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Dr. Salehuddin Ahmed Executive Summary In order to fulfill the Microcredit Summit goal of reaching 100 million of the worlds' poorest 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 microcredit institutions through autonomous apex funding organizations can prove to be efficient, quick and cost effective. Therefore, there is a need to credit such microcredit funds (MCFs) at the national level 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 address the legal/ownership issue, governance issue, management issue and autonomy of MCF. The ownership structure should have a judicious mix of state, civil society and private sector. In order to keep the fund free from political interference and bureaucratic tangles, autonomy of the fund must be recognized by the government and all other stakeholders. It must be remembered that autonomy does not come as 'gift from heaven'. It has to be derived from political commitment from the government. This is difficult, but not an impossible task as the case study of PKSF in Bangladesh shows. A major advantage of autonomous microcredit funds is their ability to screen and monitor microcredit programs (MCPs) according to some standard criteria, compared to inconsistent 'ad hoc' evaluations of individual MCPs by donor and government agencies. Funding sources of MCFs may consist of government, donor agencies, international financial institutions, central bank of a country 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 for helping the poor through autonomous microcredit funds. The microcrdit funds should have some pragmatic standards and procedures for evaluating the partner organizations, accounting and auditing, default management, management information system, human resource development, performance evaluation of partner organizations and creating sustainable microcredit institutions. The case studies of PKSF in Bangladesh, Foncap in Argentina and LID in Bosnia- Herzegovina bring out the salient features of microcredit funds. Both the "process" and "output" aspects are analyzed (though in brief manner) in the three case studies which are diverse in nature and in its geographical settings. However, there are some common features present in the three case studies namely : 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 system and evaluation of partner organization based on performance. The organization for setting up microcredit funds are sometimes brushed aside by some skeptic voices who might have some preconceived notions. No system is perfect, and the preconditions to set up a system may not be perfect, but one must take a bold decision to introduce an innovative practice like that of a microcredit fund which has already proved to be a best practice in some places on the globe. Section 1. Rationale of autonomous microcredit fund It's
like a dream come true, loan brings good luck for rural women 1.1 Need Microcredit has proved itself to be an effective tool for poverty alleviation by creating opportunities for the poor to get 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 world’s poorest families with microcredit by the year 2005, measures must be taken to ensure more resources to promote microcredit and also provide those resources to MCIs in cost-effective ways. The present mechanism of channeling funds, especially government and donor funds to MCIs is not appropriate. Moreover, the amount of loan fund ultimately reaching the poor is quite low. The total cost of providing fund directly to microcredit programs (MCPs) or "retailers" is usually high when the cost of feasibility studies, appraisal missions, monitoring, evaluation, reporting and so on are included. This even more in the case when the funding agency does not have a permanent office or adequately trained personnel near to the MCP to be funded. The unique nature and needs of MCP contrary to the relief-type programs require flexible, user-friendly, consultative and fast moving processes located near to the areas of operations. 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. 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 a great potential, national funds can be created. In small countries where MCPs are not well developed, sub-regional funds can be created. 1.2 Major objectives of MCFs A major advantage of antonomous microcredit funds is their ability to screen and monitor microcrdit program (MCPs) according to some standard criteria, compared to inconsistent 'ad hoc' evaluations of individual MCPs by donor and government agencies. Funding and support on uniform standards would create a level playing field, while standard monitoring requirements would contribute to more professional MCPs which may be converted to professional microfinance institutions for poverty eradication. The rational emphasis recently put by many donors and governments to fund "institutions" rather than "ad hoc projects", is in line with the arguments put forward for creating autonomus microcredit funds. 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 development of MCP in their respective areas of operation, two major functions should be focused which are: financial intermediation and development of sustainable institutions. The two major functions mentioned above are expected to produce two important outcomes: 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 will be autonomous and outside
direct control of the government and engaged in retailing loanable funds
to the poor people. Another very important impact will be on ‘gender’ sensitization for the poor women in rural areas. A substantial portion of the borrowers of MCPs 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 MCF at national and sub-regional
levels will help achieve the following core themes of the Microcredit
Summit by the year 2005: (i)
Economic Indicators for current gains (Income, Food and Nutrition Intake,
Housing) Section 2 Institutional Structure of the Fund 1. Legal/Ownership Structure: Types of MCFs that can facilitate fulfillment of Microcredit Summit goals can be under two broad categories, as mentioned earlier, one is an autonomous national fund the other is a sub-regional fund. The legal/ownership structures of the two types will vary primarily because the first one will work within a national boundary (and as such be within national legal framework) and the second one across national boundaries (and as such be within a broad framework of consensus of different countries). National MCF (a) The government may set up such fund under a special legal enactment ensuring full autonomy to it. One may argue that MCF under government patronage will not work. While there is some truth in the statement, it may be pointed out that without government support a national MCF will not be as robust as it should be. The idea here is to mix state, civil society, and private initiatives and the ‘core requirement’ is 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 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 existing law or under a special enactment
by government. It will be easier if the MCF could be set up under existing
(c) Government may, set up MCF under the existing Company’s Act of the country and the company 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 set up by government in 1990 under the Company’s Act 1913. Sub-regional MCF (a)MCF
of such nature can serve a number of surrounding countries in a region.
For example: For Sub-Saharan African countries, for West African countries,
for Central American countries or for the Pacific Island Nations such
MCF can be established. Since such MCFs will cover several countries,
legal coverage under a particular national law may not be feasible. One
alternative may be to set up a MCF under the auspices of an inter governmental
organization like 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: Centre on Integrated Rural Development for Africa (CIRDAFRICA)
in Arusha for countries of that region. All these organizations have already
got the member countries’ support for programs on poverty alleviation,
MCFs created under these organizations can reach the poorest of the poor
in their respective member countries. The
governance structure of the proposed MCFs should be based on three principles:
A
set of policy making bodies like General Body/Governing Body; Governing
Council/Executive Committee; Board of Trustees Working Committee and so
on should be formed. In each pair of the above bodies, the first one should
be usually a representative body of about 25 members which will be responsible
to set out broad guidelines of operations, approve budgets and audit reports
and adopt strategic policy options. The second body in the pair should
be responsible for the management and administration of the affairs of
the MCF in accordance with mandate of the MCF and rules set forth by the
first body. The second body should consist of a relatively small number
of people, preferably 10 members, and should meet frequently as required,
while the first body will meet once or twice a year. 2.4 Autonomy The
critical aspect of the institutional structure of the MCFs 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 governments, and in some cases 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 Chairman, CEO and Board members for fixed terms,
and enabling various private and non government bodies to appoint representatives
to the Board directly. Sub-Regional
MCFs can start with initial grant contributions from the member countries.
Donor agencies can provide grant money for a sub-regional MCF for loan
programs as well as capacity building programs. At
the 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 securitization of the portfolios of MCIs. National MCFs may
consider raising funds from the domestic private capital market by issuing
special type of bonds (such as a social bond) which may be subscribed
by companies, banks and private individuals. MCF will not stifle innovation and will not impose any particular model as the experience of PKSF shows that its partner organizations are diverse in nature. MCF is expected to implement three interlinked programs : (i) 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) Institutional Development (ID) Program for MCF and Partner MCIs. This will consist of, among other things, training of MCF/MCI staff, Developing management information system (MIS), and capacity building programs for MCIs so that they become sustainable institutions. (iii) Research: This will include periodic monitoring and special focus studies. The emphasis on action-research will be helpful in identifying strengths and weakness of MCP to make it more robust and effective. The primary and secondary impacts of MCP on the poor and poorest families should also be evaluated periodically to sharpen the focus of the program and meet the goals of the Microcredit Summit. 4.2 Salient Features of the Credit Programs of MCIs The credit programs of the MCF should be run through its partner MCIs for cost-effectiveness and for better management at the field level. The characteristics features of the loan programs undertaken by partner MCIs should be as follows : 1.MCIs
provide loans to the poor and poorest families selected on some pre-determined
criteria like land owned, total wealth, nature of the dwelling house etc.
It must be pointed out that all criteria may not have the same importance. It will also vary depending on the number of borrowers of the potential MCIs and funds required by them. MCF should not provide start up capital for MCIs and MCF may stipulate a minimum period of 1 year of satisfactory working of MCIs. 4.4 Accounting and Auditing Principles One
of the key pre-conditions for the success of a collateral-free microcredit
program (MCP) is having a sound accounting and auditing system. Therefore,
the following steps should be taken by the MCF: The
ultimate beneficiaries of microcredit are encouraged to save regularly
which is 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/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 for more 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 the government or central bank. Recently, savings (both regular and
voluntary) have been quite substantial for many MCIs, therefore prudent
norms and regulations should be introduced to ensure the safety of savers.
MCF can take up the issue with the government to create an enabling environment
for MCIs in savings collection by providing the MCIs with license and
giving a legal identity for such activities by the MCIs. The MCF can formulate
policy guidelines in six important areas: 4.6 Default Management 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 basically six sources; To prevent default, the MCF has to prepare an early warning system based on critical indicators of the performance of MCIs. The system should be implemented to detect any potential default and to avert the default. 4.7 Performance evaluation of MCIs There
are remarkable differences among the MCIs in terms of their credit operation
and quality of service delivery. Therefore, there is a need to develop
some performance evaluation criteria to categorize various MCIs. The obvious
reasons are The MCF can use performance indicators for MCIs belonging to the following broad categories: viability
of the microcredit borrowers, including: dropout rate, percentage of loans
outstanding, savings rate, functional literacy, member/ borrower ratio,
etc. Program
implementation through a set of standard procedures is a vital element
for successful MCFs. The major elements of implementation are 5.1 Management Information System (MIS) 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 that these institutions 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 are 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. 5.2 Human Resource Development In most countries the endowment of human capital for the MCP is very limited. However, this limitation can be overcome by a comprehensive human resource development (HRD) package implemented jointly by MCFs and MCIs. Training of MCF and MCI staff is an important aspect. A Proper training needs assessment (TNA) to be done for both MCFs and MCIs and pragmatic, operation-orientated training and orientation to be provided. PKSF in Bangladesh has formulated 7 training modules for its staff and 12 modules for the staff of MCIs funded by PKSF. 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 with the objective of building and maintaining the right kind of institutional culture with a view to ensure effective management succession has to be developed for the sustainability of MCFs and MCIs. Section 6. Institutional Development 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 addressed properly. These are: Sustainability
of clients of MCIs Using
four sets of indicators related to Section 7. Regulatory Framework This issue has come to the forefront for the simple reason that MCIs are assuming an important role in providing financial services and products to the poor, outside the formal banking system. In view of the historical emergence and evolutionary process of MCIs (most of which are NGOs/SHGs), it can be argued that the conventional regulatory framework like 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 that differentiate the industry from the formal financial sector further justify the proposition. However, that does not in any way downplay the importance of having some strategic monitoring measures that are compatible and appropriate to their 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 works being done by PKSF in Bangladesh, the biggest and most successful national microcredit fund (MCF) in the world. Recent attempt to establish such MCFs in other countries is a move in the right direction, because, among other functions, MCFs will be an effective institutional option to fund start-up MCPs within a poor/poorest-friendly regulatory framework. An independent autonomous apex body outside the government control may be formed to ensure that the 'code of conduct' and the microcredit standards are complied with by the MCIs and 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. Section 8. Interface among sub-regional MCF, national MCF and national MCIs A broad framework of interface between three types of institutions should be kept in mind in a "dynamic and process" dimension because such an interface cannot be imposed once-for-all; rather it will be evolved. However, the following guidelines may be considered: In
a country where there is huge potentials for MCPs and emergence of MCIs,
a national MCF should be the apex funding agency of MCIs of that country.
9.1 Objectives of PKSF 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 creation of self-employment for enhancing their economic conditions. The specific objectives of PKSF are: (a) to provide various types of financial help and assistance to non-government, semigovernment, and government organizations, voluntary agencies and groups, societies and local government bodies, so that, as Partner Organizations (POs) and consistent with the Foundation's image and objectives, they can undertake activities with a view to generating income and employment opportunities among the economically most disadvantaged groups in the society; (b) to assist in strengthening the institutional infrastructure of the Partner Organizations, so that they can improve their present operations. 9.2 Operational Strategy of PKSF 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 of the rural areas: rather it reaches its target groups through the Partner Organizations, the delivery mechanism for reaching the poor. (b) It provides greater thrust to institutional development. (c) It favors no particular model, instead innovations and different approaches based on experience are encouraged. 9.3 Legal Structure of PKSF 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 allows the flexibility, authority and power to take programs and implement them throughout the country. PKSF can receive grants and loan from local and/or international sources. It can lend and approve grant as well. 9.4 Organizational Structure and Membership a. General Body: The maximum number of the members in the General Body will be 25, out of which the government may nominate not more than 15 members from amongst persons associated with government agencies, voluntary organizations or private individuals. The remaining 10 members may be from amongst 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 consisting of 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 of the republic, usually 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 the ex-officio member of the Governing Body. e.
Management: PKSF has three broad divisions : PKSF has research and training units to conduct research related to poverty alleviation and to impart training to the staff of the Partner Organizations. 9.5 Programs PKSF implements three complementary programs: Loan
program for the rural landless and the assetless people through Partner
Organizations; (c) Research The Loan program is the core program. The institutional development program is a support program to strengthen the POs for making them sustainable delivery systems for the poor. It consists of training of PKSF and PO staff; development of Management Information System (MIS); provision of interest free loan to POs for buying computers/motorcycles, etc. 9.6 Program Implementation 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 of managing a
credit program for the poor, PKSF preliminarily selects it for a field
visit if all information provided by the organization is consistent. PKSF
judges experience in rural credit program using several criteria; c. Field visit: Once an organization is selected for field visit, an officer visits the organization. If the performance of the applicant is found satisfactory it is recommended for acceptance as PO. If there is some deficiency, the concerned organization is kept under observation and suggestions are given for improving the performance. On the other hand, if performance of an organization is found unsatisfactory, the application is rejected. Usually, the main reasons for rejection are financial mismanagement or gross inconsistency between information in the application and that gathered from field verification. d.
Approval by the Governing Body: The final power of accepting a PO rests
with the Governing Body. If the management considers an organization to
be accepted as a PO, the proposal is placed with a detailed description
of the organization, along with the field report, rationale for accepting
it as a PO, and recommendation of the MD, in the meeting of the Governing
Body. The Governing Body accepts or rejects or puts certain conditions
for accepting the organization as a PO. f. Verification of Loan Utilization: After the first loan is given, the PO is supposed to disburse the loan immediately after receiving the funds and give a list of borrowers to PKSF. An officer from PKSF in charge of the PO visits the PO to verify the loan disbursement and utilization of the loan by the members. Usually, PKSF officials visit the POs at an interval of 3 months. g.
Application for Successive Loans: The approval of successive loans to
a PO depends on several factors: h. Monitoring: Monitoring of the credit program is crucial for its success. POs monitor their programs at the field level and PKSF monitors the programs both at their 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 mentioned above, PKSF collects information
on changes in borrowers, savings, loan disbursement and recovery every
month in a prescribed form. (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 Total = US$ 167.9 million 9.8 Achievements of PKSF a. Enlistment of PO: PKSF has accepted POs every year since its inception. Starting with 23 POs in its first year of operations, PKSF has enlisted 187 POs up to December 1999. The POs of PKSF have been working in 62 out of 64 districts of Bangladesh. b. Loan disbursement: PKSF has disbursed Taka 7049 million (about US$140 million). With the revolving nature of the fund and with additional funds, the POs have extended about Taka 21000 million (about US$411 million) at the field level. c. Loan Outstanding: PKSF has Taka 5244 million (about US$103 million) in loans outstanding with POs as on December, 1999. d. Borrowers: As of December, 1999, the total number of borrowers financed by PKSF was 1.87 million, of whom more than 90% were women. e.
Recovery of Loan: PKSF has two different recovery rates: f. Strengthening of the POs: One of PKSF’s main achievements is the development of local institutions. Most of these NGOs are running their program by receiving loans only from PKSF. Still, they are successfully able to cover almost the full amount of their cost of operations, and many have approached towards 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 system and MIS, and continuous management suggestions for improvement of their programs. g. Potential for Expansion: This is another indicator for measuring achievement. The total number of borrowers of PKSF's POs is 1.87 million (including that of BRAC, ASA & Proshika). So there is scope for further expansion of loan to the POs. In addition, PKSF is accepting new POs every year and existing POs are also expanding their coverage. h. Training and advisory services: PKSF arranged several workshops for the directors of POs. These workshops mainly discussed policy issues to introduce uniform systems across the POs. Sessions were arranged for giving training in accounting and MIS for the accountants and credit coordinators. PKSF has prepared 19 modules for training of its staff and different levels of staff of POs. One of the effective way of training of staff are those practical training sessions given by the officers of PKSF during their routine visits to each PO. During these visits problems are identified and solutions are given. Regular discussions are held with the organizers and field staff during the field visits. i. Research programs: So far, PKSF has conducted two research studies on the impact of its program on the beneficiaries. There have been several studies on PKSF by various authors in Bangladesh and abroad. Recently, PKSF has contracted out a multi-year impact study to the Bangladesh Institute of Development Studies (BIDS), the premier research institution in Bangladesh. j. Impact: Various research studies have shown positive impact of microcredit on the lives of the rural poor in Bangladesh. A set of indicators has been suggested to study the impact further. 9.9 Sustainability of POs and Role of PKSF a. Institutional sustainability of POs: Fundamental policies to run a successful rural credit program are in place in many POs. Selection of members, savings and loan policies, portfolio management, financial control, and monitoring and evaluation are some of the fundamental areas of policy formulation. So far, many POs within their limited capacity have tried to recruit competent staff. POs do not have adequate financial resources to recruit staff with better educational attainment and competence. Many POs are being managed by their founders and expected to do so for quite sometime. Leadership by the present Directors at this early stage of the organization is important for growth and sustainability. Many POs either have physical assets like office buildings and land or purchased land for construction of office, training center, etc. This shows a clear commitment from the part of the organizers for giving POs a solid foundation. Financial sustainability of POs: The basic issue in financial viability analysis is whether POs can cover the costs of managing their credit programs from the income of the programs, mainly the service charge from loans. Some POs have been successful to gradually cover the cost of operations from the income of the credit program and generate moderate surplus. It expected that all POs will continue to improve their profitability conditions. Role
of PKSF: Directors of POs have identified several areas where PKSF made
significant contributions: Future
role of PKSF: The future expected role of PKSF has also been identified
by the Directors of PKSF which are: b. Sustainability of PKSF Institutional sustainability of PKSF: PKSF has a competent and dynamic Governing Body capable of guiding the management, changing policies and introducing programs as necessary. It has well established transparent policies regarding the loan program as well as management of its affairs. It has gradually increased its outreach by enlisting an increasing number of POs. PKSF has been able to mobilize the financial resources required to embark on a large-scale expansion of its activities. These factors will continue to contribute towards the expanded operations of PKSF. Financial Viability: PKSF has been able to gradually improve its financial position. It has been successful in increasingly covering the cost of its operations by charging a reasonable service charge, increasing loan disbursement, keeping its operating expenses low and keeping the loan loss expenses very low by maintaining high recovery rate. Overall, PKSF has posted a surplus every year since inception. Some of the financial data of PKSF as on 30 June 1999 are as follows : Debt-equity Ratio 1.63:1 Cumulative Loan Recovery Rate 98.16% Reserve Rate (Loan loss reserve/loan outstanding) 2.67% Operational expenses to loan disbursed (operational 5.28%expenses/disbursement of the same year) Operational self sufficiency (Total income/operation 161%expenses including financial expenses + DMR) Percentage of total expenditure to total income36.43% Financial ratio analysis shows that PKSF is in sound position. The debt-equity ratio, the portfolio and self-sufficiency ratios show that performance of PKSF is good in terms of operational and financial self-sufficiency. The cost structure and the profitability analysis also show that PKSF is covering all the expenditures from its income from loan operations and also having surplus of income over expenditure. 9.10 Lessons from PKSF Model PKSF is unique in its organizational structure, activities and management practices. A few factors can be identified that have made it possible to register such an impressive performance. PKSF has been established and funded by the government, but it has been kept as an independent organization outside government bureaucracy. That enabled PKSF to form its own policies and develop its own management practices suitable for its activities. The outstanding quality of the Governing Body has contributed most in guiding the management and forming and revising policies whenever necessary. The policy of recruiting officials of above average quality has contributed most to the growth and performance of PKSF. PKSF has been successful in utilizing the capacities of local NGOs in quickly reaching the poor and developing the POs to deliver the financial services to the poor. Selection of the right POs was the most crucial factor for PKSF’s success. The key to the sustainability of POs is the assured source of funds and the improvement in the capacity of human resources backed by good management practices. In both areas, PKSF has proven itself to be effective. Financial intermediaries (NGOs) backed by resources from PKSF have been found to be effective in reaching the poor. Both PKSF and the POs can also become sustainable in the process. The rural poor men and women have proven themselves to be capable of managing money and improving their income. Likewise, the POs of PKSF have proven the ability to select right target groups and deliver the desired services. One area that needs top priority from PKSF is enhancing the capacity of POs. This can be done by more investment in development of the POs’ human resources of POs. The PKSF model (as an apex second-tier organization) shows potential for replication. It can further grow and make significant contribution in improving the quality of life of the poor. Section 10.Foncap S.A.-Fondo de Capital Social Argentina (Case Study) Date of creation of the fund The "Fondo Fiduciario de Capital Social" (FONCAP) is an innovative initiative of the government of Argentina created at the end of 1997. 10.1 The rationale for creating the fund There
was a need for microcredit funds because in Argentina institutions did
not exist with the necessary capability, economic strength, and, the commitment
to serve the poor and the poorest. Foncap has been designed with the intention of coordinating the strengths of three sectors - social, private and public - in order to develop an organization which aims at maximizing the contributions that each party can make in terms of their capacity to serve the poor, as well as neutralizing their particular weaknesses in the same respect. Foncap's mission is to eliminate the barriers to access to credit for the poor, safeguarding their interests and linking them with the other sectors of society. C) Foncap’s objectives match the Microcredit Summit’s goals in almost all of its work, including: reaching the poorest families, empowering their female members and building financially self-sufficient institutions. With regard to the impact on the lives of clients and their families, FONCAP is developing tools in order to measure as accurately as possible the results of the practitioner's operations in terms of social welfare and improvement of quality of life. 10.2 Institutional Structure of the fund A) Legal/Ownership Structure: Foncap’s microcredit fund amounts to US$ 40 million which is at present entirely funded by the Argentine government. Through a 30 year fiduciary agreement, the fund is managed by Foncap SA, a private corporation whose stockholders are: the government, with 49% of the shares, and private NGOs, with the remaining 51%. This scheme, with the majority interest in private hands, ensures the autonomy of the fund and allows it to set long-range policies and strategies regardless of the changes in the public administration. B) Governance Structure: The governing body in of Foncap is the Board of Directors. Its composition reflects the primacy of private sector, which is represented by 9 members, while the government is represented by only 4. To ensure effectiveness and autonomy, only the Board is empowered to hire and dismiss the managers and mid ranking managers. C) Management: The microbank and microenterprise area managers constitute the core staff of the organization. Organizational Chart
In the microbank's area, the core portion is the microbank financial services sector, which has the following assignments: Evaluate
the financial viability of microbank projects, submitting business plans
to the Board for their approval, and administrating the disbursement of
loans and grants according to the correct allocation of these resources
by each microbank. Then, supervising and controlling these operations
in order to identify any deviations either in terms of the outreach and
expansion of the operation or the population being served.
10.3 Funding: how to forge partnerships and obtain funds while ensuring autonomy Foncap's bylaws allow the creation of new microcredit funds and new trustees. The initial US$40 million in stock is considered as seed money, available to match investments with other donors for the development of new funds to assist poor microentrepreneurs. These funds can be focused on regional (a microlending operation in a province) or sectorial criteria (e.g., poor women in the agricultural sector). The goal is to identify these regional and sectoral needs and set partnerships with corporations and NGOs with specific and local interests in developing these initiatives. The efforts for replication of Foncap's model across the country will encourage the decentralization process, ensuring more and more autonomy. At this time Foncap does not consider it necessary to require institutional or commercial borrowing. Funding has not been a constraint so far. The real bottleneck is the capacity of microcredit programs to deliver services to the poor and poorest. 10.4 Policies for selecting partner MFIs Strategies
of credit program: Foncap intends to promote the Argentine micro-finance
sector through the creation, strengthening and expansion of local microbanks.
It also aims to create the infrastructure necessary to scale-up financial
services to microentrepreneurs and to create a promising network of practitioners.
b) Eligibility criteria of MFIs to be funded: The MFls who either directly or indirectly use resources of Foncap shall meet the following requirements:
c) Accounting, Auditing principles: As discussed, the MFIs agree to be audited and monitored by Foncap's staff or outside contractors. Basically, Foncap performs three types of control: Monitoring
the development of the microcredit program according to the goals established
in the Business Plan: this monthly exercise focuses on evolution of number
of clients, outstanding portfolio, operational income and expenses, and
all relevant information essential to determine the degree of accomplishment
of activity level and operational self-sufficiency. e) Default management and performance evaluation of MFIS: The information provided by the MFIs and the reports from the auditors and monitoring personnel set the basis for performance evaluation that includes:
10.5 Implementation strategies a) Management Information Systems (MIS): The members of Foncap's Board have information available on Foncap and MFIs operations. b) Human resource development: One of the Foncap’s main goals is to facilitate the generation of an increasing supply of human resources specialized in microfinance through training courses complemented with field work for practical and concrete experience. c) Institutional Development: Through the support credit line, Foncap has made available an yearly amount of $4 million for creating capacity, institutional and financial sustainability of MFIs and also has additional resources to strengthen its own capacity. This type of loans, convertibles to grants, are demonstrating to be a powerful tool in order to reach financial sustainability and institutional strengthening for MFIs, specially those who are new comers. d) Regulatory Framework: Foncap has developed a project to prepare a regulatory framework for the microcredit sector. Two consultants are engaged in this work. Foncap’s goal is to get a sanction from the government for a law setting a legal framework that will contribute to the consolidation of the microfinance industry. Section 11. Local Initiatives Department in Bosnia - Herzegovina (Case Study) 11.1 The Local Initiatives Departments (LIDs) were established in 1996 to administer the World Bank-sponsored Local Initiatives Project. The LIDs are departments of government-created Employment and Training Foundations (ETFS) established in each of the constituent Entities of Bosnia and Herzegovina - the Federation and the Republika Srpska. The ETFs channel donor fund to employment-related programs. The LIDs operate with a great deal of autonomy within the ETFs and the LIDs from each Entity work in close cooperation and share certain functions and staff. 11.2 Implementation Arrangements The
LIDs operate as apex institutions. They channel donor fund to microfinance
institutions (MFIs) that provide credit to target clients. The LIDs monitor
the performance of the MFIs and make financing decisions based on performance.
The LIDs also provide technical assistance and training to their partner
institutions to help strengthen their institutional capacity and knowledge
of microfinance best practices. And they work to establish a more favorable
legal and regulatory environment for the legal establishment of MFIs in
Bosnia.
However, not all MFIs were able to meet the LIDs assessment criteria. Based on the assessment, the LIDs decided to continue financing five MFIs in the Federation and three MFIs in Republika Srpska. 11.4 Institutional Capacity Building Supporting the institutional capacity building of the partners is one of the LIDs' main goals. Technical assistance and training have taken the form of seminars, study tours and technical advice. During 1997-98, eleven seminars were held in the following topics: Principles and Methodologies of Microcredit; Credit Officer Training; Accounting and Financial Management; and Planning for Sustainability. Three study tours were also organized to Bolivia, Egypt and Poland. The 1999 Technical Assistance program was designed based on the inputs of the MFIs provided during a participatory planning workshop held in December 1998. The program aims to reflect the MFIs' requests that TA is:
The 1999 TA program comprises seminars, study tours and individual consulting in the following areas: information dissemination on microfinance best practice to all MFIs in Bosnia and Herzegovina; accounting and financial management training; study tours to Bangladesh, Colombia and Poland; management training; board development training; and training on the new legal framework and institutional development. 11.5 Legal and Regulatory Reform A primary goal of the Local Initiatives Project is to create a clear legal and regulatory framework for the provision of credit and saving services to the self-employed and microentrepreneurs. In 1998, a participatory process was launched to develop such a framework with the support of the World Bank and USAID. Expert teams were established in each Entity comprising representatives from the microcredit practitioner community, the Ministry of Finance, the Banking Agency and the Local Initiatives Department. By the end of 1998, a draft proposal had been developed establishing four legal forms:
The draft proposal will be further discussed and presented to the government for consideration and legal enactment. 11.6 LID Portfolio Performance (December 31, 1998) Total loans disbursed : 14,347 Total value disbursed : 41,373,660 DM (US$ 20,694,974) Total no. of active clients : 8,864 Total portfolio outstanding : 149,467,435 DM (US$ 74,763,139) The Local Initiatives Project has raised a total of US$ 19 million from the Governments of Australia, Italy, Japan, The Netherlands, Norway, Switzerland; World Bank; UNDP; and UNHCR. Over 70% of funds so far received have been used in the microcredit loan fund. 11.7 Future Perspective The LID’s strategic goal is to support microfinance institutions that have demonstrated the capacity to reach financial sustainability and provide continued services to large numbers of low-income entrepreneurs. All MFIs that meet mutually agreed performance standards will be eligible for capitalization by the LID as independent, financially viable microfinance institutions. These standards include:
LIDs
will study to learn more about the impact of these loans on the clients'
businesses and their family income and well-being, as well as to learn
more about other constraints facing self-employment and microenterprise
development. The LIDs will also continue to work on putting in place an
appropriate legal and regulatory framework for MFIs.
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To transfer and adapt the practitioners' microcredit technologies and
methodologies which have proven to be effective and efficient, for use
by other practitioners.
