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CREATING AUTONOMOUS NATIONAL ANDSUB-REGIONAL MICROCREDIT FUNDS Dr
Salehuddin Ahmed This paper is intended to further the Microcredit Summit Campaigns learning agenda. Translation, printing and distribution of this paper has been made possible by a grant from the Grameen Foundation USA. The opinions expressed herein are those of the author and do not necessarily reflect the views of the Microcredit Summit Campaign or Grameen Foundation USA. Table
of Contents
Executive Summary Section 1 Rational for an autonomous microcredit fund 1.1 Need 1.2 Major objectives of MCFs 1.3 Impact on the poor and the poorest and achieving the Microcredit Summit's goals Section 2 Institutional Structure of the Funds 2.1 2.2 Governance Structure 2.3 Management 2.4 Autonomy Section 3 Funding 3.1 National MCF 3.2 Sub-Regional MCF 3.3 Market Sources of Fund Section 4 MCF Policies for funding partner microcredit institutions (MCIs) 4.1 Strategies of credit programs of MCF 4.2 Salient Features of the Credit Programs of MCIs 4.3 Eligibility criteria for Funding MCIs 4.4 Accounting and Auditing Principles 4.5 Managing the Savings of Beneficiaries 4.6 Default Management 4.7 Performance evaluation of MCIs Section 5 Implementation Strategies 5.1 Management Information System (MIS) 5.2 Human Resource Development Section 6 Institutional Development Section 7 Regulatory Framework Section 8 Interface Among Sub-regional MCFs, National MCFs and National MCIs Section 9 Concluding Remarks Section 10 PALLI KARMA-SAHAYAK FOUNDATION (PKSF) : THE APEX NATIONAL MICROCREDIT FUND IN BANGLADESH (Case Study) 10.1 Objectives of PKSF 10.2 Operational Strategy of PKSF 10.3 Legal Structure of PKSF 10.4 Organizational Structure and Membership 10.5 Programs 10.6 Program Implementation 10.7 Fund 10.8 Achievements of PKSF 10.9 Sustainability of POs and Role of PKSF 10.10 Some Lessons from PKSF Model Section 11 FONCAP S.A.-FONDO DE CAPITAL SOCIAL ARGENTINA (Case Study) 11.1 The rationale for creating the fund 11.2 Institutional Structure of the fund 11.3 Funding: how to forge partnerships and obtain funds while ensuring autonomy 11.4 Policies for selecting partner MFIs 11.5 Implementation strategies 11.6 FONCAP Portfolio (November 2000) Section 12 LOCAL INITIATIVE DEPARTMENT IN BOSNIA-HERZEGOVINA (Case Study) 12.1 12.2 Implementation Arrangements 12.3 MFI Performance 12.4 Institutional Capacity Building 12.5 Legal and Regulatory Reform 12.6 LIDs Portfolio Performance (December 31, 1998) 12.7 Future Perspective In
order to fulfill the Microcredit Summit goal of reaching 100 million
of the worlds poorest1
families by the year 2005, several measures must be taken to ensure
that more resources reach the poorest in cost-effective ways. The mechanism
of channeling funds, especially government and donor funds, to microcredit2
institutions through autonomous apex funding organizations can prove
to be efficient, quick and cost effective. Therefore there is a need
to create such microcredit funds (MCFs) at the national and sub-regional
level. MCFs can perform two major functions: financial intermediation
and development of sustainable microcredit institutions. The institutional
structure of such microcredit funds has to effectively resolve the legal/ownership
issue, governance issue, management issue and autonomy of the MCF. The
ownership structure should include a judicious mix of the state, civil
society and private sector. In order to keep the fund free from political
interference and bureaucratic tangles, the autonomy of the fund must
be recognized by the government and all other stakeholders. It must
be remembered that autonomy does not come as a 'gift from heaven;' it
has to be derived from the political commitment of the government. This
is a difficult, but not impossible task, as the case study of Palli
Karma Sahayak Foundation (PKSF) in Bangladesh shows. A major advantage
of autonomous microcredit funds is their ability to screen and monitor
a large number of microcredit programs (MCPs) according to same standard
criteria, compared to often inconsistent 'ad hoc' evaluations of individual
MCPs by donor and government agencies. Funding sources of MCFs may include
the government, donor agencies, international financial institutions,
the central bank and commercial banks within a country. The 'necessary'
condition of funding is that the government of a particular country
should commit its own resources, thereby making a firm pledge to help
the poor through an autonomous microcredit fund. The microcredit funds
should have pragmatic standards and procedures for evaluating the partner
organizations in such areas as: accounting and auditing, default management,
management information systems, human resource development and sustainability.
The case studies of PKSF in Bangladesh, Fondo de Capital Social (FONCAP)
in Argentina and Local Initiatives Department (LID) in Bosnia- Herzegovina
bring out the salient features of microcredit funds. Both the "process"
and "output" aspects are briefly analyzed in the three case
studies that are diverse in nature and in geographical setting. However,
there are some common features present in the three case studies, namely:
a commitment of the government and other stakeholders to microcredit
operations, some degree of autonomy of the funds, quick and cost-effective
implementation systems, good management and reporting systems and evaluation
of partner organizations based on performance. No system is perfect,
and the preconditions to set up a system may not be perfect, but one
must make a bold decision to introduce an innovative practice like that
of a microcredit fund which has already proved to be the best practice
in some places on the globe. The attacks on autonomous funds have already
been challenged by realities in the field. These apex funds are proving
their enormous potential to help the forgotten poorest people on earth. It's like a dream come true, loans bring good luck for rural women Not
long ago Razia Begum of Charfashion Thana in Bhola district of Bangladesh
could hardly manage three meals a day. Now the 35 year old housewife
earns more than she needs a month and dreams of prosperity. A mother
of six, Razia once had little idea about primary health care and sanitation.
Now the members of her family use sanitary toilets and consult doctors
when they fall ill. When her children study at night, Razia too reads
and writes with them. "I could never imagine that I would ever
be able to sign my name. It has been possible thanks to Family Development
Association (FDA). FDA has changed my life," said a gleaming Razia
who weaves household articles with bamboo and cane. Her husband also
helps her in her work. Goods and articles made by her are in demand
in her area because of their quality. She never goes to market. Instead,
buyers come to her house for the items she makes. It all began eight
years ago with a loan of Tk. 3000 (US$60) from Paribar Unnayan Sangstha
(FDA), a local non-government organization affiliated with Palli Karma-Sahayak
Foundation (PKSF). The funds of PKSF, the world's largest apex microcredit
funding institution, go to NGOs, cooperatives and the government sponsored
ANSAR VDP Bank. PKSF has 174 active partner organizations (POs), including
BRAC, PROSHIKA and ASA in 63 districts of the country while the total
number of its beneficiaries is about 1.8 million. PKSF not only provides
loans to its POs, but also imparts training to their staff members and
provides them with institutional development services for better loan
management. PKSF also provides interest free loans to its POs for buying
computers, motorcycles and bicycles.
Microcredit
has proved to be an effective tool for poverty alleviation by creating
opportunities for the poor to gain access to financial resources and
services. In most of the countries around the world donors, business
houses, private individuals and governments are providing funds to various
domestic microcredit institutions (MCIs) to carry out microcredit programs
(MCPs). In order to fulfill the Microcredit Summit goal of reaching
100 million of the worlds poorest families with microcredit by
the year 2005, steps must be taken to ensure more resources to promote
microcredit and to ensure that those resources are provided to MCIs
in cost-effective ways. The present mechanism of channeling funds to
MCIs, especially government and donor funds, has proved to be inefficient.
The total cost of providing funds directly to microcredit programs (or
"retailers") is usually high when the cost of feasibility
studies, appraisal missions, monitoring, evaluation, reporting and so
on are included. This is particularly true in cases where the funding
agency does not have a permanent office or adequately trained personnel
near the MCP being funded. MCPs require flexible, user-friendly, consultative
and fast-moving processes located near their areas of operation. As
a result of the high costs involved in providing funds directly to MCPs,
as well as the high costs incurred by many MCPs in receiving and administering
these funds, a relatively small amount of these funds are actually provided
as loans to the poorest. It is very difficult to give figures on how
much donor funds go to the poor. Some estimates may be made. About 51%
of CGAP's core fund reached the poorest as direct lending in its first
3 years of operation and the rest was spent on capacity building, technical
assistance, conferences, etc. Another estimate made regarding USAID's
fund: a maximum of 25% of the total funds reached the poorest. About
10% to 25% of donor funds actually reach the poorest, while the rest
is spent on administration, overhead, training, institution building
and consultants (Prof. M. Yunus "How Donor Funds Could Better Reach
and Support Grassroots Microcredit Programs Working Towards the Microcredit
Summit's Goal and Core Themes," Abidjan, June 1999). Therefore,
there is a need to create autonomous and cost-effective microcredit
funds (MCFs). In a large country or in a country where MCPs have great
potential, national funds can be created. In small countries where MCPs
are not well developed, sub-regional funds can be created3.
A
major advantage of autonomous microcredit funds is their ability to
screen and monitor microcredit programs (MCPs) according to standard
criteria, compared to often inconsistent 'ad hoc' evaluations of individual
MCPs by donor and government agencies. Funding and support based on
uniform standards create a level playing field. Standard monitoring
requirements also contribute to more professional MCPs which may be
converted to professional microfinance institutions for poverty eradication.
It may be interesting to note how PKSF played the role of both financial
intermediary and market developer. ii) By 1996 PKSF was able to create a standard for the microfinance sector in Bangladesh. It not only promoted Grameens financial technologies, but also accommodated other technologies. Most of the donors agreed that their partners should go to PKSF to expand their MCPs. The World Bank played a key role in this respect. BRAC & Proshika also applied for funds from PKSF. After a rigorous management audit, they were found to be eligible to become PKSFs POs. It should be mentioned that both gave high value to PKSFs suggestions as they became convinced that their institutional strength would be further enhanced if they followed PKSFs instructions. This was not a trivial task of course; PKSF had to earn their respect. The rational emphasis recently placed by many donors and governments to fund "institutions" rather than "ad hoc projects" is in line with the arguments put forward for creating autonomous microcredit funds. Through 189 POs, PKSF has, to date, disbursed more than US$165 million to over 2.13 million borrowers. Ninety percent of these borrowers are women. PKSF targets people who have up to 0.5 acre (0.2 hectare) of land or a total asset equivalent to the value of 1 acre of arable land (0.4 hectare). All the beneficiaries of PKSF are below the poverty line (2122 k.cal per person per day) and as such all of them are among the 'poorest.' The core objective of the national and sub-regional MCFs should be reaching the poor and poorest with financial services through sustainable MCPs under viable institutional arrangements. While the national and sub-regional microcredit funds (MCFs) may engage in providing a number of diverse services to promote the development of MCPs in their respective areas of operation, two major functions should be focused on: financial intermediation and development of sustainable institutions. The two major functions mentioned above are expected to produce two important outcomes: (i) The microcredit fund (MCF) will mobilize funds from governments and donors, in the form of loans and equity grants, and provide these funds to local MCIs to finance grassroots MCPs. These MCIs must be autonomous and outside direct control of the government and must be engaged in retailing loanable funds to the poor and poorest. (ii) The intermediation role of the MCF will therefore strengthen local organizations capacity to provide a sustainable system of financial services for the poor and poorest. This will develop the efficiency and competitiveness of MCIs to provide quick, efficient and cost-effective credit. They will be sustainable, while the ad-hoc and rootless organizations will wither away. At a more mature stage, the MCF can mediate between the MCIs and private capital markets by providing a credit rating of MCIs and securitization of MCI portfolios. Some researchers argue that in the absence of any viable MCI or MCP, apex organizations will not be viable. Therefore, they continue to hold the view that several other mechanisms may be better than apex organizations as instruments for the development of sustainable retail microfinance organizations. Both arguments hinge on the operation of regulated financial markets rather than independent, autonomous and competitive MCIs. Apex organizations will help create new MCIs and help them to attain financial sustainability. The fact that in some countries microfinance has been quite successful without strong apex organizations (like Indonesia), does not negate the necessity of an apex. While BRI in Indonesia has been successful in microfinance, their programs are rarely targeted to the poorest and their clients are not necessarily directly comparable to those of other organizations which are specifically trying to reach the poorest. Therefore, the need for apex funds for providing microfinance services to the poorest is relevant for all countries willing to work towards the Microcredit Summits goal. Some
analysts argue incorrectly that PKSF started its operation in an advanced
microfinance market endowed with a developed retailing capacity. In
fact, there was no single MFI that was even reasonably close to attaining
operating sustainability in 1990 other than the Grameen Bank. The total
portfolio of NGO-MFIs was 0.4 billion taka (US $7.4 million) in 1990.
The quality of this portfolio was far from acceptable. BRAC, now the
biggest NGO-MFI in Bangladesh, was struggling to devise an appropriate
lending technology in the early 90s. It was experimenting with
village organizations for delivering microcredit, a strategy which it
abandoned in 1993. Proshika, another large NGO-MFI, had a microcredit
program which was charitable in nature until 1994. ASA, one of the finest
MFIs in the world, did not have a microcredit program until 1992. The
fourth largest MFI in Bangladesh, TMSS, had a portfolio of Taka 0.2
million (US $3,714) in 1991 with less than 400 active clients. Moreover,
about 90% of today's NGO-MFIs did not have any microcredit program in
1990. A good number of them did not even exist. This was the retailing
capacity of the NGO sector in 1990, the same year PKSF was created.
The following is further evidence of the weak state of retailing capacity in the microfinance sector of Bangladesh in the early 90s. Total portfolio of NGO-MFIs was Tk. 0.4 billion (US $7.4 million) in 1990. The size of this portfolio has increased by 4500% in the last 10 years. It is interesting to note that this portfolio grew by only 900% within the first half of '90s. This shows that the boom in the microfinance sector of Bangladesh took place in the '90s and was especially profound in the second half of the '90s. The following table shows growth in the number of PKSFs partner organizations. It also reflects the weak state of the retailing capacity of the sector in the early 90s.
a) Governments of developing countries must adopt measures to promote microfinance as a long-term public policy. Continued government support of various types is an essential condition for a successful domestic apex organization. b) Donors must act in a concerted manner to promote microfinance with the goal to make it sustainable. c) The apex organization should be designed from the very beginning to promote the microfinance sector with a long term commitment along with a clear vision of becoming sustainable within a reasonable period of time (maybe 12 years). This vision must be reflected in its cost structure. For a thin microfinance sector, the apex organization will also be thin. It should also take special care in developing the right attitude of its own human resources from the very beginning. d) The donors should disseminate information about best practices to the domestic apex organization. This gives the apex organization an opportunity to develop its own lending technology so that it owns it. e) An established microfinance market is not a necessary condition for higher probability of success of a domestic apex organization. In every developing country (even in some of the developed countries). The need for microfinance is huge. The apex organization will adopt market development as an integral part of its financial intermediation role from the very beginning. f) The apex organizations lending technologies should give MFIs enough time for generating surplus funds, part of which may be used for innovating new financial products. No grant should be given in this regard. The result will be a more cost-effective way of innovating new financial products for the poor. g) The domestic apex organization should be in clear agreement with its partner organizations (POs) regarding the POs' institutional and financial sustainability within a reasonable period of time. The
efficacy of an apex organization like PKSF can also be seen from the
point of attaining financial viability by its partner organizations
(POs). It will be pointed out (in sec. 1.3) that PKSF has achieved financial
viability. Two main indicators - operating self-sufficiency and financial
self-sufficiency - were used in a study by the World Bank team in Dhaka
in April 1999 to determine the financial viability of 21 randomly selected
POs. These POs were enlisted by PKSF in different years starting from
1990. The financial reports and program data of all POs for the financial
year 1997-98 have been used for the analyses. The sizes of these POs
vary; the number of borrowers ranges from 1701 to 72,000. Except for
the smallest PO (with 1701 borrowers), all other POs have been found
to be operationally self-sufficient, that is, they covered operating
expenses from their income of microcredit. Similarly, 18 of 21 POs have
been found to be financially self-sufficient, that is they have been
able to fully cover their operating and financial expenses through interest
on members' savings (at the rate of 6% per annum), through the cost
of borrowing from PKSF (at 3-4.5% per annum), and through the provision
of bad-debt. The three that could not achieve financial self-sufficiency
had a small number of borrowers, ranging from 1701 to 3613. MCFs are closer to the grassroots organizations. Funds provided by MCFs are cost-effective and can reach the poor and the poorest without any leakage. Out of every dollar, it is expected that nearly 100% of it will go to help support institutions serving the poorest. Since the ultimate borrowers will get the credit in a cost-effective manner, the borrowers will be able to more quickly use these on various income-generating activities (IGAs) and thereby increase their incomes. PKSF has demonstrated a highly satisfactory performance with regard to financial viability. It has consistently covered its operational expenses from the service charges (which range from 3 to 5% per annum) it earns from wholesaling funds to its partner organizations. Until financial year 1999, PKSF had succeeded in keeping general growth and administrative expenses at less than the growth in income, resulting in rising operating margins. In 1999 total operating expenditures were 70% of the total income from service charges. PKSF has been able to fully cover its operational expenses and financial expenses (interest on loans taken from various sources, provision for debt servicing, and provision for bad debt) from its total income. PKSF has utilized the entire credit fund received from various sources for on-lending to its POs. PKSF has not spent anything from its capital fund; rather, it has been transferring its surplus income to its capital fund. For example, in 1999 Tk. 183 million (US$ 3.6 million) was transferred to the PKSF capital fund after all operational and financial expenses (including a loan loss provision of US$ 0.77 million) were met. This shows that an apex organization can channel the maximum amount of funds to the poorest people at the grassroots level. Studies of such MCFs in Bangladesh (PKSF) have shown that it has helped improve the social awareness of the poor (Alamgir 1997). It is expected that due to the operations of the MCF for on-lending through the MCIs, there will be improvements in asset levels, savings, housing patterns, occupation, education, health status and financial self-reliance of the microcredit borrowers compared to those of non-borrowers in a given area. Another very important impact is in gender sensitization for poor women in rural areas. A substantial portion of the MCPs borrowers are women. The credit received by women not only makes them active economic agents but also makes them socially important. This awareness on the part of the women is reflected in the increasing number of women participating in other development activities and in local council elections (like Village, Union/ Panchayet and sub-district councils). The three essential elements of social mobilization, economic integration and political participation of the poor are facilitated by MCPs, among others. From the above analysis, it is clear that creating MCFs at national and sub-regional levels will help achieve the following core themes of the Microcredit Summit by the year 2005: reaching
the poorest families (with MCPs). The ultimate test of a MCP is its impact on the borrowers. This impact may be direct (primary), such as impact on income and employment, or indirect (secondary), such as improvements in education, health and housing. Some selected indicators for evaluating the impact of a MCP on borrowers are: (i)
Economic indicators for current gains (income, food and nutrition intake,
housing); MCFs
that can facilitate fulfillment of the Microcredit Summit goal can be
put into two broad categories. First is an autonomous national fund,
and second is an autonomous sub-regional fund. The legal/ownership structures
of the two types vary primarily in that the first works within a national
boundary (and operates within a national legal framework) while the
second operates across national boundaries and works within a broad
framework of consensus among different countries. (a) The government may set up such a fund under a special legal enactment ensuring full autonomy. One may argue that MCFs under government patronage will not work. While there is some truth in the statement, it must be pointed out that without government support a national MCF will not be as robust as it should be. The idea is to mix state, civil society, and private initiatives with the core requirement being autonomy. We shall come to this point later. (b)
Donors and private financial institutions may form a consortium and
create a MCF. However, this may require a guarantee from the government
to allow the donor money to come to this fund on a loan basis. Moreover,
a legal entity must be created either under an existing law or through
a special enactment by the government. It is easier if the MCF is set
up under an existing law such as (c)
The government may set up the MCF under an existing Companys Act
and the MCF may be set up as a not for profit company by
the government. This is how the Palli Karma-Sahayak Foundation (PKSF)
in Bangladesh was established. The government used the Companys
Act of 1913. A sub-regional MCF can serve a number of surrounding countries, for example: Sub-Saharan African countries, West African countries, Central American countries, or Pacific Island Nations. Since such MCFs will cover several countries, legal coverage under a specific national law may not be feasible. One alternative may be to set up a MCF under the auspices of an inter-governmental organization such as the Asian-Pacific Development Centre (APDC) in Kuala Lumpur for small countries in South-East Asia; Centre on Integrated Rural Development for Asia and the Pacific (CIRDAP) in Dhaka for countries of the Pacific Island nations; and Centre on Integrated Rural Development for Africa (CIRDAFRICA) in Arusha for countries of that region. I use these examples because these organizations already have the member countries support for programs on poverty alleviation and MCFs created under these organizations could reach the poorest in their respective member countries. Sub-Regional
MCFs can be formed as an initiative of sub-regional networking organizations
which may already exist for the purpose of exchanging information and
technical knowledge on regional development issues. If such organizations
do not exist, then organizations like the Consultative Group to Assist
the Poorest (CGAP), Friends of Womens World Banking (FWWB) and
even the Microcredit Summit Secretariat could help launch discussions
with the respective countries about setting up such a fund. The
governance structure of the proposed MCFs should be based on three principles:
A
pair of policy-making bodies such as a In
order to preserve the autonomy of the MCF, a crucial issue is the political
will of the government reflected in its commitment to poverty alleviation
through microcredit. The government will possibly support other interventions
like health, education, infrastructure development and social mobilization
for poverty alleviation. Because microcredit has proved to be an important
and effective tool for poverty alleviation, support for MCPs should
be attractive for any government. Having political support, and a set
of dedicated and highly committed persons with knowledge of microcredit
from both the government and private sectors will help make MCFs truly
autonomous and efficient organizations. This point will be further elaborated
in section 2.4. Management
through core professional and support staff should be the next priority
of the MCF. The Chief Executive Officer (CEO) should be a dynamic leader,
demonstrate good management capabilities and be able to formulate good
strategic plans for the organization. The CEO should be selected by
the General Body/Governing Body through an open and competitive process.
As far as possible, nomination by the government should be avoided.
The CEO should have experience in government, civil society, and the
private sector. The CEO should be free of traditional bureaucratic attitudes.
The organization should have a dynamic and flexible operational procedure
and good management information systems (MIS). Hierarchy in decision-making
should be avoided. A collective decision-making process should be adopted,
as far as is practical, so that decisions are owned by all staff which
will help ensure the MCFs smooth implementation.
The
critical aspect of the institutional structure of the MCF is its independence
and freedom from political intrusion. One of the strengths of PKSF in
Bangladesh is that under the guidance of the highly respected General
Body and Governing Body, PKSF has been able to operate without political
interference. The extent to which organizations are able to operate
independently partly reflects the commitment of the government. In some
cases, however, it may be extremely difficult to avoid political interference
completely. Nevertheless, political influence may be minimized with
techniques which include spelling out the objectives and policies as
simply and clearly as possible, making the Governing Body members directly
responsible for achieving the objectives, limiting the number of public
sector representatives on the board, appointing the Chairman, CEO and
Board members for fixed terms, and enabling various private and non
government bodies to directly appoint representatives to the Board. (i) Seed money from the government should be the first source of funds. In fact, when the government initiates such a fund, as in the case of PKSF, international financial institutions and donor agencies are more likely to follow with matching funds in the form of loans or grants. The national government may provide seed money in the form of a grant to the MCF as a revolving fund or may provide it as a loan at a concessional rate (1-2%) for a long term period (minimum 10 years). (ii) International Finance Institutions (IFIs) such as the World Bank, IMF, IFAD, and ADB, which usually work through governments, can provide funds to MCFs established under government initiative. Alternatively, IFIs may provide funds to other privately established MCFs with a government guarantee. Donor agencies (both multilateral and bi-lateral) can provide funds more efficiently to national MCFs than by channeling their funds directly to MCPs. (iii)
National MCFs can also borrow on commercial terms from the International
Finance Corporation (IFC) and other international private capital sources.
Borrowing can be done from the Central Bank and other commercial banks
within the country. Commercial borrowing by the MCFs should be considered
at a more advanced phase of operation and not at the initial phase because
the high cost of commercial borrowing will put additional pressure on
the sustainability of the funds. (i) Sub-Regional MCFs can start with initial grants from the member countries. (ii) Donor agencies can provide grant money for a sub-regional MCF for loan programs as well as capacity building programs. (iii)
CGAP, FWWB and other international microcredit networking organizations
may also provide some funds. The host country and the host institution
(APDC, CIRDAP, CIRDAFRICA) may also be requested to provide start-up
and regular funds for the MCF. At
an advanced stage of operation, national MCFs can provide a bridge between
the private capital market and domestic MCIs by rating the credit worthiness
of MCIs and securitizing their portfolios. National MCFs may consider
raising funds from the domestic private capital market by issuing special
types of bonds (such as a social bond) which may be subscribed to by
companies, banks and private individuals. One
of the most important challenges of the MCF is to select partner MCIs.
Sometimes it is difficult to find an adequate number of efficient MCIs
running MCPs at the grassroots level. As we have mentioned earlier,
besides providing funds for MCIs, the other important objective is building
sustainable MCIs. The MCF should not stifle innovation and should not
impose any particular model. The experience of PKSF shows that its partner
organizations are diverse in nature. The MCFs credit programs should have innovative, transparent and standardized procedures for MCI selection, loan processing, monitoring and supervision at the field level. One of the strengths of PKSF has been regular contact and consultation with partner MCIs and adoption of the approach of learning-by-doing. One must remember that standardization of procedures should not exclude flexibility and the need to adapt to varied conditions and new challenges coming from the field as well as from the MCIs. As the experience of PKSF, with its diverse partner organizations shows, the MCF will not stifle innovation and will not result in the imposition of any particular model. The MCF is expected to implement three interlinked programs : (i) A loan fund to partner MCIs for on-lending to the poor and poorest families. MCFs should not be engaged in direct lending to the poor. (ii) An Institutional Development (ID) Program for the MCF and Partner MCIs. This will consist of, among other things, training of MCF/MCI staff, developing management information systems (MIS), and capacity-building programs for MCIs so that they become sustainable institutions. (iii)
Research: This should include periodic monitoring and special focus
studies. The emphasis on action-research is helpful in identifying the
MCPs strengths and weaknesses in order to make them more robust
and effective. The primary and secondary impacts of MCPs on the poor
and poorest families should also be evaluated periodically to sharpen
the focus of the program and meet the goal of the Microcredit Summit
Campaign. The credit programs of the MCF should be run through its partner MCIs for cost-effectiveness and better management at the field level. The loan programs undertaken by partner MCIs should have the following characteristics: 1. MCIs provide loans to the poor and poorest families selected on some pre-determined criteria such as land owned, total wealth, nature of the dwelling/house. 2. The borrowers are organized in small groups. 3. Groups are formed of like-minded people from the same economic strata, ensuring confidence and trust in each other. 4. MCIs collect service charges (interest) from their beneficiaries depending on the field situation of the MCIs and their target clients. The administrative and related expenses of MCIs are met from these service charges. 5. The repayment period for the poor, landless/assetless people (i.e., beneficiaries) to the MCIs should be based on the nature of the income generating activity in which they are involved. However, it is preferable to keep it within a 1-year period (with some grace period). 6. The rate charged by the MCF to the MCIs should be set at a minimum level, allowing a greater spread between the MCF rate and the rate charged by the MCI to the ultimate borrowers. 7.
Loans received by MCIs from the MCF may be for a period of 1 to 5 years.
If the funds are given for 2 to 5 years the MCIs can revolve the funds
at the field level by providing loans to different groups for a one-year
period. A
set of selection criteria for MCIs to be funded has to be formulated
so that the MCIs can be screened on the basis of the criteria. The criteria
can be divided into the following broad areas: It
must be pointed out that all the criteria may not have the same importance.
The criteria will also vary depending on the number of borrowers of
the potential MCIs and the funds required by them. One of the key pre-conditions for the success of a collateral-free microcredit program (MCP) is a sound accounting and auditing system. Therefore, the following steps should be taken by the MCF: (i) Prepare detailed and separate sets of accounts manuals, one for the MCF and the other for the MCIs. (ii) Prepare terms of reference (TOR) for the internal control and audit system of the MCF. (iii) Prepare TOR for audits of the MCF to be carried out by external and independent auditors. (iv) Prepare separate TOR for audits of MCIs to be carried out by the MCF and by external and independent auditors. (v)
Prepare guidelines for the internal control system to be followed by
MCIs. The
ultimate beneficiaries of microcredit are encouraged to save regularly
- an integral part of group formation and group activities of MCPs.
The MCIs under which the beneficiaries are organized usually manage
and keep accounts of these savings. Every member of a group saves regularly
(for example weekly) according to his or her ability. The savings collected
are recorded in the passbooks of each borrower. Though each borrower
is a net-debtor (in the sense that borrowing is greater than the accrued
savings), mobilization of savings by MCIs is a sensitive issue because
it is a financial service which can only be undertaken with specific
permission from a government or central bank. Recently, savings (both
regular and voluntary) have been quite substantial for many MCIs, and
therefore prudent norms and regulations should be introduced to ensure
the safety of savers. The MCF can raise the issue with the government
to create an enabling environment for MCIs in savings collection by
providing the MCIs with licenses and giving a legal identity for such
activities. The MCF can formulate policy guidelines in six important
areas: Full
implementation of the policies and guidelines and the creation of new
policies to manage default should constitute a major thrust of the program
of the MCF. Default may originate from six sources: To
prevent default, the MCF must prepare an early warning system based
on critical indicators of the MCIs performance. The system should
be implemented to detect and avert any potential
default. There
are dramatic differences among MCIs in terms of their credit operations
and quality of service delivery. Therefore, there is a need to develop
performance evaluation criteria to categorize various MCIs. The reasons
are The MCF can have performance indicators for MCIs using the following broad categories: 1. Viability of the microcredit borrowers, including: dropout rate, percentage of loans outstanding, savings rate, functional literacy, member/ borrower ratio, etc. 2. Institutional viability, including avoidance of overlapping with other MCIs, (where there are numerous MCIs), accessibility of borrowers, marketing prospects, banking service, governance, and equity base. 3. Program implementation, including: group members as a percentage of total target population, group cohesiveness, borrower attendance at weekly meetings, loan disbursement and recovery rate, skill of field workers, accounting system of the POs, and capacity of the top management. 4. Human resource development program, including: recruitment, performance appraisal of personnel, and training. 5. Periodic study of the impact of microcredit on poverty alleviation. 6. Creation and maintenance of expected institutional culture, including: sound governance and incentive base for management and staff. 7. Financial management and internal control, including: MIS, accounting system, internal audit, internal supervision and budgetary practice. 8. Status of physical assets, including: ownership of building, land, furniture, vehicles. 9.
Financial and economic viability, including: operational, financial
and economic self-reliance, and quality of portfolio. Program
implementation using standard procedures is a vital element for successful
MCFs. The major elements of implementation are Monitoring
of the credit program is crucial for its success. MCIs should monitor
their MCPs at the field level, while MCFs have to monitor the MCIs
programs in order to reduce their risk. For the MCFs to be successful,
it is important to establish and enforce appropriate performance and
reporting standards for the MCIs that they fund. A sound MIS based on
regular reports from the field to MCIs and from MCIs to MCFs is vital.
A computerized system at MCF and MCI head office levels will greatly
enhance the management capabilities of these organizations. Insufficient
attention to MIS by MCFs may represent a missed opportunity to improve
the outreach and sustainability of MCIs and MCPs, which are important
goals of the Microcredit Summit Campaign. A
good compensation package and incentive system has to be formulated
for the MCFs and MCIs to recruit and retain talented, efficient and
committed people in the MCPs. Finally, a HRD program committed to building
and maintaining the right kind of institutional culture and ensuring
effective management succession has to be developed for the sustainability
of the MCFs and MCIs. The institutional development components for both the MCFs and MCIs should be determined in line with attaining sustainability of each microfinance program as a whole. Three interrelated sustainability issues in microfinance must be properly addressed. These are: (a)
Sustainability of clients of MCIs; For the purpose of setting the general direction of activities undertaken by the MCFs/MCIs, sustainability of the clients must be monitored on a regular basis by using appropriate indicators (both process and impact indicators). For the MCF, monitoring the sustainability of both the MCIs and their clients will be required. Using
four sets of indicators related to This issue has come to the forefront because MCIs are providing financial services and products to the poor, outside the formal banking system. In view of the history of MCIs (most of which are NGOs or self help groups), it can be argued that the conventional regulatory framework such as that of formal banks and financial institutions is not appropriate and hence not required under the circumstances prevailing in many countries. This is particularly in view of the fact that MFIs are not accepting deposits with checking facilities. The unique features of MCIs in the field of social and financial services with the core objective of poverty alleviation differentiate the industry from the formal financial sector and further justify this proposition. However, that does not in any way downplay the importance of having some strategic monitoring measures that are compatible and appropriate to MCIs objectives, institutional operation and development culture. The measures should incorporate user-friendly prudential norms/indicative guidelines in the form of a concrete Code of Norms/Conduct which would ensure sound and organized growth of MCIs on a sustainable basis. A
set of financial standards, reporting formats and performance standards
may be an effective way to keep the MCIs on the right track. There is
a broad range of experiences to draw from in establishing appropriate
standards, including the work being done by PKSF. Recent attempts to
establish such MCFs in other countries are a move in the right direction,
because, among other functions, MCFs will be an effective institutional
option to fund startup MCPs within a poor/poorest-friendly regulatory
framework. An independent autonomous apex body outside the governments
control may be formed to ensure that the 'code of conduct' and the microcredit
standards are complied with by the MCIs. Non-compliance by the MCIs
may ultimately result in cancelling the permission/registration of a
defaulting MCI. This apex regulatory body for MCIs has to work very
closely with the MCFs. A broad framework of interface between these three types of institutions should be kept in mind in a dynamic and process dimension because such an interface cannot be imposed once-and-for-all; but it will evolve. However, the following guidelines may be considered: (i) In a country where there is huge potential for MCPs and an emergence of MCIs, a national MCF should be the apex funding agency for MCIs of that country. (ii) In a country where MCPs and MCIs have limited scope, that country can link with similar countries and form a sub-regional MCF, which will be the apex funding agency for the MCIs of the member countries. (iii) The two types of MCFs outlined above (i and ii) may form a network to exchange information and ideas and through that network, the MCIs of various countries may exchange information and ideas. Many 'experts' have argued that wholesaler organizations (apex organizations) have failed in different countries. PKSF, however, is cited as an exception. While we agree that there are some unique features, we also argue that the preconditions for creating a successful MCF like PKSF can be fulfilled by many countries. None of the apex organizations studied by the experts, except PKSF, was designed from the beginning as an apex organization focused on promoting microfinance. All of the other organizations studied began with a donor-induced program and then through a perverse process of changing roles induced by donors, they started operating as apexes for MFIs. This process evaporates the institutional sense of ownership. This may be one of the fundamental reasons these institutions have failed. PKSFs experience shows that an apex organizations costs for supplying resources to MFIs, with the ultimate objectives of reaching the poor with credit and enhancing the capacity of MFIs, can be done cost-effectively compared to other donor-induced arrangements. PKSF has supplied Tk. 7.94 billion (US $147.4 million) as a revolving fund to its partner MFIs (POs) over the last 10 years. This has enabled the POs to disburse Tk. 28.13 billion (US $522.4 million) as microcredit. The cost of supplying resources to POs was 5.47% during this period. The expenditures of PKSF for the training and capacity enhancement of its POs was only 6.94% of PKSFs total expenditures. It should be noted that expenditures for training and capacity enhancement are an integral component of the total expenditures made for supplying funds to POs. The creation of a domestic apex should not be expensive if the government is convinced of the importance
of promoting microfinance. In Bangladesh, microfinance could not have
reached its present stage without the long-term public policy adopted
by the government. The microfinance sector of Bangladesh has received
continuous support from the government. For example, the government
recently provided a tax exemption on the corporate profits of PKSF so
that PKSF can increase its equity quickly. Recently, institutions similar
to PKSF have been set up in Pakistan (Pakistan Poverty Alleviation Foundation)
and in Nepal (Rural Microfinance Development Centre Ltd.). Both of these
new institutions have not started with a very well-developed NGO-MFI
sector. In fact, RMDC started funding only 7 partner organizations and
PPAF not more than a dozen. Therefore, attacks by the skeptics of autonomous
funds are challenged by the realities in the field. The apex funds are
proving their enormous potential to reach the forgotten poorest people
on earth. PKSF was set up in 1990 by the government of Bangladesh with the overall objective of alleviating poverty and improving the quality of life of the rural poor, the landless and the assetless people by providing them with resources for the creation of self-employment to enhance their economic conditions. The specific objectives of PKSF are: a) to provide various types of financial assistance to non-government, semi-government, and government organizations, voluntary agencies and groups, societies and local government bodies, so that as Partner Organizations (POs) and consistent with the Foundations image and objectives, they can undertake activities with the goal of generating income and employment opportunities among the most economically disadvantaged groups in the society; b) to assist in strengthening the institutional infrastructure of the POs, so that they can improve their present operations. The basic operational strategies of the Foundation have been drawn from its objectives: a) It does not directly lend money to the landless and the assetless people in the rural areas: rather it reaches its target groups through Partner Organizations - the delivery mechanism for reaching the poor. b) It provides greater thrust to institutional development. c)
It favors no particular model, instead it encourages
innovations and different approaches based on experience. Legally
PKSF is a company limited by guarantee meaning company
not for profit and is registered under the Companies Act of 1913
with the Registrar of Joint Stock Companies. The legal structure of
PKSF gives it the flexibility, authority and power to take programs
and implement them throughout the country. PKSF can receive grants and
loans from local and/or international sources. It can also lend and
approve grants. a. General Body: The maximum number of the members in the General Body is 25, out of which the government may nominate not more than 15 members associated with government agencies, voluntary organizations or private individuals. The remaining 10 members are chosen from persons representing the Partner Organizations and/or private individuals. The General Body usually meets once a year for overall policy guidance. Presently, PKSF has a General Body of 15 members who are distinguished personalities in the country. b.
Governing Body: The composition of
the Governing Body is as follows: c. Chairman: The Chairman of PKSF is nominated by the government from persons not in service to the republic. The Chairman usually serves for a term of three years. The present Chairman is a leading economist and a Professor of Dhaka University. d. Managing Director: The Managing Director is the Chief Executive Officer (CEO) of the Foundation. He is an ex-officio member of the Governing Body. e.
Management: PKSF has three broad divisions: PKSF
has research and training units which conduct research related to poverty
alleviation and provide training to the staff of the Partner Organizations. PKSF implements three complementary programs: (a) A loan program for the rural landless and the assetless people through Partner Organizations; (b) An institutional Development Program for the POs; and (c) Research The
loan program is the core program. The institutional development program
is a support program to strengthen the POs into sustainable delivery
systems for the poor. It trains PKSF and PO staff; develops Management
Information Systems (MIS); and provides interest-free loans to POs for
buying computers, motorcycles, etc. a. Application in prescribed form: PKSF receives applications for loans in a prescribed application form that requires the applicant to include details about the organization, program, financing, etc. b.
Preliminary appraisal: If an organization
has experience managing a credit program for the poor, PKSF will do
a field visit. PKSF judges experience in managing a credit program using
several criteria: c. Field visit: Once an organization is selected for a field visit, an officer visits the organization. If the performance of the applicant is found to be satisfactory it is recommended for acceptance as a PO. If there is some deficiency, the organization is kept under observation and suggestions are given for improving the performance. However, if the performance of an organization is found to be unsatisfactory, the application is rejected. The main reasons for rejection are, usually, financial mismanagement or gross inconsistency between information in the application and that gathered from the field visit. d. Approval by the Governing Body: The final decision on accepting a PO rests with the Governing Body. If the management considers an organization qualified to be a PO, the proposal is forwarded to the Governing Body along with a detailed description of the organization, the field report, rationale for accepting it as a PO, and recommendation of the managing director. The Governing Body accepts, rejects, or puts conditions on acceptance of the organization as a PO. e. Signing of Loan Agreement: The final step in disbursing a loan to the newly selected Partner Organization is the signing of a standard loan agreement. The loan agreement contains terms and conditions of the loan (e.g., rate of service charge, area of loan disbursement, number of installments). The loan is collateral-free. In addition to a loan agreement, a promissory note is signed by a representative of the PO. The loan agreement is signed for PKSF by the Managing Director and for the PO by the Chief Executive of the PO or sometimes jointly by the Chief Executive and the Chairman. f. Verification of Loan Utilization: After the first loan is given, the PO is supposed to disburse the funds immediately and provide a list of borrowers to PKSF. An officer from PKSF in charge of the PO visits to verify the loan disbursement and utilization of the loan by the members. PKSF officials usually visit the POs every three months. g.
Application for Successive Loans: The
approval of successive loans depends on several factors: h. Monitoring: Monitoring of the credit program is crucial to its success. POs monitor their programs at the field level and PKSF monitors the programs both at the field and office levels. Since PKSF provides collateral-free loans to POs, the only way to reduce the risk is to monitor the programs regularly. Several complementary steps are taken to monitor the activities of POs, especially the credit program and fund management. A brief account of the monitoring system is given below: (a) Collection of program information: As previously mentioned, PKSF uses a standard form every month to collect information on changes in borrowers, savings, loan disbursement and recovery. (b) Financial position: POs submit cumulative and monthly income, expenditure and cash flow statements to monitor the financial health of the PO. (c) POs regularly send their lists of borrowers to PKSF. These are borrowers from fresh installments of loans from PKSF or loans from the revolving fund. (d) Field visits: Field visits by the officers of PKSF are the backbone of monitoring the POs. PKSF places the utmost emphasis on field visits. Usually, the officer visits each PO every three months. However, if the PO is big and has multiple branches, a team of PKSF officials visit the program. During the visits the information submitted by POs as mentioned in (a), (b) and (c) is verified. Suggestions are made for improvement. The field visit is used for verification of the program and for institutional development of the PO. (e) Audit by internal audit team: PKSF conducts an annual audit of all its POs. The audit reports are submitted to the CEO of PKSF directly. (f)
Audit by audit firm: As a part of the annual financial auditing of PKSF,
an external audit firm verifies the financial position of sample POs. (i) Grant from government = US$ 21.6 million World Bank = US$ 5.0 million USAID = US$ 12.7 million (ii) Loan from government = US$ 10.0 million World Bank = US$100.0 million ADB = US$ 18.0 million Others = US$ 0.6 million a. Enlistment of POs: PKSF has accepted POs every year since its inception. Starting with 23 POs in its first year of operation, PKSF has enlisted 189 POs as of December 2000. The POs of PKSF work in 62 out of Bangladeshs 64 districts. b. Loan disbursement: PKSF has disbursed Taka 7,049 million (US$140 million). With the revolving nature of the fund and with additional funds, the POs have extended about Taka 21,000 million (US$411 million) at the field level. c. Loans outstanding: PKSF has Taka 5,244 million (US$103 million) in loans outstanding with POs as of December 1999. d. Borrowers: As of December 1999, the total number of borrowers financed by PKSF was 1.87 million, more than 90% of whom were women. e.
Recovery of loans: PKSF has
two different recovery rates: f. Strengthening of the POs: One of PKSFs main achievements is the development of local institutions. Most of these NGOs run their programs with loans only from PKSF. Still, they are successfully able to cover almost the full amount of their cost of operations, and many have approached financial viability. Aside from financial viability, local POs are now better prepared to manage their programs because of the training, advisory services and institutional development program of PKSF. These include training, development of accounting systems and MIS, and continuous management suggestions for improving their programs. g. Potential for expansion: The total number of borrowers of PKSF's POs is over 2.1 million (including that of BRAC, ASA |