Smart Credit Policy for Microfinance Banks

Credit policy has direct effects on the cash flow of any business and financial resources are the back bone of any financial institution without it institutions could not run its operations. Credit policy of a Microfinance Institution clearly defines its business. A credit policy that is too strict will turn away potential customers, reduce sales and finally lead to a decrease in the amount of cash inflows to the business. On the other hand, accredit policy that is too liberal will attract slow paying (even non-paying)customers ,increase in the business average collection period for accounts receivables ,and eventually lead to cash inflow problems. A good credit policy help management to attract and retain customers, without having negative impact on cash flow.

Credit policy simply defines (In 2002 Ahimbishwe) “Credit policies are set of objectives, standards and parameters to guide bank officers who grant loans and manage the loan portfolio. Thus, they are procedures, guidelines and rules designed to minimize costs associated with credit while maximizing the benefit from it. initially microfinance was limited as only provision of micro loan to the poor entrepreneurs and small businesses lacking access to banks and related services then the cocept of financial inclusion introduced and based on the guidelines given by different regulators in different countries MFIs defines their credit policies. And so on different authors intellectuals and microfinance practitioners defines what should be the credit policy for MFIs.

But now in this smart age of world where things are being smart from wallet to airplanes, from toys to towers. Artificial intelligence have become an industry, even recently UAE announced their ever first Minister for artificial intelligence. Different digital companies are keeping a close eye on customer’s behaviors that what are their needs, life styles, spending patterns, liking disliking, daily routines, even their thoughts on different social, political & other issues are being observed. Customers behaviors are also being sold by data companies to other companies those are directly marketing their products. Even in banking industry customers are rapidly shifting to Mobile Banking services which is more convenient easy to use and time saving then conventional banking for a common user.

 SBP shared statistics on 8th International Mobile Commerce Moot, total user of Branchless Banking customers are 5Million in Pakistan with 24Millions monthly volume and total value of 125 Billions. PTA and the State Bank of Pakistan (SBP) are working in close coordination to develop the regulatory framework that supports growth in the mobile banking sector. Furthermore, Ashraf Mahmood Wathra, governor of the central bank, told that SBP recently developed in collaboration with the World Bank The National Financial Inclusion Strategy, envisions that the uptake of M-wallet accounts will cross 50 million over the next five years.

With all these perceptive and future financial trends there is a need of smart credit policy for microfinance banks, which should determines customer behaviors, their actual needs, livings, consumption patterns, repayment behaviors, financial & mental capacity to rebuild in disasters, financial & living developments from previous years, probability of default, social behaviors etc.

 Currently the credit policies are adopted by different MFIs are not supportive to the employees, uses directive approach instead of supportive approach to make the decision easy for employees. Not easy to understand which resulted wrong product selection for customers with wrong repayments patterns and become the mean reason of default. Rather smart credit policy will assist employees, in decision making that which product, repayment pattern is most suitable for the customer of which data is inputted using artificial intelligence. This is only one example of its effectiveness but there are many more. Moreover as the technology will improve this smart credit policy will be updated and its efficiency, authenticity and accuracy will be improve, and similarly credit risk will reduced on optimum level.