microfinance institutional rating · 2017-01-30 · fina trust mfb nigeria / june 2016 microfinance...

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RATING GRADE PERSPECTIVE

Stable

MICROFINANCE INSTITUTIONAL RATING

FINA TRUST MFB Nigeria / June 2016

ANALYST

Maritza Rodriguez

[email protected]

[email protected]

www.microrate.com 2

FINA TRUST MFB Nigeria / June 2016 Microfinance Institucional Rating

CONTENT

Microfinance Environment 5

Governance and Management 6

Organization 7

Credit Operations 8

Porfolio Quality 9

Financial Profile 11

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1 See Annex I. 2 The rating is valid up to one year after the issue of the draft report. MicroRate

reserves the right to modify the rating at any time due to changes that may

occur. 3 See Annex 1.

FINA TRUST MFB

FINA TRUST MFB is a for-profit, regulated microfinance insti-

tution (MFI). It began operations in 2009 and currently oper-

ates under a state license in Lagos with 3 offices. As of De-

cember 2015, FINA TRUST had 5,210 active borrowers with

an outstanding portfolio of US$ 4 million.

The bank originally offered Small and Medium Enterprise

(SME) Loans with individual methodology. In 2015 the institu-

tion focused strongly on village banking methodology, chang-

ing drastically the average loan size and increasing substan-

tially the number of borrowers. Deposits from the public total

US$3.9 million.

RATING RATIONALE

FINA TRUST MFB is growing rapidly with excellent govern-

ance, but in need of more specialization in microfinance

operations. It has a clear strategy of moving from Small

Business lending to microfinance. The diverse products and

credit methodology create a path to serve the clients while

growing their businesses. The methodology for Small and

Medium (SME) loans is well adapted to the context. However,

the microcredit (individual and group lending), is still overly

complex for this market segment. It creates high Operating

Expenses and is likely to result in high arrears.

To achieve healthy growth, the organization needs to

strengthen staff at all levels with more specialization in mi-

crocredit. Otherwise ambitious growth could jeopardize the

Bank’s financial results.

Financially, FINA TRUST MFB’s solvency, liquidity and market

risk management are good to excellent. Apart from equity,

savings mobilization is the single-most important source of

funding, however concentration in a few big savers poses a

moderate risk. Profitability is tight and could become tighter

if the Bank cannot reduce relatively high operating expenses.

Ambitious growth of the microcredit portfolio could threaten

profitability further unless weaknesses in staff training and

lending methodology are dealt with first.

HIGHLIGHTS

Strengths

» Excellent governance

» Diversity of credit and savings products

» Strong share of deposits

Risk Factors

» Cumbersome methodology for microloans

» Need of improving staff training and knowledge in microcredit

» Tight profitability

a

RATING GRADE PERSPECTIVE1

Stable

Number of ratings

Rating Validity date2

Financial Profile3

Date of Visit

Date of Financial Information

1

June-17

May- 16

Dec- 15

MICROFINANCE INSTITUTIONAL RATINGS

FINATRUST

MAIN PERFORMANCE INDICATORS

Dec-13 Dec-14 Dec-15

Gross Loan Portfolio

(US$000)$3,745 $3,261 $4,037

Number of Borrowers n/a 345 5,210

Total savings (US$000) $4,548 $5,063 $3,864

Number of Savers 883 1,229 9,402

Average loan n/a $9,453 $775

Portfolio at Risk n/a 6.4% 7.5%

Write-offs 0.0% 0.0% 0.0%

Leverage 5.6 5.5 4.2

ROE* 8.8% 2.2% -4.9%

* Adjusted

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GENERAL SUMMARY

FINA TRUST MFB – Nigeria

» Portfolio (US$000): US$4,037

» Borrowers: 5,210

» Number of offices: 3

» Number of states served in the country: 1 out of 36.

» Credit Methodology: Individual and village banking

» Number of financial products: 6

Indicators Dec-15 Quartile* 1st Quartile Average

Adjusted ROE -4.9% 4to 35.4% 39.8%

Leverage 4.2 4to 2.3 3.8

Portfolio at Risk 7.5% 3ero 0.5% 1.3%

Operating Expense Ratio 32.1% 4to 21.5% 26.5%

Number of borrowers per staff 57 4to 167 153

Operating Margin 3.0% 2do 13.4% 10.8%

Gross Loan Portfolio (US$000)

Number of Borrowers

Average Loan Balance (per borrower)

* The quartiles given show which quartile the MFI is in for a particular indicator.

MicroRate- Nigerian MFIsFINA TRUST MFB

Dec-15 Average

5,210

$775

$70,608

251,434

$351

$4,037

5.6%

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

7.6%

7.8%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

Dec-14 Dec-15

%US$000

Gross Loan Portfolio

(US$000)

Portfolio at Risk

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MICROFINANCE ENVIRONMENT AND POSITIONING

Nigeria is considered a lower-middle income country. The

economy relies mainly on oil exports that provide 80% of the

country’s export revenue. The low price of oil has affected

the economy. Inflation and accelerating devaluation are

challenges. Nigeria has the world's seventh-largest natural

gas reserves but mismanagement, corruption, and political

problems significantly slow the country's development. Insta-

bility is an issue in the country, especially in the north where

religious conflicts lead to frequent breakdowns in law and

order and have spawned the Boko Haram insurgency. How-

ever, FINA TRUST does not operate in any of the affected

areas.

In May 2015, a new President was elected on a platform of

fighting corruption and increasing economic inclusion. The

dramatic decline in oil prices however, is cutting tax revenue

and thereby limits the scope of government action. One

symptom of the oil price decline is a growing shortage of

dollars, which is leading to restrictions on foreign currency

transfers.

The financial sector is still underdeveloped. Only 36% of the

adult population is banked4. It suggests that there are oppor-

tunities to extend financial services to the unbanked and

under-banked low income segments in the country.

There is still huge unmet demand in the microfinance sector

of Nigeria. The sector is dominated by a few large NGOs and

Microfinance banks. The sector is mostly financed by inter-

national investors.

The microfinance regulatory environment was adjusted in

April 2011, defining three categories of microfinance banks:

4 Enhancing Financial Innovation and Access to Financial Ser-

vices in Nigeria 2014 survey.

(i) Unit MFBs which can operate branches in one unique location of a state, (ii) State MFBs, in all parts of one State;

(iii) National MFBs authorized to operate in all 36 States.

Supervisory bodies are still understaffed to effectively super-

vise the large number of MFBs (nearly 900) and MFIs.

There are three Nigerian credit bureaus, but they still have

challenges to develop microfinance data. Over-indebtedness

is not yet an important issue in Nigeria, but increasing.

FINA TRUST is a small scale player in Lagos, but has a diver-

sified offer covering different niches (SME and microcredit).

Traditionally, its main focus was on the small and medium

enterprise (SME) market. This niche is underserved by tradi-

tional Banks and it is not served by MFIs. In this context,

FINA TRUST is well positioned, providing faster service than

its competitors.

Since 2015, FINA TRUST has increasingly focused on provid-

ing group-lending microcredit within its product mix. This

lower niche of the microcredit market in Nigeria is vast and

still largely underserved. While FINA TRUST has a clear vision

to reach it, the established microfinance institutions, that

have more specialized group lending methodologies, will be

strong competitors in this niche. A relatively cumbersome

credit methodology, stricter credit conditions and higher

financial and operating expenses of FINA TRUST are likely to

affect the competition with the big MFIs.

On the other hand, FINA TRUST has an important portfolio

with individual microcredit methodology. This offers a huge

opportunity, since the niche of group lending is maturing and

the large established competitors are not serving it yet.

In general, to be competitive FINA TRUST needs a more

specialized microloans methodology. On the other hand,

savings mobilization, which accounts for 80% of funding

provides competitive advantage.

Country Profile Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Annual Inflation 10.3% 12.0% 7.9% 7.9% 9.6%

Annual Devaluation 5.0% -0.6% 0.0% 7.9% 16.1%

End of Period Official Exchange Rate / US$ 158.3 157.3 157.3 169.7 197.0

Deposit Rate (Year Average) 6.8% 9.2% 8.0% 9.5% 6.9%

GDP Annual Nominal Growth 4.9% 4.3% 5.4% 6.3% 3.0%

Source: International Finance Statistics Unless Noted Differently

» Huge potential market

» Microfinance regulation and supervision are strengthening, but remain insufficient

» No developed credit bureaus for the micro-finance sector

» Strong positioning of FINA TRUST in SME and entering the microcredit niche with challenges

www.microrate.com 6


GOVERNANCE AND MANAGEMENT

FINA TRUST began operations in late 2009. It has a state (as

opposed to a national) license to operate as a microfinance

bank. Its vision aims to serve the microfinance sector on a

long-term basis.

The MFB is completely owned by Nigerian shareholders, four

of whom are members of the board. Three of the board

members are independent, which follows best practices of

governance.

Shareholders Structure

Board members are Nigerian professionals with significant

board experience. Their backgrounds range from business

and banking to engineering. There is still a lack of micro-

finance background, but this is offset by a strong culture of

learning. So far, all earnings were retained in the company.

No decision has been made for the period 2015.

The board meets quarterly but calls additional meetings as

needed and it receives frequently information about the

bank’s performance. The board is well structured and good

rules exist to ensure checks and balances and to avoid con-

flicts of interest. There are four board sub committees, one

of them Internal Audit. Additionally, the board gets infor-

mation from the Risk Department about overall risks. The

President of the board is an experienced accountant with

high reputation in the country.

A board member himself, the Managing Director is an expe-

rienced banking professional. He is the main shareholder

and he is supported by a stable and committed top man-

agement team. All of them are experienced professionals

within their field. However, more specialization in microcredit

is needed, in order to face the challenges of the context and

to improve the credit methodology.

The business plan is consistent. They expect to open two

branches yearly until 2020, mainly in areas with low compe-

tition. Priority is given to human resource management and

technology to provide a solid foundation for institutional

growth. Specifically, the bank intends to be one of the top 3

in staff compensation in the microfinance industry

The board members are willing to increase the equity in the

next 5 years. The institution is successfully mobilizing depos-

its and now they need to start building relationships with

international investors in order to diversify funding and to

further reduce financial expenses.

Initially, FINA TRUST was focused on traditional individual

lending for SMEs. However since late 2014, priority has

shifted towards group lending to microentrepreneurs, which

is more consistent with the company’s mission and vision.

The bank aims to gain a 30-40% share of microloans in the

total portfolio. In MicroRate’s opinion the institution needs to

strengthen its credit methodology and to better train staff

before growing more in that niche. Without a strengthened

methodology and well-trained staff, the quality of the micro-

credit portfolio could deteriorate rapidly.

Shareholders Participation

Investor 1 65.0%

Stecam Nigeria Ltd Engineering 25.0%

Other 3 investors 10.0%

Total 100.0%

Vision “To be the leading Microfinance Bank in Nigeria.”

Mission “To Set new standard in Microfinance Banking by im-

proving economically active individual and entrepreneur

through excellence services and innovative product

delivered by skilled workforce.”

» Excellent governance

» Clear strategy of moving to microcredit

» Experienced top management, but in need of more microcredit specialization

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ORGANIZATION

FINA TRUST is a young institution, with stable staff. The in-

ternal control is heavy and the information system is ac-

ceptable.

The bank has the practice of recruiting experienced staff

from banks and microfinance institutions. This creates a risk

of weak immersion in the culture of the institution. The initial

training for Loan Officers is too short (2 weeks) and supervi-

sion is not efficient.

Organizational Profile

Internal and external training are planned annually. However,

more training and close supervision is needed to strengthen

the staff in branches. The bank has not yet reached a suffi-

ciently high level of standardization of credit operations and

internal controls are too weak to control this problem.

Efficiency and Productivity

The operating efficiency is low. The Operating Expense ratio

is high in comparison with Nigerian MFIs. Some factors that

affect this ratio are the small scale, low productivity and the

expenses of taking deposits. However, in MicroRate’s opinion

the main factor is the heavy methodology and cumbersome

internal controls. These inefficiencies limit the capacity to

compete with big MFIs.

The staff productivity is affected negatively by the policy of

forming small groups for the village banking product. FINA

TRUST requires from 5 to 10 members whereas leading MFIs

require from 10 to 30 members.

The MFI motivates staff with monthly, quarterly and annually

bonuses. These take into account qualitative and quantita-

tive factors. However, the monthly bonus does not follow

best practices to combine the portfolio growth and portfolio

quality. This may affect negatively the bank indicators.

Internal Control

FINA TRUST has a solid structure of internal control but it is

too heavy for a MFI. As an example, 100% of group lending

clients are visited by the Loan Officer, Supervisor and Verifi-

cation Officer.

The internal audit’s reports show good knowledge of the

microfinance sector. A new Manager is trying to re-organize

the team’s tasks. Internal auditors do mostly deskwork and

the supervisors are not monitored by them in the field. This

affects the standardization of the group methodology and

weakens the internal controls.

FINA TRUST has a risk department, which is not commonly

seen in small MFIs. This department is in charge of evaluat-

ing 100% of the loans. This centralization may not work while

growing the portfolio and adds expenses which are too high

for microloans. This office also evaluates the overall risks of

the institution using a simple system.

Information System

The institution has an acceptable information system re-

quired to manage the current operations. It includes most of

the banking operations and is flexible to create new prod-

ucts. However, MicroRate observed that there is need for the

bank to adequately equip the staff with important infor-

mation on portfolio and portfolio quality and other aspects of

the bank’s business.

The system BANK ONE is provided by a foreign company

since 2012. It is used by approximately 100 MFB in Nigeria.

It is a web-based banking application with backups in the

cloud.

FINA TRUST is actively looking for electronic solutions and is

convinced that the technology has to support the bank’s

operations. For example a phone application allows clients to

make several operations online. Additionally, the bank works

with Mastercard debit cards. Both achievements are com-

mendable, considering the small scale of the bank.

Dec-13 Dec-14 Dec-15

Number of branches 1 2 3

Total Staff 34 45 92

Number of loan officers 12 13 49

Staff turnover n/a n/a n/a

Dec-13 Dec-14 Dec-15MicroRate

Nigeria

Operating Expense /

Average Gross Portfolio33.1% 29.5% 32.1% 26.5%

Borrowers/ Staff n/a 8 57 153

» Stable staff, but more training is needed

» Low efficiency and productivity

» Solid structure of internal control, but not yet efficient

» Acceptable information system

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CREDIT OPERATIONS

In a strategic shift, FINA TRUST dramatically changed the

portfolio composition in 2015. After focusing exclusively on

SME in the past, the institution introduced a village banking

product in 2015. In only one year, average loan size de-

creased from US$ 9,453 to US $775 and the number of

borrowers rose from 345 to 5,210. All loans continue to be

very short term with an average maturity of 3 months.

As a result, the portfolio grew by 24% in US$ terms and by

44% in local currency5. SME loans still account for nearly

70% of the outstanding loan portfolio, but at the end of

2015, 94% of borrowers were microentrepreneurs.

Graph 1: Portfolio Growth in Local Currency and Foreign

Currency

5 The US$ numbers for 2015 are somewhat distorted by the rapid devaluation of the Naira

(16%).

In MicroRate’s experience, the transition from small-business

lending to microcredit tends to be difficult for financial insti-

tutions. This is particularly the case if this transition has

occurred abruptly, as in FINA TRUST. It is then no surprise

that the institution still struggles to find a firm footing in

microlending. Despite considerable attention to staff train-

ing, more needs to be done to give loan officers a sufficiently

firm grounding in the microcredit methodology.

Product Mix as of December 2015

Loan officers are specialized by credit product. SME loans,

FINA TRUST’s traditional product, show good methodology in

terms of qualitative factors. However, cash analysis could be

improved.

For microloans to individuals, the bank applies the same

methodology as for SME loans. This is inefficient and wher-

ever MicroRate has seen it applied it produces poor results.

Microentrepreneurs usually cannot comply with banking

formalities and in any event the cost of doing so would be

disproportionally high for loans of such a small size.

Important inconsistencies in the cash analysis confirm that

the approval process for individual loans in general, is not

efficient. Best practices suggest having participatory credit

Company Profile Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Gross Loan Portfolio (US$000) $2,385 $2,774 $3,745 $3,261 $4,037

Annual Change in Gross Loans 193.2% 16.3% 35.0% -12.9% 23.8%

Number of Borrowers n/a n/a n/a 345 5,210

Annual Change in Number of Borrowers n/a n/a n/a n/a 1410.1%

Number of Loans Outstanding n/a n/a n/a 345 5,210

Total savings (US$000) $2,423 $3,183 $4,548 $5,063 $3,864

Annual Change in savings n/a 31.4% 42.9% 11.3% -23.7%

Average Loan Balance (per borrower)- US$ n/a n/a n/a $9,453 $775

Portfolio at Risk / Gross Loan Portfolio n/a n/a n/a 6.4% 7.5%

Portfolio Yield 73.3% 55.5% 54.1% 48.5% 47.5%

15.6%

35.0%

-6.0%

43.7%

16.3%

35.0%

-12.9%

23.8%

-20%

-10%

0%

10%

20%

30%

40%

50%

Dec-12 Dec-13 Dec-14 Dec-15

Local Currency Foreign Currency

Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec-15

Small Business

Loans74.0% 69.2% 45.8% 3.0% $15,405 $18,149

Village Banking

Loans1.4% 16.3% 18.6% 93.7% $706 $134

Microloans to

individuals22.1% 13.7% 26.7% 2.4% $7,896 $4,396

Consumer Loans 0.9% 0.2% 1.4% 0.1% $5,667 $1,527

Other Loans 1.6% 0.6% 7.5% 0.8% $2,070 $610

Total 100% 100% 100% 100% $9,530 $775

Portfolio Clients Average loanProduct

» Important level of growth

» Diversification by amounts and products

» Heavy microcredit methodology

» Moderate portfolio quality with negative trend

» Relatively low provisions coverage

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committees (with loan officers present). Leading MFIs show

that participatory credit committees are the best way to learn

for the credit staff.

In general, for individual methodology, as in its small busi-

ness lending, the bank is relying strongly on collateral (cash,

two guarantors, signed checks from clients and guarantors;

assets, mortgages, etc). As loan sizes decreases, formal

collateral tends to be more cumbersome to administer and

less effective. The key to good results in individual micro-

credit is an effective cash flow analysis that accurately

measures the borrowers’ repayment capacity. FINA TRUST

needs to redouble its efforts to teach loan officers how to

master this skill.

It is good to see that individual loans smaller than US$ 5006

(called micro-individual) have an acceptably defined meth-

odology. However, the methodology is not well implemented

by the loan officers nor is it well checked during loan approv-

al.

Most of the growth has occurred in the group-lending portfo-

lio (with village banking methodology) and the MFI expects

this growth to accelerate further. The groups are formed by

5-10 members. Leading MFIs using village banking method-

ology find that larger groups (up to 30 members) allow the

same number of loan officers to attend to two or three times

the number of clients and that they are more effective. Mi-

croRate also observed various breaches of best village bank-

ing practice. Closer supervision of all lending practices and

improved and more intensive pre-loan training would remedy

these weaknesses.

FINA TRUST’s group lending methodology makes sure that

information is reliable by visiting all the homes and busi-

nesses of all village banking clients. This is another case

where a practice that is standard in SME lending is overly

cumbersome and certainly too expensive to be applied in

microcredit. Best practice in microcredit suggests to visit a

random sample of clients.

Group Lending US$ 250

Cash collateral for group lending (10% up front and approxi-

mately US$ 1 weekly) is higher than is usual in the Nigerian

market and it is used as group liability. Big Nigerian competi-

tors use it as personal liability. Since the market is used to it

for many years, it can affect negatively the competition.

Furthermore, savings are deposited in an account that is

6 Included in the group lending portfolio. No break down exists.

owned jointly by all group, which can become a high reputa-

tional risk.

FINA TRUST has achieved moderate compliance of Client

Protection Principles. The transparency, privacy of client

data, the risk of over indebtedness and respectful treatment

of clients are well managed. However, the effective cost of

borrowing from FINA TRUST is high. High cash collateral

requirements (20%) contribute to this cost. In a market

where demand for credit far exceeds supply these practices

merely slow down growth. But if competition from other MFIs

accelerates – as it is bound to – FINA TRUST could find itself

at a serious disadvantage if it has not by then managed to

bring its costs and the prices it charges down to competitive

levels. Finally, there is opportunity to implement a complaint

resolution system. Those challenges are understandable for

a small MFI.

Client Protection Principles

Portfolio Quality

FINA TRUST shows moderate portfolio quality with relatively

low (for a microfinance institution) provision coverage. How-

ever, there are early signs that weaknesses in the micro-

credit methodology are beginning to affect portfolio quality.

Portfolio Quality

Because the MFI does not have the practice of writing off

loans, the PAR is affected by old loans with more than 180

days (87% of the PAR30). If those loans were written off,

PAR30 would be 1%.

APR* EIR**

Interest 72.4% 105.2%

Fees 23.6% 53.5%

Mandatory Savings 25.3% 72.8%

Total 121.3% 231.5%

* Annual Percentage Rate.

** Effective Interest Rate. It is an interest rate with an annual compound

interest. Both include interest, fees and savings.

Dec-15

Appropiate product design and delivery Good

Prevention of over-Indebtedness. Good

Transparency Good

Responsible pricing Poor

Fair and respectful treatment of clients. Good

Privacy of client data Good

Mechanisms for complaint resolution Fair


Nigeria

Portfolio at Risk / Gross

Loan Portfolion/a 6.4% 7.5% 1.3%

Write-offs / Gross loan

portfolio0.0% 0.0% 0.0% 2.1%

Loan loss reserves /

Portfolio at Riskn/a 107.8% 70.3% 156.8%

*Balance of Loans w ith arrears >30 days plus refinanced loans.

www.microrate.com 10


PAR by Products

The portfolio at risk of group lending of 1.7%, at first sight

seems good, since the expected average in the sector is 3%.

However, the institution is measuring arrears only at the

group level. This figure will not show arrears by individual

group members, which have been covered by the group or by

the bank paying itself from the Group’s savings account.

Measuring arrears at the level of group members would help

the institution to evaluate the risk of deterioration of this

product. Yet the aging portfolio analysis suggests that the

group savings are being used to offset loans from defaulters.

Best practices suggest using the cash collateral only at the

end of the cycle and only after all other ways of collecting

arrears have been exhausted. The large difference between

PAR of 30 days or less (12%) and loans affected by arrears

of more than 30 days (1.7%) suggests that group members

have to make considerable sacrifices to cover arrears of their

delinquent colleagues before these exceed 30 days.

The 12% arrears level is significant, because it means that

up to 4 repayments have been missed before the delinquent

amount was somehow covered by the village bank before it

reached the 30-day mark. Also, relying heavily on other group

members and on their savings undermines the village bank-

ing methodology as creditworthy members begin to leave. In

that sense a large difference between a high PAR of less

than 30 days and low PAR above 30 days is a leading indica-

tor of portfolio trouble to come.

The provisions coverage of PAR30 was reduced in 2015. The

PAR increased more than the provision expenses of the

period. The coverage seems relatively low for a MFI. Howev-

er, since the SME loans are well secured with formal collat-

eral a lower level of provision coverage is acceptable.

Loans are not restructured. Collection procedures are in line

with best practices, which includes calls before the due date.

However, the credit staff don’t have up-to-date portfolio

information at hand. It may suggest that the collection is not

strong and timely as expected. It can affect the image of the

institution and position it a “soft collector”.

Dec-14 Dec-15 Dec-14 Dec-15

Small Business Loans 5.3% 4.9% 62.7% 45.1%

Village Banking Loans** 0.0% 1.7% 0.0% 3.7%

Microloans to individuals 9.3% 23.8% 32.5% 43.3%

Consumer Loans 7.4% 22.6% 1.0% 0.5%

Other Loans 14.8% 86.8% 3.8% 7.5%

Total 6.3% 7.5% 100% 100%

*Balance of Loans with arrears >30 days plus refinanced loans.

Product PAR by Products Weight in PAR

** Measured at the group level, not at the level of the individual

group member.



FINANCIAL PROFILE

FINA TRUST has a good financial profile. However, the tight

profitability is the main concern.

The traditional niche (SME) prioritizes the speed of the ser-

vice and hence it allows high prices, which in turn lead to a

high portfolio yield. However, portfolio yield is decreasing

faster than expenses. The increasing portfolio at risk is af-

fecting negatively this indicator, since the loans in arrears do

not generate income.

In 2015, the group lending started to grow. This product has

lower interest rates than other products of FINA TRUST, in

order to compete with huge MFIs. FINA TRUST does not

calculate profitability by product, but given the relatively

“heavy” and therefore expensive microcredit methodology it

is likely that this new product exercises a drag on profitabil-

ity. If this is indeed the case it would be prudent for the bank

to slow down growth of this segment of the portfolio until

methodology problems are ironed out and operating expens-

es have been reduced. Otherwise growing the microcredit

portfolio would increase the pressure on margins.

As a young institution, financial expenses are high as well

because the bank needs to offer depositors higher interest

rates than established banks, which is understandable.

Operating Margin Composition

In order to reduce financial expenses, in 2015, the bank

reduced the interest rates for fixed deposits. At the same

time the requirement of cash collateral (mandatory savings)

for borrowers was increased. Even though this makes finan-

cial sense it further erodes FINA TRUST’s competitive posi-

tion in the market. Additionally, it could increase provision

Financial Ratios Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Capital Adequacy

Debt / Equity 5.2 6.1 5.6 5.5 4.2

Asset Quality

Portfolio at Risk / Gross Loan Portfolio n/a n/a n/a 6.4% 7.5%

Write-offs / Gross loan portfolio 0.0% 0.0% 0.0% 0.0% 0.0%

Loan loss reserves / Portfolio at Risk n/a n/a n/a 107.8% 70.3%

Loan loss provision exp 4.1% 0.7% 3.7% 3.0% 0.6%

Management

Operating Expense Ratio 47.2% 40.9% 33.1% 29.5% 32.1%

Earnings

Net income / Average equity 14.7% 11.5% 14.9% 8.3% 13.0%

Net income / Average assets 2.1% 1.5% 1.9% 1.1% 1.9%

Portfolio Yield 73.3% 55.5% 54.1% 48.5% 47.5%

Cost of borrowed funds 12.4% 9.6% 10.2% 9.9% 9.6%

Liquidity

(Cash & Banks + Temp Inv) / Gross Loans 19.1% 43.9% 58.0% 84.4% 31.9%

(Cash & Banks + Temp Inv) / Deposits 18.8% 38.2% 47.8% 54.3% 33.3%


Nigeria

Portfolio Yield 54.1% 48.5% 47.5% 47.2%

Interest expense 12.2% 13.6% 11.8% 8.3%

Financial margin 41.9% 34.8% 35.7% 38.9%

Operating Expense Ratio 33.1% 29.5% 32.1% 26.5%

Loan loss provision exp 3.7% 3.0% 0.6% 1.6%

Net operating margin 5.1% 2.4% 3.0% 10.8%

Adjusted ROE 8.8% 2.2% -4.9% 39.8%

» Good solvency

» Well managed liquidity and no market risk

» Strong participation of savings

» Tight profitability



expenses if it prompts the best clients to seek loans else-

where.

Indeed, in 2015 the Portfolio at Risk increased and the pro-

visions expenses were not enough to meet the requirements

from the Central Bank of Nigeria. In that context, FINA TRUST

achieved a Return of Equity of 13%, which would have turned

into a negative 4.5% if the numbers had been adjusted for

inflation and provision expenses (See Financial Adjust-

ments).

The net margin7 is tight in comparison with the market. FINA

TRUST has the challenge to reduce expenses while not allow-

ing Portfolio Yield to erode further in order to ensure profita-

bility.

The net income is the first source to increase the equity. The

second source is the paid in capital from shareholders. As of

December the ratio Debt/equity (4.2%) is acceptable, and it

has been improving due to an increase of paid in capital in

2013, net income and the reduction of savings in 2015. The

shareholders are willing to further increase paid in capital

during the next years until 2020.

FINA TRUST did borrow funds from institutions until March

2016, when the Central Bank of Nigeria made a loan of US$

250,000. It is a good start. However, even though the regula-

tor charges low annual interest rates (2%) it requires the MFI

to cap lending rates for these funds at 9%. Profitability mar-

gin of only 7% falls far short of what the bank needs to cover

expenses.

Graph 2: Composition of Funding

Since its inception, FINA TRUST had success taking deposits

to finance its operations. Now, deposits are the main source

of funds. Most of the deposits are for a fixed term (70% of

total deposits). In 2015, this was reduced, possibly due to

the lower interest rates offered. Additionally, withdrawals

from big savers could affect the balance importantly. As of

7 Portfolio Yield minus expenses of the loan business (operating,

financial and provisions).

Dec-15, 64% of the deposits are concentrated in the top 20

savers.

The number of savers increased importantly due to the man-

datory savings for group lending. However, the savings ac-

count balance was reduced possible due to withdrawals to

offset some delinquent loans. The Financial Expenses shown

good trend in 2015. The bank is interested in borrowing

abroad to diversify its funding sources

Liquidity is overseen by a special management committee. In

December 2015, liquidity was equivalent to 32% of the loan

portfolio and 33% of total deposits. No contingency lines of

credit exist.

Terms of assets and liabilities are matched, since assets and

liabilities are contracted with an average of 3 months. As-

sets and liabilities are in local currency and carry fixed inter-

est rates as well. This results in very low market risk.

16.1% 14.1% 15.2% 15.4% 19.1%

83.9% 85.9%

84.8%

84.6% 80.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Equity Savings



Balance Sheet (US$000)


Assets 3,201 4,311 6,115 6,611 5,804

Cash and Banks 456 1,217 1,840 2,739 1,228

Temporary Investments - - 334 12 61

Net Loans 2,265 2,635 3,486 3,038 3,823

Gross Loans 2,385 2,774 3,745 3,261 4,037

Performing Loans 2,385 2,774 3,745 3,054 3,733

Portfolio at Risk - - - 208 304

Loan Loss Reserve 119 138 259 224 214

Interest Receivables 24 232 215 343 292

Other Current Assets 277 71 77 245 159

Long Term Investments - - - - -

Property and Equipment 179 156 164 235 241

Other Long Term Assets - - - - -

Liabilities 2,737 3,787 5,301 5,692 4,893

Demand Deposits 300 985 1,409 1,397 1,134

Short Term Time Deposits 2,123 2,198 3,139 3,665 2,730

Short Term Funding Liabilities 1 - - - -

Other Short Term Liabilities 313 604 753 630 1,029

Long Term Time Deposits - - - - -

Long Term Funding Liabilities - - - - -

Quasi-Capital Accounts - - - - -

Other Long Term Liabilities - - - - -

Equity 464 524 814 919 911

Capital 505 508 699 648 558

Earnings (Losses) Period 70 57 99 72 119

Retained Earnings - - - 25 (63)

Other Capital Accounts (111) (42) 15 174 297

Total Liabilities & Equity 3,201 4,311 6,115 6,611 5,804

Source of Financial Statements Audited FFSS Audited FFSS Audited FFSS Audited FFSS Audited FFSS



Income Statement (US$000)

For periods between: Jan-11 - Jan-12 - Jan-13 - Jan-14 - Jan-15 -


Interest and Fee Income 1,173 1,432 1,762 1,698 1,733

Cash Interest and Fee Income 1,149 1,200 1,547 1,356 1,441

Accruals (Int.. Receivables) 24 232 215 343 292

Interest and Fee Expense 232 270 396 478 429

Net Interest Income 940 1,162 1,366 1,221 1,304

Provision for Loan Loss 66 18 121 106 21

Net Interest Income After Provisions 875 1,144 1,245 1,115 1,283

Operating Expense 754 1,055 1,078 1,033 1,172

Personnel 195 392 316 307 462

Other Administrative Expense 559 663 762 725 710

Net Operating Income 120 89 166 82 111

Other Income 4 21 10 17 57

Investment Profits (Losses) - - - - -

Other Non-Extraordinary Income 4 21 10 17 57

Other Expenses - - - - -

MFI's Inflation Adjustment (if any) - - - - -

Other Non-Extraordinary Expenses - - - - -

Net Income Before Extraordinary Items 125 110 176 99 168

Extraordinary Items - - - - -

Extraordinary Income - - - - -

Extraordinary Expense - - - - -

Net Income Before Taxes 125 110 176 99 168

Taxes 55 53 77 27 49

Net Income 70 57 99 72 119

Source of Financial Statements Audited FFSS Audited FFSS Audited FFSS Audited FFSS Audited FFSS



FINANCIAL ADJUSTMENTS

Financial Statements are submitted according to a common

format, but are not adjusted to account for different account-

ing policies or subsidies. To allow a comparison between

microfinance institutions, the tables below show perfor-

mance indicators based on adjusted financial statements.

The adjustments are concentrated in the following areas:

inflation adjustments if the institution does not include them,

adjustments for subsidized funds8, and adjustments for loan

provisioning and write-offs. Provisions and write-offs are

recalculated based on a formula9 generally accepted as

prudent for portfolios of microfinance loans.

For FINA TRUST MFB, MicroRate made adjustments equiva-

lent to US$65,000 for inflation and US$99,000 for provi-

sions reducing the annual net income of US$119,000 to a

loss of US$ 45,000. Therefore, the ROE decreased from 13%

to -4.9%.

Summary Adjustments Effects on Net Income (US$000)

8 MicroRate takes the deposit rate from the IMF / International Financial Statistics as minimum market rate for loans in local currency. For liabilities in U.S. dollars, the one-year LIBOR +2% and prime rate loans are used for short- and long-term, respective-ly. The difference between the minimum market rate and the rate charged by the funds is applied to the average of the funds in balance and is charged as additional financing expenditure. 9 MicroRate writes off delinquent loans > 180 days and recalcu-lates the provisions according to the following: 1-30 days 10% 31-60 days 30% 61-90 days 60% > 90 days 100% Refinanced 50% Refinanced with > 1 day past due 100%

Dec-13 Dec -14 Dec -15

Annualized Unadjusted Net Income $99 $72 $119

MR Inflation Adjustment -$40 -$53 -$65

Write Off Adjustment $0 $0 -$51

Provision Adjustment $0 $0 -$49

Cost of Funds Adjustment $0 $0 $0

Adjusted Net Income $59 $19 -$45



Adjusted Comparison Table

Average Rates of the MicroRate Sample

(US$000)

Loan Portfolio

Gross Loan Portfolio (US$000) $4,037 $70,608

Annual Change in Gross Loan Portfolio 23.8% 48.8%

Number of Loans Outstanding 5,210 324,644

Annual Change in Number of Loans Outstanding 1410.1% 74.4%

Number of Borrowers 5,210 251,434

Annual Change in Number of Borrowers 1410.1% 31.8%

Average Loan Balance (per borrower) - US$ $775 $351

Portfolio at Risk / Gross Loan Portfolio 7.5% 1.3%

Write-offs / Gross Loan Portfolio 0.0% 2.1%

Loan loss reserves / Portfolio at Risk 70.3% 156.8%

Loan loss provision expense / Average Gross Portfolio 0.6% 1.6%

Efficiency and Productivity

Total operating expense / Average Gross Portfolio 32.1% 26.5%

Number borrowers per credit officer 106 268

Number of borrowers per staff 57 153

Portfolio yield 47.5% 47.2%

Personnel Expense/Average Gross Portfolio 12.6% 15.7%

Credit officers / Total personnel 53.3% 58.3%

Incentive Pay as % of Base Salary 0.0% 0.0%

Percent of Staff with MFI < 12 Months n/a 48.1%

Total operating expense / Borrowers $422 $66

Financial Ratios

Debt / Equity 4.2 3.8

Equity/Assets 15.7% 21.4%

Net Income / Average equity (ROE) -4.9% 39.8%

Net Income / Average assets (ROA) -0.7% 7.9%

Interest expense / Average Gross Portfolio 11.8% 8.3%

Interest expense / Average funding liabilities 9.6% 9.6%

(Cash + Temp. Investment)/ Gross Portfolio 31.9% 15.1%

Operating margin 3.0% 10.8%

Absolute Currency Amounts (US$000)

Interest and Fee Income $1,733 $28,555

Net Income ($45) $5,975

Total Assets $5,804 $88,377

Deposits $3,864 $42,826

Funding Liabilities (excluding Deposits) $0 $12,780

Equity $911 $22,001

* It includes several MFIs as of the last period evaluated by MicroRate (from 2014 to 2016)

** Data with figures to Dec-15

Período: December 2015* FINA TRUST **MicroRate- Nigerian

MFIs



ANNEX I: INSTITUTIONAL RATING GRADE DEFINITION

Institutional

Rating

The Institutional Rating provides an opinion on the long-term institutional sustainability and creditwor-

thiness of a microfinance institution (MFI) through a comprehensive assessment of risks and perfor-

mance.

α+

α » Financial Institutions with high long term sustainability and high creditworthiness.

» Excellent performance. Low or well managed short- medium term risk.

α−

β+ » Financial institutions with good long term sustainability and good creditworthiness.

» Good performance. Modest or well-managed short- medium term risk.

β

β− » Financial institutions with moderate long term sustainability and moderate creditworthiness.

» Fair performance. Moderate to medium-high risk.

γ+

γ » Financial institutions with weak long term sustainability and poor creditworthiness.

» Weak or poor performance. High to very high risk.

Financial Profile

Rating Opinion about the financial strength of the institution and the ability to repay their obligations.

Rating Outlook Expected direction of the rating grade over the 12 months following the rating

Positive The rating is expected to increase.

Stable The rating is expected to remain unchanged.

Negative The rating is not expected to remain unchanged.

Uncertain Due to unpredictable factors, a rating outlook cannot be determined.



ANNEX II: GLOSSARY OF MICROFINANCE TERMS AND INDICATORS

Credit Operations

» Gross Loan Portfolio

Value of Loan Portfolio at a given time.

» Average Gross Loan Portfolio

(Value of Loan Portfolio at the start of a period + Value of Loan Portfolio at the end of a period) / 2

» Number of Loans Outstanding

Number of Loans at a given time.

» Number of Borrowers

Number of Borrowers at a given time (assumes that a Borrower can have more than one Loan at a time)

» Average Loan Size

Value of Loan Portfolio at a given time / Number of Borrowers at that time

Portfolio Quality

» Portfolio at Risk

(Outstanding Balance on Arrears over 30 days + Total Gross Outstanding Restructured Portfolio) / Total Outstanding Gross

Portfolio

» Write-off Ratio

Value of Loan Write-offs / Gross Loan Portfolio

» Provision Expense Ratio

Loan Loss Provisioning Expenses / Average Gross Portfolio

» Risk Coverage Ratio

Loan Loss Reserves / (Outstanding Balance on Arrears over 30 days + Refinanced Loans)

Productivity

» Operating Expense Ratio

Total operating expense / Average gross portfolio

» Cost per Borrower

Operating Expenses / Average Number of Active Borrowers

» Borrowers per Credit Officer

Number of Active Borrowers (excluding Consumer Loans) / Number of Loan Officers

» Borrowers per Staff

Number of Active Borrowers (excluding Consumer Loans) /Total Staff

Financial

» Debt / Equity

Total Liabilities / Total Equity

» Return on Equity

Net Income / Average Equity

» Return on Assets

Net Income / Average Assets

» Portfolio Yield

Interest and Fee Income / Average Gross Portfolio

» Funding Expense Ratio

Interest and Fee Expenses / Average Gross Portfolio

» Cost of Funds Ratio

Interest and Fee Expenses / Average Funding Liabilities

» Liquidity Ratio

Cash and Banks, and Temporary Investments/Gross Loan Portfolio

» Deposit Coverage Ratio

Cash and Banks, and Temporary Investments/Client Deposits

www.microrate.com

Copyright © 2016 by MicroRate

All rights reserved. The reproduction of this document either as a whole or in part without MicroRate’s permission is prohibited.

Ratings are opinions, based on analysis and observations. As statements of opinion they must be distinguished from state-

ments of fact. In no case are they recommendations to purchase, sell or hold any securities.

All information contained herein is obtained from sources believed to be accurate and reliable. Because of the possibility of

human or mechanical error, MicroRate makes no representation or warranty as to the accuracy or completeness of any infor-

mation. Under no circumstances shall MicroRate have any liability to any person or entity for any loss in whole or in part

caused by or relating to any error (negligent or otherwise) or other circumstance or contingency within or outside the control of

MicroRate. The CEO and External Audit Firm(s) of the entity under review are responsible for the consistency and accuracy of

the information given to MicroRate. MicroRate does not have the function of auditing the financial statements of the entity.

microfinance institutional rating · 2017-01-30 · fina trust mfb nigeria / june 2016 microfinance...

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