The following is part of a blog series spotlighting the perspectives and experiences of CEOs and board members of financial institutions, as well as industry experts, who have participated in CFI’s Africa Board Fellowship program.
The mention of overheated credit markets sends chills up the spine of anyone who lived through the crises in Bosnia, Andhra Pradesh, Morocco, or Nicaragua, where market saturation played a prominent role. While regulators and investors have key responsibilities in avoiding these crises, boards of financial service providers (FSPs) must also steer their organizations carefully when more companies enter the space to compete for the same customers. And since portfolio at risk at 30 days (PAR30) is a lagging indicator in the earlier stages of a credit market cycle—growth and high liquidity mask debt stress for a time—boards have to be more creative about how to understand what is actually happening.
We spoke with two Africa Board Fellowship alumni from Uganda, ECLOF Board Chairman Vincent Kaheeru and UGAFODE Board Member Olive Kabatalya, to capture their insights on governing in a competitive environment. “There are about 2,000 institutions [in Uganda] that could pass for microfinance institutions,” explained Vincent. “It’s quite a complicated market because there are both big and small players. Even the big banks target the smallest savers and borrowers.”
Based on their experience, Vincent and Olive offered other board members the following guidance:
Anticipate Where the Market Is Going
“For any strategic response to be meaningful, the conversation between board and management needs to happen early in the credit market cycle,” warns Olive. “Keep studying market trends in any way possible. Pay attention to the media, newspapers, central bank announcements and other sector players. Financial sector studies like Finscope are very informative. Look for reports from and talk to microfinance associations.”
Meet Your Customers
“Bring the customer closer to you and listen to him or her,” said Vincent. “You can’t serve them generally. It doesn’t work. Client visits were an idea we picked from the Africa Board Fellowship. We [the board] had done them occasionally, but we intensified the number of visits and changed the approach to make the visit more effective. When you visit customers, you understand the context of all that is going on. That helped me and my team.”
Olive added, “We are visiting clients to ensure that we are not just reading performance reports, which do not usually include anything to do with meeting the needs of the client.”
Get Creative with Target Market and Product Differentiation
“We have a situation of multiple borrowing,” explained Vincent. “Many people have three or four loans from different financial service providers. It burdens the clients. But I’m also aware that the target clientele is narrow. There are still many people at the bottom of the ladder who want to borrow. Lenders need to be more creative and develop products to bring more of the unserved ‘into the boat’…
We’re doing studies to be more responsive to the needs of our market. Everyone offers the common products. If we don’t differentiate, we’re the same. We’re looking at products that will appeal to the target market by helping the target market make money…
About half of our portfolio is urban and half is rural. Each carries different risks. In rural areas, we’re looking at agricultural value chains, helping the farmer bridge the gap between harvesting and processing; and [we look at] the market side, so farmers are not stranded with a crop and can fetch a good price. We’re also looking at microinsurance to protect our investment as well as [appeal to] the interest of the client in case of drought.”
Pay Attention to Your Staff
“We’ve had a challenge with our highest performing staff members being poached by bigger and better-paying microfinance organizations,” said Olive. “This has caused us to review staff benefits.”
Ensure Effective Operational Controls
In competitive environments, FSPs face all the risks of rapid growth, including a deterioration of operational controls, without actually growing. As loan officers become more desperate to achieve targets in a competitive space, shortcuts are taken and credit assessment becomes lax. Boards must ensure effective supervision as well as a robust system of checks and balances. “Although growth is what we really want, even as we thirst for growth, we need to be careful that we do not go down with the growth never to be seen again,” said Vincent.
Improve Your Own Capacity to Manage Risk
Olive and Vincent also both emphasized, and have exemplified, the importance of board members continually sharpening their own ability to manage risk. Vincent explained, “Things are changing. What worked yesterday won’t work tomorrow. As a board member, you have to keep reading, keep sharing experiences to stay on the cutting edge.”
CFI is currently recruiting fellows for the next cohort of the Africa Board Fellowship program. If you or someone you know is a board member or executive at an Africa-based MFI or financial service provider, we recommend considering this opportunity.