Why Documented Procedures Benefit MFIs
(Inferences from FRIENDS Consult Work with ENCOT)
Lower Tier MFIs could learn from ENCOT and improve their systems and procedures. ENCOT updated and refined its Finance and Accounting Policies and Procedures Manual, working with FRIENDS Consult Ltd. This was to more comprehensively document the internal financial procedures and operations of ENCOT, a Tier 4 MFi. This could pass a just one of “those things that happen” but for one thing: it provides learning for smaller MFIs.
The Learning
The importance of documenting internal operational and financial affords a microfinance institution advantages in the following aspects:
- Ensures Operational Consistency and Efficiency
Well documented procedures standardize processes like loan disbursement, repayment tracking, and savings management. This reduces errors, minimizes reliance on individual knowledge, and ensures smooth operations, especially during staff turnover. For example, a clear loan approval process helps loan officers in a rural area to maintain uniform standards, improving service delivery to SMEs. - Enhances Regulatory Compliance
In Uganda, MFIs are regulated by either Bank of Uganda under the Microfinance Deposit-Taking Institutions Act or by UMRA under the Tier 4 MFIs and Money Lenders Act. Documented financial procedures aid adherence to regulations, such as loan aging and provisioning, anti-money laundering (AML) and know-your-customer (KYC) requirements. - Improves Transparency and Accountability
Clear documentation fosters trust among clients, investors, development partners and donors by detailing how funds are managed, interest rates are set, and risks are mitigated. - Improves Risk Management
Documenting procedures for credit risk assessment, transaction recording and processing, fraud detection, and default recovery helps MFIs identify and address vulnerabilities. In Uganda, where SMEs face climate and market risks, documented processes ensure consistent risk evaluation, protecting the MFI’s financial health. - Informs Performance Monitoring and Reporting
Documented procedures provide a framework for tracking key metrics, such as loan repayment rates or portfolio-at-risk. - Builds Client Confidence
SMEs and individual clients rely on MFIs for accessible credit. Documented, transparent processes assure clients of fair treatment, encouraging repeat business and loyalty in competitive markets like Kampala.
Conclusion
For a microfinance institution, documenting financial procedures and operations is a cornerstone of operational success and sustainability. It ensures consistency, compliance, and trust while enabling risk management, scalability, and performance tracking. By prioritizing documentation, MFIs can better serve SMEs, strengthen financial inclusion, and contribute to Uganda’s economic growth. Follow ENCOT’s example and streamline.
By Dr. Keren Obara
Digital Marketing Associate.