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These guiding notes are mainly based on lessons learned during the pilot linkage project between SHGs in Nazareth and an MFI in Central Ethiopia, that took place from December 2015 to December 2017.

PREPARED BY ICCO Terrafina Microfinance

AUTHOR Gabriëlle Athmer

EDITOR Fransien Wolters

LAYOUT Gizaw Legesse

© ICCO Cooperation 2018

ICCO Central, Eastern and Southern Africa Regional OfficePlot 1608 Kironde Road, Muyenga – P.O.Box 33333, Kampala, Ugandawww.terrafina.nl | www.icco-cooperation.org

ICCO Terrafina Microfinance is a program of ICCO Cooperation, its aim is to boost smallholder farmers to improve their business and income through microfinance.

This document is based on a project linking Self Help Groups to Financial Service providers funded by Church of Sweden and implemented in collaboration between ICCO Terrafina Microfinance, Tear Netherlands and Tearfund Ethiopia.

Introduction

Guiding note 1: Be aware of opportunities but also of limitations, risks and challenges

Linkage should be demand basedAnticipate risks for SHGsSHG promoting agency: make sure you understand FSPs and recognise the need for your active involvementFSPs: make sure you understand the SHGs and related agencies

Guiding note 2: Linkage requires well operating SHGs, well governed SHGs structures and support of SHG promoting agency

Well operating SHGsWell governed SHG structuresSupport of a SHG promoting Agency

Guiding note 3: Provide loans to SHGs and to individual SHG members and not to FLA or CLAs

Guiding note 4: Linkage requires a FSP with capacity to deliver responsible financial services adapted to SHGs

Responsible financial servicesCapacity to deliver these services

Guiding note 5: Invest in building partnership between stakeholders

Coordination meetingsMoURecommended responsibilities and roles of stakeholders

Guiding note 6: Invest in market research and product development involving stakeholders

Carry out a market researchLink loan amount with SHG members savingsMitigate risks of group guaranteeMinimise Cash CollateralCommunicate timely and in a transparent way about products and pricesAssess repayment capacityDo not apply zero tolerance policyMonitor and adapt products

TABLE OF CONTENTS

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This paper is based on lessons learned during a pilot linkage project between Self Help Groups (SHGs) and a Microfinance Institution (MFI), which took place from December 2015 to December 2017 in Central Ethiopia and was replicated by the MFI in another location further south. The pilot did only partly yield the initially expected results, but precisely because of this reason many lessons can be learned from this experience. This paper is organised around 6 guiding notes considered useful for both Financial Service Providers (FSPs) and SHG promoting agencies for linkage projects. It is important to note that the paper does not pretend to offer a full manual for a linkage process.From August 2017, as a spin-off of the pilot in the MFI linked also with SHGs in another location. Lessons learned from this spin-off are taken in this paper. The guiding notes consider the insights on linkage as described in the

Introduction

international literature on linkages of SHGs or Savings Groups with Formal Financial Services. Moreover, the guiding notes are in accordance with Social Performance Universal Standards (including Client Protection Principles), and Programme Quality Guiding notes for Savings Groups (SGs).The definition of linkage used in the pilot is SHGs taking a loan from a Formal Financial Service Provider (FSP) This definition of linkage comes from India1, even though SHGs’ relation with an FSP starts with depositing savings. It is important to make this definition explicit, as Savings Group (SG)2 promoters understand ‘linkage’ differently; these include also SGs depositing savings at FSPs. 1 The official definition of the NABARD: National Bank Of Agriculture and Rural Development. 2 Savings Group is similar to a Self-Help Group in the sense that group members save and use their savings for internal lending; a fundamental difference is that Savings Groups have access to their savings through the annual share-out and some SGs methodologies (e.g. stamp based VSLA) allow members to make savings withdrawals.

APR Annual Percentage RateCGAP Consultative Group to Assist the PoorCLA Cluster Level AssociationFLA Federation Level AssociationFSP Financial Service ProviderJLG Joint Liability GroupMFI Microfinance InstitutionSACO Savings and Credit Officer SG Savings GroupSHG: Self Help Group

LIST OF ABBREVIATIONS

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SHGs are self-managed micro-banks, consisting of 15 to 20 members who save on a weekly basis and build up their own loan fund. Members borrow from this loan fund against an interest rate. Interest income and fines constitute the profit of the group. Savings - plus a part of the profit proportional to members’ savings - are not accessible until the members leave the group. The groups have their bylaws and record keeping systems, and receive training and support, which is most intensive during the first 6 months and last for about 3 years. The SHG model is developed in India and facilitates access to financial services for the otherwise financial excluded. Tearfund, the initiator of the SHGs in this case, and their SHG

A loan from an FSP can be interesting for those SHGs that consist mostly of entrepreneurial members who have the potential to increase or diversify their businesses, and that fully use their internal fund for internal lending while not satisfying their members’ credit needs. Additionally, the external loan might increase the SHG’s reputation and SHG members’ self-confidence, being formally recognised as credit worthy organisation and/or individual. However, not all SHGs consist of a majority of entrepreneurial members. SHG members came together for saving and internal lending and for other SHG related benefits, like training opportunities and being part of a social network. While in India people might join an SHG to access an external loan, this is not the case in Ethiopia. Even though several factors caused a low uptake of loans during the pilot, it appeared that SHGs’ demand for external loans was overestimated by all stakeholders in both locations.

One of the lessons learned is that it is crucial to ensure that external loans are

promoting partners were trained by MYRADA in India. Kindernothilfe and Tearfund introduced in 2002 the SHG approach in Ethiopia. Up to now, Tearfund partners trained approximately 20,000 SHGs with a total membership of 400,000. In India, the large majority of SHGs are linked with formal financial institutions, as a result of the Indian Government’s guiding notes on priority sector lending. In Ethiopia, only a very small minority of SHGs receive loans from Financial Institutions. SHGs in the pilot area mainly deposit their savings at banks. Several individual members of SHGs have bank accounts and/or use financial services of MFIs.

based on SHGs’ demand and that none of the organisations involved pushes SHGs to apply for an external loan, even when done with the best intentions. SHG promoting agencies might be convinced that external loans are beneficial for SHGs and try to ‘educate’ SHGs in this sense. When the SHG promoting agency pushes the SHG to ‘give it a try’, possible negative consequences include the following:

• SHG members take less responsibility for loan repayment due to lack of ownership in the decision making process;

• over-indebtedness of SHG members who do not have the capacity to invest the loan in a profit making business;

• abuse of the external loan by some powerful members;

• on-lending to non-members.

SHGs should not only be trained about the opportunities of linkages with financial institutions, but also about potential risks and disadvantages compared to their internal savings and lending practices.

Linkage should be demand based

Be aware of opportunities, but do not deny limitations, risks and challenges

Guiding Note 1

1. Be aware of opportunities to link SHG’s and FSP’s, but do not deny limitations, risks and challenges

2. Linkage requires well operating SHGs, well governed SHG structures and support from SHG promoting agency

3. Provide loans to SHGs and to individual SHG members and not to FLA or CLAs

4. Linkage requires an FSP with capacity to deliver responsible financial services adapted to SHGs

5. Invest in building partnership between stakeholders6. Invest in market research and product development involving

stakeholders

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Guiding Notes

Based on the results of our project we like to make the following six recommendations. The recommendations are elaborated in 6 guiding notes:

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Another factor influencing the demand for linkage is that SHG members have other options. Outside the SHG they already have access to several informal and occasionally formal financial structures, including loans from MFIs. They generally save relatively small amounts in their SHG when compared to their contributions to an Iqub3. SHG members mentioned as the main reasons for this low investment in their SHG the sporadic access to loans because of the waiting lists, and the process involved to get a loan from SHGs. Getting the ‘pot’ from Iqub is a simple process, defined by lottery or by turn. The backside of an Iqub is that you cannot plan when you receive the money, what in principle should be possible in an SHG.

Interesting was that some SHGs after receiving one or two external loans started to save much more in their SHG to avoid dependency on an external loan; in one year, they doubled or even tripled their internal funds from what they had saved up during more than 7 years.4 The SHG members reported that the external loan caused stress when the time of reimbursement approached, since the MFI does not offer the same flexibility as the SHG, while they felt that many factors of their businesses are unpredictable, for example fluctuating prices of traded goods. The members perceived the costs involved with an external loan as high, even though they recognised that the prices of the MFI were comparable to those of other MFIs. In the pilot area, the SHGs had much lower interest rates on internal loans than those of MFIs, while in the spin off location interest rates on loans were similar or even higher. Since the SHG benefits from the interests paid by its members on internal loans, SHG members are cost sensitive and feel it as a pain to have to pay an external agency.

3 Ethiopian informal rotating savings and credit association.4 In about one year, one SHG increased its internal savings from 99 000 to 350 000 birr and another SHG increased savings from 67000 to 150000 birr.

delivered loans to SHGs with few members interested in a loan in an attempt to respond to the demands for higher loans from some individuals within the SHGs. This resulted in a minority of the SHG members receiving relatively large external loans in several of the 13 SHGs participating in the pilot. In one extreme case this led to default and disintegration of the SHG. The bulk of the loan (150 000 of in total 175 000 birr) was taken by the SHGs’ secretary, who did not repay after the second instalment. Internal decision making within the group about the loan had not been transparent; in fact this was a case of ‘elite capture’, where influential group members take advantage of the other members. In other SHGs, SHG members expressed that they did not like the group guarantee, but this had not led to SHG members leaving the group (dropouts).

• Over-indebtedness5 of group members and/or groups when repayment capacity is not appropriately assessed, and/or automatically larger repeat loans are given after loan repayment.

The above mentioned secretary who wrongly took the loan of the majority of the group became over-indebted. No repayment capacity assessment had been done for this loan size, nor by the group, nor by the MFI. Not surprisingly, the entire SHG became over-indebted, since it is unrealistic to assume that this loan amount to one person can be guaranteed by a group guarantee. After the incident group members hardly attended meetings and stopped to invest in the group since they are afraid that the MFI might claim their savings.

• SHGs and SHG members can be tempted to on-lend to non-members6, in case they take loans above their absorption capacity.

5 A microfinance customer is over-indebted if s/he is continuously struggling to meet repayment deadlines and repeatedly has to make unduly sacrifices to meet his/her obligations. (Schicks, 2010)6 In India, 18% of the SHGs included in a rather large survey were lending to non-members. Source: Frances Sinha 2009. ‘Microfinance Self-help Groups in India. Living up to their promise?’ Practical Action Publishing.

It is crucial that SHGs, SHG related agencies and MFIs know the risks involved in external loans for SHGs, so these risks can be addressed. The risks can be mitigated by appropriate product design and delivery channels (see Guiding note 6 on product development), as well as by training and guidance of SHGs, and by an effective monitoring by both the FSP and SHG promoting agencies. Before the pilot several potential risks were identified. For each of the risks, which are mentioned below, it is described to what extent they were successfully mitigated or indeed became apparent during the pilot.

• Mismatch between risks and benefits of the loans among members: only a few individual members receive loans guaranteed by the entire group; poor people putting their savings at risk to guarantee the loans to the less poor. This mismatch can easily provoke problems within the SHG, and ultimately cause repayment problems to the MFI. A mismatch may cause also (especially older) members to dropout because they do not want to bear the risk of external loans to their peers. External loans to only a few members accentuate differences within the group, what is counter to self-help principles and potentially undermines group cohesion.

The loan product was designed in collaboration with all stakeholders in such a way that the above mentioned risk would be avoided. In contradiction to what had been extensively discussed and agreed upon in the MoU, the MFI

Anticipate risks for SHGs

SHG members involved in the pilot might have given or shared the loans with their husbands, which is a risk since the husbands are not member of the group and therefore do not feel the peer pressure to repay. Apart from the secretary of the defaulting SHG, who shared the loan with her husband, there have been no cases in which repayment problems occurred because of this reason. SHG members themselves were also keen to avoid this risk. Initially, the MFI required husbands to sign the loan contract, but waived this requirement after SHG members refused to ask their husbands to sign, arguing that some of the SHG members’ husbands, especially those with an alcohol problem, might misappropriate the loan.

• SHG members might be less motivated to repay external than internal loans. International experience with linkage of VSLAs and SHGs shows that when external funds increase in proportion to internal funds and high variability in size of loans to different members within the group is seen, default rates will tend to increase.

In general, this was so far not experienced in the pilot. However in the case where one member took the lion share of the loan and defaulted, the members of the SHG did only contribute to repayment of the loan to a limited extent. They did however make costs in an effort to get the money back from the defaulting lady. Group solidarity is stretched too much when few people receive very large loans and the differences between benefits and risks within the group are too big.

• Reimbursements and compulsory savings might weaken the members capacity to save for the internal fund. Access to external loans might discourage SHG members to continue saving for their internal fund, making them more dependent on external funds.

From the SHGs that were part of the pilot SHG members with an external loan responded in different ways; some members said that

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reimbursement and compulsory savings were indeed affecting their saving capacity, while others said that they could save as much, or even more, than before. From the SHGs that were part of the spin-off, where ongoing compulsory savings were higher, more SHG members complained that it was difficult to save for the SHG fund and at the same time fulfil the obligations towards the MFI. There were no signs that the SHG members were discouraged to save after they got access to external funds. On the contrary, among the pilot SHGs some started to invest much more in their SHG to avoid the need

For the FSP, the advantages of linkage include the following:

• reaching female (target) clients and increase outreach;

• no investment needed for creating and training of SHGs;

• SHGs have experience with savings and lending;

• SHGs exist for several years and are generally cohesive;

• SHGs have a supporting structure potentially reducing risks;

• SHG internal fund provides a ‘cushion’ in case of repayment problems of group members.

It is important that FSPs recognise the difference between SHGs and solidarity groups. FSPs might consider SHGs as solidarity groups with a larger number of members and less risks, given the advantages described above. However, a fundamental difference is that SHGs are independent institutions,

for an external loans.

• ‘Loan repayment stress’ can lead to more tensions in the group, aggravated when the SHG lacks clear policies (for repayment problems or in case people want to leave the group) or when record keeping is not transparent or not correct.

Loan repayment stress was mentioned by SHGs in both locations as a negative factor of linkage. In the pilot area, it was one of the reasons for SHGs to not apply for a second or third loan. Loan repayment stress was not related to late repayments or weak record keeping.

SHG promoting agency, make sure you understand FSPs and recognise the need for your active involvement

FSPs, make sure you understand the SHGs and related agencies

There are several reasons why SHG promoting agencies are interested in linkage to FSPs. First, because of the existence of waiting lists for loans and members expressing the need for loans. Moreover, the linkage with a financial institution can increase dynamism in a SHGs, especially those that exist several years or even a decade and have lost their initial enthusiasm. The expectation is that linkage increases SHGs’ longevity.

A challenge for SHG promoting agencies is to enhance the sustainability of the SHGs in order to finalize and shift development activities with SHGs to other areas. SHG promotors can consider linkage as a phase-out strategy, with the expectation that with the presence of the MFI the support function of the SHG promotor is no longer needed.

The linkage can also be seen as part of a sustainability strategy for the SHG structures Federation Level Association (FLA) and/or Cluster Level Association (CLA). In this case, the FSP delivers loans at FLA and/or CLA level, which on their turn channel the loans to SHGs and receive a fee from SHGs for these activities. During the pilot discussions took place about the possibility of delivering loans at the FLA or CLA level (see Guiding

note 3), but this would increase costs of the loans for the SHGs and requires an FLA and CLAs that have the capacity to play such intermediary role

Despite these perceptions, linkages between SHGs and FSPs do require support from SHG promoting agencies, as issues become more complex for the SHGs. In fact, not less, but more support is needed, especially at the initial stage of linkage. Challenging for the SHG promoter is the need for involvement in product design and initial discussions with the FSP, as well as the need for training and guidance of the SHGs. This means that the SHG promoting agencies have to understand FSPs and be aware of good practices standards of the microfinance industry that are relevant for SHGs (see further Guiding note 2).

During the pilot, the SHG supporting agencies were not sufficiently aware of the need for active involvement in the linkage process. Project roles were transferred to the FLA. However the FLA did not receive sufficient support to fulfil its role in the linkage process. The lack of capacity for this support was recognized and therefore the need for a focal point for this linkage was expressed. In the other location the promoting agency was still supporting the SHGs, but not yet fully aware of the implications of the linkage process for its role.

while solidarity groups are set up and controlled by the MFIs, acting only as financial intermediary and guarantor. Solidarity group members joined the group merely to access an external loan, while this is not the case for SHG members. SHGs have their own characteristics, making it necessary for FSPs to understand their operations, their capacities and demand. This means the FSP has to invest in assessing SHGs according to relevant criteria (see Guiding note 2), and in developing products that are suitable and support the longer-term well-being of the groups (see Guiding note 6). Moreover, the FSPs have to engage with several SHG related agencies. This is especially a challenge in cases where many stakeholders are involved in the SHG promotion and it is not always clear what the task division and authority levels between these stakeholders is.

MFI head office staff did not fully recognize the need to understand the SHGs’ operations. A simple rating tool (see Guiding note 2), developed to assess the performance of the SHGs, was initially not applied in the selection of the first pilot SHGs.

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In this section, characteristics of well operating SHGs are mentioned, challenges for SHG structures described, and explanations of what type of support is needed from the SHG promoting agencies and which conditions favour a productive partnership are given.

Challenges mentioned by the loan officer using the rating tool included the following:

• SHGs resisting to give access to their records;

• differences in amounts between the SHGs’ ledger and the bank passbook;

• balances not carried forward for several weeks or months;

• inconsistencies between individual passbooks and the ledger;

• some expenses not being recorded; • overall doubt of the reliability of

records of some groups.

Guiding Note 2Linkage requires well operating SHGs, well governed SHG structures and support from SHG promoting agency

The general principles of SHG formation are: voluntary participation, some sort of affinity between group members, homogeneous in terms of socio-economic status, mutual beneficial, and equitable7. Well operating SHGs have transparent transactions and record keeping, active participation of all members, and a fair access to loans in terms of frequency, size and share.

Inspired by the rating tools used in India by Financial Service Providers to rate the credit-worthiness of SHGs, a rating tool was developed for the assessment of SHGs in the pilot. The idea behind this tool is that SHGs operating according to the above-mentioned principles are more likely to benefit from the external loan and less likely to run into repayment problems.

7 Source: Frances Sinha (2009) Micro-finance Self- Help Groups in India, living up to their promise? Practical Action Publishing, UK, page 111.

Experience in India shows that the type of rating an SHG receives is related to the repayment behavior. SHGs rated as C, the lowest acceptable category, had significantly more repayment problems than the SHGs rated as A, the highest category.

The rating tool assesses the systems and self-management capacities of SHGs, and its financial performance. The self-management part of the tool includes for example criteria for group homogeneity, attendance level, record keeping quality, member awareness of bylaws and conflict management. The financial part includes criteria for regularity of savings, borrower quality, percentage of internal fund used for internal lending, and portfolio distribution (the percentage of the internal fund that is outstanding to a single member). Based on the outcome of this tool, the SHG is either fully rejected for an external loan, or graded in one of three categories indicating the eligibility level. Although the MFI branch staff said the rating tool was useful for them, they faced challenges to use the tool, especially in relation to the quality of the SHGs’ internal records.

Well operating SHGs

Very few SHGs included in the pilot prepare financial statements (balance sheet and income statement), as is often the case in India (about 28% of SHGs prepare financial statements)8. Without these statements, record keeping mistakes and fraud can go undetected, and the SHGs cannot monitor their financial position and if their savings are all present. For FSPs these statements are important to assess the financial health of the SHGs. Support and training on how to elaboration of these financial statements for those SHGs interested in linkage is an important role for the promotor9.

SHG members are generally assumed to be poor. In practice, this is not always the case. A study in India found that 53% of SHG members are poor, including 15% very poor; 17% are non-poor, and 32% are borderline or vulnerable non-poor.10 Since SHGs are normally operating for many years, members might evolve in economic status, be it not all at the same pace and to the same level. 8 Source: Frances Sinha (2009) Micro-finance Self- Help Groups in India, living up to their promise? Practical Action Publishing, UK.Frances, pages 130-131. 9 See also: Brett Hudson Matthews and Trivikrama Devi: SHGs should balance or break MicroSave India Focus Note 19; and Anjaneyulu Ballem and Denny George (2010) SHG Audit – A Field Balance Sheet Approach MicroSave India Focus Note 5410 Source: Frances Sinha (2009) Micro-finance Self- Help Groups in India, living up to their promise? Practical Action Publishing, UK.

Since the SHGs involved in the pilot have been existing for at least 7 years, they are not homogeneous in economic status, and the level of weekly savings contributions of a significant number of the SHG members suggest that they are not (anymore) belonging to the poor. On the other hand, the relatively high age of the SHGs is a positive sign for their group cohesion. A risk of SHGs and similar groups is ‘elite capture’; some powerful members taking most benefits from the groups. The older groups might be more vulnerable for elite capture, as power dynamics can settle over time. A sign of this happening are SHGs that allow few members to take large loans for longer periods of up to 1,5 to 2 years, limiting the access to loans for other members.

Part of the SHG approach is to build a structure with the aim to support the individual SHGs and to create new SHGs, to represent the SHGs at different levels, to organize social action and lobby for improved social services. SHG structures are the Cluster Level Associations (CLAs) and Federation Level Associations (FLAs). Generally, CLAs consist of 8 to 12 SHGs, each SHG being represented by 2 delegates. The SHGs pay a small contribution to the CLA. The services of the CLAs to the SHGs include auditing, SHG quality assessment, annual collection of financial data, creation of new SHGs, support to weak SHGs, conflict resolution, and training.

Well governed SHG structures

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Occasionally CLAs provide loans to SHGs from their internal fund, obtained through an income generating activity – if any - and contributions of SHGs. The CLA elected members are organised in several committees, such as a loan repayment committee, weak SHG strengthening committee, reporting and monitoring committee, networking committee, and conflict resolution committee.

In Ethiopia, CLAs represent the SHGs at kebele (village/sub-city) level and lobby for the provision of water supplies, electric power, roads, schools and green areas. Also some CLAs are running kindergartens for children of SHG members and for the community at large. Other types of income generating project, such a computer business centre or a wholesale cooperative, are seen as well. To qualify for membership of the CLA, SHGs have to operate at least 6 months and have to comply with a list of about 16 quality criteria.11 When there are 10 to 15 CLAs created, a Federation Level Associations (FLA) can be formed. The CLA has to comply with criteria to qualify as a member of the Federation. CLAs pay a contribution to the FLA. FLAs represent the SHGs at woreda (district) level, facilitate linkages with various organisations, including market linkages, and provide support and oversight. The FLAs are meant to become a legal umbrella organisation for the SHGs and take over the role of the promoting agency. They provide support, like organizing training, creating linkages with Financial Institutions and others, and grading of CLAs. FLAs are more suited to urban than to rural areas, because the geographical areas that FLAs would have to cover become too large in rural areas.

11 The SHGs do an annual self-assessment and must get over 7/10 on each criteria to join. The criteria are: holding regular meetings, everybody saving regularly, everybody participating in decision-making, have bylaws and abide by them, members starting businesses, good record-keeping, good relationships, good attendance, roles and responsibilities of members clear, opened a bank account, reasons members have left recorded and discussed, vision and purpose clear, everybody’s economic status improving, and good attendance at training sessions.

ChallengesAccording to a study carried out in India, it is not easy to find a viable FLA. The FLAs add significantly to the costs and are often not operational self-sustaining. Organizational sustainability proved also to be an issue, depending on adequate governance, staffing and rganizational processes12. A publication on FLAs in India mentioned ‘governance’ as one of the main internal challenges of FLAs, next to well-trained human resources and financial resources for the SHGs.13

In the pilot location, questions arose about the governance and representativeness of the FLA for all affiliated SHGs. Governance issues included conflict of interest as facilitators report to the FLA board, while some of them were board members themselves, and slow rotation of leadership as board members are eligible for another position at the end of their term. The current chairperson started as secretary for 3 years, followed by an election for 3 years as chairperson with the possibility to be elected for another term as chairperson, meaning that people can be in the board for an extended period of time.

During the pilot the FLA was very protective towards their SHGs, not allowing the MFI to promote their products among CLAs and SHGs, and preferring to spread information through the facilitators. Their argument was that the MFI would push the SHGs as they would be above all interested in increasing the number of SHGs taking loans. The very low number of SHGs that showed interest in the loans of the MFI14, gave rise to doubts about the number of SHGs that were informed about the possibility to link with the MFI. Moreover, it was suspected by some stakeholders that internal dynamics in the FLA had reduced trust between the FLA and some of the affiliated SHGs. Question is also to what extent facilitators are still as active as before, now that they are no longer paid.

As was said before, SHG structures need to be involved in product design and initial discussions with the FSP and need to train and guide the SHGs in the linkage process. This requires well-trained human resources, which are usually not available when project responsibilities are transferred to FLAs or CLAs. Therefore, the continuing support of an SHG promoting agency is important for the linkage process. SHG promoting agencies can play an important role in safeguarding the interests of the SHGs and empowering the SHGs to deal with FSPs and ensuring that the right decisions are being taken. The SHG promoting agency has to ensure that linkages between the FSP and SHGs is demand - and not supply-led, and that the demand for external loans is not limited to a few powerful 12 Aga Khan Foundation (2010) Savings Groups and Self-Help Groups AKF savings groups learning initiative. Accessed 06-02- 2017: http://www.mastercardfdn.org/pdfs/India_85x11_LR.pdf13 J.K. Tandon (2017): A Pragmatic Analysis of SHG Federations in Rajasthan. International Journal of Human Resource & Industrial Research, Vol.4, Issue 5, Jul--Sep- 2017, pp 08-14, ISSN: 2349 –3593 (Online), ISSN: 2349 –4816 (Print)14 It was planned to include 20 SHGs in the pilot phase, while only 13 SHGs showed to be interested in a loan. From these 13 SHGs, 4 applied for a second loan. At the time of the final evaluation, one loan was outstanding, and one SHG was in the pipeline for a third loan.

In the initial pilot area three FLAs have been formed, of which one has a legal status as an association with the Office of Labour and Social Affairs. In cooperation with this FLA, the linkage pilot has been designed and implemented. The General Assembly (GA) of this FLA consists of 3 members per CLA and 2 members of each SHG. The GA elects a 15-member board and an executive committee of 5 members for a 3 year term.

About 20 facilitators in Nazareth Adama, report to Tomorrow’s Hope FLA, while previously they reported to the promotion agency. This is part of the process where the FLA takes over the role of the SHG promoting agency. Facilitators are currently volunteers, since no project money is available to pay for their salaries. The promoting agency still provides technical assistance to the FLA.

At the spin-off location, the promoting agency operates mainly in rural areas and supported SHGs to set up CLAs. In this case the formation of FLAs will only be supported if SHGs and CLAs express an explicit need for this apex body. Here the priority is to strengthen the capacity of CLAs so that project roles eventually can be handed over to them. The promotion agency staff and paid community trainers are still actively involved in supporting CLAs and SHGs.

Support from an SHG promoting Agency

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members of the group. Marketing of the products should be left to the MFI, as the FSP should be the one responsible for the loan product. It is good to clearly separate the roles between SHG promoting agencies and FSPs. If there are concerns about aggressive marketing by the FSP, these should be discussed with the FSP and monitored. SHG promoting agencies should make sure that SHGs are informed on the advantages, disadvantages, opportunities and risks of external loans and, if necessary, SHGs’ bylaws have to be adapted to include specific rules on external borrowing, e.g. what the group will do in case of repayment problems15. Moreover, it is advisable that SHGs adapt their record keeping system, so they can keep track of the external loan through their own ledger. SHGs also need support to elaborate financial statements.

Ideally, SHG promoting agencies should familiarize themselves with client protection principles and standards for microfinance to be able to have a clear position regarding these elements in discussions with FSPs. Client protection principles relate to:

• appropriate product design and delivery, including standards on compulsory savings and prevention of aggressive sales;

• prevention of over-indebtedness; • transparency; • responsible pricing; • fair and respectful treatment of

clients; • privacy of clients’ data; • client complaint mechanisms.

15 Suggestions for bylaws: the group can decide to allow the member with repayment problems to take a short-term loan from the group fund (if available), to repay the external loan. In case the repayment problems are caused by an emergency, the group can decide to provide additional support through its Social Fund, according to their normal procedures. In case the repayment problem is caused by unwillingness to pay, the CLA will assist the SHG to solve the problem, according to their usual procedures as defined in the bylaws. In case the member has no possibility at all to repay the loan in the foreseeable future, the group can decide to allow the person to withdraw her savings (including her portion of the profit or loss) from the group fund, what means that the group member will leave the group.

In the beginning of the pilot, there was no consensus among stakeholders if loans should be provided to the FLA and/or to CLAs to on-lend to SHGs, or directly to SHGs or individuals within the SHGs. One of the reasons mentioned to grant loans to the FLA and/or CLAs, was to improve sustainability of these structures, since they would charge a fee for their intermediation. However, this would increase costs for SHGs and its members. The aim of the linkage project was to increase access to affordable loans for SHG members, not to increase sustainability of SHG related structures. Moreover, risks would increase, as it was uncertain if the FLA and CLAs would be able to manage this intermediation and loan funds remaining idle during the ‘transit’ between FLA and/or CLAs and SHGs would even further increase costs for the end-user. Moreover, a direct relationship between the MFI and the SHG is required for the MFI to get to know the SHGs, to assess members’ repayment capacity and to monitor SHGs and borrowers after loan disbursement.

In the beginning of 2017, the FLA requested the MFI to levy 1% administration costs on each SHG loan and pay this to the FLA to compensate the FLA and CLAs for facilitating the

In summary:The initiator of the linkage process, should consider the following criteria for the selection of the SHG partner:

• With regard to SHGs: are SHGs well trained, and operating according to widely accepted SHG principles? do they have an appropriate and transparent recordkeeping system? Are financial statements prepared? Are SHGs likely to allow FSPs to assess their performance?

• With regard to SHG structure FLA and/or CLAs: is the governance transparent, is change of leadership happening in a timely manner? Are there clear communication channels with affiliated SHGs? Do CLAs and FLA have clarity about roles and capacity to implement them? Are FLA and CLA willing to facilitate access of FSP to SHGs, for product promotion, assessment of SHGs and repayment capacity assessment of members?

• With regard to SHG promoting agencies: can the SHG promoting agency guarantee sufficient training capacity to facilitate the linkage? Does it have - or can it support - a network of paid community-based trainers and what is the size of this network? Is the SHG promoting agency willing and capable to provide additional training to SHGs to prepare them for linkage? What are the resources that the SHG promoting agency can invest in the linkage? Does the SHG promoting agency have the support of donor organizations?16

16 Adapted from: SEEP 2017: “Delivering Formal Financial Services to Savings Groups: A Handbook for Financial Service Providers”

Guiding Note 3Provide loans to SHGs and to individual SHG members and not to FLA or CLAs

linkage by informing SHGs about the loans, approving the loan requests and channelling the requests to the MFI. The MFI agreed to charge the SHGs this 1% and to channel the amount to the FLAs’ account. While this made the loan for SHGs more expensive, it did not result in a better cooperation between the MFI and the FLA, nor did it result in an increase of the number SHGs interested in a loan.

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The FSP has to recognise the need to get to know the SHGs and have the willingness and capacity to invest in product development for SHGs, instead of considering the SHGs as a short-term opportunity for profit.17. The FSPs have to be aware of the risks involved for SHG members (and eventually for the FSP) of external loans (see Guiding note 1) and mitigate these risks by careful product design involving the stakeholders. In this way, FSP might contributes to the long-term well-being of SHGs.

Responsible finance means ‘the provision of financial services in a way that protects the interests of clients and protects the mission and sustainability of the institution’18. MFIs that aligned its products and systems to client protection principles19, are more 17 See also Principle 6 of “Program Quality Guiding notesfor Savings Groups”: http://www.seepnetwork.org/program-quality-guidelines-for-savings-groups-pages-20708.php (accessed 21/02/2017)18 Definition Social Performance TaskForce (Responsible Inclusive Finance Training)19 See: https://www.smartcampaign.org/about/

allows for deposit taking, MFIs initially did not feel the need, since there was enough relatively cheap credit available. However, from about 2000, MFIs started to face liquidity problems and could not meet the demand. Since this time, many MFIs started to invest more in deposit taking21. As MFIs’ clients are used to deposit their savings in a bank, effort is needed to promote the possibility to deposit accounts at MFIs in general, but also among SHGs.

At the spin-off location, the MFI received some amount from the promoting agency to increase its loan fund to facilitate the start of the linkage. However, this did not cover the demand of the selected 25 SHGs and due to liquidity shortage, the MFI was unable to disburse loans to all SHGs that fulfilled all requirements.

Well trained staffThe FSP should ensure that training to staff is systematically incorporated in the institutions’ growth strategy and planning and that sufficient staff training capacity exist within the institution. Concerning staff has to be well trained in products adapted to SHGs and understand that the products – including delivery – should not interfere with SHG core principles. They have to know what these principles are, how SHGs are operating, the bylaws, record keeping system and loan procedures. Staff must be aware of the differences between SHGs and other groups, namely solidarity groups, and how SHGs and its members have to be treated. Very importantly, staff must be trained in the assessment of clients’ repayment capacity.

21 See Kirsten Weiss (2015) Expanding access to savings-led Financial services in Ethiopia UNCDF Microlead

likely to deliver responsible financial services to SHGs and its members. For the initiator of the linkage process, it is advisable to assess the MFI, through a client protection assessment or a social audit (e.g. using the SPI420), prior to the linkage process, so that weak areas can be addressed during the linkage process, including product design.

Capacity refers to financial capacity (liquidity), capacity in terms of sufficient well-trained staff and adequate systems, including manuals and MIS.

LiquidityMany MFIs in Ethiopia have liquidity problems and depend for their funds on loans from banks. Although the law smart-microfinance-and-the-client-protection-principles accessed 21/02/2017. Client protection principles relate to: appropriate product design and delivery; prevention of over-indebtedness; transparency; responsible pricing; fair and respectful treatment of clients; privacy of clients’ data; complaint mechanisms.20 http://www.cerise-spi4.org/. the Responsible Microfinance Facility https://sptf.info/resources/responsible-microfinance-facility co-finances social audits and SMART client protection assessments.

Guiding Note 4Linkage requires an FSP with capacity to deliver responsible financial services adapted to SHGs

Responsible financial services

Capacity to deliver these services

In the spin-off area the MFI had recently opened a branch. The staff was new, limited in number and not well trained, but in close contact with the area manager, who they could approach any time. Due to the promises to the SHG promoting agency that were made at head office level, the MFI staff felt pressured to disburse loans as quickly as possible, while the capacity of the branch was still limited.

Adequate systems Adequate systems include user friendly manuals, such as an SHG operations manual including all steps in the linkage process, the content of the information to be provided by the MFI to the SHGs, and tools to be used. Moreover, communication channels between branch and head office staff should be clear and efficient, and the MIS should have the capacity to analyse the performance of the SHG products separately.

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Linkage between an FSP, SHGs and related agencies requires the motivation of all stakeholders to invest in building a productive partnership and awareness of the fact that such a partnership takes time and energy. Linkage implies an uncomfortable marriage between objectives and culture of a for-profit FSP and member-owned SHGs/CLAs/FLA and its promoters. Even though the marriage can be beneficial for both FSP as well as the SHGs and related agencies, the different objectives and organizational cultures can cause distrust between partners, aggravated when the SHG related agencies have prior negative experiences with FSPs, which was the case for the FLA in in the pilot location. As trust is the foundation for any successful partnership, the stakeholders should commit to build trust by showing commitment to the partnership, by having regular and open communication and keeping their promises.

As mentioned before, the FSP has to support to the long-term well-being of groups, not only to the business model.22 SHGs and related organizations have to recognise that linkage implies the need to empower the SHGs to manage confidently the relationship with the FSP. This implies focussed financial literacy training, so 22 See also Principle 6 of “Program Quality Guiding notes for Savings Groups”: http://www.seepnetwork.org/program-quality-guidelines-for-savings-groups-pages-20708.php (accessed 21/02/2017)

Important is to organise regular coordination meetings (at least quarterly) among all stakeholders to discuss progress and resolve any issues that might have come up. To make these coordination meetings happen, the NGO supporting the SHG promotion hired a consultant to act as linkage facilitator. Unfortunately, after his contract finished, no coordination meetings were held. A complicating factor was that FLA members asked for a sitting fee to attend these meetings. These fees were initially paid through the project funds from the NGO, but that stopped after the project came to an end.

SHGs can take informed decision on the basis of knowledge on how FSPs work and what the advantages and disadvantages, opportunities and risks of linkage are. If the SHG feels to they want to start a relationship with an FSP, the FLA or SHG promoting agency have to help them to make necessary adaptations of the bylaws or to cover any gaps in their bookkeeping system. Very importantly, the SHG related organisations have to accept that linkage means giving space to the FSP to relate independently with the SHGs, even though this might feel like the ‘FSP invades their territory’. The energy of SHG related organisations should focus on building a partnership with the FSP and on empowering SHGs to manage the relationship with the FSP themselves; trying to control and limit interactions between FSP and SHGs is counterproductive and nourishes distrust between stakeholders.

During the pilot, SHG related agencies and the MFI did not succeed to build sufficient trust between the organisations, even though on the ground, the Savings and Loan Officer was very much respected by SHGs. Prior to the linkage with the pilot MFI, the FLA has had bad experiences with FSPs, which contributed to their distrust in the pilot as well.

Guiding Note 5Invest in building partnership between stakeholders

Good partnership requires clarity of roles and responsibilities of the different organisations involved and commitment and capacity to fulfil these roles. Partners can sign an MoU in which the different roles are defined. Such an MoU should have an end date and include an evaluation of results. For the pilot the implementing partners signed an MoU at the start of the pilot. This MoU was revised and signed after the mid-term review of the pilot. A limiting factor was that one of the organizations supporting the SHG promoting agency was not included in the MoU. It is important that the leadership of all organisations involved are committed to the partnership. Overall, there was a lack of sense of ownership of the pilot, especially among SHG promoting agencies. At the spin-off location the promoting agency was much more

Coordination meetings

MoU

involved leading to a more successful linkage from the start.

In pilot area, quite some of the agreed roles and responsibilities defined in the MoU were not implemented. The FLA and promoting agency signed for responsibilities beyond their capacities, specifically when it comes to training and guiding the SHGs prior to the linkage. All parties involved should be aware of their capacities and limitations and keep each other responsible for promises made at the start of a project in order to let it be successful.

Based on experiences from the pilot, recommended responsibilities and roles of the different stakeholders are summarised below. Responsibilities and roles not elaborated in the sections above, are further explained in Guiding note 6.

Responsibilities of the FSP: • Develop appropriate and responsible

product development adapted to SHGs and SHG members, not interfering with SHG core principles;

• Provide transparent information on products and prices for stakeholders and SHGs, both written and verbal;

• Provide appropriate and timely training to staff;

• Develop adequate manuals, tools and systems to manage and monitor the product;

Recommended responsibilities and roles of stakeholders

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• Market the product among CLAs and SHGs;

• Assess SHGs’ performance through a rating tool;

• Visit clients’ businesses and assess repayment capacity of SHG members or in case SHGs are well trained to assess the repayment capacity of SHG members, check on these assessments;

• Monitor SHGs and members after loan disbursement, including visits to individual members.

Role in partnership of the FSP: • Get to know the SHGs and their

operations;• Involve SHGs and related agencies in

product development; • Deliver product as agreed; • Organise regular coordination

meetings to discuss progress and to solve any upcoming issue;

• Treat SHGs and its members with respect;

• Only start with the partnership if the liquidity situation allows.

Responsibilities of SHG promoting agency (the NGO): • Make sure that linkages are demand

and not supply-led, and that the demand for external loans is not limited to a few powerful members;

• Empower SHGs to take decisions on linkage through information on the advantages, disadvantages, opportunities and risks of external loans (focussed financial education);

• Support SHGs to adapt their record keeping system to the management of the external loan;

• Support SHGs to elaborate financial statements;

• Guide the SHGs on how to deal with differences in interest rates between loans of internal or external fund;

• Support adaptation of the SHGs bylaws to include specific rules

• If deemed necessary, review SHGs’ loan application, endorse the request and submit the loan application to the MFI. This was the procedure in the pilot, which may contribute to more sense of responsibility for the (monitoring) of the loan. However, it adds also to the bureaucracy and loan processing time.

CLAs’ role in partnership:• If no FLA exists, some CLA members

can participate in the coordination meetings;

• Communication with the FSP about potentially interested SHGs, facilitate access to SHGs for marketing of the products.

Responsibility of FLA:• In case project responsibilities

are transferred to the FLA, all responsibilities of the SHG promoting agency become the responsibility of the FLA;

• Clear communication with the CLAs on their roles and responsibilities;

• General oversight, identification of issues and problem solving;

• Facilitating access of FSP to SHGs to market their product.

FLA’s role in partnership:• In case project responsibilities are

transferred to the FLA, all roles of the SHG promoting agency become the role of the FLA;

• Participation in coordination meetings or call coordination meetings whenever needed.

It is important to involve all stakeholders in product development by organising several meetings among stakeholders to discuss the product features. Some suggestions for several aspects of product development are provided below.

on external loans, e.g. what the group will do in case of repayment problems;

• Train the SHG in assessing the repayment capacity of their members, based on a format agreed upon with the FPS (if agreed with FSP, the FSP can also provide this training, or do the assessment itself for all SHG members, see further Guiding note 6);

• Make sure that staff and/or community trainers are trained to provide the above-mentioned support to the SHGs in the linkage process;

• Support the FLA in realising these responsibilities, in case project responsibilities are transferred to the FLA.

SHG promoter’s role in partnership:• Get to know the FSP and ideally get

familiarised with client protection principles and standards;

• Contribute to product development and safeguard the interests of the SHGs;

• Facilitate access of the FSP to market their products to potentially interested SHGs;

• Participate in coordination meetings or call coordination meetings whenever needed and communicate actively and timely with the FSP about any issue arising;

• Only start the partnership when human and financial resources are available for realising the above-mentioned responsibilities;

• Support the FLA in realising these roles, in case project responsibilities are transferred to the FLA.

Responsibility of CLAs:• Support the identification of

potentially interested SHGs;• Monitor SHGs that received an

external loan and support them in case of any problem;

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SHG or from different SHGs. The members of JLG continue to remain members of the SHGs and continue to participate in the activities of SHGs as earlier.

Initially, three types of products were developed for SHG members: for SHGs with only few members being interested in an external loan individual loans with a moral responsibility of the group, group loans for SHGs in which the majority was interested in a loan, and loans to Joint Liability Groups for SHG members with larger credit needs. At the end, only a variation of the second product was accepted by all stakeholders.

Guiding Note 6Invest in market research and product development involving stakeholders

Information on performance of groups to be provided by the SHG promoting agency

The SHG promoting agency can provide basic information about the number of SHGs, the number of years they are operating, where they are located, etc. Moreover, the SHGs might collect and analyse information on financial performance at group- and at aggregate level: e.g. the average savings per member, utilization rate of the internal fund, and average loan size, which will contribute to an initial idea on the potential demand of the SHGs. Also information that gives insight in group cohesion such as meeting attendance rates would be useful.

Information received at the time of product development was aggregated for all SHGs in the area, and was therefore of limited use, as variations among groups were large.

Carry out a feasibility study

Information from SHGs and cash-flow analysis

Focus group discussions with SHGs gives insight in to what extent the demand for external loans is limited to a minority of members or is general for the entire SHG. Additionally, these discussions can give insight in prior experience with FSPs, use of informal financial mechanisms, and perceived credit needs.

It is not wise to automatically assume take sufficient market information and business analyses are available because stakeholders have been working with the SHGs for long time.

SHGs are not homogenous in socio-economic status and it is useful to analyse the cash-flow of several type of SHG members to get an idea of the different types of demands. As groups are not homogeneous, one product to fit all is not sufficient. Some members might have demand for a higher size of loan that cannot be responsibly delivered in an SHG setting. For these members, either a regular individual loan product could be interesting or a joint liability group existing of SHG members, either from the same

Link loan amount with SHG members savings

In the pilot area SHGs’ bylaws define that internal loans depend on the amount saved, Usually SHGs allow loans to be two or three times the amount the member saved. In the spin-off area, the maximum loan size can also be defined by the amount saved weekly. For external loans it is good to keep the link with the level of savings of the members for the following reasons: • to encourage savings and reduce

dependency on Financial Service Providers;

• to avoid that a few powerful people take large loans while their contribution to the group fund is negligible;

• to address the concern of SHG members on the group guarantee.

When the external fund becomes available, SHGs can decide to allow a higher multiplication factor. For example they could allow loans to up to a maximum of 5 times the members’ savings.

Mitigate risks of group guarantee

As was mentioned before, a risk of an external loan guaranteed by the entire SHG, is a mismatch between risks and benefits of loans among members: only a few individual members benefitting from the loan while the rest of the members bear the risk. This potentially distorts the group cohesion and can destroy groups in times of repayment problems, stretching the group solidarity principle too far. The same is the case when the variations in loan sizes are too large. In general, large loans cannot be responsibly delivered in SHGs as they cannot be realistically guaranteed by the group members. In the pilot area the requirement for a loan to the SHG is that at least 50% of the members should be interested in an external loan. In spin-off area the external loan is used for topping up an internal loan: the member receives an internal loan supplemented by an external loan. This practice spreads the benefit and the risk of the external loan.

Another solution for loans guaranteed by a group is that group members do feel a moral responsibility for their peers and help each other in the case of repayment problems while there is no formal requirement to pay on behalf of a defaulting member. This means that, for the external loan, the SHG plays the role of a solidarity group in its original sense23 where good repayment behaviour is reinforced by the driving forces of the group: trust, mutual understanding and peer pressure to ensure all individuals goals are aligned. The group will not be eligible for a subsequent loan in the case of default. This type of solidarity lending has been implemented successfully in several countries and did not lead not deteriorating repayment behaviour. 23 Muhammad Yunus. Grameen Bank at a Glance, Grameen Bank, Dhaka, September, 2006, p. 2 There is no legal or formal “… form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member.”

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Compulsory savings is common terminology in Ethiopia, but ‘cash collateral’ or ‘security deposit’ reflect better the purpose of these deposits. Compulsory savings is usually divided in a certain percentage of the loan to be paid upfront (before loan disbursement) and a percentage that has to be paid at each reimbursement. Compulsory savings do not make sense for SHG members, as they also save in their SHG and the compulsory savings to the MFI might limit their potential to contribute to the SHG’s fund. Therefore, compulsory savings should not be required or at least minimized and, according to the Client Protection Standards,24 never be more than 10% of the loan amount.

The MFI has the responsibility to clearly communicate, in writing, all information related to the products to all stakeholders. Moreover, the MFI should make sure that the products are understood by the SHGs, before they submit a loan application. MFI staff must be trained in how to explain products and policies to the clients in a detailed and understandable way, without using aggressive sales techniques, respecting clients to refuse the products. At the time of signing the contract there should not be any doubt left about the product features, such as responsibilities

24 See the Getting Started Questionnaire of the SMART campaign: http://www.smartcampaign.org/tools-a-resources/1108-gsq-version-2-0

recommended to calculate the real costs of the loan for the clients by calculating the APR (Annual Percentage Rate) or EIR (Effective Interest Rate), by using the MFTransparency price calculation tool. http://www.mftransparency.org/resources/calculating-transparent-pricing-tool/

SHG members used to the declining balance interest rate in their groups considered the flat interest rate as unfair, even if the real interest paid in group was at a similar level or higher: ‘why paying interest on money we do not have anymore?’

Loans should never be approved based on the guarantee available, but the repayment capacity of the SHG members should be assessed. The client protection criterion that applies is the following: For loans with a group guarantee, due diligence may be conducted by the provider or group members. For group loans without group guarantees, the provider carries out a repayment capacity analysis for each borrower. If due diligence is conducted by group members, groups are trained on how to conduct due diligence and relevant loan criteria.25

In the pilot it was agreed that repayment capacity would be assessed by group members first, who would be trained by - trained - facilitators according

25 Client protection principles SMART campaign, principle 2: prevention of over-indebtedness, compliance criteria 2.1.2.2 and 2.1.6.1. See Getting Started Questionnaire

Eliminate or minimise Cash Collateral

related to group guarantee, the way interest is calculated (declining balance or flat rate), total costs of the loan, reimbursement schedules, if and how cash collateral can be withdrawn in case of default, policies for early repayment, penalties in case of late repayments, etc. This transparency is fundamental for SHGs in order to be able to take informed decisions. Moreover, it is fundamental for a good relation between the SHG and the FSP. The client protection principle ‘transparency’ includes the following compliance criterion:

The provider communicates all information related to products, services and policies to clients in the local language and at an appropriate level given financial literacy limitations. For less literate clients, oral communication supplements written information (Client Protection compliance criterion 3.3.3.2)

Generally, prices of MFIs are not transparent in countries where transparency is not a legal requirement. Prices in Ethiopia consist generally of several components for insurance, upfront service fee, registration costs, upfront and ongoing cash collateral, flat interest rate per month. Some of the components are in percentage, while others are in cash value. The more components, the less understandable the price. Moreover, the many components make it impossible for clients to compare prices between MFIs. Most MFIs in Ethiopia use flat interest rates for their products, unless they use a core-banking MIS that can deal with declining balance calculations. Flat interest rates calculate the interest on the initial loan amount, independently of how much of the loan amount is reimbursed. Interest rate calculated on declining balance is more straightforward, as interest is only paid on the outstanding loan balance. MFIs and SHG promoting agencies are

to a mutual agreed format. The MFI would check at least half of the repayment capacity assessments by visiting the clients’ businesses before final approval of the loan and the remaining clients as part of the post-credit monitoring. Since facilitators had not been trained, in the end it was the MFI staff supporting SHG members to complete the assessment format.

Especially in the beginning of a linkage project, it is recommendable to visit clients’ businesses and do repayment capacity assessments in those cases that training to SHGs would be provided and groups would be able to perform these assessments themselves. This will provide the opportunity to the FSP to get to know the SHGs and its members better.

The pilot MFI had a zero-tolerance policy for delinquency. Although in the past zero tolerance has been actively promoted by e.g. CGAP26, this practice is currently discouraged. One of the compliance indicators for the standard ‘Fair and Respectful Treatment of Clients’, of the Universal Standards of Social Performance is: ‘the institution does not endorse a policy of zero tolerance for PAR’. It is good practice to differentiate between clients who are willing to repay, but face set-backs and emergencies, and clients who are not willing to repay. The MFI policies should

26 The Consultative Group to Assist the Poor is a global partnership of more than 30 leading organizations that seek to advance financial inclusion.

Assess repayment capacity

Communicate timely and in a transparent way about products and prices

Do not apply zero tolerance policy

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include in their policies the possibility for rescheduling, refinancing or writes-off of loans on an exceptional basis for clients who have the willingness but not the capacity to repay.

Especially during and at the end of a pilot phase, it is important to gather feedback on SHGs’ satisfaction with products, services and delivery channels, and to discuss adaptations to the product. This can be done by the FSP and/or by the SHG promoting agencies, and/or by an external consultant.

During the pilot, consultants gathered feedback on SHGs’ satisfaction at the mid-term review and final evaluation. Moreover, during the coordination meetings the FLA and promoting agency could transmit any dissatisfaction with the products. The products have been adapted after the mid-term review.

Monitor and adapt products

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