Free Daung Capital: Managing the Credit Risk Challenges of Microfinance in Myanmar Case Study Solution | Assignment Help

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Written by Gary F. Smith
Publish Date: 2024-12-03

Harvard Case - Daung Capital: Managing the Credit Risk Challenges of Microfinance in Myanmar

"Daung Capital: Managing the Credit Risk Challenges of Microfinance in Myanmar" Harvard business case study is written by Gary Pan, Benjamin Lee, Lipika Bhattacharya. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Apr 19, 2022

At Fern Fort University, we recommend Daung Capital implement a comprehensive risk management framework that incorporates both quantitative and qualitative assessments to mitigate credit risk and ensure sustainable growth in the Myanmar microfinance market. This framework should focus on enhancing loan origination practices, strengthening portfolio management, and leveraging technology and analytics to improve risk assessment and monitoring.

2. Background

Daung Capital is a microfinance institution (MFI) operating in Myanmar, a country with a rapidly growing economy and a significant unbanked population. The case study highlights the challenges Daung Capital faces in managing credit risk, particularly in a context of limited financial infrastructure and information availability. The main protagonists are the founders, who are passionate about promoting financial inclusion but are concerned about the increasing loan delinquency rates and the potential impact on the institution's sustainability.

3. Analysis of the Case Study

The case study can be analyzed using the following frameworks:

  • Financial Analysis: Daung Capital needs to conduct a thorough financial analysis to understand the drivers of loan delinquency and assess the impact on profitability. This includes analyzing financial statements, calculating key ratios like profitability ratios, liquidity ratios, and asset management ratios, and performing a break-even analysis.
  • Risk Management: Daung Capital needs to develop a robust risk management framework that encompasses credit risk, operational risk, and regulatory risk. This framework should include a clear risk appetite statement, risk identification and assessment processes, risk mitigation strategies, and regular monitoring and reporting.
  • Operations Strategy: Daung Capital needs to optimize its operations to improve efficiency and reduce costs. This includes streamlining loan origination processes, implementing activity-based costing to understand the true cost of lending, and exploring partnerships with other MFIs to share best practices and resources.
  • Technology and Analytics: Daung Capital can leverage technology and analytics to improve risk assessment and monitoring. This includes implementing credit scoring models, using data analytics to identify early warning signs of loan delinquency, and adopting fintech solutions to automate loan origination and collection processes.

4. Recommendations

  1. Enhance Loan Origination Practices:
    • Develop a comprehensive credit scoring model: This model should incorporate both quantitative and qualitative factors, including borrower demographics, financial history, and creditworthiness.
    • Implement rigorous due diligence processes: This includes verifying borrower information, conducting site visits, and assessing the viability of loan purposes.
    • Offer tailored loan products: This includes designing loan products that meet the specific needs and financial capacity of different borrower segments.
  2. Strengthen Portfolio Management:
    • Implement a robust loan monitoring system: This system should track loan performance, identify early warning signs of delinquency, and enable timely intervention.
    • Develop a clear loan collection strategy: This strategy should include a mix of proactive and reactive approaches, such as regular communication with borrowers, offering repayment flexibility, and pursuing legal action when necessary.
    • Diversify the loan portfolio: This includes lending to a diverse range of borrowers across different sectors to mitigate concentration risk.
  3. Leverage Technology and Analytics:
    • Invest in data analytics tools: This will enable Daung Capital to analyze loan data, identify trends, and improve risk assessment and monitoring.
    • Explore fintech solutions: This includes using mobile banking platforms for loan disbursement and collection, implementing digital KYC (Know Your Customer) processes, and leveraging AI-powered fraud detection tools.
  4. Build Strategic Partnerships:
    • Collaborate with other MFIs: This can facilitate knowledge sharing, resource pooling, and joint product development.
    • Partner with government agencies and NGOs: This can provide access to resources, expertise, and market insights.

5. Basis of Recommendations

These recommendations are based on the following considerations:

  1. Core competencies and consistency with mission: The recommendations align with Daung Capital's mission of promoting financial inclusion and its core competencies in microfinance lending.
  2. External customers and internal clients: The recommendations aim to improve the experience for both borrowers and internal stakeholders by offering tailored loan products, enhancing customer service, and improving operational efficiency.
  3. Competitors: The recommendations help Daung Capital stay competitive in the microfinance market by adopting best practices, leveraging technology, and building strategic partnerships.
  4. Attractiveness ' quantitative measures: The recommendations are expected to improve loan portfolio quality, reduce delinquency rates, and enhance profitability. While quantifying the exact impact requires further analysis, the expected benefits include:
    • Increased ROI: Improved loan performance and reduced delinquency rates will lead to higher returns on investment.
    • Improved cash flow: Efficient loan collection and reduced write-offs will improve cash flow management.
    • Enhanced financial stability: A strong risk management framework and a diversified loan portfolio will enhance the financial stability of Daung Capital.

6. Conclusion

Daung Capital faces significant credit risk challenges in the Myanmar microfinance market. By implementing a comprehensive risk management framework, enhancing loan origination practices, strengthening portfolio management, and leveraging technology and analytics, Daung Capital can effectively mitigate credit risk, ensure sustainable growth, and continue to promote financial inclusion in Myanmar.

7. Discussion

  • Alternative Approaches: Daung Capital could consider other approaches, such as focusing solely on low-risk borrowers or partnering with insurance companies to mitigate credit risk. However, these alternatives may limit the institution's reach and impact on financial inclusion.
  • Risks and Key Assumptions: The recommendations are based on the assumption that Daung Capital has the resources and capacity to implement the proposed changes. Potential risks include:
    • Implementation challenges: Implementing the recommendations requires significant organizational change and may face resistance from employees.
    • Technological limitations: Adopting technology and analytics requires investment and may face limitations in infrastructure and technical expertise.
    • Regulatory environment: The regulatory environment in Myanmar may evolve, requiring adjustments to the risk management framework.
  • Options Grid: A comprehensive options grid outlining the potential benefits, risks, and costs of each recommendation would provide a more detailed analysis of the trade-offs involved.

8. Next Steps

  1. Develop a detailed implementation plan: This plan should outline the specific steps, timelines, and resources required for each recommendation.
  2. Secure necessary funding: Investment in technology, training, and staff is crucial for implementing the recommendations.
  3. Pilot test new approaches: Pilot testing new credit scoring models, loan products, and technological solutions will allow Daung Capital to assess their effectiveness before full-scale implementation.
  4. Monitor and evaluate progress: Regular monitoring and evaluation of the implementation process and the impact on key performance indicators will ensure that the recommendations are achieving the desired outcomes.

By taking these steps, Daung Capital can effectively manage credit risk and achieve its mission of promoting financial inclusion in Myanmar.

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Case Description

In February 2021, political turmoil had engulfed Myanmar following a military coup under which elected leader Aung San Suu Kyi was jailed after her party won a landslide victory in the elections. CEO and co-founder of Daung Capital (Daung), a microfinance institution (MFI) in Myanmar, Leon Qiu recalled the years before the coup, when inclusive finance businesses like his had just begun to flourish. Daung had offered a variety of loan products in Myanmar since its inception in 2017. Its products included short-term loans for purchasing motorbikes, short-term loans to salaried workers for purchase of everyday utility items, and educational loans to students from poorer households. In 2019, Daung had launched a new loan product for farmers. Unlike other loan products, the loan scheme for farmers did not entail regular repayments. Instead, the farmers were expected to repay the loan as a lump sum after the harvest. Careful credit risk assessment of the target customer base was a key criterion in designing a loan product for farmers. Ethical obligations and decision-making were important considerations as well. Qiu pondered over the various constraints around which the farmer loan product had been constructed and how it could be improved. How could Qiu and his team assess the credit risks associated with the farmer loan product? What strategies could they implement to control the credit risks associated with farmer loans? Could they use machine-learning algorithms to assess the credit risks? The case illustrates (1) the various challenges faced by an MFI in assessing credit risk of agricultural borrowers (mainly farmers) (2) the dynamics of the MFI sector in Myanmar (3) credit risks presented by rural lenders. The case can be used in undergraduate, postgraduate and executive education classes to teach concepts on credit risk management in microfinance for emerging markets.

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