The Future of Digital Lending in Ethiopia
The traction that met Michu and Telebirr early on highlights the massive demand for uncollateralized digital credit in Ethiopia. New entrants such as Kacha Digital Financial services have also announced they’re eying the micro-credit market. The impending entrance of Safaricom’s M-PESA is undoubtedly going to have an impact, but the telecom operator must wait until the National Bank of Ethiopia (NBE) sets rules before it can enter the fray.
Among the most significant recent developments in the digital lending sphere is credit cards. Awash Bank has announced it will start issuing credit cards to its clients in both secured and unsecured loan forms. Clients will be able to access as much as a few hundred thousand Birr in credit from the bank, with limits depending on the loan type.
It is a significant milestone for the Ethiopian financial sector, and the development is likely to be followed up by even more big changes.
Central bank regulators are working on a digital lending framework that will likely see micro-credit providers gain a step up in the financial sector. As it stands, mobile money providers are the only non-traditional financial institutions allowed to engage in micro-credit service but are still required to partner with banks or MFIs to access loanable funds.
The central bank, however, has recently expressed intentions to allow fintechs to loan out funds sourced from entities other than banks or MFIs. Common practice in other countries indicates that these other sources are usually private equity firms, individuals or development institutions. This model is practiced in various countries across the globe.
For instance, In Kenya, Digital Credit Providers (DCPs) were not regulated by the central bank until recently and sourced funds from various sources without having to disclose them to the central bank.
Nonetheless, close to 300 DCPs have applied for licenses from the Kenyan central bank this year after regulators put out a call following a decision that compels lenders to disclose their source of funding. Ten of them have already been licensed. Development Financial Institutions, commercial banks, private equity firms and high-net-worth individuals are some of the popular sources of funding that Kenya-based DCPs use for lending.
The implementation of various models of lending come with their own advantages and disadvantages. Here are the possible opportunities and threat that the Ethiopian market will experience as a result of the upcoming changes:
Opportunities
Encourages the development of new lending models such as peer-to-peer (P2P lending). Countries with advanced digital lending models have progressed to be able to offer a slew of innovative lending products. Diversifying the source of funds would allow creditors to experiment with innovative use cases based on their own risk appetite as they’ll be able to retain the risk on their own.
Provides a more attractive business case for
2. 04/02/2010 2
Financial versus
Fiscal Management
• for our purposes:
– fiscal management is limited to the management
of the funds, etc. during the institution’s twelve-
month fiscal year
– financial management includes fiscal management
and goes beyond just a twelve-month period
LIS 451
3. 04/02/2010 LIS 451 3
Organizational Accountability
• accountability is a managerial responsibility
with managerial functions that include
coordination among units, control
mechanisms to manage inputs and outputs,
and reporting the findings
4. 04/02/2010 LIS 451 4
Organizational Accountability
• accountability is important because people
are asking if the benefits of library services (or,
for that matter education; city services;
foreign policy) equals or exceeds its cost.
– tax payers want tax-supported institutions held
more accountable for the funds, time and other
resources allocated and expended.
– they want institutions to demonstrate their
effectiveness through efficiency and quality.
5. 04/02/2010 LIS 451 5
Organizational Accountability
• as library managers, we are accountable to:
– Academic Dean or an Academic Vice President or Provost
– they, in turn, to the institutional President
– President Board of Trustees or Chancellor
– eventually, State Government (Dept. of Higher Education)
– eventually, the regional accrediting association. They, in turn, are
responsible to the Council for Higher Education Accreditation and the
U.S. Department of Higher Education.
– maybe (likely) one or more professional accrediting associations
– eventually, students and whoever is responsible for supporting their
tuition. Could be a parent; could be the federal government.
6. 04/02/2010 LIS 451 6
Controlling
• controlling is the process whereby managers
monitor and regulate how efficiently and
effectively an organization and its members
are performing the activities necessary to
achieve organizational goals
• control is often used to coordinate the various
organizational units
7. LIS 451 Hernon and Dugan 7
Budgeting
• Budgets as a planning and controlling tool:
– in it simplest form, it is stated in terms of income and expenses
– its reflects the goals and objects of providing information services
– it is a political document, expressing policy decisions about priorities
of programs
– are commitments with funding authorities for services and programs
to be rendered, and facilitate the process of evaluating how
successfully the programs and services are being provided
• The control function of budgets is increasing as accountability
needs increase
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Finance and Budgets as Control
• Budgeting
– think of budgets as spending plans rather than a
“tool of constraint”
– an operating budget is a blueprint that states how
managers intend to use organizational resources
to achieve organizational goals efficiently
– budgets are more than numbers; they reflect the
mission, goals, plans and intentions of your
organization
10. LIS 451 Hernon and Dugan 10
Steps in the Budget/Funding Cycle
• First, a budget cycle is much longer than a fiscal year
– fiscal year is 12 months; fiscal years do not run concurrently
• The budget cycle includes
– preparation of the budget
– its execution
– and its auditing
• Oftentimes, three budget cycles are running concurrent.
Shortest time period is usually 2 years
11. LIS 451 Hernon and Dugan 11
Steps in the Budget/Funding Cycle
• Guidelines issued from the parent to the library
– the library must follow the budget system and budgeting cycle of the
parent institution
• Preparation of the budget based upon categories being
requested with justification for amounts (programs and
services needed, how much, and why the program and
service is needed for the requested dollar amount)
– staff involved in the preparation, oftentimes representing the
functional units of the organization chart
– use planning document to budget by action plan objective
(program) goal (bottom-up budgeting)
• Submission of the requested budget
12. LIS 451 Hernon and Dugan 12
Steps in the Budget/Funding Cycle
• Face-to-face review by the parent institution of the requested
budget with the library explaining and defending identified
programs and services, and the amount requested (marketing
opportunity)
• Approval of the budget allocated and submission of that
information to the library
• Appropriation of the budget during the fiscal year (all at once;
monthly; etc.)
13. LIS 451 Hernon and Dugan 13
Steps in the Budget/Funding Cycle
• Execution of the budget through the fiscal
year
• Reporting of the expenditures to the parent
institution (may be done by the library or the
institution’s business office, or a combination)
• Financial and program audit of the
expenditures to determine if the funds were
actually expended as reported
14. LIS 451 Hernon and Dugan 14
Steps in the Budget/Funding Cycle
• Librarians are increasingly spending time on systematic
budget review, analysis and evaluation to justify what has
been expended, why, and as feedback to the planning
(preparation) for the next budget cycle
15. LIS 451 Hernon and Dugan 15
Budget Information
• Where do we get costs and budget
information?
– Data produced internally, both current and
historical
– Information from vendors, such as inflation
projections
– Information from the professional associations
and organizations, such as provided by Bowker’s
Annual
16. LIS 451 Hernon and Dugan 16
Sources of Funds
• Internal
– the parent institution’s general budget
– departmental charges
– fees
• Support to the library from the parent institution depends
upon
– its level of funding
– its sources (taxed-based; tuition; grants; endowments; competing
interests of other units in the institution).
17. LIS 451 Hernon and Dugan 17
Sources of Funds
• External
– fundraising
– inter-governmental support from various levels
– private foundations or other philanthropic grants
– from gifts or support groups (Friends or
Associates)
– from fines and fees (membership; reimbursement)
18. 04/02/2010 LIS 451 18
Budgets
• types of budgets
– operational (income and expenses)
– capital (extraordinary acquisitions or services with
life spans of more than one year and in excess of a
dollar amount set by the institution)
19. Lump Sum Budgets
• library receives a “lump” of funds from the
institution
• ultimate flexibility – directors love this
• lacks specific relationships to the library’s
goals and objectives
• can lead to financial mismanagement
04/02/2010 LIS 451 19
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Line-item Budgets
• most common form because of its simplicity
– handout
• broad categories
• based upon historical information
• incremental
• critics claim that it is no longer effective, but it is
actively used
• easy to prepare
• in many institutions, the bottom line is the most
important; managers can unilaterally move
allocations between categories without approval as
long as the bottom line is not over-expended
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Formula Budgets
• used primarily in large systems with branch or campus
libraries
• assumes no changes in mission, goals and objectives
• usually determines what the library will get, but not how it is
expended
• popular formula:
– dollars per FTE student
– % spent on materials out of total budget (public libraries)
• sometimes used for departmental collection resource
allocations
– handout
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Program Budgeting
• establishes costs for programs, usually aligned
with the strategic plan (Robinson & Robinson)
• programs
– ILL
– reference services
• the reality: we program budget, but
implement by line-item because that is the
way the business office handles expenditures
and accounting controls
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Performance Budgeting
• performance budgeting
– funding is linked to outcomes
– bases expenditures on performance of activities,
emphasizing efficiency of operations
• tasks over programs
– measures quantity rather than quality; uses cost-
benefit analysis
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Zero-Based Budgeting (ZZB)
• requires organizations to review and to evaluate each of their
service programs and activities on the basis of both output
measures and costs.
• aligned with strategic plan and program objectives; forward
looking rather than based on past performance
• resource needs are calculated for each program at what is
needed, and then at a cut-off point that states: “if funds for
this program is allocated at this level, it makes no sense to do
this program.”
• essentially, once you get the funding allocated, fund the
priorities starting at the highest until funds run out.
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Cost Terminology: Direct Costs
• of a program are costs incurred for the sole
benefit of the program
– example of a direct cost = salary of a reference
staffer
26. 04/02/2010 LIS 451 26
Cost Terminology: Indirect Costs
• indirect costs are costs incurred for the
common benefit of two or more programs.
– example of an indirect cost = salary of the library
director
27. 04/02/2010 LIS 451 27
Cost Terminology: Overhead Costs
• are usually administrated centrally by the
parent and then assigned to the library based
upon a formula, such as square feet.
– insurance costs
– utilities
– maintenance
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Cost Terminology: Fixed and Variable Costs
• fixed cost stays constant while volume
increases or decreases
– salaries
• variable costs fluctuate dependent upon
volume
– printing supplies
29. LIS 451 Hernon and Dugan 29
Costs Terminology
• Capital costs
– acquire assets with a life cycle longer than one
fiscal year
– or, as determined by local policy (with the help of
auditors)
– budgeting for an upgrade/replacement for the
integrated library system
– the annual operating piece is the annual
maintenance costs for upkeep of the system
30. LIS 451 Hernon and Dugan 30
Fund Raising
• Non-parental support is increasingly
important because of the constraints on
institutional sources.
– Fundraising activity to enhance budgets is
increasing; seeking budgetary support for special
projects and capital needs.
– Fundraising has its own political and public
relations role.
31. 04/02/2010 LIS 451 31
Fund Raising
• make sure it is program-based
• do not ask for more than you can handle
• keep complete records of allocations,
expenditures, and what you did with them
– make sure they are auditable
32. 04/02/2010 LIS 451 32
Fund Raising
• report back to the funder when required
• publicize what you received and what good
you were able to do with it
• failure to do what you said you would do,
and/or mismanagement of funds, could end
the funding and your career
33. 04/02/2010 LIS 451 33
Accountability for Funds: Reporting
• keeping accurate records of what has been disbursed, what
has been encumbered, and the balance
• monthly reports (budget status reports) are usually forwarded
to the library from the parent. Library managers need to
reconcile this report with their internal reports.
• library internal reports are usually maintained on the library’s
integrated system, except for personnel costs.
• much of this is done through the library’s business office
operations which is an administrative unit, with accountants,
HR specialists, and others.
34. 04/02/2010 LIS 451 34
Accountability for Funds: Audits
• most institutions conduct an annual financial
audit of expenditures to verify that control
mechanisms work, and that funds were
allocated, expended and reported accurately.
– program audit: funds actually expended on
programs as planned and outcomes reported are
factual.
– in an institutional audit, the library is a program
35. 04/02/2010 LIS 451 35
Reports
• libraries report their information, internally and
externally.
• internal institutional reports are usually factual
based, identifying allocations (inputs), expenditures,
and measures of outputs.
– Example: spent $100,000 for monographs. Bought 1,500
monographs.
– The intent is to demonstrate efficiency and effectiveness of
managing resources allocated to meet stated service
objectives.
36. 04/02/2010 LIS 451 36
Reports
• external reporting is usually a public relations
activity.
– the purpose is to solicit support for causes set forth in the
goals of the library.
– shows effectiveness of how support received has been
used to provide services.
– it also tactfully requests continued or expanded support:
“with support (usually funding), we can provide this
program or service which we have identified as a critical
need of our users.”
37. Standards and Guidelines
• no prescriptive standards and guidelines since
the 1970s
– use to be libraries were responsible for about 5%
of the institutional expenditures
• now, lucky to get 2%
• goal: spend more on collections than on staff
04/02/2010 LIS 451 37
38. 2009 - 2011
• budget requests are reduced and/or approved
allocations are rescinded during fiscal year
• strategies: ensure that the library
– provides important and valued services to its users (know
your users’ needs) (handout – Polk)
– implements marketing strategies to inform users of
services (let users know the library is meeting their needs,
and how it is doing it) (handout – UC-SC)
– is prepared with its own proposals for reductions (know
your priorities) (handout - UC-SF)
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39. LIS 451 Hernon and Dugan 39
Political Budget Strategies
• Washington Monument Strategy
– Essentially this: if the funding is not there for a popular or mission
critical program, it will not be undertaken.
– used by the Clinton administration to close federal government when
the Republican-controlled House would not pass budget
authorizations. Clinton closed federal government monuments,
among other services.
– used by libraries all of the time: hours open is an example
• Squeaky Wheels
– decisions are heavily influenced by those making the most complaints
• Program Accreditations
– resources diverted to become, or maintain, accreditation status
