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An Introduction to Liquidity and Asset-Liability Management

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An Introduction to Liquidity and Asset-liability Management
Monnie M. Biety

hen a formerly credit-only microfinance institution (MFI) starts raising voluntary savings and using those deposits to finance the loan portfolio, the liquidity and asset-liability management of the institution becomes more complex. The institution not only has to deal with the fluctuating demand and varying interest rates and terms on loans, but also with erratic deposit demands and withdrawals and changing interest rates and terms on savings. Liquidity and assetliability management in savings institutions requires a coordinated, planned approach.

Liquidity Management
Liquidity refers to the ability of an institution to meet demands for funds. Liquidity management means ensuring that the institution maintains sufficient cash and liquid assets (1) to satisfy client demand for loans and savings withdrawals, and (2) to pay the institution’s expenses. Liquidity management involves a daily analysis and detailed estimation of the size and timing of cash inflows and outflows over the coming days and weeks to minimize the risk that savers will be unable to access their deposits in the moments they demand them. In order to manage liquidity, an institution must have a management information system in place—manual or computerized—that is sufficient to generate the information needed to make realistic growth and liquidity projections. The information needed includes:


The actual deposit liabilities of the MFI as of a certain date according to client name, maturity, amount, and type of account.

294 STRIKING THE BALANCE IN MICROFINANCE

■ ■

A history of deposit and loan inflows and outflows. A history of overall daily cash demands to determine the amount of cash that needs to be kept on-site and in demand deposit type accounts.

A liquidity shortage, no matter how

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