The products that MIKROFIN provides to its clients are loans divided in four categories:
Fast Loan: This is an individual loan that does not require ownership of a business. The loan amount ranges from BAM 500 – 10,000 (US 370 – 7,380). Repayment terms vary with the size of the loan. For small loans (up to BAM 2,000 or US 1,480), the repayment term is from 1 to 36 months; while for large loans (BAM 2,001 – 10,000 or US 1,480 – 7, 380), the repayment term is from 1 to 60 months. For small loans there are no guarantors required, while for higher loans the guarantors are natural persons and legal entities, as well as pledge. The interest rate for this loan ranges from 18% – 20%.
Loan for Entrepreneurs: This is an individual loan given to persons who have registered or unregistered businesses. The loan amount ranges from BAM 1,500 – 50,000 (US 1,100 – 36,900) for registered businesses and from BAM 1,500 – 10,000 (US 1,100 – 7,380) for unregistered businesses. The repayment terms are the same as the ones for the fast loans. There are no guarantors for loans up to BAM 20,000 (US 14,750) and repayment term up to 18 months, while for higher loans guarantors are natural persons and legal entities, pledge and mortgage. For this kind of loans there is also a grace period. This is up to 6 months for loans from BAM 1,500 – 5,000 (US 1,100 – 3,687), up to 12 months for loans from BAM 5,001 – 20,000 (US 3,688 – 14,750) and up to 18 months for loans from BAM 20,001 – 50,000 (US 14, 751 – 36,900). The interest rate for this loan ranges from 16% – 18%.
Loan for Agriculture: This loan is given to individual farmers and the amount ranges from BAM 1,000 – 50,000 (US 738 – 36,900). The repayment terms are the same as the other loans and there is a grace period of up to 12 months. There are no guarantors for loans up to BAM 10,000 (US 7,375), while for higher loans the guarantors are natural persons and legal entities, pledge and mortgage. The interest rate ranges from 15% to 16%.
Housing Loan: This loan is given to individuals for purchasing improvements for their homes. The loan amount ranges from BAM 500 – 50,000 (US 370 – 36,900) and the repayment terms are the same as the above loans. The grace period for this loan is 6 months for purchase of apartments. There are no guarantors for loans up to BAM 2,000 (US 1,480), while for larger loans the guarantors are natural persons and entities, pledge and mortgage. The interest rate for this loan ranges from 16% – 20%.
These products are clearly financial and make MIKROFIN a purely micro credit institution. In contrast to other MFI’s, whose products include social services not related to loans, MIKROFIN only provides loans to individuals. This limits its scope and vision as an organization and makes it a micro credit only institution.
MIKROFIN, through its network of 33 branch offices, serves clients in the Northeast part of Bosnia Herzegovina, mainly in Republica Srpska. The target clients are low-income individuals who live just above the poverty line. These individuals are active and have or are planning to start their own small businesses. Through the 4 different types of loans presented above, the institution serves small businesses, agriculture and housing. Agricultural loans are very important as about 55% of the country’s population lives in rural areas and agriculture is an important industry. Housing loans are equally important as they improve the quality of life for the borrowers. Through these loans, individuals can purchase apartments, or make improvements (e.g. better hydration system) to their homes. Thus the target clientele for MIKROFIN is very broad and covers individuals with small businesses, farmers and individuals who want to get housing. Microfinance in general has been targeting women because they are mainly the ones encouraged to start new businesses and to support their households. In MIKROFIN’s case however, the percentage of women borrowers is not very high. In 2007, the percentage of women borrowers is 34,30%, down from 55% in 1999 In the future, the institution aims to become a national player, expanding its outreach to low-income clients throughout the country, as opposed to clients living mainly in its Northeast region. In March 2007, the total number of active borrowers was 40, 806, increasing dramatically from the 28,840 borrowers in December 2006. This huge increase in the client base is an indication of the overall growing process of MIKROFIN.
Operating Environment The political environment is very unstable since the country is divided into three distinct ethnic groups. Political turmoil has also been observed between the two main government bodies of the country. Corruption has always been a large problem, increasing bureaucracy and making it hard for MFI’s to operate efficiently.
The regulations and restrictions for Microfinance institutions in Bosnia Herzegovina are obstacles to the efficiency and productivity of MFI’s in the country. The maximum loan size an MFI can give is BAM 50,000 (US 36,900). The laws relating to MFI’s are defined in the Law on Microcredit Organizations, and provide regulations for the organizational structure, capital and reserves, and licensing of the institutions. In the Republica Srpska, a microcredit organization must have at least three natural persons or one corporation as founders and it takes 30 days to register. Operating manuals are required, outlining governance and membership requirements. The minimum capital required is around BAM 5,000 (US 3,240). Moreover, auditing reports are required as well as regular onsite visits by Finance Ministry officials.
The major funding sources are commercial bank loans and donations from organizations like the World Bank. From 2002 until 2006 the composition of loans was as following:
Hypo Banka 10%
RS Development and Employment Fund 9%
The fact that the basic funding sources are commercial loans shows that MIKROFIN has an excellent financial performance and an exceptional credit track record that make it profitable for commercial banks to give loans to this institution. The social mission of the institution is what attracts organizations like the World Bank and USAID to give loans and donations.
Governance Recruiting and training is very efficient due to the large number of training workshops and team building events. In conclusion, this organizational structure has benefited the institution in clear decision-making, efficient operations and good organization of responsibilities.
Portfolio at Risk is very low, currently at 0.33%. In its short history, MIKROFIN’s portfolio at risk has never been above 3.5%, despite its high growth and increasing competition. This is due to good client selection and strict portfolio management procedures.
Loan Loss Provision Expense ratio was 1.08% in the end of 2006. This is not too low since the loan loss reserve ratio has been growing on parallel with the portfolio at risk.
Loan Loss Reserve ratio is currently at 2.3%. This percentage is the highest in the institution’s history and reflects the considerations of higher growth and increasing amount of clients. However, it is still very low which proves the high quality of the portfolio.
The risk coverage ratio is very high at 698.25%. This shows the conservative culture of MIKROFIN and means that it could cover 6 times its portfolio at risk with its loan loss reserves. This is due to the fact that the collaterals and guarantees usually cover more than 100% of the value of the loan.
The write off ratio was at 0.08% in the end of 2006, an extremely low ratio. This represents the excellent portfolio quality of the institution and the rareness of long-term delinquency. Looking at the low portfolio at risk, many would expect the write-off ratio to be very high but that is not the case. All the above portfolio quality indicators show that MIKROFIN is an extremely healthy institution with minimal risk to investors.
The operating expense ratio has been kept under 10% and in 2006 it was 8.47%. This is very low and proves the efficiency of the institution. It can be explained by efficient cost management, fast loan approvals and high productivity of staff and systems.
The Borrowers per Staff ratio is currently at 170, decreasing from 189 in 2006. This is due to 35 new hires in 2006. The ratio is still very high and represents the high productivity of the staff.
The Financial Expense ratio is very low at 4.35% at the end of 2006. This is means that the financial cost of the institution to fund itself is very low.
The Debt/Equity ratio is extremely high at 300.88%. This shows that the institution has easy access to commercial funds, as shown in the funding section above.
The return on assets, at 4.8% is quite low for an institution with so many assets like MKROFIN. This means that the institution does not use its assets very efficiently and could do better in that aspect. The return on equity is at 17.45%, which shows what the institutions profitability would be if it was a for-profit entity.
Finally, the portfolio yield at 19.9% compared to its average portfolio APR of 19.4% shows that the decreasing interest rates have not provided a significant yield. It does not show a bad portfolio quality since portfolio at risk, write-off ratio and loan loss provision expense ratio have all been excellent.
MIKROFIN is a microcredit institution that is leading the microfinance sector in Bosnia Herzegovina. Its constant product innovations, efficient procedures and operations and low interest rates, accompanied with its exceptional financial performance make it a unique institution to invest in. In the future, increasing competition from commercial banks entering the microfinance industry will pressure the institution to lower interest rates even more. However, MIKROFIN will still remain an industry leader due to its exceptional performance indicators and portfolio quality.
Bibliography MIKROFIN website, http://www.mikrofin.com/mission.html
Benefits of Activity – Based Costing, ABC
Activity Based Costing (ABC) is an accounting method that assigns costs to activities according to their use of resources, rather than products or services. This enables resources and other related costs to be more accurately attributed to the products and the services which they use. It does not change or eliminate any costs, in the other way; it provides detailed information on how costs are consumed. The main benefits of Activity Based Costing are providing understanding into the fastest growing and least visible element of cost-overhead. We can also improve profitability by monitoring total life-cycle cost and performance so that we can improve the effectiveness of budgeting by identifying the cost of different service levels. In addition, ABC costing does encourage continuous improvement and total quality control because control and planning are directed at the process level and it links the corporate strategy to operational decision making. By using ABC costing, we can also eliminate waste by providing visibility of non-value added activities. Besides that, ABC costing help to improve make or buy, estimating, and pricing decisions which based on product cost that reflects the manufacturing process. Although there are many benefits of ABC costing, there are also a few limitations. (J. Antos)
Limitations of Activity – based Costing
There are a few limitation of using ABC costing. First, we may consuming more time to collect data for example data concerning numerous activity, collecting data, checking data, and entering them into the system. Besides that, once implemented, the activity-based coting is costly to maintain for example the cost of buying, implementing, and maintaining activity-based system. This system may make waste visible which some executives and managers do not want their boss to see because it may be difficult to set up and establish, particularly if that organization is using more traditional accounting method. Furthermore, it can be time consuming if all activities are to be costed and also it may provide too much details which obscuring the bigger picture. Activity-based costing data can easily be misunderstood so it must be used carefully especially when it is used for decision making. Before making any significant decisions using activity-based costing data, managers must recognize the costs which are really relevant for the decision at hand. (Ray H. Garrison, 2008)
Value-Added versus Non-value-Added Activities Every organization requires information to allocate resources, monitor the actions taken, set priority and make decisions. Activity-base costing provides the accurate cost information by allocating overhead costs. However, activity-based management is focusing on enhance the use of ABC from product costing to a comprehensive management tool that concentrate on decreasing the costs and concurrently improving processes and decision making. After that, a refinement of ABC used in activity based management is the classification of activities to value-added and non-value-added. A non-value-added activity can de defined as the production or service related activities that can be eliminated with no deterioration of product attributes ( Miller, 1992). Non-value-added activities are activities that simply add cost to or increase the time spent on a product without increasing the market value of the products. Activities such as the storage of inventory, building maintenance; inspection and inventory control are examples of non-value-added activities in manufacturing companies. Examples of non-value-added activities in service industry consist of bookkeeping, billing, traveling, advertising, cleaning, taking appointment, reception and etcetera. According to David and Robert (1995), making non-value-added activities visible is one of the advantage of activity based management but it is the most difficult to achieve.
Value-added activities are activities that increase the worth or market value of a product or service to customers. For instance, activities like engineering design, machining, packaging, performing surgery, providing legal research for legal services and etcetera are categorized as value-added activities. When people understand and accept the reasons why an activity is classified as non-value added or value added then the clarity and understanding between value-added and non-value-added activities are achieved (Miller,1996).
Cost Hierarchy In Activity-Based Costing A cost hierarchy classifies costs into different cost pools on the basis of different type of cost driver or cost allocation bases or different degrees of difficulty in identifying cause-and-effect or benefits-received relationships(Horngren et al. p 142, 1999). There are four levels to identify cost allocation bases or cost drivers, the classification is shown as follow:
Unit-level activities: these activities can be defined as resources sacrificed on activities performed on each individual unit of a product or service (Horngren et al, 1999). For instance, manufacturing operating costs such as energy and repair which have relationship with the activity of running a machine are unit-level activities.
Batch-level activities: Activities performed for a group of product units or services rather than to each individual unit of product or service (Horngren et al, 1999). Examples of batch-level cost in manufacturing are setup cost and procurement costs. Then, the number of setups or setup time is examples of cost drivers in batch-level activities.
Product-sustaining activities: These activities are defined as resources sacrificed on activities that performed in support of an entire product line, but not performed every time when a new batch or unit of products is produced (Horngren et al.,1999). Design costs and engineering costs are examples of product-sustaining activities in manufacturing industry.
Facility-level activities: Activities required to support or sustain the organization as a whole and cannot be traced to individual product (Horngren et al, 1999). The example of this activity includes home office general administration costs.
In fact, the successful classification of these activities provide managers a structured way of thinking about the relationships between activities and the resources they consume.
Activity Based Costing for Service Industries and Small Business It is widely known that activity based costing has been used by most of the large corporation such as manufacturers. In fact, activity based costing has been widely implemented by small business and service industries such as banks, airlines, hotels, hospitals, insurance companies, financial services firms, accounting firm, railroads and etcetera. However, activity based costing has seemed to be more successful when implemented in large corporation rather than using in small business. According to Henrick noted, he mentioned that companies with not so much products and markets are not seemed to get as much advantages from basing costs on activities as companies operating with diverse products, service lines, channels and customers.
Actually the primary objective of activity based costing in small industry is no different with manufacturing company. The objective is to figure out the key activities that generate costs and to record how many of those activities are performed for each service provided. Then, managers are able to generate data to provide better budget and concurrently the expenses of a company are known better. The prevalent approach to identify activities, activity cost pools, and cost drivers is the same for manufacturing company and service companies. In addition, the classifying of activities as value-added and non-value added, and the effort to decrease or eliminate non-value added activities are used in service industries too. Since service industries and manufacturer companies are using the same objective of activity based costing, then why sometimes it is difficult in adopting activity-based costing in service industries? The difficulty of implementing activity-based costing in service companies is that a larger proportion of overhead costs are company-wide costs that cannot be directly traced to specific services provided by the company. (Weygant.)
Besides that, many of the expenses in service industries are caused by product (services) such as savings account and home mortgage. However, many expenses for service functions are caused by demands by individual customers rather than service demands. Thus, customer behavior which is the feature distinguishing these systems from activity based costing as used in manufacturing companies has to be taken into account when implementing ABC system in services industries( Cooper and Kaplan, p. 467, 1991). Service companies offer differentiate services in order to satisfy customer needs. Each service, with its characteristics, makes different demands on the organization’s resources. Thus, service companies have to improve their service quality and the variety in service line. Concurrently, service companies have to focus on customer economics far more than manufacturing companies. The cost of marketing, selling, delivery and serving of the products might be customer specific in manufacturing companies. In contrast, for service companies, even the basic operating costs of standard service are determined by customer behavior (Cooper and Kaplan, pp234-235, 1998). Therefore, a fine ABC system for Service Company will provide the information for the measurement of costs and profitability at the customer segment level and market level.
Since small business and large companies are using the same objective of activity based costing, then why does small business get less benefit from using activity based costing compare with large corporation? In fact, lack of knowledge and technical people in adopting the activity based costing system in small business may lead to unsuccessful of using this system in small business. Moreover, activity based costing software is expensive. Most ABC practitioners find that special-purpose ABC software is required to make the task manageable. At $6,000 and up for one package sold by ABC Technologies, software can add significantly to outlays for this type of accounting technique ( Mark Henricks, 1999). So, small business considers using ABC is wasting of money due to not so much profits and products differentiation for their products. Thus, they omit using ABC.
Developing Of New Approach to ABC Activity-based Costing system used in large corporation and service industries for the current grouping of costs and analysis of profitability of product (service) tend to be complex, costly and hard to adjust to quickly changing business environment. For example, ABC system used in several years ago in large financial service firm required seven hundred employees at more than one hundred facilities to submit monthly survey of their time. Thus the company employed 14 full time people just to collect and process the data and concurrently prepare management reports which took more than thirty days to prepare (Kaplan