j m ~~18C75

_ NewsletterTHE CONSULTATIVE GROUP TO ASSIST THE POOREST

_ [A MICRO FINANCE PROGRAM]

ACCESSING COMMERCIAL SHORT-TERM MICRO-

CAPITAL FOR MICRO- FINANCE: COMMERCIAL

FINANCE: THE ACCION BANKS CAN DO IT!

E X P E R I E N C E - Klaas Kuiper, International Agency

- Maria Otero, ACCION International for Economic Development

(Speech delivered at a seminar on Could commercial banks extendRural Finance at the World Bank, their standard operations in the micro-October 24, 1996, summarized by finance sector? Whv not? Consider

£ D Gregory Chen of the CGAP howv commercial banks use computersSecretariat.) and automated tellers to handle the

ACCION International is a non- current accounts of their customers.profit development agency currently Customers can regularly overdrawworking wvith a network of 18 local their accounts, -within a limit, xvithoutmicro-finance institutions (MFIs) hearing from the banker. The bank'sthroughout Latin America. Since it computer calculates interest andbecame involved with poor microen- charges the account monthly. Thetrepreneurs in the late seventies, interest rate is substantially higherACCION has discovered that its local than nornmal, as the banker is obviouslyaffiliates can become financially, self- awxare of the higher costs involved.sustaining. This has been an impor- The practice must be profitable too, ortant breakthrough, holding the else wvhy xvould banks advertise theirpromise of continued financial services overdraft facility' Add credit cards tofor the poor without reliance on donor this system and customers can givesupport. Accessing c;ommercial capital themselves a small loan any time of thewas kcy to achieving growth and self dav, any day of the wveek, -with niOsustainabilitv, and over the years, forms, no meetings xvith a loan officer,ACCION has explored different no appraisal procedure, and no securi-mechanisms for overcoming barriers to ty pledged. The securitv is the bank'saccessinig this capital. Two of these access to the customer's account. Thenmechanisms will be discussed here. bank's computer can hiandle thousanids

of such transactions while the bankI;f^> lll|n s t i t u t i o n alI G r o w t h staff is fast asleep. Clearly this is the

miost efficient and fastest credit pro-grmever designed. The conclusion is

At its inception, ACCION affiliates gram ere a no sytm ps

t#. s > *+^4le **5. tl ought to provide a range of financial banksprevecnting coiommercilbanks romiand business development services tovery poor microcntreprenicurs on a sub- enaignthstpofldn.sidized basis. Two earlv discoveries fin- Small, short, and unsecured?danmentally chianged AC'CION's Cm eca akapproach: first, that microenterprisce

Can Do It!4: ~~~~~~~~~~activities themtselves were profitable and

g i, ~v iable, and second, that newv lending What are the obstacles to movingtechnologies (or mcthods) made into the itormal sector i-ith such

(coiltilifd 177 painc 12) (Con ctiiuted o pIfl c)

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1 Acesin Cmmecil CpialEMERGING MARKET?

foE ir4nnc:TeAco Mohini Malhotra, CGAP Secretariat

continued on page 12From a relatively obscure orphan in the early 1980s to everyone's favorite

Short-Term Mcro-finance,child today, micro-finance is attracting a lot of attention. WThile early voices were

continued ~~~~~~ savTing that micro-finance institutions (MFIs) can . . perhaps . .. someday..2-3 Micro-finance: The Ne cover their costs, today, private investors are entering this arena, discussing the

Emergng Market seuitization of micro-loan portfolios and "taking institutions public." They are

4-5 Ban Daang Baji: trvingr to play match-maker betwveen poor people's demand for financial servicesPofitable Commerca and advanced capital markets. Has micro-finance become the new emerging mar-

Micro-finance ~~~~~ket for investors?S New CGAP Publictin6 CGAP~ Member4 Donors Some Major Industry Break-Th roughs

Bringing icro-finace to theThe evidence regarding micro-finance success stories has provoked privatePrivate sector RecnCodnferencs inLndond investors' 'interest. A number of MFIs have proved that they can provide financial

Syny anOd WashntnD services to poor people on sustainable and even profitable terms. A 1994 analysis7-8 WestAfrica igh Leve Poiyof 1 1 leading MFIs (CGAiP Focus Note 2) shows that a number of institutions are

Forum on Micro-finance.financially, self-sufficient -they are covering expenses wNith revenues from provid-

9-10 BanoSol: Cossing Bridgeing financial services to poor people. In 1993, ACEP in Senegal, BancoSol inBetween GO and cmmercialBolivia, and LPDs in Indonesia were covering 100, 103 and 137 percent of their

11 Scaling tMir-iac:Tecent for BancoSol.AHattGon Nationalb Bank A few commercial bankers are peering into this vast potential market. To date,

13 Practitioner Networksthe banks that have been involved, such as Grameen Bank in Bangladesh, Sewa1-1 5 Updat Bank in India, BRI and BDB (this issue) in Indonesia are specialized banks that

serve this clientele, or are banks that grew out of micro-finance NGOs, such as

CONTRIBUTORS ~~~~Bancosol in Bolivia and K-REP Bank in Kenya. The industry is still awvaiting theentry of "regular" commercial banks, but the success of Bank Dagang Bali (this

Accion Interntional and isue), and the steps of the Hatton Bank in Sri Lanka (this issue), Banco deCG~A 0p Poicy AdvHIorDesarrollo in Chile, and BANCOTMER, the second largest commercial bank in

Klaas Kuiper ~~~~~Mexico, are encouraging.iniernationa Agency forAs a growing number of MFIs explore deposit mobilization or leverage com-

Economic Devlopment andmercial capital, bank regulators in Peru, Bolivia, Ghana, Kenva and other coun-CGAP Policy Advis or

tries are creating laws or special regulations for this new breed of institutions. In

CGAP Secretariat ~~Bolivia, Bancosol, a private commercial microenterprise bank established in 1992,

~CGAP SertritadPrivateigrqieet staiinlbns u ihsmlrla ouetto nSector Development risk classification rules. To encourage newvMFIs, Boliv,ia has begun lcensing a

Department new class of intermediaries called private financial funds (PFF), subject to the same

David Wright ~~~~solvncy and reserve requirements as banks, but xvith lower minimum capital

Sara Webb and Niki Ruler reqiuirements.AUSAID ON A small number of MFIs have linked with domestic and international capital

Liza Valenzuela ~~~~~markets. In 1995, the Paraguay Foundation fr Development and CooperationUSAID ~~~~~~~~was the first non-profit institution in Paraguay to sell bonds on the securities

exchang to finance the portfolio for loans to microentrepreneurs. ACP in Peru

and FED in Ecuador plan to securitize microenterprise portfolios through issuing~M corporate debentures backed and serviced by the microcnterprise portfolio. Ini 1994, BancoSol issued certificates of deposit (CDs) in the United States.

M ~Grameen Bank has floated bonds in Bangladesh w,ith yields commensurate with

the corporate sector. The debt instruments purchased by Paraguayan, Peruvian,

Ecuadorian, U.S., and Bangladeshi investors are backed by the promise of primar-

ily poor urban and rural women to repay their US$100 to USS200 loans.

But Still Some Way to Go

With this activity, one may think that the industrv has moved from the 'fringe'

into the 'mainstream.' However, only about 20 to 25 institutions have achieved

industry break-throughs - a small proportion of the total number of active MFIs.

A recent worldxwide inventory of MFIs done by the Sustainable Banking with the

Poor Project (SBP) of The World Bank estimates that there are over 900 institu-

tions in 101 countries, each with over 1,000 clients and 3 years of experience.

The vast bulk of MFIs has not heard of or is not convinced by the emerging con-

ventional wisdonm that financial services can be provided to poor people on sus-

tainable terms. Many institutions are undergoing the same groving pains that

the leading institutions experienced a decade or more ago, and are debating the

earlier arguments about the feasibility of cost-recovery. Most do not see the

potential for their specific institution to become financially viable in the foresee-

able future and expect to continue their dependencc on public donor funds for

their operations and survival. Of the 116 institutions that applied for funding

from the CGAP Secretariat as of June 30, 1996, an estimated 5 percent covered

their expenses from revenues, although most had bccn in operation for over 3

vears.Weak or non-existent financial reporting systems for the majority of MFIs con-

strain their capacitv to attract private sources of funds. A striking result of the SBP

survey was the inability of many institutions to provide basic financial data, such as

the size of the gross portfolio outstanding, or annual administrative costs. The

availability of reliable and standard financial data and loan portfolio information has The availabiity of

played a critical role in permitting the 'break-througli institutions to access com-

mercial and other financial resources. The Paraguay Foundation mentions that the r e Ii a b i e a n d st a n d a r d

overwhelming acceptance of its bonds was due in large part to the CAMEL diagno-

sis it conducted. Private investors, and increasingly public funders, shy axvay from f i n a n c i a i d a t a a n d l o a n

funding a financial institution that cannot account for its funds nor attest to the partfaia informatian h asquality of its loan portfolio. Financial reports in and of themselves do not help

MFIs to access funds, but they do make the MFI more transparent and understand- p I a ye d a c r i t i c a I ro I e i n

able to potential investors.Beyond financial reporting svstems, investors increasingly care about other key p e r m itt i n g t h e 'br e a k -

institutional and operational issues related to MFIs' performance. The challenge t h r oug h' i f st in t ut i o n s to

of building capacity in young institutions to reach the scale, efficiency, and results

achieved by the few industrv leaders still remains. These challenges include defin- a cc e ss co m m e r c ia a n d

ing management, governance, and institutional structures, attracting and training ot h e r f i n a n c i a I r e s urces.

personnel, and designing appropriate financial products for their clients.

Emerging Market or Infant Ind ustry?

Micro-finance has made notable steps in the last decade, as evidenced by the

selection of articles in this ne\vsletter issue. The industry has come a long way

from the 'fringe' but is still far from the 'mainstream.' Serious effort and invest-

ments are still needed to build the capacity of a significant number of institutions,

beyond the current 20 or 25 strong MFIs. When a respectable number of MFIs

demonstrate "emerging market" returns, the industry wvill not escape the notice of

private investors and commercial bankers.

B A N K D A GA N G BALI: meeting and there learned much to its services, the bank permits sav-

A PRO F I TA B L E CO M M E R CIA L more about how formal banks func- ings accounts with low minimum

BANK IN MICRO-FINANCE tion. They began to seriously con- deposits. The bank's 353,838sider opening a licensed bank deposit accounts in 1995 had an

M To date, few private commercial themselves. With further loans and average account size of US$270.

banks have been active in their ow-n capital, the Okas estab- BDB also emphasizes customer rela-micro-finance. One of the earli- lished Bank Dagang Bali in 1970. tions and outreach. One importantest to get involved is the Bank Though a successful commercial component of BDB practice is the

M Dagang Bali (BDB) in bank, BDB has continued to main- mobile savings team, first establishedIndonesia. This private com- tain patterns set initially by the Okas at a time when Indonesian bank reg-mercial bank has served micro- in their informal moneylending days, ulations prevented bank branches.

finance clients profitably since it including involvement in the micro- These teams travel to clients' homes

C was founded in 1970-and even finance sector, close knowledge of and workplaces by foot, motorcycle,before. the market, careful attention to cus- or car. Covering a specified route

tomers, and wvillingness to use innov- each day, they collect deposits andT h e F o u n d e r s ative methods. provide withdrawals, serving virtually

The historv of BDB is inter- as mobile banks.twined with the personal stories Produ c t s a n d P e r f o r m a n c e Among BDB's other innovativeof its founders, I Gusti Made As a commercial bank involved devices is the use of a lottery as aOka and Sri Adnyani Oka, who not only in the micro-finance sector, means of savings mobilization. Aware

continue to own and manage the BDB makes loans of all sizes, from that smaLL savers are attracted to lotter-

bank. This husband-and-wife team under US$100 to over US$100,000. ics because these are perceived as an

had been poor themselves and At the end of 1995, BDB had a total escape route from poverty, BDBworked in the informal sector as tai- loan portfolio of US$82 million. sought to satisfv this interest to the

lor and typist, getting a small loan in Roughly 20 percent of all loans were benefit rather than risk of participants.order to buy a sewing machine. The under US$500 and about tvo-thirds It therefore created a lottery in which

couple eventually accumulated were under USS2,300. Many of the every depositor receives a free month-enough to open a savings account in large borrowers of the 1990s are lv lottery number for each RplO,000a commercial bank. Realizing, how- long-term clients who began at BDB (about US$4.60 in 1994) in the

ever, that they could make more on as small savers and borrowers during account. Lottery drawings, with suchthat capital by lending it out them- the 1970s. BDB's approach is to prizes as a house, car, or motorcycle,

selves, they became informal money- provide continued financial services are held four times a year. The draw-lenders. They made short-term loans to its good customers, whether their ings have attracted great attention,with daily repayment schedules and enterprises remain small or grow which BDB uses as an opportunity toimmediatelv re-lent the capital. Mrs. large. educate villagers about banking and to

Oka handled transfers and repay- Most BDB loan terms are for less explain and publicize its own services.ments in daily visits on bicycle to than onie year, but loans may be Following BDB's example, manycustomers, while Mr. Oka kept the rolled over. Interest on most loans is banks in Indonesia as welL as Bolivia,accounts. As their own funds were set at about 30 percent a vear. KIenya, and Mexico have adopted thistoo small for demand, the Okas also Repayment has been consistently strategy of savings mobilization.served as intermediaries between high throughout the bank's history, BDB's assets have grown substan-those wanting to borrow and other with less than 1 percent of loans tially from about US$162,000 inindividuals with excess liquidity who more than three months overdue. 1970 to about USS 115 million intrusted the Okas' judgment. Perhaps BDB's greatest innova- 1995. There has been a steady

As a consequence of obtaining a tions have been in the design and increase over the years in thefurther loan in 1956 from Bank implementation of voluntary savings amounts of both deposits and loans,Perniagaan Umum, the Okas found instruments and services for lower- wvith total deposits always exceedingthemselves at a bank shareholder's income people. To facilitate access the loan portfolio. At the close of

1995, BDB had approximately BDB was one of the first com- N EW CGAPUS$95 million in deposits and mercial banks to understand the PU B LI CAT I O N SUS$82 million in credit outstanding. demand for micro-finance, given the J u I y D e c e m b e r, 1 9 9 6The total number of deposits personal experience of its founders.(353,838) dwarfed the total number It xvas also one of the first to operateof loans (11,646). This pattern profitably in the micro-finance sector. F O C U S N O T E 4reflects both BDB's impressive local- Its role in this area goes bevond merelevel savings mobilization and a relative- involvement to successful innovation, Regulation and Supervision of Micro-ly conservative lending policy. In 1994, establishing practices that have been finance institutions: Stabilizing a Newthe bank began increasing its lending implemented elsewhere. Financial Market. Maria Otero, Racheloperations at the local level. As a result, Rock, and Richard Rosenberg.the loan/deposit ratio increased from This articlc vwas prepared by Anne-Marie

Smith. It vas drawn from, "`Where the68 percent in 1993 to 86 percent in Microfinancing Revolution Began: The1995. BDB has been consistentiv prof Bank Dagang Bali, 1970-1995," by F O C U S N O T E 5itable throughout its history, but it is Marguerite Robinson, Chapter 6 in The

Micro-finance Revolution: Sustainable Financial Sustainability, Targeting thelikelv that the bank could become more Banking for the Poor, Manuscript under Poorest, and Income Impact: Are Thereprofitable if the credit side of its activi- prepararionl.

ties xvere expanded. ~~~~~~~~~~~~~Trade-offs for Micro-finance Institutions?Paul Mosley and Brigit Helms.

Short-Term Micro-finance OCCASIONAL PAPER 1(continywrdfrom page 1)

Microcredit Interest Rates, Richardpractices? Most poor people do not have access to financial services. RosenbergCommercial banks need to change their policies so that the poor can open cur-rent and savings accounts and prove they can handle such accounts successful-ly. Other bottlenecks are the lack of computers, automated tellers, and credit N E W S L E T T E Rcard facilities-but that may only be a question of time. The village bank of C O N T R I B U T 10 N Sthe future may well be an automated teller. Perhaps international donor agencies Please send contributions (between 600should consider making resources available for these technologies, as one way to

and 700 words) at the address listedinclude the involvement of commercial banks in the rmicro-finance sector.

under contact information on the lastpage. The selection of articles for publi-cation will be at the editors' discretion.

CGAP ONLINE

All CGAP publications and general infor-mation about CGAP can be accessedthrough the World Wide Web at:

http://www.worldbank.orglhtml/cgap/cgap.html

ff4BXf}ai faUf; }3af' Aii00 'za3et 'f3>' f':'at 93"i 00 i lt j ii M i M B E M E M B

Au a 5 t a a BRINGING MICRO-FINANCE bv the Parliamentary Secretary to the

TO THE PRIVATE SECTOR: Minister of Foreign Affairs, theBei iua m RECENT CONFERENCES IN HonorableAndrewThomsonMP,who

LONDON, SYDNEY, AND encouraged greater involvement by theCa n a da ' ' Australian private sector in development

W A S H I N G T 0 N D C as a matter of corporate self-interest

Denmark rather than as an act of charity. Overall,ta Most micro-finance programs were the seminar introduced micro-finance to

F xf n 1 a d started and continue to be man- attending participants, and helped facili-J aged by non-governmental (non- tate a discussion on how Australian com-

F r !Cn < e g profit) organizations. Their sources panies can seek to support micro-financeof funding have included grants activities in their offshore operations.and "soft" loans from donors, Between November 18-20, 1996,trusts, foundations, and occasional- USAID sponsored a conference on

L u x e m bv u r, 1- ly goxernments. As they grow and "Commercial banks in Micro-finance."f proliferate, however, these pro- The event brought together twenty com-

,5^ f,z,>0 Wi e X F et tzxa r.' e gm grams begin to reach the limit of mercial banks from Asia, Africa, andT such resources. A next likely place Latin America -all of whom are

N "' to turn is the international capital engaged in micro-finance. The bankers4 markets. Bringing the micro- present felt that micro-loans and savings

finance and commercial private sec- was a large untapped market that couldtors together was the aim of three be profitable. They identified key ele-

a recent conferences. ments required to enable banks to carrvS -,A? i ?z f r u~ F, r, d On June 12, 1996, the Overseas out micro-finance operations on a signifi-

g Development Administration and cant scale. Most important was a com-CGA1P Secretariat held a round- mitment to micro-finance among thetable for the financial community in highest level of management. Moreover,

U3 ed _ f London. There were 85 participants at there is a need to: change the existing

the meeting that included representatives corporate culture that treats micro-busi-Atf 'ic 3 D(fave1?tnt ment, Ba' k from Barclays Bank, Triodos Bank, the ness loans as "second class" activity;

Barings Foundation, and the develop the internal controls necessary toAw s f oa fn D 3-- v e a I o rn e 3 a z '7 International Finance Corporation. The track thousands of tiny loan and deposit

recent experience of organizations, such accounts; educate public regulators aboutE Pu 3 o p e a n C o p m i 's s a i m f as ACCION International, in gaining this specialized segment; design appro-

access to commercial funds was dis- priate institutional structures to handleI a t e C . a n cussed. It was noted that interfacing micro-finance within the existing corpo-

v e I 3 ra e f t f a n , . \fw MFIs and international capital markets rate structure; and provide training andwill require some creativitv and innova- incentives to staff to maintain high pro-

a t t aat a i 3 d" f F r tion to develop new and appropriate ductivity.A a g , a f , .(1 i u 3a 1 D e vt e I p m e nn financial instruments. The roundtable The higher costs of micro-finance

sought to raise awareness on micro- operations compared to traditional bank-a ita a ' La a b f f r 3f ft e finance among participants and help ing concerned many participants,

them explore steps for future involve- although thev agreed that costs can bea n e d f aQt a a n f ment in the field. controlled bv seeking efficiencies and

'p .. ' r` f3 fet'few ment Fi'a OnnAugust29,1996,theAustralian appropriate pricing. For further informa-Agency for International Development tion, please contact Lisa Valenzuela,

i+a d 3 . t >3 > Pa t T j 7 f f g : 33 C>aaa aa e E n >> O hosted a seminar in Sydney that brought phone: (202) 663-2321.

T a3Q a a ad Pt - e Q ? Q Sa ane t together representatives from some ofAustralia's largest companies, as well as Sources: "Roundtable on Micro-finance,"micro-finance practitioners and non-gov- Summary Report, David Wright, ODA,

d at t ernmental tions ne 12, 1996; "Bringing Micro-finance toPa aaiaat'a tP a p ia :ra ANZ rganiztions.Westpa Bank, the Private Sector," Sara Webb and Niki

D 0v e o rQ e n j'97' p r o g - a m ?n ANZ Bank, and Commonwealth Bank Ruler, AusAID, August 29, 1996; and "A

were among the 60-plus attendees at the New Breed of Micro-financiers?" LizaI7' Q a,i Wa 7 fd a a k Q seminar. The proceedings were opened Valenzuela, USAID, November 21, 1996.

Out- ReaitA y T P v i T e E M Forum

P LIC 0e R m Uv Mi th Cetr Inentoa de ing governmen authoriti:esncm

0 N-, C - F I NANCEDeoppmn et> d Rehrh mercal baner are tha it i

NOur~ ~ ~ ~~~~~Mai They objective ofntn the Forumtepenu intiuton that sevethupor

... The West Africa High Level were to establish dialogue and The key policy issue discussed at

P.lolicy Forum on Micro-finance understanding between the stake- the Forumn was the Lawv on Usury

held in Bamako, Mali from holders in the region on: the impor- prevalent in the seven countries of. * Jne 1921, 196, bought tance of micro-finance as a poverty L'Union Economique et Monetaire

Jungeter 19-21cy1996,erought alleviation tool; the policy and regu- Ouest Africaine (Economic and

-° - ~~~~~~~latory environmnent conducive to the Monetary Union of West Africa~mir-iac rciinr development of MFIs; and the prin- UEMOA). It sets a ceiling on inter-

from 16Ws.fia onre ciples that underpin the operations est rates at twice the discount rate of.oV(Benin, Burkina Faso, Cape of micro-finance institutions (MFIs). 7 percent, thus constraining the abil-

^Verde, Cote d'Ivoire, Ghana, The Forum w as opened by Prime itv of the MFIs to reach sustainabili-

.. The Gambia, Guinea, Guinea Minister Ibrahim Keita of Mali and ty. The monetary authorities of the

6.Bissau, Mali, Mauritania, Niger, Mr. Jean- Louis Sarbib, Vice UEMOA recognized the need to

i!.Nigeria, Sao Tome and President, Africa Region, the World liberalize interest rates. MFIs, sub-

Principe, Senegal, and Togo) as Bank. The 200 participants agreed ject to the Lawv on Usury, wvere

-well as donor agencies. on the importance of self-employ- urged by UEMOA Ministries of

It was jointly organized by ment and the informal sectors in their Finance to seek an exemption from

.- CGAP (the CGAP Secretariat, local economies, and that improving the ceiling by approaching their

*-.The French Ministry of the access of poor entrepreneurs to respective Ministry. They also com-

Cooperation, IFAD, UNDP, financial services wvould increase and mitted to reviewing ways to remove

and UNCDF), The WA;orld Bank, stabilize incomes of the poor. The this ceiling.

Participants agreed that regula- defined. Moreover, unlike creditdons for MFIs, when necessary, unions, these institutions do notshould be flexible, simple, and receive any benefits from registering,accommodate a range of intermedi- such as tax breaks, etc. Practitionersaries, and that MFIs should develop requested for a national level consul-internal controls to ensure sound tative process to review the latestfinancial performance. There was lit- draft of the prototype agreement andtle consensus, however, between provide input into the regulatorypractitioners and authorities from requirements of non-credit unions.

I n s u m, the Forum brought UEMOA countries on the new Many participants, particularly from

together key stakeholders to Credit Union Law. While the intent the non-UEMOA and Anglophoneof the law was to formalize institu- countries, expressed the desire to

raise awareness on the issues tions mobilizing large amounts of learn more about recently promul-

savings, many practitioners felt that it gated legislation for MFIs in Therequires all MFIs to register as credit Gambia and Ghana, and on the

micro-finance industry in the unions, thereby restricting MFIs in South African code of conduct.the region to a particular institutional There was general consensus

region, and began a process of structure. Although MFIs can seek among practitioners that MFIs

consultation among the part i ci - not to register as credit unions by should strive for financial sustainabili-signing a prototype agreement with ty by establishing appropriate pricing

pa n t s to address them. the Ministry of Finance, they are at policies, controlling costs, ensuringsome risk because their legal status is low delinquency, mobilizing savings,

i unclear and the rules under which building financial linkages with com-they can operate are not well- mercial banks, utilizing external

funds to mobilize domestic sourcesof financing, and above all develop-ing good governance, management,and staff. They also saw the need todefine national and (in the case of

.q UEMOA) regional strategies for the- l l l l > < | development of MFIs, and identified

f ~~~~capacity bniilding as a means forMFIs t'o move towards increased out-

T ~~~~~~~~~~~~~~~~~reach and sustainability.LVY ~~~~~~~~~~In sum, the Forum brought

together key stakeholders to raiseawareness on- the issues facing th-edevelopment of the micro-finance

T% ~~~~industry in the region, and began ap1 -~~ ~~ r ~ process of consultation among the

participants to address them.

Source: Anne-Marie Chidzero, CGAPMarketing Soweto-style Secretariat/Private Sector Development

Department, The World Bank.

B A N C O S O L: CR O S S I N G PRODEM realized that its clients vations necessary to create the newA BR I D G E B E T WE E N N G o lacked not only credit but a fill line bank xvere costly. COBANCO andA N D CO M M E R CI A L B A N K of banking services, including savings PRODEM spent nearly US$560,000

facilities. PRODEM's poor clients on the transition process, excludingE s t a b I s hi n g t h e B a n k were excluded from the traditional renovations and the purchase of fixed

- rg BancoSol in Bolivia is the result banling system by requirements of assets. With the completion of thisof the transformation of a sue- high minimum deposits and literacy, phase in February 1992, Banco-;--4 cessful NGO into a commercial as wvell as by the distant location of Solidario, SA, or BancoSol, openedOS bank, while maintaining the most banks. A history of bank fraud its doors for business.original mandate to serve the also inspired little confidence. To PRODEM and BancoSol operatemicro-finance sector. The roots PRODEMI, providing savings facili- within a mutual relationship. The for-. aO of BancoSol are in the NGO ties would not only be a service for mer sold a large portion of its portfo-< .Fundacion para la Promocion y its clients, but also a viable source of lio to the new bank in exchange forDesarrollo de la Micro Empresa funds to expand its loan program. A shares. This arrangement put

(Foundation for the Promotion and final impetus to create a new institu- BancoSol in a strong starting posi-Development of Microenterprise, or tion was the desire to find a sustain- tion, with nearly half of its paid-inPRODEM). This non-profit able market approach to equity capital available for lending.microlending program was estab- micro-finance, avoiding dependence PRODEM also transferred its 20,000lished in 1986 by ACCION on donated funds. Thus, the very clients to BancoSol, making the bankInternational with members of the success of PRODEM highlighted its the largest in the country in terms ofBolivian business community, using limitations as an NGO in this sector: number of clients from its very start.funds from USAID, the Bolivian inability to grow enough to meet Staff and offices of the NGO wereFondo Social de Emergencia (Social demand without access to other also transferred to the new bank.Emergency Fund), the Bolivian pri- funds; inability to provide full bank-vate sector, and the Calmeadow ing services; and limitations of being S e r v i c e s o f f e r e dFoundation of Canada. PRODEM a nonmarket entity. BancoSol makes much smallerwas a real success, educating clients In 1990, PRODEM's organizers loans than most commercial banks,in the use and management of credit therefore formed a steering commit- with a minimum of US$80 ratherand providing small short-term loans tee, COBANCO, to examine the than the standard minimum offor small-scale production and com- possibility of creating a private com- US$3000 of most Bolivian banks.mercial activities. PRODEM's track mercial bank which would serve the From February 1992 to Decemberrecord in micro-finance opened the microenterprise sector. The new bank 1994, the bank's outstanding loandoor to new funders and larger would be able to mobilize additional portfolio grew from US$3 million togrants. sources of funding, expand its vol- US$27 million, with the total number

Despite PRODEM's strong per- ume of lending by raising deposits, of borrowers increasing from 14,446formance, however, studies indicated and provide multiple financial ser- to 61,225. While arrears increased, asthat it was reaching less than 2 per- vices to clients. For two years this would be expected with such rapidcent of the estimated demand for committee undertook to design such expansion, they remained at 5.2 per-small loans in Bolivia. The organiza- a bank, find investors (including the cent, below the financial system'stion needed to expand its loan port- Inter-American Investment average, and the default rate was closefolio, yet potential sources of funding Corporation and the International to zero. In 1992, its annual percent-were finite. Only a limited amount Finance Corporation), obtain an age rate of interest on loans was 5 5-could come from international fund- operating license for the new bank, 57 percent, compared to 28-32ing agencies and donations-not and oversee the transfer of resources percent for other commercial banks.enough to meet demand. In addi- from PRODEM to the new bank. As a means of credit evaluation,tion, as an NGO, PRODEM was The additional management BancoSol depends upon "solidaritylegally restricted from raising funds information systems, software, securi- groups" rather than assets, cash flowin the commercial capital market or ty, personnel, training, consultants, or collateral. Community membersfrom client savings. Furthermore, travel, transition seminars, and reno- choose to be in a group with others

wvho are creditworthy and on whom US$120. From February 1992 tothey can rely to make timely loan December 1994, savings on depositpayments. In each solidarity group, more than tripled, fromthe individual borrowers act as co- US$953,600 to US$3.05 million.guarantors of each other's loans. Substantial growth in deposit mobi-These loans are typically given to lization has contributed to angroups of four to seven individuals. increase in the amount of creditLoans start at US$100 per individual available to microenterprisesborrower for terms that do not throughout Bolivia.exceed 60 days. The amount of the BancoSol has sought to fulfill theloan may increase, or its terms may microfinancing goals of its NGObe changed, subject to the clients' roots, xvith some of the resources,repayment records. skills, and scale of a private commer-

Interaction between staff and cial bank, as well as new proceduresclients is an important aspect of and programs designed to meet cus-BancoSol's lending operation. The tomer needs and market demand. It

With respect to savings mobilization, bank's operations are largely decen- expanded lending, recovered repay-tralized vith 29 branches in or near ments successfully, mobilized savings,market districts to facilitate client and became profitable in the micro-

no minimum amount required to open an interaction. Loan officers are recruit- finance sector xvithout having toed from these same communities and depend upon subsidized sources of

account. The average size of a savings neighborhoods. They undertake funds.

account is US$120. extensive fieldwork to survey localneeds and concerns, as well as to This article was pared by An-rieSmith. It is drawvn from tw~o sources: "Theacquaint themselves with potential View from the Field: Perspectives fromclients and the purposes for wvhich Managers of Micro-finance Institutions,"

loas mPresentations bv K imanthi Mutua, Pittyapolloans may be needed. They also workQ Nataradol, and M1aria Otero, compiled and

closely vvith solidarity groups, meeting edited by Beth R. Chung, Journal ofxvith each group on a weekly basis. Internati°onal Development, Vol. 8, -aNo. 2,

Withrespct t savngs obilza- pp. 179-193 (1996); and "The Creation ofWith respect to savings mobiliza- BancoSol in Bolivia" by Amy J. Glosser in

tion, BancoSol is the only bank in The New WVorld of MicroenterpriseBolivia with no minimum amount Finance: Building Healthy Financial

Institutions for the Poor, edited by Mariarequired to open an account. The Otero and Elisabeth Rhyne, West Hartfordaverage size of a savings account is CT: Kumerian Press, 1994, pp. 229-250.

S CA L I N G T O M I C R O- for worlking capital and financing of their customers. About one-third ofF I N A N C E: T H E H AT TO N equipment. HNB launched the first the loan accounts in the GP program

N AT 10 N AL B A N K GP units at 13 village locations. By are repeat customers. Many clients1995, it wvas operating from 45 bank have graduated to the SMI program.

Some established commercial branches and 33 village-based units. Until recently, the loans madebanks are entirely new to the The key personnel in this program under the GP program focused most-field of micro-finance, lacking are the Gami Pubuduwa Upadeshakas ly on individual borrowers. HNB haseither an NGO past such as (GPUs) or "barefoot bankers." The now begun to venture into group-BancoSol or a tradition of GPUs arc expericnccd banling offi- lending methodologies. It perceives

engagement in the micro- cers from HNB's mainstream opera- solidarity group lending schemes as°t. finance sector like Bank Dagang tions who receive special training in building upon the shramadana or

. -Bali. As the experience of microenterprise finance and project community-based sharing traditionHatton National Bank Limited development and analysis. Most are of villagers, and can be the means to(HNB) demonstrates, this lack from the same geographical areas as reach village households on lowerof background need not hinder the villages in which they work. These levels of the poverty pyramid.

>o a bank from entering into the village banking advisors bring to rural The full range of HNB's deposit-

The ACCION experience Accessing Commercial to 5percentoftheoutstandingletters(continuedfrom page 1) C a p i t a I f o r M i c r o - f i n a n c e of credit; and 3) all loans made to the

possible for micro-finance institutions Although the focus on operating Bridge Fund are pooled with each(MNFIs) to deliver financial services at efficiency has reduced costs for several investor sharing a proportional burdengreatly reduced costs. ACCION affiliates ACCION affiliates and some have even of the risk. To date, no investors in theshifted to a specialized approach focused earned profits, this achievement by itself Bridge Fund have suffered any losseson providing financial services to poor has not been sufficient to draw com-households, and developing strong insti- mercial investors to these institutions. The results of this new guaranteetutions able to cover the costs of deliver- Commercial investors perceive microen- mechanism have been positive. By Maying these services progressively. terprises as highly risky and are not of 1996, the Bridge Fund had been cap-

The results of this focus on financial familiar wvith how MFIs operate. iralized with US$6.6 million.sustainability and outreach to the very Moreover, even for investors ,villing to Currently, ten of ACCION's 18 affili-poor has shown substantial progress. In take the risk, there are few instruments ares are successfully raking advantage ofthe last five years, affiliates of ACCION available to forge links with the micro- the Fund. On average, the Fund guar-International have disbursed USS 1 bil- finance sector. In recent years, antees 50 percent of the commerciallion in loans to verv poor clients, and ACCION International has worked to bank loans extended to ACCION affili-the number of loans outstanding today develop mechanisms to overcome these ares. This means that today the Bridgeis around 280,000. First time loan sizes barriers, including the Latn America Fund is leveraging approximately twvice

e Bridge Fund and the ACCION its value in loans made to MFIsare between US$100-US$200, and the dg udadteACOoverall repayment rate00-iS$abo 9d pher Gatewav Fund. (US$13.2 million). Over time, matureoverall repayment rate iS above 98 per- - affiliates using the Bridge Fund mecha-cent. nism have become regular and trusted

In its effort to reduce costs and The Latin America Bridge clients of local banks. As a result, the

extend services to larger numbers of Fund has been able to provide letters ofE poor clients, ACCION has learned five The Latin Amerca Bridge Fund was credit for additional affiliates. DespiteE principles for successful MFI develop- established by ACCION International in the substantial resources mobilized by

ment: 1984. It is funded by loans from a num- the Bridge Fund, demand among localber of foundations, ptivate investors, and affiliates for commercial capital far out-

* MFIs need to know their market and religious organizations. This Fund oper- strips the current supplyrespondwxvith easily accessible and ates by providing a guarantee on loans

appropriately designed loans, made by local commercial banks to The ACCION Gateway FundACCION affiliates. Thus, by sharing ACCION International is currently

* MFIs can cut administrative costs by some of the risk in extending loans tosimplifiling loan review, working MFIs, the Bridge Fund induces commer- developing an expenmental equity instru-with small groups, and decentraliz- cial banks to enter into business relation- ment for MFIs in the ACCION neva,ork.ing loan approval, ships with MFIs. Typically, first time Equity investments from the Gateway

loans bv commercial banks are guaran- e MFIs,* Institutions should price loans to teed up to 90 percent by the Bridge usually those in a position to be licensed.

reflect the costs of efficient lending Fund. Over time, as the relationship An advantage of providing equity over

- even very poor microentrepre- between the MFI and the bank develops debt is that equity can be used by theneurs are willing to pay high inter- the proportion of guarantee drops pro MFI to leverage commercial loans, thusest rates for services they value. gressively; and in some cases the guaran- expanding the available resources several

tee has been eliminated altogether times over. Moreover, equity investmentsT Institutions can motivate loan repa- hese guarantees are extended oy to provide investors wxith decision-making

ment by assuting continued access ACCION's affiliates wrhich in turn are power in the MFI xvith a voting positionto services and through peer group required to meet both financial and non- on the MIFI's board.pressure. financial criteria established bv the Bridge The Gateway Fund will be capital-

* MFIs should recognize that the poor Fund. ized by a mix of donor grant fiundingvalue savings and should offer safe ACCION International maintains and private investors from the capitaland convenient deposit options. three layers of protection for its Bridge markers. Vhile there has been no expe-

Fund: 1) each affihare must maintain a nience with this sort of instrument in theloan-loss reserve equal to a minimum of micro-finance industry, ACCION hopes2 percent of the outstanding microen- this experimental mechanism will proveterptise portfolio; 2) the Bridge Fund to be a successful tool for mobilizingitself maintains a loan-loss reserve equal commercial resources for its affiliates.

PRACTITIONER NETWORKS

TheCGAPSecretariatreceivesmanyrequestsfrom MFlsforinformationon micro-financenetworks in their region. In response, CGAP has pulledtogether the contact information on a number of networks operating at the regional or international level. (There are too many national levelnetworks of practitioners to list here.} This list is not comprehensive of all micro-finance networks.

Global Networks Address Contact Information

Telephone: Fax:

1. International Coalition of West40th Street, 10th Floor NewYork, NY 10018 - USA 1 212-768-8513 1 212-768-8519Women and Credit

2. Micro-finance Network 733 15th Street, Suite 700, Washington, DC 20005 - USA 1 202-393-113 1 202-93-115

3. Opportunity International 1111 North 19th Street, Suite 501 Arlington, VA 22209 - USA 1 703-522-8155 1 703-522-8049

4. FiNCA International 1101 14th Street, N.W., Washington DC 28005 - USA 1 202-682-1510 1 202-682-1535

5. SEEP Network* do PACT, 777 United Nations Plaza, 6th Floor New York, NY 10017 - USA 1 212-808-0084 1 212-692-9748EMail: seepny@undp.org

6. Women'sWorldaBanking* 8West4oth St 10th Floor, NewYork, NY 10018- USA 1 212-768-8513 1 212-768-8519

7. World Organization of Credit 805 15th Street, NW Suite 300 Washington, DC 20005 - USA 1 202-682-5990 1 202-682-9054Unions (WOCCU)*

8. Agricultural Cooperative 50 F Street, N.W., Suite 900 Washington, DC 20001 - USA 1 202-879-0224 1 202-626-8726Development International (ACDI)

Asian Networks Address Contact Information

Telephone: Fax:1. Banking With the Poor 232 Adelaide Street, PO Box 10445, Brisbane QLD 4000 - Australia 61 7 3236-4633 61 7 3236-4696

EMail: fdc@ozemail.com.au

2. Grameen Trust Mirpur 2, Dhaka 1216- Bangladesh 880-2-806-319 880-2-806-319EMail:Grameen@driktap.tool.nl

3. CASHPOR Inc.* 6, Lorong 4/1, Jalan Permata 4 Taman Permata (Lobak) 70200 60 6 764-5116 60 6 764-2307Seremban, Negeri Sembilan - Malaysia Email: Gibbons@pc.jaring.my

African Networks Address Contact Information

Telephone: Fax:1t Reseau d'lnitiatives et du Credit do FONG, SBP 269, Thies - Senegal 221 51-12-37 221 51-20-59

Autogerees en Afrique (REICA)

2. PAMEF B.P. 1236, Cotonou, Oenin 229 33-06-39 229 33-07-33

3. PRAOC 01 BP 529, Ouagadougou - Burkina Faso 226-31-2983

4. Faulu Africa RO. Box 60240, Nairobi - Kenya 254 2 569-328 254 2 567-504Email: faulu@maf.org

5. Freedom from Hunger (FFH) 1644 Da Vinci Ct., Davis CA 95617- USA 1 916 758-6200 1 916 758-6241

Latin American Address Contact InformationNetworks

Telephone: Fax:1. ACCION International* 120 Beacon Street, Sommerville, MA 02143 - USA 1 617-492-4930 1 617-876-9509

2. Katalysis 1331 North Commerce, Stockton, CA 95202 - USA 1 209 943-6165 1 209 943-7046Email: katalysis2@aol.com

* Networks which have publications for sale on a variety of issues related to micro-finance of global interest.

SEPTEMBER 17-18, SEPTEMBER 19-20, action/research institutiononmicro-19 9 6 19 9 6 finance. The conference providedThird CGAP Consultative CG Meeting, Washington DC the first opportunity for a broadForum The Consultative Forum was fol- range of more than 100 Chinese

The third meeting of CGAP was lowed by a two-day meeting of the practitioners and policymakers toopened with a Consultative Forum CG that was attended by 21 Member share experiences and perspectives,that was attended by members of Donors. Reflecting on the first year and to learn about best practices inboth the Consultative Group (CG) of operations, the CG reaffirmed international micro-finance. Theand the Policy Advisory Group (PAG), their confidence in the current CGAP Chinese Academy of Social Sciencesas well as nearly 100 micro-finance structure, but acknowledged that Rural Development Institute alsopractitioners and experts. The CGAP more pro-active efforts were need- played an important role in coordi-Secretariat reported on its first year ed in donor coordination to improve nating the three-day workshop andof operation and solicited feedback communications and build internal three-day field trip to Yuchengfrom invited practitioners. A large capacity of member donors. A new County in Henan Province.part of the agenda was devoted to working group - New Financial The conference addressed criticalgroup and plenary discussions along issues in micro-finance design andthe themes of the seven working @@ g . g @ implementation ranging from thegroup topics identified at the Rome

meeting in February: (i) Financial role of government agencies toreporting and information systems; U P D A T E poverty measurement, financial sus-reportingi)nd informpacti asystessme methodo.tainability, and the design of credit

gies iii Poverty yardsticks andmea- , * ,g and savings instruments. Discussionsgies; (iii) Poverty yresltedinrasonsenus tatdthreaisurement tools; (iv) Private sector esus coten t for isinvolvement; (v) Mainstreaming and enormous potential for micro-involvement; (v) Mainstreaming and ~~~finance in China as part of a broad-dissemination; (vi) Savings mobiliza- Instruments -was created to exam- er poverty alleviation strategy, thattion; and (vii) Donor structures, ine the role of leasing and insurance cost coverage is critical to sustain-instruments, and modalities as they in micro-finance. The CG also agreed ability, and that certain policiesapply to micro-finance. The emerg- that performance criteria would be (notably savings mobilization restric-ing recommendations will be incor- developed to determine the effec- tions and interest rate ceilings) mayporated by working groups' tiveness of CGAP at the end of its limit the ability of micro-financemembers into an action-paper on term. institutions to reach sustainabiity.each topic at the next CG Meetingscheduled for June 18-20, 1997 in OCTOBER 13-119. CGAP is considering ways to build onManila. A summary of the proceed- 1 9 9 6 the momentum created by the con-ings from this meeting are available M i c r o -f i n a n c e C o n f e r e n c e, ference to help a rural credit foun-ings rom his eetig arBevalangon the CGAP Website and/or from dation apex train branch managers,the Secretariat. CGAP co-sponsored a conference establish a management informa-

with the Ford Foundation (China), tion system, and translate materialsUNDP (China) and the Management on micro-finance best practices intoCommittee for the Farmers Chinese for dissemination.Development Fund, a local Chinese

CGAP FUNID FACILITYAs of June 1996, the Secretariat received 116 applications. As of December 5, 1996, the Investment

Committee approved funding totaling around US$9.7 million.

Support for retail MFIs

Compartamos (Mexico) 2,000,000VBP Technical Assistance (Vietnam) 250,000Doveriye (Russia) 50,000WWB Capitalization Fund (5 MFIs Global) 2,500,000Accion Gateway (4-5 MFls Latin America 2,500,000Rural Finance Facility (South Africa) 50,000

Sub-total $7,350,000

Support to Networks

DEVCAP (Global) 25,000Credit & Devt. Forum (Bangladesh) 50,000Micro-finance Network (Global) 150,000Banking With The Poor Network (Asia) 50,000Freedom from Hunger (West Africa) 50,000PHILNET (Philippines) 50,000Pride Africa (Tanzania, Uganda) 56,000Cashpor (8 East and South Asian countries) 323,000

Sub-total $754,000

Pol icy/Best practice

Regulation and Supervision of MFIs

Conference (L. America) 15,000INAISE Seminar (Global) 5,000Village Bank Workshop & Study Tour (Tunisia) 15,000City of London Seminar (Global) 50,000Mali Policy Forum (16 West African countries) 250,000Third CGAP Meeting (Global) 119,000Policy and Regulatory Work (China) 298,000Micro-Finance Workshop (Peru) 20,000

Sub-total $774,000

Industry Product/Tool Deve'opment

Deloitte and Touche (Audit and FinancialStandards) 300,000

Economics Institute (Database of MFls) 345,500Ohio State University (Study of national and

regional funds) 180,200CG Donor Working Group (impact Assessment Methodology) 10,000

Sub-total $835,700

TOTAL $9,711,700

NEWSLETTER CREDITS

Editors Mohini Malhotra

Joyita Mukherjee

Production Valerie Chisholm

This newsletter is printed on recycled paper

using soy-based inks, by Select Printing,

911 21st Street, NW, Washington, DC 20006.

CDIUTACT INUFORMATIODN

The CGAP Secretariat, Room G4-115, The World Bank,

1818 H Street, NW, Washington, DC 20433

Tel: 202. 473 9594, Fax: 202. 522 3744

E-mail: CProject@Worldbank.org

World Wide Web: http://www.worldbank.org/html/cgap/cgap.html

-s

CGA P

THE CONSULTATIVE GROUP TO ASSIST THE POOREST

[A MICRO-FINANCE PROGRAM]

e w s E t