PKSF : National Apex Funding for Microcredit

Every institution that joins a Microcredit Summit Council commits to developing an Institutional Action Plan outlining how it will contribute to the Summit’s goal. In this issue we highlight the Institutional Action Plan of the Palli Karma-Sahayak Foundation (PKSF), the world’s largest national apex microcredit funding institution exclusively serving poor clients. Managing Director Dr. Salehuddin Ahmed outlines how his institution succeeds at its work.


Tell us about the Palli-Karma Sahayak Foundation (PKSF).

Palli Karma Sahayak Foundation is a Bengali name which means Rural Employment Support Foundation. This foundation was created by the government of Bangladesh in 1990 as a not-for-profit company. The idea behind the company aspect is that it should be autonomous and free from bureaucracy. PKSF is an apex financial institution for collateral-free loans to about 162 NGOs and also some government programs and cooperatives. The idea is to reach the grassroots-level organizations. We call them partner organizations, or P.O.s. We also have the mandate to set standards for microcredit operations and to develop NGOs as sustainable microcredit finance institutions.

PKSF is governed by a board of directors of seven people and there is a general body of 15 members. The government representatives are nominated in an individual capacity, not in their government capacity and they usually speak on an individual basis. PKSF has flexibility and autonomy. Our budget is approved by the board of directors and then the government is informed. Thus we operate in a really flexible and autonomous way.

The sources of funding for PKSF include the following: First, the government of Bangladesh has provided US$31.9 million since the inception of PKSF. Second, we have a credit line from the World Bank of US$105 million. In fact, the borrower is the government of Bangladesh on behalf of PKSF. After twenty years we have to pay the principal back. The government of Bangladesh is borrowing at a rate of .75% and PKSF is borrowing from the government at 1%. Third, we also have a credit line from Asian Development Bank of US$18 million. Fourth, we have a grant for seed capital from USAID–about US$10.3 million. And there are other institutions that are coming forward to provide funds.

At present we have 162 partner organizations. We have some selection criteria: they should target the poor and the landless people; the organization should work in the different areas of Bangladesh, they should not be overlapping; they should have a management information system (MIS) and accounting system. That’s how we select them.

Out of our 162 P.O.s, three are big: BRAC, PROSHIKA, and ASA. As I mentioned earlier, we get funds from the government at 1% interest. We call it service charge, not rate of interest. And we provide funds to the partner organization at the rate of 3-5%. For the small organizations we charge only 3% service charge; and for the big ones like ASA, BRAC, and PROSIHKA we charge 5%. We have a 2-4 % margin and out of that we have to manage PKSF’s expenses. We are not dependent on the government budget.

PKSF’s 162 partner organizations reach about 1.2 million borrowers in the rural areas. More than 90% of the clients are women. Up to October 1998 we had provided about US$91.3 million. This in fact has spun off at the field level about 2.7 times because we provide funds to partner organizations for three years but they usually give it to the groups for 50 weeks. So they can revolve the money for about three years and–along with the savings generated from the beneficiaries–they have provided about $247 million at the field level to 1.2 million borrowers. And the recovery rate is 98%. To get the World Bank money and government money, PKSF must maintain the 98% recovery rate. The recovery rate at the two levels–that is the clients are paying to the partner organizations, and partner organizations are paying in installments to PKSF–at both levels we are maintaining 98% recovery rate. Recently, to cope with the severe flood that hit Bangladesh, PKSF has provided 0.2 million US$ to its POs as grant to help them create "Disaster Management Fund", which will be a revolving fund with each PO.By the end of December 1998, we have a target to reach about 1.8 million borrowers. And as part of the Summit’s goal, we have a plan to reach about 3 million borrowers by the year 2005.

Experience demonstrates that governments, and authorities run by governments, should not administer microcredit programs because there is too great a chance for corruption, favoritism, and other political problems. What are some of the principles that make PKSF work, and what are specific mistakes that the government of Bangladesh has been able to avoid in setting up PKSF?

The principles: Number one is PKSF’s mandate is clear and it is straight forward. The mechanism to implement this mandate is flexible and free from bureaucracy. Number two principle is PKSF has a friendly, system–that is, clients are called partners. We have very close consultation with NGOs and our partners, so this is a kind of very friendly system. Number three principle is PKSF is managed by a dedicated set of professionals. Number four principle is that PKSF has a good management information system; it has a good accounting system. Therefore it has a very good supervision and monitoring system. And fifthly, PKSF receives very good guidance from the members of the board of directors, as well as members of the general body. So these are the five very basic principles of PKSF.

About how many staff does PKSF have?

Right now I’ve got about 121 staff members.

How are the board members chosen? How was the Managing Director chosen?

Out of seven members of the board, the chairman and two other members are chosen by the government. The managing director is chosen by the board through a search and selection committee. There was an open advertisement; there were about three hundred people interested in that. So out of that, I was selected by the Board of Directors on the recommendation of the search and selection committee. Rest 3 members of the Board come from Universities, NGO etc. elected by the General Body every year.

How does PKSF decide which programs to fund?

If some partner organization is interested then they apply to us. The first, foremost criteria is you must have microcredit programs for the poor and the landless people. This is the very first thing we look at on their papers. Then another criteria is the focus on the rural areas. And another very important criteria is focus on women. Then on the basis of this we assess their applications, their activity report, their audit report, the composition of their board of directors because the people behind an organization is very important. A kind of social audit is necessary. And on the basis of that we first make a preliminary selection when we ask a lot of questions to them. Then after that our officers must visit the field. They go to the office, to the area, then they also visit and talk with the beneficiaries they are working with. They double-check whether this organization is really working. So after a very extensive field visit and on the basis of that the final recommendation is written and it goes to the board. So the selection criteria is quite rigorous. And it’s quite systematic.

What reporting requirements does PKSF ask of the programs you fund?

We usually ask for five types. For example, a list of the microcredit borrowers. They must really give us specific names, we cross-check the names also. That is important.

Then secondly the loan disbursement schedule, that is how much money they have given to each individual–2,000 taka to Amena 3,000 taka to Rezia, or like that. Then they must give us the audit report. Then we have this monthly cash flow and monthly income expenditure statement. That is, how much they spend on administration, they spend on training, they spend on institutional development, and how much they actually fund for microcredit operation. Then we have a monthly report on the recovery rate, overdue loan, amount of savings generated.

In addition to loans, what types of training do you provide?

We have three types of training. One, is for the executive or director level people of POs [partner organizations]. The second is the mid-level people like accountant and field coordinators, and the third is training for the field level officials. We do not train the beneficiaries; that is the job of the partner organizations themselves. PKSF has given some interest-free loans to partner organizations to buy, for example, bicycles, motorcycles, and computers. We have provided about US$2.3 million worth of interest-free loans. That is, for three years they don’t have to pay any interest. This is kind of an incentive we are giving to the partner organizations for them to develop their capability.

One of the Summit’s core themes is ensuring impact, or movement out of poverty. Do you have any criteria in this area?

We have commissioned the Bangladesh Institute of Development Studies (BIDS) for a three-year multi-period longitudinal study. We are spending about US$400,000 for that. We will trace 3000 households over three years, how they are improving from their benchmark condition by 2001. We also want to see the impact on their income level, on their education, on their family welfare. In fact, we have about 11 indicators to choose. Number one, the foremost one, is income. Then the second one is food and nutrition intake. Number three is housing. Number four: land. If they get a loan they can buy land and can move from the level of landlessness. Then education, sanitary conditions, and drinking water. These are the very simple indicators we would like to see and whether they have tin roof houses. So we are trying to monitor the impact of microcredit on the poor through these indicators.

The challenges before PKSF is to reach the poorest of the poor. In fact some of the people we have not been able to reach: the 10% or 15% of what we call the hard-core poor, the people whose nutrition intake is below 1800 calories per day. This is one of the challenges we are now trying to move toward. The second is the problem of multiple membership when some people become members of two or three microfinance institutions.

The third challenge is to provide credit for micro-enterprises for the graduated and innovative entrepreneurial members of the microcredit program. Fourthly, the issue of removing urban poverty by microcredit. And lastly, the most important thing. PKSF is trying to work on some sort of legal framework. You know that the NGOs which are getting funds and giving funds are not strictly covered by any legal mandate covering financial product and services. Grameen Bank is a bank. It has set up by an act of Parliament. But other NGOs are not covered by any such act. So PKSF is in contact with the government and central bank to devise an appropriate legal framework for microcredit.

There must be some sort of legal authority for these NGOs to mobilize savings and give a return on their savings. Because now there is no appropriate coverage of law right now.

Are you looking at all to any other central bank or to any other government as to what they’ve done, or is all the thinking coming from Bangladesh?

Oh no, our people have visited some countries Central America like Bolivia and Chile. The central bank people have also gone. Other officials of PKSF including myself have visited many institutions in the USA and some other countries. More importantly we are sitting with the partner organizations. It must be participatory. It must be a very friendly kind of a legal framework.

For example there must be some kind of legal coverage so these NGOs can really mobilize the savings, they can mobilize the voluntary savings as well. Because a kind of a financial service is there. These savings and some of these funds can be invested in kind of a long-term loan of some kind of return, which may not be possible right now. For example, they can’t buy any government bonds with this kind of money, the excess money which they do have. A kind of investment in government securities are not allowed right now.

From your staff’s research and visitation, can you name any government who has, to your understanding, developed very positive legal framework?

No, no one has developed [this]. There may be some legal frameworks in Bolivia and Chile. They may have kind of a law, to start with any kind of microcredit operation, someone has to first register under the law. But in Bangladesh we can not institute that kind of law because NGOs have already started microcredit programmes. It’s [the microcredit programs] already started and the government has to really adopt some kind of laws suiting their needs and requirements.