Managem

ent July 9

Control
system Of
Micro
201
Financing
Institution
0
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Microfinance is the provision of a broad range of financial services
such as deposits, loans, payment services, money transfers, and
insurance to poor and low-income households and, their BY:-
microenterprises. Microfinance services are provided by three types of
sources ARSHAD ALI
09BS0000422
Introduction :- ‘Microfinance refers to small scale financial services for both credits and
deposits- that are provided to people who farm or fish or herd; operate small or micro enterprise
where goods are produced, recycled, repaired, or traded; provide services; work for wages or
commissions; gain income from renting out small amounts of land, vehicles, draft animals, or
machinery and tools; and to other individuals and local groups in developing countries in both
rural and urban areas.

Microfinance is the provision of a broad range of financial services such as deposits, loans,
payment services, money transfers, and insurance to poor and low-income households
and, their microenterprises. Microfinance services are provided by three types of sources

• Formal institutions, such as rural banks and cooperatives;

• Semiformal institutions, such as nongovernment organizations
• Informal sources such as money lenders and shopkeepers.

Institutional microfinance is defined to include microfinance services provided by both

formal and semiformal institutions. Microfinance institutions are defined as institutions whose
major business is the provision of microfinance services.

Formal institutions:- Traditionally, the formal sector Banking Institutions in India have been
serving only the needs of the commercial sector and providing loans for middle and upper
income groups. Similarly, for housing the HFIs have generally not evolved a lending product to
serve the needs of the Very LIG primarily because of the perceived risks of lending to this sector.
Following risks are generally perceived by the formal sector financial institutions:

• Credit Risk
• High transaction and service cost
• Absence of land tenure for financing housing
• Irregular flow of income due to seasonality
• Lack of tangible proof for assessment of income
• Unacceptable collaterals such as crops, utensils and jewellery

As far as the formal financial institutions are concerned, there are Commercial Banks, Housing
Finance Institutions (HFIs), NABARD, Rural Development Banks (RDBs), Land Development
Banks Land Development Banks and Co-operative Banks (CBs).

Semi-formal institution : Typically have no specific legislation but can register under an existing
Act. Non-government organisations (NGOs) are the most common semi formal institution. In
Indonesia for example, the range of semiformal institutions is vast with Badan Kredit Desa
(BKDs, or village credit organisations), and LKDP, finance and insurance companies,
cooperatives and credit unions, and NGOs. In contrast, in India NGO-MFIs are the main types of
semi formal financial intermediary. These institutions help groups of informal organisations to
transform into federations. In addition, some larger rotating savings and credit associations
(ROSCAs) in India, also an informal organisation, have been transformed into semi formal
institutions under the Indian Chit Fund Act 1982.
Management control system :- The process by which managers ensure that resources are
obtained and used effectively and efficiently in the accomplishment of the organisation’s
objectives A MCS is a system. A system is an aggregate of machines and people that work
toward a common objective. A system can be described as a series of steps or phases consisting
of an input phase, a processing phase, and an output phase. A control system adds measurement,
analysis and reporting phases to the system. Output is measured, compared against a plan,
analyzed if judged significant, and then reported back to the appropriate earlier phases of the
system in the form of positive or negative reinforcement. In a management control system,
data/information is typically fed back to managers of the various system phases. Responsible
managers will then take appropriate action based on the data/information provided.

A control system is a set of formal and informal systems to assist the management in steering the
organization towards its goals. Controls help in guiding employees effectively towards the
accomplishment of the organization’s goals. Establishing a control system in an environment of
distributed accountability, reengineered processes, and local autonomy and empowerment is a
challenging task. The control process in any organization can be undertaken at three levels.
These are: the strategic level, the management level, and the operational level. Each type of
control occurs primarily at one of the three distinct levels of the organizational hierarchy.

Management control system

The detector analyzes the situation that is being controlled. An assessor helps in comparing the
actual results with the standard or expected results. An effectors is used to reduce the gap
between the actual and the standard result. The communication network transmits information
between the detector, the assessor and the effectors
 M a n a g e m e n t C o n t r

F o r m a l C o n t r o lI nS f y o s r t me m a l C o n t

I n p u t P r o c e sO s u t p u tS e l f S o c i a Cl u l t u
C o n t r oC l o n t r oC l o n t r oC l o n t r oC l o n t r oC l o n t

Control systems in an organization fall under two broad areas: formal and informal. Formal
controls are laid out in writing by the management, whereas informal controls arise as a result of
employees’ behavior. Examples of formal controls are plans, budgets, regulations and quotas.
Informal controls include group norms and organizational culture. Formal controls are framed by
the managers, whereas informal controls often originate with employees and are affected by
general socio-cultural factors.

Formal Control System

Formal control systems are written, management-initiated mechanisms that influence the
behavior of employees in achieving the organization’s goals. Formal controls can be classified
into three types, based on the nature of management intervention. They are:

Input controls

These are the actions taken by the company before a planned activity is implemented. These
measures help the company to select the right way to undertake the activity. Input controls
include selection criteria, recruitment and training programs, manpower allotments, strategic
plans and resource allocations.

Process controls

Process controls involve tracking certain variables and taking corrective action whenever there is
any deviation from specified parameters in the variables. The control action takes place before
the process of transformation is completed and the output is produced. Process control is
exercised when the firm attempts to influence the ongoing activity to achieve the desired ends.
The control is applied to the behavior or activities rather than the end results.
Output controls

Output control is exercised when performance standards are set and monitored, and the results
are evaluated. Output control takes place when the control activity is based on the comparison of
actual and planned outcomes. Such controls are applicable when it is easy and inexpensive to
measure the output and when there are few elements of uncertainty. In this type of control, the
management expects the employee to perform in a result-oriented way, as it believes that the
employee has the requisite knowledge to undertake the activities required, in a suitable manner,
and to complete the assigned task without management intervention.

Informal Control System

These are unwritten, typically worker-initiated mechanisms that influence the behavior of
individuals or groups in business units.

There are three types of informal controls. They are:

Self-control

It deals with the establishment of the personal objectives by the individual, monitoring their
attainment and adjusting the behavior in the organization to attain the goals. Self-control can be
beneficial to an organization if the organization’s goals are in congruence with the individual’s
goals. But if the goals do not match then the performance of the employee can suffer.

Social controls Social control refers to the prevailing social perspectives and patterns of
interpersonal interactions within subgroups in the firm. In this type of control, an organization
establishes certain standards, monitors conformity with the standard and takes action when
deviations occur. Social control arises out of the internalization of values and mutual
commitment towards some common goals.

Cultural controls

According to William G Ouchi, culture is “the broader values and normative patterns that guide
worker behavior within the entire organization.” Cultural control can be realized by norms of
social interaction, and stories, rituals and legends relating to the organization.

Management control system in Micro Financing institution :-

Management Control System (MCS), simply put, is an organization’s strategy implementation.
Being so, MCS anchored on the vision and mission of the organization and its strategy, which is
usually its response to changing environment. Microfinance institutions (MFIs), whether non-
government organizations (NGOs) or banks, may not be using MCS jargon but they could
already be using the MCS concepts or its building blocks. “Performance management” could be
an alternative way of presenting MCS, as organizations are probably more familiar with this
concept.
Micro financing institution comes under formal ,semiformal, and informal
control system because the system of micro financing is written, management-initiated
mechanisms that influence the organization’s objectives.

Objectives of micro financing institution are:-

Objectives :-

• To form and promote self help groups of the poor, women, needy, oppressed and to attain
improvement in their socio-economic condition through economic activities.
• To give priority to women and to involve them directly in production activities so that the
opportunities are created for additional income.
• To create employment opportunities for both males and females by involving them in
income generating activities for increasing the income of the family and to continue
gradual support for attaining self sufficiency.
• To provide assistance so that the poor become self dependent by accumulating and
creating their own capital through savings from increased income.
• To provide assistance so that the poor can gradually decrease the dependence on the
money lenders, borrowing at a high interest rate , advance sale of crops before it is
produced, selling and mortgaging of lands and finally should be in a position to abandon
all this kind of restrictive economic practices, which restricts him on his way to
development.
• In the process MFIs attain self sufficiency by decreasing its dependence on external grant
and mobilizing resources by way of service charges .

Input control in MFI:-

In the MFI, actions are planed before activity is implemented. These measures help the
MFI to select the right way to undertake the activity. Input controls include selection criteria,
recruitment and training programs, manpower allotments, strategic plans and resource
allocations. MFI first judge the project and according to the project potential it allocate the fund .
first of all it select the area where they are going to invest according the condition and
development required . then it develop the strategic plan and resource allocation .

Process control in MFI:-

In process control MFI consider risk management before the allocation of resource and fund for
desire output . A risk management framework is a consciously designed system to protect the
organization from undesirable surprises (downside risks), and enable it to take advantage of
opportunities (up-side risks). A good risk management framework:
1.Integrates into MFI operations a set of systematic processes for identifying, measuring, and
monitoring many different types of risk to help management keep an eye on the big picture;

2. Uses a continuous feedback loop between measurement and monitoring, internal controls and
reporting, and involves active oversight by senior managers and directors, allowing more rapid
response to changes in internal and external risk environments;

3. Considers scenarios where risks interact and can exacerbate one another in adverse situations;

4. Elevates responsibility for risk management and preparedness to senior management and the
board;

5. Encourages cost-effective decision-making and more efficient use of resources;

6. Creates an internal culture of “self-supervision” that can identify and manage risks long before
they are visible to outside stakeholders or regulators.

The risk management feedback loop has six key components:

1. Identifying, assessing, and prioritizing risks.
2. Developing strategies and policies to measure risks
3.Designing policies and procedures to mitigate risks
4. Implementing and assigning responsibilities
5. Testing effectiveness and evaluating results
6. Revising policies and procedures as necessary

Output control in MFI:-

Output control is exercised by the MFIs when performance standards are set and monitored, and
the results are evaluated. MFI traces the output by the comparison of actual and planned
outcomes. MFI always put output control mechanism on the employee to perform in a result-
oriented way ,that the employee has the requisite knowledge to undertake the activities required,
in a suitable manner, and to complete the assigned task without management intervention.

SEMI FORMAL CONTOL IN MFI:-As we know that the major two part of MFI is formal and
semi formal because in the semi formal, typically MFI have no specific legislation but can
register under an existing Act. Non-government organisations (NGOs) are the most common
semi formal institution. Microfinance institutions also serve as intermediaries between borrowers
and the formal financial sector and on-lend funds backed by a public sector guarantee. Business-
like NGOs can offer commercial banks ways of funding micro entrepreneurs at low cost and risk,
for example, through leveraged bank-NGO-client credit lines. Under this arrangement, banks
make one bulk loan to NGOs and the NGOs packages it into large number of small loans at
market rates and recover them.
Informal control in MFI:- The informal financial sources generally include funds available
from family sources or local money lenders. The local money lenders charge exorbitant rates,
generally ranging from 36% to 60% interest due to their monopoly in the absence of any other
source of credit for non- conventional needs. Chit Funds and Bishis are other forms of credit
system operated by groups of people for their mutual benefit which however have their own
limitations. The experience of these informal intermediaries shows that although the savings of
group members, small in nature do not attract high returns, it is still practised due to security
reasons and for getting loans at lower rates compared to that available from money lenders.
These are short term loans meant for crisis, consumption and income generation needs of the
members. The interest rates on such credit are not subsidised and generally range between 12 to
36%. Most of the loans are unsecured. In few cases personal or group guarantees or other
collaterals like jewellery is offered as security.

Self-control

MFI with the establishment of the personal objectives by the individual, monitoring their
attainment and adjusting the behavior in the organization to attain the goals. In this control MFI
it self control the operation of the project without interference of the government for benefit of
individual

Social control

MFI always prevailed social perspectives and patterns of interpersonal interactions within
subgroups in the firm. In this type of control, MFIs establishes certain standards, monitors
conformity with the standard and takes action when deviations occur. Social control arises out of
the internalization of values and mutual commitment towards some common goals.

Cultural controls

MFI generally use cultural approach in the informal control mechanism . It gives stress on the
social interaction to know condition of the society where they should put fund or operation on
the particular area. Cultural control can be realized by norms of social interaction, and stories,
rituals and legends relating to the organization.

Although the importance of microfinance in the process of poverty eradication is realized, it

faces multiple problems. Offering financial services to the poor individual is a complex process
and that in itself leads to various challenges.

Area where the Micro Financing institution should control:

The poor’s inability to offer marketable collateral for loans: Microfinance clients are either
very small businesses or poor individuals who usually have few assets, non-existent
credit histories, and low income levels. This is a problem because it means these clients
have cannot offer any collateral to microfinance providers against loans
Solution :- microfinance institutes (MFIs) may either raise their interest rates or turn
down hundreds of applications

Poor institutional viability of micro enterprises:- Shabbily constructed business ideas with
a lack of consideration of demand and costs render the micro venture unsustainable, and
microfinance may incorrectly get the blame for it. For instance, in the case of micro crop
farming, farmer often fail to account for their personal consumption between the sowing
and harvesting periods and realize they face a shortage of money. As a result, they often
end up using the micro loan for personal matters. The problem arises when its time to pay
back the loan – the farmer is forced to take up another loan to pay the first one. This may
lead to a vicious cycle where the farmer gets inundated with debt.
Solution: MFI should clear the previous loan then deliver the other loan so that there will be
liquidity in the system.

Lack of knowledge about sources of microfinance services

Many micro entrepreneurs live in far off rural areas, often remote villages, which is a problem
because it means they have no access to microfinance services offered by MFIs

Solution :- MFIs should target the potential customer also in the remote areas . And also promote
their sachems in the remote area to provide the service to the needy customers.

Shortage of Financial Capital – Or Misallocation

As a result of the above three problems, a fourth problem arises for micro entrepreneurs – a lack
of funds, which can be solved if MFIs build up their capital base by accessing various sources of
funds. Without money, the micro ventures cannot grow and take advantage of opportunities.
Since, 20% of the world’s population accounts for 86% of consumption one can deduce that the
problem isn’t related to the shortage, but rather, misallocation of funds.

Solution :- The allocation of the fund should be monitor. Also trace the allocated fund which is
sent to the particular area is distributed properly or not .
Inability to exploit growth opportunities

The last point is a contributor to this problem, because a lack of access to funds means micro
entrepreneurs cannot inject money into their businesses (say, to buy more resources or hire more
people) to grow them after observing a surge in demand. Moreover, the remote locations of
micro businesses means they have little information pertaining to their markets, such as customer
needs and competitor strengths and weaknesses and so on. As a result, many critics may find
faults with the idea of microfinance, not realizing that this isn’t really a problem, but just a
challenge that can be overcome as the business grows and increases its capital base.

Solution :- By the increase of the business with the time can short out this problem .

Few organizational resources and poor governance

Micro entrepreneurs have limited skills, qualifications and exposure to handling businesses.
While they need to be trained through capacity building initiatives by the MFIs, many micro
entrepreneurs may not grow as planned because of these problems. For instance, they may
borrow more money than needed, or mis-allocate it in their business and end up bearing the
burden of large interest payments instead of enjoying the fruits of their business.

Solution :- government should put stress on these organizational resource and promote some new
players in it .

Low bargaining power

In case micro entrepreneurs operate in competitive markets, their individual bargaining power is
diminished when dealing with customers because of their small size. However, at the other end
of the spectrum, there still isn’t any respite because micro entrepreneurs deal with MFIs on an
individual basis, which also erodes their bargaining power. This isn’t really a problem for
microfinance, but rather micro entrepreneurs.

Vulnerability to economic shocks

Micro entrepreneurs are particularly susceptible to sudden changes in customer demand, or the
weather (even though microfinance can help with natural disasters) because their businesses
cannot sustain losses owning to their small size (low capital). This may be a problem for the
social objectives of microfinance providers but MFIs ensure their economic performance is
untarnished by charging high interest rates to compensate this risk Most problems faced by
micro entrepreneurs are caused by their small size, varied locations and improper skills.
Naturally, once the venture secures a loan and begins to grow, these problems will eventually
subside. One may think the problems at the MFIs’ end, therefore, need greater attention but that
wouldn’t be correct because poverty eradication is a very socially-integrated endeavor.
Flow of operation and control :-

The flow chart of the MFIs shows the operation and the area where control mechanism is
required . Goal of the MFIs is to increase the economy and reduce the poverty. For this MFIs
need to increase access to and availability of financial service . to achieve this MFIs need to use
of control system in the following action .

1>Strengthen financial institution :- In this system MFIs has to control the funding raising and
increase of the fund . but there are lots of challenges to the same . challenge funds to foster
product development and innovation among banks and institutes .

2>Reduce financial institution costs & risk enhance liquidity :- for this MFIs focus on the
risk management to control mechanism to reduce risk and achieve desire goal .

3> Improve borrower access to financial service :- Another control mechanism is required in
this service to in crease the penetration of the MFIs in urban and semi urban area. This is
required to enhance the condition of the each and every economy suffered area to enhance the
economy of the farmers, poor people and make them self dependent .

Key concern:-
There are certain key issues that need to be tackled before ensuring the benefits of MFIs .

Scaling-up Microfinance:- micro financing through formal and EMI formal can reach self-
sustainability only when there is substantial volume which they can generate .

Effective policy, legal and regulatory framework:- An enabling policy ,legal and regulatory
frameworks critical to scaling-up. For this government needs to take certain steps as:

• Reducing minimum start-up capital requirement to facilitates the transformation of MFIs

into NBFCs.

• Encouraging multiple source of equity for MFIs.

• Developing a set of prudential norms that are more appropriate to the institution serving
the poor,and the set up supervision mechanism around those norms.

Conclusion :- Microfinance remains a powerful tool for development. It may be a drop in the
ocean, but it has made people self sufficient. Management Control System (MCS), simply put,
is an organization’s strategy implementation. Being so, MCS anchored on the vision and mission
of the organization and its strategy, which is usually its response to changing environment.
Microfinance institutions (MFIs), whether non-government organizations (NGOs) or banks, may
not be using MCS jargon but they could already be using the MCS concepts or its building
blocks. For these institutions, there is a distinct need to introduce and adopt sound commercial
practices into their financial activities as well as to formalize the provision of operating
information. These are best achieved through exposure to and application of best techniques for
managing risk, reducing administrative costs, increasing revenue and collection and organization
of information which is necessary for internal management and control systems.