:: www.pksf-bd.org

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)

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.

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.

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;

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.

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.

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.

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.

The organization should have trained and skilled manpower to administer the organized group and to maintain a sound accounting system.

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.

There should be potentials for expansion of the programme by avoiding duplication with the activities of the other organizations in the same area.

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.

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.

System for collecting information from member, group and office level for proper management and monitoring of the microcredit programme should be present.

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.

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.

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.