June 3, 2009

Weeks, Months and Years

Author: cadrivera

There are 7 days in a week, 4 weeks in a month, 12 months in a year. Well, more or less. In a general sense this may be true, but when this logic is used for mathematical purposes then problems will arise.

In my experience going around rural banks and other financial institutions all over the Philippines, implementation of an integrated core banking system is always a challenge. But when it comes down to the details, the most challenging aspect has to be in the Loans Operations. Issues or questions have always come up regarding installments, term, interest that is always related to how things are done manually.

When one is used to a “manual” way of thinking, the logic used for weeks, months and years can be very appealing. A simple concept, can be explained to others in a few choice words. But looking at it deeper and then checking a calendar, the “house of cards” collapses.

Thru analysis, it can be seen that the constant in this equation is “days”. In one week there are 7 days, in a month there can be 20,31 or 28 days. Maybe 29 days in a month (February) if it is a leap year. In a year there are 365 or 366 days. A weekly repayment loan with 12 installments will always have a different term and interest compared to a 3 month loan. Why, because when you look at a calendar the days in a month does not equate to the days in 4 weeks.

The MicroBanker System always uses days for different interest calculation functions. Loans with different repayment frequencies are considered based on the number of days as the base reference instead of using a heirarchical approach. All factors are considered against the main constant which is the number of days. This may cause fluctuations in the calculations a few times, but the logic is sound. There is a basis that can readily be explained.

During the implementation of a new core banking system, an explanation on how something works is not an option, it is a must. The best approach is always to use examples. Entering figures and coming out with results. Once the message has been understood by all concerned a common ground can be established.

It has always been a core principle of the MicroBanker system to allow for “flexibilty”. To think in variables instead of constants. That is why the system is able to accomodate a wide variety of loan interest calculation types (declining, flat, annuity, etc.) and various installment schemes (yearly, quarterly, monthly, weekly, etc.). But the system always strives to strike a balance between logic and flexibity. For one without the other is surely a lost cause.