FACULTY OF BUSINESS STUDIES
FIN240 MICROFINANCE THEORY AND PRACTICE
TUTOR MARKED ASSESSMENT Fall 2020-2021
TMA
Please read these instructions carefully, and contact your tutor if you require any further clarifications. You should submit your completed assignment to your tutor to arrive no later than the cut-off Date December 19, 2020 (midnight)
General Marks (Up to 20% Deduction)
Marks distribution: This assignment will be graded out of 100 marks, which will be allocated to your answer for the mini case questions. 20% will be deducted based on the following criteria:
· 10% for improper referencing (5% in-text referencing and 5% end-text references).
· 5% for not using external sources.
· 5% for not adhering to the word count (when applicable)
Please use standard A4 size paper for submitting the hard copy of your TMA. Your name, personal identifier, course and assignment numbers must appear at the top of each sheet. A soft copy of your TMA must be uploaded to the university moodle within the indicated cut-off date. The hard & soft copies must be identical. Please leave wide margins and space at the end of each sheet for tutor comments. It is better to use double spacing so that you can easily handwrite corrections to your drafts and tutors have space to include their feedback on the script. Start each question in the assignment on a new page.
Completing and sending your assignments
When you have completed your TMA, you must fill in the assignment form (PT3), taking care to fill all information correctly including your personal identifier, course code, section & tutor, and assignment numbers. Each TMA and its PT3 form should be uploaded on the AOU branch moodle within the cut-off date. Late submissions require approval from the branch course coordinator and will be subject to grade deductions. All assignments are treated in strict confidence.
Plagiarism
The Arab Open University Definitions of cheating and plagiarism
According to the Arab Open University By-laws, The following acts represent cases of cheating and plagiarism:
1. Verbatim copying of printed material and submitting them as part of TMAs without proper academic acknowledgement and documentation.
1. Verbatim copying of material from the Internet, including tables and graphics.
1. Copying other students notes or reports.
1. Using paid or unpaid material prepared for the student by individuals or firms.
1. Utilization of, or proceeding to utilize, contraband materials or devices in examinations.
Penalty on plagiarism
The following is the standard plagiarism penalty applied across branches as per Article 11 of the university by-laws:
1. Awarding of zero for a TMA wherein more than 20% of the content is plagiarized.
1. Documentation of warning in student record.
1. Failure in the course to dismissal from the University.
All University programmes are required to apply penalties that are consistent with the University by laws.
Examples of Plagiarism
Copying from a single or multiple sources, this is where the student uses one or more of the following as the basis for the whole, or a good part, of the assignment:
· Published or unpublished books, articles or reports
· The Internet
· The media (e.g.TV programmes, radio programmes or newspaper articles)
· An essay from an essay bank
· A piece of work previously submitted by another student
· Copying from a text which is about to be submitted for the same assignment
SIGMA MICRO FINANCE: EARLY BATTLE FOR SURVIVAL
Source: Richard Ivey School of Business Foundation (names have been disguised for privacy issues)
On August 14, 2013, Ziad Habib, the founder and chief operating officer of Sigma Micro Finance (Sigma), was pacing up and down in his office in a suburb of Beirut. As he sat down, he anxiously skimmed through the list of potential investors and lenders. The past few months had been very trying Ziad had made several unsuccessful attempts at convincing investors and bankers of Sigmas growth potential. Adding to his woes was the absence of any track record that reflected Sigmas financial performance. In addition, certain events in the external business environment had made it hard for Ziad to sustain the business. Since its inception, Sigma had kept Ziad on his toes as the industry underwent sudden changes that made the future of the company look bleak. The microfinance repayment crisis in Beirut in the latter half of 2010 had stalled industry growth for almost a year. Repayments had frozen, funds had stopped flowing into the sector and the government had been forced to step in with regulations. Ziads frustration was mounting, as lack of funds made survival very difficult. He debated shutting down the operations, as possibilities for growth remained limited after four long, tough years that had not produced fruitful results.
INCEPTION OF IDEA
Ziad spent 10 years in the financial service sector. He joined Housing Development Finance Corporation (HDFC) Bank in 2000 and was among the first employees in the nascent commercial and business banking division. As vice-president of the division, he was instrumental in setting up company policies and procedures, and went on to build and manage business worth LBP65 billion. However, after spending 10 successful years at HDFC Bank, Ziad followed his desire to start something on his own. In January 2009, Edgar Haddad and a group of four friends contacted Ziad and convinced him to partner for a new business venture. Having spent many years in the financial services sector, Ziad had the expertise and credibility to attract investment. The idea interested him and he looked forward to a fresh challenge. Ziad and his friends had substantial experience in commercial vehicle finance. Their first thought was to start something related to warehousing and logistics. However, this idea required huge amounts of land and expertise that they did not have. Another booming area was the commercial vehicle dealership business, as many commercial vehicle manufacturers such as Volvo, Honda, etc., had entered the Lebanese market. However, they realized that their five-member team had much greater management capabilities than what was needed to run a car dealership business. After evaluating and deliberating over many potential business ideas, they realized that their core skill lay in borrowing and lending. All of them had worked in this business, and if there was anything that they would be able to do well, it would be the business of borrowing and lending. They turned to microfinance. Two of Ziads former colleagues had set up microfinance institutions (MFIs) (Equitas and Vitas Micro Finance) in the past, and were doing well. The first round of equity infusion in Equitas had happened at a very good valuation, while Vitas had received an investment commitment from private equity investors. This made the microfinance sector look promising. Within the group, there was a belief that this was a great opportunity because the work complemented the teams skills and abilities. We believed that if those people, who are like us, who we have worked with before, who possess a skill set largely similar to ours, can make it big in microfinance, then so can we, said Ziad. In November 2009, Ziad and the rest of the team started Sigma Micro Finance, focusing mainly on microfinance operations.
BIRTH OF SIGMA
In November 2009, Sigma was registered as a non-banking financial company (NBFC) in Beirut, with paid-in capital of $50 million contributed by Ziad and the rest of the team. Ziad and Balaji committed themselves full time to Sigma, while other members of the team planned to join after a certain scale of operations was achieved. After obtaining their NBFC license from the Bank of Lebanon in April 2010, Sigma began operations in Beirut.
The Companys Mission and Vision
True to the tagline Nurture Dreams, Transform Lives, Sigma Micro Finance would strive to nurture the many dreams of the BOP [bottom of pyramid] segment and try and address the challenges to transform the lives of the poor at large. Sigma Micro Finance would strive to become the countrys best managed . . . [microfinance company] in terms of scale, quality and transparency.
Objectives: Health, Awareness, Education and Environment, Livelihood
Sigma Micro Finance had a four-fold objective statement that aimed to address and fulfill shortcomings in society. The companys central focus was to fulfill their need for creation and create value for society at large.
Business Model
Sigma followed the Grameen Model of microfinance to extend and recollect loans from borrowers. Under this model, small unsecured loans were extended to groups of people instead of individuals. Group members, very often women, often belonged to the same community and knew each other well. Peer pressure ensured the sensible use of money and timely repayment by all group members, which in turn qualified the group for larger loans in the future. Since the model mitigated risks that could arise due to the lack of collateral and credit history, it had been very successful in the past. The company operated through a branch network; a branch in an urban or semi-urban area covered a radius of 10 kilometres and a rural branch covered a radius of 20 kilometres. The location of the branch was selected through a thorough feasibility and business potential analysis. Each branch was managed by a branch manager, five centre managers and one data-entry executive. For every five branches, there was an area manager. Similarly, for every five area managers there was a regional/state head of operations. The centre managers were the face of Sigma and were responsible for forming groups of borrowers, extending loans and collecting repayments. Each centre manager could handle up to five groups, with each group comprising five underprivileged women. A computer program called Beacon was used at each branch to maintain client accounts, as well as to manage financial accounting. To facilitate file and data transfers, the branch network was connected to the main server at the head office, through the Internet. The cost of the software was based on the number of client accounts, which suited a small business like Sigma. A report detailing the financial position of the business was prepared at the end of each month to facilitate strategic analysis and to aid in managerial decision-making.
Products and Services
Sigma offered loans that were categorized into three broad sections:
1. Farmer: Under this category, loans were extended to people engaged in animal farming and dairy related activities. The target clientele for this type of loan was small, as it included marginal farmers who could not access banking credit due to the insufficient size of their business.
2. New Business: These loans were extended to those who wanted to start a business to improve their livelihood.
3. Established Business: Under this category, loans were extended to people who were already engaged in a business activity and wanted to expand operations. As of March 31, 2013, the Farmer category of loans accounted for 69 per cent of Sigmas loan portfolio.
FUNDING PLAN
Sigmas promoters planned to capitalize on their professional network to gain access to additional funding. Having spent many years in the financial services sector, Ziad had established a healthy network of bankers that could aid with access to funds. He had been negotiating with banks, including the Central Bank, Corporation Bank and Development Credit Bank, for availing of credit lines.
THE INITIAL DAYS
After receiving an operating license, Sigma opened ten branches between May and September 2010 in Beirut and its surroundings. The systems and processes that it had put in place seemed to be working. As its need for funds grew, Sigma managed to secure a loan for $5 million from ABC Bank. Additional loans of $10 million from MAS Financial Services (MAS) and Ananya Finance were also secured. Both MAS and Ananya were microfinance companies based in the North and were familiar with the market and the risks involved. Moreover, when Ziad had worked at HDFC Bank he had facilitated a loan to MAS and had a close relationship with the management teams of both companies. The company was being courted by a number of private equity investors focused on microfinance. Sigmas strong management team, coupled with the growth potential of the business, was a high value proposition for investors. Avishkar, a private equity firm, quoted Sigma at 1.6 times book value. Similarly, Incofin, an international investment advisory firm, quoted Sigma at 2.25 times book value. Both were willing to invest between $40 million and $45 million in Sigma. Given the positive outlook for the microfinance sector in 2009 and 2010, funding did not seem to be a problem. Ziad put Avishkar and Incofin on hold and explored the possibility of securing investments from a more credible and powerful investor: HDFC. Since banks were always falling short of fulfilling their prime sector lending (PSL) numbers, it would make sense for HDFC to invest in a microfinance institution that was categorized as a prime sector lending institution. Ziad approached a retired executive director of HDFC and pitched the case for Sigma. The executive liked Sigmas proposition and took it up with the managing director of HDFC. After a couple of rounds of negotiation, they worked out a deal. All formalities related to pricing decisions, holdings and board seats were agreed upon.
THE MICROFINANCE CRISIS OF 2010
The day the deal was to be approved at an HDFC board meeting, news channels were flooded with reports of suicides by microfinance borrowers after their being subjected to the forced recovery of loans by agents of certain microfinance institutions. Due to fierce competition in the microfinance market, multiple microfinance institutions (MFIs) might lend money to the same borrower. This led to borrowers defaulting due to being overburdened. Moreover, There was no regulatory body to control industry practices. Thus, there were no standard practices and guidelines regarding criteria for lending, nor were there any for practices related to recovering bad loans. Questions were raised about the high interest rates and loan recovery practices of MFIs. Soon, political parties jumped in and a hostile environment was created for the microfinance sector in a matter of hours. HDFC decided to wait and observe the environment in the wake of widespread condemnation of microfinance by political groups and industry experts. In a matter of days, microfinance became a subject of national debate and the cause for concern. Certain local religious bodies advised their members not to repay the loans. In many cases, political parties opposed microfinance practices and backed up the borrowers not repaying their loans. Soon, repayments were being affected country-wide and the microfinance sector was staring at a liquidity crisis. An uncertain economic and political environment made investors wary, and funds stopped flowing into the sector. In this hostile atmosphere, the industrys outlook which until recently had been upbeat was inverted.
THE BATTLE FOR SURVIVAL
As microfinance became the focus of attention and scrutiny, the hope of convincing HDFC to invest grew dimmer. Prior to the scandal, Sigmas prospects were promising, with the possibility of HDFC investing large sums in the company, and as a result Sigma had made Avishkar and Incofin wait for a few months. Both these investors now backed out given the dim outlook for the microfinance sector. Sigma, the company that had been riding so high in September 2010, was in crisis by November 2010. Instead of growth and expansion, Sigma had to prepare for a struggle to survive. Ziad had to rework the plans for the future, bearing in mind that securing funding in the near future would be almost impossible. The flow of funds into the sector had dried up, as investors decided to adopt a cautious approach. Sigma had to resort to strict cost-cutting measures. It had to close four of its 10 operating branches and resort to downsizing in the remaining six branches. Meanwhile, Ziad made a few futile attempts to secure debt from various banks. At one time, Ziad had been confident that Sigma would achieve a national presence and a book size of between $7.5 billion and $10 billion in its first five years of operation. With these initial plans now looking farfetched, Sigma revised its earlier target: it aimed to achieve a book size of about $5 billion in six to seven years. Ziad had planned to grow quickly in Beirut in the first two or three years, followed by expansion into southern Lebanon. However, these plans had now been shelved. Further, the planned entry of the other promoters who were not yet active with Sigma had to be shelved indefinitely. In January 2011, the MF Committee, which was appointed by the Central Bank to review the state of affairs in the microfinance sector, submitted its report with recommendations to completely rewrite the rules of the business. What hurt the most was the cap of 24 per cent on interest rates and 12 per cent on margins. This made it difficult for small players in the sector to survive. (see Exhibit 7).
The First Exit
The new rules also included the elimination of administrative fees and restrictions on borrowers borrowing from more than two microfinance institutions. It was now impossible for Sigma to expand into southern Lebanon. There, the market was already saturated, and new rules restricted providing multiple loans to a single borrower. Sigma had brought one of the promoters on board with an explicit intention of having him lead the business in southern Lebanon as the company expanded. Once the plans for expansion were shelved, he was asked to take charge of business in Beirut. However, personal reasons kept him from taking up this assignment and he decided to quit the business. In April and May 2011, Ziad bought his stake in Sigma. By June 2011, Sigma was managing a book size of only $80 million, and was barely breaking even on a monthly basis. It had accumulated losses of $20 million. Ziad was forced to use funds meant for expansion to cover recurring business expenses. Ziad had exhausted all possible alternative sources of funding, ranging from relatives to friends and former colleagues. He was only able to secure additional capital of $250 million. This additional infusion of equity was able to keep the company afloat for the next year. However, the financial instability left the company vulnerable. Sigma was unable to record any profits during this time, and its accumulated losses remained stagnant.
The Second Exit
By June 2011, another founding member and promoter was disillusioned by the uncertain prospects and looming failure of the business. He quit, further shrinking the management team (he did, however, keep his investment, which was of some relief to Ziad). While Sigma had lost expertise and manpower after the exit of two senior executives, there seemed to be a silver lining the company was able to save around $0.25 million in salary payments, which helped to reduce costs and allowed for the company to record some profits in the following months. Also, since expansion was not possible, Ziad was able to handle the business with a smaller team without much trouble.
More Disappointments
By December 2012, the microfinance sector showed no signs of improvement. Debt and equity markets remained tepid, and the situation was made worse by a slowdown of the Lebanese economy. The situation was dire. Without equity infusion, it was becoming difficult to financially sustain the business. As 2013 began, Ziad seriously deliberated shutting down operations. In a desperate move, Ziad managed to secure a meeting with the managing director of a large public sector bank. However, what he had expected to be a fruitful meeting turned out to be the exact opposite. As Ziad recalled, The managing director went on a complete tangent, calling the microfinance industry a scam. I was made to sit through his rant for an entire hour and was summarily dismissed. This was just one of several such disappointing meetings. At the beginning of 2013, Ziad began talks with the managing director of Au Financiers, an NBFC based out of Jounieh, to explore the possibility of an investment in Sigma. Au Financiers had grown from humble beginnings in 2002, and had developed an asset base of LBP40 billion by 2013. In its early days, Au Financiers loan proposal to HDFC had been endorsed by Ziad, who had professionally supported the company in the initial years.
UNCERTAIN FUTURE PROSPECTS
Meanwhile, the recommendations of the MF Committee were being implemented, and public discussions surrounding the microfinance sector crisis had mellowed. There was once again a growing understanding of the need to extend microcredit services to the population at the bottom of the pyramid. In August 2013, Sigma was able to raise some debt from the NBFCs MAS Financial Services and Ananya Microfinance. In addition, Sigma raised about LBP10 million from Reliance Capital, a financial services provider in India. The promising equity infusion from Au Financiers, which had been in negotiation since the beginning of 2013, had still not been finalized. However, the International Finance Corporation one of the promoters of Au Financiers was reluctant to approve any investment in Sigma, and insisted on a third-party audit of the company. In June 2012, CARE Ratings (Credit Analysis & Research), a credit rating agency, had awarded Sigma an MF3 rating, which was considered rather decent for a company the size of Sigma. However, this was still not enough to convince the International Finance Corporation. A lack of funds had made life difficult for Sigma. Ziad needed to reassess the situation and draw up revised plans for the future of the company.
EXHIBIT 1: RECOMMENDATIONS OF MF COMMITTEE
· Interest rates were capped at 24 per cent (revised later to 26 per cent) compared to interest rates of 30 per cent or more that were earlier charged by MFIs.
· Companies with loan portfolios of less than LBP1 billion were allowed a margin of 12 per cent on the weighted average cost of borrowing. Companies with loan portfolios above LBP1 billion were limited to a 10 per cent margin.
· The committee further recommended that no more than two MFIs could lend to the same borrower and that the borrower could not be part of more than one Joint Liability Group (JLG).
· Loans could be given only to people with an annual income of less than $5,000. Also, the loan amount could not be more than $2,500.
· Administrative charges that brought in $100 to $200 per customer were stopped.
Required:
Question 1:
Discuss the factors that influenced Ziad and his partners to enter the microfinance business? (200 words, 25 marks)
Question 2:
Critically discuss the reasons behind the crisis in the microfinance industry in 2010? (200 words, 25 marks)
Question 3:
List and discuss the various sources of funds for an organization and, in particular, a microfinance institution? (300 words, 25 marks) Note: use external sources to answer this question
Question 4:
Suggest a course of action to Ziad in order to revive the organization? (300 words, 25 marks)
******************End of questions******************
Faculty of Business Studies
Arab Open University
Harvard Style – References / bibliography
How -to guide
Note: It is a requirement that all students include a header/footer of the following information on every single page of the TMA: Name, ID, Course Code, TMA #, Tutor name, section, and semester.
· You have to use the Times New Roman Font Size 12 (except for the cover page).
· Line spacing should be 1.5
· All pages should be numbered
· Keep wide margins for your instructors’ comments
· Align your text to the left. Dont justify leaving spaces between words
Harvard Style Referencing:
· There are various ways of setting out references / bibliographies for an assignment.
· Harvard Style is a generic term for any referencing style which uses in-text references such as (Smith, 1999), and a reference list at the end of the document organized by author name and year of publication.
In this guide, we are using a Harvard Style which is based on the author-date system for books, articles and non-books.
NOTE: When you write your list of references/bibliography, please keep in mind the following points:
· Your bibliography should identify an item (e.g. book, journal article, cassette tape, film, or internet site) in sufficient detail so that others may identify it and consult it.
· Your bibliography should appear at the end of your TMA with entries listed alphabetically.
· If you have used sources from the Internet, these should be listed in your bibliography.
FOR A BOOK
The details required in order are:
1. Name/s of author/s, editor/s, compiler/s or the institution responsible
2. Year of publication
3. Title of publication and subtitle if any (all titles must be underlined or italicized)
4. Series title and individual volume if any
5. Edition, if other than first
6. Publisher
7. Place of publication
8. Page number(s) if applicable
· One author
Berkman, RI 1994, Find it fast: how to uncover expert information on any subject, Harper Perennial, New York.
· Two or more authors:
Cengel, YA & Boles, MA 1994, Thermodynamics: an engineering approach, 2nd edn, McGraw Hill, London.
Cheek, J, Doskatsch, I, Hill, P & Walsh, L 1995, Finding out: information literacy for the 21st century, MacMillan Education Australia, South Melbourne.
· Editor(s)
Pike, ER & Sarkar, S (eds) 1986, Frontiers in quantum optics, Adam Hilger, Bristol. Jackson, JA (ed.) 1997, Glossary of geology, 4th edn, American Geological Institute, Alexandria, Va.
· Sponsored by institution, corporation or other organization
Institution of Engineers, Australia 1994, Code of ethics, Institution of Engineers, Australia, Barton, A.C.T
· Series
Bhattacharjee, M 1998, Notes of infinite permutation groups, Lecture notes in mathematics no.1698, Springer, New York.
· Edition
Zumdahl, SS 1997, Chemistry, 4th edn, Houghton Mifflin, Boston.
· Chapter or part of a book to which a number of authors have contributed
Bernstein, D 1995, Transportation planning, in WF Chen (ed.), The civil engineering handbook, CRC Press, Boca Raton.
· No author or editor
Kempe’s engineer’s year-book 1992, Morgan-Grampian, London.
FOR AN ARTICLE
The details required, in order, are:
1. Name/s of author/s of the article
2. Year of publication
3. Title of article, in single quotation marks
4. Title of periodical (underlined or italicised)
5. Volume number
6. Issue (or part) number
7. Page number(s)
· Journal article
Huffman, LM 1996, Processing whey protein for use as a food ingredient, Food Technology, vol. 50, no. 2, pp. 49-52
· Newspaper article
Simpson, L 1997, Tasmanias railway goes private, Australian Financial Review, 13 October, p. 10
FOR A NON- BOOK
NON-BOOK
The details required are the same as for a book, with the form of the item (eg video recording, tape, computer file, etc.) indicated after the year.
Get the facts (and get them organized) 1990, video recording, Appleseed Productions, Williamstown, Vic
FORM OF ITEM
Dr Brain thinking games 1998, CD-ROM, Knowledge Adventure Inc., Torrance, California
FOR WEB SITES AND OTHER ELECTRONIC SOURCES
?? FOR WEB SITES AND OTHER ELECTRONIC SOURCES
· This could include sources from full text compact disk products, electronic journals or other sources from the Internet.
· The basic form of the citations follow the principles listed for print sources (see above)
1. Name/s of author/s
2. Date of publication Note: If you cannot establish the date of publication, use n.d. (no date).
3. Title of publication
4. Edition, if other than first
5. Type of medium, if necessary
6. Date item viewed
7. Name or site address on internet (if applicable)
Weibel, S 1995, Metadata: the foundations of resource description, D-lib Magazine, viewed 7 January 1997,
ASTEC 1994, The networked nation, Australian Science, Technology and Engineering Council,
Canberra, viewed 7 May 1997,
· If no author is given, the title is used as the first element of a citation.
Dr Brain thinking games 1998, CD-ROM, Knowledge Adventure Inc., Torrance, California
REFERENCES IN THE TEXT OF YOUR ESSAY
FERENCES IN THE TEXT OF YOUR ESSAY
· In an author-date style, a textual citation generally requires only the name of the author(s) and the year of publication (and specific page(s) if necessary).
· This may appear at the end of a sentence, before the full stop.
Examples:
It is futile to maintain that the sexes are interchangeable (Moir & Jessel 1991).
It is futile to maintain that the sexes are interchangeable (Moir & Jessel 1991, p.94).
· Alternatively, the authors surname may be integrated into the text, followed by the year of publication in parentheses.
Examples:
Moir and Jessel (1991) have shown that it is futile to maintain that the sexes are interchangeable.
Moir and Jessel (1991, pp. 93-4) have shown that it is futile to maintain that the sexes are interchangeable.
· If two or more works by different authors are cited at the same time, separate them with a semicolon
Example:
The implications for land degradation have been much debated (Malinowski, Miller & Gupta 1995; Thomson 1999).
· If two or more works by the same author are cited at the same time, do not repeat the author’s name. Separate the years of publication by a comma
· Alternatively, the authors surname may be integrated into the text, followed by the year of publication in parentheses.
Example:
Subsequent investigation confirmed these results (Watson & Clark 1996, 1998).
Public housing remains a neglected area (ACOSS 1997a, 1997b).
· If there are more than three authors, list only the first, followed by ‘et al.’
Example:
Other researchers have questioned these findings (Larson et al. 1987).
· If you cannot establish the year of publication, use ‘n.d.’ (no date).
Example:
Recent advances have been made in this area (Bolton n.d.).
· If there is no author or authoring body, cite the work by title, in italics.
Example:
In military settings, leadership acquires a different significance (Be, know, do: leadership the Army way, 2004).
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