RESEARCH MONOGRAPH SERIES

Number 19

STRENGTHENING CREDIT UNIONS IN SRI LANKA: DISPELLING THE MIDDLE CLASS MYTH

Prepared by:

Anna Cora Evans August 2001

5710 Mineral Point Rd. PO Box 2982 Madison, Wisconsin 53701-2982 USA Phone: (608) 231-7130 Fax: (608) 238-8020 www.woccu.org “Quality Credit Unions for Everyone”

TABLE OF CONTENTS

EXECUTIVE SUMMARY .................................................................................................... 1

I. ROADMAP .......................................................................................................................... 6

II. CREDIT UNIONS IN SRI LANKA: THE SANASA MOVEMENT............................ 6

LEGAL FRAMEWORK............................................................................................................... 6 STRUCTURE & SCALE ............................................................................................................. 7 OVERVIEW OF WOCCU/SANASA CREDIT UNION STRENGTHENING PROJECT.............................. 7 BACKGROUND ON KIRIMETIYANA & PETHIGODAGEDARA PRIMARY SOCIETIES....................... 7

Kirimetiyana PS ................................................................................................................ 7 Pethigodagedara PS ......................................................................................................... 8

III. OUTREACH..................................................................................................................... 8

SAVINGS OUTREACH: AN OVERVIEW FOR ALL WOCCU PROJECT PRIMARY SOCIETIES.............. 8 SAVINGS OUTREACH: AN IN-DEPTH EXAMINATION OF TWO PRIMARY SOCIETIES .................... 9

Scale.................................................................................................................................. 9 Gender.............................................................................................................................. 12 Depth............................................................................................................................... 13

LOAN OUTREACH: AN OVERVIEW FOR ALL WOCCU PROJECT PRIMARY SOCIETIES................. 15 LOAN OUTREACH: AN IN-DEPTH EXAMINATION OF TWO PRIMARY SOCIETIES ....................... 15

Scale & Loan Purpose .................................................................................................... 15 Gender............................................................................................................................. 17 Depth............................................................................................................................... 18

IV. FINANCIAL PERFORMANCE................................................................................... 19

CONSOLIDATED PERFORMANCE OF 72 PRIMARY SOCIETIES AND 2 INDIVIDUAL PS .............. 19 Protection........................................................................................................................ 19 Effective Financial Structure .......................................................................................... 20 Asset Quality ................................................................................................................... 21 Rates of Return and Costs............................................................................................... 22 Liquidity .......................................................................................................................... 23 Signs of Growth (Annual Growth Rates) ........................................................................... 24

V. CASE STUDY CREDIT UNION PRODUCTS VS. COMPETITORS ...................... 25

SAVINGS PRODUCTS & INTEREST RATES OFFERED AT PRIMARY SOCIETIES ........................... 25 SAVINGS PRODUCTS & INTEREST RATES OFFERED BY COMPETITION.........................................26 LOAN PRODUCTS & INTEREST RATES OFFERED AT PRIMARY SOCIETIES ....................................27 LOAN PRODUCTS & INTEREST RATES OFFERED BY COMPETITION..............................................28 INSURANCE PRODUCTS OFFERED BY PRIMARY SOCIETIES..........................................................30 INSURANCE PRODUCTS OFFERED BY COMPETITION ...................................................................30

VI. CONCLUSIONS .............................................................................................................31

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EXECUTIVE SUMMARY

This case study examines the outreach and performance of primary societies in Sri Lanka. Despite Marguerite Robinson’s assertion that “credit unions tend to lend mainly to middle-class salaried borrowers,” 1 the depth of outreach of these credit unions to poor and low income Sri Lankans disproves the applicability of Robinson’s statement to the credit unions providing microfinance services in rural Sri Lanka. In Sri Lanka, there are three tiers of the credit union system: the top tier, the Federation of Thrift and Credit Cooperative Societies of Sri Lanka, more commonly known as SANASA (the FTCCS acronym in Sinhala); the second tier, the district unions; and the third tier, the primary societies. The modern SANASA movement began its revitalization in 1979. At year-end 2000, more than 8,400 registered primary societies provided one million members with savings and credit and served an additional undocumented number of non-member clients and youth with microsavings services. This report focuses on the outreach and performance of the credit union base providing an overview of 72 partner primary societies with $4.8 million in assets and an in-depth case study analysis of two primary societies, Kirimetiyana PS and Pethigodagedara PS. These credit unions are located in rural areas where coconut farming and processing is prevalent. Kirimetiyana PS serves a remote town of 5000 inhabitants. This credit union serves 441 members, 50 non-member client savers and 136 youth savers. The manager and the board describe the composition of the primary economic activity of its members as 50% agriculture day laborers, 30% public employees and 20% self-employed business people. This credit union had $101,424 in assets on December 31, 2000. Pethigodagedara PS serves three rural villages with a total population of 1500. This credit union serves 600 members, 325 non-member client savers and 260 youth savers. According to the manager and the board, 60% of the membership is involved in agriculture and small and micro agribusiness, 10% in non-agriculture microenterprise, 25% are daily agriculture wageworkers, and 5% are public employees. At year-end 2000, this credit union had $146,478 in assets. The World Council of Credit Unions, Inc. (WOCCU) in coordination with its local partner, SANASA, has worked to strengthen the performance and increase the outreach of a small subset of approximately 80 primary societies of the registered 8,400 primary societies. The intent of the technical assistance has been to bolster the credit unions’ capacity to provide microsavings and microcredit services to poor people. For the purposes of analysis for this report, average and median loan and savings deposit sizes are used as proxies for income level. The US Agency for International Development (USAID) has funded this effort with $710,000 from February 1998-September 2001. OUTREACH SAVINGS OUTREACH. As of December 2000, 72 credit unions serving 26,424 members were participating in the WOCCU Sri Lanka project. These 72 credit unions had mobilized $3.7 million in savings by year-end 2000. The average deposit size per number of deposit accounts was $58. This average deposit size is 7% of GNP per capita. There were 879 deposit accounts in Kirimetiyana PS in December 2000. The average deposit size at Kirimetiyana PS per member-client was $112 dollars, representing 14% of GNP per capita. There were

1 Robinson, Marguerite S. The Microfinance Revolution: Sustainable Finance for the Poor, May 2001, The World Bank, Washington, DC, p. 92.

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1928 deposit accounts at Pethigodagedara PS at year-end 2000. The average deposit size per member-client at Pethigodagedara PS was $97 or 12% of GNP per capita. Data from December 2000 Kirimetiyana PS Pethigodagedara PS # of Deposit Accounts 879 1928Average deposit size per member-client $112 $97Avg. deposit size as % of GNP per capita 14% 12% At Kirimetiyana PS, women have 54% of the number of deposit accounts and hold 47% of the total savings volume. At Pethigodagedara PS, women have 62% of the deposit accounts and hold 62% of the savings volume. At Kirimetiyana PS, 88% of the deposit accounts are for amounts less than $100. While these small accounts make up only 21% of the volume of deposit accounts, a mere 4.5% of accounts larger than $300 make up 64% of the savings volume. At Pethigodagedara PS, 90% of the savings accounts are for amounts less than $100. These small accounts make up only 38% of the volume of deposit accounts, while a mere 3% of accounts larger than $300 make up 43% of the savings volume. Data from December 2000 Kirimetiyana PS Pethigodagedara PS % of Number of Deposit Accounts <$100 88% 90%% of Volume of Deposit Accounts <$100 21% 38% LOAN OUTREACH. Paralleling the 40% growth in savings volume from 1998-2000, the gross loan portfolio of the 72 credit unions increased 44% from December 1998 at $2.4 million to $3.4 million in December 2000. The average loan size outstanding in 2000 was $162. The average loan size of $162 in 2000 represents 20% of GNP per capita. Both average deposit and outstanding loan sizes suggest significant depth of outreach. Kirimetiyana PS had 221 loans granted as of December 2000. At this time, the average loan size granted was $444 and the median loan size granted was $313.2 The average loan size granted represents 54% of GNP per capita and the median loan size granted represents 38% of GNP per capita. Pethigodagedara PS had 625 loans granted as of December 2000. The average loan size granted at Pethigodagedara PS was $270 while the median loan size granted was $184 in December 2000. The average loan size granted was 33% of GNP per capita and the median loan size was 22% of GNP per capita. Data from December 2000 Kirimetiyana PS Pethigodagedara PS Number of Loans Granted 221 625Average Loan Size Granted $444 $270Avg. Loan Size Granted as % of GNP per capita 54% 33%Median Loan Size Granted $313 $184Median Loan Size Granted as % of GNP per capita 38% 22% Both Kirimetiyana PS and Pethigodagedara PS have diverse loan portfolios -- their portfolios have a mix of microenterprise, agriculture, housing and consumer loan purposes.

2 NOTE: The loan information available for both Kirimetiyana PS and Pethigodagedara PS is on loans GRANTED and not loans OUTSTANDING. Outstanding balances are smaller than the full loan size granted.

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Kirimetiyana PS has four loan purposes that it records in its books: a) microenterprise; b) housing; c) consumer; and d) instant. While microenterprise business loans are 27% of the number of loans, they represent 61% of the loan portfolio volume. The loan portfolio volume is dominated by microenterprise loans. The purpose of small-sized “instant” loans is not documented. Five loan purposes are recorded at Pethigodagedara PS: a) microenterprise/business; b) agriculture; c) instant; d) housing; and e) consumer. At Pethigodagedara PS, microenterprise business loans are 47% of the number of loans and they represent 67% of the loan portfolio volume. Consumer loans make up only 5% of the number of loans at Pethigodagedara PS. At Kirimetiyana PS, women hold 56% of the number of loans granted and these loans represent 55% of the loan portfolio volume. At Pethigodagedara PS, women hold 59% of the number of loans granted and these loans represent 58% of the loan portfolio volume. At Kirimetiyana PS, loans granted for amounts less than $300 are 46% of the number of loans. Three-fourths (77%) of the loans are for less than $500. At Pethigodagedara PS loans granted for amounts less than $300 make up 69% of the number of loans. A total of 92% of the loans are for amounts less than $500. FINANCIAL PERFORMANCE This section looks at key ratios of the WOCCU PEARLS Monitoring System to assess the consolidated financial performance of all 72 primary societies and the individual performance of Kirimetiyana PS and Pethigodagedara PS. The PEARLS System examines Protection, Effective Financial Structure, Asset Quality, Rates of Return and Costs, Liquidity, and Signs of Growth. Protection: The important financial discipline of making allowances for loan losses was not practiced by the Sri Lankan primary societies until the inception of WOCCU technical assistance. Whereas provisions for loan losses were 0% at year-end 1998, by year-end 2000 all of the 72 partner credit unions had implemented the discipline of provisioning 100% for loans delinquent for more than twelve months. Effective Financial Structure: Savings finance the lending portfolios of the 72 primary societies. From 1998-2000, the credit unions have had more savings than loans outstanding. As of December 2000, there is 7.8% of external credit to total assets in these 72 consolidated credit unions. Many of the individual credit unions do not have any external credit. In order to ensure credit union possibilities for growth and to protect the institution from defaults or economic downturns, it is imperative that the institution builds up institutional capital to a minimum of 10% of institutional capital to total assets ratio. This institutional capital is separate and distinct from member share capital. The 24 credit unions in Group 1 involved in the program since late 1998, such as Kirimetiyana PS and Pethigodagedara PS, have received bi-monthly training visits from the IDU. They typically reveal strong levels of institutional capital of above 10%; however, the consolidated 72 credit unions reveal a downward trend towards insufficient capital reserves. Asset Quality: The report considers total delinquency and non-earning assets. The most worrisome aspect of credit union financial performance is delinquency (portfolio-at-risk calculated on outstanding balance at 30 days). There has been a dramatic lowering of delinquency that has resulted from training in improved credit administration and collection. Delinquency in December 1998 for these 72 credit unions was 40.5%. The consolidated delinquency in 72 credit unions was 22.0% in December 2000. Pethigodagedara PS had delinquency of 47.9% in August 1998 and reduced delinquency to 2.1%3 in 3 Pethigodagedara PS had reduced its delinquency to 2.1% at its year-end (August 2000). By November 2000, the delinquency had risen to 10.3%. This case provides the lesson that an institution can never be too confident about

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August 2000 with technical training from WOCCU. Kirimetiyana PS reduced delinquency from 11.2% in December 1998 to 4.3% in December 2000. The 72 consolidated credit unions have a non-earning assets to total assets ratio (12%) that is higher than the WOCCU International Standard of Excellence of lower than 7%. Kirimetiyana PS has not had difficulty keeping non-earning assets under 4% while Pethigodagedara PS has decreased non-earning assets from 10.5% to a respectable 6.4%. Rates of Return and Costs: The report looks at member dividends, operating expenses and return on assets. The WOCCU IDU has not succeeded in convincing the leaders of the 72 partner credit unions that they should offer a yearly dividend to their members that is, if not as high as what savings deposits earn, than at least a rate above inflation. Members typically receive no annual dividend. Compared to other microfinance institutions (MFIs), credit unions have extraordinarily low operating expense ratios – the primary ratio determining efficiency. The operating expenses of the 72 credit unions are 3.8% of average assets in 2000. At Kirimetiyana PS, operating expenses are 4.6% and at Pethigodagedara PS, operating expenses are 3.2%. This level of operating efficiency is unmatched by other small-size microfinance institutions. Credit unions are not-for-profit, member-owned financial institutions; however, not-for-profit does not mean operating at a loss. The 72 credit unions have low levels of institutional capital; they are not generating sufficient profit to maintain a strong capital position. Kirimetiyana PS and Pethigodagedara PS are each respectively earning a high enough unadjusted return on assets to maintain institutional capital at a 10% minimum. Liquidity: Among their deposit products, the Sri Lankan credit unions offer voluntary withdrawable passbook savings. For this reason, liquidity management is absolutely essential so that the institutions can maintain a delicate balance between having sufficient liquidity to meet withdrawal demand and avoiding a situation of excess liquidity wherein funds are idle. The WOCCU Standard of Excellence for Liquidity is a minimum of 15% of total deposits. The 72 credit unions had 17% in 1999 and 13.3% in 2000. In terms of the case study credit unions, Kirimetiyana PS had 16.6% liquidity and Pethigodagedara PS had 11.9% in 2000 Signs of Growth: The report considers annual growth rates in total assets and membership. The 72 partner credit unions have met and surpassed the goal of growth in assets above annualized inflation. The consolidated figure hides the variety that both Kirimetiyana PS and Pethigodagedara PS illustrate. Growth in assets from 1999 to 2000 at Kirimetiyana PS was 84.5%. Pethigodagedara PS, mirrors the growth of the 72 from 1999 to 2000 with total asset growth of 22%. One of the essential tenants of credit union philosophy is that credit unions should offer access to quality financial services to as many members as possible; therefore, growth in membership of 5% per year is a goal for credit unions around the world. The 72 partner credit unions have been growing their members by approximately 21% per year. Kirimetiyana PS increased membership by 21.8% while Pethigodagedara PS increased membership by 5.2% from 1999 to 2000. CREDIT UNION PRODUCTS & THEIR COMPETITION Both Kirimetiyana PS and Pethigodagedara PS offer four types of savings products: passbook savings, fixed deposits, youth savings and interest-bearing compulsory savings. When compared to a commercial bank (Seylan Bank) and a state-owned bank (Bank of Ceylon) that the credit unions consider as

loan repayment, particularly if its loan portfolio is susceptible to external economic shocks such as the decreased global price for coconut in the case of Pethigodagedara PS.

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competitors, one discovers that credit unions pay higher rates on passbook savings than both of these banks do. Banks pay somewhat higher rates of interest on fixed deposits; however, their minimum balances are as large as ten times higher than minimum balances required for fixed deposit accounts at the credit unions. Both credit unions pay higher rates on youth savings than Seylan Bank. Pethigodagedara PS and Bank of Ceylon pay the same rate of interest on youth savings while Kirimetiyana pays one point lower. It appears that these banks are accessible for passbook savings services to many of the same people that are served by credit unions; however, the rates tend to be lower. These banks do not offer the members of credit unions access to credit as the credit unions do. Kirimetiyana PS and Pethigodagedara PS offer the microenterprise, housing, consumer, agriculture and instant loans as previously mentioned. More noticeably different than the interest rates charged on loans between the credit unions and the banks, are the larger loan sizes offered by banks and the more stringent conditions for borrowing such as mortgages and proof of monthly income. Both of the large banks have national networks and have a wider array of savings products and credit products, yet high minimum balances required for savings accounts and large minimum loan sizes backed by collateral in many cases would prevent a typical Sri Lankan credit union member from gaining access to these services. The comparison of two primary societies with banks highlights the important role that Sri Lankan credit unions play in providing low-income people with access to interest-bearing microsavings accounts and to small amounts of credit.

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I. ROADMAP This case study examines the outreach and performance of primary societies (credit unions) in Sri Lanka. In the first volume of her recently published book, The Microfinance Revolution: Sustainable Finance for the Poor, Marguerite Robinson asserts that “credit unions tend to lend mainly to middle-class salaried borrowers.” 4 The depth of outreach of these credit unions, using average and median loan and deposit sizes as proxies for income levels, disproves the applicability of Robinson’s statement to the credit unions providing microfinance services to poor and low income Sri Lankans. The main focus of this analysis is on the outreach and performance of two primary societies, Kirimetiyana PS and Pethigodagedara PS. Section II provides a general overview of the credit union system in Sri Lanka. Section III assesses the outreach of credit unions’ savings and loan services. First, this outreach section briefly discusses the consolidated outreach of the 72 primary societies that have been involved in varying degrees with a World Council of Credit Unions, Inc. (WOCCU) institutional strengthening program (1998-01) sponsored by the Sri Lanka Mission of the US Agency for International Development (USAID). In-depth analysis of the outreach of Kirimetiyana and Pethigodagedara credit unions follows the discussion of the consolidated credit union outreach. After examining the outreach of the consolidated and the individual credit unions, Section IV reviews the financial performance of the consolidated credit unions and the two individual credit unions. The discussion focuses on an examination of 13 key financial indicators of the WOCCU PEARLS Performance Monitoring System recorded annually from 1998 to 2000. Section V considers the savings and loan products and terms of the two case study credit unions vis-à-vis those of some of their stated competitors. Section VI closes the paper with brief conclusions and a policy recommendation. Sri Lanka is a predominately rural country. More than three-fourths (76.7%) of its 19 million inhabitants live in rural areas5. The majority of the credit unions affiliated with the WOCCU technical assistance program, including Kirimetiyana and Pethigodagedara, are located in rural areas in the North West and North Central Provinces of Sri Lanka. Around the world, WOCCU, employing its model credit union methodology, traditionally works intensively with 10-20 credit unions. The project design of the Sri Lanka credit union strengthening program had a much broader scope of approximately 75 credit unions and therefore less involvement with individual credit unions. Kirimetiyana and Pethigodagedara are credit unions that have received a majority share of training from the in-country Institutional Development Unit (IDU) since these credit unions are two of 23 credit unions which have received bimonthly technical assistance visits since late 1998. These two credit unions received training in accounting, policies and procedures, delinquency and collections, PEARLS and strategic planning.

II. CREDIT UNIONS IN SRI LANKA: THE SANASA MOVEMENT

LEGAL FRAMEWORK The legal framework that authorizes Sri Lankan credit unions or primary societies to operate as financial intermediaries consists of the Cooperative Societies Law of 1972 and its two ensuing amendments (1983 and 1992). In order to operate, each credit union must register with the Register or Commissioner of Cooperative Development. Credit unions can opt for a limited or an unlimited liability structure: limited

4 Robinson, Marguerite S. The Microfinance Revolution: Sustainable Finance for the Poor, May 2001, The World Bank, Washington, DC, p. 92. 5 The World Bank Group’s World Development Indicators 2001 and The World Bank Sri Lanka Country Brief 2000 are available for reference at www.worldbank.org.

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means that members’ liability is restricted to their share capital. Individuals are eligible for full membership in credit unions at age eighteen. Credit unions in Sri Lanka are typically community-based credit unions. A credit union can serve individuals that live, work, or own real estate in the geographic area defined by the credit union’s bylaws. Credit unions are regulated by the Government of Sri Lanka’s Ministry of Cooperatives and the Cooperative Development Department within the Ministry. By law, it is the responsibility of the Registrar of Cooperative Development to audit registered credit unions once per year. As of 1992, the amended law gives the Registrar the authority to replace the board of a troubled credit union with an interim board and the Registrar may also dissolve a credit union under certain conditions. Also since 1992, government officials have been prohibited from serving on the boards or credit committees of primary societies. In addition to mobilizing savings from their members, credit unions have the legal right to provide savings services to minors and to adult non-members.

STRUCTURE & SCALE The Federation of Thrift and Credit Cooperative Societies of Sri Lanka, more commonly known as SANASA (the FTCCS acronym in Sinhala) is the national federation of Sri Lankan credit unions. In Sri Lanka, there are three tiers of the credit union system: the top tier, the national federation; the second tier, the district unions; and the third tier, the primary societies or credit unions. The modern SANASA movement began its revitalization in 1979 under the leadership of Mr. P.A. Kiriwandeniya, the head of the national federation. At year-end 2000, more than 8,400 primary societies provided one million members with savings and credit and an additional undocumented number of non-member clients with microsavings services. This report focuses on the activities at the credit union or primary society level.

OVERVIEW OF WOCCU/SANASA CREDIT UNION STRENGTHENING PROJECT The World Council of Credit Unions, Inc. (WOCCU) in conjunction with its local partner, SANASA, has worked to strengthen the performance and increase the outreach of a small subset (72) of primary societies. The intent of the technical assistance has been to bolster the credit unions’ capacity to provide microsavings and microcredit services to poor people. This work has been supported by the US Agency for International Development (USAID) in the amount of $710,000 from February 1998 through September 2001. The Institutional Development Unit (IDU), a Sri Lankan technical unit created within the national federation structure supported by WOCCU, has worked with four groups of primary societies (the groups designate the time of entry into the strengthening program). The 23 credit unions in Group 1 began receiving bimonthly technical assistance visits and/or attending training seminars in the fourth quarter of 1998. The institutional strengthening activities have been aimed at convincing credit unions to improve their operations by adopting a business focus and improving internal operations such as credit administration; by upgrading the technical skills of credit union staff and managers; and by introducing marketing and savings mobilization techniques.

BACKGROUND ON KIRIMETIYANA & PETHIGODAGEDARA PRIMARY SOCIETIES

Kirimetiyana PS Kirimetiyana credit union was registered in 1992 with 18 members. The credit union is managed by four women and governed by seven men. Kirimetiyana joined the WOCCU Sri Lanka project in late 1998. Originally, Kirimetiyana PS was registered as an unlimited liability society; however, it converted to a limited society in 1999 so that it could expand its membership.

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The manager and board estimate the composition of the primary economic activity of its members as 50% agriculture day laborers, 30% public employees and 20% self-employed business people. They classify 90% of the membership as low income. The 50% of the agriculture wageworkers labor in the local coconut fiber and tile mills where they can earn a maximum of 3000 rupees ($37.50) per month or $450 per year (55% of GNP per capita). The board estimates that most of the day laborers and many of the public employees borrow for their personal rice paddies or for small-scale coconut production using the instant loan mechanism. In order to join the credit union, an individual must buy a 100 rupee share ($1.25) and agree to save 50 rupees ($0.63) per month. The Board, elected by the General Assembly, meets weekly. The General Assembly meets on a monthly basis to approve procedures.

Pethigodagedara PS This primary society was founded in 1959 as an unlimited liability society to serve the rural village of Pethigodagedara. In 1959, moneylenders were the primary providers of financing because banks were too far away. The credit union converted to a limited liability society in 2000. The credit union is run by three staff (woman manager) and seven directors (six men and one woman director). In order to join the credit union, besides meeting the criteria of living or working in one of the three villages, a person is required to pay 300 rupees ($3.75) for one share, 145 rupees ($1.80) for admission and application fees, and commit to save a minimum of 100 rupees ($1.25) per month. Per the estimates of the manager and the board members, 60% of the membership is involved in agriculture and small and micro agribusiness, 10% in non-agriculture microenterprise, 25% are daily agriculture wageworkers, and 5% are public employees. Sri Lanka is a highly literate country, with adult illiteracy for males estimated at 5.7% and for females at 11.7%6. According to the staff, the membership is 100% literate and an estimated 90% of members have a high school education.

III. OUTREACH

SAVINGS OUTREACH: AN OVERVIEW FOR ALL WOCCU PROJECT PRIMARY SOCIETIES In terms of scale, individual Sri Lankan credit unions are very small, rarely numbering over 500 members per primary society. In addition to their members, these credit unions serve non-member clients (adults and youth) that receive savings services only. The credit unions are small, in part due to legal constraints. As mentioned, there are two legal structures for all cooperatives (including credit unions), limited or unlimited liability registration. If a credit union is unlimited, then its membership is restricted to a limited geographical community, typically one to three small villages. The limited liability credit unions have more flexibility in broadening their fields of membership; however, it was only in July 1999 that several Cooperative Development Commissioners issued a circular granting special access for those unlimited primary societies that wanted to convert to limited societies in an expeditious manner.7 As of December 31, 2000, there were 72 credit unions serving 26,424 members participating in the WOCCU Sri Lanka project. These 72 credit unions had mobilized $3,706,036 in savings by year-end 2000. In December 1998, 70 partner credit unions had mobilized $2,628,881 in savings8. This two-year period reveals an increase of 41% in the volume of savings and reflects the intent to encourage savings mobilization. In December 2000, there were three member savers (63,947) for every member borrower (21,228).

6 The World Bank Group. World Development Indicators 2001. Available for reference at www.worldbank.org 7 Grace, David and Kitsch, Lois, WOCCU Sri Lanka Mid-Term Evaluation, November 1999, pp. 3-4. 8 Statistical Report for USAID prepared by WOCCU on SANASA Primary Societies 1998-2000.

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There were 52,597 savings deposit accounts in 70 partner credit unions in December 1998. The number of accounts had increased by 19.3% to 63,947 deposit accounts in 72 partner credit unions in December 2000. These credit unions are providing microsavings services. The average deposit size per member is $139; however, this figure does not take into account hundreds if not thousands of non-member clients and youth savers. The average deposit size per number of deposit accounts increased slightly from $50 in 1998 to $58 in 2000.

SAVINGS OUTREACH: AN IN-DEPTH EXAMINATION OF TWO PRIMARY SOCIETIES

Scale Kirimetiyana PS served 627 clients (441 members, 50 non-members, and 136 youths) in December 2000. It has increased its membership by 55% from 284 in December 1998. There are 5,000 people that reside in rural Kirimetiyana. The adults living and working in this small town are the potential field of membership for Kirimetiyana. Kirimetiyana has 879 deposit accounts that belong to members, non-member clients and youth under the age of eighteen. Since Kirimetiyana served a total of 627 clients on December 8, 2000, the fact that there are 879 deposit accounts illustrates that there are members-clients that have multiple savings accounts; for example, a passbook account and a compulsory savings account. The most popular account is the passbook savings. The chart below illustrates that the number of accounts is concentrated in passbook and compulsory savings (mandatory deposits of $.63 per month earn 9% interest as of December 2000) while the majority of deposit volume is concentrated in fixed deposits. The average deposit size at Kirimetiyana PS per member-client is $112 dollars, representing 14% of GNP per capita. It is interesting to note in the chart below that the average size per savings product differs substantially from the median size of each savings product. This trend is indicative of large numbers of microsavings accounts and smaller numbers of larger savings accounts that increase the average savings deposit size.

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KIRIMETIYANA PS 12/08/00

TYPES OF SAVINGS DEPOSIT ACCOUNTS

Compulsory Savings

Passbook Savings

Fixed Deposits

Youth Savings

TOTAL

Number of Deposit Accounts 335 354 54 136 879% of Total Number 38.1% 40.3% 6.1% 15.5% 100%Volume of Total Deposits $5,619 $24,288 $39,157 $1,260 $70,325% Volume of Total Deposits 8.0% 34.5% 55.7% 1.8% 100%Average Deposit Size per Product

$17 $69 $725 $9

Median Deposit Size per Product

$14 $23 $233 $0.90

Average Deposit Size per Number of Deposit Accounts

$80

Average Deposit Size per Member-Client (627 clients)

$112

Average Deposit Size per Member-Client/GNP per Capita*

14%

*GNP per capita is $820 per The World Bank Group’s World Development Indicators 2001. Pethigodagedara PS served 600 members at year-end 2000, in addition to 325 non-members and 260 youths. Pethigodagedara serves three villages with a total population of 1500 people. Given that only residents or people working in the three villages can be members (non-resident clients can be offered savings services), the penetration rate of the credit union is substantial, over 30% of members. Pethigodagedara illustrates a less marked concentration of savings volume in fixed deposits than Kirimetiyana. Pethigodagedara has a larger membership and a higher compulsory savings requirement per member than Kirimetiyana (100 rupees or $1.25 per month that earned 8% interest as of December 2000); therefore, it has a larger concentration of volume in the compulsory savings category than the passbook savings. Pethigodagedara served 1185 member-clients in December 2000. Given that there are 1928 deposit accounts, there are members-clients that have multiple savings accounts; for example, a passbook account and a compulsory savings account. The average deposit size per member-client (including members, non-members and youth) is $97 or 12% of GNP per capita. Pethigodagedara also displays the trend that the average size of deposits of each savings product is significantly higher than the median.

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PETHIGODAGEDARA PS 12/12/00

TYPES OF SAVINGS DEPOSIT ACCOUNTS

Compulsory Savings

Passbook Savings

Fixed Deposits

Youth Savings

TOTAL

Number of Deposit Accounts 1031 587 50 260 1928% of Total Number 53.48% 30.45% 2.59% 13.49% 100%Volume of Total Deposits $43,093 $33,463 $29,875 $9,004 $115,435% Volume of Total Deposits 37.33% 28.99% 25.88% 7.80% 100%Average Deposit Size per Product $42 $57 $597 $35 Median Deposit Size per Product $31 $8 $250 $16 Average Deposit Size per Number of Accounts

$60

Average Deposit Size per Member-Client (1,185 Member-Clients)

$97

Average Deposit Size per Member-Client/GNP per Capita*

12%

*GNP per capita is $820 per The World Bank Group’s World Development Indicators 2001. Kirimetiyana PS, registered in 1992, is a young credit union compared to many of the other primary societies affiliated to the WOCCU Sri Lanka project. Most of the project credit unions have been registered for at least fifteen years. Members of the 18-34 age group have the largest number of deposit accounts (34%) and hold 20% of the volume of savings in Kirimetiyana PS while the 35-49 age group has 25% of the number of accounts and holds the largest volume of savings deposits (32%). Looking at the number of accounts, vis-à-vis the volume of accounts, the 50-64 age group that has 17.1% of the number of accounts holds the largest proportional volume of savings (29.6%). Similarly, the 65+ age group holds 8% of the accounts that represent 16% of the savings volume. The youth accounts that comprise 15% of the number of accounts make up only 1.8% of the volume of accounts.

KIRIMETIYANA PS 12/08/00

DEPOSIT ACCOUNTS BY AGE GROUPS

Number of

Accounts

Compulsory Savings

Passbook SavingsFixed

DepositsYouth

Savings

Total Savings

Deposits US$

0-17 136 $0 $0 $0 $1,260 $1,26018-34 299 $2,163 $8,893 $3,002 $0 $14,05835-49 220 $1,818 $7,694 $13,239 $0 $22,75150-64 151 $1,505 $5,052 $14,287 $0 $20,84465+ 73 $134 $2,649 $8,629 $0 $11,412Total 879 $5,619 $24,288 $39,157 1,260 $70,325 In Pethigodagedara PS, registered in 1959, the 35-49 age group makes up the bulk of the credit union’s number of accounts (37%) and volume of savings deposits (40%). This group is followed by the 18-34 age group that has almost as many accounts (32%), but less of the deposit volume (25%). The 50-64 age group comprises 12% of the number of accounts yet it has 19% of the deposit volume. Youth accounts make up 13% of the number of accounts and 8% of the deposit volume.

12

PETHIGODAGEDARAPS 12/12/00

DEPOSIT ACCOUNTS BY AGE GROUPS

Number of

Accounts

Compulsory Savings

Passbook Savings Fixed

Deposits Youth

Savings

Total Savings

Deposits US$

0-17 260 $0 $0 $0 $9004 $900418-34 616 $14,121 $11,370 $3,350 $0 $28,84135-49 706 $19,166 $11,435 $15,706 $0 $46,30750-64 236 $6,215 $8,356 $7,669 $0 $22,24065+ 110 $3,592 $2,302 $3,150 $0 $9044Total 1928 $43,093 $33,463 $29,875 $9004 $115,435*Row and Column totals off by one dollar in certain cases due to rounding and exchange rate conversion. This breakdown by age groups demonstrates the life cycle patterns of savers. In their younger years, members are investing in their businesses, improving their homes, raising families and are not saving as much as the older members who are more established and whom need to set aside money for old age when they will no longer be working. Both credit unions are providing people of all ages, at different stages in the life cycle of financial needs, with access to microsavings services.

Gender

Kirimetiyana PS had 441 members at year-end 2000. Women members form the majority in the credit union. There were 224 women (51%) and 217 men (49%) members in December 2000. Of the 879 deposit accounts, 472 deposit accounts corresponded to women (54%) and 407 accounts belonged to men (46%). At Kirimetiyana PS, men have less of the numbers of deposit accounts; however, they have slightly more of the savings volume than the women. Women’s savings make up 47% of the total savings volume. The gender difference is most noticeable in the fixed deposit product where men have 58% of the savings volume of the fixed deposits. The fixed deposits have an average size of $725 and a median size of $233. This difference reflects the results of Kirimetiyana PS’s marketing efforts in the last two years to attract the savings of successful entrepreneurs in the Kirimetiyana town. KIRIMETIYANA PS DEPOSITS BY GENDER

MEN WOMEN TOTAL 12/08/00

Number of Deposit Accounts 407 472 879Percentage of Number of Accounts 46.3% 53.7% 100%Volume of Deposits $37,488 $32,836 $70,325Percentage of Volume of Deposits 53.3% 46.7% 100%

13

KIRIMETIYANA PS 12/08/00

DEPOSIT ACCOUNTS BY GENDER

Number of

Accounts

Compulsory Savings

Passbook SavingsFixed

DepositsYouth

Savings

Total Savings

Deposits US$

Men 407 $2,622 $11,622 $22,585 $660 $37,488Women 472 $2,997 $12,666 $16,573 $600 $32,836Total 879 $5,619 $24,288 $39,157 $1,260 $70,325*Row and Column totals off by one dollar in certain cases due to rounding and exchange rate conversion. Pethigodagedara PS had 600 members, 312 (52%) were women and 288 (48%) were men as of December 2000. Of the 1928 total deposit accounts, 62% of these corresponded to women, while men had 38% of the number of accounts. In the case of Pethigodagedara, the percentages of the number of accounts and the volume of deposit accounts are almost identical. Pethigodagedara differs from Kirimetiyana additionally in the sense that women are the dominant savers in the fixed deposits category. Women’s deposits make up 64% of the volume of fixed deposit savings. At Pethigodagedara PS, the average size fixed deposit account is $597 and the median fixed deposit account size is $250. PETHIGODAGEDARA PS DEPOSITS BY GENDER

MEN WOMEN TOTAL 12/12/00

Number of Deposit Accounts 732 1196 1928Percentage of Number of Accounts 38.0% 62.0% 100%Volume of Deposits $44,260 $71,176 $115,435Percentage of Volume of Deposits 38.3% 61.7% 100%

PETHIGODAGEDARAPS 12/12/00

DEPOSIT ACCOUNTS BY GENDER

Number of

Accounts

Compulsory Savings

Passbook Savings Fixed

Deposits Youth

Savings

Total Savings

Deposits US$

Men 732 $14,636 $14,618 $10,674 $4331 $44,260Women 1196 $28,458 $18,845 $19,201 $4676 $71,176Total 1928 $43,093 $33,463 $29,875 $9,004 $115,435*Row and Column totals off by one dollar in certain cases due to rounding and exchange rate conversion.

Depth As has already been suggested by the brief discussion of the depth of outreach of the 72 consolidated credit unions, Kirimetiyana PS and Pethigodagedara PS confirm the depth of outreach of microsavings services that these credit unions offer to poor and low income members and clients. Both credit unions are employing the strategy of attracting new savers that have the capacity to save larger amounts so that the credit unions can decrease the transaction costs they incur from predominately serving interest-bearing microsavings accounts that are less than $25.

14

By paying competitive interest rates, particularly on fixed deposits, both credit unions have been able to mobilize a few, 30 and 34 respectively, fixed deposit accounts greater than $500. These larger accounts spread fixed costs over larger volume and reduce the costs of serving small accounts. At Kirimetiyana PS, 88% of the deposit accounts are for amounts less than $100. While these small accounts make up only 21% of the volume of deposit accounts, a mere 4.5% of accounts larger than $300 make up 64% of the savings volume. KIRIMETIYANA PS DEPTH OF SAVINGS OUTREACH: 12/08/00

$0-25 $25-50 $50-100 $100-300 $300-500

>500 TOTAL

Number of Deposit Accounts

578 112 86 63 10 30 879

Percentage of Number of Deposit Accounts

65.8% 12.7% 9.8% 7.2% 1.1% 3.4% 100%

Volume of Deposits $4,687 $4,019 $5,849 $10,629 $4,095 $41,045 $70,325Percentage of Volume 6.7% 5.7% 8.3% 15.1% 5.8% 58.4% 100%

KIRIMETIYANA PS 12/08/00

SIZE DISTRIBUTION OF DEPOSIT ACCOUNTS

Number of

Accounts

Compulsory Savings

Passbook SavingsFixed

Deposits Youth

Savings

Total Savings

Deposits US$

$0-$25 578 $3,012 $1,208 $71 $395 $4,687$25-50 112 $1,806 $1,630 $128 $455 $4,019$50-$100 86 $802 $4,441 $513 $94 $5,849$100-$300 63 $0 $8,675 $1,639 $316 $10,629$300-$500 10 $0 $2,940 $1,156 $0 $4,095$500+ 30 $0 $5,395 $35,651 $0 $41,045Total 879 $5,619 $24,288 $39,157 $1,260 $70,325*Row and Column totals off by one dollar in certain cases due to rounding and exchange rate conversion. At Pethigodagedara PS, 90% of the savings accounts are for amounts less than $100. These small accounts make up 38% of the volume of deposit accounts, while only 3% of accounts larger than $300 make up 43% of the savings volume. The disparity between the distribution of accounts by size and the volume distribution is less dramatic than at Kirimetiyana PS, yet is still notable and reflects the trend of serving a diverse membership in order to lower transaction costs. PETHIGODAGEDARA DEPTH OF SAVINGS OUTREACH: 12/12/00

$0-25 $25-50 $50-100 $100-300 $300-500

>500 TOTAL

Number of Deposit Accounts

1055 404 276 136 23 34 1928

Percentage of Number of Deposit Accounts

54.7% 20.9% 14.3% 7.1% 1.2% 1.8% 100%

Volume of Deposits $9,723 $15,227 $18,403 $22,295 $9,103 $40,688 $115,435Percentage of Volume 8.4% 13.2% 15.9% 19.3% 7.9% 35.3% 100%

15

PETHIGODAGEDARAPS 12/12/00

SIZE DISTRIBUTION OF DEPOSIT ACCOUNTS

Number of

Accounts

Compulsory Savings

Passbook Savings Fixed

Deposits Youth

Savings

Total Savings

Deposits US$

$0-$25 1055 $5022 $2989 $247 $1465 $9,723$25-50 404 $11,983 $1714 $50 $1480 $15,227$50-$100 276 $13,376 $2770 $184 $2073 $18,403$100-$300 136 $10,907 $6636 $1313 $3439 $22,295$300-$500 23 $1,806 $4253 $3044 $0 $9,103$500+ 34 $0 $15,102 $25,038 $548 $40,688Total 1928 $43,093 $33,463 $29,875 $9004 $115,435*Row and Column totals off by one dollar in certain cases due to rounding and exchange rate conversion.

LOAN OUTREACH: AN OVERVIEW FOR ALL WOCCU PROJECT PRIMARY SOCIETIES Paralleling the growth of 40% of savings volume, the gross loan portfolio of the 72 primary societies increased 44% from $2,387,360 in December 1998 to $3,447,248 in December 20009. Credit unions did not track the total number of loans outstanding in 1998; however, the number of loans outstanding had increased 31.5% from December 1999 (16,132 loans) to December 2000 (21,228 loans). The average loan size outstanding in 2000 was $162. With GNP per capita estimated at $820 for 2000, the average loan size of $162 in 2000 represents 20% of GNP per capita. This average loan size is slightly smaller than the average loan size outstanding of $166 in 1999. The loan portfolio, as the savings portfolio discussed above, suggests that the Sri Lankan credit unions serve the poor with microfinance services.

LOAN OUTREACH: AN IN-DEPTH EXAMINATION OF TWO PRIMARY SOCIETIES

Scale & Loan Purpose Kirimetiyana PS had 221 loans granted on its books on the day of the author’s site visit in December 2000. The fact that Kirimetiyana serves clients that can save only (50 non-member savers) and offers youth savings services (136 accounts) helps to provide the credit union with the resources to finance its lending portfolio. In total there are roughly three savers (627) for each one borrower (221). There are 441 members that have the right to borrow and save; thus, the member savers to member borrowers ratio is 2:1. The average loan size granted is $444 and the median loan size granted is $31310 at Kirimetiyana PS in December 2000. The average loan size granted is 54% of GNP per capita and the median loan size granted is 38% of GNP per capita. These loan sizes are larger than the consolidated 72 credit union average loan size outstanding of $162 for December 2000. These larger loans may be indicative of more flexible loan products that meet the size demands of member borrowers. Many of the primary societies in Sri Lanka have yet to adopt savings driven growth and continue to rely on shares for financing portions of their loan portfolios. Often these same credit unions do not have the liquidity to fund larger loan sizes. KIRIMETIYANA PS 12/08/00 Average Loan Size Median Loan Size

9 Statistical Report for USAID prepared by WOCCU on SANASA Primary Societies 1998-2000. 10 NOTE: The loan information available for both Kirimetiyana PS and Pethigodagedara PS is on loans GRANTED and not loans OUTSTANDING. Outstanding balances are naturally smaller than the full loan size granted, yet the Microfinance Industry typically reports on loan portfolios using outstanding balances.

16

LOANS GRANTED US $ 12/08/00 12/08/00 Number of Loans 221 $444 $313Volume of Loans $98,119Average Loan Size/GNP per capita* 54%Median Loan Size/GNP per capita 38%*GNP per capita is $820 per The World Bank Group’s World Development Indicators 2001. Both Kirimetiyana PS and Pethigodagedara PS have diverse loan portfolios -- their portfolios have a mix of microenterprise, consumer, housing and agriculture loan purposes in both the number of loans and the volume of the loan portfolio that these loans represent. Kirimetiyana has four loan purposes recorded on its books: a) consumer; b) business/microenterprise; c) instant; and d) housing. The purpose of the small-sized instant loans (three times the amount of a member’s savings account at 4% per month for no more than four months) is not recorded at the credit union. The Manager estimates that most of the instant loans are for agriculture or ag-related microenterprise. Kirimetiyana, as mentioned earlier, has at least 50% of its members that work as day laborers in the coconut mills and tile production businesses that dominate the economy of the local area. In terms of the number of loans, consumer loans are the most prevalent at 43% followed by instant loans at 28% and microenterprise at 27%. While microenterprise business loans are 27% of the number of loans, they represent 61% of the loan portfolio volume. The loan portfolio volume is dominated by microenterprise loans. KIRIMETIYANA PS LOAN PURPOSE 12/08/00

Business/ MicroE

Housing Consumer Instant* Total

Number of Loans 60 3 96 62 221Percentage of Number of Loans

27.1% 1.4% 43.4% 28.1% 100%

Volume of Loans $59,625 $3,375 $23,103 $12,016 $98,119Percentage of Loan Portfolio

60.8% 3.4% 23.6% 12.2% 100%

Average Loan Size Granted per purpose

$994 $1,125 $241 $194

*The purpose of the Instant loan category is not known. Management estimates that purposes include agriculture and agribusiness, commercial, and consumer purposes. Pethigodagedara PS had 625 loans granted on its books when the author visited in December 2000. Pethigodagedara serves a notable number of adult clients that save only (325 non-member savers) and offers youth savings services (260 accounts). These savings help to provide the credit union with the resources to finance its lending portfolio given that Pethigodagedara does not have any external credit. In total there are roughly two savers (1185) for each loan granted (625). There are 625 loans granted yet there are only 600 members at Pethigodagedara PS and presumably not all members have loans. These numbers point to the fact that some members have been granted multiple loans; for example, microenterprise and home improvement. The average loan size granted at Pethigodagedara PS was $270 while the median loan size granted was $184 in December 2000. The average loan size granted is 33% of GNP per capita and the median loan size is 22% of GNP per capita. These loan sizes are smaller than Kirimetiyana PS even though the largest loan size possible at Kirimetiyana is $2500 and the largest loan size possible at

17

Pethigodagedara is $5625. In fact, there is only one loan granted on the books at Pethigodagedara for this maximum loan size of $5625 (for a self-employed business purpose). PETHIGODAGEDARA PS 12/12/00 LOANS GRANTED US $

Average Loan Size

Median Loan Size

Number of Loans 625 $270 $184Volume of Loans $ $168,971Average Loan Size/GNP per capita 33%Median Loan Size/GNP per capita 22%*GNP per capita is $820 per The World Bank Group’s World Development Indicators 2001. There are five loan purposes recorded at Pethigodagedara PS: a) microenterprise/business; b) instant; c) housing; d) instant; and e) consumer. In contrast to Kirimetiyana PS that had the largest number of loans in the consumer purpose, at Pethigodagedara PS consumer loans make up only 5% of the number of loans. At Pethigodagedara PS, microenterprise business loans are 47% of the number of loans and they represent 67% of the loan portfolio volume. PETHIGODAGEDARA LOAN PURPOSE 12/12/00

Agriculture Business/ MicroE

Housing Consumer Instant* Total

Number of Loans 41 291 117 32 144 625Percentage of Number of Loans

6.6% 46.6% 18.7% 5.1% 23% 100%

Volume of Loans $2,806 $112,911 $29,238 $2,962 $21,054 $168,971Percentage of Loan Portfolio

1.6% 66.8% 17.3% 1.8% 12.5% 100%

Average Loan Size Granted per purpose

$68 $388 $250 $93 $146

*The purpose of the Instant loan category is not known. Management estimates that purposes include agricultural, commercial, and consumer purposes.

Gender Differing slightly from the characteristics of the savings portfolio by gender, in both Kirimetiyana PS and Pethigodagedara PS the percentage of the number of loans parallels the volume of the loan portfolio by gender. Women in both credit unions have the majority of the number of loans and a majority of the loan portfolio volume. At Kirimetiyana PS, women hold 56% of the number of loans granted and these loans represent 55% of the loan portfolio volume. KIRIMETIYANA PS LOAN PORTFOLIO BY GENDER*

MEN WOMEN TOTAL 12/08/00

Number of Loans 98 123 221Percentage of Number of Loans 44% 56% 100%Volume of Loans $44,225 $53,894 $98,119Percentage of Loan Portfolio Volume 45% 55% 100%*All Loan Portfolio information in this report refers to Loans Granted not Loans Outstanding.

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At Pethigodagedara PS, women hold 59% of the number of loans granted and these loans represent 58% of the loan portfolio volume. PETHIGODAGEDARA PS LOAN PORTFOLIO BY GENDER*

MEN WOMEN NOT REPORTED TOTAL 12/12/00

Number of Loans 257 367 1 625Percentage of Number of Loans 41.1% 58.7% 0.2% 100%Volume of Loans $70,568 $98,154 $249 $168,971Percentage of Loan Portfolio Volume 41.8% 58.1% 0.1% 100%*All Loan Portfolio information in this report refers to Loans Granted not Loans Outstanding.

Depth Like the savings portfolio, the loan portfolios at both Kirimetiyana and Pethigodagedara credit unions signals depth outreach. At Kirimetiyana PS, the loan sizes range from $12.50 to $2500. At Pethigodagedara PS, the loan sizes range from $12.50 to $5625. At Kirimetiyana PS, loans granted for amounts less than $300 are 46% of the number of loans. Three-fourths (77%) of the loans are for less than $500. Kirimetiyana is an example of where a few loans (16% of the number of loans) total more than $1000 and drive up the average loan size granted. The depth of the lending activities can be hidden if one does not examine loan size distribution in addition to looking at average loan sizes. The median loan size of $313 is much more representative than the $444 average loan size granted. KIRIMETIYANA PS LOAN SIZE DISTRIBUTION:

DEPTH OF OUTREACH* 12/08/00 US$

$1-300 $301-500

$501-1,000

$1,001-2,000

$2,001-3,000

Total

Number of Loans 102 69 15 27 8 221Percentage of Number of Loans 46% 31% 6.8% 12.2% 4% 100%Volume of Loans $11,059 $22,000 $10,625 $34,687 $19,748 $98,119Percentage of Portfolio Volume 11.3% 22.4% 10.8% 35.4% 20.1% 100%*Loan size ranges from $12.50 to $2500 at Kirimetiyana PS. At Pethigodagedara PS loans granted for amounts less than $300 make up 69% of the number of loans. A total of 92% of the loans are for amounts less than $500. At Pethigodagedara only 50 of 625 loans granted are for amounts greater than $500. While 431 loans less than $300 represent 33% of the loan portfolio volume, 4 loans greater than $3000 represent 10% of the loan portfolio volume. PETHIGODAGEDARA PS LOAN SIZE DISTRIBUTION

DEPTH OF OUTREACH* 12/12/00

$1-300 $301-500 $501-1,000

$1,001-2,000

$2,001-3,000

>3,001 TOTAL

Number of Loans 431 144 26 20 0 4 625Percentage of Number of Loans

69.0% 23.0% 4.2% 3.2% 0% 0.6% 100%

Volume of Loans $55,638 $49,521 $20,750 $25,562 $0 $17,500 $168,971Percentage of Loan Portfolio

33% 29.3% 12.3% 15.1% 0% 10.3% 100%

*Loan size ranges from $12.50 to $5625 at Pethigodagedara PS.

19

IV. FINANCIAL PERFORMANCE

The SANASA movement began in Sri Lanka in 1906. In 1979, when a new revitalization phase was launched, the Cooperative Development Department consolidated the movement into 1,20011 primary societies. In December 2000, the national federation reported that there were 8,445 primary societies operating in Sri Lanka12. The Sri Lankan credit union system as a whole services hundreds of thousands of members with varying degrees of sustainability; however, many of these primary societies were established with a social or charitable mission rather than operating with a business orientation. The WOCCU effort in Sri Lanka has placed emphasis on improving the financial performance standards of the subset of credit unions that have been incorporated into the technical assistance program over its three-year duration.

CONSOLIDATED PERFORMANCE OF 72 PRIMARY SOCIETIES AND 2 INDIVIDUAL PS This section looks at key ratios of the WOCCU PEARLS Monitoring System to assess the consolidated financial performance of all 72 primary societies and the individual performance of Kirimetiyana PS and Pethigodagedara PS. The PEARLS System examines Protection, Effective Financial Structure, Asset Quality, Rates of Return and Costs, Liquidity, and Signs of Growth. The full PEARLS reports of all 41 ratios for the consolidated credit unions and the two individual credit unions are found in the annex of this report. In this section please note that the year-end for the majority of the primary societies is December 31; however, Pethigodagedara PS has its year-end on August 31. Although the charts below have December year-end dates, please note that the information recorded for Pethigodagedara PS is for August 31 rather than December 31.

Protection The important financial discipline of making allowances for loan losses was not practiced by the Sri Lankan primary societies until the inception of WOCCU technical assistance. Whereas provisions for loan losses were 0% at year-end 1998, by year-end 2000 all of the 72 partner credit unions had implemented the discipline of provisioning 100% for loans delinquent for more than twelve months. P1 Allowance for Loan Losses /Allowances required for Loans Delinquent > 12 Months

GOAL 12-98 12-99 12-00

72 Consolidated Primary Societies 100.0% 0.0% 23.2% 100.0%Kirimetiyana PS 100.0% 0.0% 100.0% 100.0%Pethigodagedara PS 100.0% 0.0% 0.0% 100.0% In terms of provisions for loss losses for loans delinquent between one and twelve months, the credit unions have overall complied with the discipline imposed by national regulations of setting aside 15% of the amount of loans delinquent between 30-90 days and an average of 35% of the amount of loans delinquent between 91-364 days. None of the credit unions had previously practiced this discipline. Given the fact that delinquency is the most serious concern impeded credit union sustainability in Sri Lanka, these provisions serve as the first line of defense in protecting the institution and its members against borrower default. At year-end 2000, the P2 ratio of 20% at Kirimetiyana PS was somewhat lower than the standards of excellence goal, which given Sri Lanka legal requirements would be approximately 27% (see footnote12). 11 Grace, David and Kitsch, Lois, WOCCU Sri Lanka Mid-Term Evaluation, November 1999, pp. 3-4. 12 Author interview with L.B. Dasanayake, General Manager, SANASA, December 2000.

20

P2 Net Allowance for Loan Losses/ Allowances Required for Loans Delinquent < 12 Months

GOAL13 12-98 12-99 12-00

72 Consolidated Primary Societies 35.0% 0.0% 0.0% 27.6%Kirimetiyana PS 35.0% 0.0% 35.0% 20.1%Pethigodagedara PS 35.0% 0.0% 0.0% 27.5%

Effective Financial Structure Savings finance the lending portfolios of the 72 primary societies; from 1998-2000, the credit unions have had more savings than loans outstanding14. There is 7.8% of external credit to total assets in these 72 consolidated credit unions. Many of the individual credit unions do not have any external credit at all. WOCCU works with its partner credit unions so that they each have a financial structure characterized by an asset to liabilities match of approximately 70-80% of loans to total assets financed by approximately 70-80% of deposits to total assets. In most developing countries, the challenge for WOCCU partner credit unions is to mobilize sufficient savings to finance their loan portfolios. By contrast, in Sri Lanka most of the partner credit unions have a higher savings/ total assets ratio than a loans/total assets ratio. In the Sri Lankan context, technical assistance and training has been directed towards offering appropriately priced credit and savings products so that the match in the 70-80% range can be maintained.

$0$1,000,000$2,000,000$3,000,000$4,000,000

1998 1999 2000

Savings & Loans in 72 CUs

L-Gross Loans Outstanding R-Savings Mobilized

E1 Net Loans/Total Assets GOAL 12-98 12-99 12-00 72 Consolidated Primary Societies 70.0-80.0% 70.3% 64.8% 65.9%Kirimetiyana PS 70.0-80.0% 59.7% 72.7% 74.6%Pethigodagedara PS 70.0-80.0% 76.3% 71.9% 75.3% The consolidated primary societies have lost a bit of ground in their loan portfolios as a portion of total assets. In contrast, the two individual credit unions have managed to keep net loans/total assets in the goal range since 1999. The WOCCU/SANASA Institutional Development Unit (IDU) worked with Kirimetiyana PS on business planning, setting targets for expanded lending.

13 WOCCU International Standard of Excellence for P2, allowances for loans delinquent between 1-12 months is an average of 35%. In Sri Lanka, the Cooperative Development Department requires that Sri Lankan credit unions provision 15% for loans delinquent between one and three months; 35% for loans delinquent between three and twelve months. This results in a goal of approximately 27% for P2 for Sri Lankan primary societies. 14 Statistical Report for USAID prepared by WOCCU on SANASA Primary Societies 1998-2000.

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E5 Savings Deposits/Total Assets GOAL 12-98 12-99 12-00 72 Consolidated Primary Societies 70.0-80.0% 75.1% 82.2% 78.2%Kirimetiyana PS 70.0-80.0% 74.1% 76.3% 76.0%Pethigodagedara PS 70.0-80.0% 83.8% 82.5% 77.6% Both the consolidated and individual credit unions have met the goal of maintaining a savings to total asset ratio of 70-80%. Some of the credit unions in the group of 72 have savings to total asset ratios as high as 87-89% yet their net loans to total assets can be in the 60-65% range. Loans are a credit union’s highest yielding asset. It is the interest earned on loans that allows credit unions to pay competitive interest rates on savings deposits; for this reason, training seminars have been offered by the IDU to the credit unions on pricing and asset liability management. E8 Institutional Capital: Unencumbered Reserves and Retained Earnings / Total Assets

GOAL 12-98 12-99 12-00

72 Consolidated Primary Societies >= 10.0% 7.1% 1.8% 1.5%Kirimetiyana PS >= 10.0% 13.4% 13.7% 11.7%Pethigodagedara PS >= 10.0% 10.7% 8.1% 11.5% In order to ensure credit union possibilities for growth and to protect the institution from defaults or economic downturns, it is imperative that the institution builds up institutional capital. This institutional capital is separate and distinct from member share capital. Member share equity is not permanent capital because it can be withdrawn when a member terminates his/her membership. It is a difficult challenge to set aside adequate capital reserves and there is great variety in the performance results across the 72 credit unions that have had widely varying degrees of technical assistance. Credit unions in Group 1 such as Kirimetiyana PS and Pethigodagedara PS that have received bi-monthly training visits from the IDU typically reveal strong levels of institutional capital; however, the consolidated 72 credit unions reveal a downward trend towards dangerously insufficient capital reserves.

Asset Quality

A1 Total Loan Delinquency/ Gross Loan Portfolio

GOAL 12-98 12-99 12-00

72 Consolidated Primary Societies <= 5.0% 40.5% 30.7% 22.0%Kirimetiyana PS <= 5.0% 11.2% 2.1% 3.8%Pethigodagedara PS <= 5.0% 47.9% 16.6% 2.1% The most worrisome aspect of credit union financial performance is delinquency (portfolio-at-risk calculated on outstanding balance at 30 days). There has been a dramatic lowering of delinquency that has resulted from training in improved credit administration and collection policies and convincing leaders that subsidizing borrowers that do not repay loans at savers expense does not result in a community social benefit. Delinquency at project start-up for these 72 PS was 40.5%. The consolidated delinquency in 72 credit unions was 22.0% in December 2000. The high delinquency ratio for the 72 credit unions reflects the social versus business orientation that is a source of tension among credit union managers and leaders when making decisions to toughen up collection and credit administration procedures. Also, many credit unions do not write-off bad loans. It was illegal for Sri Lankan credit unions to charge-off delinquent loans until 1997 and many credit unions have not adopted what is now a legally acceptable practice of charging off loans that are delinquent more than 12 months.

22

The 22.0% consolidated delinquency ratio is an improvement from 40.5% two years earlier, yet it remains significantly higher than the WOCCU Standard of Excellence of less than 5%. Fortunately, as discussed under Protection, the credit unions are fully provisioned for loans delinquent over 12 months. What is most interesting to note is how a credit union can manage to control delinquency after receiving basic training in calculating delinquency using the portfolio-at-risk calculation and becoming serious about appropriate credit analysis and strict collections. Pethigodagedara PS had delinquency of 47.9% in August 1998 and reduced delinquency to 2.1%15 in August 2000 with technical training from the WOCCU IDU. Prior to becoming a partner in the WOCCU technical assistance program, the board and staff of Pethigodagedara PS calculated delinquency based on late payments only instead of the outstanding balance. Also, it did not consider a loan delinquent until 90 days after a payment was missed. A2 Non-Earning Assets/ Total Assets GOAL 12-98 12-99 12-00 72 Consolidated Primary Societies <= 7.0% 10.2% 11.8% 12.4%Kirimetiyana PS <= 7.0% 3.6% 3.1% 3.4%Pethigodagedara PS <= 7.0% 10.5% 7.5% 6.4% It is important for credit unions to maximize earning assets; thus, to keep their non-earning assets to a minimal percentage of total assets. The 72 consolidated credit unions have an A2 ratio that is higher than the WOCCU Standard of Excellence of less than 7%. Kirimetiyana PS has not had difficulty controlling its A2 ratio while Pethigodagedara PS has decreased non-earning assets from 10.5% to 6.4%.

Rates of Return and Costs

R7 Total Interest (Dividend) Cost on Shares/ Average Member Shares

GOAL 12-98 12-99 12-00

72 Consolidated Primary Societies Market Rates >= Interest cost on deposits

0.1% 0.0% 0.1%

Kirimetiyana PS Market Rates >= Interest cost on deposits

0.0% 0.0% 1.6%

Pethigodagedara PS Market Rates >= Interest cost on deposits

0.0% 0.0% 0.0%

Board members and managers interviewed expressed a consensus that, in their view, a member share is that individuals “contribution” to having access to financial services. The limited exposure of the WOCCU IDU to most of these 72 credit unions has not yielded the influence in convincing the credit unions leaders that they should offer a yearly dividend to their members that if not as high as what savings deposits earn, than at least a rate above inflation. As seen in the R7 chart, this “ideological” shift has not taken place during the 1998-2001 technical assistance. R9 Total Operating & Admin Expenses/Average Total Assets

GOAL 12-98 12-99 12-00

72 Consolidated Primary Societies <10.0% 3.8% 2.9% 3.8%Kirimetiyana PS <10.0% 3.0% 3.1% 4.6%Pethigodagedara PS <10.0% 4.0% 3.8% 4.1%

15 Pethigodagedara PS had reduced its delinquency to 2.1% at its year-end (August 2000). By November 2000, the delinquency had risen to 10.3%. This case provides the lesson that an institution can never be too confident about loan repayment, particularly if its loan portfolio is susceptible to external economic shocks such as the decreased global price for coconut in the case of Pethigodagedara PS.

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Compared to other microfinance institutions (MFIs), credit unions have extraordinarily low operating expense ratios – the primary ratio determining efficiency. The most efficient Latin American MFIs such as Caja Los Andes, FIE, WWB Cali have operating expense ratios in the low teens (12.9%-13.6%). Damian von Stauffenberg, founder of MicroRate, suggests that there are economies of scale that allow credit unions to improve their efficiency. It is von Stauffenberg’s opinion based on MicroRate’s experience (rating MFIs primarily in Latin America and more recently in Africa) that an MFI can improve its operating efficiency ratio when it reaches an asset size of approximately $2 million16. MicroRate defines the Operating Expense Ratio as Administrative Expenses, Personnel Expenses and Depreciation divided by Average Total Gross Loan Portfolio. In contrast, WOCCU defines ratio R9: Operating Expenses as Administrative Expenses, Personnel Expenses and Depreciation divided by Average Total Assets because credit unions, as full intermediaries, incur more expenses than only those related to the loan portfolio. Credit unions also incur operational expenses related to their savings and their share accounts. Using the performance indicator Operating Expenses/Average Total Gross Loan Portfolio, the 72 credit unions worth a total of $4.8 million in assets in 2000 had a consolidated Operating Expense/Average Gross Loan Portfolio Ratio of 5.3%. The credit unions improved their efficiency to 5.3% from 6.4% in 1999. When calculating the Operating Expense Ratio, Operating Expenses/Average Total Assets, Operating Expenses are even lower; they are 3.8% in 2000. This level of operating efficiency is unmatched by other small-size microfinance institutions. The downside to this efficiency indicator is that in many credit unions the salaries of personnel are low. WOCCU has been working with the partner credit unions so that boards of directors see value in increasing pay scales for credit union employees; for example, at Pethigodagedara PS, personnel costs increased nominally by 183% while overall operating expenses increased 108% in nominal terms from December 1998 to December 2000. R12 Net income / Average Total Assets GOAL 12-98 12-99 12-0072 Consolidated Primary Societies Sufficient to maintain

capital ratio of 10% 1.2% 2.0% 0.3%

Kirimetiyana PS Sufficient to maintain capital ratio of 10%

2.4% 2.9% 1.4%

Pethigodagedara PS Sufficient to maintain capital ratio of 10%

0.0% 0.2% 2.8%

Credit unions are not-for-profit, member-owned financial institutions. Credit unions need to earn sufficient profits so that they can build up institutional capital to the minimum 10% institutional capital/total assets ratio. The 72 credit unions have low levels of institutional capital (E8); therefore, although they are showing positive unadjusted Return on Assets (R12), they are not generating sufficient profit to maintain a strong capital position. Kirimetiyana PS and Pethigodagedara PS are each respectively earning a high enough unadjusted return on assets to maintain institutional capital at a 10% minimum.

Liquidity

L1 ST Investments + Liquid Assets-ST Payables/Total Deposits

GOAL 12-98 12-99 12-00

72 Consolidated Primary Societies >= 15.0% 15.8% 17.0% 13.3%Kirimetiyana PS >= 15.0% 42.1% 16.8% 16.6%Pethigodagedara PS >= 15.0% 10.4% 20.9% 11.9%

16 Damian von Stauffenberg’s lecture at the Boulder Microfinance Training Program Session II August 2001.

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The Sri Lankan credit unions offer voluntary withdrawable passbook savings among their various deposit services. For this reason, liquidity management is absolutely essential so that the institution can maintain a delicate balance between having sufficient liquidity to meet withdrawal demand and avoiding a situation of excess liquidity wherein funds are idle. Pethigodagedara PS shadows the former trend illustrated by the 72 consolidated credit unions wherein these institutions have been above and below the WOCCU recommended minimum liquidity ratio 15%, but as of December 2000 they do not meet the goal of a minimum of 15% liquidity (L1). Kirimetiyana PS was in the latter position of having high levels of liquidity in December 1998 with a corresponding low level of net loans to total assets ratio (E1). As a result of asset liability management and liquidity management training offered by the IDU to Kirimetiyana, the staff and board of this credit union brought liquidity down to a desirable level.

Signs of Growth (Annual Growth Rates) S10 Membership GOAL 12-98 12-99 12-00 72 Consolidated Primary Societies > 5.0% 20.7% 24.9% 20.9%Kirimetiyana PS > 5.0% 10.1% 27.5% 21.8%Pethigodagedara PS > 5.0% 7.1% 2.9% 5.2% One of the essential tenants of credit union philosophy is that credit unions should offer access to quality financial services to as many members as possible; therefore, growth in membership is a WOCCU goal for its partner credit unions around the world. The 72 partner credit unions have been increasing their membership by approximately 21% per year. Kirimetiyana PS, founded in 1992 and one of the first credit unions to convert to a limited liability charter in 1999 has kept slightly ahead of the consolidated group of credit unions in the S7 Membership Growth ratio. Pethigodagedara PS, founded in 1959 and limited legally to serving only the three immediate villages until mid-2000, has not grown at the pace of many of the other project credit unions. That said, Pethigodagedara, with 600 members is one of the larger credit unions in Sri Lanka. The individual primary societies tend to be tiny (100-200 members) and the annual growth rates are on a small base number of members for many of the credit unions vis-à-vis Pethigodagedara’s larger starting membership base. S11 Total Assets GOAL 12-98 12-99 12-00 72 Consolidated Primary Societies > Inflation 33.8% 17.0% 25.2%Kirimetiyana PS > Inflation 63.1% 74.6% 84.5%Pethigodagedara PS > Inflation 52.7% 48.1% 22.0%*Annualized Inflation 11.3% 9.8% 6.2% All of the WOCCU/SANASA partner credit unions have met and surpassed the goal of growth in assets above annualized inflation. The consolidated growth in total assets for the 72 credit unions is 25% in 2000; however, the consolidated figure hides the variety that both Kirimetiyana PS and Pethigodagedara PS illustrate. Kirimetiyana PS, formed in 1992, has a board that has embraced the WOCCU business planning process and has undertaken marketing efforts to increase its assets and its membership. Growth in assets from 1999 to 2000 was 84.5%. Pethigodagedara PS, established in 1959, displays like Kirimetiyana PS, much higher growth in total assets in 1998 and 1999 than the broader 72; however it mirrors the growth of the 72 in 2000 with annual growth from 1999 to 2000 at 22%.

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V. CASE STUDY CREDIT UNION PRODUCTS VS. COMPETITORS In interviews with the boards and managers of six primary societies and one district union, these respondents identified which institutions they considered were their direct competition. Distinct from the situation in other parts of the world, Sri Lanka is a country that has both state-owned and commercial banks that have branches in many rural areas. The six credit unions consistently named the National Savings Bank (NSB), Bank of Ceylon, Seylan Bank, Peoples Bank, the Regional Development Bank and the Cooperative Rural Bank as competition primarily for mobilizing savings and in certain instances for lending, in addition to the government-sponsored subsidized credit offered through Samurdhi Bank Societies and some state-owned banks. Often cited as competition on the credit side is the Government of Sri Lanka’s poverty alleviation effort, the Samurdhi Movement that includes a subsidized microcredit component, the Samurdhi Bank Societies. The Samurdhi Development Bank targets “the poorest” and offers its target population loans at 10% nominal interest. The Government projected spending of 13.5 million rupees (roughly $170,000) on this program in 200117. Samurdhi Bank Societies are a competitor for credit union lending activities in areas where the Samurdhi program reaches credit union members. The Board and Management of Kirimetiyana PS specifically cited Seylan Bank, the Cooperative Rural Bank, Peoples Bank, and the National Savings Bank as their competitors, in addition to a credit line for small and micro entrepreneurs sponsored by the Asian Development Bank. They believe competition is paying on or about 9% per annum on savings and charging fluctuating amounts slightly below 20% on loans. The subsidized credit fund charges 12% for its small and medium enterprise (SME) lending programs. The Board and Management of Pethigodagedara PS cited Bank of Ceylon, the Cooperative Rural Bank and National Savings Bank among their competitors.

SAVINGS PRODUCTS & INTEREST RATES OFFERED AT PRIMARY SOCIETIES

In the charts below, readers will find the rates of interest paid on savings and the terms and conditions for these four types of savings products offered at both Kirimetiyana and Pethigodagedara credit unions. Credit unions in Sri Lanka have traditionally set both their savings and their lending rates once per year. The rates are set by the Boards of Directors. WOCCU has worked with certain credit unions advising their boards to change their bylaws so that interest rates can be changed at least on a monthly basis. In the fourth quarter of 2000, credit union interest rates paid on savings, typically higher than those paid by banks, fell behind the rates of some of their competition given that 90 day treasury bills jumped up their rates to 18% in December 2000. The rate paid on 90 day treasury bills in 1999 was 12%18. Banks have more flexibility to raise their interest rates paid on deposits than credit unions do in Sri Lanka at present.

17 Daily News, December 9, 2000, “More funding with Samurdhi success”, Colombo, Sri Lanka. 18 Central Bank of Sri Lanka Annual Report 1999.

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KIRIMETIYANA PS 12/08/00 SAVINGS PRODUCTS

Compulsory Savings

Passbook Savings

Fixed Deposits

Youth Savings

Interest Rates 9% 12% for members; 10% for clients*

15% for members and clients

10%

Terms or Conditions 50 rupees savings (US$0.63) mandatory per month

Voluntary and withdrawable

12 month term

Same as passbook savings.

*On December 8, 2000 Kirimetiyana PS had 25 non-member passbook savings accounts and 26 non-member fixed deposit accounts. Clients that are not members receive savings services only, no credit. PETHIGODAGEDARA PS 12/12/00 SAVINGS PRODUCTS

Compulsory Savings

Passbook Savings

Fixed Deposits

Youth Savings

Interest Rates 8% 10% for members and clients*

For members and clients: 12% ($6.3-$125) 12.5% ($125-$1,250) 13% ($1,250+)

11%

Terms or Conditions 100 rupees savings (US$1.25) per month

Voluntary and withdrawable

Minimum amount $6.25. 12 months

Same as Passbook Savings

*On December 12, 2000 Pethigodagedara PS had 203 non-member passbook savings accounts and no non-member fixed deposit accounts. Clients that are not members receive savings services only, no credit.

SAVINGS PRODUCTS & INTEREST RATES OFFERED BY COMPETITION Interviews took place with staff from one competitor commercial bank, Seylan Bank, and one competitor state-owned bank, Bank of Ceylon. These institutions were cited by the credit unions as competitors for savings, even in the rural areas. Below see the products, terms and conditions that these offered in December 2000. Seylan Bank does have branches that are accessible to credit union members belonging to Kirimetiyana and Pethigodagedara as well as many other credit unions throughout the country. What is interesting to note from the table below is that Seylan is paying significantly less on passbook and youth savings accounts than Kirimetiyana and Pethigodagedara. Seylan Bank pays higher rates on fixed deposits; however, the minimum balance is $62.50, ten times higher the minimum balance for fixed deposits at the primary societies that have been discussed. The 17% interest rate is for 90 day deposits of minimum balance of $1,250. The credit union members would presumably not be able to raise this much money for a fixed deposit given that the median fixed deposit size for Kirimetiyana and Pethigodagedara was $233 and $250 respectively.

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SEYLAN BANK 12/15/00 SAVINGS PRODUCTS

Passbook Savings

Fixed Deposits Youth Savings

Interest Rates 7.5% Range from 13%-17% depending on deposit size & term

7.5%

Terms or Conditions Voluntary and withdrawable.

Minimum balance $1.25

Minimum amount $62.50.

90 & 180 days, 1, 2, 3, and 4 years

Eligible for lottery & prizes based on deposit

size.

Like the case of the Seylan Bank, the state-owned Bank of Ceylon does not pay as well on passbook savings as the credit unions do. The Bank of Ceylon is making a more concerted effort than Seylan Bank is to attract youth savings. Kirimetiyana does not pay as well as Bank of Ceylon (10% versus 11%) and Pethigodagedara is paying the same rate, but neither credit union has the prize and lottery structure for youth savings. Kirimetiyana does have lottery drawings for passbook holders as does the Bank of Ceylon. The lottery idea was introduced to Kirimetiyana during the WOCCU technical assistance as a savings mobilization technique. BANK OF CEYLON 12/16/00 SAVINGS PRODUCTS

Passbook Savings

Fixed Deposits Youth Savings

Interest Rates 9% (also, there is a special savings account for women that pays 10% w/ $6.25 minimum)

Range from 12%-15% depending on deposit size & term

11%

Terms or Conditions Voluntary and withdrawable. Minimum balance $1.25 Lottery & prizes with minimum balance of $12.50

30*, 90 & 180 days, 1 & 2 years. *Minimum for 30 days is $12,500

Minimum opening deposit of $.63 in rural areas and $1.25 in urban areas. Lottery & prizes based on deposit size (minimum deposit for eligibility is $37.50)

LOAN PRODUCTS & INTEREST RATES OFFERED AT PRIMARY SOCIETIES The WOCCU/SANASA technical assistance activity has been working with its partner credit unions on pricing, particularly encouraging an adequate spread between rates charged on loans and rates paid on savings. In addition to advising credit union leaders on the appropriate spread, the Institutional Development Unit (IDU) has been working with certain credit unions so that they will make the interest rates charged on loan products reflect the risk of the loan purpose; for example, concentrating loans in the coconut sector that has declining world market prices is risky and the interest rate should reflect that risk.

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KIRIMETIYANA PS LOAN PRODUCTS

Nominal Interest Rate

Maximum Amount

Terms

Business or Commerce Loan

20% $2500 5 years, < $312 requires two cosigners, $312+ requires collateral (borrow up to 60% of value of collateral).

Housing Loan 20% $2500 5 years, < $312 requires two cosigners, $312+ requires collateral (borrow up to 60% of value of collateral).

Instant Loan 4% monthly Three times the amount in savings acct.

Four month limit

Loan vs. Fixed Deposits

3% higher than Fixed Deposit i rate

90% amount of Fixed Deposits

No cosigners, manager approves

The Kirimetiyana Board of Directors meets weekly for loan approvals. The process at the PS involves less paperwork than a commercial bank and takes approximately one week to process and disburse. According to the Board, while Kirimetiyana processes and disburses a loan in one week, the competitor banks take 30+ days to process and disburse a loan application. Such a delay is a significant transaction cost for any borrower. PETHIGODAGEDARA PS LOAN PRODUCTS

Nominal Interest Rate

Amounts* Terms*

Business or Commerce Loan

13%-15%-18%

$13-$5625 Monthly repayment

Housing Loan 15% $94-$313 Monthly repayment Agriculture Loan 14%-18% $19-$125 14% is monthly repayment; 18% is

two repayments per year Consumer Loan 15% $31-$125 Monthly repayment Instant Loan 4% per

month $375 Repay on a quarterly basis, maximum

one year length* *Due to limited interview time, author was not able to obtain precise details on maximum amounts & terms. Information provided is based on loan sizes granted on the books on December 12, 2000.

LOAN PRODUCTS & INTEREST RATES OFFERED BY COMPETITION What is immediately evident to the reader is that while Seylan Bank may be a competitor on the savings side (it has lower rates but it is a well-known commercial bank and that offers customers confidence in the savings service), it is not truly accessible for borrowing for the type of members that Kirimetiyana and Pethigodagedara and hundreds of other credit unions serve. This evidence is most strong in the personal assistance or consumer loan category. Half of Kirimetiyana’s members earn $37.50 per month and would not be able to demonstrate income of $187.50 per month. The typical borrowing amounts for the housing and home entrepreneur loan also suggest service to a wealthier clientele than that served by Sri Lankan credit unions.

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SEYLAN BANK LOAN PRODUCTS*

Nominal Interest Rate

Amounts* Terms*

Loan versus Fixed Deposits

2.5% higher than rate paid on fixed deposits

Borrow 90% of value of fixed deposits

Monthly repayment.

Housing Loan 18-22% $625-87,500 Monthly repayment. Mortgage required, borrow 75% of the value of property and construction costs. 3 week processing time.

Home Entrepreneur Loan (housing improvement)

16.2% $625-125,000 Monthly repayment. Mortgage require, borrow 75% of the value of capital required. 3 week processing

“Personal Assistance Loan” (Consumer Loan)

Varies Amounts vary for loan purpose

Monthly repayment. Borrower must demonstrate mthly income of $188.

Farmer Supplier Credit Subsidized, 10-12%

Varies Repay on a seasonal basis. This “loan” serves as a guarantee to suppliers for payment of agriculture inputs.

*There could be other loan products, but these were the only loan products described to the author during interviews. It is interesting to note the difference between the products offered and interest rates charged between the commercial and state-owned banks. The rates charged by the state-owned bank are less; however, the author was not able to obtain at Bank of Ceylon, the detailed information about the amounts and terms that was readily available at Seylan Bank. From the limited information attained, it would appear that the state bank is focusing its business lending on the small and medium sized enterprises, industries and agricultural producers rather than the micro enterprises and micro agribusinesses and wageworkers in these sectors to which the credit unions are lending money. BANK OF CEYLON LOAN PRODUCTS 12/16/00*

Nominal Interest Rate

Amounts* Terms*

Small and Medium Industry Loan

14.5-16% Not specified Borrow 75% of value of project

Housing and/or Home Improvement Loan

16-17.5% Not specified

Coconut Development Loan

18% Not specified

Samurdhi Development 10% Max. loan size of $125

Borrower must qualify as a “Samurdhi recipient”.

Pawn Service 23% Loan size based on appraised jewelry value

Jewelry is only acceptable item for the pawning service

Small & Medium Enterprise Projects

16-17% Not specified Not specified

Perennial ag. crops, short term crop loans

14% & 15% respectively

Not specified Not specified

*There are a multitude of other government supported projects for which the Bank of Ceylon offers credit including the fishing industry, small tea cultivators, but the author has no further information on these lines of presumably subsidized directed credit.

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INSURANCE PRODUCTS OFFERED BY PRIMARY SOCIETIES Many Sri Lankan primary societies offer either or both loan protection insurance and life savings protection insurance through the All Lanka Mutual Assurance Organization (ALMAO), one of the pillar activities of the SANASA National Federation. For either product, members pay .65 of one rupee per every 1000 rupees of the loan amount or the savings account. In some credit unions visited, the credits unions absorb the fee for the savings protection insurance and offer this product to their members as a member benefit. Kirimetiyana PS offers loan protection insurance (“the debt dies with the debtor” credit union philosophy) to its borrowing members. Neither the member nor her/his family members will be responsible for repayment of the loan in the event of death or severe disability. When the management staff and board members of Pethigodagedara PS were interviewed in December 2000, the board was considering introducing the loan protection insurance in 2001. At that time, Pethigodagedara did not offer any insurance products.

INSURANCE PRODUCTS OFFERED BY COMPETITION The only savings protection insurance product that the author was informed of during her interviews at Seylan Bank and Bank of Ceylon was a savings protection insurance that is offered by the Bank of Ceylon free of charge to its women savers in the special women savings program that pays 10%. Women participating in this contractual savings program are required to deposit a minimum opening balance of $6.25 and contribute monthly minimum savings of $3. Any participant that has a minimum balance of $37.50 that has been maintained for at least six months is eligible to receive ten times the amount of the deposit balance in the event of death or dismemberment. Participants receive five times the amount of their deposit balances in the event of serious injuries.

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VI. CONCLUSIONS

The goal of this study was to examine data to assess the outreach and financial performance of the 72 credit unions that have received varying degrees of technical assistance from a WOCCU/SANASA credit union strengthening program sponsored by the USAID Sri Lanka Mission. What conclusion can be drawn from the information reviewed in the body of the report? First and foremost, if one accepts average and median loan and savings deposit sizes as proxies for income levels, then the credit union members that belong to the 72 Sri Lankan primary societies affiliated to the WOCCU program are NOT middle class members. The middle class salaried stereotype put forth by credit union critics who assert that credit unions do not serve the poor is not applicable to rural primary societies in Sri Lanka. The Sri Lankan credit unions provide poor and low-income members access to microsavings and microcredit. This report has focused its analysis on two primary societies that are part of the 23 “Group 1” credit unions that have received technical assistance and training since late 1998. On one hand, the in-depth outreach data of the two credit unions should be considered representative of the much larger body of 72 credit unions since small credit unions in rural areas of Sri Lanka serve similar groups of people. If anything, the Kirimetiyana PS, located in a town, rather than a village and focused on attracting net savers, may have a “high-end” profile vis-à-vis less centrally located village primary societies such as Pethigodagedara PS. On the other hand, the financial performance of the two case study credit unions is substantially better than the 72 credit unions as a whole. This difference points to institutional improvements seeded by WOCCU technical assistance and training efforts invested in those particular institutions over time. Additionally, this report has made an introductory attempt to look at products and services offered by two banks that credit unions identify as their competitors. This particular analysis had the goal of examining if these financial institutions serve the same niche of people and if they offer equal access to savings and credit at similar rates of interest. This report provides a general sense of the outreach profile of rural credit unions in Sri Lanka. The WOCCU program has provided technical assistance to roughly 80 credit unions while the national federation reports that there are more than 8,400 active credit unions operating in the country. The 72 primary societies represent less than one percent of the total number of primary societies and represent 3% of the total credit union membership in Sri Lanka. If the outreach of the 72 primary societies were representative of all Sri Lankan primary societies and the improvements in financial performance exhibited by Kirimetiyana PS and Pethigodagedara PS are illustrative of gains possible in a three-year period of technical assistance, then further credit union strengthening programs in Sri Lanka would lead to improved weak financial performance and continued membership expansion. This type of technical assistance intervention would result in the credit unions being better equipped to provide more poor people in rural areas with access to microfinance.