self-learning guide in microfinance
TRANSCRIPT
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Copyright @ 2007 by PACAP. All rights reserved.
All Rights Reserved 2007Philippines-Australia Community Assistance Program
If any part of this technokit is used, copied or reproduced, in any formor by any means, one should make the proper attribution to thePhilippines-Australia Community Assistance Program (PACAP).
Published by the Philippines-Australia Community Assistance Program
Prestige Building, Ortigas Avenue, Pasig City, Philippines
ISBN __________________
Printed in the Philippines
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Table of Contents
Introduction 1
Key Terms and Concepts 4
General Organizational Performance 36
Microfinance 55
General Instituttional Types and Sectors 75
Financial Service Institutions 83
Types of Stakeholders 93
Five Elements of Effectiveness 95
17 Microfinance Donors 97
Microfinance Institutions 98
Microfinance Statistics 101
Key Principles of Microfinance 106
Microfinance Models 108
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SELF-LEARNING GUIDEIN M ICROFINANCE 1
Introduction
SAMIAH and NAGA MACARANGCAT, along withtheir seven children, decided to leave Mindanao in2004 to escape from the vicious cycle of hostility andin-fighting between Muslims and Christians. Armedwith nothing but the hope of being able to livepeacefully and the resolve to raise their childrenaccording to the teachings of Allah, they arrived in
Capiz in February of that year.
The Macarangcat couple first heard of PACAP/CRIFI(Philippines-Australia Community Assistance Program/Capiz-Roxas Islamic Foundation Inc.) from otherMuslim settlers and the possible financial assistancethey could get from these agencies to help them getstarted. However, failing to meet the minimum
residency, they were denied on their initial loanapplication. To make matters worse, Naga couldhardly find employment in a predominantly Christiancommunity.
They turned to usurers, as a last recourse, to take outa small loan with a huge interest rate to enable themto start their trading business. Not surprisingly, the
decision would later cost them everything they had.There were days they could not even have one decentmeal. Their children had to stop schooling. They werepushed to dire poverty. According to Samiah, herhusband Naga had practically lost all hope.
But Allah soon came to their rescue. It was the timewhen PACAP granted financial assistance to the Datu
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Bangkaya Traders Multi-Purpose Cooperative for theirrubber sandal and slipper-making project. Naga
applied for work at the cooperative and was hired asa member of the production team. While he becamegainfully employed, his wife Samiah was selected asone of the beneficiaries of the Capiz-Roxas IslamicFoundation, Inc.
A P____ initial loan from CRIFI made it possible fortheir trading business to take off once again, but this
time, on the right footing. Samiah sells the finishedproducts of the Datu Bangkaya Traders MPC as wellas other dry goods to Christian communities in RoxasCity and in the province of Capiz. Her succeedingloans have enabled her to widen her array of productsto offer, including pants and T-shirts.
With all these things going for them, the Macarangcats
have started to count their blessings. They now enjoythree square meals a day. The couple can even affordto send their children back to school. With the helpof PACAP, CRIFI and Datu, Samiah and Naga nowlead their lives with a brighter and more optimisticoutlook.
Millions of poor people have used microcredit to
fund a new tool, a machine, or a shop in themarketplace, with surprising success. Studies in India,Kenya and the Philippines found that the averageannual return on investments by microbusinessesranged from 117 to 847 per cent. If they are solucrative, why didnt these businesses start sooner?Lack of capital. Poor people either have no money toget started, or have to borrow from loan sharks who
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SELF-LEARNING GUIDEIN M ICROFINANCE 3
charge usurious rates that wipe out profits. This iswhat microfinance, or banking for the poor, seeks
to address. Ultimately, its vision is to empower poorpeople to pull themselves out of poverty.
The Year of Microcredit, Human News, 29 September2005)
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Purpose, Target, User and How to Use
The purpose of this module is to equip PACAP
personnel wi th a working knowledge on t he key terms
and concepts as wel l as the var ious stakeholders in the
microfinance industry.It also aims to help them get
started for a more informed evaluation of project
proposals seeking t he agencys financial assistance.
This will be a useful tool for the PACAP staff,
part icularl y project offi cers and evaluators, as wel l as
complementary or administ rati ve staff. They wi l l find
easy-to-understand defini t ion of key concepts and terms
used in microfinance. It also contains practical
information on the various stakeholders in the indust ry.
Key Terms and Concepts
Social Performance
Thi s sect ion contains terms that apply generall y to
understanding, assessing, managing and investing in
social per formance.
Accountability
The principle that individuals and organizat ions
are responsible for their actions and may be
required to explain them t o others.
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SELF-LEARNING GUIDEIN M ICROFINANCE 5
Blended Value
The idea that the total value created by an
organization consists of three components:
economic value, social value, and environment al
value.
Code of Conduct
A set of pr incip les indicat ing how an
organization expects its members to act. It isfrequently general, and enforcement is left to
the discret ion of the organizati on.
Code of Et hi cs
A general code that art iculates an organizat ions
values or moral standards, focusing on the dut iesand responsibilities of organization members.
Code of Practice
A set of written rules that dictate measurable
and verif iable operating requirements for
specified activities.
Community Economic Development
A process by which communit ies can ini t iate and
generate their own solutions to their common
economic problems and t hereby bui ld long-term
community capacity and foster the integration
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of economic, social, and environmental
objectives.
Compliance
The act or process of fulfi l l ing internal or
external requirements as set forward in pol icies,
regulations, or guidelines.
Consumer Protect ionGovernment or self-regulation to protect the
r ights and int erests of consumers.
Core Values
Values that are formally ident i fied as important
by an organization and which it attempts toreal ize. These are often ref lected in the
organizations vision or mission statement and
cover i ts relationship wi th those stakeholders
cr i t ical to success. Core values endure over the
long term and provide a constant source of
st rength and mot ivation for an organizat ion and
its employees.
Corporate Social Responsibil i ty (CSR)
The pr incip le that corporat ions have a
responsibility to the local community, broader
society, and the envi ronment . I t may involve the
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SELF-LEARNING GUIDEIN M ICROFINANCE 7
integrati on of social value dir ect ly i nt o business
operations or it may refer to philanthropic
act iv i t ies ind i rect ly re la ted to bus iness
operations.
Double Bot tom-Line
A framework for measuring and reporting an
organizations performance against financial
and social standards.
Embeddedness
Integrat ion of the social and ethical account ing,
auditing, and reporting processes into an
organizations operations, systems, and policy
making.
Empowerment
The process of i ndividuals equipping themselves
with the knowledge, skills, and resources they
need in order to change and impr ove the quali t y
of their own l ives.
Fair Trade
A t rading relat ionship based on commitment to
social just ice in whi ch employees and producers
are t reated and pa id in a fa i r manner,
susta inable environmental pract ices are
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fol lowed, and long-term t rade relati onships are
fostered.
Fungibility
The quali t y of money that makes one individual
specimen indistinguishable from another.
Anything used as money (gold, shells, bank
notes) must have this quali ty. The fungibil i ty of
money makes it difficult for lenders to ensurethat borrowers use the loan funds in the way
lenders wish; one way they try to get round
misuse of funds is to lend in kind. Often a
person wil l borrow money for one stated purpose,
but the effect of the loan is to finance another
activity.
Governance
Anything related to the activities of governing
the organizat ion, e.g., board of directors, bylaws,
and so on.
Institutionalization
The integration of processes, procedur es, bel iefs,
values, norms, etc., into an organizations
systems, routines, and culture.
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Mission
The core pur pose of an organizat ion t hat defines
why i t exists, and what i t does for whom.
Mission Al ignment
The alignment of an organizations internal
processes, policies, culture, incentives, and
products and services with its mission.
Mission Dr i ft
The divergence of an organizations activities
and out comes from its mission.
Mission Statement
A formal, wr i t ten expression of an organizati onsmission.
Norms
A shared expectation of behaviour that notes
what is considered culturally desirable and
appropriate. They are prescr ipt ive, but lack the
formal status of rules.
Organizat ional Cult ure
An organizat ions bel iefs, knowledge, att i tudes,
norms, values and customs. I t can be suppor t ive
or unsupport ive of an organizat ions mission and
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can affect employees ability or willingness to
adapt or per form well .
Responsiveness
The responsibil i ty of an organization for i ts acts
and omissions, including the processes of
decision making and the results of these
decisions.
Social Account abi l i ty
The responsibil i t y of an organizati on t o provide
evidence to stakeholders that i ts operations and
per formance are in conformance wi th i ts social
mission and obligat ions.
Social Accounting
The process by which an organizat ion moni tors,
evaluates, and accounts for its social
per formance in relation to i ts aims and those of
its stakeholders.
Social and Ethical Accounting,The variety of approaches related to the
assessment and communication Social and
Ethical Accounting, Auditing, and Reporting
(SEAAR).
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Social and Ethical Performance
The impact of an organizat ion on i ts
stakeholders, particularly in those dimensions
in which they hold the organization account able.
I t refers to the systems and individual behaviour
wi thin an organizati on, as wel l as to the dir ect
and indirect impact of an organizat ions
activities on stakeholders.
Social Audit
An examination of the records, statements,
internal processes, and procedures of an
organization related to its social performance.
I t is undertaken with a view to providing
assur ance as to the quali ty and meaningful nessof the organizations claimed social per formance.
Social Bot tom L ine
The social outcome measur ement that parall els
the financial bottom line. It is equal to the net
social benefi t fr om operations.
Social Capi tal
Socia l resourcesin part icular, t rust ,
reciproci ty, network s, and the shar ing of values
or norms of behaviour which al low a
community or society to funct ion more
effectively.
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Social Entrepreneur
A person who uses entrepreneurial skills to
address social and environmental problems. It
may involve revenue generati on, alt hough this
is not required.
Social Impact
The change in net social welfare due to an
organizations activities. It includes the widerlocal, national, and global communities.
Social-Impact Causal Chain
A model that explains how i mpact is created. I t
begins with organizational inputs, which are
t ransformed via internal processes into outputs.Outputs in turn produce outcomes, and
outcomes produce impacts.
Social Mission
The core social pur pose of an organi zat ion.
Social Object ives
Object ives related to the social mission and t he
corresponding social performance of an
organization.
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Social Performance
The effective translation of an organizations
social mission int o pract ice. Social per formance
is not just about measuring the outcomes, but
also about the actions and corrective measures
that are being taken to bring about those
outcomes.
Social Performance Assessment (SPA)The process by which an organi zat ion measur es
its social performance relative to its social
mission and objectives and to those of key
stakeholders. Measurement may focus at any
of t he steps in t he social impact causal chain.
Social Performance Management (SPM)
The process of t ranslating mission into pract ice,
including setting social objectives, tracking
social per formance and using this informat ion
to improve practice.
Social Rating
An independent assessment of an organizat ions
social per formance using a standardized rat ing
scale. The social rat ing process and rat ing scale
may parallel those used for financial r ati ng.
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Social Report ing
Public disclosur e by an organizat ion of i t s social
performance.
Social Value Added
The increased social value at each stage of a
production or service delivery process. I t can also
refer to the change in net social impact resul t ing
from an organizati ons act ivi t ies.
Social Welfare
The overall well-being of society in general.
Social welfare is improved when the social
benefits of a program, policy, or action exceed
its social costs and vi ce versa.
Stakeholder
An i ndividual or group of individuals who affect
and/or are affected by an organization and its
activities.
Sustainability
The capabil i t y of an organization to sustain i ts
act ivi t ies over the long term, having taken due
account of i ts envi ronmental, social, and human
impacts.
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Sustainabi l i ty Repor t
A formal , wr i t ten repor t d isc los ing an
organizations performance toward the goal of
sustainable development. I t provides a balanced
and reasonable representat ion of the
sustainability performance of the reporting
organization, including both posit ive and
negati ve cont r ibut ions.
Sustainability Reporting
The pract ice of measur ing, disclosing, and being
accountable for organizational performance
towards the goal of sustainable development .
SustainableRefers to having a neut ral or posit ive impact on
the environments abil i ty to sustain itself
indefinitely into the future, and on the health
and well-being of individuals, society, and
communit ies. It also refers to the state of being
economically viable.
Sustainable Development
Meeting needs of the present without
compromising the ability of future generations
to meet their needs.
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Transparency
The openness and willingness to accept public
scrut iny. Transparency exists when there is open
public access to information produced by the
organizati on, when t he information is suff icient
and reliable, and when there exists sufficient
means of communicat ion between the
organization and i ts stakeholders.
Tr iple Bot tom L ine
A framework for measuring and reporting an
organizations performance against financial,
social, and environmental standards.
ValueThe benefit-per-unit cost.
Value Added
The increased value at each stage of a product ion
or service delivery process.
Value-Added Chain
Those act ivi t ies or steps that add to or change a
product or service as it goes through a product ion
process; these are the activities or steps that
customers view as important and necessary.
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Value Proposition
A statement to stakeholders or potential
stakeholders describing how an organization
differentiates itself in the market and what
par t icular values i t del ivers to i ts target market .
Values
Deeply held beliefs within organizations that
may be stated or unstated and which aredemonstrated through the day-to-day
behavi our s of i ts empl oyees.
Vision
Long-term goal of strategy. It answers the
quest ion, H ow would society be different i f ourmission were realized.
Social Investing
Ethical I nvestment
Investment that at tempts to ensure thatinvested funds are not used to violate the
investor s most basic moral values or ethi cal
codes. There is a wide var iety of means to ensure
that invested funds are used ethically, and a
wide range of interpretations of what ethics
mean relative to invest ing.
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Return on I nvestment (ROI)
A return ratio that compares the net benefits
(financial and/or social) of an organizations
activities versus its total costs. As such, ROI
represents the re lat ive value of the
organizat ions cumulat ive net benefi ts (benefi ts
less costs) over the analysis period, divided by
its cumulative total costs, expressed as a
percentage.
Screening
The inclusion or exclusion of clients into an
organizati on using select ion cri ter ia.
Social I nvestmentInvestment that aligns an individuals or an
organizations investment policies with i ts social
values, that is made pr incipal ly for the purpose
of earning a social return.
Social Investor
A person or organization that engages in social
investing.
Socially Responsible Investment (SRI)
Investment that aligns an individuals or an
organizations investment policies with i ts social
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values, that is made principally for the purpose
of earning a financial r eturn.
Social Retur n
The net impact on society resulting from an
organizations operations.
Social Return on Investment (SROI )
Monetary summary of an organizations socialreturn from a capital investment. A term
originating from return on investment (ROI)
used by t radi t ional i nvestors.
Social Screen
The inclusion or exclusion of securities in aninvestment portfolio using social selection
criteria.
Social Vent ur e Capit al
Equi ty investment wi th the goal of social as wel l
as financial return on investments. It is typically
longer term t han a loan, wi th r isk being shared
more equally between the investor and the
organizat ion invested in. Social-vent ur e-capit al
financial r ates of r eturn are oft en not as high as
for convent ional venture capital.
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Strategic Giving
Engaging in phi lanthropy in a st rategic manner
to make a major social impact through maki ng
better choices surrounding how much one
spends, invests, and gives back to society.
Total Return on I nvestment (TROI )
A measur e of t he social impact of double bot tom
line ventures. It is a blend of the social andfinancial return on investment .
User
A non- or for-profit entity that receives a
program-related investment directly from a
funder for use in its programs or ventures.Source: Renz and Massarsky
Venture Philanthropy
Philanthropy that borrows some of the best
pract ices of the ventur e capi tal wor ld to invest
in non-prof i t organizat ions to bui ld their
capacity. Venture phi lanthropists typically value
their donor dol lars in terms of the social r eturn
on i nvestment .
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Social Institutions
Civi l Society
Refers to the totali ty of voluntary civic and social
organizat ions that form the basis of a
functioning society, as opposed to the force-
backed structur es of a state (regardless of that
states pol i t ical system). Civi l society
organizations include non-profit and non-government al organizat ions, organized groups,
clubs, universit ies, tr ade unions, envi ronmental
movements, and indigenous peoples
associations. Civil society can be organized at
the local, national and international level.
Double Bottom-Line Business
Entrepreneurial ventures or investments that
st r ive to achieve measur able social and financial
outcomes. See Social Enterprise.
Mission-Based For-profit Business
See Social Enterprise.
Non-profi t Business Venture
See Social Enterprise.
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Social Business
A socially or iented business that seeks to balance
the emphasis between its social and business
int erests. Unl ike a social enterpr ise, it does not
necessari ly al low the social mission t o primari ly
drive operations; however, managers will
conduct business in such a way as to not conf l ict
wi th i t s social object ives.
Social Enterprise
An organizat ion that uses business solut ions to
accompl ish social goals. Social object ives are it s
primary dr iver, rather than being dri ven by the
need to maximize profit for shareholders and
owners. See Double Bottom-Line Business,Social-Pur pose Enterpr ise, Non-profi t Business
Venture, Mission-Based For-profit Business.
Social Organizat ion
An organization with the primary purpose of
pursuing and achieving social object ives.
Social Vent ur e
An earned income strategy that has both
financial and social goals int egral to i ts purpose.
This term is generally used as a synonym for
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social business, although it is sometimes used
to refer specifically to the revenue-generating
arm of a non-profi t organization.
Social Purpose Enterprise
See Social Enterprise.
Socially Responsible Business
A for-profi t business that operates in an ethicalmanner and demonstrates concern and action
for the public good.
Social Assessment Methods
Account abi l i ty 1000An evaluation f ramework developed by Uni ted
Kingdom-based AccountAbility to address the
need for organizat ions to int egrate stakeholder
engagement processes int o dail y act ivi t ies. The
framework provides a systemat ic, inclusive, and
credible approach to improving social and ethical
accountability and overall performance. It
provides guidance to users on how to establish
a systematic stakeholder engagement process
that generates the indicators, targets, and
report ing systems needed to ensure i ts
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effectiveness in impacting on decisions,
act iv i t ies, and overal l organizat ional
performance.
Assessment
Evaluat ion act ivi t ies under taken t o determine
how well an organization performs financially,
operationally, and manageriall y. See Evaluat ion.
Assurance
An evaluat ion method that uses a speci fi c set of
principles and standards to assess the quality
of a repor t ing organizat ions subject mat ter, such
as reports, and the organizations underlying
system, processes, and competencies thatunderpin its performance. Assurance includes
the communicat ion of the results of this
evaluation to provide credibility to the subject
mat ter of i ts users.
Balanced Scorecard
A strategic management system that aligns
business act ivi t ies wi th organizational st rategy
and monitors the per formance of strategic goals
over t ime. It proposes that organizations
measure operational performance in terms of
financial, customer, business-process, and
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learning-and-growth outcomes, rather than
exclusively by fi nancial measures, to arr ive at a
more powerful view of near-term and future
performance. It advocates integration of these
outcomes into the organizations strategic
planning processes.
CGAP Pover ty Assessment Tool
An assessment tool designed by theInternational Food Policy Research Institute
(IFPRI) and the Consultative Group to Assist
the Poor (CGAP) to measure the relative poverty
status of microfinance clients.
EvaluationSee Assessment.
Global Repor t ing Ini t iati ve (GRI)
An independent inst i tut ion whose mission is to
develop and disseminate globally applicable,
sustainability reporting guidelines, comprising
158 indicators. These are for voluntary use by
companies and governmental and non-
governmental organizations to report on the
economic, environmental, and social dimensions
of t heir act ivi t ies, products, and services. Started
in 1997 by the Coalition for Environmentally
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Responsible Economies (CERES) and t he Uni ted
Nations Environment Program (UNEP), the
GRI uses a mult i-stakeholder process
incorporat ing the act ive part ic ipat ion of
representatives from business, accountancy,
investment, environmental, human rights,
research, and labour organizations from around
the wor ld.
Impact Assessment
A research act iv i ty under taken wi th the
objective of attributing observed outcomes to
organizat ional act ivi ty. Impact is determined by
the counter factua l . Determin ing the
counterfactual in turn requires comparing at reatment group to a val id cont rol group.
Impact Monitoring
The per iodic or rout ine tr acking of selected client
outcomes. In contrast to impact assessment,
impact moni tor ing does not at tempt to att r ibute
observed impacts to organizational activity.
Impact Moni tor ing System
The integration of impact monitoring into an
organizat ions int ernal processes, rout ines, and
management information systems.
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Par t icipatory Rapid Appraisal (PRA)
A label given to a family of part icipatory
assessment approaches and methods that
emphasize local knowledge and enable local
people to make their own appraisals, analyses,
and plans. PRA uses group animation and
exercises to facilitate information sharing,
analysis, and action among stakeholders.
Although originally developed for use in ruralareas, PRA has been employed successful ly in a
variety of set t ings.
Qualitati ve In-Depth Individual Impact Assessment
Protocol (QUI P)
An assessment method that uses in-depthinterviews of microfinance clients to help MFI
managers bet ter understand them. Designed to
be conducted simply and inexpensively over a
short period of t ime to produce detai led
information about how particular clients feel
about financial services and the impact they
have on t heir l ives.
SEEP-AIMS Tools
A set of pract i t ioner-or iented c l ient-
assessment tools developed joint ly by t he U.S.
Agency for Internat ional Development and the
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SEEP Network. I t includes two quanti tat ive
tools an impact survey and a client exit
surveyand three qualitative toolsclient
satisfaction focus group discussions, client-
empowerment interviews, and loan and
savings use st rategies over t ime int erviews.
Poverty and Outreach
Absolut e Pover ty
The state of subsist ing without a set of minimum
necessi t ies for l iving.
Bankable
People deemed eligible to obtain financialservices that can lead to income generation,
repayment of loans, savings, and the building
of assets.
Breadth of Outreach
The number of persons reached with financial
services.
Client s below pover ty l ine (%)
Percentage cl ient s below poverty l ine (where the
poverty line is defined as population living on
less than US$2/day). Sour ce: The MIX M arket
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Cost of Out reach
The sum of costs to the consumer for financial
services, including financial costs, transaction
costs, and opportunity costs.
Depth of Out reach
The degree to which an organization reaches
poor people wi th fi nancial services.
Ext reme Pover ty
The state of living below an absolute extreme
poverty line. Common extreme poverty lines
include (1) persons in the bottom 50 percent of
those living below the poverty line established
by the nat ional government , or (2) persons li vingon less than US $1.00 per day in daily per-capita
expendi tur esequal to $1.08 per day per capita
in purchasing power par i t ies at 1993 pr ices.
Ext reme Pover ty L ine
The level of annual income below which a person
is defined to be l iving in ext reme pover ty.
Ext remely Poor
Persons fall ing under an ext reme pover ty l ine.
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Gini Index
An index that measures the extent to which the
distribution of income (or in some cases,
consumpt ion expendi ture) among individuals or
households within an economy deviates from a
perfect ly equal distr ibution. A Lorenz curve plots
the cumulative percentages of total income
received against the cumulative number of
recipients, start ing wit h t he poorest indivi dualor household. The Gini index measur es the area
between the Lorenz curve and a hypothet ical l ine
of absolute equality, expressed as a percentage
of the maximum area under the line. Thus, a
Gini index of zero represents perfect equality,
whi le an index of 100 implies per fect inequali ty.
Length of Outreach
The sustainabi l i ty of the supply of microfinance
services.
Low Income
Persons below or just above the poverty line.
Moderately Poor
Persons in the top 50 percent of those living
below the relevant absolute poverty line.
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Non-poor
Persons living above the relevant absolute
poverty line. It may also refer to persons who
are non-poor by relat ive standards.
Outreach
Act ive att empt to target , at t ract , serve, retain
or otherwise interact wi th a cl ientele in selected
populations, geographic areas, or targetedinitiatives.
Poor
Persons who live below the relevant absolute
poverty line. It may also refer to persons who
are poor by relative standards.Poorest of the Poor
Persons who are among the very poorest of all
members of a given society.
Poverty
The state of one who lacks a usual or socially
acceptable amount of money, material
possessions, standard of l iving, or access to basic
needs and/or services. I t may also be defined or
character ized by persons who suffer fr om social,
economic, or polit ical exclusion, marginali zation,
or powerlessness. Two common measures of
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poverty include (1) persons living below the
poverty l ine establ ished by the nat ional
government, or (2) persons living on less than
US $2.00 per day in dai ly per-capi ta
expendi tur esequal to $2.15 per day per capita
in purchasing power parities at 1993 prices.
Pover ty Al leviation
The amelioration of the effects, symptoms, orcauses of poverty on persons, households, or
broader society. I t is oft en used as synonym for
poverty reduction although it may or may not
imply an actual r educt ion in pover ty.
Poverty AssessmentA process whereby the poverty status of an
individual or group is determined. It typically
involves the use of quantitative methods, but
may also use quali tative methods.
Pover ty Gap
The mean shortfal l f rom the poverty l ine
(count ing the non-poor as having zero shor t fal l ),
expressed as a percentage of the poverty line.
This measure reflects the depth of poverty as
well as i ts incidence.
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Poverty Headcount
The total number of rural population living
below the nat ional pover ty l ine.
Pover ty Line
The level of annual income below which a person
is defined to be living in poverty. It is often
calculated as the minimum level of income
needed to secure the necessit ies of l i fe.
Poverty Reduction
The reduction in the number of persons or
households l iving in r elative or absolute pover ty.
It is alternatively defined as an improvement
in t he relati ve income dist r ibuti on between t hepoor and non-poor.
Poverty Lending
Lending in which the focus is on poverty
alleviation and empowerment of vulnerable
groups.
Purchasing Power Par i t ies (PPP)
Currency conversion r ates that both conver t to
a common currency and equalize the pur chasing
power of different currencies. They operate by
eliminating the differences in price levels
between countr ies in the process of conversion.
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Relative Poverty
The state of being poor in comparison to other
members of society.
Scope of Outreach
The number of dist inct types of f inancial
products and services offered.
Standard of L ivingThe level of individual, household, or group well-
being. It is measured by the ability of the
individual, household, or group to acquire goods
and services.
Very PoorSee Ext remely Poor.
Vulnerable Non-poor
Persons living near the absolute poverty line,
but who are vulnerable to falling below the
poverty line.
Worth of Out reach
The value of financial products and services
consumed and the clients willingness to pay.
Value and willingness to pay are a function of
the benefi ts der ived from consumpt ion.
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General Organizational Performance
This sect ion contains terms that apply generall y to
understanding, assessing, managing organizational
performance.
General Assessment
Accounting
The systematic generation, tracking, andanalysis of informat ion about the financial and
social performance of an organization for the
benefi t of i ts stakeholders.
Audit
An examination of the records, statements,
systems, and procedures of an organization
together wi th i t s stated claims for per formance.
This is typically undertaken with a view to
verifying the quality, meaningfulness (e.g.,
accuracy, validity, compliance, inclusiveness,
completeness), and other aspects of t he claimed
performance of t he organizat ion.
Audit Report
A t est imony produced by an audi tor regarding
the qual i ty and meaningfulness of an
organizat ions records, statements, systems, and
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procedures, as well as stated claims for
performance. May also include an opinion on
areas for improvement and predicted future
progress.
Auditor
Person who conducts an audit , oft en cer t i fied by
a professional body or licensed under statute.
The auditor may be internal (employed by theorganization) or external (unconnected to the
organization).
Baseline
A star t ing point against which future changes
are compared. Used for benchmarking.
Benchmark
A measurable variable used as a relative
basel ine or reference in evaluat ing the
performance of an organization. Benchmarks
may be drawn from internal experience, the
experience of other organi zat ions, or fr om legal
requirements.
Benchmarking
The process of putt ing performance
measurements in context by comparing an
organization with similar organizations based
on a common factor, such as region, size or
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methodology. A benchmark can also refer to the
relative standard against which all similar
inst i tut ions are compared.
Best Practice
A technique or methodology that through
experience and research has proven to lead
rel iably to the desired resul t .
Br eak-even point
The point at which the volume of sales or
revenues exactly equals total expensesthe
point at which there is neither a profi t nor loss
under varying levels of act ivi ty. The breakeven
point tel ls the manager what level of output oractivity is required before the firm can make a
profit; reflects the relationship between costs,
volume, and profi ts.
CAMEL
A U.S. Federal Reserve-developed diagnost ic tool
that measures the Capital adequacy, Asset
quality, Management, Earnings and Liquidity
of financial institutions. ACCION adapted the
CAMEL ins t rument to the micro f inance
industry as a quantitative and qualitative
assessment of MFI financial performance.
Source: ACCION
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Causal Model
A model or portrayal of the theorized causal
relationships between concepts or variables.
Conceptual Framework
A systematic structure for classifying and
organizing complex informati on.
Cont rol Group(See Comparison Group)
External Audit
A formal, independent review of an
organizations financial statements, records,
transactions, and operations. External auditsare usual ly performed by professional
accountants in order to lend credibility to
f inancia l statements, to ensure external
accountability and to identify key internal
weaknesses in an organization. The external
audit process is vi tal t o t ransparency.
External Audit or
An audi tor who is independent of the
organization being audited and does not share
any mater ial interest wi th the organizat ion.
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Feedback Loop
A continuous cycle by which information is
processed wi thin an organizat ion. I t start s wi th
the col lect ion of informat ion, passes thr ough to
data consol idation and analysis, and next uses
the data to make, communicate, and implement
decisions.
Fund BalanceNet worth in a nonprofit organization; total
assets minus total l iabi l i t ies. Source: Renz and
Massarsky
Indicator
A piece of qualitative or quant itative informationthat provides meaningful insight into the
performance of organizat ions or their
beneficiaries.
Internal Audit
An independent appraisal of operat ions,
conducted under the direct ion of organizat ional
management, to assess the effectiveness of
internal administ rati ve and account ing cont rols
and help ensure conformance with managerial
policies.
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I nternal Auditor
A person employed wi thin an organization who
conducts an int ernal audit . The internal auditor
is generally independent of management and
repor ts direct ly t o the board of di rectors.
Key Per formance Indicators
A short list of indicators that an organization
has ident i fied as the most impor tant measur esof organizat ional per formance.
Logical Fr amework (logframe)
A matrix articulating what a project aims to
achieve and how, what its main assumptions are,
and what the means of verifying objectivelyver i fiable indicators are.
Metric
A measur ement used for comparison pur poses.
Net Loan Por t fol io
Gross Loan Port foli o less the Loan L oss Reserve.
Sour ce: The MIX M arket
Net Working Capital
Current assets minus cur rent l iabi l i t ies. Sour ce:
Renz and Massarsky
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Net Worth (Fund Balance in non-prof i t
organizations)
Total assets minus total liabilities. Aggregate
net value of the organization. Source: Renz and
Massarsky
Opportuni ty Cost
The potent ial benefi t that is foregone from not
fo l lowing the best ( f inancia l ly opt imal)alternat ive cour se of act ion.
Standard
A widely agreed set of procedures, practices, or
performance outcomes. Standards vary across
a number of dimensions, including process andsubstant ive standards, mandatory and
voluntary standards, and theoretical and best
practice standards.
Taxes
Include all taxes paid on net income or other
measure of profits as defined by local tax
authorities. This item may also include any
revenue tax. It excludes taxes related to
employment of personnel, financial t ransact ions,
fixed-assets purchase or other value-added
taxes. Sour ce: The MIX Market
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Theoret ical Fr amework
A basic conceptual st ructur e organized around
a theory. It often defines the kinds of variables
used to make the theory operat ional .
Total Assets
Total of al l net asset accounts. Sour ce: The MIX
Market
Total Equit y
Total of al l equity accounts, less any
distributions. Sour ce: The MIX Market
Total L iabil it ies and Equit y
The sum of total liabilities and total equity.Sour ce: The MIX M arket
Total L iabi li t ies
Total of all liability accounts. Source: The MIX
Market
Treatment Group
A group of i ndividuals receiving organizati onal
services that is being evaluated or studied. I t is
used to assess the impact of organizational
activities on participants and is necessary to
establ ish att r ibut ion.
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Methods of General Assessment
Benefi t -Cost Analysis
See Cost-Benefit Analysis.
Client Assessment
The process of gathering and assessing
information about clients. Ideally, information
includes clients perspectives and experiences.I t inc ludes quant i ta t ive and qua l i ta t ive
methodologies.
Cli ent Monit or ing
The routine process of tracking changes in
cl ients status or of provid ing important
descr ipt ive informati on about cl ients. It may be
quanti tat ive or qual it at ive in natur e.
Cost -Benefi t Analysis
A type of economic analysis in which the costs
and benefi ts, both tangible and intangible, of an
investment , pol icy, program, or organization areexpressed in monetary terms and assessed
according to one or more of three measures: (1)
net present value, (2) cost -benefi t ratio, and (3)
internal rate of return. See Benefi t-Cost
Analysis.
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Cost-Benefi t Rat io
The discounted value of benefi ts divided by the
discounted value of costs.
Internal Rate of Return
The discount or interest rate at which the net
present value of a cash-flow stream is equal to
zero.
Monetization
An approach to measurement that converts
input s, outputs, outcomes, or impacts into dol lar
values.
Net Present ValueThe future stream of benefi ts and costs
converted into equivalent values today. This is
done by assigning monetary values to benefits
and costs, discount ing fut ur e benefi ts and costs
using an appropr iate d iscount rate, and
subtracting the sum total of discounted costs
fr om the sum total of discounted benefi ts.
Sensit ivit y Analysis
Analysis of how sensitive analytical outcomes
are to changes in under lying assumpt ions. The
assumptions that deserve the most attention
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depend largely on the dominant benefi t and cost
element s and the areas of greatest uncer tainty
of t he organi zat ion or process being analyzed.
General Organizational Performance
Act ive Clients
The number of clients with loans outstandingon any given date. An institutions official
statist ics on act ive cl ient s are usuall y recorded
as the number of cl ient s wi th loans out standing
on the date its financial statements are filed.
Source: ACCION
Active Loan Portfolio
The total amount loaned out less the total
amount of repaid loans; i.e., all money that is
on t he st reet or owed to the inst i tut ion in t he
form of loans on the date the report is filed.
Source: ACCION
Bad Debt
A debt that is not collectible and is therefore
worthless to the creditor. Source: Renz and
Massarsky
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Borrowers per Staff Member
Number of Active Borrowers / Number of
Personnel. Sour ce: The MIX M arket
Client Dropout
The share of an organizat ions cl ient s that ceases
to purchase its products or services.
Client RetentionThe share of an organizations clients that
cont inue to purchase its products or services. See
Customer Retention.
Client Satisfaction
An organizational measure of the extent towhich the needs, wants, and expectations of
cl ient s are met. See Customer Satisfact ion.
Effectiveness
The degree to which an organizat ion is
successful in achieving a speci fi ed goal.
Efficiency
The extent to which maximum output is
achieved from a given input. Alternatively, a
minimum input for a given output.
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Goal
The end result of ultimate accomplishment
toward whi ch an effort is directed. Goals provide
purpose and direction to an organization and
thus must be capable of being effect ively pursued
and measur ed.
Goal Al ignment
The process of evaluat ing whether operationaloutputs, outcomes, or impacts meet
organizational goals and determining what can
be done to bet ter achi eve those goals.
Impact
Those organizational outcomes that can beattributed to the activity of the organization
above and beyond what would have happened
anyway.
Input
Resource used to implement an act ivi ty,
including money, people, time, facilities, and
equipment.
Intermediate Outcome
An outcome from an act ivi ty that can be
ident i f ied and measured in the medium-
term,which is pract ica l when long- term
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Objective
A measurable statement about the end result
that an organizat ion is expected to accompl ish
in a given period of time. Objectives flow from
goals, the purpose of an organization, or the
organizations overall mission.
Outcome
The change to the client population and itsenvi ronment t he organizat ion is t rying to make,
which could include attitudes, behaviours,
knowledge, skil ls, status, or socio-economic well-
being. (I f outcomes can be statist ically att r ibuted
to the organizations activities, they become
impacts.)
Output
The measurable product of an organizations
activities delivered to external beneficiaries.
Outputs are the tangible results of applying
inputs and under taking act ivi t ies.
Performance Management
The process of translating an organizations
mission into practice, which includes setting
social objectives, tracking social performance
and using this information to improve pract ice.
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Por t fol io at Risk > 30 days
The value of al l loans out standing that have one
or more instal lments of pr incipal past due more
than 30 days. This includes the entire unpaid
principal balance, including both the past due
and future instal lments, but not accrued
interest . I t does not include loans that have been
restructured or rescheduled. Source: The MIX
Market
Port fol io at Risk
Measur ement of t he total out standing balance
of loans past due - not late payments or
payments not yet due - divided by the active
por t fol io. A more r igorous manner of assessingport fo l io qual i ty than port fo l io past due/
delinquent portfolio. Sour ce: ACCION
Portfolio
A combinat ion of assets held for i ts investment
benefits, including financial and non-financial
returns. The asset mix is usually vari ed in kind
and size to maint ain an acceptable level of r isk
and return. Sour ce: Renz and Massarsky
Strategic Goal
See Strategic Object ive.
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Strategic Ini t iati ve
A specific activity or action undertaken to
achieve a strategic goal, i ncluding the plans and
milestones.
St rategic Object ive
An elaboration of the mission statement that
develops with greater specif icity how the
organization will carry out its mission. Theobjective may be of a programmatic, policy, or
management nature, and is expressed in a
manner that allows a future assessment to be
made of whether the objective was or is being
achieved. See Strategic Goal.
St rategic Plan
A document used by an organizati on t o ali gn i ts
organizat ion and budget s t ructure wi th
organizati onal pr ior i t ies, mission, and st rategic
objectives.
Strategic Targets
The numbers to achieve on each strategic
object ive by a specifi ed t ime.
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Target
A quantitative measurement of a performance
object ive that is to be achieved by a given t ime.
Target ing Tool
A marketing tool used to identify and extend
products or services to an organizations target
market or markets
Transact ion Costs
Imputed costs from organizational operations
and activities in relation to client services and
other organizat ional in teract ions (e.g. ,
Processing fees). Source: Calmeadow
Willingness to Pay
The amount a consumer wi l l pay for a par t icular
quantity of a good or service. In consumer
demand t heory, wi l l ingness to pay automat ically
implies ability to pay. In contemporary social
science writing, ability to pay is sometimes
cont rasted with wi l l ingness to pay. The impl ici t
assumpt ion here is that even t hough people are
willing and actually do pay a certain amount,
they lack the abi l i t y to pay because they should
have spent this money on something else.
Buying the good (e.g., water ) resul ts in a loss of
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consumption of some other good or service and
places the purchasers further below some
socia l ly def ined minimum-consumpt ion
standard. Source: Vi r tual L ibrary on Microcredi t
Microfinance
This sect ion contains terms re levant to
understanding microfinance and placing social and
general per formance terms inn a microfinance cont ext
Types of Microfinance Institutions
Accumulating Credit and Savings Association
(ASCA)
Informal savings groups that resemble rotating
credit and savings associations, but are sl ight lymore complex. In an ASCA, all members
regularly save the same fixed amount while
some participants borrow from the group.
Interest is usually charged on loans. ASCAs
require bookkeeping because the members do
not al l t ransact in the same way. Some members
borrow while others are savers only, and
borrowers may borrow different amounts on
different dates for different per iods. I f members
pay interest on t heir loans, the return t o savings
has to be individually calculated and fairly
shared among the group.
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Alt ernat ive Financial I nst it ut ion (AFI)
All types of financial institutions that offer
financial services to low-income or persons
otherwise excluded from formal f inancial
services. It includes microfinance institutions,
rural banks, state/agricultural development
banks, and postal banks. The common thread
binding alternative financial institutions and
microfinance institutions is the pursuit of adouble bot tom l ine.
Apex Inst i tut ion
A wholesale lending inst itut ion operating within
a single country or integrated market that
channels funds, with or without technicalassistance or other support ing services, to retail
microfinance inst i tut ions.
Development Bank
Generally country-owned and state-based, these
banks offered agr icul tural credit or iginall y and
have moved to offer microfi nance services.
Microfinance I nst i tut ion (MFI )
A financial inst i tut ion specializing in providing
financial services to low-income persons or to
persons otherwise systemat ically excluded fr om
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formal financial services. It may also offer
business development or other non-financial
services. I t includes non-governmental
organizations, cooperatives, credit unions, non-
bank financial institutions, and commercial
banks.
Microfinance Non-governmental Organization
(microfinance NGO)A non-governmental organization that offers
financial services to it s cl ient s.
Non-bank Financial I nst it ut ion (NBFI )
An inst i tut ion that provides simi lar services to
those of a commercial bank, but is l icensed undera separate legal author ity or regulation that may
requir e lower capital r equir ements, limi tations
on financial service offerings, or supervision
under a dif ferent regulatory body.
(ROSCA)
An informal savings and credit group. I t
operates through a commitment of group
members to cont r ibute per iodic fi xed sums to a
common savings fund that is lent in succession
to all group members based on pre-existing
distribution rules. Once one group member
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repays the loan, the fund is re-lent to another
group member. This process cont inues unt i l each
group member has had the opportunity to
borrow the fund amount. The process differs
from an accumulating savings and credit
association in that all group members receive
loans.
TransformationThe conversion of a non-regulated microfinance
inst i tut ion into a regulated microf inance
institution.
Transformed Microfinance Inst i tut ion
A microfinance inst i tut ion that has t ransformeditsel f fr om a non-regulated financial inst i tut ion
into a financial inst itut ion that is author ized and
supervised by the nat ions supervisory
authorities.
Vil lage Bank
A loan group made up of approximately 2030
people (typically women) drawn from the same
communi ty and operating under a joint l iabi l i t y
arrangement. Vi l lage banks are semi-
autonomous organizations with an elected
leadership drawn from group members who
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manage the operation of t he vi l lage bank wi th
monitor ing by a representative of the sponsor ing
microfinance institution.
MicroFinance Products and Services
Business Development Services
Non-f inancial services offered tomicroenterprises that have the objective to
increase product ivi ty, compet i t iveness, and job
creation. They include, for example, training,
capacity development, market ing, account ing, or
strategic planning.
Compulsory Savings
Savings payments that are required as part of
loan terms or as a requi rement for membership,
usual ly in a credi t union, cooperat ive,
microfinance inst itut ion, vil lage bank, or savings
group. Compulsory savings are often required
in place of col lateral. The amount , t iming, andlevel of access to these deposit s are determined
by the pol icies of t he inst i tut ion r ather than by
the client. Compulsory savings policies vary:
deposits may be required weekly or monthly
before the loan is disbursed, when the loan is
disbursed, and/or each time a loan installment
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is paid. Cl ient s may be allowed to wi thdraw at
the end of the loan term; after a set number of
weeks, months or years; or when t hey terminate
their memberships. See Forced Savings.
Forced Savings
See Compulsory Savings.
Group GuaranteeA loan guarantee based on joint l iabil i ty in which
each group member who receives a loan pl edges
to guarantee the loans of all other group
members. I f one member of t he group defaul ts,
the remaining group members are responsible
either for enforcing loan repayment by thedefaul t ing member or for paying of f the
out standing loan balance.
Group Lending
Lending mechanism that allows a group of
individualsoften called a sol idar i ty groupto
provide col lateral or loan guarantee through a
group repayment pledge. The incent ive to repay
the loan i s based on peer pressur eif one group
member defaults, the other group members
make up the payment amount .
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Group L oan
A loan extended to a group of persons under a
joint l iabil i ty arrangement . It is generally shor t-
term, relati vely small in size, and not t ied to any
speci fi c investment act ivi ty.
Guarantee Fund
A fund that can provide an organizati ons ini t ial
access to the formal fi nancial sector, st rengthenthe organizations capabilities as financial
intermediari es, and provide impor tant leverage
in terms of lending capabil i ty. See Br idge Fund.
Guaranteed Loan
A pledge to cover the payment of debt or toper form some obli gation i f t he person l iable fai ls
to perform. When a third party guarantees a
loan, it promises to pay in t he event of a defaul t
by the borrower.
Joint Li abil it y
A method of providing guarantees for loans in
which members of a loan group agree to joint ly
guarantee the loans of al l group members. If one
member of the group defaults, the remaining
group members are responsible either for
enforcing loan repayment by the defaulting
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member or for paying off the out standing loan
balance.
Microfranchising
A business approach designed to assist
individuals to be more successful as independent
ent repreneurs. The impetus behind t he idea is
to provide sound business opportunities and
services to the poor by int roducing scaled-downbusiness concepts drawn from successful
commercial fr anchi se businesses.
Microinsurance
A sub-sector of microfinance that provides
insurance products to micro- and smal l businessowners, their employees, and low-income
persons.
Microleasing
A sub-sector of microfinance that provides small-
scale leasing. I n one microleasing arrangement ,
the lessee (cl ient ) goes to an equipment suppl ier,
chooses the needed equipment, and negotiates
the price and terms of delivery. Then, rather
than approaching a bank for a loan, the lessee
approaches a lessor (MFI) or the equipment
provider itself. The lessor evaluates the lease
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appli cation and, if i t is approved, the two par t ies
sign a lease contract. The lessor purchases the
equipment fr om t he supplier and leases i t to the
lessee for a period that is usually close to the
est imated economic l i fe of t he asset . Dur ing this
period (the lease term), the lessee uses the
equipment and makes regular payments to the
lessor. I n many cases, the lessee has the opt ion
to buy the equipment fr om the lessor at the endof t he lease term.
Microsavings
Small-scale savings deposits mobilized by
microf inance inst i tu t ions, o f ten wi thout
minimum balance requirements.
Peer Lending
Lending methodology that relies on the peer
pressur e of group members to act as a guarantee
in place of more traditional forms of collateral
and credit scor ing.
Remittances
Transfers of funds from people in one place to
people in another. Compared with other sour ces
of money that can fluctuate depending on the
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pol i t ical or economic cl imate, remi t tances are a
relat ively steady sour ce of funds.
Self-Help Group (SHG)
A community-based group of low-income persons
who come together to address issues of mut ual
concern, share knowledge, and provide
Financial, not -financial , services to each other.
Finanical services provided typically includesavings and loans in which l oans are funded by
group savings. Government and non-
government al organizat ions oft en play a role in
forming and serving self-help groups to faci l i tate
and st rengthen group format ion and operati on.
Social Col lateral
A method for guaranteeing loans that uses joint
l iab i l i ty wi th in a loan group ra ther than
individual real collateral or personal guarantees.
Sol idar i ty Group
A loan group made up of approximately 310
people drawn from the same community and
operating under a joint l iabi l i ty ar rangement .
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Sol idar i ty Loan
A group loan made to members of a solidarity
group.
Stepped Lending
The process by which borrowers who repay loans
on t ime are el igible for increasingly larger loans.
Stepped lending keeps ini t ial r isk at minimum
while allowing microent repreneurs to grow theirbusinesses and i ncrease their incomes.
Technical Assistance (TA)
The exchange of knowledge, products, servi ces,
and management technology between t echnical
service providers and microfinance inst i tut ions.
Volunt ary Savings
Savings that are voluntarily deposited in a
microfinance inst i tut ion by its cl ients. Voluntary
savings pay an interest rate and typically permi t
reasonably unrestr icted deposits and
withdrawals.
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Microfinance Context Terms
Commercialization
Refers to steps taken by microf inance
insti tut ions to adopt principles and pract ices of
commercial banks, including bank or bank-li ke
legal status, formal regulatory oversight and
other integration into the formal f inancial sector.
Downscaling
Descr iption of formal f inancial inst itut ions move
down market by offer ing products and services
to micro- and smal l enterpr ises and low-income
persons.
Development Finance
General term that encompasses all types of
fi nancial services and financial service del ivery
models to promote social and economic
development among low-income, vulnerable, or
otherwise marginal persons.
Financial Self-Sufficiency
A situat ion in which an organizati on generates
sufficient revenues from clients to cover all of
its operating and financing costs, both actual
and imputed.
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Formal Financial Sector
The financial sector consisting of legally l icensed
and registered financial i nst i tut ions.
Formal Financial I nst it ut ion
Financial institution operating in the formal
financial sector. I t may or may not be supervised
by national supervisory authorities.
Gender Relat ions
Focuses on womens bargaining power within the
household, power imbalances between the
genders, effects of microfinance on gender-
related issues, empowerment and/or ill effects
on women, gir l /chi ld issues. Source: Calmeadow
I nformal Financial Sector
The financial sector consist ing of unl icensed and
unregistered (and often community-based)
organizations, groups, or individuals offering
financial services.
Informal Credit
Credit services provided by independent persons
or community-based groups that do not belong
to the formal financial system.
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I nformal Savings
Savings held outside of a formal financial
inst i tut ion. Informal savings mechanisms
include saving at homein cash or in kind
savings groups, rotating savings and credit
associations, accumulating credit and savings
associations, through reciprocal savings and
lending with neighbors or relatives, and with
money guards (fr iends or relatives wil l ing to holda saver s money for a per iod) or informal sector
deposit collectors (people who charge a fee to
hold a saver s money for a determi ned per iod).
Informal savings devices are often highly
convenient , but may be unreliable, insecure, and/
or i ll iquid.
Microcredit
A sub-segment of microfinance that focuses on
givi ng smal l loans to low-income people for the
purpose of allowing them to earn additional
income by investing in the establishment or
expansion of microent erpr ises. Microcredit may
also refer to the actual microloan.
Microfinance
The provision of financial services adapted to
the needs of microentrepreneurs, low-income
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persons, or persons otherwise systematically
excluded from formal f inancial services,
especially small loans, small savings deposits,
insurance, and payments services.
Microenterprise
A market -or iented economic act ivi ty wi th 10 or
fewer employees (including the owner and
unpaid family members) that is owned andoperated by someone of modest means.
Microenterprise Development
Any activity undertaken to encourage the
formation of microenterprises and/or the
improved performance of exist ingmicroenterprises.
Microentrepreneur
The owner and operator of a microenterprise,
sometimes an individual who is economically,
socially, or educationally disadvantaged, and
usually one who lacks access to the formal
f inancial system and tradit ional business
development services.
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Microloan
A l oan provided by a microfinance inst i tut ion t o
a microentrepreneur or low-income person for
business or personal use.
Non-prudential Regulation
Financial r egulation in which t he regulator does
not vouch for or assume responsibility for the
soundness of the regulated institutions. Non-prudential regulatory techniques may include
registration and legal chartering of licensed
entities; disclosure of ownership or control;
repor t ing or publicati on of f inancial statements;
norms for the content and present ation of such
statements; accounting and audit standards;transparent disclosure of interest rates to
consumers; external audits; submission of
names of bor rowers and status of t heir loans to
a cent ral credit informat ion bureau; and int erest
rate limits. Enforcement of non-prudential
regulations seldom involves regular supervision
or on-si te inspect ion.
Operational Self-Sufficiency (OSS)
A situat ion in which an organizati on generates
suffi cient revenues from operat ions to cover all
of i ts operational costs.
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Performance Standards
Normative levels set for specific performance
measurements, l ike por t fol io quality or leverage.
In the field of microfinance, there are several
ent i t ies and projects attempt ing to set universal
performance standards for MFIs. Sour ce:
ACCION
Prudent ial RegulationRegulation set out and enforced by the financial
sector regulator; it defines detailed standards
for financial st ructure, account ing pol icies, and
other important dimensions of a financial
institutions business. Prudential regulations
will include requirements for liquidity, capitaladequacy, loan-loss provisioning, and loan
diversifi cati on, as wel l as l imi ts on del inquency
and non-earning assets. Compared to non-
prudential regulations, enforcing prudential
regulations requi res more intensive report ing as
well as on-site inspection that goes beyond the
scope of normal financial statement audits.
Regulation and Supervision
The creation and enforcement of a set of rules
for financial inst i tut ions, including MFIs. These
rules are usually set by a countrys cent ral bank
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or super intendency of banks, or by other banking
agencies.
Rural Area
An area in which the primary economic act ivit ies
are small-scale agriculture and l ivestock
rearing, although it also includes small-scale
t rade, service, and manufactur ing act ivi t ies. I t
is also characterized, in relative terms, bygeographic isolation, low population densities,
poor ly developed infr astructure, underdeveloped
market for goods and services, and high pover ty
concentration.
Rural FinanceThe provision of financial services to rural areas
and rural inhabitants. Although the term
applies to all forms of rural-based financial
services, the term is often used to connote the
provision of f inancial services to support
t radi t ional rura l and agr icul tura l income
generating activities.
Rural Microenterprise
A microenterprise owned and operated by a
resident of a rural area. It often serves to
supplement income generated through
agriculture and livestock activities.
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Small and Medium Enterprise (SME)
Enterpr ises employing 5 to 10 workers (small)
or between 10 and 50 workers (medium).
Smallholder
A person engaged in small-scale agr icul tur e and
l ivestock act ivi t ies in r ural areas.
Subsidized CreditLoans offered at int erest rates and fees that fai l
to cover the ful l long-run costs of providing those
loans.
Subsidy
A monetary or non-monetary grant given bygovernments, indiv iduals, foundat ions,
investors, or non-governmental organizations.
Also refers to the offer of a pr oduct or service to
the market at a price below the cost of
product ion, general ly targeted to certain
disadvantaged groups believed unable to pay the
full-cost pr ice or for whom paying a ful lcost pr ice
is bel ieved to consti tut e a bur den.
Tradit ional Finance Schemes
Pawnbrokers, rotating savings and credit
associat ions, individual savings groups,
tontines. Source: Calmeadow
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Training
Staff, may be senior, field or loan officer, training
regarding microcredit methodologies, case
management, etc. This does not include client
training which would be found under business
development services. Source: Calmeadow
Transformation
In a microfinance context , t ransformat ion refersto the process by which a nonprofit community
organization or an NGO becomes a regulated
financial inst it ut ion.
Unbanked
A person or persons without access to formalfi nancial services.
Ur ban Ar ea
An area including and sur rounding large ci t ies
characterized, in relat ive terms, by high
populat ion densit ies, concent rat ion of economic
activity, and high infrastructure development.
General Institutional Types and Sectors
This sect ion contains terms re levant to
understanding different institutional types and the
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economic sectors in which they operate as a cont ext for
understanding social and general per formance terms
General Financing Institutions
Arrears
Interest or principal which was not paid when
due, but is st i l l owed.
Bank
A licensed financial intermediary regulated by
a state banking supervisory agency. It may
provide any of a number of financial services,
including deposit taking, lending, payment
services, and money transfers.
Commercial Bank
A type of financial intermediary and a type of
bank. I t raises funds by col lect ing deposits fr om
businesses and consumers via checkable
deposi ts, savings deposi ts, and t ime deposi ts. I tmakes loans to businesses and consumers and
buys corporate bonds and government bonds. Its
primary li abi l i t ies are deposi ts and i ts primary
assets are loans and bonds. It is regulated by
nati onal banking supervisory author i t ies.
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Communi ty-Based Finance I nst i tut ion (CBFI )
Financial organizat ion structured to enable low-
income communi ty groups to par t icipate in and
govern the development process and to access
services of the institutions. Frequently, these
organizat ions are referred to as cooperatives, but
some community-based organizat ions are in fact
not cooperatives but groups with a similar
st ructur e and object ives.
Cooperative
A non-bank financial inst i tut ion organized as a
mut ual society and joint ly owned by i ts members
for the purpose of mobil izing and int ermediat ing
savings and providing other financial and non-financial services to its owners/members. See
Credit Union.
Credit Union
A cooperative financial institution owned and
cont rol led by the members who use i ts services.
I t serves groups that share a common bond, such
as where they work or l ive, or go to church and
offers a place for members to save money and t o
get loans and other f inancial services at
reasonable rates. See Cooperat ive.
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Financial I nst it uti on
An organizati on whose pr imary l ine of business
is to provide financial servcies to i t s cl ient s. I t
may specialize in a narrow range of financial
servcies or offer a wide array of financial
services. Includes formal and informal
organizat ions, for-prof i t and non-prof i t
organizat ions, and r egulated and non-regulated
organizations.
Lending Investor
Lending investors are basically moneylenders
who are licensed by the Bangko Sentral ng
Pil ipinasand subject to minimal regulatory
requirements and supervis ion. They arepermitted to accept deposits from a maximum
of 19 individuals, and are permitted to make
loans to whomever they wish. There has been a
rapid increase in the number of lending
investors in recent years, and increased
compet i t ion has led to reduct ions in the interest
rates they charge. Some 1,400 lending investors
typically charge interest of between 3.5 and 4
per cent flat per month. Together wi th more than
2,000 pawnshops, they deal with segments of the
population usually beyond the reach of formal
financial inst itut ions and compete wi th informal
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fi nancial sector lenders. They are character ised
by simple procedures, low transaction costs,
rapid response and accessibility, but normally
require col lateral and probably do not reach t he
ultra poor. Source: Getting the Framework
Right: Policy and Regulation for Microfinance
in Asia Paul B. McGuire, John D. Conr oy, and
Ganesh B. Thapa, 1998
Moneyshops
A phenomenon in the urban areas of the
Phil ippines where a few formal f inancial
intermediaries extended banking services
through a br idge-bui lding mechanism. These
shops occupy stall s in publ ic markets and offerworking capital to market vendors. They charge
an int rest rate of about three percent per month,
but st i l l much lower than the usurer s several
hundred per cent under the five-six scheme.
Source: Vir tual L ibrary on M icrocredit
Mutual Savings and Loan Association
A non-bank financial inst i tut ion organized as a
civi l association authorized to engage in
f inancia l in termediat ion and of fer o ther
financial services to the public.
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Rural Bank
A banking inst i tut ion t hat t argets cli ents who
l ive and work in non-urban areas and who are
general ly involved in agricultural-related
activities.
Savings and Credit Cooperative (SACCO)
Another word for a credit union in Afr ica. The
term credit union is generally not used inAfr icaand specifi cally not in South Afr icato
avoid confusion with the var ious labor
movements.
Savings Bank
A bank that focuses on savings mobi l izat ion asits core business. Found worldwide, some
savings banks are publ ic, some are pr ivate, and
some function as cooperat ives. Many are postal
savings banks that offer their services through
their countries post office branch network.
Savings banks often have far greater rural
out reach than other bank networks and tend to
of fer products wi th terms that are more
manageable for the poor than t ypical commercial
banks.
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Savings Mobil izati on
Programs intending to mobilize capital and to
provide savings accounts, as well as credit
services, to individuals and households.
General Other Institutional Types
For-profit Enterpri se
An enterprise that operates for the sole or
pr inciple object ive of earning a financial r eturn.
Non-governmental Organizati on (NGO)
A non-profit group or association organized
outside of i nst i tut ionali zed pol i t ical st ructures
to realize particular social objectives or servepar t icular const i tuencies. I t s act ivi t ies include
program operation, service delivery, research,
in fo rmat ion d is t r ibu t ion , t ra in ing , loca l
organizat ion, and community service, as well as
legal advocacy, lobbying for legislat ive or social
change, and civil disobedience.
Non-profi t Enterpri se
A revenue-generating non-profit organization
operating with a focus on the financial bottom
line.
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Non-profi t Organization
An organization whose income is not used for
the benefit or private gain of shareholders,
directors, or any other persons with an interest
in the organization. Such organizations are
typically funded through a mix of private or
public donations. They may also be funded by
an endowment or separate for-profi t ent erpr ise,
social franchise or other commercial means.
Private Voluntary Organization (PVO)
A term used to describe international non-
governmental organizations based in North
America.
General Sectors
Community-Based Sector
See Voluntary Se