6 Topics for Effective Financial Literacy Program

ImageBorrowing is an essential part of modern living. From the credit cards of urban residents to the rural neighborhood moneylenders, financing is needed for emergency situations, household consumption and even capital for income-generating activities and small businesses. The availability of lending sources and the easy access to some of these sources pushed some people to have multiple loans, over-indebtedness and financial ruin.

 It is in this context that financial literacy becomes relevant. People need to be educated to become prudent and to acquire skills in managing their finances. Effective financial literacy programs are composed of two sets of topics. The first set are those that advocates change in perception and the other set are those that teaches skills in managing finances.  Among the most relevant financial literacy topics are the following:

 1. Defining Life Goals. Setting life goals allow people to have something to hope for. A reason to work towards a target objective.  It helps when the goals are visualized with actual pictures of one’s dream house, business or any other thing.  Some people tend to work hard more with a visualize dream.

 2. Acquiring the Money Mindset.  The shift in perception is the main focus of this topic. Among the subjects covered are: valuing money, identifying the best role model in financial management and learning the mindset of people with money.

 3. Budgeting as a Coping mechanism. This topic covers the basic skills in computation – identifying assets and liabilities, income sources and expense items and determining net worth. Only when the person got hold of his basic financial circumstances can he start working to improve his financial condition.

 4. Savings. With a budget as a guide, savings skills are shared. The skills in regularly setting aside portion of the income are emphasized. Practical tips are discussed to make it a habit.

 5. Preventing Over-Indebtedness. Responsible borrowing is covered in this topic, answering the basic questions of why, when and where to borrow. Other subjects include defaults, its causes and consequences. The most relevant topic is the discussion on how to get out of debt.

 6. Retirement Planning. What to do when one cannot earn anymore by reason of age?  Preparations for the time when one is retired and setting up a nest egg culminates the financial literacy course.

 For clients of microfinance institutions, these topics are the most appreciated and most requested.

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Transforming Development Organizations into Microfinance Operators

ImageMicrofinance has been touted as one of the most effective tools in providing financial access to the poor, and helping them move out of poverty.  In most developing countries, non-government organizations providing microfinance services are considered informal service providers. They are not regulated and government agencies in most cases acquiesced and allow them to operate in support of poverty alleviation initiatives.  One main concern is the fact that most NGOs who are into microfinance lack the needed competencies in financial management.  This is explained by the fact that most NGOs are more focused and involved in development issues. Minimalist organizations that focus on one main service, like microfinance, are quite few.

Recent developments like the growing number of MFIs and the emerging commercial investors willing to place money in microfinance are some of the factors that push for the formalization of the industry. Many countries were able to establish legal framework for MFIs to operate, motivating them to register and operate formally.  It is viewed that transformation will enhance the image of the MFI.  On the one hand, it will give visibility, higher reputation and client confidence for the MFI. On the other hand, MFIs should be able to enhance its governance, operating systems, recording and reporting mechanism to be able to comply with regulatory requirements.

Among the main issues expressed by MFIs against formal registration are the following:

  1. Minimal capacity to transform from informal to formal institution, especially in upgrading operating systems;
  2. High requirements to hurdle towards formalization, specially interest rate, reserve requirement, loan loss provisioning, etc.;
  3.  Cost of formalization may be beyond the capacity of the institution; and,
  4. Possibility of being subject to political pressure as a licensed institution.

In Southeast Asia, countries have varying levels of development. In Cambodia and the Philippines, the regulatory framework is advanced, giving favorable environment for MFIs to develop and grow, while in Vietnam, the regulatory framework is still being developed.

6 Features of Effective Financial Literacy Materials

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Financial literacy is considered as one of the main tools to prevent over-indebtedness that has plagued many microfinance borrowers.  A consistent and effective financial literacy program will ensure that borrowers receiving loan funds will use them for its intended purpose and will not divert it for non-productive purposes.

One main concern however is the perception that financial literacy is an added burden both for the borrower and the loan staff.  On one hand, ineffective financial literacy methodologies are viewed by clients as time consuming, taking away precious time from their income-generating activities. On the other hand, most loan staff has   a notion that doing financial literacy activities reduces their level of performance. It does not contribute to the attainment of their targets and their main functions of generating borrowers and collecting repayments.

When done properly, financial literacy will develop the capacity of the clients to become prudent managers of funds and responsible borrowers.   This in turn will lower the cost of providing services by the MFIs.  Applicable methodologies should be the main consideration in the design of FinLit  materials.  Among the key features that can help make the materials effective are the following:

  1. The AUDIENCE of the sessions should primarily be the current clients, but it should also encourage non-clients as well.  Efforts should be made to reach as much audience as possible.
  2. The materials should use VISUALS to reinforce verbal presentations.  Structured-learning activities (SLAs) are applied in sessions where it is applicable. Texts in the visuals should be minimal so as not to intimidate clients who cannot read.
  3. The MATERIAL should be designed as a “discussion-starter” and should be able to generate interest and participation among the audience.
  4. The loan staff shall be the FACILITATOR in the conduct of the learning sessions.  The sessions shall be interfaced with her/his regular field activities like loan assessment, collection and monitoring activities.
  5. The SESSION should be conducted in the field whenever possible, as often as possible to cover as many topics as possible.  The session should not be made as a requirement for loan release.
  6. The material should be PARTICIPATORY and INTERACTIVE, so that maximum participation from the clients can be expected and encouraged.

Social Performance Management (SPM) Training for Microfinance Institutions

Social Performance Management (SPM) is a management tool used to translate the mission statement of microfinance institutions into reality and be able to keep track on how they perform in line with the internationally and socially accepted indicators. This will ensure that MFIs will continue to serve the poor, despite the issue of commercialization and moving towards bigger borrowers.

A training of trainers will be conducted in Cambodia and Vietnam for selected MFIs to re-enforce the capacities of the respective SPM point persons in providing guidance as mentors in the process of SPM institutionalization. The training activities are slated on August 13-17 in Phnom Penh, Cambodia; and August 20-24 in Hanoi, Vietnam.  The topics covered in the training are coaching and mentoring skills, social performance standards and client protection principles.

The training is expected to develop in-house pool of capable SPM point persons whose major role is to ensure that SPM is in-place in their respective MFIs.  The knowledge transfer gained out of this effort will pave the way to disseminate and expand SPM adaptation among other MFIs in the two countries.  The entire process of SPM institutionalization is part of the various  technical assistance provided by PlaNet Finance, in partnership with the Cambodia Microfinance Association (CMA) and the Vietnam Microfinance Working Group (MFG)  to strengthen their  over-all institutional  capacities, under the project “Improving Financial Inclusion and Social Impact Towards Food Security in Southeast Asia” (FinInc Asia).

How to prevent MFIs to be channels of money laundering

Microfinance institutions providing financial intermediation functions can be used as conduits of money laundering and terrorism financing. With MFIs, it is even harder to track down since transfer of money in small amounts through a non-profit “charitable” institutions may not be monitored effectively.

Deterring people with motives to use MFIs as a channel of their illegal activities should be part of the risk management efforts of the institution. It should be the lookout of MFIs to ensure that they will not be part of money laundering and terrorism financing. Among the basic steps that should be done are the following:

1. Anti-money laundering policies. Microfinance institutions should establish policies against money laundering and terrorism financing. Implementing procedures for these policies should immediately be cascaded down to the frontline staff.

2. Know your client (KYC). The first thing to determine is the origin. Inflows deposit, money transfer and even grants should be scrutinized. From where is the money coming from? The individual owner of the fund must be determined. A grant coming from a foreign foundation is to be highly appreciated, but it is more important to determine who are the people behind the foundation. The ultimate beneficial owner (UBO) must be identified to make sure that it is not just a front for a terrorist-supporting organization.

3. Another KYC effort is to know the destination of the money. Who is the final receiver and user of the money? Is the money being deposited to the institution only for a short time, to be withdrawn immediately? Or is the money invested to be used only for a certain group without expectations of being repaid? Answers to these questions will reveal the intention of the destination.

It is surprising that in the series of anti-money laundering seminars we have conducted, most microfinance institutions are not aware of the possibility that their institution may be used. Appropriate policies and mechanism and vigilance are the answers to ensure that your institution will not be used by people with criminal intention.