Main Threat To Others Microfinance Institutions

Published Date: 02 Nov 2017

5.1 Introduction

This section will look at the Environmental analysis of (insert company name) as it pertains in Ghana. It will show the historical perspective of the company and will provide details about the shareholding structure of the company. It will also discuss the Mission, Vision and Core values of the company. Also, it will outline and discuss the various products and services of this company. The final portion will discuss the organogram and the business strategies of the business.

5.2 SWOT Analysis

The goal behind a SWOT analysis is to use the resources available in unison with the environment in any industry that builds on a firm’s strengths, reduces its weaknesses, takes advantage of opportunity and avoids threats (David, 2011). By knowing the external and internal factors that affect one’s company and finding strategies to raise profits is the greatest weapon a firm can use to stand the test of time. The two components of a SWOT matrix are the internal and the external analysis that embody the factors that a firm is in control of and outside influences that are not.

An internal factor is something a business is in control of like management, marketing, accounting and finance, production and operations, research and development and management information systems (David, 2011). An internal factor is referred to as either strength or a weakness and completely reliant on the creator of the SWOT matrix to conclude whether it is one or the other.

The means of determining each are defined through a variety of methods from comparing ratios, to looking at past financials, evaluating performance, and giving surveys that analyse trends of a firm’s target consumer. In order to correctly employ a SWOT analysis the user must correct the weaknesses of an internal investigation in order to turn them into strengths, as well as utilize the strong points of a company to be more competitive in a market (Camden, 2009).

An external analysis comes from the evaluation of a firm’s opportunities and threats that come from factors that are outside of its control. Such factors include economic, cultural, social, demographic, environmental, political, governmental, legal, technological and competitive trends and events that could significantly benefit or harm a business (McConkey, 1988). The primary objective of identifying opportunities is to exploit them, while reducing the threats of other factors that could impair the profitability of an organization.

Strengths

The company possesses numerous strong points, only some of which can be enumerated below (Abbibiman Foundation, 2012c):

It has been identified that there are not too many direct competitors who possess the same lending methodology.

The Company has a strong international corporate relationship with International NGOs.

The Company possesses commendable corporate citizenship with sound institutional interaction with the Bank of Ghana (BoG).

Weaknesses (Abbibiman Foundation, 2012c):

A limited market image and limited experience as a formal financial institution.

A limited range of products and peripheral services.

An existing skills gap in human resource capacity to cope with the challenges of banking and the anticipated accelerated growth requirements.

Uncompetitive pricing when compared with formal banking institutions.

Opportunities (Abbibiman Foundation, 2012c):

Currently, there is a stable political, legal, and regulatory regime with satisfactory macro-economic indicators (i.e. inflation, interest rates).

Currently, there are favorable government support in terms of policies and funding microfinance.

Over the years, there has been a trend of repeat business and referrals from satisfied customers.

As it stands now, loans are disbursed into customers’ accounts. If the e-zwich system is made to work properly, customers will be able to access their loans and make repayments via e-zwich merchants.

Threats (Abbibiman Foundation, 2012c):

There is a threat of unauthorized access and other security breaches to Management Information Systems due to the lack of a vibrant technological environment in the industry.

There is a possible threat of the Company’s competitors imitating its lending approach.

Currently, Abbibiman Foundation Limited is a main threat for competition from financial institutions within the microfinance industry.

Table 1: SWOT Matrix

Helpful

to achieving the objective

Harmful

to achieving the objective

Internal origin

(attributes of the system)

Strengths

Lending Approach not common on the market.

Strong Corporate Identity

Strong relationship with International NGO’s

Weaknesses

Limited range of products and service.

Skills gap in human resource capacity

Still competition with commercial banks in terms of pricing.

Limited Scope of the market.

External origin

(attributes of the environment)

Opportunities

Stable political, legal and regulatory environment with satisfactory macro-economic indicators.

Favorable government funding & policies towards microfinance.

Threats

Threat of the competitors imitating its lending approach.

Lack of sophisticated IT infrastructure, a threat to safe keeping of sensitive information.

Main threat to others microfinance institutions.

     

5.3 Competitive Analysis

Competitive analysis can be described as the process of recognizing the performance and marketing plan of competitive products in the marketplace. An effective marketing strategy enables organizations to understand more about the competitive environment within which they operate. This enlightens companies to get a clear indication of competitive products, prices, promotion, quality, and service so as to determine areas of competitive advantage and disadvantage (http://www.allbusiness.com/glossaries/competitive-analysis/4965572-1.html).

"Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company’s own position. Understanding industry structure is also essential to effective strategic positioning" (Porter, 2008: pg 80).

Porter (1980) provided an awareness of the organization of the five forces for the industry analysis. These five competitive forces includes: the threats of substitute products or services; the threats of the entry of the new competitors; the intensity of competitive rivalry; the bargaining power of buyers; the bargaining power of suppliers. These forces cooperatively regulate the competitive concentration of a firm with in the industry.

Wheelen & Hunger (2002) also regards the Porter’s five forces for industry analysis however they believe that the relative power of other stakeholders (governments, local communities, trade associations, special interest groups, unions and shareholders) should be a sixth force.

Pearce and Robinson (2005) as well as Johnson and Scholes (2002) revealed that Porter’s approach offers a relaxed and simple model for industry evaluation. Porter’s five forces offer an opportunity for industries to decide whether to enter in a particular market or not and also seen as a very simple tool for strategists to determine the profitability position of a firm.

Threat of New Entrants

With high barriers to entry, there is not a major threat of new entrants in the Ghanaian financial industry. In fact, the capital requirements to enter this industry act as a strong barrier. Another barrier to entry that is considered a "natural" barrier to entry is the high risk nature of this industry, which has, over the years, succeeded in preserving industry profit (Abbibiman Foundation, 2012c).

Threat of Substitute Products

Apart from Abbibiman Foundation, consumers in the financial industry can choose between similar financial services provided by the other i) 28 banks, ii) 18 savings and loans companies, iii) 135 rural banks and iv) 27 financial institutions. However, Abbibiman Foundation is distinct in the operation of its group lending methodology (Abbibiman Foundation, 2012c).

The primary mode of doing business is through its Trust Group Methodology. In line with this methodology, Trust Groups are formed and loans are disbursed through the individual accounts of clients (Abbibiman Foundation, 2012c).

Rivalry among Competing Firms

There is stiff competition between major firms in the industry; especially with the entrance of foreign banks. According to Matutes and Vives (1996) (as cited in Schnitzer, 1999) banks/financial institutions in the financial industry are always competing for deposits. Furthermore, the probability of their failure increases with the degree of rivalry in the industry due to the lower profit margins that these firms can obtain. Moreover, this industry has high entry and exit barriers as well as high fixed costs, which only exacerbates the situation (Abbibiman Foundation, 2012c).

Bargaining Power of Suppliers

Abbibiman Foundation’s customers—those who deposit funds into the organization—are referred to as its major suppliers. Moreover, there has been observed to be a medium power among the suppliers of OISL. Therefore, to attract more funds, Abbibiman Foundation has made attempts at offering higher interest rates and making loan accessibility easier. These have all been acknowledged as important for the continued sustainability of OISL (Abbibiman Foundation, 2012c).

Bargaining Power of Buyers

There is a relatively high bargaining power among the customers (buyers) of OISL. This is mainly because of the existence of a large number of banks and other financial institutions that are operating in the Ghanaian market and providing similar services to OISL. However, OISL has a competitive advantage due to its lending methodology (Abbibiman Foundation, 2012c).

5.4 Industry Analysis

The Ghanaian microfinance industry is made up of 18 Savings and Loans Companies and 135 rural and community banks registered an average assets growth of 30%1 in 2009 compared to 18% a year earlier. Deposit and loan clients for the industry reached approximately 1.6 million and 440,000 respectively. As the Ghanaian economy expands, total deposit clients for the industry is expected to reach the 2 million mark by 2011 and grow further onwards.

Abbibiman Foundation has made a mark on the financial services industry in Ghana since it began operations. After only a few months of operation, Abbibiman Foundation ranked among the top 20 savings and loans in terms of stated capital, total assets, and gross loan portfolio. The decline was primarily due to a slowdown in expansion and a focus on consolidation: A strategy adopted following consistent declining loan quality and a subsequent huge write offs.

The microfinance industry in Ghana thrives on this huge market potential. However, the operations of profit-oriented microfinance institutions are concentrated mostly in the urban areas. Besides, average loan balances for most of these institutions are above US$ 1,000; an indication that SME loans are gaining significance in their loan portfolio mix. On another hand, the downscaling of commercial banks to tap into the huge market potential of microfinance institutions is a wakeup call. Customer retention and growth has become key to the future success of microfinance institutions.

5.5 Marketing Analysis

Most commercial banks have concentrated their activities in the urban areas leaving the rural and the semi-rural (near-urban) areas un-served. Hence demand for banking services has always lagged behind supply and has given an advantage to traditional money lenders and "susu" operators to provide services at astronomical costs to clients.

To meet the unmet demand, the Bank of Ghana promoted the ‘rural banking’ concept to operate banks based on community ownership and management. However, poor management resulting from the inability to attract qualified personnel resulted in poor internal controls and inadequate credit control regimes.

5.5.1 Target Market

Creating financial services and making them available to the informal operatives in Ghana has been very fundamental to the operations of the company and its mission over the past few years. The occupation of company’s target clients includes traders, farmers, agro-food processing firms, schools, salaried workers and churches etc. The company will also focus on developing new markets in the rural and near-urban areas. Preference will mainly be given to women bearing in mind their unequal access to credit and affordable training will be provided to enhance their economic performance.

The targeted clientele and market are Trust Groups which consist of the enterprising poor in urban, near-urban communities and deprived communities as well as farmers in farming communities. There are traders who are categorized as small and medium scale enterprises and petty traders as well as market women and men in the agro value chain. Schools also require both working capital and capital for infrastructure. Salaried workers can save and take loans against their salaries. Churches are also included in the pool that can take loans for infrastructural development and other acquisitions.

5.5.2 Distribution Channels

Abbibiman Foundation continues to offer excellent services to customers using staff who are well trained handling customer complaints and they generally the first point of contact.

Also, the company does not wait for customers to bring deposit all the time but have invested Deposit Mobilization Officers who go round to provide excellent services and take deposits from clients. Mobile vans are dispatched to provide excellent services to customers such as deposit mobilization, withdrawals, disbursement of loans and repayments and opening accounts.

The company has adopted a strategy of deploying staff such as Performance Managers, Relationship Managers, and Direct Sales Officers as sales persons on the field to enhance service delivery to clients.

5.5.3 Strategy

Abbibiman Foundation will make judicious use of the emerging technologies to enhance the delivery of services to its customers.

The use of mobile e-zwich devices for field officers to use in providing and transacting business with clients. This will greatly assist deposit mobilizations and funds transfers.

The introduction of ATMs will allow for checking balances, statements and transferring cash as well as withdrawals.

The use of mobile banking services for clients to check balances, make payments which will be extended to making loan repayments using their mobile phones.

Abbibiman Foundation also hopes to invest more in financial literacy education to teach clients basic financial tips to educate them. Currently RO’s provide financial literacy education during Trust Group meetings. DVDs of these trainings are also played in all the banking halls so that customers receive the training whiles waiting their turn to be served

5.6 Financial Analysis

There are several ways of measuring the performance of financial institutions. The two main methods include the accounting approach and the econometric techniques. The accounting approach mostly focuses on the use of financial ratio analysis for evaluating the performance of financial institutions (Ncube, 2009). Although, ratio analysis has its limitations, it seems to be widely used in measuring the performance of financial institutions. The limitations of ratio analysis have contributed to the development of the econometric techniques that employ several statistically methods (Berger and Humphrey, 1997).

A study by Berger and Humphrey (1997) stresses that the major reason for assessing and evaluating the performance of financial institution is to distinguish between performing institutions and the non-performing. Regulatory bodies that govern financial institutions, especially banks, are very conscious of the liquidity, solvency and general performance of financial institutions. This is to assist regulators to intervene when necessary (Casu et al, 2006).

5.6.1 Financial Ratios Analysis

Financial Ratio Analysis would be used in this analysis because it is useful in assessing high performing financial institutions from non-performing (Samad, 2004). Additionally, financial ratios help to identify and assess the relative and unique strengths and weaknesses among financial institutions. Again, it provides a consistent approach in comparing companies and industries. It enables companies to be judged solely on their performance and not by size or market share. Also, it is easy to calculate, understand and interpret and can unveil certain patterns in certain industries and benchmarking their performances against other companies. Many organizations can derive their overall strategy from the performance revealed by the financial ratio. Although it has its own limitations, it is relatively simple to use in analyzing financial data.

5.6.2 Limitations to Financial Ratio Analysis

Although financial ratio analysis can be very useful in assessing performance, it can also be meaningless if not used appropriately. This means that there several limitations to the use of financial ratio analysis and some of which have highlighted below:

It is difficult to identify a meaningful set of ratio for large companies that operate diverse divisions in different industries.

Comparative analysis of industries with different ages must profits with care because inflation is likely to distort their balance sheet and further distorting.

A fair understanding of the nature of business of the company can greatly help in interpreting financial ratio that affect a business and can decrease the probability of misinterpretation.

Different accounting practices can distort comparisons even within the same company (leasing versus buying equipment, LIFO versus FIFO, etc.).

It is generally difficult to make generalizations about whether a ratio is good or not. This is because a ratio that is good for one industry may be not be good for another.

A company may have some good and some bad ratios, making it difficult to tell if it's a good or weak company.

5.6.3 Performance Ratios

The most common measure of bank performance is profitability. Profitability is measured using the following criteria: i. Return on Assets (ROA) ii. Return on Equity (ROE) iii. Cost-To-Income Ratio

Return on Assets (ROA) = net profit/total assets shows the ability of management to acquire deposits at a reasonable cost and invest them in profitable investments (Ahmed, 2009). This ratio indicates how much net income is generated per £ of assets. A higher ROA indicates a more profitable financial institution.

Figure 1 shows the profitability performance of the Abbibiman Foundation for the period 2008-2012. Profitability is measured in terms of ROA, ROE, and Cost-to-Income (C/I).

Figure 1 below shows the trend in ROA for the period between 2008 and 2012. The ROA initially decreases in 2009 from 0.67% to -0.10% but further decreases to -3.92%. This trend swing upwards to 2.71% and 2.91% for 2011 and 2012 respectively. A higher ROA signifies more profitable the business. The ROA averaged around 0.45% for the period between 2008 and 2012. This implies that for every GHS 100 in assets invested into the business returned GHS 0.45 which is less than 1%.

Figure 1: ROA Trend

ROE is the most important indicator about a company’s profitability and potential growth rate. It measure the amount of Net Income returned as a percentage of equity contributed by shareholder (Shareholder worth). Alternatively, it measures a company’s profitability performance by revealing how much profit a company makes with the investment made by shareholders. Return on Equity (ROE) can be expressed as = net profit after tax/ total equity.

Figure 2 below shows the trend in ROE for the period between 2008 and 2012. The ROE initially drops in 2009 from 2.36% to -0.41% but further decreases to -19.81%. This trend swing upwards to 12.27% and 14.68% for 2011 and 2012 respectively. A higher ROE signifies more profitable the business. The ROE averaged around 1.85% for the period between 2008 and 2012. This implies that for every GHS 100 assets invested into the business returned GHS 1.85 which is close to 2% for the five year period.

Figure 2: ROE Trend

Cost-to-Income Ratio (C/I) is a key financial indicator that measures the income generated per cost. This indicator shows whether it is expensive for a company to produce an item. The lower the C/I ratio indicates that the company is managing cost better than companies with higher ratio. Cost to Income Ratio (C/I) can be expressed as = total cost /total income.

Figure 3 as displayed below indicates that C/I initially increased from 0.97 in 2008 to 0.99 in 2009. The ratio further increases to 1.13 in 2010 and then takes a downward trend to 0.9 in 2011 but again slightly increases to 0.93. The C/I ratio averaged around 0.98 over the five year period from 2008 to 2012. The ratio takes considers credit loss as part of the total cost and it shows that the company is not doing well in terms of managing its cost because on average the company spends about 98% of revenue generated is used to take care of expenses.

Figure 3: Cost-To-Income after Credit loss is deducted

Figure 4 show a slight variation of the Cost to Income Ratio (C/I) displayed above. This indicator shows whether it is expensive for a company to produce an item assuming there was no credit loss. It can be expressed as = Total cost-Credit loss /total income. The evidence shows that on average the company is 10% better off in terms of managing their cost if they put efforts to recover all the outstanding loans. The 2008- 2012 figures are 0.81, 0.90, 1.04, 0.86, 0.88 representing about 20%, 11%, 8%, 4%, and 6% respectively lower than the C/I ratio indicated in figure 3. This implies that credit risk is significant in the performance of Microfinance industries.

Figure 4: Cost-To-Income before Credit loss is deducted

Liquidity performance indicators can be used to measure the performance of financial institutions. Liquidity can be described as the capability of the financial institutions to meet their financial commitments in a timely and effective manner. The ratios used mainly to quantify the liquidity of financial institutions usually includes Net Loans to total asset ratio, Liquid assets to deposit-borrowing ratio, Net loans to deposit and borrowing etc. I will focus on Net Loans to total asset ratio and Net loans to deposit and borrowing for this analysis.

Figure 5 shows the Net Loans to total asset ratio for the period from 2008 to 2012. It measures the percentage of assets that is tied up in loans. A high ratio indicates lower liquidity. Figure 5 a very erratic trend in the liquidity of the company meaning that on average about 63% of the company’s assets is tied up loans.

Figure 5: Net Loans to Total Asset Ratio