The impactiive® Partner in charge of the finance department for an established MFI in Kosovo (KOM), which had been operating for 9 years, quickly understood some things should not be taken for granted. 

The accounting and financial reporting functions were a nightmare, for both the finance department and those who relied on the financial data. The financial statements production workflows were a maze, going through a legacy software with limited functionality and an endless string of MS Excel calculations.

This ultimately resulted in the following issues:  

• Significant delays in producing financial data and reports.
• Management reports close to non-existent.
• Lender reports consistently delayed, which brought lender relationships close to a breaking point.
• Questionable report quality, which made the audit track easily lost in accounting and analysis that could only happen at a hypothetical level.

KOM funding was only obtained via multilateral lenders and microfinance investment vehicles (MIVs). There were no credit lines available at local banks, and, since KOM was not a banking institution, no “lender-of-last-resort” was in sight. In his orientation week in the Global Network Head Office, the impactiive® Partner understood from the Group CFO that a liquidity window could be made available from the Head Office Treasury in case of extreme need.

Lenders’ and KOM’s customer loan disbursement timings didn’t coincide. Lenders were driven by their fund reporting schedules and typically disbursed loans by the end of each quarter. This was the same period that lenders’ loan repayments were scheduled. Therefore, quarter ends were characterized by significant cash flow fluctuations.

While creating the 12-month liquidity forecast, the impactiive® Partner observed that 30% of the MFI funding was scheduled to disappear within 2 months due to debt repayments. He thought this represented a significant funding risk. Lending activities were bullish, which only aggravated the funding position. Talks for new funding facilities had been underway for some time, but the impactiive® Partner was not confident about the way the negotiations with two lenders were progressing.  The MFI Finance Department was barely capable of delivering the standard company financial statements. There was an unpleasant back-and-forth with the lender reports, due to complaints about report quality.

Due to the limited number of lenders (only two), the lack of internal capacity to deal with lender requests, and significant liquidity pressure ahead, the impactiive® Partner was  doubtful the two lender disbursements would happen in time to cope with the expected debt repayment. Holding a 30% cash buffer was simply not a luxury KOM had. The time was ripe to use the Head Office one-month liquidity window.

But things were to get worse, as the request for Head Office funding was denied. Faced with no alternatives, Management then decided to stop loan disbursements and use the incoming customer loan repayments to repay the maturing debt. There were no other funding options available. 

Stopping disbursements to customers, at a time of healthy credit demand, was a painful decision. In that financial year, KOM generated less interest income than budget, in the range of 12%, because the planned portfolio growth was not accomplished.  Limiting new loan disbursements had dire consequences for the loan portfolio quality, too. Loan impairment expenses increased by 55% in the quarter following the disbursement freeze, and 17% in the following two quarters. The impactiive® Partner discovered that loan stoppages due to funding constraints were a frequent occurrence in the past.

Management learned the hard lesson that having Finance Department capacity to deal with lenders and financial reporting increased operating costs, but not having those capacities could be much more painful.

The CFO decided to undertake the following action to remedy the situation: 

• Realign the responsibilities in the Finance Department, by separating Accounting from the Reporting and Treasury functions. 
• Redesign the accounting processes, by focused interventions in automating some labor-intensive tasks and by ensuring clear traceability, documentation and cut-off rules.
• Increase the reporting, budgeting and analysis capacity in the Finance Department, by hiring the right type of candidates, clarifying their deliverables and guiding their performance. 

Three months into the above restructuring processes, the impactiive® Partner felt prepared to deal with the lenders. He had mastered the KOM financials and was equipped with analysis, reporting and treasury management capabilities. He was able to increase the number of lenders from 2 to 6 within a year.  In dealing with those lenders, he realized that their comfort improved since the credibility of KOM was re-established.

The results of the Finance Department restructuring were felt within the first year and lasted through time. KOM secured all the necessary funding and was able to continue lending to customers uninterrupted during the impactiive® Partner’s tenure as CFO.  KOM reduced its cost of funding by 350 basis points.  Given the improved availability of funding pipeline, the cash reserve to total assets was lowered by 5%. The impactiive® Partner demonstrated that the right structure and capacity for the Finance Department paid dividends far beyond the immediate investment.