In the first quarter of 2013 we carried out spot checks on four of our partners. These were Gatsby Microfinance (Uganda), Tujijenge Uganda, Micro Kenya and KEEF. The partners had scores ranging from 4 to 8 out of 10. The spot check score forms part of the parameters that are used in overall risk rating on MYC4 (commonly referred to on MYC4 as the star rating, due to the five stars displayed on each provider profile). Subsequent action points are given for each provider, including measures such as pausing of loan uploads until certain issues are adequately addressed.
The spot check is a tool used by MYC4 bi-annually to verify that the data captured on MYC4 is accurate; and that the borrowers not only exist but are carrying out the businesses as detailed on the platform. Another objectives of the spot checks is to verify that the providers are carrying out best practice as laid down in their policies (MYC4 only engages with providers that demonstrate, during due diligence process, that they have sound risk management policies). Many will agree that, it is one thing to have good risk policies in the finest print, but consistently implementing the same requires a multiplicity of factors – including management commitment, staff motivation & ownership, adequate training, and a good incentive scheme. Thus from the aforementioned, there are two principal aspects: Adherence to MYC4 model; and implementation of risk management practices.
Over a period of time since 2010, we have seen tremendous improvement in adhering to best practice. Many of our partners have incorporated aspects that were not part of their routine into their overall risk management structures. Areas that have seen good improvements include loan assessment, collateral perfection, and documentation. We have also managed to enforce more strictly, adherence to the MYC4 model.
The MYC4 model basically requires that borrowers access the loan funds at exactly similar terms and conditions as stated on the MYC4 platform. Thus, for example, loan for Odeke Julius is lent on MYC4 at an effective interest rate (EIR) of 41.87% for 12 months with collateral of a motor vehicle: We expect during the spot check to find a properly appraised loan at same terms and with collateral adequately perfected. Repayments received from borrowers should also be entered on MYC4 system as and when received from the borrowers. Suffice to say that loan status on MYC4 should mirror the provider’s information system with regard to each loan on MYC4. The withholding tax must also be remitted to the tax authorities.
The grading of the four institutions was divided as follows
1. Adherence to MYC4 model
2. Implementation of sound risk management practices
i. Completeness of loan files
ii. Perfection of collateral
iii. Loan assessment and documentation
iv. Processing of loan repayments
v. Client visits
Gatsby Microfinance holds our biggest portfolio per provider (about 23% of our portfolio). It was thus refreshing and comforting that they achieved the highest score from the spot checks, 8 out of 10. Among the highlights were that they had adequate loan assessment and approval mechanisms which were well documented; collateral perfection was sufficiently and consistently done; business visits revealed businesses with capacity to meet loan obligations; and there was strong adherence to MYC4 model with regard to disbursement amounts, interest charged, borrower awareness and consent of MYC4. The concerns noted included that there was a gap in repayment processing on MYC4 resulting in loans being cleared in GMFL books whereas small balances were outstanding on MYC4. Other concerns were that MYC4 currently finances a big part of GMFL portfolio (30%) and as such GMFL is required to urgently diversify funding sources.
Tujijenge Uganda (TUG) holds about 4% of overall MYC4 portfolio, while MYC4 holds over 40% of its portfolio. About 99% of its portfolio comprises of short term group loans. The perception of positive impact among its borrowers is very high – as several of the borrowers visited (who can be classified as bottom of the pyramid) attributed their elevated level of income to TUG. TUG was found to have good assessment of groups; had good documentation; collateral mostly was group co-guarantee and the necessary guarantees were in place. The key concern with TUG was on adherence to MYC4 model, whereby it was established that there was quite a high degree of non-compliance (TUG mostly pre-funds the loans it uploads on MYC4 at predetermined interest rates). This informed their low score of 4 out of 10. Other concerns noted were on documentation especially of the approval process and referencing/ file retrieval. TUG has been paused from further uploads so as to address adherence to MYC4 model and also give way forward on diversification of loan funding.
KEEF (Kenya Entrepreneurship Empowerment Foundation) holds a significant part of overall MYC4 portfolio, about 17%, and the converse is even more significant with MYC4 financing about 27% of KEEF portfolio. KEEF has demonstrated commitment to following the MYC4 model, as there was no issue of prefunding that existed previously. Repayments processing was found not to be accurate and with room for improvement. Loan assessment was not well captured in the documentation on file. Collateral perfection was satisfactory. KEEF generally has sound risk management principles and is complying with the MYC4 model. The omissions in loan documentation and lack of consistency in repayment processing have informed the average score KEEF scored 6 out of 10. Further growth of KEEF on MYC4 will be limited to ensure that MYC4 remains below 30% of overall KEEF portfolio.
Micro Kenya holds about 15% of MYC4 portfolio, while MYC4 holds below 5% of Micro Kenya portfolio. Micro Kenya is part of the Micro Africa group that has made a strategic decision to exit from MYC4 platform, after acquisition by Letshego of Botswana. Micro Kenya is to a large extent uploading freshly approved loans as per our pre-funding policy. However, the requirement for compliance is 100%, which has been violated. Over 90% of the loans funded through MYC4 have been through the group lending methodology. The loan appraisal and documentation were well documented. However, the loan documentation was not consistently and completely done as several loans did not have critical loan documents such as loan agreements. Compliance with MYC4 policies on other areas than pre-funding, was noted to be good.
The next round of spot checks will be carried out in this 2nd quarter on our partners in Tanzania.