Loan Portfolio Audit in Practice

This briefing note describes MicroSaves ‘Loan Portfolio Audit, a tool that assesses the risks and inadequacies inherent in a microfinance institutions (MFIs) portfolio. The paper states that:

• An MFIs loan portfolio is often subject to material mis-statement, often causing the failure of the MFI;
• MicroSaves loan portfolio audit is useful in:
  • Facilitating discussions regarding investing in the MFI;
  • Isolating specific areas for capacity building and technical assistance for enhancing the MFIs portfolio management.
• ABN Amro Bank and Equity Bank have successfully used MicroSaves loan portfolio audit to:
  • Review credit management systems, policies and procedures;
  • Address long-term portfolio challenges and prepare for rating.

The paper describes:

• MicroSaves Loan Portfolio Audit toolkit and its functions;
• The steps involved in conducting a loan portfolio audit:
  • Identifying sample branches;
  • Tracing a sample of loans from the head office downwards through the branch to borrowers accounts;
  • Cross verifying the loan disbursements/repayments with other accounting records.
• Issues that typically arise from a loan portfolio audit.

The brief concludes that:

• Traditional ratings often fail to explore the primary asset of MFIs;
• MicroSaves Loan Portfolio Audit has always uncovered important issues in the management, controls and policies of loan portfolios;
• The Loan Portfolio Audit has proved a valuable tool both for investors in MFIs and MFIs committed to optimizing their loan portfolios.