanced Responsibilities in an HIV/AIDS Context

Supervisory •Ensure that the significant risks—including financial, operational, and strategic risks—the MFI faces have been identified•Confirm that strategies are in place to manage risks or that there are a plan and timeline for implementation•Review management reports and information from internal and external auditors to determine whether those strategies are working effectively•Hold management accountable for identifying appropriate risks and implementing the risk management framework.

Supervisory•Ensure that the health/epidemic risk of HIV/AIDS has been identified•Confirm that strategies to deal with the impact of HIV/AIDS are in place, including a plan and a timeline•Hold management accountable for implementing a risk management framework that includes HIV/AIDS•Review internal audit reports thoroughly because the incidence of fraud is often higher in an HIV/AIDS context, and perform occasional spot checks of the institution.

Management Assessment and Accountability•Supervise selection, evaluation, and compensation of senior management•In the transition from a small, growing, entrepreneurial organization to an established institution, ensure that the company survives.

Management Assessment and Accountability•Evaluate performance of management in managing new risks related to HIV/AIDS•Move the institution beyond dependency despite the economic impact of HIV/AIDS.