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MICROFINANCE NETWORK

MICROFINANCE CLIENTS,

PRODUCTS/SERVICES AND MARKET NICHES:

WHAT are we delivering? HOW are we delivering? WHO are we reaching?

Summary of the MicroFinance Network Conference on “Microfinance Clients, Products/Services, and

Market Niches”

Convened in Bali, Indonesia October 7-10, 2003

Edited by Kelly Hattel

2004

MicroFinance Network The MicroFinance Network is a global association of microfinance institutions committed to improving the quality of life of the poor through the provision of credit, savings, and other financial services. Network members believe in applying a commercial approach to the establishment of sustainable financial institutions that reach large volumes of clients who are not served by traditional financial institutions. The MicroFinance Network serves as a vehicle for facilitating the information flow from leading microfinance organizations to other microfinance practitioners through international conferences, technical exchanges and publication of best practice materials. The Network is committed to expanding the frontier of microfinance by challenging member practitioners to new levels of excellence and, where regulatory frameworks exist, to become regulated financial institutions. Number of Members: 29 microfinance institutions, 1 second-tier institution and 2 support institutions in 18 countries Total Loan Portfolio: US$ 2.2 billion (2002)

Total Number Borrowers: 9.1 million (2002) Steering Committee: Carlos Labarthe, Compartamos; James Obama, PRIDE Tanzania; Jason Meikle, FINCA Microcredit Company; Maria Otero, ACCION International; Martin Connell, Calmeadow; Md. Shafiqual Choudhury, ASA

Regulated Financial Institutions

ACLEDA Bank, Cambodia Compartamos, Mexico K-REP Bank, Kenya Banco ADEMI, Dominican Republic Cooperativa Emprender, Colombia Los Andes, Bolivia BancoSol, Bolivia FINAMERICA, Colombia Mibanco, Peru Bandesarrollo, Chile FINCA Microcredit Company, PRODEM FFP, Bolivia BRI Unit Desa, Indonesia Kyrgyzstan Share Microfin Limited, CERUDEB, Uganda Equity Building Society, Kenya India Citi Savings and Loan, Ghana Kafo Jiginew, Mali SogeSol, Haiti

Non-Governmental Organizations

ABA, Egypt BRAC, Bangladesh PRIDE Tanzania Al Amana, Morocco Constanta, Georgia Tanzania ASA, Bangladesh Fundusz Mikro, Poland TSPI, Philippines

PADME, Benin UMU, Uganda

Support Institutions

ACCION International, USA Calmeadow, Canada

MICROFINANCE CLIENTS, PRODUCTS/SERVICES AND MARKET NICHES:

WHAT are we delivering? HOW are we delivering? WHO are we reaching?

Summary of the MicroFinance Network Conference on “Microfinance Clients, Products/Services, and

Market Niches”

Convened in Bali, Indonesia October 7-10, 2003

Edited by Kelly Hattel

2004

Microfinance Clients, Products/Services and Market Niches

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TABLE OF CONTENTS

TABLE OF CONTENTS ........................................................................................i

LIST OF ACRONYMS AND DEFINITIONS .........................................................iii

FOREWORD ........................................................................................................v

INTRODUCTION ..................................................................................................1

DEDICATION: ..................................................................................................................................3

WELCOME...........................................................................................................5

THEME I: WHO ARE WE REACHING? HOW DO WE KNOW WHO OUR CLIENTS ARE?....................................................................................................7

1. Who are our Clients? ................................................................................................................8 1.1 Serving a Range of Clients – Starting with the Poorest..........................................................8 1.2 The Creation of a Multi-product Bank to Foster Microfinance ................................................9

2. Knowing our Clients through Assessment Tools ................................................................11 2.1 Poverty Assessment Tools – The ACCION Approach .........................................................11

THEME II: WHAT KINDS OF SERVICES & PRODUCTS ARE WE DELIVERING?....................................................................................................17

1. Specialization or Diversification .............................................................................................17 1.1 PRIDE Tanzania – A Single-Product Example.....................................................................19 1.2 Uganda Microfinance Union (UMU)......................................................................................22 1.3 An MFI caught in the middle – what approach to take? .......................................................24

THEME III: WHAT KINDS OF SERVICES & PRODUCTS ARE WE DELIVERING?....................................................................................................27

1. The Experience of Bank Rakyat Indonesia (BRI) – Simple Products, Big Impact.............27

2. Housing Microfinance in Mibanco and Other ACCION Affiliates........................................30

THEME IV: HOW ARE WE EVALUATING MFIS?.............................................33

1. Commercial and Microfinance Ratings/ Ratings and Assessments – What is the

MicroFinance Network

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Difference?....................................................................................................................................33

2. Benchmarking and Transparency...........................................................................................37

THEME V: HOW ARE MFIS DELIVERING SERVICES & PRODUCTS? - METHODOLOGY............................................................................................... 41

1. Models and Modes ..................................................................................................................41 1.1 Share Microfin Limited (SML) – An Evolving Model .............................................................41 1.2 ASA – A Model of Simplicity .................................................................................................44

THEME VI: HOW ARE MFIS DELIVERING SERVICES & PRODUCTS? – FOCUS ON EFFICIENCY .................................................................................. 51

1. Use of Staff Incentives ............................................................................................................51 1.1 Key Observations of Staff Incentive Schemes .....................................................................51 1.2 Alexandria Business Association (ABA) ...............................................................................53 1.3 Building a Path to Increased Productivity – Staff Incentives at Centenary Rural Development Bank, Uganda.......................................................................................................55 1.4 Incentives for both Staff and Clients – Share Microfin Limited.............................................60

2. Efficiencies Through Investment Capital: A Means to Encourage Expansion of Commercial Banking in Microfinance ........................................................................................64

3. How are MFIs Delivering Services/Products – New Products, New Technologies ..........66 3.1 BRINETS for Delivering BRI Unit’s Products and Services..................................................66 2.2 Innovative Use of Technology to Build a Market ..................................................................70

CONCLUSION ................................................................................................... 75

ANNEX I: CONFERENCE AGENDA.................................................................. 77

ANNEX II: SPEAKER BIOGRAPHIES............................................................... 79

ANNEX III: PARTICIPANT LIST ........................................................................ 85


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LIST OF ACRONYMS AND DEFINITIONS

ACP Acción Comunitaria del Perú APS Autonomous Points of Sale ATM Automatic Teller Machine BRBD Bangladesh Rural Development Board BRI Bank Rakyat Indonesia BRINETS BRI Integrated Network and Information System CAMEL Capital Adequacy, Asset Quality, Management, Earnings, and Liquidity

Management CGAP Consultative Group to Assist the Poorest EFT Electronic Funds Transfer EO Extension Officer FFP Fondo Financiero Privado (Private Financial Fund) FINCA Foundation for International Community Assistance FFP Fondo Financiero Privado, Private Financial Fund IDB Inter-American Development Bank IFC International Finance Corporation IT Information Technology LSMS Living Standards Measurement Survey MBB MicroBanking Bulletin MIX Microfinance Information eXchange MFI Microfinance Institution MFN MicroFinance Network MIF Multilateral Investment Fund MIS Management Information System NGO Non-Governmental Organization NORAD Norwegian Agency for Development PKSF Palli Karma Sahayak Foundation POS Point of Sale PRIDE Promotion of Rural Initiatives and Development Enterprises PRPS Performance Related Payment Scheme RLF Revolving Loan Fund SATM Smart Automatic Teller Machine SGL Solidarity Group Lending SOGEBANK Societé Generale Haitienne de Banque SOGESOL Societé Generale de Solidarite STU Teller Unit System UMU Uganda Microfinance Union USAID United States Agency for International Development VSAT Virtual Satellite $ Refers to US$ if not otherwise specified


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FOREWORD The MicroFinance Network is a global association of leading microfinance practitioners. The Network provides a forum where the most advanced microfinance institutions can convene to engage in high level discussions that allow them to learn from each other’s experiences. Each year, the executive directors of these institutions meet for several days in one of the member countries to discuss the most important issues in the industry. The 10th annual conference of the Network was held in Bali, Indonesia in October 2003. This year’s topics focused on service delivery. The conference addressed the following questions:

• What do we know about our clients? What do we know about the poverty level of our clients?

• What products are we offering? Under what circumstances do we add new products? How do new products affect our institutions?

• What have we learned about how to deliver with greater efficiency? What have we learned about customer satisfaction?

The Network would like to extend a special thanks to Mr. Rudjito, President Director, Bank Rakyat Indonesia, who helped to host and facilitate this year’s conference. He and his staff contributed a great deal of personal and professional time to ensure a dynamic and professional meeting of the members of the MicroFinance Network. The Network also would like to thank the special guests who joined us during the conference. We were honored to have Mr. I Gusti Made Oka, President and Founder of Bank Dagang Bali, a pioneer in commercial microfinance, welcome us to his native island and participate in the conference. The Network would also like to thank the two other invited guests, Isabelle Barrès from the Microfinance Information eXchange (MIX) and Leesa Shrader, formerly with the Microfinance Centre of Poland, both of whom provided valuable perspective to the discussions held during the conference. The editor of this report thanks Beth Rhyne and Patty Lee Devaney of ACCION International and Isabelle Barrès of the MIX for taking time to review this document and for providing valuable comments on the final draft. Finally, the MicroFinance Network would like to thank all of its members who contributed to making the conference a success, reaffirming the relevance of this very special forum of leaders in the field of microfinance.


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INTRODUCTION The 10th anniversary of the founding of the MicroFinance Network is a good time to reflect on what has been accomplished to date and what the future holds for the Network. The members of the MicroFinance Network are among the strongest microfinance institutions (MFIs) around the world – those that are setting the pace, forging new paths, and providing leadership in their countries and regions. The annual MFN conference is a unique opportunity to meet in a setting that encourages frank and open exchange. The Network was founded based on a common interest in the transformation of non-governmental organizations into regulated financial institutions and its origins are grounded in three concerns shared by all its members:

• Keeping our mission of establishing sustainable financial institutions • Meeting the challenge of scale in reaching the poor • Making microfinance permanent

From the outset, Network members turned to financial principles applied by sound financial institutions as the basic tenets behind microfinance. The application of these principles – what we came to call the financial systems approach – made permanence possible by emphasizing financial viability and scale, and establishing permanent sources of funding for microfinance institutions. This shared vision has remained constant in the Network. This global network is committed towards a commercial model, inspired by the member-pioneers, BRI and BancoSol. The microfinance institutions in the Network have gathered annually since it’s founding in 1994 at a BancoSol-hosted workshop in Bolivia. Since then, as a formal Network, members met in South Africa, Canada, the Philippines, Egypt, Bangladesh, the United States, Poland, and this year in Indonesia. These conferences address issues key to arriving at our shared goals, engage members in discussion and debate, and use presentations by members to inform and challenge each other. At times the Network has opened its meetings for a broader attendance. Hundreds benefited from the MFN conference on Governance in 1998, and the second conference on Commercialization in 2001. The MFN has taken on key issues and provided leadership in the field, sharing the experiences of its members and voicing key support for the commercial model. Its work has continued to develop along several significant paths, and the MFN has succeeded in:

1. Gathering the best information on key issues, such as transformation of NGOs to regulated institution and supervision and regulation of MFIs;

2. Developing standards that extend to the field in areas such as internal controls, and governance;

3. Facilitating exchanges among its member institutions;


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4. Offering a broad array of publications, including manuals on topics that are essential for best practice in microfinance.

It is particularly interesting that the Network is agnostic about methodology. Its members utilize all the leading methodologies in microfinance – village banking, solidarity groups and individual loans. Their experience highlights the often ignored dictum that it is the best application of a methodology, and not the methodology itself, that yields results. As the Network completes its first ten years, it is a good time to ensure that the Network will continue its path-breaking work, that it is well-oriented to maintain its position of leadership and that it will continue to influence the field in general. We must see ourselves as social entrepreneurs, poised to make an increasingly profound impact on the lives of poor families. We have the opportunity to do so because our work combines finance with development in a synergy that is seldom accomplished. This Network helps us do that. This report provides a summary of the presentations and discussions of the Microfinance Network members at this year’s annual conference. Rather than provide a transcript of the proceedings, this report organizes the ideas and discussion topics to draw out the key issues. For some sections, presentations are included in their entirety. In other sections, the ideas are presented as key points generated from the rich discussion. The leading microfinance institutions from around the world that comprise the MicroFinance Network have made substantial progress in extending financial services to unserved markets. However, each MFI recognizes that there is much that can be learned from one another. This report seeks to provide insight for the members of the MicroFinance Network and other practitioners who are open to new ideas and learning from the successes and challenges of others. Maria Otero Chair, Steering Committee MicroFinance Network Washington, DC, USA December 2003


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DEDICATION:

The MicroFinance Network dedicates this conference summary to Nabil El Shami, for his committed service to the MicroFinance Network since its inception. We recognize his leadership on the Steering Committee, as well his many contributions to the industry as a whole. We wish him all the best in his retirement.


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WELCOME

Bank Rakyat Indonesia –Conference Host At the opening reception of the 10th Annual Conference of the MicroFinance Network, Mr. Rudjito, President Director of Bank Rakyat Indonesia (BRI), welcomed guests with the following words: “Starting tomorrow, you will work on important issues and challenges of microfinance. I believe that having this conference in Indonesia is the right choice because we have a history of rich experience in commercial microfinance. With a population of over 220 million people on over 17,000 islands with 300 types of dialects, BRI was established over a century ago in 1895 in Java, representing the beginning of rural finance in Indonesia. In the 1970’s, BRI’s microfinance operations served as a supply-driven channel of government support. This proved to not be sustainable. From this model evolved a demand-driven product based on the principles of commercial banking. BRI has had many successful experiences in dealing with low-income people. During its long journey, BRI has overcome many different circumstances – whether political, social, economic or technological in nature. BRI also has experienced a severe economic crisis which started in 1997 and still exists until now. However, our work in microbanking consistently has demonstrated impressive performance throughout all those years. Using simple technology, BRI, through its Unit Desa system grew to become a leading commercial microfinance provider. Since the beginning of the commercial era of BRI in 1984, we have delivered credit in the amount of almost Rp. 80.5 trillion [US$ 9.5 billion]. Now, loans outstanding as of June 2003 are Rp. 13 trillion [US$ 1.6 billion] with more than three million customers spread out all over Indonesia, from the urban to rural areas, even in very remote areas where other banks would think ten times before operating in that area. BRI has 3,931 BRI Unit offices to serve micro business customers. Not only in loans do BRI Units show successful performance. In savings, its performance is even more astonishing. When BRI mobilized savings in rural areas, many people were skeptical. However, BRI Units’ success has turned around the old paradigm that low-income people cannot save and will not save. Now our savings amount exceeds our loans outstanding. More than 29 million savers deposit their money in BRI, with a total amount of Rp. 24.6 trillion [US$ 2.9 billion] in our microbanking network. Our success does not mean that our job has finished. New challenges always come up in the development of the bank. After more than two decades in operation, we do not want to just sit down and enjoy our success. Even now we have to work harder if we want to maintain our success as the business environment and customers’ preferences have changed. We must address the challenge of how to increase the economic welfare of the people and how to


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empower micro, small and medium entrepreneurs. BRI must work to strengthen its capital base and continue to find ways to manage the many risks the bank faces including credit, market and legal risks. It must also continue to build a foundation of good corporate governance, recapitalizing lending operations day by day. Last September, the Indonesian government recognized BRI as the best state-owned enterprise in finance because of its successful outreach. Countries around the world are sharing the common millennium targets for 2025 to slash poverty up to half. It is possible. Therefore, I am very grateful for being the host of MicroFinance Network annual conference. I believe that during the three-day conference, your deliberation and your wealth of experiences shared in this conference will widen our perspective in providing the best services to low-income people and hopefully increase their wealth as well, which eventually will have a positive impact on society. Finally, I hope this meeting can develop and explore many kinds of cooperation and partnership among members based on mutual benefits. I wish you good luck to this meeting and enjoy your stay in this paradise island of Bali.” Mr. Rudjito President Director Bank Rakyat Indonesia MFN Conference Host


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THEME I: WHO ARE WE REACHING? HOW DO WE KNOW WHO OUR

CLIENTS ARE? “The provision of microfinance services is evolving from focusing only on microentrepreneurs to reaching the working poor. This evolving definition includes poor salaried workers and others with need for capital (for education, home improvement, insurance, etc.) As regulated microfinance institutions expand their operations toward a full service approach, their loan products reflect this new definition of the market.” - Maria Otero, ACCION International “Since the beginning of the commercial era of BRI in 1984, we have delivered credit in the amount of almost Rp. 80.5 trillion [US$ 9.5 billion]. Now, loans outstanding as of June 2003 are Rp. 13 trillion [US$ 1.6 billion] with more than three million customers spread out all over Indonesia, from the urban to rural areas.” - Mr. Rudjito, President Director of Bank Rakyat Indonesia

* * * * * The definition of microfinance has expanded both in terms of customer demand and the profiles of microfinance applicants. MFIs recognize that many clients want more than working capital loans and that they come from more diverse populations than those served in the past. More MFIs are serving a broader range of clients who fall somewhere between the extremely poor and higher-income salaried workers who still cannot access financial services from traditional commercial banks. MFIs are now offering consumer loans, housing loans and other new products and services that respond to the needs of not just microentrepreneurs, but also their families and their employees. Microentrepreneurs of all levels are benefiting from these expanded services. Conference participants were asked to think about how they define their respective markets, considering particularly when they would decide to broaden their target market and why. Why are MFIs moving beyond their traditional markets? Has this expansion been driven by increased demand from different market segments or from a supply-side institutional decision? How has this shift been supported or stifled by donors or other interested parties?

MFIs in different countries, operating under varying regulatory structures are frequently moving up market, providing higher loans to higher income clients often to compensate for lower returns


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on portfolios with smaller loans. At the same time, other MFIs are taking a second look at their mission and are beginning to move down-market to better meet the needs of microentrepreneurs. In the following section, two MFIs offer an analysis of their clients and offer insight into why they target certain sectors of the market.

1. WHO ARE OUR CLIENTS?

1.1 Serving a Range of Clients – Starting with the Poorest Presented by Udaia Kumar, Managing Director, Share Microfin Limited (India) Share (Society for Helping and Awakening Rural Poor through Education) Microfin Limited (SML) provides financial and support services to skilled and unskilled rural poor women entrepreneurs. This enables them to undertake income-generating activities, such as becoming vendors, home-based producers, artisans or traders. SML is a community-owned institution with a paid up share capital of Rs. 8.28 crore (US$ 1.8 million) and has disbursed over Rs. 274.29 crore (US$59.6 million) in loans to about 216,000 women entrepreneurs since its inception. Share started microcredit operations as a Society in 1993 as a two-year action research project with a recoverable grant from the Asia Pacific Development Center in Malaysia and a soft loan from the Grameen Trust in Bangladesh. In 1999, due to legal constraints as a Society, Share Microfin Limited transformed into a Non-Banking Financial Company (NBFC). Share’s prime activity is to reduce poverty by providing poor women continuous access to collateral free credit, creating opportunities for self-employment. The objective in creating the public limited company was to leverage a significant quantity of mainstream commercial funding, to expand the outreach of microfinance in India. Share provides financial and support services to the bottom 50 percent of women living below the poverty line. The loan term is for one year, and loans are disbursed as general loans, seasonal loans, special loans and microenterprise loans. Loan delivery begins with a public orientation meeting that is organized in villages. These meetings are designed to brief women and other villagers on the loan delivery programs. Women form groups of five members based on general criteria. There should not be blood relationship between members, women should be of the same age group, and should come from the same area. Once enrolled in a group, the members are responsible for loan approval, disbursement and repayment. A staggered disbursement ratio at 2:2:1 is maintained in order to build up group peer pressure. The process is as follows:

• Two members of the group receive a loan in the beginning of the first cycle. • Once weekly repayments are established and four weeks have passed, the next two

members can receive their loans. • After another four weeks, the group leader finally receives a loan.


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The loan period is one year with repayments spread over 50 weeks of equal installments. The field staff and the monitoring department of SHARE closely monitor the loan utilization, repayments and credit discipline of the groups. As of August 31, 2003, Share had worked in 2,755 villages through a network of 99 branches and had disbursed about Rs. 268.37 crore (USD 58.34 million) to 215,254 poor rural women. The institution has reached operational self-sufficiency of 111 percent, with a total loan portfolio of about Rs. 68.44 crore (USD 14.88 million) and a repayment rate of 100 percent. Share has minimized risk through an insurance fund that is used in the case of death of a borrower. Seed capital is provided based upon mutual trust, discipline and peer pressure, rather than collateral or guarantee. Share is quite clear about who they are reaching. They aggressively target the poorest of the poor by handpicking them off the streets and inviting them to join the program. Share believes that their targeting efforts have had an important effect on their high repayment rate. To effectively target clients, loan officers rely on assessments of the clients’ housing and household assets. Through a general home visit and discussions with neighbors, the loan officers are able to determine the level of poverty of potential clients. Then, through the lending program, borrowers are lifted out of poverty gradually during each loan cycle. Recent impact studies of Share indicated that 77 percent of their mature clients, those that have been members for at least three years, have experienced significant reduction in their poverty over the past four years, and half of these are no longer poor. Sixty-four percent of mature clients had been very poor when they began receiving SML microfinance loans three to four years ago, while the remaining 36 percent had been moderately poor. Today, only 7.2 percent remain very poor, while 56.8 percent are moderately poor and 36 percent have moved completely out of a state of poverty. At the end of 2001, The International Food Policy Research Institute (IFPRI) in Washington, D.C., USA, undertook a CGAP-supported study to assess the poverty levels of Share’s clients. The survey results indicated that 85 percent of Share’s clients come from the lowest 20 percent of people living below the poverty line in India. The remaining 15 percent of clients are below the poverty line, but have income levels above the bottom 20 percent. The survey demonstrated that Share’s targeting tool is indeed effective in targeting the poorest of the poor. However, while Share continues to target the very poor, they have also begun reaching out to slightly wealthier borrowers to balance risk and acquire more savings that can in turn be used to support more loans for the poor.

1.2 The Creation of a Multi-Product Bank to Foster Microfinance Presented by Alvaro Retamales, General Manager, Banco del Desarrollo Microempresas S.A. (Chile) Chile has a population of 15.6 million with a GNP per capita of US$4,260. With 20.3 percent of the population below the poverty line, there are approximately 1.1 million microentrepreneurs in the country, while only about 135,000 are currently being served. Banco del Desarrollo (Bandesarrollo) is a private company that focuses on sectors of the population with few


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opportunities to access the traditional financial system in Chile. Bandesarrollo’s mission is to provide financial services to the full range of the microenterprise sector in Chile, including medium, small and micro entrepreneurs. As of June 30, 2003, Bandesarrollo had 42,191 clients in the microfinance program, with 38,437 microloans outstanding (35,934 loans for microentrepreneurs and 2,503 for solidarity group loans) and an outstanding portfolio of US$26.6 million. Bandesarrollo decided to broaden its services towards new segments when they became aware that only 10 to 15 percent of Chile’s microentrepreneurs are actually being served. The bank also aims to be a development partner which is able to impact the socioeconomic growth of its clients. The bank sees their role as a pioneer provider of financial services in Chile. Because of this, they continuously explore how to serve new segments with new tools. Bandesarrollo’s strategy to broaden services includes several key elements:

1. Periodically reviewing of the impact of existing products and services 2. Revising and improving the risk management system for assessing new products 3. Increasing productivity through the use of new technologies 4. Using an increasingly a more differentiated price structure on loans for different levels of

clients As a private bank looking to broaden services, Bandesarrollo began a steady down-scaling strategy which included a decision to include non-registered microenterprises and microentrepreneurs without collateral. They also lowered the minimum loan size from US$240 to US$120 and re-incorporated the group lending methodology for the most risky segments of the market. Finally, they stimulated savings among these same population segments. Through this down-scaling strategy, the bank has opened more than 15,000 new accounts in just three years. To continue outreach to new sectors of the population, Bandesarrollo has also engaged in a diversification strategy which has led to the launch of some very interesting and innovative loan products, including loans for fishermen working in specific fishing areas, flexible loans for families (offered to clients with good repayment history), forestry loans, and loans to small farmers. The bank also began to focus more on innovation potential through market research studies (quantitative and qualitative), the use of different polling techniques, and utilizing effective listening skills with regards to clients. The process flows from bottom to top - from clients, to loan officers, to management. The bank continuously observes existing markets and services in order to find out how to make existing tools better. In addition, the bank has put together a flexible, multidisciplinary team focused on the design and development of new products and methodologies. This team recognizes the importance of field testing through pilot phases of new products and the importance of making necessary adjustments as they continue to gradually expand throughout the country. Averaging three new product launches per year, Bandesarrollo has succeeded in tripling the total number of clients in three years. This increase has come with high client satisfaction and has had a significant impact on the socio-economic status of its clients (as measured by an independent agency).


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2. KNOWING OUR CLIENTS THROUGH ASSESSMENT TOOLS

2.1 Poverty Assessment Tools – The ACCION Approach Presented by Elisabeth Rhyne, Senior Vice President, ACCION International (USA) Poverty assessment is used to understand and measure the poverty levels of the clients reached. This is done by developing special indicators that are used to monitor outreach to the poor on a regular basis. These indicators measure an institution’s social performance alongside its financial performance. This information collected about poor clients can be used in many ways, among them in product and service design. The effective use of a poverty assessment can ultimately enhance the ability of an institution to reach down-market. It is important to note that ACCION’s poverty assessment is NOT a targeting tool and should not be considered as an impact study. There are several approaches to poverty assessment currently under way. Each has special methods and objectives that differentiate them from one another. CGAP has been working to develop a targeting tool which serves as an institutional assessment that looks at whether the MFI is making an effort to reach the poor and what tools the MFI itself has in place to measure their success in doing so. Both Freedom from Hunger and FINCA International have developed their own instruments. However, since these institutions use the village banking methodology, they must use proxy indicators for client income. Each of these tools is simple to use, yet effective. As a natural extension of their organizational focus, Freedom from Hunger focuses on the issue of food security. The loan officer asks the client’s family “which one of the following statements best describes the food eaten in your household?”

a) Enough and the kinds of food we want to eat b) Enough but not always what we want to eat c) Sometimes not enough to eat d) Often not enough to eat.

FINCA has developed a “poverty index”, using seven indicators and an overall score. The indicators include 1) food; 2) healthcare; 3) housing quality; 4) children in school; 5) empowerment; 6) social capital; and 7) expenditure. They use a brief questionnaire which takes the loan officer about 30 minutes to administer. A third approach, one being developed by ACCION, flows from the individual lending methodology that is used by most of our affiliate organizations. It draws from two datasets: the national data of the World Bank’s Living Standards Measurement Surveys (LSMS1) and management information systems (MIS) of the MFI. Because detailed information on household and business expenditure is already available in the MIS from the loan analysis process, no additional data collection is needed. The analyst only needs to understand the value of the data and put it into a form that is useful for interpretation and can be used for decision-making.

1 LSMS is a large-scale household survey project that pulls together information from a number of country organizations and is coordinated by the World Bank.


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ACCION Poverty Assessment Methodology Using the example of Mibanco in Peru, data from their MIS was compared with data from national household expenditure surveys, as well as national and international poverty lines. First, the MIS data was downloaded from the system. The relevant data on income and expenses of the household unit was originally collected during the client application process and credit analysis. Next this data was compared to the World Bank’s Living Standard Measurement Study (LSMS) data. The ACCION poverty assessment of Mibanco used LSMS data from the 1994 survey which provides a sample of 3,623 households. From this national sample, ACCION selected 830 households in the Lima metropolitan area in order to compare with Mibanco’s clients located in Lima. The ACCION methodology assesses absolute poverty levels by comparing income and expenditure to a number of fixed poverty lines, including the national Peruvian poverty line, the Lima metropolitan line, and the US$1/day and US$2/day international poverty lines. Finally, the two data sets are compared, with certain adjustments to make the data comparable. The results of the ACCION study show that the poverty rate of Mibanco clients is higher than the Lima sample population, in terms of both national and Lima poverty lines. Forty-nine percent of Mibanco’s clients are living in poverty, while 40 percent of the Lima population falls into the same category. Twenty-seven percent of Mibanco’s clients are below the national poverty line, while twenty-two percent of the Lima sample population had incomes below the national poverty line. These results and other comparisons suggest that Mibanco is serving Lima’s poor and near-poor majority.

Figure 1: Household Annual Income Per Capita, Mibanco vs. Peru 2000-2001

Lessons about Measuring Poverty

0%

20%

40%

60%

80%

100%

- 1,000 2,000 3,000 4,000 5,000 6,000

Income (nuevos soles)

% o

f pop

ulat

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Mibanco National PopulationLima National Poverty LineLima Poverty Line $1/day$2/day


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When trying to assess poverty levels, it is important to keep in mind that poverty lines are arbitrary and subject to great error and manipulation. From ACCION’s experience, it is better to compare population distributions than to focus on a distinct poor/non-poor cut-off. For example: Haiti’s national poverty line is below the international US$2/day line, while Peru’s national poverty line is well above the US$2/day line. However, all purport to measure the same thing: the ability to buy basic food necessities plus a minimum of non-food items. What is a Social Scorecard? A social scorecard is a set of indicators that captures the social mission of an organization. It is analogous in nature and uses to key financial, demographic and enterprise-focused indicators. An effective social scorecard should be able to effectively capture the organization’s social mission, should be easily measured and used in regular monitoring. Finally, it should be actionable: the results of the data can influence management decisions. While there are various strategies for creating social scorecards, standard indicators of outreach include the number and/or growth of clients: this is an essential part of any scorecard. Standard indicators also include the percentage of women: this is optional depending on an institution’s mission. The average loan size is often used, but this is a very poor, misleading indicator because of the range of loans that many MFIs offer. Impact studies touch on many of these issues, but they are often complicated and expensive. They are also open to methodological challenge and not actionable by management. Finally, they are difficult to use as a means for ongoing monitoring. ACCION’s proposed approach uses the client profile to track the poverty distribution of clients. The loan size distribution is used in place of the often used indicator of average loan size.

Figure 2: Proposed Social Scorecard for Mibanco (Summary)

Clients Income/Capita Loan Size2 Portfolio3 New Clients4

Income as Percent of

Poverty Line1 % USD USD % No.

A: 0-50% 7 1,500 844 2.3

B: 50-75% 21 2,263 1,230 10.2

C: 75-100% 21 3,140 1,705 14.1

D: 100-120% 13 3,955 2,136 11.1

E: >120% 38 7,489 4,131 62.4

Total/Mean 100 4,610 2,529 100

Notes: 1. Macroeconomic indicators needed to calculate poverty lines, 2. Mean initial loan size 3. Distribution of the portfolio by loan size, 4. Column shown here as an example of number of clients who received their first loan from Mibanco during given period (Actual numbers not included in this table) It is recommended that the full report include the following: number of clients, household income, average initial loan size, average outstanding loan balance, the value of the


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portfolio, total assets, and the number of new clients. In addition, we recommend that the report include a break-down of the value of the portfolio, number of clients, and clients’ income by specific loan size categories. MFIs can use the scorecard in a number of ways. The board and management can agree on preferred indicators to reflect the organization’s goals (in a tailored, non-standardized manner). Specific goals for these indicators can be set during business planning and can be monitored regularly (quarterly, annually, biannually). The results could be published in annual reports or places such as the MIX (www.mixmarket.org). Social scorecards would differ for each organization. That is, different MFIs would focus on different goals such as job creation, reaching women, etc. A social scorecard could be more relevant than an impact study as an information tool for management because management cannot make decisions on the basis of impact alone. It would probably be advisable for management to review the scorecard on a quarterly basis – less frequently than they would review financial performance data. Key Issues and Discussion on Poverty Assessment Tools and their Use With better social indicators, we would do a better job of measuring performance to meet specific goals. Some practitioners in the industry believe that it should become standard practice for microfinance institutions to develop a social scorecard to accompany indicators of financial performance. However, a broader question is whether or not microfinance institutions could produce appropriate scorecard information? How can management use the information in a scorecard? A scorecard is like a photo of an organization at one period in time. As such, it can show trends in an MFI’s ability to reach their target population over time if it is used regularly. One drawback, however, is that it is not possible to see changes as particular clients move from one poverty level to another. So the scorecard is unclear on whether clients are “moving up” or whether new products are bringing in new clients from different income categories. It is important to tie data directly to clients so that it is possible to cross-reference the scorecard results to individual data files for specific clients. One important issue to consider is the fact that for MFIs with many clients or limited resources, targeting and measuring can be very expensive. An MFI’s competition may have an advantage simply because they are not targeting. However, with ACCION’s approach, the cost of collecting the data is negligible because it uses information that already exists in the MIS. Nonetheless, an MFI must pay to have the report built into their MIS and must pay for validation to make sure the data is accurate – this can be expensive. The goal of the scorecard is to find a way to take advantage of the data that loan officers are already collecting and to find a low-cost way to gauge actual client composition on a regular basis. For MFIs without this kind of information, a proxy-based system is often more appropriate. That would mean that some additional questions would be included during loan analysis. Because of biases inherent to the loan application process, it is not advised to completely rely on information provided by the clients. It is important to learn to interpret the information given. Loan officers learn the skill of probing and use a system of cross checks to verify that information is correct. In terms of poverty data, the key is to understand systematic biases and to adjust the


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data used in the analysis accordingly. Data is credible as long as the researcher is up-front and transparent about its biases. Another concern from an MFI’s point of view is that a government or donor agency may decide to take action on an MFI because a segment of the MFI’s clientele is not “poor” in terms of the official poverty line. This could put an MFI in a difficult position. However, for MFIs with a specific mission, the scorecard is designed to push the boundary of defining a social mission. Other MFIs believe that it is not useful to measure the poverty levels of clients if the organization has grown steadily over time. It is easy to demonstrate the effect of new services on clients by seeing how the services are valued. However, perhaps in rural areas, it is easier to prove that an MFI is serving the poor. The scorecard could still provide valuable quantitative market data which can help an MFI better understand their clients. ACCION’s poverty assessment work is not about measuring impact, but about understanding to whom an MFI is lending. With the example of Mibanco, the data shows that a commercial bank (Mibanco) has a clientele that is 50% under the poverty line. This helps answer the big question being raised right now about whether there is a relationship between microfinance and poverty. This tool helps management gauge whether there is mission drift. Another consideration is how credible the data or assessment results will be if conducted by the MFI itself and not an independent entity. If there is any question of bias, policymakers will not see the data as credible. One conference participant believes that the question should go beyond just knowing who your clients are, but knowing if the services provided have helped to move people our of poverty.


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THEME II: WHAT KINDS OF SERVICES & PRODUCTS ARE WE DELIVERING?

* * * * *

Having discussed some of the types of clients that MFIs have reached, we now look at how MFIs are actually reaching them. The types of products and services that MFIs offer are often determined by location, institutional structure and certainly by management. Conference participants looked at some specific products being offered by MFIs, including housing loans, simple savings and loan products and discussed when an MFI might want to consider specializing in fewer products or look to diversify with many loan products.

1. SPECIALIZATION OR DIVERSIFICATION MFIs following a strategy of specialization focus their staff and resources on a few products and services, developing an expertise in a particular market for microfinance. A strategy of diversification is one where an MFI offers many products and services, sometimes referred to as “one-stop shopping.” The question of whether to move beyond one product and one market is a difficult choice for an institution whose entire structure and even mission is based on a one-product model. Moving beyond one product or changing a core methodology can expose an MFI to uncertain risk. However, it can also help to assure long-term sustainability in competitive markets and is the primary way for an MFI to grow. This section will look at this question from the perspective of several MFIs – those that currently specialize in one primary loan product and those that offer multiple products either to the same target market or to a range of clients. How do MFIs define what they offer to clients? An informal survey of MFN members conducted by the Microfinance Information eXchange (MIX) for internal use by the MicroFinance Network shows that most MFI’s have a range of two to five products. The survey found that MFIs were using different criteria to differentiate products: for example, seven MFIs used the loan term, one MFI used “currency, three “loan amount” and four “type of client receiving loan” (such as micro medium or small entrepreneurs). This highlights the importance of looking at the criteria used by MFIs before comparing the breadth of product offering. Let’s assume for example that 2 MFIs offer 2 types of loans with similar characteristics, except for the fact that one in US dollars and the other in local currency. The MFI that uses “currency” to differentiate its products will indicate that it has 2 loan products, while the other will indicate that it has only one product. Other criteria used to differentiate loan products includes loan payment frequency, guarantees required, the minimum and maximum amounts of the loans, lending methodology, and the


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ultimate use of the loan by the client. Some common criteria used to define savings products included the type of account (voluntary vs. mandatory), the initial deposit amount, minimum balance and the interest rate charged. Other financial products mentioned by MFIs include cash management (payroll, supplier payments, payment of utility bills), transfers and insurance. Also, even among the common criteria, actual definitions can vary widely.

Figure 3: Diversification/ Specialization as Stated by the MFI

Number of MFIs w ith X Loan Products

0

1

2

3

1 2 3 4 5 6 7 8

Number of Loan Produc ts

Num

ber

of M

FIs

Number of MFIs w ith X Savings Products

0

1

2

3

4

0 1 2 3

Number of Sav ings Products

Num

ber

of M

FIs


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Number of MFIs w ith X Other Financial Products

0

1

2

3

4

5

6

0 1 2 >3

Number of Other Financial Products

Num

ber

of M

FIs

Of the MFN members surveyed:

1. Loan terms ranged from three to 416 months 2. Microfinance loan amounts ranged from US$200 to US$100,000 (housing loans) 3. Criteria used to segment were different: by income, by number of employees, etc.

1.1 PRIDE Tanzania – A Single-Product Example Presented by James Obama, General Manager, PRIDE Tanzania (Tanzania) The Promotion of Rural Initiatives and Development Enterprises (PRIDE) Tanzania started as a government project funded by the Norwegian Agency for Development (NORAD) through a bilateral agreement between the Government of Norway and the Government of Tanzania and was incorporated in 1993 as a company limited by guarantee without share capital. PRIDE Tanzania started operations in 1994. PRIDE’s mission is “to create a sustainable financial and information services network for small and micro entrepreneurs in order to stimulate business growth, enhance income and generate employment in Tanzania.” Tanzania has a population of 34.2 million, covers an area of 945,000 square kilometers, and has a GDP per capita of US$ 2,180. Commercial lending rates average between 11 and 20 percent and the inflation rate is around 4.5 percent. Approximately 18 percent of the country lives below the poverty line.


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Figure 4: Conventional Business Dynamics – the Big Picture

Supply Driven Demand Driven

Production concept Product concept Selling concept

Marketing & Societal concepts

Assumptions: • Unlimited demand for

products and services, • Less or no competition, • Homogeneous market Limitations: • Does not take into

account market needs, changes

Emergence of stiff Competition: • Focus on

improved quality of products and services through R & D function

Challenges: • Product did not

sell as expected

• Application of aggressive selling strategy to push products and services out

Challenges: • Hard selling

became a nuisance, did not meet expectations of the market

Assumptions: • Market is heterogeneous • Concern for social

responsibility - Focus on market

needs and retention of customers through use of market research

- Responsiveness to social concerns

Advantages: • Promotes a win-win

situation Dynamics of Tanzania’s Microfinance Industry The level of economic, socio-cultural, political development in Tanzania as well as the technological environment is reflected in the nature and character of Tanzania’s microfinance industry. Until the late 1990s, microfinance was viewed as a social intervention in the poverty eradication initiatives. The industry, which is about 30 years old, has undergone drastic changes in terms of character and focus over the last decade and microfinance is now widely regarded as a business in its own right. The current drive advocates the application of commercial principles in microfinance while at the same time MFIs are seeking to maintain their social mission. MFIs have to adjust to changes in clients’ needs or they risk losing business or failing to be sustainable. The issue is therefore not a question of whether an MFI wants to specialize or diversify in order to survive, but rather if an MFI has the ability to respond to changes in market tastes. PRIDE’s sole product, the solidarity group loan (SGL), was launched in 1994. The microfinance industry in Tanzania at the time was not very developed, with very little competition, while the market was starved for credit, with huge demand relative to supply. The basic concern for MFIs was reaching out to the poor, yet prospective/target clients were considered to be risky. The market was considered to be more or less homogeneous. PRIDE’s particular product design was borrowed from the successful Grameen model and modified to suit what was considered to be the market needs at the time (supply driven). From the beginning, PRIDE Tanzania established a system of obtaining regular feedback from its clients in order to capture client views and concerns on an ongoing basis. The approach focused mainly on the performance of existing product rather than looking to the development of new


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products. Modifications of the product were carried out in 1997, 1998, 2000 and 2002 as attempts to address clients’ concerns were expanded. However, it was difficult to address all client concerns because the MIS could not support delivery of multiple products. The staff and structure of PRIDE were familiar with the SGL product and it would take a great deal of time to adjust. In 2002, the organization made the decision to innovate as a result of increased competition. Adjustments to loan products have helped the institution grow, a welcome change from the nearly flat growth from the previous year.

Figure 5: Advantages and Disadvantages of Single Product

Advantage of Single Product Disadvantage of Single Product • Good starting point • Limited to reaching a narrow market • Likely to prolong the product life cycle • Over-extended product life cycle inhibits

innovation • Allows for standardization • Product may not fare well in a competitive

environment • Works well in a relatively homogenous, less

competitive market • Product is less responsive to changes in

market taste • Allows for a market segment focus • Requires rigorous sales drive • Can lead to fast growth of outreach • Susceptible to limited yield potential • Tendency for staff to become stereotyped As Figure 5 indicates, there are certain advantages of an institution focusing on one primary product. The institution will be better able to prolong product life cycle where there is a strong Research & Development function. A single product works very well in a relatively homogenous market where the environment is less competitive. This approach allows for standardization in a number of areas such as the service delivery mechanism. This makes it easier to handle the product across the branch network. Staff training becomes less costly because of the more focused level of expertise. Specialization also reduces the cost and complexity of incentive programs by allowing the MFI to establish a uniform system of staff appraisals and rewards. Specialization also allows an MFI to focus on a specific market segment. This can help lead to fast outreach and growth. For example, PRIDE Tanzania has been able to expand to 64,000 clients with a loan portfolio of USD 8.5 million and 26 branches throughout the country, 22 of which were established between 1994 and 1998. At the same time, there are disadvantages of specialization. Focusing on a few specific products, an MFI will likely be limited to reaching out to a narrow market. An over-extended product life cycle inhibits innovation and can often lead to serious portfolio risks if not closely monitored. The product may not fare well in a competitive environment, especially if the product is less responsive to changes in the market taste. Focus on a single product requires a rigorous sales drive and the institution is susceptible to limited yield potential. The institution takes on greater risk if there the product is negatively impacted for some reason. Finally, there is a tendency for staff to become stereotyped.


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1.2 Uganda Microfinance Union (UMU) Presented by Charles Nalyaali, Managing Director, Uganda Microfinance Union (Uganda) The Uganda Microfinance Union (UMU) is a strong, dynamic leader that provides quality financial services to entrepreneurs and low-income people throughout Uganda. UMU works to partner with its clients to move them into the economic mainstream by providing quality financial services tailored to meet their needs. UMU’s knowledge and experience in microfinance drives it to approach each client with honesty, respect and sensitivity. UMU has a “full service approach” which has allowed it to grow quickly. They encourage clients to set goals and determine how they want to take advantage of services. UMU is a locally managed, non-governmental organization that incorporated and became operational in August of 1997. With the help of Victoria White of ACCION International and others, UMU is in advanced stages of transforming in to a for-profit, licensed financial institution regulated by the Bank of Uganda (the central bank of Uganda). The new company will be considered a micro-deposit taking institution and will have a set of shareholders. UMU’s mission is “to offer quality financial services to microentrepreneurs and low-income people (female or male) living in the rural, peri-urban, and urban areas in the Republic of Uganda. The financial services offered include the provision of a safe and secure place to keep savings and the extension of credit for working and investment capital at reasonable, fair and transparent interest rates.” UMU offers a wide array of quality financial products to meet the needs and diversity of its client base including the extension of agriculture and agricultural-related loans. UMU understands that there is often a fundamental difference between an individual engaged in agriculture and a person running a retail shop. Both individuals may be considered poor, but this does not directly translate into the two entrepreneurs having identical financial needs, thus UMU’s impetus to develop a variety of financial products. To deliver its services, UMU uses a hybrid methodology referred to as the “UMU WAY”, which is based on the following core principles: • Quality - Microfinance should be delivered in a manner that you and I would expect from our

own financial institution. • Innovation - Microentrepreneurs are a constantly changing and evolving group. Therefore,

UMU believes that it must design new products in order to meet the needs of this dynamic group.

• Flexibility - No entrepreneur is the same, the delivery methodology needs to be able to mold to the needs of each individual within certain parameters.

As a diversified microfinance provider, UMU offers a variety of loans and financial services to its clients. UMU currently offers five primary loan products: working capital loans, capital asset loans, employment guaranteed loans, micro corporate loans and healthcare provider’s credit. Under working capital loans, clients form self-selected groups ranging from five to ten individuals of whom at least 50 percent must be female. The groups are required to attend a one to two hour lecture on the UMU’s rules and procedures. The capital asset loan product was developed from


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a needs assessment study on borrowers who indicated that they wanted to borrow larger sums of money over a longer period of time to buy fixed assets. Loans are extended only to clients who have completed at least five working capital loan cycles without any arrears. The employer guaranteed loan product targets individuals who are in formal employment. This is a salary-based loan that targets the “working poor.” The micro corporate loan product is the newest UMU innovation. This loan product extends individual loans based on a financial and personal assessment made by the UMU field staff. This product targets the small and medium microenterprises who do not qualify for loans from the formal financial sectors. Finally, for the healthcare providers’ credit, UMU identified healthcare workers as a particular niche market, which has been marginalized by the formal financial sector. This product is designed to cater for working and investment capital needs of all healthcare providers.

Figure 6: Loan Portfolio by Product as of July 2003 (US$)

Product Portfolio (‘000’s)

% of Portfolio Borrowers

Working Capital 1,500 29.5% 19,291 Capital Asset 211 4.1% 432 Employer Guarantee 750 14.7% 1,005 Rural Employer Guarantee 800 15.7% 3,205 Micro Corporate 1,600 31.5% 1,607 Healthcare Provider’s Credit 220 4.3% 367 Back to School Fee Loan 6 0.1% 112

TOTAL 5,087 100% 26,118 MU firmly believes in offering its clients comprehensive financial services, and believes savings products are a critical component of these services. UMU members are able to access two types of savings services – restricted and fixed deposit savings – from UMU at present. Members may deposit their savings into a restricted savings account, which has unlimited withdrawals and deposits. When a member is borrowing from the UMU, access to the minimum balance or collaterized savings is restricted during the life of a loan. A monthly fee is charged for the service while interest is credited to the account at the end of every month. UMU currently also offers clients a fixed deposit savings product as well, though this product has not been aggressively marketed throughout the branch network. This product is a high interest, long-term investment.

Figure 7: Savings Portfolio by Product as of July 2003 (US$)

Product Value

(‘000’s) Percentage Restricted Savings 1,750 98.4% Fixed Deposit Savings 26.5 1.5% Total 1,776.5 100.0%

Other services offered by UMU include local money transfers which allow clients the option of transferring funds from one UMU location to another without the risk of carrying physical cash. UMU recently signed a sub-agency license with Nile Bank the agent for Western Union in Uganda to offer money transfer services worldwide. UMU offers its clients loan insurance services through a reputable insurance company. In the event of an accident or sudden death of


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a client, the estate of the deceased receives US$600 from the insurance company and pays off the outstanding balance of the client’s UMU loan. Two new products in the pipeline include a back-to-school loan and a home improvement loan. The back-to-school loan is tailored to parents with children attending school. UMU is currently assessing the feasibility of offering a loan for home improvement or construction. UMU has clearly defined itself in the Ugandan microfinance market from the beginning by its wide range of products. This was part of UMU’s early strategic plan and continues to play a significant role in the future plans of the institution.

1.3 An MFI caught in the middle – what approach to take? Carlos Labarthe, Executive Director, Compartamos (Mexico) Both models of specialization and diversification work; the question is which is right for you? Compartamos, an institution with over 215,000 active clients, located primarily in rural areas, has four basic products, all of which can be “specialized” to the entrepreneur. The advantage to this approach is the possibility for high growth. From the beginning, Compartamos has kept its focus on “keeping it simple”. However, at the same time, Compartamos is faced with the difficulty of being too supply-oriented. It seems that client needs are changing faster than products were being offered. This weakness arises from a rigidity and an “over-focus” on a specific approach to doing business (i.e. keeping it simple) and can leave the institution vulnerable to competition. In the experience of Compartamos, competition seems to be the key driver for diversification. “If we look at a business model, General Electric is a company that has pursued diversification and Ford is a company that has specialized. Both companies have experienced great successes and great failures, so the answer to the question is not entirely clear. To know if or when to diversify or specialize, each organization must understand its own context and remember what business they are in,” commented Mr. Labarthe. Group Discussion For an institution using a traditional lending methodology such as village banking, a move to diversification can carry a certain degree of risk, particularly with regards to repayment. In the case of PRIDE Tanzania, this has meant a strategy focused on reconciling the two methodologies that changes the people who deliver the services. “It involves a lot of personnel training. The key need is to prepare staff and make sure they are positive and looking forward to the change,” noted Mr. Obama. MFIs considering the question of specialization or diversification would do well to observe the lessons offered by BRI. They have two products, KUPEDES for loans and SIMPEDES for savings. These products are very flexible and responsive. From these basic loans, BRI has developed different marketing packages for clients and more flexible terms for corporate loans.


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Share in India began their lending program with many products, but it became too complicated for the accounting system. Share quickly learned that products have to be simple and flexible for the very poor. Today, Share has just two products that are tied to a client’s ability to repay. On the other side of the spectrum, as an institution that has focused on diversification of products, UMU believes that flexible products are good. New products can bring additional interest from clients. However, in some cases, there is a need for standardization and flexibility must be limited (i.e. farming loans and, solidarity group loans). An MFI must understand their market segments in order to design flexible products and avoid needless product multiplicity. Part of the reason that UMU, in particular, has chosen to offer many products, is because of the context of Uganda. UMU wanted to respond to the lack of banks in the rural areas and serious problems with highway robbery of rural clients headed to urban centers to buy inputs. For this reason, UMU has ventured into local money transfers. They designed a product to allow borrowers to deposit money at the rural branch level and receive a check issued to a major city bank, where they can cash the check and get on with their business. In addition, UMU has now become a Western Union agent. They have also designed a loan insurance product tied to sudden death or accidents. UMU believes that if the client wants a product or service, UMU will give it to them. Whether an MFI chooses to focus on further developing existing products or to diversify to new products and services, it is important that each institution understand how a particular strategy can help achieve its longer-term goals. One must consider many factors, including whether the existing methodology, staff commitment and available resources are sufficient for a particular plan. In the presence of strong competition, an MFI must be able to identify its comparative advantage in the market with more products and services or ones that are more focused.


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THEME III: WHAT KINDS OF SERVICES & PRODUCTS ARE WE DELIVERING?

“BRI has a rural mandate and its product offerings reflect this with 30 percent of its loan portfolio present in microloans, 20 percent in corporate loans, 20 percent in medium loans and 10 percent in farming loans.” - Sulaiman Arief Arianto, Denpasar Regional Manager, Bank Rakyat Indonesia

* * * * *

Members of the MicroFinance Network working in developing countries around the world have been leaders in expanding financial services to the poor in both urban and rural areas. MFN member institutions have been able to demonstrate that rural outreach is possible because they offer demand-driven products on a sustainable basis and have access to resources that enable them to take on the risk involved in working in rural markets. MFN member Bank Rakyat Indonesia’s Microbusiness Division (BRI Unit Desa) has been particularly successful in penetrating rural markets. Since 1984, the BRI Unit Desa system has provided financial services to the rural poor throughout Indonesia. Their experience provides many useful lessons for other MFIs looking to expand or initiate rural outreach. In urban areas housing is one of the most important issues affecting the lives of the poor and their families. Despite the growth of microfinance, services are often limited to income-generating activities. Mibanco, an MFN member and regulated commercial bank is Latin America's second largest microfinance institution with over 70,000 active clients. Mibanco began offering Micasa (“My home”), a home improvement loan program, in 2000. Since then, the demand for the housing product has steadily grown. Mibanco anticipates that these loans will grow to 50 percent of its overall portfolio within the next five years. The following cases from BRI and Mibanco provide good examples of MFIs whose specific products and services have allowed them to serve their target markets and have placed them ahead of their competition in terms of both scale and outreach.

1. THE EXPERIENCE OF BANK RAKYAT INDONESIA (BRI) – SIMPLE PRODUCTS, BIG IMPACT Presented by Sulaiman Arief Arianto, Regional Manager – BRI Denpasar, Bank Rakyat Indonesia (Indonesia)


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Bank Rakyat Indonesia sees microfinance both as a tool for poverty alleviation and as a commercial business, as indicated in Figure 8 below. This perspective has emerged since the institution’s inception as a state-owned bank, functioning as an agent of development. From 1969 to 1983, BRI used a non-commercial approach to microenterprise development through the Unit Desa system, a subsidized loan program for farmers. However, during this time, the bank suffered significant repayment problems. After 1984, the system was reengineered into BRI units, where the unit was made up of four to eight people. Once an office had a staff of more than eight, it was split into two branches. Another important change after 1984 was that the units were relocated to village markets in order to be closer to clients. Units assumed full authority over loans, as long as they could cover their costs.

Figure 8: Financial Services in BRI’s Poverty Alleviation Toolbox

An important part of this shift in structure within the bank was the switch to a commercial approach. The success of the BRI Unit demonstrated the potential for massive outreach to the bank. However, the beginning of the economic and monetary crisis in 1997 prompted a great decline in banking in Indonesia. Despite the widespread crisis, BRI Unit Desas not only survived, but remained profitable throughout. Following the crisis, the government (as a shareholder of BRI) made an important choice to restructure and recapitalize BRI to provide the support necessary to build up management, information technology systems, and audit and risk management systems. All these efforts paid off, and in 2002, BRI was named the best state-owned bank in Indonesia.

Subsidized Poverty Alleviation Programs

Commercial Financial ServicesIncome Level

Extremely poor and displaced households

Economically active poor

Lower middle income

Off icial P over t y L ine

Standard commercial bank loans; full range of

savings services Commercial

microloans

Interest-bearing savings

accounts for small savers

Poverty programs for such purposes as food and water,

medicine and nutrition,

employment generation, skills

training, and relocation

BRI-Unit Grameen Bank


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BRI’s road to success as a commercial microfinance provider was marked by several key points in its transformation. 1983 - 1984

1. BRI Unit became an autonomous entity within BRI Beginning of 1986

2. Reallocation of some BRI Unit offices to local market centers Gradually from the late 1980’s

3. More loan approval authority and loan repayment responsibility given to BRI Unit manager and officers

4. Establishing a good monitoring and supervisory system 5. Developing transfer prices between BRI branches and BRI Units

These milestones have contributed to making the BRI Unit a strong, profitable microfinance provider in Indonesia, as indicated by the financial highlights provided in Figure 9.

Figure 9: BRI’s Financial Highlights and Projection (in billion IDR)

2000 2001 2002 2003

Net interest income 2,822 4,300 5,364 6,509

Net Income 335 1,030 873 1,007

Total Assets 65,187 72,240 80,787 92,640

Capital Adequacy Ratio

14.35% 13.60% 15.70% 15.40%

Deposits 50,519 58,760 66,030 76,619

Loans • SMEs • Micros

27,519 80% 29%

32.000 85% 30%

35,050 85% 30%

39,731 85% 30%

The key factors to the success of the BRI Unit have been the simplicity of products, transparency in operations and services, accessibility to clients, ability to recover costs, and demand-driven products. Furthermore, BRI offers effective incentives to both clients and staff (who receive bonuses tied to repayment rates of over 95 percent). In addition, the success of BRI Units has been the result of BRI’s commitment, consistency and the capacity of management to combine a development finance approach with a business approach that is inherent in the system and products of BRI Units. These products and services include a basic loan product (KUPEDES), a


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basic savings product (SIMPEDES), a current account, money transfer services, and payment point/utilities bill opportunity. An important aspect of the BRI Unit’s effective operation is the risk management system documented in the bank’s credit policy and procedures. This credit manual comprises general loan policy, prudential credit principles, organizational credit management, credit administration and documentation, supervision, and non-performing loan management. And, for every transaction, three people – the maker, the checker and the signer – are responsible. The credit management system within the BRI Unit is independent and has a specific business strategy and marketing plan. This system exercises prudential credit operation and portfolio management and sends a danger signal if a risk is presented. BRI has a rural mandate and its product offerings reflect this with 30 percent of its loan portfolio present in micro loans, 20 percent in corporate loans, 20 percent in medium loans and 10 percent in farming loans. BRI Unit’s marketing strategy focuses on particular segments within the market and uses targeting and positioning to differentiate clients, and uses an effective marketing mix to sell products valued by clients. BRI has identified that clients want continued access to credit, incentives for repayments, simple procedures and quick disbursement. For savings, clients prefer security, convenient locations, confidentiality and different ratios of liquidity and return. BRI’s on-going agenda is to continue to build capacity, continue to offer incentives that promote productivity and reduce fraud, and to bring information and communication technology into microfinance. Such technology will increase efficiency, provide new or improved products and services, and foster businesses through competition. Recent market research has shown that there are usually at least two entrepreneurs in every household, but that half are not yet profitable. To address this, BRI has opened an SME support center to help clients prepare profit and loss statements for their businesses and help refer them to an appropriate BRI Unit. If the client has potential, but is not yet bankable, the center will refer them to an NGO for service. Also, in response to the need to build capacity within the bank, BRI established a training center for their 30,000 employees to bring information and communications technology into microfinance. To finance micro and small enterprises successfully and to generate profit, the approach must be appropriate. It was once thought that to help the poor and make a profit was an unachievable objective. However, financing micro enterprises and serving the poor using a commercialized approach is possible. At the same time, BRI believes that it is important to adjust products and services according to what clients need, while treating them with care and respect.

2. HOUSING MICROFINANCE IN MIBANCO AND OTHER ACCION AFFILIATES Elisabeth Rhyne, Senior Vice President, ACCION International (USA) Mibanco is a commercial bank dedicated to microenterprise that was founded in 1998 by transforming from NGO Acción Comunitaria de Peru (ACP). Operating mainly in Lima and five other provinces through 28 branches, Mibanco has a current total loan portfolio of US$107 million and 110,000 active borrowers (as of mid-2003).


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Because home improvement was found to be a high priority for most clients and the formal financial sector was not responding to this need, Mibanco developed Micasa, its primary housing loan product that met both the needs of the clients and the bank. Different from a traditional housing loan, which involves complete construction, the Micasa loan focuses on home improvement. Micasa takes into consideration the fact that there is an enormous need for improved housing in Peru, with both substandard housing and shortages of housing. Ninety-percent of Lima residents live in their own homes, with or without a building title. Only nine percent of Lima residents rent their house. However, as most clients cannot afford a loan to purchase an entire house, the standard process for the informal sector to progressively build a home through a series of small improvement projects. It is useful to note that many microentrepreneurs in Peru also use their homes in their businesses (sales location, storage, workshop, rental). As the sizes and terms for Micasa loans are similar to Mibanco’s more traditional working capital loans, the product is a good fit. The loans are derived from individual lending methodology and are easy to incorporate into the bank’s ongoing microenterprise lending operation. Also, collateral is based on the same household assets as microenterprise lending, which enables the institution to enter the housing market and address this basic need with low risk. The product has also brought Mibanco into contact with a new market (i.e., salaried persons). The purpose of the Micasa loan is to improve or expand an existing house. The average amount of the loan is US$3,000 and the loan terms are up to five years, although the loans are typically of short duration. The loan carries a grace period of two months and the security is the same as for individual microenterprise loan, although some are secured by mortgages. The interest rate is slightly below the rate on working capital loans (50 to 70 percent versus 60 –to 85 percent total effective rate per year). Borrowers are both microentrepreneurs and salaried workers. Interest rates are lower because of the use of effective marketing strategies and incentives. Mibanco appears to have tapped into an exciting new market and the results have been impressive. Because the product is so similar to the working capital loan, portfolio at risk (over 30 days) for the Micasa products is only 1.74 percent and the product has been profitable since nine months after it was launched. Housing now represents 14 percent of loan portfolio (a 12 percent increase since December 2000). Mibanco also offers a larger government-designed and -guaranteed loan called “Mivivienda”, which requires fully legal perfected mortgages. This is a government subsidy program with a 20 percent public contribution. Mibanco currently has about 231 Mivivienda loans with an outstanding portfolio of US$4.3 million. However, it has demonstrated slow growth as compared to the Micasa loan. Mibanco finds that it is often too expensive to support legally perfect mortgages so many clients prefer the smaller Micasa loans. Microenterprise loan officers handle both working capital and Micasa loans. Specific training in assessing a construction budget is provided to loan officers. The bank also gives advice to clients on construction questions on request. Mortgages are available for many clients, but they are often too expensive to legalize.


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An issue that remains to be explored is the cannibalization on similar products as a result of offering Micasa loans. There is also a present need for longer term resources (secondary market) to extend loan terms. Ideally, longer loan terms would allow for better construction options, but those types of resources aren’t yet available to Mibanco. There is also debate on providing construction advice to clients. Mibanco chooses to keep this limited as it implies responsibility for the outcome of the quality of construction. Group Discussion MFIs appear to have had different experiences with housing loans. Alvaro Retamales from Chile commented that, “We tried to diversify into home improvement, but faced several problems and constraints. First, we had a problem with cannibalization (from nonproductive or consumer loans). Second, the Central Bank had a liquidity issue and bank regulators had a problem with the matching gratuity. Third, it was a challenge to convince the government to forget older models and look at more realistic options for poor people.” Mr. Arianto of BRI commented that the huge cost of personnel inhibited diversification at BRI. “There are almost 35,000 employees and the margin for microfinance lending is only seven percent. Of total operating costs, 62 percent are personnel.” Share Microfin Limited was involved with housing loans in the beginning of the lending program. However, they discontinued offering housing loans because of a lack of resources. Mr. Udaia Kumar of Share noted, “Everyone wants a house, even if they can’t afford one and access to housing finance is difficult. In the long term, it becomes very risky because many land titles are not legally enforceable. Most people want longer terms loans, but their cash inflows are often not stable. Any loans over two years are too risky.” Thus, for Share, the group lending methodology doesn't work well for home improvement loans because these types of loans are normally many times larger than standard microfinance loans.


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THEME IV: HOW ARE WE EVALUATING MFIS?

“We must reaffirm our commitment to transparency as an active concept inside each institution”. - Maria Otero, ACCION International

***** Considering the wide array of microfinance ratings and assessments available today, how do these compare to commercial ratings? What are the purposes and uses of the different types of ratings/assessments? What changes have been made in performance benchmarking through the MicroBanking Bulletin? What is the role of the MIX Market? While the MicroFinance Network has been committed to performance benchmarking for the past five years – what can the Network do to increase member participation in the MicroBanking Bulletin and now the Mix Market?

1. COMMERCIAL AND MICROFINANCE RATINGS/ RATINGS AND ASSESSMENTS – WHAT IS THE DIFFERENCE? With an increasing number of microfinance rating agencies marketing their products to MFIs and the growing interest of commercial rating agencies in regulated microfinance institutions, many MFIs have a difficult time understanding the difference between the two. Carlos Danel of Compartamos provided his perspective on the question. “… A key issue is to determine the purpose of ratings for an MFI. There are a number of drivers for MFI’s to get rated. They range from gaining self knowledge to meeting legal requirements. The purpose is fundamental in choosing the rater.” To properly understand the issue, we must first address the differences between microfinance and traditional finance. The industry has long argued that the unique characteristics of microfinance warrant a different approach to institutional rating than that used for a traditional financial company. On the other hand, it seems that the two types of organizations have some very fundamental similarities, and that microfinance would benefit from a common language being spoken. For most MFIs, though, it does come down to the key question of who is better qualified to rate the risk of a microfinance institution: a specialized agency with little public


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visibility, or highly visible rating agency with little knowledge of the specifics of microfinance? However, is it possible to consider a combination? The strengths and weaknesses of each type of rating should be addressed based upon the reasons that the institution is being rated. The MFN ought to make recommendations to all stakeholders in order to promote a more balanced approach to the issue of measuring institutional risk. Mr. Danel commented, “To attract investors, MFIs need to have a standard rater, such as Fitch or Moody’s. There is the belief that specialized ratings are important because they consider such factors as acceptable levels of portfolio at risk and capital adequacy within the context of microfinance. Yet, these types of ratings often aren’t trusted, understood or recognized by investors or financiers. Meanwhile, although standard rating agencies understand country risk and other important considerations, they generally do not understand the microfinance portfolios or management.” Several specialized raters are exploring partnerships with commercial raters. Currently, however, there is a lack of interest on the side of the commercial raters. In Compartamos’ experience, the S&P and Moody’s ratings are less expensive (cost is around US$15,000), but the MicroRate and CAMEL ratings go deeper and serve as a more useful diagnostic tool for the MFI management,” Mr. Danel concluded. Ratings and Assessments: what and for what purpose? Isabelle Barrès from the Microfinance Information Exchange (MIX) provided some helpful ways to distinguish between ratings and assessments, drawing from some comparative data provided by the IDB-CGAP Rating Fund. Credit ratings and global risk assessments (or fiduciary risk assessments) are very different products (measure of creditworthiness vs. trustworthiness). These differences reflect different usages (i.e., for debt issue or as a diagnostic tool). In choosing the appropriate product, as Mr. Danel mentioned, MFIs need to consider the intended usage and users as well as how frequently you intend to use the rating/assessment. Figure 10 provides more information on this product distinction.

Figure 10: Matrix of Service Offerings for MFIs *

Criteria A B Type of service Credit Rating Global Risk Assessments

(or Fiduciary Risk Assessments)

Final product

An opinion of the ability and willingness to pay a specific debt obligation on time. It measures creditworthiness. Always has a grade.

A measure of trustworthiness by analyzing institutional capacity and performance. It evaluates operational and financial performance and management’s capability. Some agencies provide a grade, some do not.

Clients MFIs MFIs


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Criteria A B Type of service Credit Rating Global Risk Assessments

(or Fiduciary Risk Assessments) Lenders/Creditors Commercial investors Regulators/supervisors

Lenders/Creditors Commercial investors Donors

Usage

Debt issue – instrument for pricing debt to enable raising funds from capital markets and institutional investors. Regulatory compliance.

An appraisal and monitoring tool for donors and investors. Facilitates access to grants and capital. A diagnostic tool for MFIs’ internal purposes. Enable comparison of performance between MFIs assessed by the same rater.

Public disclosure – General

Mandatory if public issuance. Optional.

Public disclosure – Rating Fund

Mandatory. Mandatory – Summary report, financial statements and accompanying notes at a minimum.

Frequency Yearly and recurrent with quarterly updates until debt redemption.

Yearly and recurrent. Some agencies do period updates.

Agencies offering the service**

Apoyo & Asociados Internacionales Class & Asociados S.A. Standard & Poor's

ACCION International Micro-Credit Ratings and Guarantees India Ltd. (M-CRIL) MicroRate PlaNet Finance

* Source: IDB/ CGAP Rating fund. More information on the rating fund is available at: www.ratingfund.com. ** Examples. For full list of raters/ assessors approved through the Rating Fund, go to www.ratingfund.com. As indicated by some of the discussion on commercial and microfinance ratings, both ratings and assessments can be perceived as costly. Differences in costs are explained by varying degrees of depth of analysis. The value of a rating/ assessment should justify its costs, and ratings/assessments should be budgeted for as a regular cost of doing business. Some ways to reduce the costs and improve the benefits of the tools is through access the IDB/CGAP Rating Fund and by sharing information between Raters/ Assessors and benchmarking. Group Discussion The cost consideration was one of the biggest concerns among participants. One participant


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commented that while he certainly recognizes the value of assessments, he is afraid of the cost to the institution. Another participant who had gone through a CAMEL assessment found the tool to be very useful, but it had been difficult initially to justify the costs to his board. However, once the CAMEL was completed, the value of the assessment was made clear as it helped prepare the MFI for transformation by pointing out issues it would face as a regulated institution, changed the way they accounted for write-offs, and would have potential use for attracting outside investors because of its focus on risk. According to Mr. Danel, it is also important to recognize the additional hidden costs in the time required to prepare and go through a rating. But he also pointed out how the time devoted to the initial assessment can be an investment towards future, more rigorous evaluations. “It is a teaching tool. When you have been through it, it is easier to prepare next time.” Mr. Danel added that the IFC’s due diligence was the most thorough assessment they have ever experienced. Further discussion indicated that MFIs were still not clear on how they should go about choosing between the rating/evaluating agencies. PADME in Benin has been rated by PlaNet Rating (costing approximately US$10,000). There has been an increase in investor interest in PADME since the rating, but financiers have not been convinced that the PlaNet Rating was the proper evaluation for the institution. Nonetheless, the rating has still been used as a marketing tool and has helped in negotiating with certain outside partners because it represents an independent expert evaluation of the institution. The conceptual framework behind the various ratings is very different. Dr. Rhyne explained the difference between the CAMEL and the Standard & Poor’s rating. Both have strong qualitative and quantitative components. However, Standard & Poor’s rating has a very different quantitative approach. In a recent MicroBanking Bulletin (Issue No.8, November 2002, 16-21), there was a discussion of the differences between the microfinance raters and benchmarks. PlaNet Rating was seen as fluid, using no external benchmarks. MicroRate, on the other hand, sets specific standards. A forum of rated MFIs could be valuable. One key point that still needs to be clarified from the point of view of Standard and Poor’s is the issue of institutional ownership. Eduardo Bazoberry from PRODEM commented that the CAMEL was a very good instrument for their management. “But you will lose a lot of time with all these ratings. PRODEM relies on evaluations from an internal auditor (US$12,000), the bank supervisor of Bolivia and a Fitch rating (US$12,000). The latter particularly helps with commercial investors. PRODEM doesn’t want more than four institutional reviews in one year.” It is true that a rating takes time, but, as the participant from Al Amana pointed out, “it is an investment. It forces you to organize your information and it professionalizes your staff. Again, one should consider the impetus to being rated – the will to be transparent, or the confidence that you are already transparent.” For example, Compartamos received initial funding from CGAP because they were transparent enough to admit that they didn’t know the exact size of their portfolio. Ms. Hattel pointed out that, in terms of the Network’s commitment to transparency, members have agreed to submit information to the MBB whether it is a good year or not. According to Carlos Labarthe, the MFN has done a lot and can do even more to promote transparency, not on behalf of each institution, but on behalf of the sector.


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2. BENCHMARKING AND TRANSPARENCY Presented by Isabelle Barrès, Director, Strategic Development, The Microfinance Information eXchange (The MIX) (USA) The Microfinance Information eXchange, Inc. is an NGO created in June 2002 to offer information services on the Microfinance industry. The organization builds on the MicroBanking Bulletin and the MIX Market (formerly the Virtual Microfinance Market) and is supported by CGAP and private funders. The main goals of the MIX are to increase standardized reporting among MFIs, increase MFI performance and transparency, link MFIs to potential funders and provide benchmarks on the industry. The MIX offers a reliable information platform in the form of the MIX Market (www.mixmarket.org). In addition, the MIX continues to provide benchmarking services through the Micro Banking Bulletin (MBB), the MIX Monitor (software to allow MBB-type benchmarking capabilities), standardized financial reporting and specialized information services. Currently, the MIX provides benchmarks for 124 participating MFI and has a readership of over 2,000. As of October 2003, the MIX Market provided comprehensive data of 153 MFIs, representing 5 different institutional types from 52 countries. In addition, the MIX Market included data from 36 Investors and donors, 53 Market facilitators and provided 78 country profiles.

One of the primary services offered by the MIX Market and the MicroBanking Bulletin is industry benchmarking. Benchmarks are important because they are the key to making relevant comparisons between institutions and how they perform. These comparisons are useful to a variety of microfinance actors in gauging the performance of MFIs:

• For MFI managers and board members - this data helps them understand their

performance in comparison with other MFIs, allows them to identify strengths and weaknesses, informs the process of setting performance targets, and helps to monitor the MFI activity

• For raters - benchmarks are a basis of comparison or scoring for ratings • For donors and investors - benchmarks are a common metric against which they

can compare the relative performance and trends of their MFI investments and prospective fund recipients

• For regulators - benchmarks provide a meaningful basis for creating prudential norms for regulated institutions

• For networks - benchmarks enable them to assess and compare the performance of their affiliates, to help their members interpret and understand their performance, to map the local MF environment

As with ratings and assessments, there are cost considerations to benchmarking as well. The information required to produce benchmarks is often quite detailed. Although MFIs do not pay for the customized benchmarking feedback that they receive, costs of participating in a benchmarking exercise are reflected by the time commitment to submit detailed information and


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answer analysts’ questions. However, the MIX is committed to support transparency and provide valuable services to the industry, while taking into consideration MFI constraints. Regarding the MIX relationship with the MicroFinance Network, there are ways to increase the value of the benchmarks and reduce the reporting costs to the MFN members. The MIX could provide an MFN member analysis that would compare members within the Network to certain industry standards. The MIX can work to decrease lag in time in feedback from MIX to MFN members. The MIX can also set-up regular mechanisms for MFN members to share internal reports (audited financial statements/ Annual Reports) with MFN and MIX to minimize the reporting burden (MIX analysts focus only on data that is not in common reports). These are all important ways to increase collaboration. Isabelle emphasized that in order to have meaningful benchmarks, it is vital to have participation of the leading MFIs. “We would like to know how we can make this easier for you. A lot of information is available, but we would like to find out how best to get your updated information, particularly information from ratings and assessments. The MIX is an on-line platform of MFIs to demonstrate performance, particularly of leading MFIs. It would be very useful if all MFN members have one point person within their organization to coordinate with the MIX and improve communication flow.” Ms. Hattel noted that it is particularly important that regulated institutions continue to participate in order to demonstrate the commitment of all MFN members to transparency in microfinance, recognizing that, for institutions already reporting to regulatory bodies in their country, participating in the MBB and the MIX Market represents an important public good to the microfinance industry. Group discussion Eduardo Bazoberry of PRODEM commented that all this information is on the website of the Superintendency of Banks for all regulated Bolivian MFIs. It would save much time to find the data there. Bolivian bank supervisors use the CAMEL and they are good at it. This has helped PRODEM improve its operations. According to Maria Otero, “It is clear that the Bolivian Superintendency is way ahead of anyone else. It is the exception. If every country were like this, we wouldn’t need the MBB. We must recommit to transparency as an active concept inside each institution. Even if the process is very easy, the value of transparency is paramount.” “It is a great idea to get the Network involved in promoting this as a core value”, commented Ruben de Lara from TSPI in the Philippines. “Likewise, it is great to work with the MIX. There remains the question of how to flesh this out so it is not too costly or burdensome for the MFIs” Mr. de Lara added. Mrs. Barrès acknowledged this point and noted that for benchmarking, the MIX prefers audited statements on an annual basis. If the Network wants the data more often, it can be discussed among members at the annual meeting. There is also the question of data quality. According to Dr. Rhyne many MFN members are presented as having “poor data quality” at the MBB because the MBB doesn’t always take into account efforts made by members to improve data quality, such as audited statements that are received after a particular issue is published. The MFN website should be giving comparisons using the MBB. The size and performance of the MicroFinance Network is extremely impressive


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and the website should show that the Network is probably the biggest in the world. Another key point is that the Network is also lagging in documenting savings. Dr. Rhyne is currently helping the MBB to develop measures for this and encourages MFIs to look at their own data and experiment in developing their own good savings indicators. Mrs. Barrès clarified that with regards to data quality, timing is a key factor. Most of the time, low data quality means that audited financials are simply not yet available for that particular issue of the MBB. “How do we ask MFN members to contribute to transparency?” Fouad Abdelmoumni asked. Ms. Hattel responded that the MFN plans to continue to explore ways to provide useful benchmarks within the MicroFinance Network. “We do need to explore how better to attain our goal of transparency, while highlighting the performance of the Network as a whole,” she said.


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THEME V: HOW ARE MFIS DELIVERING SERVICES & PRODUCTS? -

METHODOLOGY As microfinance expands to accommodate different types of clients, the landscape for different types of MFIs has also widened. This section will look at two institutional models using somewhat different methodologies to serve those left out of the formal financial sector that are currently employed within the MicroFinance Network.

1. MODELS AND MODES

1.1 Share Microfin Limited (SML) – An Evolving Model Presented by Udaia Kumar, Managing Director, Share Microfin Limited (India) Microfinance Providers in India There are currently several types of MFIs offering microfinance services in India, regulated institutions, NGOs, self-help linkage programs, cooperative banks, commercial banks and the newest group, mutually-aided cooperative societies. Because of the challenges they face, there are only about six to seven regulated MFIs operating in India today. There are instead many NGOs, registered for charitable purposes, which provide the majority of microfinance services in the country. Another very popular type of institution providing microfinance are self-help linkage programs. These types of programs began in the early 1990’s with the support of the National Bank for Agriculture and Rural Development (NABARD) and the Central Bank. These two entities believed that the large commercial bank network in India should contribute towards providing services to the very poor people in India. They encouraged a model to link self-help groups (formed through donor groups) with these commercial banks. However, the weakness in the design of the program is clear because the self-help groups are not registered entities, literacy levels of members are quite low and they do not have the bargaining capacity needed to draw respect from the banks. However, this is still one of the primary models and largest programs for microfinance that prevail in India. Another type of institution is the cooperative bank that was expected to do the work of a microfinance institution by the previous Prime Minister of India. However, because of the extremely high level of non-performing assets (almost 76%), massive loss of investor capital and bad governance, many large cooperative banks were forced to close. Just in the last year, seven


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to eight large cooperative banks have closed as well. Commercial banks also provide microfinance and recently a new type of provider has emerged, mutually-aided cooperative societies. The Cooperative Act in India was simplified exclusively for microfinance operations and most of the cooperative banks began changing themselves into this type of organization. There is not a great deal of supervision and many microfinance providers are now operating as this type of organization. However, since they are not regulated, commercial banks are not interested in funding them. Share’s Experience Share itself began its work as an NGO, registered as a charitable institution. Despite the high demand for microfinance loans and a potential market of 68 million very poor, the first three years were difficult. (Even now, microfinance only reaches about 1.33% of the population in India). Not many MFIs existed at the time and those that did ran into many obstacles. When Share began lending, it faced significant challenges and everything they did seemed to be a mistake. The founders realized that taking out a loan to lend to clients bound them to continue providing services in order to ensure repayment from clients and to be able to repay their own lenders. It was believed that in many ways “once you start lending, you can never get out. You have jumped in the ocean and you must keep swimming or you drown”. Share started its program with group lending, targeting the poorest members of the Indian villages in which it worked. Villages were segregated by income level, so the poorest clients were easy to identify and target. Typically, Share employees begin their work in a village by meeting with local politicians and schoolmasters in order to establish relationships in case something goes wrong. The loan officers spread their message that they provide collateral-free loans to the poorest people in the villages. However, often the poorest don’t initially come forward. Workers must first go around the village, educate potential borrowers and draw them out. The general rules for solidarity groups within Share are the following: 1. Members must live in the same locality 2. Members should be good friends 3. No blood family relations are permitted in the same group 4. Members must participate in obligatory training for three days (reduced from original

seven days) 5. Members must learn to sign their names (99 percent are illiterate) 6. Members must attend weekly meetings 7. Senior loan officer certifies that group has accomplished the guidelines and certifies the

group After the group is certified, eight such groups join to form a center. Each center comes together to meet once a week, with the guidance of a Share staff member. The meeting starts with a pledge from the women stating that they have come together to make use of their skills, access the loans, repay the loans on time and utilize them for the purpose taken. From income generated by the loans, they pledge to use it to reduce their poverty and educate their children. It is a pledge reminding themselves to reduce their own poverty. After the pledge by the women, the loan officers make a pledge acknowledging the responsibility given to them of serving the


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women in the group. They also pledge not to accept any kind of compensation or gift from the clients. This reaffirms that loan officers must be objective and honest. As for the loan process, loans are made at the group meeting for the first two loans, as they are very small amounts. These loans come from the “blue bag” that Share loan officers carry to the disbursement meetings. Everyone in the village knows that the blue bag has the loan money, yet there have only been a few instances of theft. Larger loans after the third loan cycle are made in the office branch. So, at center meetings, loan disbursements are made as well as loan applications and approvals. Also problems encountered by the members during the week are discussed. Loan officers monitor how the loans are used during weekly visits to the village. An initial verification is carried out within seven days of loan disbursal. Share could cut costs by not doing this mandatory verification, but there is the fear that it would affect the repayment rate of clients. Share offers three loan products: general, special and micro. They all have the same loan term, but are differentiated by amounts. Client Satisfaction Through client satisfaction monitoring, Share has found that client dropout is increasing. One reason is because clients don’t like meeting so often. Another is that when a client’s accumulated savings have grown higher than the loan amount, there is no incentive to stay with the program. Share is working on how to resolve these problems by adjusting their program parameters and by learning from methodologies used in other countries. Transformation and Current Structure Legally, Share is divided into three entities. The first is a Society, which can receive grants and is engaged in capacity building. The second is the for-profit Non-Bank Financial Institution (NBFI), which is engaged in lending only. Finally, there is a Mutual Society, which can mobilize savings and then lends the savings to the for-profit company. Insurance and social security programming are not possible within this structure, so Share contracts out those services. Transformation from an NGO to a for-profit company was difficult. Management estimates that the total cost of transformation was around US$500,000. A huge effort was put into training staff who felt increasing pressure from top management. Bringing in new consultants threatened existing management and subsequently some of the staff left. In terms of its organizational structure, Share has an advisory committee that includes commercial bankers. Because large companies draw a great deal of unwanted attention, Share decided to break into six separate institutions. Less than 10 percent of the portfolio cannot be within one entity. The smaller companies are now working toward the goal of merging into a bank within four years. Beginning as an NGO, Share has evolved in a way that has allowed them to continue working towards their mission of serving the poorest sectors of the region. Becoming a for-profit company has made their operations permanent and allowed them to grow. Yet they continue to follow much the same methodology, achieving a workable formula that has endured major transitions within the institution.


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1.2 ASA – A Model of Simplicity Presented by Md. Sohel Mahmud ‘Sagar’, General Manager – SEL, ASA (Bangladesh) Background It was not long ago that microfinance evolved from microcredit and became a much favored intervention for poverty alleviation in developing and least developed countries. In a wider sense, microfinance can be thought of as the provision of financial services such as savings and credit to the poor household. The MFIs in the Asia-Pacific region and other financial institutions providing these services have expanded their outreach from a few thousand clients in the 1970s to over 23 million in late 2000. The developments in microfinance in the region have set in motion a process of change from an activity that was entirely subsidy-dependent to one that can be a viable business. Although Bangladesh has come to a stage of maturity in regard to microfinance operational systems and approaches, specialization and diversification of microfinance services has been very limited. There are some common microfinance products and services that have a brand name but the efforts for further specialization and diversification are as of yet inadequate to satisfy the customers of different segments. There is a desperate need for specialization in microfinance services for innovation, diversity and quality improvement. Another complicating factor is the lack of a proper regulatory framework in Bangladesh. Microfinance service delivery is at a crucial point in its evolution. Types of MFIs in Bangladesh In Bangladesh, there are four main categories of institutions involved in microfinance activities: 1) Grameen Bank (GB) - a member owned specialized institution, 2) NGOs such as BRAC, ASA, Proshika, BURO-Tangail etc... (around 1,500 currently operating) 3) Commercial and specialized banks such as Bangladesh Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB) and 4) Government of Bangladesh (GOB) sponsored microfinance programs including the Bangladesh Rural Development Board (BRDB) and Swanirvar Bangladesh, which are run through several ministries including the Ministry of Women & Children Affairs, the Ministry of Youth & Sports and the Ministry of Social Welfare. All of these programs are targeted at the rural poor. Most of the MFIs provide small, collateral-free one-year term loans to individuals belonging to jointly-liable peer groups. They use similar on-site loan disbursement and weekly collection methods by forming village organizations. Total cumulative loan disbursement by these four types of institutions as of June 2002 was Tk.445.15 billion (US$7.68 billion), of which disbursement broke down as follows:

• GOB programs: Tk.41.93 billion (9.42 percent) • Grameen Bank: Tk.161.41 billion (36.26 percent) • Other banks: Tk.46.78 billion (10.51 percent) • Microfinance NGOs: Tk.195.03 billion (43.81 percent)

Recovery rate of all of these organizations excluding formal banks and government sponsored programs stood at 97.19 percent. Initially, foreign donations were the major source of funding for the MFIs in Bangladesh, which stood at near 50 percent of the total until 1996. Gradually, the dependency declined and foreign donations fell to 16.5 percent of total funds in June 2002. The


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microfinance NGOs have concentrated on accumulating funds from internal sources, the majority of which come from savings mobilization from their members. Hence, it has been observed that members’ saving has increased over time and in June 2002 has contributed 25.49 percent of total Revolving Loan Fund (RLF). Revenue from the service charge has become a more important component of the RLF as foreign donations have declined. Although foreign donations make up only 16.5 percent of the total RLF, microfinance NGOs are receiving soft loans and subsidies from other sources such as the GOB, the Palli Karma Sahayak Foundation (PKSF) (an apex funding organization of microfinance programs) and other large national and international NGOs and banks. It is widely acknowledged that the large microfinance NGOs are engaged in other profitable businesses from which they earn a handsome profit, used in part for cross-subsidization of their microfinance activities. The microfinance activities of the most NGOs (including Grameen Bank are not financially sustainable (except for ASA, because its microfinance activities fully cover costs and are financially sustainable). The issue of sustainability for microfinance NGOs is very much related to questions about their identity – that is, are these microfinance NGOs business institutions or charity organizations? Can they be bankers and social workers simultaneously? The microfinance NGOs of Bangladesh, especially the bigger ones, tend to pursue multiple ventures and therefore their legal identity is often a mix of social organization, bank and business enterprise. Products and Services In Bangladesh, about 80 percent of individual loans are provided to individuals with traditional skills while limited funds are provided to those with more advanced skills. Approximately 90 percent of borrowers are married women. Even though they may have a vocational skill or an innovative idea, unmarried men and women family members are not generally eligible for a microloan. The loan products offered by small NGOs are greatly influenced by the standards and models set by larger NGOs and Grameen Bank. Therefore, the most commonly available loan products have weekly repayment schedules, with a few institutions offering monthly and seasonal installments. Loan amounts range from Tk.2,000 to 10,000 in about 90 percent of cases with a 15 percent flat service charge per year. This picture shows that most products give customers no choice and take a cookie cutter approach to service delivery. The savings products are commonly of two types, one mandatory and the other optional. The savings are weekly approximately Tk. 5 or Tk.10, which are collected at the same time as the with the weekly loan repayment installments. Institutions tend to be quite inflexible with time and savings rates and they do not encourage voluntary savings by borrowers or their family members. There are three main operational categories of microfinance NGOs in Bangladesh. The first is large institutions such as Grameen Bank and large NGOs including BRAC, ASA, Proshika, BURO-Tangail have developed their own operational frameworks. The second category is small to medium-sized NGOs that have operational methods dominated by those of the larger organizations. Although they may have the capacity to produce innovative products, they prefer to copy the established model. The third category of NGOs lacks the operational capacity to develop new innovative products. There is a real need for innovation to make operations cost-effective and to achieve gradual sustainability of small and medium NGOs. It is observed that some NGOs have not fully adapted established methods, so they are unable to internalize necessary changes and improvements. As a result, operational methods are often inappropriate and ineffective for the success of small and some medium NGOs. For the ASA model to


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succeed, an MFI needs to follow the methodology closely with regards to the amount of RLF, the number of staff for branches, the geographical area coverage, savings collection including disbursement of loan and recovery style etc. Small and medium NGOs that are replicating ASA cannot expect to break even and achieve operational self-sufficiency within the stipulated time if they do not practice all contents of the methods of the ASA model of microfinance operation. ASA a Model of Self-reliance and Cost-effectiveness ASA was founded in 1978 to establish social justice. ASA's aim shifted in 1985 to enhancing the socioeconomic situation of the rural poor and with its foreign donor supported integrated development program. The year 1991 was a transition year in which ASA realized that its operations were completely donor dependent and unsustainable, and that outreach was limited. ASA started borrowing funds from PKSF in 1992 with a view to expanding its microcredit program to new geographic areas not covered by donor-funded programs. In 1995 ASA’s microcredit program became self-reliant, and restructured itself by shedding all other services only to continue its financial services as a specialized MFI. This change was based on a real self-assessment and accomplished without external assistance. With the reformation, operations were at once tightened and decentralized, and the composition of all groups shifted from men to women. Slowly ASA Microcredit model began to take shape. The methodology of other MFIs and ASA are quite different. Group liability for microfinance operations is the foundation concept of other MFIs. In contrast, ASA works through individual liability, allowing for greater flexibility and simplicity. Its management, book-keeping, record keeping etc. are innovative and also non-conventional. Gradual strengthening of the financially sustainable scenario helped ASA to formulate policy of less dependency on donor’s grant. In 2001 ASA became completely free from donor funds. ASA’s sources of funds as of July 2003 were members' savings 24 percent, PKSF 29 percent, CORDAID loan 0.57 percent, ASA’s own funds 41 percent and others were 5.43 percent. With its gradual innovations, standardization and highly decentralized operations, ASA has become a fully sustainable and very successful MFI. ASA’s key to success as a self-reliant and sustainable microfinance institution, known throughout the microfinance world, is based on its innovative way of operating. Currently, ASA provides technical support to more than 100 microfinance NGOs within Bangladesh, and to many institutions in 14 foreign countries, including overseas activities in the Philippines and Nigeria as an international technical service provider (ITSP) of UNDP. Demand for ASA’s technical assistance continues. Furthermore, ASA is providing financial support to 24 local microfinance NGOs in Bangladesh under its NGO Partnership Program with a volume of loan fund of Tk118.42 million (US$2.04 million) as of July 2003. ASA is one of the fastest growing and largest MFIs in Bangladesh. Its institutional mission is to support the lower status poor sector through facilitating savings and credit to those segments of the population that find it difficult to access credit. ASA follows a low-cost financial service methodology, which has been designed to make activities cost-effective and efficient. A comprehensive operations manual has been introduced which provides detailed guidelines for its program implementation. ASA staff from the branch level visit the villages and identify borrowers after assessing their income. A group is formed just to act as the collection center with, on average, 25 landless poor women. There are four Credit Officers (COs) in a branch and each


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maintain 18 groups covering 450 members. Thus, each branch provides services to 1,800 poor landless women. A group member requesting a small loan and small business loan can receive Tk.5-6 and Tk.12-15 thousand respectively as an initial loan. The loan, along with a 15 percent service charge, is to be repaid within a year through 46 weekly installments. Another loan product, Small Entrepreneur Lending (SEL) was created in July 2003 in order to create jobs for the hard-core poor. The terms of this loan include an initial loan size of Tk.50-150 thousand, repayment terms of one, one and a half, and two years in 10, 15, or 20 monthly installments. The service charge rate is 15 percent. ASA’s savings program is an innovative and flexible service and is quite effective and rare. ASA places greater importance on the capacity and choice of its clients than other NGOs. ASA introduced its voluntary savings program along with the weekly mandatory savings program to encourage the accumulation of savings. ASA borrowers of both small loan and small business loan products must save at least Tk.15 and Tk.30 respectively each week as mandatory savings. In April 1997, ASA introduced its ‘Voluntary Savings Product' for which members may deposit more than this amount and may withdraw their excess savings freely. ASA is among the first microfinance NGOs to allow even members with outstanding loans to withdraw their savings. It is notable that a member can withdraw savings at his or her doorstep. The MFIs with conventional management do not take the risk of introducing this system for the members. To encourage the savers, six percent interest rate is provided on their savings deposits, which is higher than the existing commercial bank interest rates. ASA is confident that this type of savings service offers the institution an opportunity to reduce financial dependency on outside sources while offering clients a financial service. ASA disburses members' savings to members themselves as credit. In this way, ASA is using the savings of the people to help alleviate poverty. In addition, mobilization and capitalization of savings allows ASA to be more self-reliant and is an important part of its sustainable development model. ASA has succeeded in giving an institutional shape to rural savings in the light of its extensive financial activities. In August 2003, ASA created two types of in-house insurance (loan and life) provision for its clients. The service delivery process of ASA's insurance is simple. A premium of Tk.3 on loan per thousand is charged for loan insurance and Tk.10 is deposited per week for life insurance. After the death of a borrower (unless it is suicide) the outstanding loan is adjusted from the loan insurance and the successors of the deceased will get the benefit of six times more than the amount deposited for life insurance. If there is no death, the borrower receives the total deposited amount with dividend. It can be noted here that as of July 2003 there was a single insurance product. The challenges that ASA faced were maintaining a high repayment rate, attaining specialization in microfinance and attaining a self-reliant status through a gradual shift from donor funds. Moreover, ASA successfully emerged as a pioneer of a minimalist approach, designing a microfinance model replicable in all environments and ensuring wide coverage. ASA committed itself to enlarging outreach, cost-effective lending and achieving financial self-sufficiency through efficiency within a relatively short time. Later in the growth process, it also committed itself to providing improved voluntary savings deposit services to members. These commitments led ASA to focus on the following key organizational features:

• Self-sustainability • Branch without accounts personnel


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• Simple, easy, but effective record keeping/ bookkeeping and working procedures • Innovative staff recruitment policy • Training without cost • Innovative mid-level management structure • Well-written ASA Working Manual • High degree of decentralization to the field level • Simple, small and cost-effective branch structures • Standardization in policies, procedures, equipment and logistics

ASA works from a head office in Dhaka and manages 1,222 branches through 161 regions and 30 divisions has covered 477 thanas (sub-districts), 64 districts of Bangladesh up to July 2003. The number of total group members has risen to 2.25 million from 1.58 million in December 2001, total savings balance Tk.2,730 (US$47.07) million, outstanding loans Tk.10,919 (US$188.26) million, the rate of loan recovery is 99.95 percent. ASA has 7,769 staff members as of July 2003. Remarkably in 2002, ASA’s operating cost was 7.17 percent, the Portfolio in arrears of ASA was 0.23 percent and Portfolio at risk was 0.33 percent. Financial self-sufficiency (FSS) in 2002 was 145.76 percent, ROE (adjusted return on equity) was 24.29 percent and ROA (adjusted return on assets) was 7.99 percent. ASA’s experience reveals that sustainable outreach should be the central objective of MFIs and institutions must commit themselves to achieve a significant sustainable outreach within a short time spell. This means MFIs must be obsessed with cost-efficiency. MFIs have a social obligation to be cost-efficient because the poor cannot afford to pay for the inefficiencies of service providers. It also reveals that everything ASA does and the way it conducts its operations flows from this thirst for sustainable out-reach of services to the poor. Leadership in ASA has successfully developed a participatory decision making process. The authority does not impose new ideas and decisions, rather there is a practice to explore and accept new ideas through a participatory process. Decisions are taken in a timely manner and disseminated for quick implementation. The whole process is dynamic in nature, which plays a positive role in managing things in a proper way. Most mid-level positions are filled through promotion. ASA has a lot of potential to expand its operations, as its methodology is very simple. ASA has methodological advantages over its competitors. Quick area selection, client selection, group formation, disbursement, no group guarantee, open savings (access to savings), standardized products and services etc. are the features of the ASA methodology that allow for expansion and inclusion of more poor people in the program. Moreover, transparency of all activities of ASA has created confidence among poor people, which helps quick expansion of coverage. MFIs and Commercial Banks Like ASA, other NGOs in Bangladesh are usually registered with the NGO Affairs Bureau under the Joint Stock Companies Act and the Societies Act. Under the Memorandum of Societies Act, the NGOs are referred to as the ”Societies” and engage in charitable and welfare activities strictly on a non-profit basis. But the NGOs are so far engaged themselves in rural banking and offering clients a variety of savings products, though they are not able legally to take deposits from the


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general public. The NGOs do this by ‘borrowing’ from the group and ‘associate’ members. Moreover, lack of ownership of the organizations’ assets also means lack of personal legal responsibility for organizations’ liabilities, which are mainly clients’ savings. The general public is reluctant to deposit their savings with MF-NGOs partly because the MF-NGOs are unable to perform the function of a financial intermediary legally and partly because of the legal ambiguities surrounding liability. Currently, there is not a lot of legal protection for financial service provider NGOs in Bangladesh. On the other hand, banks are permanent institutions. They need a suitable institutional structure working within a stable and favorable legal and political environment. In this respect ASA, like BRAC and the other loan-giving NGOs, is less well placed than the Grameen Bank which has a proper legal framework, with a specific ordinance passed in Ershad’s regime (1982-1990). ASA and BRAC remain NGOs, and work under an ill-defined mandate from the NGO Affairs Bureau. It encourages NGOs to work in the field of savings and credit for the poor but is not specific about how far NGOs can go before they begin to break normal banking and financial-service laws. A particularly slippery area is that of accepting deposits, which assumed that NGOs could collect savings from members organized in-groups. But what exactly can they do with these savings, how are they safeguarded, and can NGOs collect deposits from the general public? Group Discussion In response to both presentations, one participant from Compartamos wanted to know more about Share’s solidarity group principles. Share responded that to form a solidarity group, the clients must hold a public meeting, asking people to form groups of five individuals with the same background and that come from the same locality, are good friends, and are of a similar age. They must go through group training and receive certification from the loan officer. After this, the women become members of Share and the loan disbursal and verification is finalized. The same participant also wanted to understand how ASA is able to provide training for staff at no cost. ASA explained that the training is no cost because it is all on-the-job training. Based on ASA’s streamlined model, staff does not need any more training besides operational manual and on-the-job training. There is a three-day orientation for new staff and then six days of on the job training in the field. After these nine days of training, there is an unannounced test. ASA does not believe in other types of training. Tamar Lebanidze from Constanta Foundation was interested in knowing how long Share takes to disburse a loan. According to Share, 85 percent of clients are start-ups who have never thought of becoming an entrepreneur. Therefore, it usually takes us four weeks to disburse. The questioner also wanted to know about ASA’s branch strategy and decentralization. Mr. Sagar from ASA explained that in terms of recruitment, only college graduates may apply. However, no training is necessary because the system is so simple. ASA doesn’t need accountants in each branch because the manuals detail procedures for each payment and for the receipt of income. ASA doesn’t need professional people because they are too expensive. This is an important cost savings for ASA. The nine-day orientation plus the manuals are enough to guide staff in bookkeeping and accounting. One participant questioned Share about their training costs, believing that they must be quite


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high. The participant also wondered if Share’s verification system is cost effective. Share responded by saying that working with a target population of poor start-ups, clients understand that if they do not generate new income, they cannot repay. Share recognizes that they have a monopoly in the region, so their clients are loyal to Share. However, when competition arrives, the clients will prefer less requirements and a simpler methodology, in which case Share will have to change. Because government-subsidized programs are coming in, Share has been forced to foray into individual lending in order to survive the temporary existence of the government program. To remain competitive, Share has recognized that it must streamline its procedures over time. Another participant questioned how ASA could use a group mechanism without actually lending to groups. ASA responded that the group is simply used as a collection facility. Groups are very familiar with one another within ASA’s client context. ASA has decided to give loans to individuals because people don’t like the group responsibility or the group meetings.


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THEME VI: HOW ARE MFIS DELIVERING SERVICES & PRODUCTS?

– FOCUS ON EFFICIENCY “The profitability of any organization depends on the way it utilizes its employees.”

- Rene Azokli, Managing Director, PADME “The Smart Automatic Teller machine can talk to the client in different local languages. It is a digital touch screen. It instructs the client about how to use it. Most people have never seen these machines in their town. The machines are built to withstand heat, dust and other elements that come with being located in rural areas”.

- Eduardo Bazoberry, CEO, PRODEM FFP

***** Theme V looked at how the different models being used by microfinance institutions can serve the same clientele. This section of the report examines how MFIs improve their productivity and efficiency levels, specifically through the use of staff incentives and innovative microfinance technologies.

1. USE OF STAFF INCENTIVES While traditionally used widely within MFIs of all types, staff incentive schemes have received limited attention in microfinance research and documentation. Most of the available information is anecdotal and limited to specific MFIs, and no systematic research has been conducted on this topic. For the past six months, the MicroFinance Network has been working on a collaborative effort with MicroSave-Africa in order to provide better guidance to microfinance practitioners regarding the design of staff incentive schemes. As of October 2003, six MFN members had gone through a diagnostic and analysis of their incentives schemes. This chapter will present some observations from the researchers and will provide examples of how different MFIs approach staff incentives.

1.1 Key Observations of Staff Incentive Schemes


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Based on the recent collaborative research mentioned above, researchers have drawn some interesting preliminary conclusions regarding staff incentives in microfinance institutions throughout the world. 1. Complex bonus formulae are frequently not understood in detail by staff.

The more complex the method for calculating compensation and bonuses, the less likely staff will understand and the less likely that the system will improve performance. Nevertheless, incentive calculations will have a positive impact on performance if staff (1) knows the relative weights of the performance measurement parameters, and (2) sees a direct link between their bonus and their personal effort. However, it can be assumed that the effect of incentive schemes can be increased if staff could calculate their bonuses by themselves.

2. If conducted well, tournaments (or competitions) can have positive impacts on

performance. This includes a frequent and detailed ranking of staff according to key performance parameters and the presentation of the winners in the branch and newsletters (ACLEDA Bank provides a good example for this). The effect can even be observed if the winner is not rewarded monetarily, although it is fairly low in such cases. These types of incentives are recommended as a supplementary tool to group bonuses (in environments where individual incentives are not feasible).

3. Bonus calculations which are based on human assessments are often not accepted by

staff because they suspect that supervisors use subjective criteria in their evaluation. 4. Targets must be achievable.

There is little effect if targets are too challenging and staff do not have any way to realistically achieve the results needed to receive the bonus.

5. If bonuses are capped, incentives lose their power for staff who have been achieving the

maximum amount. 6. If the incentive power (bonus/total salary) was too low, there is minimal incentive for high

performance. 7. In group incentive schemes, the free rider problem increases with the size of the group.

In such a situation, staff do not “go the extra mile” (e.g. do not work overtime or on weekends) in order to increase their bonus.

8. If staff rotates regularly and, hence, specific clients cannot be attributed to each loan

officer, a provisional solution could be to reward processes rather than results (e.g. the number of group meetings held could be considered instead of the number of outstanding clients).

10. Gain Sharing Plans, Profit Sharing Plans and Employee Stock Ownership Plans (ESOPs)


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have limited incentive power because the link between effort and award is too indirect. 11. If loan officers are assigned to a new portfolio, they often dislike the fact that they lose

their clients – especially if their bonus is diminished. This problem is exacerbated by the fact that high performing staff are usually transferred to difficult areas.

12. Even extremely simple staff incentive schemes can have a powerful motivational effect. 13. In Latin America, incentive schemes focus on loan officers and have a high meaning.

Performance based incentive schemes are rare in Asia. Compared to America, powerful incentive schemes are seldom used in Africa. However both, Asian and African MFIs have shown great interest in incentive schemes.

1.2 Alexandria Business Association (ABA) Presented by Nabil El Shami, Executive Director, Alexandria Business Association (ABA) (Egypt) The ABA has used a staff incentive system since 1997. Under the previous system, ABA usually gave two types of bonuses. One was linked to the number of loans and the second was linked to the amount of loans. Under the previous system, management believed that 150 was the maximum number of active loans a loan officer could handle. As ABA expanded services throughout Alexandria (now 13 branches) and outside of the city, extension officers (EO) had more distance to cover and became increasingly frustrated by the inability to reach their targets without sacrificing portfolio quality. As a result, ABA found that loan officers were temporarily paying their own money to increase their overall repayment rate and receive their bonuses. Figures 10 and 11 show the terms of the earlier incentive scheme, based on the number of accepted loans and the rate of repayment.

Figure 10: ABA’s Incentives Based on Number of Accepted Loans (Previous Scheme)

Number of Accepted

Loans provided by Extension Officers Amount of Incentive

(US$)

15 – 19 9 20 – 24 15 25 – 29 24 30 – 34 32.5

35 & more 450


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Figure 11: Incentives Based on Repayment rate – (Previous scheme, in US$)

Rate of Repayment 70-90 91-120 121-150 >150

Active Clients Active Clients Active Clients Active Clients % $ $ $ $ 97 27 36 45 52

97.5 31 40 49 56 98 36 45 53 62

98.5 42 50 58 68 99 48 56 65 74

99.5 57 67 74 83 100 71 82 89 100

Because this system allowed extension officers to keep more than 150 active clients in his or her portfolio, poor follow-up for individual loans was often an unanticipated result. The amounts of incentives increased against an increment of 0.5 percent on repayment percent allowing extension officers to manipulate the system to reach their targets by supplementing repayment through their own funds or other client’s funds. This system discouraged officers to follow-up past due clients, as there was no incentive to do so once the officers had failed to receive the previous month’s reward. As bonus installments were based on performance of each month, it would be up to the loan officer to seek repayment for the next month, after the incentive had been given. Modified Scheme: Subsequently, ABA modified the system to make it easier for staff to receive the incentive, setting more realistic goals that would strengthen the system as well. Under the modified scheme, a lump sum of US$16 is given for a minimum of six new loans and a lump sum of US$16 is given for a minimum of 14 repeat loans. Also under the new system, loan officers were divided into two categories: junior and senior extension officers, as indicated in Figure 12 below.

Figure 12: Incentives Based on Repayment rate –(Modified Scheme

Extension Officer

Junior Extension Officer

(up to 2 years) Senior Extension Officer

(more than 2 years)

Number of Active clients 50 - 120 121 - 150 More than 150 Repayment % Amount of Incentive in US$

96 – 97 8.5 12.5 17 >97 - 98 17 25.5 34 >98 - 99 34 51 68 > 99 % 42 62.5 85

N.B.: 25 percent additional bonus on the above incentives will be granted when the E.O. achieves 99 percent cumulative repayment rate for the previous six months


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Branch Managers: Under the previous scheme, branch managers received incentives based on the number of active clients per extension officer and based on the overall repayment rate for the branch. However, under this system, branch managers would encourage the extension officers to keep more than 150 active clients in his or her portfolio. They also found that branch managers would encourage the officers to manipulate the figures to improve the repayment percentage. Under the modified scheme, branch managers receive a fixed incentive for three months based on the ranking of branches. Branch ranking is based on the evaluation of the overall performance of the branch using a point system considering the following factors:

1. Financial performance represented in the profitability ratios (20%) 2. Operational performance represented in the productivity, PAR, client retention rate and

portfolio growth (50%) 3. Personnel management (turn-over of EOs, field training of new EOs, and promotion of

new potential managers (15%) 4. Regular evaluation of upper management with regards to leadership skills, the ability to

solve problems, and the development of managerial skills (15%)

Amount of Branch Manager Incentives:

• For branches earning above 80% of the points - US$275 • For branches earning above 70% of the points - US$200 • For branches earning above 60% of the points - US$125

Based on the new system, branch managers now receive incentives which are totally unrelated to the loan officers. Their incentive system includes more broad and specific topics and their performance has improved significantly.

1.3 Building a Path to Increased Productivity – Staff Incentives at Centenary Rural Development Bank, Uganda Presented by Hung Linh, Executive Director, CERUDEB (Uganda) Created in 1982 as a development trust (Centenary Rural Development Trust) by a group of Catholic bishops with a large not-for-profit social mission in mind, Centenary was focused on providing very small loans to the rural poor. In 1993 the organization converted into a full-fledged commercial bank, Centenary Rural Development Bank. Very soon after transformation, the bank ran into great trouble. By 1996, CERUDEB was losing money, with 60 to 70 percent of the portfolio non-performing. It was at this point that management recognized the importance of balancing a social mission with profitability. They decided to completely reorganize the bank, changing the organizational structure, the composition of the board and management, the operating system, lending methodology, human resource policy and introduced an incentive


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system (previously did not have one). All these changes turned the bank’s performance around – between 1996 and 2001, assets and deposits, loans and profit increased dramatically. However, in the first half of 2002, Uganda suffered a strong economic slowdown and the bank’s lending activity dropped and profits went flat. So, the bank decided it was time to look at operations once again and make more changes. While the overall changes made were not as drastic as before, the bank paid particular attention to the incentive system this time. Management saw the incentive system as an important strategic and management tool. By experimenting with different incentive systems, a bank can encourage clients to repay loans on time, can ensure the welfare of staff and reward them appropriately for their productivity. Also, changing the incentive formula can help management reach specific strategic goals. Incentives to Clients: While management believed that lending to microfinance clients was risky, it also believed in the importance of providing loans to the rural poor. Therefore, the bank implemented a system based on a graduation principle for customers, beginning with US$50 for first time clients for three month terms. After good repayment, the customer can qualify for a 15 percent increment in their loan amount and an extension of an additional three months to the loan term. In addition, the bank decided to offer a monetary incentive to clients. On top of a 22 percent interest rate, the bank charged a monitoring fee of about two percent per month (about 24 percent per year). For all practical purposes, the interest rate equaled 40 percent per year. The bank charged the monitoring fee for the first three loans. Beginning with the fourth loan, the monitoring fee was reduced to 0.5 percent (six percent per year). Incentives to Staff: In 1996, the bank decided to give incentives to all staff, including administrative staff, because management believed that incentives were necessary to ensure staff’s fair compensation and effective motivation. For non-administrative staff, the bank established two categories: loan officers and branch managers. Figure 13 shows the breakdown of the criteria used for basing the incentives, the ranges in which a bonus would be given and the weight that each category carried. For example, if a loan officer had 4% non-performing loans in their portfolio, this would fall within the acceptable range (note the maximum of 5%) and the bonus for that category would equal 180,000 Ugandan Shillings (60% of 300,000).

Figure 13: The 1996 Incentives System – MicroLoan Officers

Criteria Requirements Weight • Non-performing % • Maximum 5% 60% • Process days • 3 days; maximum 6 10% • Number of Loans handled • 200; minimum 150 10% • Approvals per month • · 50 ; minimum 20 20%

Maximum amount of incentive = 300,000 100%

* Currency in Ugandan Shillings


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One important benchmark to note is that if the non-performing portfolio is over five percent, the loan officer is not eligible for any of the incentive compensation, regardless of the performance in all the other weighted areas. Figure 14 shows a similar structure for branch managers.

Figure 14: The 1996 Incentives System – Branch Managers

Criteria Requirements Weight • Audit Rating • Target 10; minimum 3 10% • Non-performing % • Target 2%; maximum 6% 10% • Profit • Pro-rata: 100% budget 10% • Return days • Target 2 days; maximum 5 days 5% • Customer Service (quality) • Score x .01% 10% Maximum = 45% of Gross Salary 45%

* Currency in Ugandan Shillings The 1996 incentive system for branch managers was based on different criteria than loan officers. The average gross salary for branch managers was between 1.5 and 2 million Shillings. So, the maximum compensation bonus would be 45 percent of that amount. However, the benchmark for a non-performing portfolio was the same, with a maximum level. Branch managers who fell below this level would lose all other incentives available under the system. Administrative and Support Staff For administrative and support staff, CERUDEB developed a performance related payment scheme, or PRPS. This system would compensate employees up to 45 percent of gross salary, based on individual bi-annual or quarterly performance ratings. Considering the impact of all staff on the bank’s operations, management saw very positive result from this system of incentives.

Figure 15: Results: Comparative performances: 1997-2001

Criteria FYE 1997 FYE 2001

• Total loans (value) • 8.5 billion • 23.8 billion • Net worth • 0.9 billion • 12.2 billion • Trading profit • 250 million • 5,200 million • Non-performing % • 9.9% • 2.1% • Lending ratio • 66.5% • 34.8%

* Currency in Ugandan Shillings The increase in trading profit from 1997 to 2001 and the drop in the percentage of non-performing loans are particularly noteworthy. The bank was able to reduce non-performing loans from almost 60 percent in 1995 to about 10 percent in 1997 to two percent in 2001. It is important to note that Centenary’s definition of non-performing loans is even more strict than the industry standard of 30 days. For Centenary, after one day, the entire balance of the loan is


58

considered non-performing. Considering the problems of the past, the bank decided to take this conservative view. The 1996 incentives system was successful in allowing management to reach specific corporate strategic goals. There was a strong recovery of the bank’s overall condition, increases in loans, deposits, assets, and profits and excellent loan portfolio quality. However, the strict lending criteria also led to a low lending ratio (loans to deposits), small loans, high loan turnover, heavy reliance on volatile T-bills for income, and a loss of staff motivation. Loan officers were reluctant to go after new loans and wanted to minimize the risk of each loan by booking small, short-term loans. The result was that the bank found itself with one-third in loans and two-thirds in liquid money that, without other options at the time, ended up being used to purchase risky government treasury bills. The return on the bills was completely dependent on the whims of government policy. Another downside of the 1996 system was that loan officers and branch managers were losing motivation. Staff would regularly reach 90 to 100 percent of the incentive amount available. So, everyone took for granted that they would be able to reach their incentive and had no motivation to go beyond the minimum and maximum levels. Another downside had to do with the administrative staff who also regularly would reach the performance benchmarks. Managers who had to evaluate staff several times a year would routinely award the full percent points for the extra compensation. By the first half of 2002, the system was hit hard. At the time of the severe downturn, the bank was heavily reliant on the T-bills, which were earning 20 to 25 percent interest before plummeting to 3 and 5 percent in 2002. Profit went down and the lending ratio dropped from 35 percent by December 2001 to 29 percent in June 2002. One more time, the bank needed to revise the incentive system. The 2002 Incentive System Figures 16 and 17 show the changes made to the 2002 system for loan officers and branch managers. For loan officers, changes to the system included a reallocation of the weighting for incentives, an increase in the value of the overall incentive and an additional criteria for portfolio growth. For branch managers, the new system added criteria for growth of deposits and loans and increased the maximum percentage of bonus on salary from 45 percent to 60 percent of salary.

Figure 16: The 2002 Incentive System – Loan Officers

Criteria 1996 System 2002 System

• Non-performing % • 60% • 40% • Process days • 10% • 10% • Number of Loans handled • 10% • 20% • Number of Approvals • 20% • 10% • Portfolio growth: 1%-4% per month • n/a • 20%

Maximum Amount of Incentive = 300,000 400,000


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* Currency in Ugandan Shillings

Figure 17: The 2002 Incentives System – Branch Managers

• Audit • 10% • 10% • Non-performing % • 10% • 10% • Profit • 10% • 10% • Return days • 5% • 5% • Customer Service • 10% • n/a • Deposits Growth: 1%-4% per month • n/a • 10% • Loans Growth: 1%-4% per month • n/a • 15% Maximum 45% Salary 60% Salary

Administrative & Support Staff: The performance related payment scheme, (PRPS) was completely eliminated and was replaced by across-the-board salary adjustments (of about a 35 percent increase). Also at this time, the bank decided to go more aggressively into small- and medium-enterprise lending and corporate lending. Diversification into new products contributed to the bank’s 73 percent growth in lending in 2002, but the new incentive system, which rewarded new business, probably had the most important effect.

Figure 18: Comparative performances: Jan – June vs. July – Dec 2002Criteria Jan – June 2002 July – Dec 2002

• Loan Growth % • + 6.2% • + 73.1% • Borrowers Growth % • + 4.9% • + 24.4% • Trading Profit • 1.7 billion • 2.1 billion • Lending ratio • 31% • 47% • Non-performing % • 5.1% • 3.2% * Currency in Ugandan Shillings

Results Figure 18 reflects important improvements in the bank’s performance in 2002. By identifying certain problems with the previous policy, Centenary was able to turn around loan growth, increase the number of borrowers, raise the trading profit and lending ratio and drop the non performing loan portfolio. Under the previous system, loan officers were able to give out smaller loans over shorter periods of time in order to maintain high portfolio quality and increase the number of loans given. Some of the loan officers would use their own money to credit loans on the last day of the month before the incentive system would kick in. In making changes to the system, management had to pay close attention to how changes in the incentive system would affect staff welfare and performance.


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1.4 Incentives for both Staff and Clients – Share Microfin Limited Presented by Udaia Kumar, Managing Director, Share Microfin Limited Staff incentives are very important for any institution looking to grow and increase productivity. As was the case in Centenary, from the experience of SHARE, incentives are key not just for staff, but also for clients. With respect to clients, Share gives leadership positions to them at every level – the group level, the center level and at the branch level. Clients are also elected to sit on Share’s board. In addition, Share recognizes their efforts and give gifts (such as a fan, flashlight or cooking vessel) at the branch level to best performing clients based on the discipline, repayment and leadership qualities they have demonstrated. For the best performing clients, Share also offers instant consumer loans. Share recently decided to offer this incentive because in one of the more competitive areas, a competitor was offering a similar type of incentive. Clients seemed to respond well to Share’s pilot incentive consumer loan, so it will likely continue. In terms of incentives for staff, Share has gone through a learning process. For the first four years, the institution only had four branches and 49 staff members and all staff were compensated the same. However, as the institution grew, Share found differences in staff performance and behavior. For example, some staff members were starting very early and some were not working as hard. Management decided that staff with different productivity levels and commitment levels should not be compensated the same and introduced a staff incentives system. In 1997 operations went from four branches to ten and the number of members increased from 4,000 to 9,000. Share believes that it is the incentive system which helped to build the productivity of the staff members and the efficiency of the organization – both of which help to account for such impressive growth. During the earlier period, most people did not think that the institution would survive, particularly with staff drop-out rates of 30-35 percent. During the time when Share was initially recruiting staff members and was giving the same salary to all staff, they quickly found that for the first two months, the drop-out rates were very high. From the bank’s perspective, the money used for the salaries was not grant money, but borrowed money that had to be repaid with interest. If the new staff would stay for just two months and leave with the money, this cost the bank money and time. Share realized that they needed to change this policy. So, for the first two months, Share would instead only give 1,500 rupees as a stipend. If the staff person would stay for the first two months, the amount would be increased to 2,500 rupees. If they would stay after two months and have learned the work they were expected to do, then they receive about US$110. As the institution started growing and occupying more areas of the Andhra Pradesh region, the drop-out rate slowly has come down to 3-4 percent. Today, staff of Share see career opportunities at the bank, and don’t need to look for work outside. The benefits at Share are similar to those offered in government jobs, including retirement accounts. When compared with the private market, the salary structure is quite reasonable, considering the qualifications of the


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current staff. Because Share is expanding its operations to other regions, credit staff have many opportunities to move up within the organization if their performance is very good. One key benefit Share has offered credit officers has been to change the title of loan officers. Previously, a field credit officer was called a field credit assistant. As part of the incentive system, the title officer was added to the position title, a title that carries great weight in Indian society. The response was very positive. Salaries in Share are divided into two parts – 40 percent basic pay and 60 percent is based on incentives. If the staff do their work, they will earn their benefit. For example, a divisional manager makes about US$122/month in basic pay and US$183 in incentives. Before Share sets targets for staff, each branch prepares a realistic viability plan. The three primary indicators for branch viability are that the branch reaches 2,000 members in the first year, outstanding loans value 68,000 rupees and that the branch achieves 86 percent self-sufficiency. By the second year, the branch should be 125 percent self-sufficient. For all these things, the underlying principle is to always maintain a 100 percent repayment rate. For staff to receive any incentive from the system, the repayment rate must remain at 100 percent. If there is less than 100 percent, the staff loses the whole 60 percent of the incentive. In addition, officers must update records on time at the end of each day, with appropriate documents signed by each branch manager and superior. The branches must send reports to the head office on set days. On the 7th of each month, the head office staff have their own targets to produce the balance sheet and to consolidate 100 branches. If the balance sheet is not produced on the 7th of each month, the chief accountant will lose 20 percent of their incentive compensation. Impressively, Share, operating in 100 branches and spread across the state over about 500 kilometers, is able to get financial statements audited within 30 days of the end of the financial year. For the field credit officers, the criteria for receiving incentives includes achieving set targets for the number of group members (net members) and working to connect these group members to social and cultural programs as appropriate. Finally, incentives depend on staff attending branch meetings on time, maintaining field schedules, properly maintaining each branch, conducting themselves well in the village and keeping a good appearance. For every group the officers form, they receive 100 rupees, so they must be in the villages very early in the morning (before 9am) to be able to organize, motivate and form people into new groups. The issue of the personality and conduct of loan officers became important when management found out that staff members used to get up very early to form new groups in order to receive the incentive offered. They got up so early that they weren’t dressing properly or taking the necessary time to prepare themselves. Share felt that if this continued, the credibility of the organization would be lost. So Share set certain standards for presentation. If a staff member has well-cut hair, they receive 200 rupees; for maintaining good dress – 200 rupees; if staff cleans their vehicle, they receive another 200 rupees. This system covers 2,000 staff members and was introduced in the beginning of the institution. Another incentive for staff has to do with annual leave. Staff that do not take their allocated leave (15 days per year) are able to cash their remaining days at 1 ½ times their daily pay. Through its incentive program for staff and clients, Share has been able to meet its most important goals: maintain 100 percent repayment rates; uphold the professional image of the bank and retain good, quality staff.


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Other Perspectives on Staff Incentives During the discussion to follow the presentations, one participant wanted to know about the impressive reduction in PAR and the difference between small and micro loans in this regard. For both types of loans, the PAR has hovered around three percent all year. Currently, Centenary has three loan products. Microfinance loans go up to US$7,500. Ninety-nine percent of Centenary’s loans fall into this category, or 80 percent of the total portfolio (number of loans issued). Commercial SME loans go up to US$50,000 and corporate loans are over US$50,000. These last loans make up about 20 percent of the portfolio as of June 2002. One important point to consider is that Centenary just entered into the SME and corporate loan sector in June 2002, so there may be an eventual increase in the PAR, up to around five percent. Regarding the design of the incentive scheme, James Obama of PRIDE Tanzania wanted to know who drives the incentive design process, because in many cases it is understood that for an incentive scheme to be successful, staff must buy into the process. Nabil El Shami explained that at ABA, there is a management committee comprised of top senior staff and some selected branch managers and senior field officers. This committee makes an evaluation of incentives and their impact on staff on a monthly basis. When there is a decision to change the incentive system, the committee studies the performance and goes to the branches to get feedback. Changing the system is not done each year, but after a period of time. The incentive system has been working quite well in branches outside of Alexandria. For Centenary, developing an incentive scheme was a several step process. First management had to review the bank’s financial performance. The bank also needed to have in mind the strategic goal that the board had put in place for two – five years. Based on these considerations, the bank needed to find out what would be necessary to do if the lending ratio was currently at 30 percent and the board wanted it to be at 70 percent in three years. Management would need to develop ways to increase the bank’s lending activity to meet these goals and find ways to measure their progress. For the last plan, management developed a work frame and communicated the criteria and proposal for meeting the strategic goals to all branch managers. Now, every quarter management meets with all branch managers. Branch managers have the responsibility to look at the proposal, discuss the terms with their staff at each branch and then send management their input. After quarterly meetings between branch managers and management, the plan is presented to the board. In 2002, Centenary realized the problems with the staff incentive system, submitted the new system to the board in April, had the plan approved by the board by September and implemented around October 2002. In the case of Share, one participant wanted to know how the practice of allowing staff to cash out on vacation days reconciled with internal control issues that could likely arise. To respond, Mr. Kumar explained that Share has developed an internal control system where staff do not stay in one specific position for a long period of time, unless it is a specialized position such as a senior accountant. The work of one individual is checked by at least two people, so there is little room for manipulation. One benefit of the cash out system is that if staff finds themselves at the end of the year with vacation credit, not all staff will take their remaining days at once. The cash out system allows staff to receive compensation instead.


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Another point to consider was put forward by Charles Nalyaali from the Uganda Microfinance Union. He wondered how the banks handle situations in which staff have problems meeting certain goals or performing well due to problems that are beyond their control, such as the loss of a close relative. In the case of Centenary, the system for offering incentives presented is somewhat less complex than what is actually done in practice. Certain factors must be taken into consideration. For example, with agricultural lending, the seasonal nature of this loan type must be taken into consideration when calculating bonuses. Another example might be when a new loan officer transfers to a different branch and inherits a portfolio from an existing loan officer. It could have a negative impact on the loan officer. There are always some subjective elements to the calculation of incentives that must be made at the senior management level in order to adjust for uncontrollable situations. Another example of special circumstances that can unfairly impact all staff members is if one staff is caught committing fraud. This type of situation must be handled on a case by case basis. Another special example is if a field officer is not performing well and they either resign or are fired. Until a replacement is found, the departing staff member’s clients must be distributed to other loan officers. In the case of ABA, this is one of the reasons for keeping the maximum amount of clients per loan officer at 150. In the case a field officer receives a new portfolio that has certain problems at the beginning, they are given three months in which to improve the quality of that portfolio before they are evaluated based on their own performance. In the case of Share, extraordinary situations like flood, fire, drought are taken into consideration during staff evaluations. And, when introducing a new program in another state, the incentive system is not put in place right away. The staff are given a period of six to nine months to get things running before the incentive system is used. So the overall system is flexible when it needs to be. Sometimes, when staff members get into an accident, the human side of staff relations must be considered. To this effect, the bank will help take care of hospital and medical expenses. How do incentives relate to positive or negative returns for the institution? In the case of Al Amana, at each branch there is a quarterly assessment of profit and loss of each branch. Each branch has the opportunity to receive 40 percent of quarterly results as incentives for the field agents. If the results are negative, there are no incentives. The specifics of the system are not that simple for the field agents to understand. However, they do understand the basic logic and the system has pushed them to be more effective in their work. René Azokli of PADME wanted to know how an MFI can reconcile the tension between incentives for administrative staff and loan staff. In the case of ABA, the incentives for both types of staff are based on the overall number of loans processed. There is, in addition, an evaluation factor done by the direct manager which adds a small percentage to the formula. However, the main factor is the number of loans, which represents the load of the support staff. Another 20 percent of the incentive is the repayment rate. For Centenary, there is some tension between productive staff receiving incentives and non-productive (administrative) staff who do not. This was especially the case back in 2002 when they eliminated the performance related payment scheme and gave all staff a salary adjustment. For example, loan officers were making 700,000/month and could receive additional compensation of 400,000 Ugandan Shillings. Non-incentive staff at same rate would receive the basic rate of 900,000. Management received complaints from loan officers


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about the high base salary of the other staff. What management needed to do was to take more time to explain the system goals. It took several months of listening to complaints from staff to appreciate the issues that needed to be addressed. For Share, the responsibility for giving the incentive has been decentralized and given to the field staff themselves. What actually happens is that the loan officer incentive is cleared by the branch manager and the branch manager by the area manager, all the way up. To be fair, all the terms and conditions must be very clear and standardized. You cannot design incentives based on individual backgrounds.

2. EFFICIENCIES THROUGH INVESTMENT CAPITAL: A MEANS TO ENCOURAGE EXPANSION OF COMMERCIAL BANKING IN MICROFINANCE Martin Connell, Chairman of AfriCap; Chairman of ProFund; Founder of Calmeadow (Canada) Much of the growth of microfinance can be attributed to the emergence of specialized investment funds which have provided the critical support for strengthening operations and increasing outreach of MFIs. One of the first of these funds was Profund Internacional which has operated since 1995 as a for-profit investment fund, focused on building microfinance through commercial support. Headquartered in San Jose, Costa Rica, the fund seeks “a high return on investment for its shareholders while promoting the growth of regulated and efficient financial intermediaries whose main target market is the small and microenterprises (SMEs) of Latin America and the Caribbean”. The management team works to identify financial institutions that qualify for equity and quasi-equity investments with the aim to improve the operations of the institutions and to help them achieve both sustainability and scale. As a shareholder, Profund normally holds between 15 and 20 percent of the institution’s total net worth. Profund stands out because of its early understanding of the enormous potential for financial services to microentrepreneurs and its belief that investments could be made with relative risk and at a profit. Profund’s priorities are to invest in regulated financial institutions which are providing microfinance to microentrepreneurs. With the expectation of positive returns on investment through long-term capital appreciation, Profund hopes that other investors will learn from their example and add to the pool of funds available to help grow microfinance. One key role that Profund and specialized funds like Profund play is to act as a bridge between the non-profit world and the for-profit world. Since many of the shareholders that sit on the board of Profund have extensive backgrounds in both sectors, the fund is able to understand the mission and goals of each and serve as a sort of interpreter. In addition, because of the extensive knowledge of fund managers and shareholders about microfinance, these parties have been able to play an especially active role in the effective governance of the institutions in which they invest. Figure 19 plots the progress of six institutions in which Profund has invested. From 1998 to 2002, the institutions have seen steady growth in their portfolios along side both equity and liabilities.


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Figure 19: Comparison of Six Profund Investees Combined

Combined Results of Six Profund Investees

0

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1998 1999 2000 2001 2002

years

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portfolioliabilitiesequity

Note to Figure 19: Six Investees - Banco Solidario ( Ecuador); Vision de Finanzas ECA ( Paraguay); Mibanco (Peru); BancoSol (Bolivia); Los Andes- Bolivia; Compartamos- Mexico

Figure 20: Operating Expenses and Yield for Mibanco and BancoSol Combined

Figure 20 shows a correlation for two Profund investees (Mibanco and BancoSol) between a decrease in operating expenses along with portfolio yield. With the decrease in operating expenses, the institutions also saw a 50 percent increase in operational efficiency during these five years. One of the newest funds to emerge is the AfriCap Microfinance Fund (AfriCap) which focuses on

O pera ting Expense and Y ie ld M ibanco& B ancosol C om bined

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D ec.1998 D ec.1999 D ec.2000 D ec.2001 D ec.2002

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eligible institutions, including non-governmental organizations, non-bank financial institutions, financial co-operatives and commercial banks in Africa. These institutions must have shown their dedication to microfinance or small business lending. AfriCap favors support for institutions that indicate the ability to increase their financial services to low-income clients who have not had access to formal financial markets. While AfriCap investments are not restricted to regulated institutions, there must be an institutional assurance towards transformation, a commercial approach within operations and a commitment by senior management to financial sustainability. Investments, made in local currency, are put together in a way to best meet the needs of each particular investee institution. These instruments include the following:

• Direct equity, in the form of common fully-voting shares; • Quasi-equity, subordinated notes with various features – equity conversion, profit-linked

return, or other equity premiums – to generate equity-based returns; • Straight debt where appropriate and where this will stimulate additional lending by local

banks to the investee institutions; and • Guarantees to third party lenders, such as local banks.

Finally, AfriCap is committed not just to making investments in MFIs in Africa, but the fund also seeks to create a network of expertise among these institutions, linking them to one another through exchanges of innovations and challenges. AfriCap aims to move the African microfinance industry forward across the continent.

3. HOW ARE MFIS DELIVERING SERVICES/PRODUCTS – NEW PRODUCTS, NEW TECHNOLOGIES MFIs are increasingly using technology to reach out to more clients, offering products and services never imagined possible in the context of microfinance. Successful use of technology has lead to innovations that allow for greater levels of administrative efficiency, loan portfolio management, savings and other services that contribute to greater productivity. This session will look at two MFN members actively using technology in their products and services - Bank Rakyat Indonesia in Indonesia and PRODEM FFP in Bolivia.

3.1 BRINETS for Delivering BRI Unit’s Products and Services Presented by Abing Rabani, Deputy General Manager, Information Technology, BRI (Indonesia) Background Established in 1895, Bank BRI today has the largest bank network in Indonesia with 325 BRI outlets and 4,000 micro branches. In addition, the bank has 580 BRI automatic teller machines (ATMs) and 7,300 shared ATMs (private bank, state owned bank). These ATMs are also linked to internationally used systems, Cirrus and Maestro. BRI microfinance units operate throughout Indonesia, serving rural, remote areas, and poor customers. As of September 2003, outstanding


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micro loans (namely KUPEDES) equaled 13.1 trillion rupiah (USD 1.54 billion), and total saving (namely SIMPEDES) equaled 22 trillion rupiah (USD 2.6 billion). BRI serves 38 million clients that include retail customers (6 million) and micro customers (32 million). Of those customers, there are 11.5 million on-line accounts connected to the head office. BRI Micro Branch (BRI Unit) The primary reason behind BRI’s success is that the system is simple, accessible, demand driven, transparent, sustainable and can recover its costs. Typical BRI customers are civil servants, small traders and peasants. Keeping in line with the simplicity of the bank, the few main products include: loan (KUPEDES), savings (SIMPEDES), fund transfers (remittances) and payment point/utility bills. There are two types of BRI units, those located in urban areas and those located in rural areas. Customers in urban areas are more mobile, dynamic and faster. They demand that products and services can be accessed at any time and anywhere. Therefore, it is important for BRI that the transaction can be processed in a real-time model. (i.e. fund transfer, cash withdrawal via teller or ATM). If BRI is unable to deliver this kind of service, other competitors are right next door and will be quick to meet the demand. Customers in rural areas are more static and less dynamic. They demand simple products with lower cost, and therefore, do not really need an on-line system at this time. The use of Information Technology (IT) in BRI Units Until 1985, BRI units operated with manual posting (with a ledger card) and from 1986 until today, BRI Units moved to a teller unit system (STU). And from 2002 until now, BRI has been using the BRI Integrated Network and Information System (BRINETS). Within BRI Units using BRINETS, there are two types of IT configurations. An STU is an off-line, stand along teller system that does not use ledger cards. This model is mainly focused on the BRI Unit in rural areas. However, in the urban areas, BRINETS is a real time on-line processing system that provides centralized data and processing.


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Figure 21: BRI Application Architecture

Management Support System

Core Banking System

Delivery System

MIS: - Financial System - Fixed asset System - Human Resource System - Credit Information System DSS: - Risk Management - Asset & Liability Management - Profitability Analysis - CRM (Customer Relationship Mgt.)

RETAIL AND MICRO - Loan - Deposits - Remittance - Credit Information System - General Ledger System WHOLESALE - Trade Finance - Treasury - Investment

BRANCH CHANNEL -Branch -Micro Branch E-CHANNEL -ATM -Call Center (PB) -Point of Sale (POS)/Electronic Fund Transfer (EFT) -Kiosk -Internet Banking -Mobil Banking -Third Party interchanges

System & Network Infrastructure Under the stand alone system, usually found in remote areas where there is no telephone line, diskettes are used to transfer data or else the general ledger data is uploaded off-line. The unit uses two tellers, one customer service officer and one branch manager. For the second type of system located in more urban areas, BRI uses internet technology for BRINETS. Under this system, data is transferred to or from a host server, through a web-based system, which is protected by an internal firewall, and connects to the branches through the Virtual Satellite (VSAT) Network. The technology itself uses the internet, but flows through a closed system group, or private network that transmits through satellites (VSAT Network or Broad Band VSAT). Through the VSAT Network, BRI has been able to connect to on-line BRI branches, on-line BRI units, third party interchanges (CIRRUS, Maestro, Swift, and others) and to a wide system of ATMs, phone banking and business to business operations. To date, the BRINETS system has connected 600 outlets on-line to the main BRI network. BRI chose to use internet technology (web-based) to connect branches because of the advantages that it brings to the bank. Compared to the traditional client server, the internet technology is much more cost efficient on a cost per outlet basis. The system is easy to maintain and control and to upgrade. Once a program is loaded or upgraded in the head office, all branch offices are updated at the same time automatically. The system is flexible, but can also be easily standardized. Finally, the bank is able to improve the level of service for clients. BRINETS Program for BRI Unit In 2000, BRI developed a program with the purpose of re-engineering the business processes within the bank. Basic changes were made to the IT system in order to re-configure the IT architecture from a distributed system to a centralized system called BRINETS. Next, the bank decided to no longer develop its own internal IT programs but to implement integrated

Customer

ManagementernalCustomer


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core banking software based on standard package software available. After this, the bank would only need to focus on customization of the standard software. Finally, BRI moved to implement certain IT strategic alliances which could expand the availability of shared ATMs, electronic funds transfers and point of sale. BRINETS is a centralized system that allows the Bank to process on-line transactions. It is a multicurrency and multi-branch system, integrated customer information system. In the long-term, when the demand from the rural areas may be much higher, BRI will implement BRINETS gradually in all existing STU branches. This is particularly feasible as the cost for putting units on-line steadily decreases.

Figure 22: BRINETS Features

BRINETS Features STU Features Real-time inter branch transaction (fund transfer) > in 10 seconds

Stand alone system (off-line fund transfer) > in 3-4 days

Multi branch capability Single branch capability Limited back-office processing in every outlet, more efficient

Require a full back office processing

Multicurrency Can not be linked to ATM, Phone Banking, internet banking

Integrated customer information file Separated Customer information file Flexible for product development (Parameter driven)

Simple product only (no parameter driven)

Internet based technology Traditional based technology Operate 24 hour per day, 7 day a week (with ATM)

Operate during working hours

Focused to BRI Unit , (Urban Area) > any time, any where, any how

Focused to Rural Unit (BRI Unit Desa) > any where

Cost – US$11,600/year (breaking even in 24 months)

Cost – US$4,500 (breaking even in 18 months)

The Impact of BRINETS Before implementing the BRINETS, the bank reviewed a cost benefit analysis done by the Harvard Institute for International Development. Based on this study, BRI determined that developing the system would benefit not just the bank, but also the customers. Since the system was implemented in the bank, it has increased profit in the BRI Units. It will eventually provide for more new products and services and a better delivery channel (on-line system). Research has shown that the system will help to create a financial information system and minimize operation risk. A key point for management from the study was how the new system would improve staff productivity. Implementing BRINETS would also improve the bank’s security system and allow for easy deployment of new software programs, updates and upgrades to existing programs throughout the network. Finally, the system would improve customer retention and would enable BRI to compete with others banks. From the customers’ perspective, BRINETS has provided its micro customers access to banking


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facilities from any of BRI’s on-line offices. Customer are no longer limited to banking in one office, they can travel between branches freely, making withdrawals, transfers and other transactions easily from any where. Micro customers can have access to phone banking and 7,300 ATMs, 24 hours a day and 7 days a week. These same customers can do fund transfers in seconds, compared to the three to four days it used to take. Micro customer can have multi-currency transactions and overseas remittance can be received in seconds. A worthwhile investment for the future of BRI Based on the success to date, BRI is implementing its on-line banking system, BRINETS to BRI Units. BRI hopes to have all BRI Units on-line by 2008, which means access to financial services for up to 32 million customers through 4,000 BRI Units. The program, which benefits both the bank and its customers will provide access to products and services in any manner (any time - any where - any how). Finally, it will enable BRI to provide products and services in a low cost, simple, accessible, fast and secure manner. It will ensure that BRI maintains and strengthens its leadership position in microfinance in Indonesia.

2.2 Innovative Use of Technology to Build a Market Eduardo Bazoberry, Managing Director, PRODEM FFP (Bolivia) “It is interesting to contrast urban solutions with rural solutions. It will come out that technology gives you an advantage, differentiating yourself with other competitors,” opened Eduardo Bazoberry. When PRODEM was developing its technology systems and looking to form the Fondo Financiero Privado (FFP) type of lending institution, there was a significant problem. One of the major objectives that they needed to achieve was to mobilize savings. They needed savers in order to grow the portfolio. They needed to take massive savings into the rural areas and to differentiate themselves from the NGOs lending money. However, if PRODEM had many rural branches that needed to go on-line, it was going to cost a lot of money. As a small FFP, PRODEM couldn’t pay the cost of on-line services. So the managers came up with idea to do off-line banking with micro-chips and smart cards. The strategy and vision was to have an institution to grow over time that would generate income through the network, 11 percent, 30 percent, etc, from fee-based business. Based on the key decisions to build a critical savings base through the innovative use of appropriate technology, PRODEM’s business is growing every day. Background PRODEM FFP was created in 2002 out of the NGO PRODEM, which started providing financial services sixteen years ago. Today, the bank serves micro, small and medium businesses and has the largest branch network in Bolivia with 73 branches. Seventy percent of PRODEM’s operations are in rural areas and intermediate cities. Of all regulated institutions in the country, PRODEM is the only one with such a wide market. At one time, PRODEM was concerned about


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the high level of competition from small savings cooperatives and from NGOs receiving money from the government at subsidized rates that could lend at 15 percent when PRODEM was lending at 30 percent. However, once PRODEM started offering 27 different services to their clients, many things changed. It didn’t matter if NGOs were offering a lower interest rate. Clients were getting their money from PRODEM, saving with them and were getting guarantees. PRODEM became the local bank for more than 22,500 borrowers with a loan portfolio of US$51.8 million, funded through client savings and time deposits. In addition to over 57,000 savers with savings of US$53 million, shareholder’s equity equals US$7 million. Among the many products offered, PRODEM’s major product is savings, accomplished over just 24 months. This savings product is not based on passbooks like most lending institutions, but smart cards and Smart Automatic Teller Machines (SATMs). Use of this technology was one of the biggest challenges, because people in the rural areas are illiterate or they are not active readers or writers. When PRODEM went to put the machines in place about a year ago, it was the first time that they had been introduced in rural areas in the country. They were off-line machines, because it was decided that on-line machines would be too expensive considering the scale of volume of transactions. The competition has felt the impact of PRODEM’s leading edge. Two cooperatives have gone bankrupt since PRODEM has started this offering this service. People want to have access 24 hours like in urban areas. The moment that PRODEM put the machines in place, they already had people with passbooks and smart cards. Clients had the option to keep a passbook for US$3 per year or a smart card for US$7 per year. Once the machines were operating, the clients closed their passbook accounts and opened debit cards. Since the cooperatives were not using technology in their services being offered, they lost their savings base as many of their clients moved to PRODEM. PRODEM was able to revolutionize savings by introducing the first smart card with fingerprints and SATM machines, especially in the rural areas, PRODEM’s main market. The smart card is appealing mainly because it is secure, versatile, easy to operate and durable. Clients see the card as a strong security system for them as well as a status symbol. With a normal life cycle of a card being about four years, for US$28 (US$7/year), the bank can expect a return just on the cards themselves. Use of the card helped savings grow exponentially from March 2001 to September 2003, as indicated in Figure 23. With 53,000 clients, the bank sees about 500,000 transactions per month and has not had one client claim fraud. The system cannot be copied. The bank has experienced continual growth in savings over the past 24 months as they bring in 2,500 – 3,000 clients per month. Most clients are young people between 20 and 30 years old. The financial cost of the savings is about 1.5 percent per year. Subsequently, PRODEM has the lowest cost of funding of all the FFPs operating in Bolivia. With a digital touch screen, the Smart Automatic Teller Machine (SATM) can talk to the clients in different local languages and can instruct the client about how to use the machine. While most people have never seen these machines in their town before, they quickly learn to use and depend on them. The machines themselves are built to withstand heat, dust and other elements that come with being located in rural areas. Pilot testing of the machines was done from September 2000 to March 2001. PRODEM currently has 34 ATMs and will put 56 around the


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country by 2004 in mainly rural areas. This means that people will be able to travel and still have access to banking. This is especially important because of the fact that US$800 million moves from urban to rural areas each year. PRODEM is well placed to capture a part of this market.

Figure 23: Number of Clients in Savings Accounts – PRODEM FFP

Number of Clients in Savings Accounts

1,3975,195

10,38514,555

18,73623,559

28,83932,310

38,32444,882

53,245

-

10,000

20,000

30,000

40,000

50,000

60,000

Mar-01 Jun-01 Sep-01 Dic-01 Mar-02 Jun-02 Sep-02 Dic-02 Mar-03 Jun-03 Sep-03

Period

No.

of C

lient

s.

Another innovative, new use of technology that PRODEM will be implementing soon are Autonomous Points of Sale machines which will be put at gas stations along major routes in the country. The real benefit of the instrument is that the accounting is incorporated into the machine. It will register the transaction at the pump and the control will be automated between the gas pump and the machine. There is a specific card that can be used at the gas station for use by non-PRODEM clients or any PRODEM card can be used. A truck driver can go to the gas station, pump gas and pay with his finger print recognition at the machine. They can get up to about US$80 from the machine (with a commission for the bank and the gas station) in emergency situations. With eighty-seven percent of Bolivians traveling in buses, this instrument provides a valuable service to all the public transport companies that use the roads in the country. The instruments will be in the right spot for these buses, greatly enhancing PRODEM’s ability to cross-sell to their clients. Technology as an Appropriate Tool PRODEM FFP is introducing its technology to the Bolivian majorities, establishing new paradigms in the industry. From the beginning, most people were very skeptical, including the board of directors of PRODEM. However, this strategy of differentiation has given PRODEM a competitive advantage towards the rest of the players in the market. PRODEM’s main points of differentiation are:

• National coverage with the largest nationwide network • Economic integration of rural and urban areas (US$100 million moving through the system


73

as transfers) • Introduction of the Smart Cards adapting to the life style of its clients. • Introduction of SATMs to urban and rural areas • Massive mobilization of funds for the majorities, which allows them to be part of the economy

through the use of PRODEM’s wide variety of services and products. So far the clients like the technology and the numbers show that this strategy has worked. If an institution gets a regulated license, they need savers. The first challenge for PRODEM was to receive money from local savers, which PRODEM has achieved so far through a focused strategy integrating technology and knowledge of the clients. For the first year, PRODEM saved about US$285,000 in cost of funds from looking in-country instead of looking to outside lenders. By the end of the second year, the bank saved US$460,000. PRODEM invested roughly US$1.5 million to install the machines. By the end of three years, the machines will have paid for themselves. For PRODEM, the proof of success is in the numbers. But most importantly for microfinance, it has broken the myth that rural people can’t adapt to technology. Group Discussion: Conference participants had many questions regarding the technical aspects of the products described, as well useful approaches to rolling out new technology to clients. Carlos Danel of Compartamos wanted to know how customers make deposits on the smart cards. Eduardo responded that, “in South America it is difficult to take cash deposits, so right now deposits must be made in person at the branch. However, the second generation of machines will allow customers to put in US$ and local currency (actual bills) into the machines. The machines will recognize each bill and confirm its receipt up on the screen. These machines will be first put in place in the urban areas. Ruben de Lara of TSPI asked who provides the machines to PRODEM. Mr. Bazoberry explained that Innova Impresarial, a private consulting firm in Bolivia, with whom PRODEM works very closely, helped develop the machines in collaboration with PRODEM. Right now this company is also working with the Caja Cusco in Peru and Caja Rural in San Martin to put similar machines in place. There is a particular location along the border which has US$8 million per month in exchanges. The machines to be installed will be able to take US$, Bolivianos and Soles. Eduardo emphasized, “It is a matter of deciding on your MFI’s particular strategy. Do you want to move into technology? Do you want centralized systems, decentralized systems, on-line or off-line systems?” All urban branches in PRODEM will be like BRI’s on-line, centralized system because it is cheap in the city. But in rural areas, it is not cost effective. The bank can’t justify going on-line for these branches until the variable costs are so high that you decide to make it a stable cost and put the whole system on-line. PRODEM can use the system off-line up to two million transactions per month. PRODEM is growing in 35,000 transactions per month, so in the next 18 months the bank will have to be on-line. In Bolivia now, most microfinance institutions are not very big, with about US$2 million portfolio and 10 branches, making about 5,000–10,000 transactions per month. If these institutions want to move into rural areas, they will have to go off-line, unless they install VSATs at US$50 per month. Going on-line in the rural areas in a massive way is not going to happen within next 5-10 years in Bolivia. One question posed by Charles Nalyaali of the Uganda Microfinance Union was how MFIs dealt with moving from manual systems to computerized systems and particularly how passbooks were


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replaced. In the case of UMU, clients place a lot of importance on the passbooks, because they are used to them and they understand how to read and use them. They are also often used as a type of identity card, for example, in the event of an accident. In the case of BRI, when the BRI Units moved to computers, they ran a parallel system with a backup ledger card, but this didn’t make sense after a certain point. At the time, the rural staff did not understand how to use computers and it was a hard transition. Mr. Rachmadi of BRI explained that in the beginning, BRI always tried to base the operations on what the customers wanted. However, there are times when the clients don’t know what is going to be next in the future. While the transition was taking place, BRI decided to just use the postbook for deposit. Sometimes the bank has to educate the customer in the use of IT as well, because eventually, the customer will see the benefit of a more efficient system. BRI had the experience of introducing smart cards over ten years ago. Today, the BRI network has a huge network of over 4,000 units. The IT department wanted to try to connect the branches in some manner. What is the benefit of having a large network if it can’t connect in some way? So, BRI decided to use the smart card technology because the on-line technology was too expensive. BRI put the data on the card so the customer didn’t need a passbook any longer. It made the deposits easy because the balance was kept on the card and the data was transferred automatically to the branch as well as the head office. The problem, however, was standardization and connectivity. When using the smart card for savings products, BRI tried to connect the card to other products like CIRRUS or MasterCard. It is important to make sure that the system is an open system that can one day connect to other systems. Another problem that BRI identified was that some of the BRI staff weren’t able to move as fast as the technology. For example, in the beginning, staff kept forgetting the passwords or personal identification numbers. All these things must be considered when rolling out a new technology. In the case of PRODEM, savings are kept track of with a card, but credit loans still operate with a passbook. As for the connectivity issue, it just doesn’t make sense to charge customers US$30 or US$40 per month for an on-line system to be able to use Visa or MasterCard. Right now, clients do not pay to use the PRODEM systems. They may in the future, but they do not now. This is an affordable solution that can meet the needs of the clients for now. Most Bolivians are not traveling abroad and do not need to use Visa and other international systems. In order to be on-line, PRODEM would have to charge about US$1 per transaction and this just would not make sense for clients with US$200 in savings. In the end, the use of technology depends on the particular objectives of each MFI, considering the appropriateness of a technology, cost constraints and long-term goals.


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CONCLUSION As the conference drew to a close, Maria Otero invited participants to provide their own conclusions to wrap up the two days of presentations, discussions and debate. Comments from participants reflected the diversity of institutions and perspectives represented around the table. “This has been a very good opportunity to learn about different methodologies.” “Being among such great pioneers in microfinance, is a rare opportunity. I have learned many things that we could be doing better and also realize how many things that we are doing well.” ”I am particularly impressed with the ways that institutions have developed key principles to guide them through their work, and how they have stayed with these principles.” Some of the key points that emerged from the conference:

• MFIs are increasingly looking to serve new markets – moving both up and down-market.

• Both NGOs and regulated MFIs are using special tools to assess their clients in order to increase or shift their target markets.

• The effective use of a poverty assessment will hopefully enhance the ability of an institution

to reach down-market.

• Certain MFIs that have relied on targeting tools have proven effective in targeting the poorest of the poor, as in the case of Share in India.

• Other MFIs have found that the best strategy for reaching down-market is through a

diversification strategy that offers a variety of interesting and innovative loan products to new market sectors.

• Specialization allows an MFI to focus on a specific market segment, minimizing staff and

product development costs. However, this also limits an MFI to reaching a narrow market. There are risks involved in offering just one product, particularly when competition increases.

• MFIs that have diversified their products and services are able to provide a full service

approach that can meet the demands of clients and help an institution to be competitive. However, a diversification plan should be part of a long-term strategy that considers an MFI’s existing methodology, provides sufficient resources for research and development and pilot


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testing, and adequately plans for staff training. • The key factors to the success of one of the largest MFIs in the world, the BRI Unit Banking

Division, have been the simplicity of products, transparency in operations and services, accessibility to clients, the ability to recover costs, providing demand-driven products and offering effective incentives to both clients and staff of the BRI Units.

• When considering commercial and specialized microfinance ratings and assessments, it is

important for MFIs to consider who is doing the rating and for what purpose the rating will be used.

• Staff incentives are an important tool in raising an MFI’s productivity and helping an

institution meet its long-term strategic goals.

• The effective use of technology in microfinance can give an MFI an important competitive advantage over other financial service providers. However, technology must be adapted for specific environments and both short- and long-term costs must be evaluated in terms of the return to the MFI as well as the benefits to the customer.

Drawing from some of her own observations, Mrs. Otero noted some key points drawn from the many different perspectives provided throughout the MicroFinance Network conference. She commented that this MicroFinance Network conference in particular was meaningful because members of the Network have a real clarity of purpose. All institutions in the Network embrace a similar approach to make microfinance work. “We support the organizing pillars even if we go about them in somewhat different ways. This clarity of purpose allows us to come together without having to reach agreement on different things. And this allows for a great deal of richness in the discussions.” Despite these different views, members show a great deal of mutual respect to one another. “It is refreshing that we are all here to share ideas, but aren’t distracted by trying to impress one another. Such an attitude allows us to speak freely and openly.” Everyone participating in the conference has demonstrated a commitment to improve. It is recognized that within the MicroFinance Network some MFIs are doing better in certain areas than others. Presentations are made by those who have excelled in some particular way. Members come to the conference to provide access to ideas and experiences and to share this with each other. Through the conference report, they also provide this access to others outside the Network. The commercial model is one that extends beyond the MicroFinance Network. Members recognize that they are approaching this model in different ways, depending on particular ownership models or the products being offered by each institution. However, this Network continues to believe that this model is the only way to make microfinance widespread and permanent.


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ANNEX I: CONFERENCE AGENDA

Monday, October 6th 6:00 p.m. Opening Reception at Balihai Hotel Restaurant

7:00 p.m. Official Welcome and Opening of the 2003 Conference Opening by Ms. Maria Otero, Network Chair and President, ACCION International Welcome and Address by Mr. Rudjito, President Director, Bank Rakyat Indonesia, Mr. Krisna Wijaya, Managing Director of Micro and Retail Business, Bank Rakyat Indonesia, Mr. I Gusti Made Oka, President, Bank Dagang Bali

Tuesday, October 7th

8:30 a.m. Introductions and Updates: Maria Otero, ACCION International Current Members and Brief Introduction of Invited Microfinance Institutions: Uganda Microfinance Union (Uganda); Equity Building Society (Kenya); Constanta Foundation (Georgia) and Association Al Amana (Morocco)

9:00 a.m. Opening Presentation Martin Connell, Calmeadow 9:20 a.m. Conference Orientation, Kelly Hattel, MicroFinance Network 9:30 a.m. Who are We Providing Microfinance Services to? Facilitator: Eduardo Bazoberry (PRODEM FFP)

Presentations: - Share Microfin Limited (India) - Bandesarrollo (Chile)

11:00 a.m. Principles of Concepts for Measuring Poverty

Presentation: Beth Rhyne (ACCION International) 1:30 p.m. What Kinds of Services/Products are We Delivering – Specialization

or Diversification? Facilitator: Isabelle Barrès (MBB/The MIX) Presentations: - Pride Tanzania (Tanzania) - Specialization - UMU (Uganda) - Diversification Respondent to Presentations: - Compartamos (Mexico)

3:15 p.m. What Kinds of Services/Products are We Delivering? – Specific


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Examples Facilitator: Beth Rhyne (USA) Presentations: - BRI (Indonesia) - Rural Finance - Mibanco (Peru) – Housing

5:00 p.m. Observations on Day’s Proceedings

Maria Otero (ACCION International) 5:15 p.m. End of Session Wednesday, October 8th 9:00 a.m. How are MFIs Delivering Services/Products? – Models and Modes Facilitator: Carlos Danel (Compartamos):

Presentation by: - SHARE Microfin Limited (India) - Non-Bank Financial Company - ASA (Bangladesh) – NGO

10:45 a.m. Open Discussion on Ratings, Assessments and Benchmarking: Facilitator: Kelly Hattel (MFN) Special Comments from: Isabelle Barrès (MBB/The MIX); Carlos Danel

(Compartamos) 1:30 p.m. How are MFIs Delivering Services/Products? – Use of Staff Incentives Facilitator: René Azokli (PADME)

Presentation by: - ABA (Egypt) - CERUDEB (Uganda) - Share Microfin Limited (India)

3:15 p.m. How are MFIs Delivering Services/Products? – Innovative Use of

Technology Facilitator: Leesa Shrader (Microfinance Centre) Presentation by: - BRI (Indonesia) - PRODEM FFP (Bolivia)

4:30 p.m. Concluding Remarks Maria Otero 5:00 p.m. End of Conference Thursday, October 9th

10:30 a.m. Leave Hotel for Visit to BRI Branch Offices


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ANNEX II: SPEAKER BIOGRAPHIES Fouad Abdelmoumni Director, Association Al Amana, Morocco Fouad Abdelmoumni helped to found Association Al Amana from 1996-97 and has managed the institution since. From 2001–2003, Mr. Abdelmoumni served as a member of the Consultative Group to Assist the Poorest (CGAP) Advisory Board. Before working at Al Amana, he managed the Maghreb Développement Investissement (MADI), a social venture capital fund and member of the SIDI network (based in France) from 1990–1996. He has a degree in Economics of Development from the University Mohammed V in Rabat, and an MBA equivalent from Institut Supérieur de Commerce et d’Administration des Entreprises (ISCAE) in Casablanca. He is also a civil society activist. He has worked as Vice-President of the Moroccan Association for Human Rights and as a member of the Espace Associatif for the promotion of civil society. René Azokli Executive Director, PADME, Benin President, AFMIN Mr. René Azokli is President of the Administrative Council of the Alafia Consortium, the professional association of microfinance institutions in Bénin. He is also General Director of PADME, one of the principal microfinance institutions in Bénin. Mr. Azokli has worked at PADME since 1993, where his first position was as credit manager. He has extensive experience working as a consultant in local and international organizations and in developing microfinance projects in Africa. He has been President of the Administrative Council of the African Microfinance Network (AFMIN) since 2000. Isabelle Barrès Director for Strategic Planning, The MIX, USA Isabelle Barrès is Director for Strategic Planning at the Microfinance Information eXchange (MIX), where her work focuses on enhancing MIX capability to acquire good quality data and provide value-added analysis and benchmarks to the industry at large. She is a finance professional with nine years experience in microfinance and the formal banking sector. Her work in microfinance has focused on promoting best practices in management and financing strategies. Prior to joining the MIX, she was the Manager of the MicroBanking Standards Project and Editor of the MicroBanking Bulletin. She has an MBA from McGill University in Canada and a post-graduate degree in Development Economics from the Sorbonne University in France. Nabil A. El Shami Executive Director, SME Project, Alexandria Business Association, Egypt Nabil El Shami graduated in 1957 from the Alexandria University with a degree in Mechanical Engineering. He is a founding member of the Alexandria Business Association and a board member of both the Social Fund for Development, Egypt and of the Bank of Alexandria, Egypt. He is a founding member of the MicroFinance Network and served on the steering committee from 2000-2003. He is a member of the Technical Committee Egyptian Swiss Development Fund


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(ESDF), a member of the International Council for Small Business (ICSB) and an ex-member, Policy Advisory Group of the World’s Bank, CGAP. Finally, Mr. El Shami is Chairman, Arab Micro Finance Network. Martin P. Connell President, Calmeadow, Canada President, AfriCap MicroVentures Martin Connell is co-owner and co-founder of Ace Bakery Limited, the President of Calmeadow (a Toronto-based nonprofit organization which he co-founded in 1983), the Founding Chairman of the Toronto Film Festival, and the Chair of the Toronto Community Foundation. He was formerly the Chairman of Conwest Exploration Company Limited and of the Canadian Centre for Philanthropy. He is currently chair of ProFund Internacional, S.A. and the AfriCap Microfinance Fund Ltd., two investment funds dedicated to encouraging the expansion of regional MFIs through direct equity investment. Carlos Danel Co-CEO, Compartamos, Mexico After receiving a degree in architecture, Carlos Danel began working in real estate development and social housing finance. Since helping to start Compartamos, a microfinance institution in Mexico, he has also received an MBA from the Instituto Panamericano de Alta Dirección de Empresas (IPADE), leaving real estate to devote full time to Compartamos as Co-CEO. Mr. Danel also serves as a member of the Board for Compartamos. He has been a member of the faculty of the Microfinance Training Program in Boulder, Colorado and serves on the board of Colcami, Prodesarrollo, and the Directors Council of ACCION International. He has written several studies and articles on microfinance, technology and socially responsible business. He has been profiled by Time Magazine in its special edition for October 2001 and was named Global Leader for Tomorrow by the World Economic Forum in their Annual Meeting held in Davos, Switzerland in January 2003. Kelly Hattel Director, MicroFinance Network, USA Kelly Hattel is the current Director of the MicroFinance Network where she has spent the past two and a half years advancing the mission of the Network to improve the quality of life of the poor, reaching as many of these unserved populations as possible through the commercial approach to microfinance. Ms. Hattel brings over ten years of private and public sector experience to the Network, including her work on project financing and development for ventures in Southeast Asia and nearly three years spent in West Africa, working in the areas of microenterprise development and microcredit lending. As an independent consultant, she researched and co-authored a UNAIDS/USAID study on the impact of AIDS on microfinance institutions in Africa. She has also worked for a financial consulting firm as senior consultant, where she focused on issues pertaining to the US savings and loan industry. Ms. Hattel received a bachelor’s degree in international studies and law from The American University in Washington, DC and a master’s degree in international economics with a concentration in development from the Johns Hopkins University School of Advanced International Studies. M. Udaia Kumar Chairman and Managing Director, Share Microfin Limited, India


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M. Udaia Kumar is the Chairman and Managing Director, Share Microfin Limited, one of India’s largest MFIs established primarily to alleviate poverty by reaching out to the very poor. He is also Founder and Managing Director of Share, an NGO operating in the state of Andhra Pradesh working towards the uplifting of the rural poor women through capacity building. He has also promoted Asmitha Microfin Limited and SNEHA Mutually Aided Cooperative society that work in and around Andhra Pradesh, India providing financial and support services to the women living below the poverty line. As a microfinance practitioner, Mr. Kumar has more than 25 years of experience in the field of microfinance and development. He graduated with a Masters in Business Administration and was trained at Selly Oak College, UK; Economic Institute, University of Colorado, USA; and International Institute of Rural Reconstruction, Philippines in the fields of Development studies, Micro Finance and Management of Development programmes. He is a consultant in the field of microfinance and has been an advisor to some micro finance institutions in India, China, Vietnam, Philippines, Malaysia, and Bangladesh. He is an active member of various Micro Finance networks both in India and abroad. He is the member of the High Power Task Force for Microfinance constituted by the Reserve Bank of India. He is also the member of Task Force on Housing Policies in microfinance Programs in India Constituted by National Housing Bank. Mr. Udaia Kumar is the recipient of the ‘Change Makers’ award for bringing about a significant change in the field of rural banking, the ‘Bharat Jyothi’ award, the ‘Rashtriya Ekta’ award ‘Excellence in Micro Credit’ award conferred by the Grameen Foundation, USA and the “Lifting Up the World with a Oneness-Heart” award. Tamar Lebanidze Executive Director, Constanta Foundation, Georgia Tamar Lebanidze is the Executive Director of Constanta Foundation, one of the leading Georgian microfinance institutions implementing microcredit activities. Constanta has been funded by United Nations High Commission for Refugees (UNHCR), Save the Children/USAID, CGAP, Shore Bank/USAID and Baku-Tbilisi-Ceyhan (BTC) Pipeline Company. Tamar has been with Constanta since its foundation and has had major contributions towards the development of microfinance activities in Georgia. Prior to this position she worked for several international humanitarian and commercial organizations including Save the Children USA, Medicines Sans Frontiers, Holland and Spartacus International. In addition to her work in development, she has 12 years of experience as a scientific worker at the Institute of Physiology, Georgian Academy of Science and 2 years teaching experience at the Tbilisi State University. She is the author of several publications in physiology and microfinance. Md. Sohel Mahmud ‘Sagar’ General Manager – SEL, ASA, Bangladesh Mr. Sagar is currently the General Manager of SEL (Small Entrepreneur Lending) in ASA, an MFI in Bangladesh. He has 22 years of experience in the area of financial management of MFIs, Non-Governmental Development Organizations (NGOs) and at a Chartered Accountants firm. Out of the 22 years, he has spent more than 20 years rendering his services to ASA where, from time to time he has also acted as the Officer-in Charge of the institution during the absence of ASA’s Managing Director. He received a C.A. degree from The Institute of Chartered Accountants of Bangladesh, Dhaka in 1981 and a Bachelor’s degree in Commerce from the University of Dhaka in 1976. He participated in a Certificate Course in Co-operative Credit and Promotion of Micro-Enterprise at The Coady International Institute, St. Francis Xavier University, Antigonish, Novascotia, Canada in 1992. He provided a 4-month (07 May-06 Sep 1997) technical assistance to the field office of Save the Children (SC)-USA in Tajikistan as a Consultant of GGLS Program. He has attended several national and international seminars, workshops and conferences in microfinance. He has written a


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good number of articles and case studies on various developmental issues especially related to microcredit operations of MFIs, which were published in both English and Bengali national daily newspapers. James J. Obama General Manager, Pride Tanzania, Tanzania Mr. Obama was head of Operations Department with PRIDE Tanzania for a period of three years before becoming the Operations Manager and Deputy General Manager in June 1999. He held this position for another three years before being appointed to his current position as General Manager. He is trained in business management and holds MBA and BCom (Hons) degrees, majoring in finance and marketing. He has ten years of working experience in microfinance and has held senior positions including Director of Operations at MEDA in Tanzania where he was responsible for designing and managing a wholesale credit facility for Tanzanian MFIs. Prior to his carrier in micro finance, he worked for a 22-year period in various capacities in the civil service including 6 years at a commercial bank and 4 years at an information technology training institute. He has attended a number of microfinance training programs including the Microfinance Best Practice in Managua (Nicaragua), Boulder (USA) and the ILO institute in Turin (Italy). I Gusti Made Oka President Director I Gusti Made Oka was born in 1932 in Gianyar, Bali-Indonesia. His banking and financial expertise comes from over 31 years of experience in bank management. He has received international acclaim, speaking at seminars around the world such as the Microfinance Seminars held by USAID in the Philippines and Washington D.C., U.S.A. by Women’s World Banking in Sri Lanka and New York, and By Asia Society in New York. His extensive microfinance banking training includes attending seminars such as Microfinance Development, in Indonesia and abroad such as in Lyons-France which was held by UNCTAD in 1997. He also completed a Short Monetary Course in LPPI (Lembaga Pendidikan Perbankan Indonesia) in Jakarta in 1986. In the year 2000, Mr. Oka became a member of the Women’s World Banking Board of Trustees based in New York. Mr. Oka continues to hold the prestigious position of being the Founder, and President Director of Bank Dagang Bali and to be a major and forceful leader in microfinance banking around the world. María Otero President & CEO, ACCION International, USA María Otero is President and CEO of ACCION International. She was previously ACCION’s Executive Vice President, from 1993-1999. Ms. Otero joined ACCION in 1986 as director of its microfinance program in Honduras. Ms. Otero has authored several monographs on microfinance and co-edited The New World of Microfinance. She serves as chair of the Steering Committee of the MicroFinance Network, co-chair of the Microenterprise Coalition, and has served in a variety of advisory and board positions, including the Policy Advisory Group of CGAP. In 1994, President Clinton appointed Ms. Otero as chair of the Board of Directors of the Inter-American Foundation, a position she held until December 1999. Ms. Otero currently sits on the board of several institutions including the Calvert Foundation, the United States Institute of Peace, and the Advisory Board of the United States General Accounting Office. She also serves the board of BancoSol and Mibanco. Since 1997, Ms. Otero has been an adjunct professor at Johns Hopkins School for Advanced


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International Studies. She received a master’s degree in international studies from Johns Hopkins SAIS and a master’s in literature from the University of Maryland. Ms. Otero was born and raised in La Paz, Bolivia, and resides in Washington, DC. Abing Rabani Deputy General Manager, Information Technology, Bank Rakyat Indonesia Abing Rabani is Deputy General Manager Information Technology of Bank Rakyat Indonesia. Now, he is in charge of software development for micro banking system that consists on Core Micro banking, Delivery Channel and Management Information System. He also serves as BRI’s CEO Advisor for IT and develop overall BRI’s IT Blue Print. He joined with BRI since 1986 starting from application programmer, system analyst & design, IT strategic planner and IT network & Communication Manager. Beside his current role in BRI, he also is actively involved in the education field as guest lecturer for MIS at Magister Management Agribusiness - IPB Bogor, Indonesia. Alvaro Retamales Contreras General Manager, Bandesarrollo, Chile Mr. Retamales is an Industrial Civil Engineer (“Universidad de Chile”) with a Master’s degree in Business Management (“Universidad Adolfo Ibañez”). He has also obtained degrees in Decisional Marketing at the Department of Industrial Engineering of the “Universidad de Chile” and in Poverty Reduction Strategies in Latin America at the World Bank Institute - Politic Sciences Institute of “Universidad de Chile”. His work experience relates to banks and financial companies, where he acted as (in chronological order) Deputy Manager (Banco O´Higgins), Financial Manager (Grupo Mellafe y Salas) and General Manager/CEO of “Financiera Acceso S.A.” (FFP) Bolivia. Today he is General Manager/ CEO of “Bandesarrollo Microempresas S.A.”, Affiliate of “Banco del Desarrollo” (Chile). Elisabeth Rhyne Senior Vice President, ACCION International, USA Elisabeth Rhyne is ACCION International’s Senior Vice President for International Operations/Africa and Senior Vice President for Policy, Research and Financial Analysis. In addition to leading ACCION’s operations in Africa, Dr. Rhyne oversees the CAMEL team, ACCION’s publications, and directs ACCION's research efforts to develop new financial products and assess poverty. Dr. Rhyne has published numerous articles and books on the topic, including The Commercialization of Microfinance: Balancing Business and Development (co-editor), Mainstreaming Microfinance: How Lending to the Poor Began, Grew and Came of Age in Bolivia (author), and The New World of Microenterprise Finance (co-editor), all published by Kumarian Press. Dr. Rhyne was Director of the Office of Microenterprise Development at the U.S. Agency for International Development (USAID) from 1994 to 1998, where she developed and managed USAID's microenterprise initiative. She has lived in Africa (Kenya and Mozambique) for eight years, working in the microfinance field. Rudjito President Director, Bank Rakyat Indonesia, Indonesia Mr. Rudjito has been BRI's President Director since July 17, 2000. Prior to this, he worked with Bank Dagang Negara, the other state owned company for 26 years where his last position was as Managing Director of Treasury and International. He graduated from the Faculty of Economics, Gadjah Mada University (UGM), Yogyakarta-Indonesia, in 1972. He has completed a number of non-formal education programs, both locally and overseas, including the International


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Correspondent Banking in Chicago-USA, International Banking and Finance (Los Angeles-USA), Derivative Product and Capital Market Instruments (New York-USA), School for Bank Leadership (IBI-Jakarta). His other activities include serving as Chairman of the Education Committee at the Indonesian Bankers Institute (IBI) Jakarta, Chairman of the Federation of Indonesian Association of Banks (FIAB), Chairman of the Association of State-Owned Banks (HIMBARA), Chairman of the Association of Indonesia Economists (ISEI), member of the Supervisory Board of Asia Pacific Rural and Agriculture Credit Association (APRACA) Consulting Service and also Chairman of the ASEAN Bankers Associations for the period 2001–2003.


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ANNEX III: PARTICIPANT LIST Name: Organization: Country: Md. Sohel Mahmud (Sagar) ASA Bangladesh René Azokli PADME Benin Eduardo Bazoberry PRODEM FFP Bolivia Martin Connell Calmeadow Canada Alvaro Retamales Bandesarrollo Chile Claudio Higuera Martínez Cooperativa Emprender Colombia Germán Contreras FINAMERICA Colombia Nabil El Shami Alexandria Business Association Egypt Tamar Lebanidze Constanta Foundation Georgia M. Udaia Kumar SHARE Microfin Limited India I Gusti Made Oka Bank Dagang Bali Indonesia Sulaiman Arief Arianto Bank Rakyat Indonesia Indonesia Yusuf Nawawi Bank Rakyat Indonesia Indonesia Mohamad Nazirwan Bank Rakyat Indonesia Indonesia Abing Rabin Bank Rakyat Indonesia Indonesia Agus Rachmadi Bank Rakyat Indonesia Indonesia Muhammad Rivai Bank Rakyat Indonesia Indonesia Rudjito Bank Rakyat Indonesia Indonesia Krisna Wijaya Bank Rakyat Indonesia Indonesia Carlos Danel Compartamos Mexico Carlos Labarthe Compartamos Mexico Fouad Abdelmoumni Association Al Amana Morocco Ruben de Lara TSPI Philippines James Obama PRIDE Tanzania Tanzania Simon Dr. Kagugube CERUDEB Uganda Hung Linh CERUDEB Uganda Charles Nalyaali Uganda Microfinance Union Uganda María Otero ACCION International USA Elisabeth Rhyne ACCION International USA Leesa Shrader Microfinance Centre USA Isabelle Barrès The Microfinance Information eXchange (The MIX) USA Kelly Hattel MicroFinance Network USA


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PUBLICATIONS FROM MICROFINANCE NETWORK:

CONFERENCE PAPERS: • Challenges of Microfinance Commercialization. 2001. • Microfinance in the New Millennium.* 2000. • Current Governance Practices of Microfinance Institutions. 1998. • Moving Microfinance Forward: Ownership, Competition, and Control. 1998. • Establishing a Microfinance Industry: Governance, Best Practices, Access to Capital Markets.* 1997. • Key Issues in Microfinance: Supervision and Regulation, Financing Sources, Expansion of

Microfinance Institutions.* 1996. OCCASIONAL PAPERS: • Automating Microfinance: Experience in Latin America, Asia, and Africa,* by Anita Campion and Sahra

S. Halpern, 2001. • Institutional Metamorphosis: Transformation of Microfinance NGOs into Regulated Financial

Institutions,* by Anita Campion and Victoria White, 1999. • Guidelines for the Effective Governance of Microfinance Institutions, ** by Anita Campion and Cheryl

Frankiewicz, 1999. • The Regulation and Supervision of Microfinance Institutions: Experience from Latin America, Asia,

and Africa,** by Shari Berenbach and Craig F. Churchill, 1997. • The Regulation and Supervision of Microfinance Institutions: Case Studies,* edited by Craig F.

Churchill, 1997.

TECHNICAL GUIDES: • Building Customer Loyalty,* by Craig F. Churchill and Sahra S. Halpern, 2001. • Improving Internal Control,** by Anita Campion, 2000. *Also available in Spanish **Also available in French and Spanish

MicroFinance Network The MicroFinance Network is a global association of leading microfinance practitioners. Network members are committed to improving the lives of low-income people through the provision of credit, savings, and other financial services. The Network believes that this sector should be served by sustainable microfinance institutions. The MicroFinance Network is a vehicle for accomplished institutions to learn from each other’s experiences and share best practices with the broader microfinance industry.

Regulated Financial Institutions

ACLEDA Bank, Cambodia Banco ADEMI, Dominican Republic BancoSol, Bolivia Bandesarrollo, Chile BRI Unit Desa, Indonesia CERUDEB, Uganda Citi Savings and Loan, Ghana

Compartamos, Mexico Cooperativa Emprender, Colombia FINAMERICA, Colombia FINCA Microcredit Company, Kyrgyzstan Equity Building Society, Kenya Kafo Jiginew, Mali K-REP Bank, Kenya Los Andes, Bolivia

Mibanco, Peru PRODEM FFP, Bolivia Share Microfin Limited, India SogeSol, Haiti

Non-Governmental Organizations

ABA, Egypt Al Amana, Morocco ASA, Bangladesh BRAC, Bangladesh

Constanta, Georgia Fundusz Mikro, Poland PADME, Benin PRIDE Tanzania, Tanzania

UMU, Uganda TSPI, Philippines

Support Institutions

ACCION International, USA Calmeadow, Canada

MicroFinance Network 733 15th St. NW, Suite 700, Washington DC, 20005 USA

Tel +1•202•347•2953 / +1•202•393•5113 x211 Fax +1•202•347•2959 Email: [email protected] Website: http://www.mfnetwork.org

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