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Microfinance Lending Question Paper
Microfinance Lending
Course:Bachelor Of Commerce
Institution: Strathmore University question papers
Exam Year:2011
STRATHMORE UNIVERSITY
SCHOOL OF MANAGEMENT AND COMMERCE
Bachelor of Commerce
END OF SEMESTER EXAMINATION
BCN 3201: MICROFINANCE LENDING
DATE: 11th March 2011 TIME: 2 Hrs
INSTRUCTIONS: Answer Question ONE and any other TWO Questions
QUESTION ONE:
(a) What do you understand by ‘weak collateral’ in microfinance lending? Describe how
microfinance lends without security and how the group guarantees mechanism works.
(12 Marks)
(b) Explain the elements of a ‘letter of offer’ in pre-disbursement stage of loan processing
(5 marks)
(c) Nova DTM has an outstanding portfolio made up of the following borrowers:
Borrower 1 Ok X Ok
Today Borrower 2
Ok X
Borrower 3 Ok X X
Borrower 4 ok Ok
Each box represents one installment consisting of Ksh. 1,100 interest and 9,900 principle
payments made on time are shown by words (OK) while payments due but not paid are marked
(X). The line at the centre indicates today’s date, with boxes after representing installments not
yet due.
2
REQUIRED:
Calculate Nova DTM’s outstanding loan balance (inclusive of interest) for all loans with
payments past due. (7 Marks)
(d) You have been asked to develop a loan policy for Kyambeke Village Community. Identify
and discuss three (3) components of credit policy. (6 marks)
(Total 30 Marks)
QUESTION TWO:
(a) Why do borrowers default even after a thorough screening and client profiling? (10 marks)
(b) Outline the comparative advantages of group based lending and its weaknesses in delivering
microcredit for the world’s poor. (5 marks)
(c) Explain the term “target market” as used in microfinance (5 marks)
(Total 20 Marks)
QUESTION THREE:
(a) Women are the primary target of Microcredit. Explain why? (6 marks)
(b) The aging report below shows the current loan provisioning for an MFI which offers one
standard working capital loan with a-3-month duration. The board is thinking of changing
the accounting policy on arrears aging and delinquent loan write-off because it is believed to
be tight and starts provisioning loans as soon as the first payment is missed.
At year’s end, according to the MFI’s policy, it must write off all loans that are fully provisioned.
Required:
i. Determine the number of loans to be written-off and the amount involved? (2 Marks)
ii. The task force in charge of revising the MFI’s accounting policy with respect to arrears
aging proposed changes to the Board on provisioning of the portfolio as below:
Days in arrears Reserve rate (provision rate)
0 days - current loans 0%
1- 31 days 10%
31-60 days 25%
61-90 days 50%
91-180 days 75%
Over 180 Days 100%
Recalculate numbers in the arrears table above using the new policy rates and show effect of this
policy on the aging report? Advise on whether the Board should accept the proposal or not.
(12 marks)
(Total 20 Marks)
QUESTION FOUR:
(a) Explain how credit appraisal is done in Microfinance lending. In your answer point out the
criteria used. (10 marks)
(b) “Lasting peace on earth cannot be achieved unless large population groups find ways in
which to break out of poverty. Fortunately, microcredit; a key innovation in microfinance has
demonstrated that even the poorest of the poor can work to bring about their own
development”. Discuss how microcredit can contribute to poverty alleviation and economic
development and thus get people out of poverty? (10 marks)
(Total 20 Marks)
4
QUESTION FIVE:
MADA MFI is a deposit taking Microfinance Institution and has hired a consultant to identify
why the loan portfolio is doing poorly. The consultant’s report found out that the MFI had a
delinquency problem: most clients were not repaying their loans; the repayment rate was 54%
compared to standard performance in microfinance of 98%, and portfolio at risk of 48% and
some clients had relocated to another estate in the city. The report pointed that the caseload of
the loan officers (300 borrowers per loan officer) though meeting international best practice was
slightly on the higher side in the context of Madaraka environment. The officers were also
underpaid in relation to their peers in the market and had low morale. The management of
MADA MFI has asked you to:
I. Explain to them what delinquency is (2 marks)
II. Discuss institutional causes of delinquency (6 marks)
III. Describe at least two ways MADA can use in managing delinquency (6 marks)
IV. Explain implication of the following ratios in relation to performance of their MFI:
a.Borrowers per staff ratio (3 marks)
b.Portfolio at risk ratio (3 marks)
(Total 20 Marks)
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