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Presented by :
Dr. Salehuddin Ahmed
Managing Director
Palli Karma-Sahayak Foundation (PKSF)
(Paper for course on
"Identifying Funding Options", Microcredit Summit Meeting of
Councils,
24-26 June, Abidjan, Ivory Coast)
PALLI KARMA-SAHAYAK FOUNDATION (PKSF) :
THE APEX MICROFINANCING ORGANIZATION
IN BANGLADESH (Case Study)
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 the 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 in consistence 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.
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 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.
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 flexibility, authority and power to take
programs and implement them throughout the country and managing its affairs.
PKSF can receive grants and loan from local and/or international sources.
It can lend and approve grant as well.
4. Organizational Structure and Membership
a. General Body: Maximum number of the
members in the General Body will be 25, out of which 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:
(i) Chairman of the Foundation (nominated
by the Government),
(ii) The Managing Director (appointed by
the Governing Body),
(iii) Two members nominated by the Government
and
(iv) Three members elected by the General
Body. That Makes a 7-member Governing Body of PKSF. Present Governing
Body comprises persons of international repute including Professor Mohammad
Yunus, Manging Director of Grameen Bank.
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. The present Managing Director has been appointed
by the Governing Body. He is the ex-officio member of the Governing Body.
e.
Management: PKSF has two divisions headed by two General Managers: Loan
Operations and Administration & Finance. Each department is supported
by required number of officers. PKSF from its inception has been following
a policy of recruiting officers with high academic standing. Loan Operations
Division is the program division of PKSF that selects POs, disburses and
recovers the loan, monitors and evaluates the programs and provides the
training and advisory services to the POs. PKSF has an internal audit
unit which reports directly to the Managing Director.
PKSF has a small
research and training unit to conduct research related to poverty alleviation
and to impart training to the staff of the Partner Organizations.
5.
Programs
PKSF implements
three complementary programs:
(a) Loan
program for the rural landless and the assetless people through Partner
Organizations;
(b)
Institutional Development Program for the POs, and
(c)
Research
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/motor cycles etc.
6. Program Implementation
Application in prescribed form: PKSF receives application for loan in
a prescribed application form that requires the applicant to include details
of the information about the organization, program, financing, etc.
b.
Preliminary appraisal: If an organization has experience of managing credit
program for the poor, PKSF preliminarily selects it for field visit if
all information provided by the organization are consistent. PKSF judges
experience in rural credit program using several criteria;
(a) number of years of experience,
(b) amount of loan disbursed,
(c) number of members and borrowers,
(d) recovery rate of loan,
(e) adequacy of skilled salaried staff and
(f) credibility of the sponsors.
(Criteria
of selection in Annex-1)
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 the financial mismanagement, 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 PO, the proposal
is placed with detail description of the organization along with the field
report, rationale for accepting it as PO and recommendation of the MD,
in the meeting of the Governing Body. The Governing Body after deliberation
accepts or rejects or puts certain conditions for accepting the organization
as PO.
e.
Signing of Loan Agreement:
(a) Final step in disbursing loan to the
newly selected Partner Organization is the signing of a standard loan
agreement with PO. The loan agreement contains terms and conditions of
loan (e.g. rate of service charge, area of loan disbursement, number of
instalments etc.). The loan is collateral free. In addition to a loan
agreement, a promissory note is signed by the representative of PO.
(b) The loan agreement is signed from PKSF's
side by the Managing Director and from PO side by the Chief Executive
of the PO or sometimes jointly by the Chief Executive and the Chairman.
(Credit Products : Terms and Conditions in Annex-2)
f.
Verification
of Loan Utilization : After the first loan is given, the PO is supposed
to disburse the loan immediately after receiving the fund 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 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:
(a) satisfactory utilization of previous loan,
(b) maintaining high rate of recovery of
loan at the field level (>98%);
(c) giving reports regularly to the PKSF,
(d) potential for expansion of loan program,
and
(e) repayment of loan installments to PKSF,
if due. The successive loan proposals upto Taka 2.5 million are approved
by the Loan Committee. Similar loan agreement is signed for each instalment
of loan. Loan beyond Tk. 2.5 million limit is approved by the Governing
Body.
h.
Monitoring:
Monitoring of credit program is crucial for its success. POs monitor their
programs at the field level and Since PKSF monitors the programs both
at their field and office levels. Since PKSF provides collateral free
loan 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:
Collection of program information: As already mentioned above that PKSF
collects information on changes in borrowers, savings, loan disbursement
and recovery, every month in a prescribed form.
Financial position: POs submit cumulative and monthly income, expenditure
and cash flow statements to monitor financial health of the PO.
POs regularly send the list of borrowers to PKSF. These are borrowers
from fresh instalment of loan from PKSF or loan from revolving fund.
Field visits: Field visit by the officers of PKSF is the backbone of monitoring
of programs of POs. PKSF places utmost emphasis on field visits. Usually,
the concerned officer visits each PO every three month. 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) are verified. Suggestions are made for improvement.
The field visit is used for verification of the program as well as an
effort for institutional development of the PO.
100% audit by internal audit team: PKSF conducts 100% audit of borrowers,
usually annually, before embarking on major expansion of loan. The audit
reports are submitted to the CEO of PKSF directly.
Audit by audit firm: As a part of annual financial auditing of PKSF, external
audit firm is engaged to verify the financial position of sample POs.
7.
Human Resources Management
Human resources in PKSF is considered as its main strength and engine
for its fast growth. A combination of above average academic standing
of officers, training and an compensation package for the officers, and
an open environment contributed to the success of PKSF.
a. Recruitment Policy
PKSF has a well developed 'service rules' for policies regarding the human
resources management of PKSF. Most important policy of PKSF is the recruitment
policy. PKSF recruits graduates of above average academic results. This
policy has greatly contributed to the quality of services delivered, working
culture within PKSF and advisory role played by PKSF.
PKSF follows an elaborate screening process to recruit officers and support
staff. An elaborate written test with viva-voce test is taken to recruit
officers. This ensures transparent recruitment process and ensures quality
of officers.
b. Training Program
for Officials
The objectives of training program for PKSF officials are to give them
expertise in credit program management, various approaches and aspects
of poverty alleviation programs, auditing techniques, PKSF management.
PKSF provides theoretical as well as field experience and on the job training
to its officers:
Main theoretical training on poverty alleviation programs, credit programs
and auditing techniques are provided within PKSF.
Besides officers are sent to Bangladesh Rural Development Academy (BARD),
Public Administration Training Centre (PATC) to have overview of rural
development and poverty alleviation programs.
(c) Practical training are acquired from
Grameen Bank and other NG0s. Officers stay at least 2 weeks at the branch
level of Grameen Bank. That gives the real exposure of credit program
for the poor.
(d) PKSF sends its officers to stay in the
POs as a part of training to learn about the program. After each visit
either to Grameen Bank or to PO, trainee officers submit elaborate reports
on the organizations.
(e) The most effective part of the training
is the attachment of each trainee officer to a senior officer. Trainee
officers visit the POs along with senior officers. In this fashion he/she
learns about the appraisal process of a PO, auditing techniques, minor
details of field activities, working ethics and culture of PKSF.
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 enlisted 182 POs upto March 1999. POs are dispersed
all over the country. As on March 1999, the POs of PKSF have been working
in 60 out of 64 districts of Bangladesh.
b. Membership: POs of PKSF have covered nearly
1.4 million borrowers.
Loan disbursement: PKSF in its first year of operations could disburse
only Taka 2.995 million. That was the preparatory year for formulating
policies and a period of learning to disburse loan to institutions. Upto
March 1999, it had disbursed Taka 4965 million. With the revolving nature
and with additional fund the POs have extended about Taka 15260 million
at the field level.
c.Loan Outstanding: PKSF has Taka 3554 million
loan outstanding with POs as on March, 1999.
d. Borrowers: As on March, 1999, total number
of borrowers financed by PKSF fund was 13.96 million of whom more than
90% were women.
e. Recovery of Loan: PKSF has two different
recovery rates:
(a) recovery rate of loan between the PO
and PKSF, and
(b) recovery rate of POs. Recovery rate of
PKSF over the last 6 years has been nearly 98%. This rate is defined as
the percentage of due amount has been received on time. Loan recovery
of POs at the field level is 99%.
f. Strengthening of the POs: One of the main
achievements of PKSF is the development of local institutions. Most of
the NG0s are running their program by receiving loan only from PKSF. Still
they are successful to cover almost full amount of their cost of operations.
Many have approached towards financial viability. Aside from financial
viability, local POs are now better prepared to manage their program,
because of training, advisory services and institutional development program
of PKSF. These include training, development of accounting system and
MIS, continuous management suggestions for improvement of the program
management.
g. Potential for Expansion: This is another
indicator for measuring achievement. Total borrowers of PKSF's POs are
1.4 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. Training sessions
were arranged for giving training in accounting and MIS for the accountants
and credit co-ordinators. 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 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 on the impact of its program on the beneficiaries. There
have been several studies on PKSF by varrious authors at home 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 reasearch studies have
shown positive impact of microcredit on the lives of the rural poor in
Bangladesh. A set of indicators ( Annex-3 ) has
been suggested to study the impact further.
k. Fund : PKSF has received Taka 110 million
from the government as grant since its inception. In addition, it is borrowing
US$ 105 million from the IDA through the Government. USAID has provided
a grant of Taka 500 million and the Asian Development Bank will provide
US$ 18 million as loan. PKSF has also received some project related funds.
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, monitoring and evaluation are some of the fundamental
areas of policy formulation.
So far, many POs within their limited capacity 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 be 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 show 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 their costs of managing the credit
program from the income of the program, 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:
(i) by providing funds, PKSF fueled the expansion of programs and
enabled them to become financially viable,
(ii) PKSF assisted developing the credit
management system, MIS and accounting system,
(iii) PKSF's regular advisory services helped
gradually improve the capacity of POs in managing programs.
Future role of PKSF: The future expected role of PKSF has also been identified
by the Directors of PKSF which are:
(i) continuation of providing loan fund should
be the main role of PKSF
(ii) PKSF should help train all staff of
POs for further improvement of capacity of POs which will be the basis
for sustainability,
(iii) Continuous advisory service will also
be an important area of assistance, and
(iv) PKSF should have action research not
only in micro-credit but also in other related areas of poverty alleviation.
PKSF has recently decided to provide fund on a pilot basis to microenterprises,
to the urban poor and to the hardcore poor.
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 and when 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 increasing number
of POs. PKSF has been able to mobilize the financial resources to embark
on a large scale expansion of its activities. These factors will continue
to contribute towards expanded operations of PKSF.
Financial Viability: PKSF has been able to gradually improve its financial
position. It has been successful in increasingly covering cost of operations
by charging a reasonable service charge, increasing loan disbursement,
keeping the operating expenses low and keeping the loan loss expenses
very low by maintaining high recovery rate. Overall, PKSF has posted surplus
every year since inception.
10. Lessons from PKSF Model
PKSF is a unique organization in its organizational structure, activities
and management practices. Few factors can be identified that 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 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 it was
felt 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 NG0s in
quickly reaching the poor and developing the POs to deliver the financial
services to the poor. Selection of right PO was the most crucial factor
for the success.
The key to the sustainability of POs is the assured source of fund and
improvement in capacity of human resources backed by good management practices.
In both areas, PKSF has proven itself to be effective.
Financial intermediaries (NG0s) backed by resources from PKSF has been
found to be effective in reaching the poor. PKSF and POs can also become
sustainable in the process.
The rural poor men and women have proven to be capable of managing fund
and improve their income. Given an opportunity they can help themselves.
The POs of PKSF have proven capacity to select right target groups and
deliver the desired services.
One area that needs top priority from the part of PKSF is enhancing the
capacity of POs. This can be done by more investment in development of
human resources of POs.
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.
References
The Role of
An Apex Financial Institution to Finance Micro Credit Programs: The Palli
Karma-Sahayak Foundation (PKSF) in Bangladesh by Dewan A.H. Alamgir, CDF/CGAP,
Dhaka, 1997.
PKSF, Annual Report 1997-98.
The World Bank, Staff Appraisal Report : Bangladesh Poverty Alleviation
Micrfinance Project, August, 1996.
Annex-1
Guideline for selection
of Partner Organization (PO) of PKSF for its "OOSA" (organization
operating in small area) microcredit programme
PKSF
is presently carrying out its operations through various partner organizations,
therefore, selection of PO is a crucial task of PKSF and this is an ongoing
process. Under this process PKSF appraises various types of non-government,
semi-government and government organizations, voluntary agencies, societies
and local government bodies to select these as POs which have gained experience
and expertise or which have the potentials to operate a successful microcredit
programme for self-employment and income generation of the landless and
assetless. In appraising an organization, PKSF follows a clear guideline
which can be divided into the following areas:
(i) Organization;
(2) Organizer;
(3) Management;
(4) Human Resources;
(5) Working Area;
(6) Field Activities;
(7) Past performance;
(8) Management Information System (MIS) and
(9) Accounting System.
According to the above
mentioned guideline, to become a PO, an organization should have the following
features.
(i)
Organization :The
organization should have a legal basis i.e., if it is a non-government
and voluntary organization it is to be registered under the appropriate
registration authority such as the Directorate of Social Welfare, Department
of Women's Affairs, Registrar of Cooperatives, NGO Affairs Bureau etc.
It should have a constitution
duly approved by the concerned registration authority.
It should have a General
Body and an Executive Committee approved by the concerned registration
authority.
In case of government,
semi-government and local bodies it must be formed lawfully.
The
organization should have the mandate to operate credit programme for self-employment
and income-generation activities of the landless and assetless with an
admissible service charge.
It should have a mandate
to borrow money from the government, semi-government, private and any
other organizations.
(2)
Organizer :
The organizer or founder(s)
should be socially reputable, respected, honest with intention to serve
the poor people
Organizers are to
be acceptable to the staff, group members and to the community in general.
The organizers should
have the capability and vision to develop a future perspective and strategic
plan of a development organization.
(3)
Management :
The organization should
have an organogram.
The
chief executive should be full time and should possess the mentality to
work on a long term basis. In case of local organization the chief executive
have to stay in the working area.
The
chief executive should have good and dynamic leadership quality and should
demonstrate good management capability and be able to formulate strategic
plan for the organization.
The organization should
have adequate number of regular and fulltime staff to ensure proper implementation
of microcredit programme.
The chief executive
should have a good reputation and should be acceptable to the staff, group
members, and to the community in general.
(4)
Human resource:
The organization should
have trained and skilled manpower to administer the organized group and
to maintain a sound accounting system.
Staff should be honest,
dedicated, and should possess missionary zeal.
(5)
Working Area :
Working
area of the organization should be well suited for microcredit operation.
It should have good communication network, banking facility and easy access
to market so that the borrowers can utilize their loan profitably.
It should be poverty
stricken and such rural areas will be given preference.
There
should be potentials for expansion of the programme by avoiding duplication
with the activities of the other organizations in the same area.
(6)
Field activities :
Members
organized would be the landless and assetless; the characteristic features
of whom would be as follows: those residing in rural areas owning less
than .50 decimal of cultivable land or having total asset of the value
less than that of one acre of land in the locality, would be considered
as landless-assetless.
Members are
to be organized in groups and groups must be formed with like minded people
who should be conscious/careful about group discipline and regular in
attendence in group meeting, and making saving deposits. Members should
have a minimum 6 months practice of regular saving deposit.
The organization
should have at least 400 organized members, Tk. 0.2 million operating
loan outstanding at field level and should have experience of at least
6 months successful microcredit operation.
Number of organized
members should be consistent with the working/operating capital of the
organization.Groups
should be organized within the 10 Km radius of the project office.
In
case of local organization 'Head Office' should be situated in the working/operational
area.The organization
has to maintain a minimum loan recovery rate of 98% on a continuous basis.
For a program operating for more than three years a minimum loan recovery
rate of 95% has to be maintained on a continuous basis.
Overlapping with the
activities of other organization in the same area must be avoided.
(7)
Past Performance :
The organization should
have a demonstrated experience of ensuring proper utilization of loan
money with maintaining a high rate of recovery on a continuous basis.
It
should have the evidence of successful implementation of all the programmes
undertaken by the organization.It
should have properly organized members and groups for successful operation
of microcredit programme.
(8)
Management Information System (MIS)
System for collecting
information from member, group and office level for proper management
and monitoring of the microcredit programme should be present.
Adequate information
should be available regarding microcredit operation.
(9)
Accounting System :
The organization should
maintain a sound, systematic, correct, detailed and transparent accounting
system.
The organization should
not have case of any misappropriation or illegal withdrawal of fund.
Savings account of
the group members must be complete, detailed, transparent and correct.
All the accounts should
be duly audited by the proper authority and the reports should be readily
available.
All the accounts must
be correct and updated.
Annex-2
CREDIT
PRODUCTS : TERMS AND CONDITIONS
PKSF's
services to various types of organizations (mostly NGOs) called the Partner
Organisations (POs) are given through two windows for two groups with
respect to their volume of operations. Small and medium sized POs and
large POs are termed as OOSA (Organizations operating over a small Area)
and BIPOOL (Big PO operating over a large Area) respectively. For OOSA,
the amount of first loan is 1,00,000/- taka or less. Amount of subsequent
loans is not restricted by any specific amount. It depends on the performance
and absorption capacity of a PO. Service charge varies from 3% to 4.5%
per annum depending on sanctioned amount of loan in favour of a PO under
OOSA window of PKSF.
Amount of sanctioned
loan (in taka) Service Charge
1.
Upto 5 million
3%
2.
Above 5 million to below 75 million 4%
3.
Above 75 million 4.5%
The
loan repayment period for each loan disbursed to a PO is 3 years. First
six month is considered as grace period and the loan is to be repaid in
10 quarterly instalments along with service charge within the rest 30
months.
At
present PKSF is considering to impose 2% additional service charge on
POs as penalty for late payment of instalment to PKSF.
For
BIPOOL (Big POs), service charge is 5% per annum. Loan repayment period
is 10 years. First 4 year is treated as grace period. However, service
charge has to be paid by the PO on a semi-annual basis during the grace
period. The loan is to be repaid in 12 semi-annual instalments along with
service charge within the rest 6 years.
Summary
of Foundation's Loan Programme
A..PKSF-PO Level
| Sl.No. |
Description |
Cumulitive
upto Last Year |
1998-99
FY |
Total |
| |
|
|
| Upto Last Month |
This Month |
End of This Month |
|
|
| 1 |
| Partner
Organization |
Active |
| Suspended |
| Dropped |
| Total |
|
|
|
|
| 2 |
Loan
allocation (in lac) |
|
|
|
| 3 |
Loan
disbursed (in lac) |
|
|
|
| 4 |
Loan
recoverable (in lac) |
|
|
|
| 5 |
Recovered
(in lac) |
|
|
|
| 6 |
Overdue
loan (in lac) |
|
|
|
| 7 |
Loan
outstanding |
|
|
|
| 8 |
Default
POs |
|
|
|
PO - Member Level
| Sl
No |
Description |
Cumulitive
upto Last Year |
| 1998-99
FY |
| Upto Last
month |
This month |
End of
this month |
|
Total |
| 1 |
Loan
disbursed (in lac) |
|
|
|
| 2 |
Loan
Recovered (in lac) |
|
|
|
| 3 |
Savings
Generated (in lac) |
|
|
|
| 4 |
Rate
of Recovery |
|
|
|
| 5 |
| Group
Members |
Male |
| Female |
| Total |
|
|
|
|
| 6 |
| Borrower |
Male |
| Female |
| Total |
|
|
|
|
Recovery
Rate of Foundation's Loan Programme ( in percentage)
| Description |
|
|
| (Loan
Recovered)/(Loan Recoverable) x 100 |
|
|
| (Loan
Recovered - Advance Collection)/(Loan Recoverable) |
|
|
| (Loan
Recovered)/(Loan Recoverable - Deferred installments of one PO) x
100 |
|
|
| (Loan
Recovered - Advance Collection)/(Loan Recoverable - Deferred installments
of one PO) x 100 |
|
|
| 1. Advance collection
....... lac (hundred thousand) |
| 2. Total Overdue
loan includes deferred installments of Tk. ........ lac on account
of one PO. |
| Loan
Performance Report of POs for the Month of----------- |
| SL.No |
Code
No |
Name
of the Organisation |
Number
of Members |
Number
of Loaness |
Cumulative
Loan Disbursed (in lacs) |
Cumulative
Loan Recovered (in lacs) |
Loan
Outstanding (in lacs) |
Loan
Recovery and Overdue Situation of this Month (in lacs) |
Group
Savings (in lacs) |
| |
|
Male |
Female |
Total |
Male |
Female |
Total |
|
|
| |
Grade-A |
|
|
|
|
|
|
|
|
| |
|
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|
|
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| |
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|
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| |
|
|
Sub
Total |
|
|
|
|
|
|
| |
Grade-B |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Sub
Total |
|
|
|
|
|
|
| |
Grade-C |
|
|
|
|
|
|
|
|
| |
|
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| |
|
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| |
|
|
Sub
Tota |
|
|
|
|
|
|
| |
Grade-D |
|
|
|
|
|
|
|
|
| |
|
|
Sub
Total |
|
|
|
|
|
|
| |
|
|
Grand
Total |
(in
lacs) |
(in
lacs) |
(in
lacs) |
(in
lacs) |
(in
lacs) |
(in
lacs) |
| Loan Performance
Report of PKSF for the Month of-------- |
| Code
No |
Loan
Code |
Name
of the Organisation |
Cumulative
Loan Disbursed (in Taka) |
Cumulative
Recoverable |
Cumulative
Recovered |
Loan
Outstanding (in Taka) |
Cumulative
Overdue |
| |
Male |
Female |
Total |
Male |
Female |
Total |
|
| Grade-A |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
Sub
Total |
|
|
|
|
|
| Grade-B |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
Sub
Total |
|
|
|
|
|
| Grade-C |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
Sub
Tota |
|
|
|
|
|
| Grade-D |
|
|
|
|
|
|
|
| |
|
Sub
Total |
|
|
|
|
|
| |
|
Grand
Total |
|
|
|
|
|
| Report
of Default POs for the Month of--------- |
| Sl.
No. |
Loan
Code |
Name
of the Organisation |
Cumulative
Loan Disbursed (in Taka) |
Cumulative
Recoverable |
Cumulative
Recovered |
Loan
Outstanding (in Taka) |
Cumulative
Overdue Principal (in Taka) |
%
of Total Overdue (in Taka) |
| |
|
|
|
|
|
|
|
|
| |
|
|
Principal
(in Taka) |
S.Charge
(in Taka) |
Principal
(in Taka |
S.Charge
(in Taka) |
|
|
| |
|
|
|
|
|
|
|
|
| |
|
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| |
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| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Grand
Total |
0 |
0 |
0 |
0 |
0 |
0 |
| Some
Selected Impact Indicators for Evaluating PKSF POs` Microcredit Program |
| Indicators |
Measures |
Standard
/ Norms |
| Economic
Indicators for current gains : |
| 1.
Income |
%
of beneficiary household members living below the poverty line income |
Tk.
448 and Tk. 740 per capita per month respectively for rural and urban
areas. |
| 2.
Food and Nutrition Intake |
%
of beneficiary household member below poverty line intake |
·
2112 kcal per day per capita intake for the moderate poor.
·
1800 Kcal per day for the hardcore poor |
| 3.
Housing |
%
of beneficiary households having below poverty level housing |
Semi-durable
roof (CI sheet) with one + room |
| Indicators
of Longer-term Material Gains : |
| A.
4. Land |
%
of beneficiary households owning below poverty level arable land |
0.50
acres of arable land. |
| 5.
Crisis proneness |
%
of beneficiary households facing deficit months in a year |
Occasional
deficit (3-4 months a year) |
| Social
Gains Indicators : |
| 6.
Education |
·
education of beneficiary household heads
·
primary school enrollment rate of the children of beneficiary households
|
up
to the level of class V (implies functional literacy) 60
- 65 % |
| 7.
Sanitary condition |
%
of beneficiary household members using sanitary toilets |
Toiletsū
Pucca slab with rings. |
| 8.
Drinking water |
%
beneficiary household members having access to safe drinking water |
Tubewell
water |
REGULATORY
FRAMEWORK FOR MICROFINANCE INSTITUTIONS : A CASE STUDY OF BANGLADESH
Presented by :
Dr. Salehuddin Ahmed
Managing Director
Palli Karma-Sahayak Foundation(PKSF)
(Paper for course
on "Legal and Regulatory Framework", Microcredit Summit Meeting
of Councils, 24-26 June, Abidjan, Ivory Coast)
1.
Context
Financial
services in Bangladesh come from three areas: informal sources (family,
friends, ROSCAs and savings clubs, and moneylenders); the semi-formal
sector of NGO microlending; and the formal sector of agricultural and
nationalized commercial banks, along with some privately owned banks.
Like many countries, only the formal sector is regulated, with no regulation
or supervision specifically focused on MFIS. The public policy reasons
for regulating the financial sector are:
(i) individual depositors need protection
from fraud and mismanagement by financial institutions because the public
does not have the information or expertise to evaluate those risks; and
(ii) if the government provides deposit insurance or financial
support to the financial sector, it imposes some risk parameters on those
institutions. As MFIs push further into financial intermediation and use
member savings as a major funding source, some degree of oversight under
the first rationale may be appropriate. At present, depositors and funders
of NGO microfinance institutions rely primarily on the integrity of management
to protect their funds.
2.
The Formal Sector
As
of December 1996, the formal financial sector in Bangladesh consisted
of thirty-two banking institutions: fifteen national commercial banks
(state-owned commercial banks), two agricultural bank networks (also state-owned),
ten privately owned banks, and a few recently established non-bank finance
and leasing companies.
The
Regulators
Bank
regulation is conducted by the Bangladesh Bank and the Ministry of Finance.
The Bangladesh Bank has the responsibility to establish regulations and
supervise the banking sector. It has the power to license and examine
all banks in the country and exerts great influence over the state-owned
banks and their directors, in part due to its accountability to the Ministry
of Finance. It has a staff of approximately six thousand and is headed
by a governor appointed by the Ministry of Finance.
The
Ministry of Finance is a cabinet-level position within the government,
and the Minister is a direct political appointee. Where the jurisdictions
of the two agencies meet or overlap is unclear, but the Ministry of Finance
is influential over the Bangladesh Bank.
3.
The Semi-Formal Sector: Microrinance Institutions
Most
MFIs in Bangladesh are NG0s registered under the Voluntary Social Welfare
Agencies Ordinance 1961, Societies Act of 1860, The Foreign Donations
(Voluntary Activities) Regulation Ordinance 1978 and The Foreign Contribution
(Regulation) Ordinance 1982 exempting them from central bank oversight.
Most have a donor-funded loan pool and hold member deposits in a low-risk
investment portfolio to pay interest on their savings. Several large MFIS,
however - including ASA, Buro Tangail, and BRAC - use member savings to
fund their lending activity as loan demand has outstripped the supply
of donor capital.
The
permissiveness of the current regulatory environment allows NG0s to undertake
nearly all the activities they need to meet their development objectives.
They can accept deposits, extend credit, and raise capital from donors
and private sources. While many organizations have used this flexibility
to achieve impressive development impact through creative design, efficient
branch networks, and visionary leadership, their members and funders rely
solely upon management to avert fraud, mismanagement, and/or unforeseen
circumstances.
The
few MFIs that have adopted a legal form with some regulation face minimal
oversight and monitoring. Although a legally chartered bank, Grameen faces
minimal supervision. Financial co-operatives are chartered under the Co-operative
Societies Ordinance of 1984, permitting them to mobilize deposits from
the general public in addition to their members. While the government's
Registrar of Co-operatives regulates these institutions, the registrar
has little preventive or protective regulation and conducts minimal to
no supervision.
So
far, the regulatory framework has not caught up with the evolution of
microfinance in Bangladesh. The few NG0s that have considered applying
for a standard commercial banking license have either been denied approval
or have found the process too time-consuming and uncertain to warrant
the pursuit.
Structure
of The Semi-Formal Sector
A
few large institutions dominate the microfinance industry in Bangladesh.
In June 1996, Grameen Bank and three NG0s served eighty-five percent of
the active micro-borrowers. Grameen, ASA, BRAC, and Proshika have traditionally
been the largest microlending organizations.
4.
Existing Regulation: The Grameen Bank
The
only central bank-regulated MFI in Bangladesh today is the Grameen Bank.
Grameen's formal and legal bank status allows it to raise capital and
collect deposits to finance its commitment to provide banking services
to low-income persons. In theory, this forms the basis for Grameen's permanence
as a banking institution. Grameen Bank evolved from an initiative sponsored
by Chittagong University, to a project of the Bangladesh Bank, to a specially
chartered institution in 1983 with the passage of the Grameen Bank Ordinance
by the Bangladesh Parliament. While Grameen does not attract private capital
with market rates of return, and still receives substantial donor funding
for its development activities, the Bank's operating costs are covered
more than one hundred percent by internally generated revenues.
The
major features of the Grameen Ordinance parallel most of those requirements,
but were adapted to fit the microfinance mission. Specifically:
Capital Requirement:
Grameen began with an initial capital base of Taka 10 crore (US$2.5 million),
with additional paid-in capital of Taka 7 crore (US$1.75 million), or
US$4.25 million compared to US$3.25 million for a standard commercial
bank in Bangladesh. However, there are no ongoing capital adequacy or
liquidity ratio requirements for Grameen Bank.
Ownership stake by the Bangladesh Bank: Ownership of Grameen Bank is shared
by Bangladesh Bank and Grameen's clients (member-shareholders). The central
bank amended the ordinance in 1990 to reduce its ownership from 60 to
25 percent, with member-shareholders increasing their stake proportionately.
Compliance with standard (relatively weak) portfolio risk classifications,
including delinquency, loan-loss provisions and write offs. While Grameen
has developed more detailed and useful internal reporting systems, it
reports delinquency to the Bangladesh Bank using the same measures as
formal banks (i.e., loans more than one year past due are delinquent,
and loans more than two years past due are considered bad debts).
Branching Restrictions: Grameen must request Bangladesh Bank approval
to open a new branch. In practice this has been a formality since no request
has ever been denied. For new branch approval, the central bank prepares
a brief "feasibility study" that describes the area, the population,
demographics (percentage of women and landless; literacy rates, if available;
and typical occupations), and the opinions of local politicians and local
national commercial bank officers.
Access to Bangladesh
Bankfunds: While Grameen Bank cannot access central bank lines of credit,
the Bangladesh Bank amended the Ordinance in 1990 to add a provision for
the issuance of bonds and debentures that are guaranteed by the Government
of Bangladesh, dramatically increasing Grameen's access to the capital
markets. The interest rate is 1-1.5 percent below market rates, with interest-only
payments during the term of the bond.
No limitations
on the scope of activities: As long as business functions are conducive
to the objectives of the Grameen Bank, they are permitted activities.
Grameen has been authorized to collect savings from non-members since
1987, but has only recently emphasized savings mobilization.
Board Structure: According to the 1990 amendment, governance is by a twelve-member
board of directors, of which three are government appointees and nine
are elected by member-shareholders. Member-shareholder representatives
are elected through a regional process of a series of local elections.
The Chair of the Board is appointed by the government from the board's
appointed directors. All directors serve three-year terms. The managing
director is an ex-officio Board member with no right to vote.
Bangladesh Bank Approval on Senior Management: While the board appoints
the managing director, any selection must have prior approval of the Bangladesh
Bank. To date, the only managing director has been Dr. Mohammed Yunus,
Grameen Bank's founder.
Taxable Status: For at least the first ten years, no taxes were due on
any profits. The board of directors determines the permitted use of profits.
5.
Proposed Framework for Regulation of MFIs
In
view of the historical emergence and evolutionary process of MFIs (most
of which are NGOs) in context to Bangladesh comparing to the experiences
of other developing countries in micro-finance industry, it can be argued
that the conventional regulatory framework like that of formal banks and
financial institutions is not considered appropriate and hence not required
under the circumstances prevailing in Bangladesh particularly in view
of the fact that MFIs are not accepting deposits with chequing facilities
from public. The unique features of MFIs in the mode 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, the above proposition (non-requirement of conventional regulatory
framework) does not, in any way, downplay the importance of having some
strategic monitoring measures that lie compatible and appropriate to their
objectives, institutional operation and development culture. And that
it should incorporate user's friendly prudential norms/indicative guidelines
(preventive measures) in the form of a concrete 'Code of Norms/Conduct'
which would ensure sound and organized growth of MFIs on sustainable basis.
5.1
Self-Regulation For NGO-MFIs
The
self-regulation mechanism for the MFIs is a prerequisite for their smooth
functioning and sound growth. It is admitted that the effective self-regulation
is one of the important key elements of an well-managed and viable institution
which can hardly be substituted by external measures.
It
is, therefore, proposed that self-regulation through development of own
strong governance -body, efficient management system and effective supervision
and internal control (on-site and off-site) should be introduced within
the fold of an agreed 'Code of Norms/Conducts' for the growth of MFIs
in Bangladesh. The following elements of self-regulation are suggested
which the MFIs must abide by under the agreed 'Code of Norms/Conducts':
(a)
A strong and capable board of directors that establishes sound program
interventions, financial and risk management policies and holds management
accountable for implementing those policies effectively,
(b) Developing of standard accounting system
that is transparent and acceptable universally,
(c) Effective internal control and an intensive
and extensive internal audit function to conform that the approved policies
are followed and procedures are effective,
(d) Development of effective mechanism of
saver's protection,
(e) Efficient management and effective Management
Information System (MIS),
(f) Development of effective financial and
operational performance standard,
(g) High quality external auditing by those
auditors who are knowledgeable and competent in micro-finance as an objective
check on internal systems to protect against fraud and mismanagement,
and
(h) Strategic monitoring of the financial
performance standards, program performance and compliance of the code
of norms/conducts by an appropriate and competent monitoring organization.
5.2
Strategic Monitoring Framework for NGO-MFIs
Side
by side with the self-regulation mechanism for MFIs, there has been a
strong felt need for overseeing the financial and program performance
through an appropriate monitoring mechanism based on certain standards
compatible to the MFIs activities unlike the conventional financial performance
standards being used for formal banks and financial institutions. As most
of microfinance institutions undertake both financial and non-financial
services, the ratio analysis should also be different from formal banking
institution. However, the non-financial services, i.e. the social development
activities of the MFIs bring no direct financial return to the institution,
the assessment of such activities could be made through impact studies.
Usually financial performance evaluation for a bank is being done by CAMEL
rating that includes the capital adequacy ratio, portfolio quality ratios,
management efficiency, earning quality ratios and liquidity ratio. In
case of micro-finance institutions, some of the proponents suggest for
more or less similar set of measures to assess the performance which is
known as SCALE (includes self-sufficiency ratio, capital adequacy ratio,
asset or loan portfolio quality, liquidity ratio and earning quality ratio)
and in addition to evaluate the development objectives suggest using OSI
(outreach, service quality and impacts). A mix of contextual indicators
from the above rating measures as a package based on the important
features ( Annex-4 ) can be suggested for assessing
financial performance situation of the micro-finance institutions (irrespective
of size and outreach).
The
program monitoring of the MFIs is recommended to be periodically undertaken
(off-site) by the monitoring agency through regular periodical statistical
reporting from the micro-finance institutions. The periodical information
should include the extent of coverage in terms of membership and geographical
area, loan disbursement (by term), loan recovery, loan outstanding, amount
of gross and net savings (obligatory and voluntary), amount of arrears
due with actual recovery against the due, loan recovery rate etc.
5.3
Organizations to Undertake Strategic Monitoring
(a)
Bangladesh
Bank
Bangladesh
Bank does not have, at present, adequate expertise and manpower to undertake
strategic monitoring and supervision of the NGO~MFIs. And as the number
of such organizations are many (more than 1000) with varied size, outreach
including their operation at different locations in the country, it will
not be appropriate and feasible for Bangladesh Bank to play the role of
monitor and to undertake supervision functions. It is often suggested
that the Bank should only be responsible for registration of MFIs.
(b)
Palli Karma Sahayak Foundation (PKSF)
PKSF
has a great potential to administer and monitor the system of self regulation.
It has qualified expertise. PKSF devoted considerable resources to monitor
and supervising its partner organization to ensure that they meet those
standards. The supervision responsibility would need its charter to be
amended further.
(c)
Apex MFI as Apex Body of NGO-MFIs
The
thire-option is to establish an exclusive and independent organization
as Apex Body through the government enactment. It will be responsible
for undertaking strategic monitoring of MFIs in line with the agreed 'Code
of Norms/Conducts'. It could be a corporate body having representatives
of formal and semi formal MFIs, the government and the Bangladesh Bank.
(d)
Apex
Body as Unified Organization for Registration, Monitoring & Supervision
: Alternate Option
Instead
of having more than one organizations (Bangladesh Bank for registration
and Apex Body for monitoring and supervision) involved in the process
of registration, monitoring and supervision, it would be an alternative
option to have one unified organization to deal with the whole affairs
of NGO-MFIs. In that case, the proposed apex body will be in a better
position to play its role effectively as monitoring organization. Such
quasigovernmental organization can be established through special enactment
by the government. The main features of the organization will be
(a) a non-profit corporate body to be established
under Companies Act limited by guarantee,
(b) a capable Governing Body with mixed stake-holders
and
(c) sources of funding to run the organization
will be from the subscriptions of member institutions,contribution from
the Government and donations from the international organizations.
6.
Special Enactment
There
is the need for special enactment for the MFIs (mainly the semi formal
ones) for formally recognizing them as legal entity by the Government
for providing limited financial services with the objective of poverty
alleviation. The enactment should clearly identify the appropriate organization
delegating the authority of providing registration or issuing certificate
of recognition as NGO-MFI in favor of the Government based on certain
eligibility criteria. The eligibility criteria should be simple and appropriate
in context to the usual features of the existing micro-finance institutions
working in Bangladesh. Any existing NGO-MFI who fulfills the eligibility
criteria will get the registration irrespective of whether it was previously
registered under any act of the Government or not. A new NGO which wish
to undertake micro-financial services will be eligible to obtain the registration
from the concerned authority if it fulfills the criteria/conditions. The
above Government enactment and incorporation of the NGOs to function as
micro-financial service providers would legally allow and authorize the
NGO-MFIs to undertake contract/ agreement to get access to funds with
formal financial institution or other national and international organizations.
For various reasons PKSF as regulating agency might emerge as viable option.
To avoid the conflict of interest the lending function and regulatory
function can be clearly demarcated. For this, PKSF should be organizationally
restructured and appropriate legal authority should be bestowed on it
by the government.
References
PKSF,
Annual Reports of various years.
Bangladesh Bank/Development
Planners & Consultants (DPC), "Final Report on Regulatory Framework",
January 1999, Dhaka.
Microfinance Network,
Occasional Paper No. 2, "Regulation and Supervision of Microfinance
Institutions: Case Studies", Washington D.C., 1997.
M.A. Baqui Khalily
& M.O. Imam, "Behaviour of Microfinance Institutions and the
Case for Regulation and Supervision", Paper presented at a Seminar
arranged by PKSF/Proshika, Dhaka,
June 1998.
| Important
Ratio Analysis Tools for Appraising a Micro-Finance Institution |
| Ratio
|
Formula
|
Purpose
|
| A.
Financial Sustainability Ratios |
| 1.
Return on Performing Assets |
Financial
Income/Average Performing Assets |
Indicates
financial productivity of credit services and investment activities |
| 2.
Financial Cost Ratio |
Financial
Cost/Average Performing Assets |
Shows
cost of funds, affected by mix of net worth, sotf loans, hard loans. |
| 3.
Loan Loss Provision Ratio |
Loan
Loss Provision/Average Performing Assets |
Indicates
provisioning requirements on loan portfolio for current period. |
| 4.
Operating Cost Ratio |
Operating
Expenses/Average Performing Assets |
Key
indicators of efficiency of lending operations. |
| 5.
Imputed Cost of Capital Ratio |
Quantity
of loans X Rate of inflation |
Indicates
cost of maintaining purchasing power of net worth and soft loans. |
| 6.
Donations & Grants Ratio |
Donations
& Grants/Average Performing Assets |
Shows
dependency of institution on outside funding for operations. |
| 7.
Operating Self-sufficiency Ratio |
Financial
Income/Financial Cost+Operating Cost+Loan loss Provision |
Shows
ability of institution to cover costs of operations with the internally
generated income. |
| 8.
Financial Self-sufficiency Ratio |
Financial
Income/Fin.+Op. Costs + Loan Loss Provision+Imputed CC |
Shows
ability of institution to be fully sustainable in the loan-run covering
all operating costs & maintain value of capital. |
| B.
Operating Efficiency Ratios |
| Ratio |
Formula |
Purpose |
| 1.
Cost per Unit of Money Lent |
Operating
Cost/Total Amount Disbursed. |
Indicates
efficiency in disbursing loans (in monetary terms). |
| 2.
Cost per Loan Made |
Operating
Cost/Number of Loans Made. |
Indicates
efficiency in disbursing loans (in terms of number of borrowers). |
| 3.
No. of Active Borrowers per Credit Officer |
No.
of Active Borrowers/No. of Credit Officers. |
Indicates
performance of Credit Officer and efficiency of methodology. |
| 4.
Portfolio per Credit Officer |
Value
of Loan Outstanding/No. of Credit Officers. |
Indicates
potential financial productivity of Credit Officers. |
| C.
Portfolio Quality Ratios |
| 1.
Portfolio in Arrears |
Payments
in Arrears/Value of Loan Outstanding. |
Indicates
amount of loan payments past due. |
| 2.
Portfolio at Risk |
Balance
of Loan Arrears/Value of Loan Outstanding. |
Measures
amount of default risk in portfolio. |
| 3.
Loan Loss Ratio |
Amount
of Written Off/Average Loan Outstanding. |
Indicates
extent of uncollectible loans over the past period. |
| 4.
Reserve Ratio |
Loan
Loss Reserve/Value of Loan Outstanding. |
Indicates
adequacy of reserves in relation to portfolio. |
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