MicroFinance Network - Center for Financial Inclusion blog

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MicroFinance Network

ESTABLISHING A MICROFINANCE INDUSTRY

Governance Best Practices Access to Capital Markets

Edited by Craig F. Churchill


Foreword The MicroFinance Network is a global association of leading microfinance practitioners. The primary purpose of this Network is to provide advanced microfinance institutions with a forum to learn from each other’s experiences and to give each other technical assistance. Each year, Network members assemble for three days of presentations and intense discussions about critical issues in the day-to-day operations of their institutions. This document presents a summary of the proceedings of the 1996 conference in order to share the content with a wider audience. Anyone who is interested in the sustainable provision of microfinancial services will find this document invaluable. The fourth annual conference of the MicroFinance Network, Establishing a Microfinance Industry, was a tremendous success. It was held in a beautiful Canadian setting, Niagara-onthe-Lake, and it was well-organized by Calmeadow, our very capable hosts. Martin Connell, Barbara Calvin, Stefan Harpe and Kerri Moloney deserve the Network’s sincere appreciation for their long hours of hard work in preparing the logistics and content of the conference. The title of the conference reflects the belief that, while microfinance is too young and small to be considered a industry, it is moving in that direction. As the MicroFinance Network represents an industry association of sorts, it is important for the members to consider what will be required of microfinance to become a formal industry. In doing so, this allowed the participants to review issues that were immediately relevant, such as governance, client desertion and product development, and to look into the future and consider what is on the horizon for microfinance, such as a rating agency and establishing universal performance standards. During the conference, Network members presented the first MicroFinance Network Pioneer Award for outstanding contribution to the field. By unanimous selection, this award went to someone very dear to my heart, Francisco “Pancho” Otero, the visionary behind the creation of BancoSol (Bolivia), and the individual most responsible for the establishment of the MicroFinance Network. Although Pancho has handed the reins of BancoSol to professional managers, his contribution to this field is far from complete. Today, Pancho is developing a plan for a microfinance policy institute that will operate as a research and advocacy companion to the MicroFinance Network. Another force behind the MicroFinance Network has been Dennis Isidro, the President of TSPI Development Corporation (Philippines). Dennis stepped down from the Steering Committee of the Network after two years of dedicated service, and the Network would like to thank him for his hard work and commitment. With Dennis’ departure, the Steering Committee of the MicroFinance Network now consists of Kimanthi Mutua (K-REP, Kenya), Juan Padilla (Emprender, Argentina), Benjie Montemayor (TSPI), Barbara Calvin and myself. On behalf of the Network, I want to welcome four new members to the MicroFinance Network: Accion Comunitaria del Peru, Citi Savings and Loans (Ghana), SEWA Bank (India) and Get Ahead Financial Services (South Africa). We look forward to their participation and contribution to the Network, and to furthering our mutual objective of increasing the access of financial services for low-income communities.

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Establishing a Microfinance Industry

I also want to thank the special guests who came to the conference to share their experiences with the MicroFinance Network: Damian von Stauffenberg (PSIF), Alex Silva (Profund), and Max Clarkson and Michael Deck from the Faculty of Management at the University of Toronto who provided us with an excellent framework for governance. The Network also appreciates the very warm and thoughtful welcoming address presented by John Robinson, Vice President of CIDA. Finally, I want to take this opportunity to thank the supporters of the MicroFinance Network. Calmeadow has done an excellent job over the past year serving as the institutional sponsor of the MicroFinance Network. David Wright and the ODA believed in the Network from the very beginning and have supported us ever since. The Consultative Group to Assist the Poorest (CGAP) is providing very generous assistance that is enabling the Network to significantly increase the scope of its activities. Citibank and a private foundation have been helpful by supporting the Network’s special activities, including staff exchanges and our forthcoming research project on regulation and supervision. I want to thank Hank Jackelen and the UNDP for providing resources toward the Network’s annual conference. And last but not least, I would like to acknowledge the personal contribution of “Friends of the Network,” Beth Rhyne (USAID), Marguerite Robinson (HIID) and Gilles Lessard (CIDA).

Maria Otero Chair, MicroFinance Network Washington, DC, USA January 1997

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Table of Contents FOREWORD, Maria Otero .............................................................................................................. i TABLE OF CONTENTS ............................................................................................................... iii LIST OF ABBREVIATIONS..........................................................................................................iv INTRODUCTION ............................................................................................................................1 THEME I: GOVERNANCE ............................................................................................................5 EFFECTIVE GOVERNANCE FOR MICROFINANCE INSTITUTIONS, Max Clarkson and Michael Deck .......5 LESSONS FROM PROFUND, Alex Silva and Stefan Harpe ...................................................................9 CORPOSOL/FINANSOL: PRELIMINARY ANALYSIS OF AN INSTITUTIONAL CRISIS IN MICROFINANCE, Maria Eugenia Iglesias and Carlos Castello ................................................................................14 THEME II: BEST PRACTICES ...................................................................................................21 THE INFORMATION SYSTEMS CHALLENGE: HOW TO DEVELOP AN EFFECTIVE SYSTEM WITHOUT PUTTING THE ORGANIZATION INTO BANKRUPTCY! Eduardo Bazoberry...........................................21 CLIENT DESERTION, Henry Jackelen .............................................................................................25 BancoSol: Group Lending in a Competitive Market, Hermann Krutzfeldt .................................25 Monitoring Desertion at the Alexandria Business Association, Nabil El Shami.........................27 NEW PRODUCT DEVELOPMENT, Henry Jackelen.............................................................................28 Graduate Loans at BancoSol, Hermann Krutzfeldt ....................................................................28 Emprender’s New Financial Products, Juan Padilla..................................................................29 THEME III: ACCESSING CAPITAL MARKETS ......................................................................32 A RATING AGENCY FOR THE MICROFINANCE INDUSTRY, Damian Von Stauffenberg........................32 PERFORMANCE STANDARDS IN THE PHILIPPINES, Benjamin Montemayor.........................................35 REGULATION AND SUPERVISION OF THE MICROFINANCE INDUSTRY, Elisabeth Rhyne.......................36 Experience in Kenya, Kimanthi Mutua......................................................................................37 EDPYME in Peru, Manuel Montoya.........................................................................................38 Non-Bank Financial Institutions in Ghana, Christine Dadson...................................................41 REFLECTIONS ON ACCESSING CAPITAL MARKETS, Michael Chu......................................................43 APPENDICES ..............................................................................................................................A-1 WELCOMING ADDRESS, John Robinson .......................................................................................A-1 LIST OF CONFERENCE PARTICIPANTS ............................................................................................A-5 MICROFINANCE NETWORK MEMBER LIST.....................................................................................A-6 MICROFINANCE NETWORK MEMBER STATISTICS ..........................................................................A-8

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List of Abbreviations ABA

Alexandria Business Association

ACP

Accion Comunitaria del Peru

BRI

Bank Rakyat Indonesia

CAF

Corporacion Andina de Fomento

CAMEL

Capital adequacy, Asset quality, Management, Earnings, Liquidity

CEO

Chief Executive Officer

CIDA

Canadian International Development Agency

CFC

Commercial Finance Company

CGAP

Consultative Group to Assist the Poorest

DOS

Disk Operating System

EDPYME

Entidades de Desarrollo para la PequeZa y Microempresa

HIID

Harvard Institute for International Development

IDB

Inter-American Development Bank

IFC

International Finance Corporation

IFI

Instituto de Fomento Industrial

K-REP

Kenya Rural Enterprise Programme

LAN

Local Area Network

MIF

Multilateral Investment Fund

MFI

Microfinance Institution

NBFI

Non-Bank Financial Institution

NGO

Non-governmental Organization

ODA

Overseas Development Administration

PRODEM

Fundacion para la Promocion y Desarrollo de la Microempresa

PSIF

Private Sector Initiatives Foundation

SCM

Sistema Calificador para Microcredito

SIDI

Societe d’Investessement et de Developpement International

TSPI

Tulay Sa Pag-Unlad Inc.

UNDP

United Nations Development Programme

USAID

United States Agency for International Development

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Introduction1 Historically, the provision of microfinancial services to low-income persons, whether by banks or non-governmental organizations (NGOs), has consisted of an assortment of pilot projects and innovative ideas. After twenty years of experimentation, microfinance is beginning to establish a new industry, which is a hybrid of both commercial finance and economic development. This emerging industry adapts certain tools and principles of traditional finance, along with the mission and methodologies from development work, to forge a new identity. Although it is premature to consider microfinance a legitimate industry, it is important to plan ahead. This introduction considers the current state of microfinance in light of two key characteristics that constitute an industry. It also provides a framework for the remainder of this document, which summarizes the presentations from the MicroFinance Network’s 1996 conference.

The Characteristics of an Industry An industry is comprised of two primary characteristics. The first characteristic is “a distinct group of productive or profit-making enterprises.”2 An industry emerges once there exists a significant number of similar enterprises that have proven their legitimacy and durability. The second characteristic is an accommodating environment. For an industry to flourish, practitioners need to operate in hospitable conditions. This includes an enabling policy and regulatory regime, and interaction with external agents, such as regulators and the investment community, who are knowledgeable about the features that make the industry distinct.

A Distinct Group of Practitioners In an analysis of the first characteristic of an industry, microfinance institutions successfully define themselves as a distinct group of practitioners, although they are still in the process of establishing their legitimacy and durability. What makes microfinance institutions distinct? Although microfinance relies on some basic principles from conventional finance, microfinance institutions (MFIs) are qualitatively different from traditional banks. The most common features that make MFIs distinct include: • • •

providing financial services to the informal sector, a market that was previously considered unbankable; using unconventional lending technologies based on lessons from moneylenders and other indigenous systems; the goal of expanding outreach to provide financial services to a large number of lowincome people.

1

This introduction was adapted from the opening address of the conference delivered by Kimanthi Mutua, Managing Director of K-REP. 2 Merriam Webster’s Collegiate Dictionary, Tenth Edition, Merriam-Webster, Incorporated, 1993.

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In addition, for most MFIs the initial source of capital has a strong element of public funds, either directly from government, as in the case of BRI in Indonesia, or through development agencies, such as the bilateral, multilateral and NGO owners of BancoSol in Bolivia. Microfinance is also different from other development initiatives. Ten years ago, credit programs were often one piece of a holistic approach to development that may have included client training and marketing services, and perhaps even non-business activities such as education or health care. Today, organizations that consider themselves microfinance institutions are distinct from other development activities by their singular focus and commercial approach. MFIs promote economic development of low-income communities by providing sustainable financial services including savings and microenterprise loans, and perhaps evolving into the provision of insurance, and housing and consumer loans. A key feature of microfinance—one that separates it from both traditional finance and development—is the creative tension necessary to balance the objectives of its two parent industries. Microfinance is unique because it accomplishes a social mission with commercial tools. Balancing the tension between the two is one of the greatest challenges for microfinance institutions. Legitimacy. Before proclaiming that the microfinance industry has arrived, it is necessary to establish and observe a dependable history of performance for a significant number of sustainable microfinance institutions. Microfinance needs to demonstrate that MFIs are here to stay, that they are growing, and that they have viable commercial operations. Any new industry has to establish legitimacy, but this task is more difficult for microfinance because of the unique way in which it has emerged as a development strategy with commercial tools. Key ingredients in establishing legitimacy include a) appropriate governance structures, b) transparency, and c) accountability to both stakeholders and regulatory bodies. Most microfinance institutions do not excel in these three areas. Best Practices. Another means of establishing the legitimacy of an industry is through common practices. There is a growing body of microfinance literature about the principles of success for this emerging industry. Most of the literature treats microfinance as a unique category, separate from its parent industries. The “best practices” outlined in the literature have improved the quality of the services provided by this sector and advanced the state of the industry, although there remains room for improvement. Performance Standards. An industry should measure the performance standards of its practitioners. A number of microfinance institutions have started working on this, but a common understanding has not been reached. Perhaps the microfinance sector can learn from experiences in South Africa and the Philippines where MFIs have established associations and codes of conduct that will lead to the formulation of local industry standards. A country and regional approach to this issue may be the most practical way of establishing standards.

An Accommodating Environment Microfinance has had less success fulfilling the second characteristic of an industry—an accommodating environment. However, recent initiatives on this front hold promise for the future. Policy Environment. A key element in the development of this industry is an appropriate policy environment for informal businesses, and for the institutions that provide them with -2-


financial services. Microenterprises can only thrive if they operate in jurisdictions with enabling conditions, including appropriate business licensing requirements, zoning rules and collateral practice, and the elimination of usury laws. There is also a need for a functioning judiciary administrative process to settle claims and disputes. Success along these lines varies from country to country. In general, informal businesses operate in repressive policy environments, although some countries are beginning to introduce reforms, including financial sector regulation that is appropriate for microfinance institutions. Financial Sector Regulation. Several jurisdictions in Latin America, Africa and Asia are developing a category of financial institution that will cater to the new breed of MFI. Often referred to as “non-bank financial institutions,” this category generally have lower capital requirements and different reporting stipulations than commercial banks, in return for more limited powers and lower acceptable leverage ratios. This has already occurred in Bolivia, Peru and Ghana, while other countries, including Kenya and French-speaking West African countries, are considering the possibility. Knowledgeable Investment Community. For microfinance to flourish as an industry, it has to have access to sufficient capital. However, the traditional financial markets are not structured for the unique characteristics of microfinance institutions. To solve this problem, the microfinance community is taking two approaches. First, it has created its own investment vehicles. Specialized funds, such as Profund, ACCION’s Gateway Fund, and an investment vehicle being explored by Calmeadow for African MFIs, are needed to provide equity or quasi-equity to microfinance institutions. The accomplishments of Profund’s first year in operations are discussed in detail below. The second approach is to educate traditional financial markets about the investment potential of the informal economy. Because of this effort, microfinance is beginning to increase its access to traditional investment avenues. For example, securities firms in Latin America are developing an understanding for microfinance, such as BHN Multibanco in Bolivia, which has placed securities for BancoSol. Slowly, a group of informed investors is emerging. While still mainly donor in nature, dominated by multilateral institutions like the International Finance Corporation (IFC) and the Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB), a few private organizations, including the Calvert Group and Citibank, are developing an interest in the microfinance sector. Similarly, bankers in certain jurisdictions, particularly Bolivia and Colombia, are becoming more knowledgeable about microfinance institutions in their countries and more willing to lend to these institutions. However, for microfinance to fulfill its goal of providing financial services to a large number of low-income people, this emerging industry requires access to capital on a more significant scale. To assist microfinance institutions to access the capital markets, the Private Sector Initiatives Foundation (PSIF) has recently introduced an effort to create transparency in this industry. PSIF has begun a pilot project to establish a rating agency for microfinance institutions to monitor and publish their performance indicators. Access to commercial sources of capital will be enhanced by a rating agency that has specialized knowledge of this industry. The creation of this rating agency will help establish the legitimacy of the microfinance industry, and serve as an important link to investors in the capital markets.

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Conclusion The initial two themes of the MicroFinance Network’s 1996 conference address the first characteristic of an industry—a distinct group of legitimate practitioners. The document’s first theme is dedicated to the critical issue of governance. This topic includes a framework for governance presented by experts from the University of Toronto; the experience of Profund as a shareholder and director of MFIs; and an analysis of the Finansol crisis, which was caused in part by governance problems. The second theme reflects on some of the best practices of the infant microfinance industry. While this is a broad topic, this document considers three areas of best practices that are particularly important to the members of the MicroFinance Network: a) the process of developing an information system, b) monitoring client desertion, and c) new product development. The third theme of this document looks at the accommodating environment that is necessary for microfinance to develop into a full-fledged industry. This environment includes an appropriate regime of financial regulations, industry standards, and relationships with external bodies that are necessary for an industry, such as bank regulators, investors and a rating agency.

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Theme I: Governance Effective Governance for Microfinance Institutions Max Clarkson and Michael Deck, Clarkson Center for Business Ethics, Faculty of Management, University of Toronto, Canada The process of establishing microfinance as a new industry mirrors the emergence of any entrepreneurial industry. The infant microfinance industry has achieved a degree of success, and now it must institutionalize that success. This raises challenges that are common to all small businesses as they expand: issues of power, control and transparency; and problems of cash flow, a perceived lack of legitimacy and a short track record. Since these challenges are faced by emerging industries all over the world, it is useful to review the typical pattern as industries mature. A closer examination of governance includes an outline of the four roles of the board of directors, board composition, and an explanation of important issues of trust and conflicts of interests. This section then explores governance issues in the particular case of microfinance.

Visionaries and Managers In emerging industries, the person who starts the company is often a visionary. In the case of microfinance, the visionary is the person with the noble idea of lending US$100 here and US$200 there, mostly to women, and trusting that they will repay the loan. The visionary who starts a business with a fresh idea—to make something better or less expensively, to make it a new way or to satisfy a unique need—is usually not interested in making money. The visionary wants to do something that no one else has done because it is interesting and exciting, and because it is worthwhile for society. Only after the business experiences some success, do visionaries reach the conclusion that they need to make a profit, in order to pay salaries or to attract investors to expand the business. At this stage, the infant business experiences its first set of challenges: • • •

How does the visionary entrepreneur transfer the skills and the inspiration that made the little enterprise a success into something larger? How does the business deal with cash flow constraints? How does it obtain the legitimacy necessary to enable it to borrow?

Often, the visionary is not interested in these issues. Visionaries are notoriously poor at supervising staff, negotiating with investors, or training successors. The business now needs a professional manager with a new set of skills, to manage and sustain growth, that are distinct from the skills necessary to start an enterprise and promote a vision. A professional manager is brought on board and the adolescent enterprise continues to do well, but the business culture begins to change. The manager creates structure, policies and procedures, and emphasizes the bottom line. Then the business reaches the next challenge: the

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maturing enterprise now requires governance to create checks and balances to ensure that the manager does not become too powerful.

Governance Businesses in emerging industries go through these three stages characterized by vision, management and governance. Upon developing into an institutionalized company with appropriate governance structures, the business encounters a new set of challenges that are also common to all industries: • • •

How does the business preserve its vision? How does it balance growth, risk and profitability? How does it establish a governance system that holds management accountable without undermining its independence and flexibility?

Governance is a system of checks and balances whereby a board of directors is established to manage the managers. Governance is sometimes conceived as a virtuous circle that links the shareholder to the board, to the management, to the staff, to the customer, and to the community at large. Boards review, confirm and approve the plans and performance of the senior management, but they do not usually provide vision. The board needs to know what the vision is, and then ensure that it is maintained. Management, on the other hand, is involved in the daily operations of putting the vision into action. How does ownership affect governance? It is important not to confuse control with ownership. A company is a separate legal entity, which no one actually owns. Shareholders do not own a company, they own shares. They have a residual claim to the assets of the company, if there is anything left after it has discharged all its obligations. Shareholders have the right to vote their shares to elect a board of directors, who in turn controls the company. It is not necessary for directors to be shareholders. In fact, it may be preferable if some of the directors are independent and do not represent an investment in the company.

Board Responsibilities The basic responsibilities of the board comprise four specific roles: fiduciary, strategic, supervisory and management development. 1) Fiduciary. The board has the responsibility to safeguard the interests of all the institution’s stakeholders. As such, the board serves as a check and balance to provide confidence to the company’s investors, staff, customers and other key stakeholders that the managers will operate in the best interests of the institution. 2) Strategic. The board participates in the organization’s long-term strategy by critically considering the principal risks to which the organization is exposed, and approving plans presented by the management. The board does not generate corporate strategy, but instead reviews management’s business plans in light of the institution’s mission, and approves them accordingly. 3) Supervisory. The board delegates the authority for operations to the management through the Chief Executive Officer. The board supervises management in the execution of the approved strategic plan and evaluates the performance of management in the context of the goals and time frame outlined in the plan. 4) Management Development. The board supervises the selection, evaluation and compensation of the senior management team. This includes succession planning for -6-


the CEO. In the transition from a small, growing entrepreneurial organization to becoming an established institution, governance ensures that the company survives. Governance moves an institution beyond dependency on the visionary.

Board Composition The board should consist of members who have a diversity of skills, including financial, legal and managerial expertise, to give effective guidance to senior management and to critically analyze management’s plans and reports. There is no magic formula for board composition. The selection criteria should arise from decisions about the role of the board and how it will carry out its role. For this purpose, a board must define the following items: • • • • • • •

The role of board members in external relations, such as building key alliances The existence of committees to oversee key areas of operations Term limits for board seats The process for replacing board members The role of the CEO in selecting board members The optimum number of board members Mechanisms to evaluate the contribution of individual members

Once the role of the board is determined, then it is possible to fill in the gaps of the existing composition. If board members represent particular constituencies, they may be unable to act as a member of the board in the interests of the institution, but instead will be apologists for other interests. This highlights the importance of independent board members who are chosen for their qualities of excellence. Since they do not have a financial stake or represent a specific constituency, they can be purely responsible to the interests of the corporation.

Trust and Conflicts of Interest The governance procedures and the actions of the board of directors should be such that they create accountability and enable the stakeholders to trust one another. Governance gives shareholders confidence that managers are being supervised. It creates checks to prevent management from serving its own interests. Governance engenders trust that allows a financial institution to attract depositors and investors. Governance provides assurance to government officials and, in the case of financial institutions, to bank superintendents. One way to create trust in the governance process is to eliminate conflicts of interests. Board members should not receive any personal or material gain other than the approved remuneration. The board must have common and clear objectives. It is important that board members do not have political agendas to influence the direction of the organization.

Governance, Microfinance and Transformation In the emerging microfinance industry, MFIs have large pools of financial assets. As an NGO, no one in the institution, either at the board or management level, has a financial stake in the institution. One of the rationales for changing institutional forms, from an NGO into a regulated financial intermediary, is because for-profit institutions have capital that is owned by someone who will be upset if their capital is dissipated. Once the institution has shareholders

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who have something to lose, then there are clear lines of accountability between the owners and the board of directors. Many organizations in this industry are struggling with the governance challenges of becoming for-profit institutions. The motivation of members on NGO boards is very different from members of traditional for-profit boards. When institutions begin as NGOs, the directors usually has some allegiance to the visionary who assembled the board. They participate on the board, not because they are interested in monetary gain, but because it enhances their visibility, credibility and prestige. Private sector representatives may join the board because they feel a strong social responsibility to the target market and a need to give something back to society. NGO board members do not usually fulfill the board’s fiduciary role by assuming responsibility for the institution’s financial resources, especially those provided by donors. When NGOs transform into financial intermediaries, their boards need to assume new legal responsibilities. Do board members have the skills necessary to govern a more sophisticated financial institution? Do board members understand the objectives of a transformed microfinance institution that combines a social mission with profitability? Board members tend to be persuaded by one objective or the other, but they seldom appreciate the balance between the two and the hybrid culture that management has to instill in the institution. Since individual members may not represent both objectives, the overall composition of the board should generate creative tension by striking a balance between these two perspectives. In some cases, the main shareholder of the transformed institution is the parent organization. As a result, the primary influence on the board comes from an NGO that projects the governance approach of not-for-profits onto the new institution. While this presents an opportunity to build into the governance process the NGO’s social mission, the relationship between the MFI and the NGO needs to be kept at arm’s length, and include transparency and clear transfer pricing. An unfortunate example of the pitfalls of this relationship is described below in the Corposol/Finansol crisis. When NGOs transform into for-profit financial institutions, they attract investors with different types of motivations and expectations of rewards. There are special equity funds, like Gateway Fund and Profund, that create a mechanism for investors to have representation on a board.3 There are commercial investors who want to maximize the return on their investment. There are support institutions, like ACCION and Calmeadow, who bring technical expertise to the board, and who are interested in ensuring that the institution is true to its mission. There are multilateral investors, like the MIF and the IFC; there are donors who do not have the mechanisms to be proper investors; and there are private individuals who represent important local interests. Most investors want to have a guaranteed seat on the board. The governance challenge for microfinance institutions is to juggle these varying motivations and expectations. Board composition for MFIs is further complicated by the geographic locus of ownership visà-vis the operations. Funding often comes from investors that may be thousands of miles from the institution. Statutes may require boards to meet on a monthly basis, but it is not realistic for foreign directors to meet so regularly. This can lead to a situation where the control of the board becomes localized in the community where the institution is based, even though the local board members may have a very small stake in the institution. 3

The Gateway Fund is an equity investment vehicle which enables ACCION International to mobilize commercial investments for its affiliates. Profund is discussed in detail in the next section.

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Next Steps This review of governance and microfinance raises more questions than it answers. Indeed, there are no easy answers, particularly in an infant industry that has yet to establish governance guidelines. Future steps on this topic could include: developing a director’s recruiting kit to assist a board in identifying its role and the skills necessary for an MFI board; training directors about the hybrid objectives of microfinance; preparing guidelines about conflicts of interest and the role of independent directors; and conducting research to suggest ways of aligning incentives and compensation for senior management and directors with the social objective of the institution.

Lessons from Profund Alex Silva, Investment Manager, Profund, Costa Rica Stefan Harpe, Profund Investment Committee Member, Calmeadow, Canada Profund is a for-profit, commercial entity designed to provide equity or quasi-equity to commercial, financial intermediaries in Latin America that specialize in providing financial services to small and micro entrepreneurs. It started operations in late 1995 after two years of planning and negotiations. Its founding sponsors are ACCION International, Calmeadow, SIDI and FUNDES. Other key shareholders include IFC, MIF/IDB, Corporacion Andina de Fomento (CAF), Swiss government, Calvert Investment Fund and other minority shareholders. Most of Profund’s shareholders are primarily interested in receiving a return on their investment, but they also want to play a key role in the development of the microfinance industry. Profund can help accomplish this secondary objective by broadening the base of potential microfinance investors, and paving the way for increased participation by commercial capital in the micro market. To advance, the emerging microfinance industry needs success stories; Profund’s shareholders want to help create these successes. Profund is looking for investments that will have good returns, but does not perceive a conflict between poverty alleviation and profitability. In fact, financial viability is a necessity for the long-term success of poverty alleviation efforts in microfinance. Profund has three roles: 1) Profund is an investor that protects its interests. When Profund sits on a board, it ensures that its investment is safe, and that the institution is moving toward making money for its investors. In this governance capacity, Profund monitors microfinance operations and would react quickly if something was fundamentally wrong. 2) Profund is a catalyst for the microfinance industry. Since Profund has investments in several institutions throughout Latin America, it transfers the lessons of best practices between its investees. 3) By promoting the microfinance industry, Profund promotes itself. Profund encourages conventional intermediaries to provide funds to the microfinance industry, especially in those companies in which Profund has already invested. Profund cannot be the only source of capital for an institution, and it cannot invest in all MFIs, so it needs to attract other investors to this industry.

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Profund’s participation as a microfinance investor is breaking new ground regarding the governance of microfinance institutions. As a minority shareholder in a variety of microfinance institutions, it negotiates shareholder agreements that clarify both parties’ rights and obligations regarding key governance, operational and ownership issues. As an equity investor interested in maximizing its returns, Profund helps to establish benchmarks and expand the finance frontier for other commercial lenders and investors. With investments and board representation in numerous microfinance institutions, Profund is evolving into a microfinance holding company. This poses interesting challenges regarding conflicts of interest, since it must safeguard confidential competitive information. On the other hand, this relationship creates opportunities for productive exchanges among Profund investees, thus consolidating Profund’s leading role in the legitimization of the emerging microfinance industry. Profund is a closed investment fund that will be liquidated in ten to twelve years, subject to a vote of its board. As a result, Profund must have exit mechanisms, such as put options, or structure its investments as preferred redeemable shares or subordinated loans. This creates another incentive for the development of an investment market for microfinance. If there is not a market for MFI shares, Profund will have difficulty exiting its investments. The returns to Profund’s investors will be primarily through capital appreciation, rather than current income. The philosophy behind this approach is that these investments are in start-up institutions that are growing very quickly. Growing companies should normally reinvest their earnings, rather than pay dividends. A possible exception is if the investee organization plans to list its shares publicly. If so, it may want to generate a track record of paying dividends to its investors. However, that track record should demonstrate consistency. Until a new institution is sure of a constant stream of earnings, it is better to refrain from paying dividends rather than making infrequent payments.

Profund as Venture Capital To develop a better understanding of Profund’s role, it is useful to compare and contrast this specialized investment fund with venture capital. They both take an equity stake in start-up firms in hopes of generating above average returns. The main difference, of course, is that a venture capitalist can be ruthless in extracting the maximum return on its investment, while Profund maintains a broader objective in developing this emerging industry. A closer examination of venture capital helps to describe Profund as an investment vehicle. There are five main elements that are key to successful venture capital investing: 1) Venture capital investors focus on a specialized niche because they are familiar with the market, the competition and the investment potential. 2) Venture capital involves a very selective investment process. For every investment, a venture capital fund reviews many proposals, and conducts due diligence on several possible investments before selecting the best. This selectivity reflects the significant demand for financing in emerging industries. 3) Venture capital funds link with partners who want to make money. This motivation is important to ensure a mutual interest in working hard to increase the equity value of

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the company, which will eventually be realized through the sale of the shares of the investee. 4) The judgment of venture capitalists is based on industry specific knowledge, which allows them to work with people they trust, who exercise good business judgment and have systems in place to generate performance feedback and accountability. 5) Successful venture capital requires an ability, should the need arise, to intervene and exercise control to protect the investment—this has important implications on the governance of the investee. The investment is a contractual agreement that commits the investee to certain management systems, board structures and operational control. How does Profund compare to these five characteristics of venture capital funds? 1) Profund deals with a focused market—lending for small and micro enterprises— although within this market, there are several institutional models. Possible investment candidates include NGOs that are converting into regulated financial intermediaries (the BancoSol model); commercial entities that have discovered this market; and possible joint ventures between NGOs and banks. 2) Selectivity is a challenge because this industry has not yet generated a large number of potential investments. The lack of selectivity may affect Profund’s negotiating ability, since investees might perceive that Profund needs them as much as they need Profund. 3) Profund is interested in generating the greatest return for its shareholders. To realize this return, it needs to help develop the microfinance industry and attract commercial investors to this market. Otherwise it will not be able to exit its investments profitably. 4) For Profund, the personal relationship between its investment manager and the management of investees is critical. To facilitate this relationship, the investment manager and staff are based in Costa Rica, and they travel constantly to maintain contact with investees and senior management of potential investee organizations. This relationship provides the investment committee with increased confidence. 5) Profund aims for the kind of governance involvement exhibited by venture capital. Profund is aware of the importance of structuring the initial investment appropriately and regularly monitoring institutional performance thereafter.

Profund’s Investments Profund has a capitalization of US$17 million, and expects to raise additional capital to reach US$21 million by the end of 1996. It has already committed roughly $8 million in five investments: Banco Solidario - Forty percent of all credit clients in Bolivia’s formal financial system are borrowers of BancoSol. The bank’s portfolio is managed carefully and professionally, with very low delinquency rates. Convinced of BancoSol’s quality of management and its potential to deliver a superior rate of return to its shareholders, in 1995 Profund acquired 24% of BancoSol’s common shares for US1.5 million. Profund’s Investment Manager sits on the bank’s board of directors.

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Caja de Ahorro y Prestamo Los Andes - Founded in 1995, Los Andes specializes in micro and small enterprise lending in Bolivia. Bolivia offers attractive conditions for investors because there are no restrictions on currency convertibility or capital repatriation. Also, the market for micro credit is very large. Because of these factors, and the quality of Los Andes operation, Profund has invested US$750,000 in this institution through a quasi-equity instrument. Additionally, Profund has granted Los Andes a threeyear loan for up to US$750,000. Finansol - In 1995, Profund invested in Finansol US$684,000 in common shares, which amounted to approximately 10% of the institution’s total capital. Subsequently, Finansol experienced serious problems that are discussed in detail below. Profund has committed an additional US$2 million to the recapitalization package, which includes ACCION, Calmeadow, FUNDES, Citibank, the Colombian development bank (IFI), as well as other private and institutional investors. It is anticipated that Finansol will return to profitability in 1998. Profund holds a seat on Finansol’s board of directors. Accion Comunitaria del Peru - Since 1993, ACP has practically doubled in size every year, while generating an average return on equity in excess of 30%. ACP is an NGO that is in the process of transforming into a regulated financial intermediary in accordance with new Peruvian regulations for non-bank financial institutions. Profund has agreed to invest US$1.5 million in exchange for 25% of the new institution’s common shares and a seat on the board of directors. Pending the establishment of the new institution, Profund has extended to ACP a convertible bridge loan of US$1.0 million. Enlace Sociedad Financiera - Established in Ecuador in 1995 to provide microfinancial services, Enlace projects to break even in 1996. From 1997 to 2000 it expects to produce an 18% average return on equity. Enlace is an interesting case because, unlike the other four investees, it did not begin as an NGO. It is a new institution founded by private entrepreneurs who acquired a financiera to enter the micro market. Profund has committed to invest US$1.9 million in exchange for approximately 12% of Enlace’s common shares. Given the size of Profund’s assets, the maximum investment is approximately US$4 million. Investment sizes depend on the magnitude of the institution and the risk in a particular country. Profund does not want to be the major shareholder, but it wants to have a significant enough investment to have an influence. Twenty to thirty percent of the institution’s equity is the target level of investment. As indicated by its investments to date, Profund wants to be extremely flexible by responding to the investment type and the time table of the investee organization. If an NGO wants to transform into a bank, it must progress at its own pace. Profund has to be ready when the investee is ready, and shape itself to meet the needs of the investee. If an institution has good experience managing a microfinance portfolio, but no experience accessing funds, then Profund can assist them to access the capital market. On the other hand, if it works with a commercial institution, then Profund must link the bank with organizations that know about microfinance. Profund is not just an investor, it is also a facilitator. In this way, Profund promotes microfinance success stories, adds value to the microfinance community, and creates a positive image for itself.

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Looking Ahead Existing microfinance institutions are becoming ready for investment for several reasons: • • • •

the market for MFIs is virtually unlimited; the microfinance community has an increased availability of useful financial data and appropriate research; the regulatory environment is becoming more familiar with microfinance, and in some cases it is actually enabling the formalization of MFIs; most donors now prefer to assist institutions that are becoming sustainable, and therefore donors provide fewer on-going subsidies and soft loans.

Ten years ago, a development strategy that tried to make a profit while assisting low-income populations would not have been well received, by either the legal environment and by society in general. Today, while skepticism remains about the practicality of combining development and profitability, there is little or no outright disapproval of this approach. While the prospects for effective microfinance institutions are good, the risks of operating in this market are high. These risks include currency exposure, infant industry risk and country risk. This is a precarious field that could easily be undermined by government intervention through interest rate ceilings or soft loans. In addition, the institutional capacity of the microfinance industry as a whole is fairly shallow. Few people understand the intricacies of microfinance and many MFIs have problems with weak management. After factoring in all the potential risks, from a commercial perspective, the microfinance industry presents a great investment opportunity, especially since Profund is getting in on the ground floor. The challenge for Profund is to adjust the usual investment considerations, such as legal documentation and prospectus-type disclosure, to the small number of potential investees who have limited experience in dealing with institutional relationships with funders or shareholders. While Profund wants to remain flexible, it needs to formalize a rigorous process for making investments, and make investees more accountable. Another challenge for the microfinance community is to create other investment vehicles. For example, with assistance from CIDA, Calmeadow is leveraging its Profund experience to establish an African investment fund. Instead of replicating Profund, it is expected that Calmeadow will adapt the model to the unique characteristics of African MFIs and their operating environments. Calmeadow is currently conducting a feasibility study to identify the needs of African institutions and investors, and to develop an appropriate structure. A “Profund for Africa” may fulfill multiple roles, such as a capital fund that also provides technical assistance and management consulting. Given the diversity and size of the African market, and the importance that investors are intimately familiar with their market, it may be more practical to discuss regional investment vehicles instead of one fund for the entire continent.

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Corposol/Finansol: Preliminary Analysis of an Institutional Crisis in Microfinance Maria Eugenia Iglesias, President, Finansol, Colombia Carlos Castello, Vice President for Latin American Operations, ACCION International, USA Over the past year, Finansol, a regulated microfinance intermediary in Colombia and an affiliate of ACCION International, experienced a crisis that caused a severe deterioration of its portfolio quality. With the assistance and collaboration from both the private and non-profit sectors, ACCION developed and implemented a recovery plan. New management is now on board, portfolio quality has improved, and new investors have recapitalized the institution, with hopefully more to follow. To share this experience for the benefit of the field of microfinance, it is necessary to: 1) analyze the origins of the Corposol/Finansol crisis; 2) explain the turnaround of Finansol including the recently completed recapitalization package; and 3) identify lessons that emerge from this experience.

Origins of the Corposol/Finansol Crisis Background. Finansol emerged from Actuar Bogota (hereafter referred to as Corposol), an NGO founded by influential local business persons with ACCION’s support to provide services to microentrepreneurs in Colombia’s informal sector. From its start in 1987, Corposol was noteworthy. It grew at an unprecedented rate, providing integrated training and access to credit to more than 3,000 clients in 1989, and escalating to nearly 25,000 active borrowers at the end of 1992. Corposol was also one of the first microlending institutions to begin its lending activities by obtaining lines of credit from commercial banks, initially through the personal guarantees of the founders, and afterwards through guarantees from ACCION's Bridge Fund and FUNDES. However, these sources of capital were insufficient to sustain the institution’s rapid growth. By 1992, Corposol began to explore ways to tap directly into financial markets by forming a regulated financial intermediary. After examining the feasibility of a number of options, Corposol decided that a commercial finance company (CFC) was the preferred type of regulated financial institution. Not only would Corposol avoid raising the large minimum capital requirement (US$13.7 million at that time) to create a bank like BancoSol, but it could buy an existing CFC license and begin operations immediately. In October 1993, with 71% of the shares, Corposol became the controlling owner of a CFC, which was renamed Finansol. Joining Corposol as minority shareholders were ACCION International, Calmeadow, FUNDES, a local development bank and private individuals.4 Deterioration. Finansol inherited from Corposol a loan portfolio of excellent quality, a proven lending methodology (i.e., short term, working capital loans and sequential step lending), large volumes and consistent operational profitability. Nevertheless, three major factors led to the deterioration of Finansol's financial position. First, the structural relationship between Corposol and Finansol was flawed. During the transformation process, the NGO’s original management—the visionaries—were reluctant to 4

A portion of the shares of ACCION, Calmeadow and FUNDES were transferred to Profund as partpayment of their investment in the fund.

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discharge control of the operations. As a result, Corposol, the NGO, retained the credit extension staff as part of its personnel, while Finansol, the financial institution, served only as a booking and financing agent. Since Corposol generated most of its operating revenues through training fees charged concurrently with loan disbursement, it had an incentive to disburse loans without a corresponding incentive for loan collection. In addition, except during the first few months, Finansol was managed by a long-time associate and subordinate of Corposol’s President.5 Together, these factors left Finansol without the ability to control loan placement, nor the will to conduct independent action. Second, Corposol became too ambitious. Buoyed by the success of establishing a regulated financial institution, the management of Corposol set out to provide completely new services and expand quickly at the same time. During 1995, the microfinance portfolio grew from US$11M to US$35M. This huge portfolio increase was delivered in part by large numbers of new credit officers who had not endured a well-structured induction and training system. Due to their entangled relationship, Finansol was dragged along as Corposol launched three new untested microfinance projects: Mercasol, a chain of retail outlets for microentrepreneurs to purchase supplies with credit lines; Agrosol, a rural credit program with borrower groups of twenty or thirty clients and different repayment schedules than the urban program; and Construsol, a home improvement loan scheme. In some cases, Corposol approved two or three concurrent loans per client. The results were dismal. The new products were largely unsuccessful; the management information system could not keep up with the product diversification; and the institution lacked appropriate staff training for the new products. To stop the monthly deterioration of the profit and loss statement caused by provisioning for the increasing number of delinquent loans, management launched a massive refinancing of the portfolio that included lengthening loan terms. This response provided brief cosmetic relief at the huge cost of hiding and worsening Finansol’s asset quality, and undermining the ACCION methodology. At the same time, loan officers came under intense pressure to increase loan volumes to generate revenue for Corposol, which resulted in disregard for credit quality. Third, management made poor decisions in response to banking regulations. In 1994, the Colombian government attempted to control inflation by limiting the asset growth of regulated financial institutions to 2.2% per month—an extremely low figure considering that annual inflation was more than 20%. Finansol was affected immediately, but as an NGO, Corposol was not. It became expedient for Corposol to retain a portion of the loans to permit the combined portfolio to grow at a faster rate than the regulated system. Thus began a practice of shifting portfolios between the institutions, which lacked transparency and misrepresented the financial position of both institutions. The combination of a flawed structure, excessively ambitious policies, poor decision-making and the lack of financial transparency led to the worsening of Corposol/Finansol's financial position. The loan portfolio deteriorated, the credit methodology was weakened, and neither ACCION nor the Superintendency were able to get a clear picture until the situation had reached crisis proportions. 5

During the first five months of its existence, Finansol was managed by a team of bankers hired by Corposol. However, because this team wanted to work with greater independence from Corposol, it led to the decision in April 1994 to replace all but a few of these key specialists with former management of Corposol.

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The Turnaround Although ACCION and the other outside directors sensed these problems, they found it difficult to analyze and tackle them effectively. By presenting its new projects—and later reporting on them—as attractive opportunities, shifting assets between the two institutions, and assuring critics that it was dealing with the problematic signs, Corposol delayed the effective review of its operations by outsiders. In addition, a clean audit by a big six accounting firm bolstered its case. In May 1995, after months of delays, ACCION prevailed upon Corposol to perform a CAMEL evaluation of the entire microlending operation.6 The results, reported in July 1995, identified worrisome trends, but did not capture the true magnitude of the deterioration because the CAMEL was restricted to a period ending December 31, 1994. However, the CAMEL effectively articulated the concerns of Finansol’s outside board directors and launched the move for change. After the resignation of Finansol’s President in September 1995, a totally open appraisal of the institutions occurred. Solution. In October 1995, Finansol obtained the services of Luis Fernando Tob\n, a prominent banking consultant formerly with Citibank, to analyze the operations and design a corrective plan. The turnaround plan rested on a conceptually simple solution: a rigorous and uncompromising return to the basics. Finansol regained control over its loan portfolio by eliminating new product offerings, returning to the basic loan model, severing most arrangements with Corposol, and taking management responsibility for the credit extension staff. In addition, Finansol implemented a comprehensive plan to reduce costs, improve reporting and budgeting, and focus on quality hiring, training and evaluation. In March 1996, Maria Eugenia Iglesias, a former colleague of Tob\n’s at Citibank with extensive local and international banking experience, was hired as the new President of Finansol. To track the progress of the turnaround, Finansol split the portfolio into a “New Bank” containing loans since October 1995, and an “Old Bank” with the portfolio of the past. The trend of the New Bank's performance indicators has been similar to other ACCION programs, indicating the efficacy of the new policies. Finansol is also eliminating non-productive assets that at one point comprised a significant portion of all assets, and effected a capital increase of US$2 million to cover loan losses. The problem was correctly diagnosed, a highly competent management took corrective measures, and the affected portfolio, although significantly worse than in the past, was no longer at the disaster stage. Regulatory Context. Although the operational problems were diagnosed and the cures already implemented, the regulatory framework presented another challenge for Finansol. Since Colombian banking rules mandate the gradual provisioning of delinquent loans, the effect of writing off the Old Bank’s debts flowed regularly through Finansol’s books for the first nine months of 1996. Overall, Finansol provisioned more than US$6 million. The monthly losses caused an erosion of Finansol’s net worth to such an extent that it violated the Superintendency’s rule that a regulated financial institution may not lose more than 50% of its starting net worth in a given fiscal year. Finansol crossed this “thin red line” in May 1996, creating a situation where the Superintendency could have intervened. 6

ACCION’s CAMEL is a diagnostic tool based on bank examinations of North American regulators, but adapted to microfinance institutions. CAMEL is an acronym for the key dimensions on which a financial institution is measured: Capital adequacy, Asset quality, Management, Earnings, and Liquidity.

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The potential ramifications of intervention are significant. It could have sent a signal to the market that Finansol was entering a crisis situation, rather than coming out of one. Not only could this situation have caused Finansol’s collapse due to a lack of market confidence, but it may have affected the broader Colombian financial market as well, since Finansol had issued paper amounting to approximately US$30 million. Accordingly, averting this crisis was of the utmost concern. Intense efforts to launch a recapitalization plan were quickly initiated to forestall intervention. Recapitalization. Working with IFI (Instituto de Fomento Industrial), Colombia’s secondstory development bank, Profund, Citibank-Colombia and others, ACCION led a recapitalization plan in July 1996. The plan had two goals: 1) to sever the relationship between Corposol and Finansol;7 and 2) to raise enough capital to meet the capital requirements of the Superintendency and to provide for future growth. The first goal was achieved when Corposol surrendered its majority stockholder position through a debt for equity swap with its banks to whom those shares were pledged.8 The second goal was achieved when new investors purchased US$3.5 million of equity in Finansol.

Lessons Learned The lessons emerging from this case can be analyzed by examining the institutional characteristics that allowed the crisis to occur, the role of ACCION in monitoring and eventually helping to rectify the situation, and the implications for MFIs in the event of a similar crisis. Institutional Structure and Governance. Typically, ACCION has co-founded institutions in its network with local partners drawn from the leaders of the private business sector. While working intensely to establish new microfinance operations, ACCION does not join the board of local organizations in order to promote the full involvement, and the attendant strong sense of ownership, of its local partners. ACCION believes that the development of these deep roots is an essential ingredient of its network’s success in reaching economic self-sufficiency and scale. As a result, in the Colombian case, ACCION was on the board of Finansol as a shareholder, but not on the board of Corposol. Thus, there was little opportunity to influence Corposol’s diversification into untested activities. The institutional structure aggravated a governance issue that may arise when an NGO parent is the majority shareholder of a regulated microfinance institution. While it is possible to solve this problem (as the example of BancoSol suggests), an NGO parent nevertheless establishes a controlling party that is not inherently bound to the standards of economic performance or fiscal prudence that is expected in the business sector. In fact, the NGO’s own mission may encourage it to assume greater risk in order to accomplish its vision. Because of this possible tension, in the best cases, the NGO parent must ensure that it sets standards appropriate to the financial sector for its regulated microfinance subsidiary, even if these are not applicable to its other activities. In the worst cases, the lack of normal shareholders at the NGO parent may translate into a disregard for economic performance, which influences how it runs the MFI. Unfortunately, the latter was the case in Colombia where, in pursuit of its own aims and the generation of its own income to cover operating 7 8

This was a condition set by all new investors. Finansol also participated in this debt/equity swap.

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deficits of its new initiatives, Corposol pushed for the expansion of services and the rapid expansion of clients at Finansol. This occurred, in part, because Corposol’s board did not have the technical expertise, nor the will, to manage the managers. The lack of management autonomy at Finansol, for reasons previously noted, aggravated this state of affairs. But even if Finansol opposed Corposol’s initiatives, the structural relationship between the institutions—where Corposol retained all the credit extension and supervision capabilities—would have made it difficult for Finansol to intercede. One direct result of this structural flaw was the dramatic distortion of the lending methodology.9 Under pressure from Corposol to increase clients, the credit officers allowed larger loans for longer terms, without the credit history from sequential lending. Even worse, management refinanced loans to circumvent the provisioning requirements, solving a short term problem, but creating the conditions for the eventual crisis. These problems underline the fact that microfinance institutions cannot relax standards under pressure to increase services or the client base. Given the CAMEL’s importance in mobilizing the board of Finansol, it is clear that the application of such a review even a few months earlier would have made a significant difference. This issue underscores the conclusion that an effective quality control instrument, applied on a regular basis by professionals with microfinance experience, is one of the best safeguards against the kind of institutional deterioration seen at Corposol/Finansol. In addition, the importance of such specialized reviews is heightened by the realization that neither external audits by prestigious accounting firms, nor the supervision of banking regulators, is sufficient control for portfolio quality. Role of ACCION. In examining the role of ACCION, the first fundamental question is why it took so long to appreciate the magnitude of this problem. A variety of factors contributed to the delay: • • • •

local management that, in the best cases, suffered from arrogance and an excess of salesmanship, and in the worst cases, intentionally provided faulty information; a clean external audit by the local office of a Big Six accounting firm; an institutional structure that lacked transparency and made comprehensive analysis difficult; and the persuasive power of a highly successful prior track record.

However, perhaps the most damaging was ACCION’s own reluctance to accept at an early stage the depth of the Finansol crisis. ACCION personnel failed to push earlier for the ultimate implications of the troublesome signs for two major reasons. First, Finansol was widely held as a leading example of the future of microfinance: the insertion of successful institutions into the capital markets. While Finansol’s problems were due to deviations from ACCION’s methodological model, and as such this crisis does not reflect on ACCION’s conceptual framework, nevertheless the symbolic visibility of Finansol introduced elements of wishful thinking into ACCION’s perceptions. Second, these blinders were exacerbated by the importance of Finansol in the statistics of the

9

The rapid growth of the institution without sufficient capacity for staff development is another cause for the distortion of the lending methodology.

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ACCION network, particularly in terms of microentrepreneurs reached. This experience has demonstrated the importance of clarity of analysis, regardless of image or other considerations. But even if an understanding of the depth of the crisis was delayed, what should ACCION have done differently? Clearly, ACCION should have confronted Corposol management more forcefully. ACCION should not have been content to state its objections at the Finansol board level while the company veered in directions it found disturbing. Serving on boards presents the dilemma of deciding which is more effective: vocal opposition at board meetings, or suggestions and recommendations to management in the corridors. In the case of Finansol, ACCION believes it should have realized earlier that, until the CAMEL, it was not being effective in either venue. In this regard, the ultimate lesson for support institutions like ACCION is that they must have the political will to put an organization’s affiliation with the network at stake when fundamental issues are concerned and when its effectiveness has severely diminished. It is also important to analyze what ACCION did once the depth of the crises was communicated by Finansol’s new management. ACCION immediately mobilized an internal team to lead a rescue effort while simultaneously alerting its international partners (FUNDES, Calmeadow and Profund) and stakeholders (both actual and potential, such as the IDB, USAID and the World Bank). The last several months of intense efforts illustrate several key lessons for ACCION as a microfinance support institution. MFIs at the vanguard have become full-fledged participants of the financial sector. The ability to deal with crises in this context, with all its implications for functional and management expertise, is a necessity. Such efforts require an interdisciplinary team that combines both microfinance methodology and financial-business experience, preferably involving complex capital restructuring. In addition to quality personnel, there must be sufficient quantity—fully two-thirds of ACCION’s senior management team was directly involved in the Finansol crisis and the remaining third was redeployed in order to prevent other activities from being seriously impaired. Had this crisis occurred eighteen months ago, ACCION may not have been capable to field all the professional resources required. Finally, the assistance of other organizations in crafting a viable solution is critical, as demonstrated by the involvement of FUNDES, Calmeadow and Profund. Implications in the Event of an MFI Crisis. As successful microfinance institutions scale up and become regulated financial institutions, it is inevitable that some of them will go through crises. In that event, some additional lessons may be applicable. The importance of management quality is foremost. In the entire restructuring process, the exceptional quality and experience of its current President, Maria Eugenia Iglesias, has been fundamental. Without a similar capability, none of the vital components of the proposed solution could have come together—the institutional changes required, the support of ACCION and colleague institutions, the sustained confidence of the financial markets, the credibility with the Superintendency of Banks, and the involvement of new investors. The time frame in which crises in open financial markets must be resolved is inconsistent with the response time of multilateral institutions. During the entire process, ACCION received strong encouragement and benefited from the advise of many international donor agencies interested in microfinance in Latin America. They clearly understood the severity of the crisis and the importance of the Finansol emergency for the nascent microfinance industry.

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However, there were only two months between the new management’s report of the extent of the crisis in March and the crossing of the “thin red line” that opened the possibility of intervention by the Superintendent of Banks. The injection of the first round of new equity occurred three months later, at the outside limit of the Superintendent’s flexibility. None of the multilateral institutions could act within those time limits. Should donors participate in the recapitalization of MFIs that experience crises? On the one hand, Finansol operates in the private sector, and private sector firms fail every day. If Finansol had been allowed to go out of business, it would have sent a powerful message to the microfinance community about the importance of staying true to its methodology. On the other hand, donors helped capitalize microfinance institutions, and perhaps they should be available in good times and in bad. Although Finansol is a private sector business, its roots in the NGO community meant that it did not have an appropriate governance system to prevent and manage a crisis. The board members did not have deep financial resources or a means to raise capital for the ailing institution. The microfinance industry today does not yet have the level of investment from the private sector to respond to a crisis situation as pure private sector businesses would. This further emphasizes the importance of specialized financial investment funds such as Profund. In practice, it was through Profund that multilaterals could translate their strong support of microfinance into action. Perhaps it is through similar vehicles, structured as independent units with professional investment management, that multilateral institutions can achieve the necessary response speed to resolve microfinance emergencies. Finally, the Finansol experience demonstrates the importance of a microfinance model that is based on economic viability and performance. Without a past experience as a profitable NGO, and a firm commitment in the future to serving the most fragile sectors of the community while producing sustained and attractive returns, it would have been impossible to consider attracting investors from the private sector, such as Citibank-Colombia.

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Theme II: Best Practices The Information Systems Challenge: How to Develop an Effective System without Putting the Organization into Bankruptcy! Eduardo Bazoberry, Executive Director, PRODEM, Bolivia The MicroFinance Network has identified the development and use of information systems as one of their greatest challenges. Often, MFIs invest thousands of dollars in developing new information systems, only to be at the mercy of consultants and salespeople. When the system is finally installed, it rarely does everything that it is supposed to, and even if it does, the institution’s needs quickly outstrip the system’s capacity. PRODEM, a Bolivian NGO and an ACCION affiliate, is known to have one of the most effective systems in the industry—which it developed at minimal costs to the organization. As an initial foray into the complicated world of systems development, the MicroFinance Network asked PRODEM to share its experiences in developing its Excelsior and Confin systems. In 1992, when BancoSol was created, PRODEM assumed the challenge of developing financial technologies to offer credit to rural areas, secondary cities and border towns. One aspect of achieving this goal, was to develop a management information system to accommodate wide coverage, high growth and accountability in a large geographic area with a sparse population at a low cost. PRODEM needed an information system for a branch network that was so dispersed and inaccessible that senior management could only visit each office two times per year. Since its mission requires PRODEM to conduct research and development of new financial products, the information system also needed to have the flexibility to accommodate the addition of new products and levels of analysis to evaluate the viability of each product.

Systems Development Previously, PRODEM had its client database in Quickbasic, a software system that duplicated client data with each loan, operated slowly, required additional memory, and became expensive. One of the organization’s major frustrations was its inability to export information between branches and the national office. Since it was clear that the existing information system did not meet the institution’s changing needs, PRODEM initiated the process of developing a new system. However, instead of relying on external computer consultants, PRODEM chose to build internal capacity. Because of this commitment, out of 132 total staff, today PRODEM has seven people dedicated to systems development, three at the national office and four throughout the country. It was also critical to hire the right personnel. To identify the appropriate persons, PRODEM sought individuals who had system development experience in the formal financial sector, and who had a good reputation. PRODEM was also interested in finding persons who could talk to the system’s users in layperson’s terms, and who could understand users’ needs. After employing key personnel, the first step in the process was determining the needs of the different end users. For example, the branches needed to have the right technology for the

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local management of their portfolios and their liquidity, while the regional and national offices needed a system that quickly aggregated balances and statistics. It was determined that the branches did not require sophisticated accounting systems to ensure that the focus of their attention remained on client service. The accounting needs at the branch level consisted primarily of managing petty cash, information on cash flow and expenditures, and selfsufficiency indicators. The participation of the end-users in the development process was critical for three reasons. First, it ensured that the system was designed to meet the needs of the users. Second, the user’s involvement in the design process enhanced their willingness to accept change as it gave them a sense of ownership over the new system. Third, the process of analyzing the needs of the users represents the first step in the constant training of staff to use the system to maximize efficiency and productivity. A perfect system will be worthless unless staff knows how to use it, so MFIs should allocate generously to the training line item. In developing its system, PRODEM also considered the needs or specifications for external users. It solicited input from the Bank Superintendency, auditors, the national board of statistics and the credit risk unit. This was necessary to ensure that the system met the specifications of auditors and bank supervisors, and could link with external bodies if necessary. By hiring a systems development team, PRODEM committed itself to a gradual development process that could keep apace with the changing needs of the users. It was important that the users understood that the system would not be perfect immediately, and that staff was prepared to work with the systems development team to improve the product over time. The software needed to be able to grow with the organization to accommodate increased demand by external clients (the borrowers), and the changing needs of internal clients such as the personnel department, accounting department, operations department and the credit officers. This approach made sense for PRODEM because it is a rapidly expanding organization that is testing a variety of financial products. It cannot realistically project its long-term system needs. Through increased experience with the system, users may think of additional requirements or enhancements. If PRODEM did not have an in-house systems team, it would have to choose between the high costs of hiring consultants to upgrade or refine the product, or not meeting the changing needs of the users. The in-house capacity for system development to meet the changing needs of the organization allows PRODEM to spread the development costs over time. Besides spreading the costs of system development, PRODEM also gradually increases its investment in hardware as the branch grows. Initially, it costs about US$6,000 per branch for the basic hardware package. This basic system works well with smaller volumes of transactions, but as the branch grows, the system needs to expand with it. When branches disburse about US$3 million per year, they require a more advanced system with the tellers linked on-line directly with the accounting system. The total cost for the upgraded system for larger branches is about US$11,000.

Key Features By June 1994, PRODEM had reengineered its systems to use on a 386 computer in each branch with two homemade software packages, Excelsior and Confin. Excelsior manages the information related to clients, communities and activities (see Table 1). Confin is the finance

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Table 1: PRODEM’s Excelsior Portfolio System

Excelsior Portfolio System Characteristics • Designed in the environments of FoxPro/DOS and LAN Novell • Data is validated the moment it is entered • High speed processing allows for 35,000 clients per branch and 5,000 loans per month • Obtain daily, monthly or annual reports for any date • Storage of automatic back-ups • Open interface with other systems in FoxPro • Consolidation of information from all branches

Branch

System Services Department

National

• Elaboration of disbursements

• Control of branch portfolios

• National consolidation

• Payments

• Projection of cash flows for

of portfolio

• Local Statistics:

each branch

• Elaboration of Statistics:

• Default

• Departmental statistics

• National arrears rates

• State of portfolio

• Stratification of terms, amounts, etc

• Growth

• Growth

• Risk Control with other MFIs

• Central risk unit

• Integration with other systems: • Accounting • Operations

and accounting system (see Table 2). One of the most important features of these two packages, as determined by the users, was to link the accounting system with the client data and statistics. Now PRODEM can close its books and immediately consolidate the portfolio movement by source of funds, and produce separate income statements for each source. No hands are involved in transferring information or preparing the statistics; it is all done automatically. The software has control systems to prevent entry error and fraud. For example, the computer will not accept a new application for a client who has an outstanding balance, and the system leaves a message for the regional manager that this was even attempted. Data is validated at the moment it is entered and then sealed. The software integrates all of the organization’s information systems, including accounting and budget data, the payroll, and the fixed asset register with automatic depreciation. It even monitors costs, such as gasoline expenditure per month per office, and provides a nationwide inventory of office supplies that allows PRODEM to save money through bulk buying while charging cost centers for actual use. Because of PRODEM’s mission to development of new financial products, the organization requires detailed levels of analyses. For example, PRODEM has developed new financial products that allow credit officers to tailor the loan terms and repayment schedules to the cash flow of its best clients. With the Excelsior system, credit officers monitor a client’s cash flow over several loan cycles and customize a payment schedule to meet the needs of the client’s business. When introducing such innovations, it is critical to analyze the arrears and risk for each product, and the levels of profitability. This allows PRODEM to monitor the needs of its market, and to keep one step ahead of the competition.

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Table 2: PRODEM’s Integrated Accounting and Finance System

Confin: Integrated Accounting and Finance System Characteristics • Designed in the environments of FoxPro/DOS and LAN Novell • Data is validated the moment it is entered • High speed processing • Obtain daily, monthly or annual reports for any date • Storage of automatic back-ups • Automatic adjustments for exchange rates • Consolidation of information from all branches

Branch

System Services Department

National

• Control of expenditures

• Simple accounting

• National consolidation

• Information on cash flows

• Generate automatic entries

of balances

and expenditures • Information on adminstrative,

the portfolio, fixed assets, payroll and supplies

• Detailed information on movement • Integration with other systems:

operational, and financial

• Comparative reports between

self-sufficiency at month end

branches: growth & expenditure • Publication of bank balances

• Administration (fixed assets, payroll supplies) • Operations (statistics) • Finance (budget, financial reports)

Lessons Learned Should every MFI develop its own information system, or is there a way to save development costs by sharing management information technologies? While MFIs can learn lessons from each other’s experience, the main obstacles to achieving economies of scale in system development are the problems of local support, unique regulatory environments, and different methodologies that create evolving needs. If an institution uses a system that was developed by another organization and it does not have the internal capacity to modify the system to accommodate new products, reports or controls, then the information system may undermine the natural evolution of the MFI. A preferred approach is to have the internal capacity, and to encourage learning across institutions through exchange visits by technical people. In addition to the importance of building internal capacity, there are several characteristics that underline PRODEM’s approach to development of information systems. The first is participation, including the significance of involving internal and external system users in the development process. The second feature is its incremental approach to the development of the software and investments in hardware. This spreads the costs over time and ensures that the system can evolve in parallel with the changing needs of the institution. Third, PRODEM developed its information system with the intent of using technology to improve its internal control systems. Fourth, PRODEM’s approach to systems development reflects its commitment to customer service. Finally, it is critical that MFIs allocate sufficient resources to training so that staff members use the system to improve their productivity and efficiency.

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Client Desertion Facilitated by Henry Jackelen, Deputy Manager, Private Sector, UNDP, USA Unlike traditional lending, which is collateral-based, microfinance assumes an informationintensive approach to providing financial services to low-income populations. New borrowers start with very small loans, often less than US$100, for short terms. Loan sizes and terms generally increase over time as the borrower and lender become more familiar with each other. In addition, some form of social intermediation is often required, such as group formation or basic credit training, to prepare new clients to manage micro loans. With repeat borrowers, the application process becomes more streamlined and less expensive for both parties. The increased familiarity between borrower and lender, and the established credit history of the repeat client, reduces the credit risk. With the larger loan sizes that accompany repeat loans, the MFI also generates more income. Therefore, repeat clients are less expensive, less risky and generate more income than new clients. It is essential that MFIs find ways of retaining repeat borrowers who have good repayment records. Many microfinance institutions experience problems with client desertion. MFIs may experience a desertion rate of 30% or more. However, very few programs actually measure and monitor their desertion rate, or attempt to learn why clients do not return for repeat loans. Factors that cause client desertion can be categorized as either internal or external. External factors relate to the market in which entrepreneurs operate, the conditions in their homes and the health of their businesses. Microentrepreneurs work in an extremely precarious economy. This risk is inherent to the nature of microfinance. MFIs have to expect a fair amount of desertion due to these external factors, but how much is “fair”? Internal factors relate to the microfinance institution, its lending methodology, product design and pricing, and the quality of its service. With information regarding the internal factors that precipitate desertion, MFIs can make corresponding adjustments to better meet the needs of microentrepreneurs and thus improve client retention. This is particularly important in a competitive microfinance market. Two Network members, BancoSol from Bolivia and ABA from Egypt, recently completed some preliminary research on this topic. Their findings are discussed below.

BancoSol: Group Lending in a Competitive Market Hermann Krutzfeldt, Managing Director, BancoSol, Bolivia At BancoSol, there was an assumption among management that the bank was experiencing a problem with client desertion, but its systems were not able to accurately monitor this issue. To understand the problem of client desertion, BancoSol conducted a survey of approximately 1,400 former clients encompassing most areas in which the bank operates. The results, outlined in Table 3, identified various internal and external factors explaining why clients were not renewing their loans. These findings suggest that one-fifth of the clients that BancoSol believed had dropped out were only refraining from borrowing temporarily because of seasonal sales cycles. The biggest factor causing client desertion, identified by over forty percent of the dropouts, is attributed to problems with the solidarity groups. While this is an

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Table 3: Causes of Client Desertion at BancoSol Internal Factors - 67% Solidarity group related difficulties Voluntary rest due to sales cycles Problems with the bank’s services or products

External Factors - 33% 42% Family Problems 8% 20% Market Problems 7% 5% Others 18%

indication that groups are performing their intended function to reduce the risk to the institution, some of the group-related problems could be prevented. When the group does not work properly, it can create significant costs for both the borrowers and the lender. BancoSol believes that this not a problem with the methodology per se, but rather with its implementation, particularly with the group formation procedures. If credit officers rush through the group formation process, the groups may not be well-formed, cohesive or homogeneous. Approximately one-third of the sample identified external factors as the primary cause of desertion, including 8% with family problems and 7% with market problems. This reflects the fragility of the micro market. Whatever happens to a client’s family, such as illness, has an impact on the financial situation of the business. Clients usually identify market problems by saying that their sales have dropped so they are unable to assume additional financial obligations. The survey also determined what it would take to attract the clients back to the bank. Thirtytwo percent of the respondents indicated that they planned to borrow again when their businesses needed another loan. BancoSol has not lost these clients. They are just waiting for the proper time to return, as determined by their sales cycles. Thirty percent of the respondents said that they would return to BancoSol if they could access individual or larger loans, while 28% indicated that they would return once they formed new groups. Desertion Control. In response to the internal factors identified by this survey, BancoSol has designed desertion control strategies. First, the bank is focusing its attention on the solid formation of solidarity groups to reduce the frequency of group problems. This issue is addressed by spending more time with the group before it receives a loan to ensure that it is cohesive and homogeneous, and by testing that group members fully understand their responsibilities. In addition, this research has caused BancoSol to modify its loan products to serve the needs of its customers more appropriately. This includes developing individual loans for graduates of the group lending scheme, discussed in detail below, and making group loans more flexible. The challenge is to balance flexibility and risk. One lesson from this experience is that market research should be an on-going concern. MFIs operating in monopoly markets need to remain close to their clients and develop a deeper understanding of clients needs, or they will lose clients when competition invariably arrives. In Bolivia, a new regulated financial institution, Los Andes, has harvested some of BancoSol’s best clients because it provides larger loans for individuals at the same interest rates as BancoSol.

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Monitoring Desertion at the Alexandria Business Association Nabil El Shami, Executive Director, Alexandria Business Association, Egypt Unlike BancoSol, the Alexandria Business Association (ABA) only provides individual loans. Therefore, BancoSol’s primary cause for client desertion, problems with the group, is not even applicable in this case. In addition, ABA does not operate in a competitive market. In exploring the issue of client desertion, ABA determined that it has a “desertion rate” of 44%. But this is misleading. This ratio was measured by dividing the number of inactive clients by the number of cumulative clients. This definition of desertion includes clients who were not given repeat loans because of their poor repayment history with the institution. Among the members of the MicroFinance Network, ABA assumes the strictest approach to delinquency. ABA does not allowed borrowers who have accumulated more than five days of delinquency Table 4: Causes of Desertion at ABA during the loan term to access repeat Internal Factors loans. 46.0% Loan size and terms not suitable

External Factors 23.9% Got a job in an Arab country 19.2% Stopped the business 2.1% Consider interest against religion 1.7% Eradicated by authorities 0.7% Died 6.2% Other

Only 3.9% of the 10,739 “dropouts” had paid on or before their due date, and another 24.4% had accumulated up to 5 days of delinquency. Therefore, ABA’s actual desertion rate is close to 12%, while the remaining inactive clients were not allowed to access a repeat loan.

To understand why they stopped borrowing, ABA’s branch managers approached the 422 clients who did not have any delinquency. A summary of their responses is in Table 4. Over half of the causes of desertion are related to external factors, primarily leaving the country and stopping the business. Forty-six percent of the dropouts were caused by internal factors, namely that the size and terms of the loan were not suitable. The branch managers have also followed up with dropouts who had accumulated one to five days of delinquency. Through this outreach effort, ABA has managed to reinstate approximately 55% of the actual dropouts. ABA is now in the process of giving second chances to clients who accumulated 6 to 15 days of delinquency based on the recommendations of field staff and provided that they paid their delinquency penalties. Next Steps. This initial research on client desertion is a useful start for the microfinance industry, but this issue requires further analysis. The next step is to establish a common definition for client desertion that accounts for 1) voluntary rests from borrowing and 2) the number of dropouts that are actually “kick-outs” due to a poor repayment history. With a common definition, it would be possible to monitor desertion as performance indicator. For management purposes, this can be one way of measuring the customer service of a branch or a loan officer. MFIs could build client desertion monitoring into a broader strategy of market research and product development. For institutional comparisons, this information would make it possible to analyze important issues, such as whether group lending programs have inherently higher dropout rates, or the effect of competition on client desertion.

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New Product Development Facilitated by Henry Jackelen, Deputy Manager, Private Sector, UNDP, USA When microenterprise development started, it consisted primarily of group lending to informal producers and retailers, especially poor women. Now that this field is maturing, it is necessary to consider a wide diversity of financial products, including individual lending, savings, insurance, and housing and consumer loans. In some cases, microfinance institutions have been operating for ten years or more, and their best clients have growing needs for diversified financial services. MFIs do not want to lose their best clients, in whom they have invested time and money collecting information and building relationships. This creates a market niche for financial services that the microfinance industry needs to understand better. The Corposol example is a case of how not to diversify products, but this should not suggest that diversification is bad. The Corposol experience highlights three critical lessons regarding new product development. First, MFIs must test products and carefully analyze their profitability before introducing them on a wide scale. Second, it is critical to involve all departments in process of product development, for example, to ensure that information system can accommodate the new product. And third, the Corposol example stresses the dangers of clients having concurrent access to multiple loan products. How does an MFI conduct market research to investigate the demand and capabilities of its clients and then tailor the product to client demands without significantly changing the level of risk? The experiences of two Network members, BancoSol and Emprender, that created individual loan products for graduates of their group scheme are discussed below.

Graduate Loans at BancoSol Hermann Krutzfeldt, Managing Director, BancoSol, Bolivia BancoSol has relied solely on solidarity group loans since its inception as PRODEM in 1987. The group approach is intended to reduce the transaction costs of microlending and provide a guarantee mechanism, but it is not specifically designed to meet the clients’ needs. While some borrowers benefit from the social support system inherent in the peer group methodology, for other microentrepreneurs, particularly those with growing businesses, the group approach is not a good fit. This fact became glaringly apparent to BancoSol after it conducted initial research on client desertion. In 1994, BancoSol evaluated the previous three years of its operations to determine how to meet the expanding needs of its best clients. BancoSol’s first attempt to cater to this market involved requiring real guarantees for clients who requested loans over US$3,000. This caused the unintended perception that the bank was penalizing its best clients by requiring them to produce guarantees, and this led to higher arrears rates with larger loans. Many of these clients deserted BancoSol, borrowing instead from the competition that was willing to provide larger loan sizes without real guarantees. To explore this issue more seriously, BancoSol created a special department to develop an individual loan product. This department established a pilot project to provide individual loans and to systematically analyze the results. The analysis includes the quality of the individual portfolio, the role of guarantee mechanisms, how the product affects the organizational culture,

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and how it is perceived by credit officers who provide group loans. After conducting this thorough analysis, and making the necessary adjustments to the methodology, by March 1997 BancoSol plans to introduce this product in all of its branches. Product Details. To be eligible for an individual loan from BancoSol, an entrepreneur must have been a solidarity group client for three years or five loan cycles with an excellent repayment history. The loan application process includes an analysis of the client’s capacity to repay, a risk evaluation that may or may not require guarantees, a recommendation from the credit officer, and approval of the regional credit committee. Loan terms range from six months to two years. The interest rates are currently the same for individual and group loans, but the evaluation of the pilot will determine if the rates should be adjusted. Currently, BancoSol is implementing this pilot with one or two credit officers per region, each covering up to twelve branches. These are the most experienced credit officers in the organization and they were trained to conduct objective loan analysis. The most difficult aspect of issuing individual loans is collecting the right information to make an objective decision. These experienced staff members provide an in-house consultant service by conducting the analysis and making recommendations to the credit committee. Challenges. Providing individual loans to growing microenterprises helps the bank to diversify its portfolio and generates additional income to cross-subsidize the high costs of its microloans. One of the challenges of introducing larger loans is to ensure that the institution remains true to its social mission. When MFIs provide larger loans, they may be attracted to the larger profits that are achieved with relative ease in this market. To protect its social mission, an institution should establish guidelines about the percentage of the portfolio that is dedicated to larger loans. Another challenge, which BancoSol has not yet resolved, is where to place this new product within the bank’s organizational structure. Should it train all of its credit officers to provide both group and individual products, or should it have specialists who only provide graduate loans? If the bank chooses the latter option, how does it structure staff incentives to minimize friction between the two types of credit officers? BancoSol has also learned that there are greater risks associated with lending to growing microenterprises. This client is no longer a microentrepreneur who needs working capital for short terms, who generates high profit margins every time their inventory turns over, who has the flexibility to come in and out of the market and to adapt to changing conditions. The players in this new market have the same characteristics as microentrepreneurs, in terms of education and access to information and other resources, but now have a larger business with fixed assets and overhead costs. This client is in limbo between the micro market and the commercial market served by traditional banks. This market is more sensitive to changes in interest rates that affect its capacity to repay loans. It is important that MFIs enter this market with great caution and attention to this new set of risks.

Emprender’s New Financial Products Juan Padilla, Executive Director, Emprender, Argentina Over the past year, Emprender has initiated two new financial products that have been very successful: individual loans and insurance. Emprender attributes the key to this success to its

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on-going communication with its customers to generate dialogue, which allows the organization to address client complaints and suggestions with imagination. In 1995, there was an economic crisis in Argentina and the financial system lost about 25% of its savings. This provoked an increase in the interest rate, and the national economic growth dropped by 10%. These factors had a profound impact on the informal sector. As a result, Emprender experienced a dramatic increase in client desertion. Before 1995, the organization lost less than 25% of its borrowers, but during this crisis Emprender experienced a desertion rate close to 60%. Individual Loans. Since it was founded in 1991, Emprender had worked exclusively with the solidarity group methodology. But the huge increase in desertion caused the organization to reevaluate its approach. After conducting informal research with clients who dropped out of the program, Emprender realized that many of these groups had experienced arrears during the loan term. However, within a group there were uneven situations. Some of the clients had disappeared, leaving other members to assume responsibility for their debts. Since the good clients did not want to pay for other’s debts again, they were reluctant to borrow another loan. The research indicated an overwhelming response from clients favoring individual loans with alternative guarantees, such as co-signers or formal collateral. In response to this demand, Emprender is testing an individual loan product. Currently, five percent of its clients accounting for 16% of its loan portfolio are receiving individual loans. Emprender also introduced flexibility for its solidarity groups to avoid a mass exodus from group to individual loans. For example, Emprender reduced the minimum number of group members from four to three if one member owns property or a house that could serve as collateral. Life Insurance. Each of Emprender’s branches has comment books for clients to write their suggestions and complaints.10 From these suggestions, Emprender has received several ideas that it has incorporated into its services. The most significant development was the addition of life insurance. Many clients requested life insurance to cover a group member’s debt in the case of death. In response, Emprender contracted with Argentina’s largest insurance company to provide US$2,000 policies for all clients, for which they paid an additional fee. This insurance product was so successful that 95% of the borrowers chose to increase their coverage to US$4,000, even though the average loan is US$1,200, so they could have social security for their families. After this success, clients inquired about the possibility of contracting emergency medical insurance for their families. Since 90% of Emprender’s borrowers make weekly repayments, medical insurance is a logical step for reducing risk, as well as an important social service to its clientele. By combining all of its clients in one policy, Emprender can arrange a group policy that is seven times cheaper than the clients could access individually. These insurance products are interesting additions to the microfinance portfolio because they are fee-for-service products that decrease institutional risk by increasing client allegiance and reducing arrears associated with ill health or death. Lessons Learned. These examples highlight the importance of soliciting clients' comments about the appropriateness of the products, the quality of the service, and suggestions for new

10

This mechanism for monitoring customer service is appropriate in Argentina because of its high literacy rate.

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products. As microfinance matures as an industry, it will need to adopt more formal approaches to market research, product development and evaluating customer service.

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Theme III: Accessing Capital Markets A Rating Agency for the Microfinance Industry Damian von Stauffenberg, Private Sector Initiatives Foundation, USA The Private Sector Initiatives Foundation (PSIF) expects that the microfinance industry will soon experience explosive growth. Then, this industry will form a major part of the formal financial system, perhaps not in portfolio size, but certainly in the number of clients.11 There is a huge unmet demand for microfinancial services, and the leaders in this industry have established methodologies to meet that demand profitably. For the leaders in the field, the primary bottleneck is funding. Expansion of this magnitude will require not millions, but billions of dollars. There is only one source of funding that can accommodate those volumes: commercial sources of capital. Commercial capital operates very differently than donor funding, the source of funding familiar to most MFIs. Commercial sources of capital require transparency. The market only functions when it can see what is happening, so that investors can assess risk. To date, the microfinance industry is characterized by a conspicuous absence of transparency. Microfinance consists of a few high quality players and a vast sea of smaller institutions who have neither the will nor the skill to access commercial sources of capital. Transparency is critical so that one can clearly distinguish between the two. To address this issue, PSIF is creating a Rating System for Microlenders (Sistema Calificador para Microcredito—SCM) in Latin America. This system is currently in its pilot phase. After the pilot phase, if PSIF can demonstrate that the rating system works, it intends to extend the rating system to other parts of the world.

Ratings Methodology The SCM will create a map that reveals “Who’s who” in microfinance, and in whom investors should consider investing. However, it cannot rely on financial statements to assess the quality of microfinance institutions. Transparency requires that one compare apples with apples, but all MFIs are different fruits. For example, how do they measure their interest income? On a cash or accrual basis? Are borrowers in arrears when they are one day, 5 days, or 30 days late? Provisioning policies are vastly different. Some MFIs do not make provisions, while others are extremely conservative and provide for the balance of almost every loan in arrears. In reviewing financial statements, it is also necessary to adjust for soft loans and other subsidies. All of these factors affect net profits. Those adjustments are fairly straightforward mathematical exercises. The second problem is a reality check, to ensure that the basis for the figures is correct. Auditors are supposed to perform this function, but as indicated in the Corposol/Finansol case, auditors are fallible. A 11

In Bolivia, for example, BancoSol already has more clients than any other commercial bank, although its loan portfolio is only a fraction of other formal financial institutions.

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rating system cannot conduct audits because it would be prohibitively expensive. Instead, PSIF has developed a short cut that emphasizes two areas: the management information system and the quality of the portfolio. The “Methodology Outline” in Table 5 describes the SCM’s approach to program evaluation. The SCM asks important questions, such as: •

Is there a reliable management information system? How well does it perform?

•

Is the status in the portfolio reflected in the information system?

•

How does the institution reach its lending decisions?

•

How are the files kept?

•

And most importantly, is there any refinancing? Is the portfolio quality really what it appears to be?

The rating system consists of three reports. The first is a set of comparative financial statements with adjusted numbers to produce peer group comparisons. Second, the SCM reports include a fact sheet that supplements the financial statement, including details such as the number of borrowers, the average loan size, and the incentive scheme. The third report is a narrative profile of the institution. To produce transparency in this industry, PSIF intends to publish these reports. The main difference between PSIF’s reports and ACCION’s CAMEL—besides the fact that the CAMEL goes into more detail—is that PSIF’s reports will become public knowledge. Depending on the quality of the institution, this will assist the participating MFI to access capital. Another important difference is that PSIF does not have another relationship with these institutions. If ACCION’s partners use the CAMEL analysis to access funds, a commercial source of capital may question the objectivity of the report because of ACCION’s relationship with its affiliate. Once PSIF establishes its credibility in this market, and proves Table 5: SCM Methodology Outline Day 1

Leadership Orientation: governance, methodology, policies, financial strategy corporate planning, growth strategy, human resource development

Day 2/3

HQ Based Interviews • MIS: system capacity, interface with accounting, management and staff reports • Internal Audit: personnel qualifications, methodology for internal audit, frequency and thoroughness, adequate resources • Accounting: accounting system, detailed audit review, request info for adjustments • Director of Field Operations: methodology, personnel and incentive pay, organizational structure, historical and projected growth • Special Unit (e.g. Small Business): discussion of field methodology, staff qualifications, review potential risk factors

Day 4

Field Visit (Two Office Locations) • Office Director: methodology, MIS, controls • Extension Personnel: methodology, policies, practices • Review Sample Client Files: random sample (1-5%), review completeness, consistency with MIS and with policies

Day 5

Wrap-up • Auditors: accounting policies, statements • Board Director(s): governance, long-term planning, management • Management Team: observations, lessons learned, additional info required

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the quality of staff, its evaluations can be considered objective and reliable.

Looking Ahead Over the next twelve months, to get a critical mass of data, PSIF will conduct an assessment of twelve MFIs in Latin America who intend to fund themselves commercially. After PSIF assembles this data base, it will be possible to develop a rating system. On a parallel front, PSIF will create a commercial company, probably based in Costa Rica, to operate the rating system. It is projected that this will eventually become a viable company that will have commercial banks as its shareholders. From an entrepreneurial point of view, creating a rating agency for this infant industry is a reckless venture. At the moment, there are not nearly enough companies to make a rating agency commercially viable. But the industry also cannot afford to wait. Once ratings become a necessity, it will be too late to start because a rating system requires a series of historical data. Eventually, it will cost an MFI between US$5,000 and US$10,000 per year to be rated. Microfinance institutions will have to become much larger to justify that expense. In the meantime, to create a viable company PSIF is giving the new company generous share capital from multilateral and private investors to carry it through the start-up period. It also intends to supplement its income by providing other services, such as contracting with funders to conduct supervision services. How often will the inspections occur? The Finansol crisis clearly demonstrates the volatility of this industry and suggests that ratings must occur regularly. In December 1994, Finansol was a healthy company; by December 1995, it was basically bankrupt. PSIF intends to conduct on-site investigations on an annual basis, but will supplement them with quarterly updates with certain warning lights. If a warning light goes off, PSIF will conduct an early on-site inspection.

Best Practices PSIF has conducted three evaluations to date: Los Andes (Bolivia), ADEMI (Dominican Republic) and Genesis (Guatemala). Although the principal objective of the SCM is to review the creditworthiness of MFIs, visits to these well-operated institutions yielded a number of best practice issues that deserve discussion. Incentive Scheme: All three institutions employ an incentive scheme for their field agents. Typically, institutions base incentives on a formula that includes a mix of targets for portfolio value, the number of new and repeat loans, and the on-time repayment record. The multiple of base salary earned as incentive pay varies dramatically—at one institution, the incentive pay per field staff averaged 82% of the base salary. Guarantees: Los Andes, which only issues individual loans, applies an innovative method for guaranteeing very small loans. As part of the loan analysis process, Los Andes agents catalog all personal household assets, such as furniture, appliances and televisions, which could be used as collateral. While it is legally and practically cumbersome to sell these personal effects, the threat of losing their assets is a strong incentive for repayment. Insurance Fund: Genesis has established a highly popular self-administered insurance pool that covers outstanding loan obligations in the case of death, catastrophic circumstances or

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natural disaster. With each loan application, borrowers contribute one quetzal (US$0.20) to the insurance fund. Clients find this insurance facility attractive because it shields family members from their debt obligations. Efficiency: At all three institutions, there is a relentless commitment to creating operating efficiencies. For example, they have simplified application forms, particularly for repeat loans. At Los Andes, the field office administrator approves credit applications for loans under US$1,000; applications for larger loans are reviewed by “committees” by fax and phone at any time of day. Except in the cases of late payments, there is little loan supervision between the first and repeat loans. Top credit officers manage a caseload of more than 600 clients. In a further step toward streamlining operating procedures, Los Andes is introducing a line of credit for preferred clients who have completed five or more loans with nearly perfect repayment histories. One central credit officer will administer the line of credit, and he/she will rely on local agents to follow-up with delinquent borrowers.

Performance Standards in the Philippines Benjie Montemayor, TSPI Development Corporation, Philippines The Philippines is planning an aggressive microfinance strategy to alleviate poverty. As a result, the need to establish standards for the industry has become imperative. With financial support of USAID, a tactical coalition of key participants has begun developing and promoting performance standards among NGO microfinance institutions, to increase the scale of the provision of microfinancial services on a sustainable basis, and to improve access to the capital markets. This two-year project will operate from August 1996 to August 1998 with TSPI as project holder and Punla Sa Tao Foundation as project manager. One of the important strategies of this major microfinance project is the formation of a tactical coalition. The coalition is multi-sectoral and includes: •

the leading MFIs in the Philippines (represented by APPEND and PHILNET);

•

key government planning and regulatory bodies, such as the National Credit Council of the Department of Finance, the Central Bank of the Philippines, National Economic and Development Authority, the Presidential Commission to Fight Poverty and the apex institution for microfinance, the People's Credit and Finance Corporation;

•

private sector representatives including the Bankers Association of the Philippines and two commercial banks;

•

the Asian Institute of Management representing the academe; and

•

funders such as USAID, Asian Development Bank, World Bank and AusAID.

The coalition will also invite external auditors as they also need to appreciate and endorse the standards. The high level representatives of these institutions will form a policy advisory group, similar to the CGAP structure, to serve as the governing and planning committee of the coalition. After the coalition is formed and has agreed on its plan of action, it will oversee the following major components of the project:

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The first step is to design a national microfinance survey to conduct a stocktaking of MFIs in the Philippines. Currently, much of the information in the field is anecdotal. There is a need to quantify and assess the operating and financial performance of the MFIs and create a reliable statistical baseline. There may be 500 NGOs in the Philippines involved in microfinance; of those, as many as 30 to 50 NGOs may implement the financial systems approach and attempt to cover their costs. This survey will identify all 500 or so MFIs and select the 50 most advanced institutions for a more detailed study and analysis. The design of the survey is critical to the success of this project, and it will probably be implemented by the Social Weather Stations, a top local research firm. The results of the survey are expected to make available a rich database on the levels, best practices as well as constraints to the growth of microfinance institutions in the Philippines. The second component involves training the 50 selected institutions. This initiative is designed to build the capacity of the participating NGOs to improve their support systems to scale up and move towards viability. The training will also help these NGOs monitor their operations based on agreed standards and produce reliable and comparable data. It is critical that everyone uses the same language and the same definitions for their reporting. Once there is a sufficient set of reliable and comparable data, then the coalition can establish and market performance standards. This third component will be implemented through workshops, advocacy and other communication strategies to create awareness about the standards among microfinance stakeholders. It is hoped that this initiative will produce standards that are acceptable to all. Users of the standards will not only be the MFIs, but also banks and funding agencies, to guide them in identifying and supporting the key players; and the government, to assist it to provide an enabling environment for microfinance to operate as an effective poverty alleviation tool. The final component of this project is to link with similar efforts around the world. The coalition is very interested in connecting this effort with initiatives such as the Bank Poor '96 Program by the Asia Pacific Development Centre in Kuala Lumpur, CGAP at the World Bank, and Khula Finance Ltd. in South Africa.

Regulation and Supervision of the Microfinance Industry Facilitated by Elisabeth Rhyne, Director, Office of Microenterprise Development, USAID Today, an increasing number of institutions are transforming into regulated financial intermediaries. The metamorphosis from NGO to formal financial institution allows organizations to access broader sources of capital, including client deposits, and to significantly increase the scale of their operations. Transformation also permits the institution to diversify its provision of services to better meet the client needs. However, as MFIs attempt to transform, they often confront a regulatory regime that is not appropriate for their nontraditional methods of providing financial services. Around the world, supervisory agencies are encountering a growing number of mature microfinance institutions. In some cases they have enacted regulatory legislation for institutions providing microfinancial services, such as defining a special category for non-bank

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financial institutions. Some superintendents are receiving political pressure to grant licenses to institutions that serve low-income clients. While it is to the advantage of the national economy for financial services to extend more broadly and deeply, superintendents face a difficult paradox. On the one hand, removing barriers to entry will encourage competition, create efficiencies and make financial services available to a greater percentage of the population. However, low barriers to entry could cause a deluge of weak financial institutions that might expose depositors to bank failure and the economy to instability. Regulators face with the challenge of maintaining the principles of prudential regulation while enabling MFIs to serve a population that was previously considered unbankable. This challenge is exacerbated by the sheer volume of transactions and clients that characterizes the microfinance sector, and by the fact that most regulatory agencies are overburdened and under-funded. Regulators and the microfinance community need to work together to strike a balance to solve this dilemma. The experiences described below, from Kenya, Peru and Ghana, provide evidence that this collaborative approach is taking root.

Experience in Kenya Kimanthi Mutua, Managing Director, K-REP, Kenya Introduction and Background K-REP’s decision to create a bank was based on the realization that NGOs lack the capacity to serve as effective financial intermediaries. One factor limiting their capacity is that in Kenya the corporate image of NGOs elicits skepticism in the minds of the community, clients, the government, and particularly other institutions in the financial markets. This makes it difficult for NGOs to be considered serious financial institutions. Secondly, NGOs have limited legal capacity to explore other financial instruments and products such as savings mobilization. Upon realization of this shortcoming, K-REP commissioned a study in 1994 to determine the best institutional form to support its continued expansion. The study looked at different types of institutions, such as credit unions, non-bank financial institutions, and commercial banks under the banking act. It recommended the commercial bank as the best form of institution given its capacity to provide a wide range of financial services. Between March and June 1995, K-REP developed a business plan articulating various aspects of the proposed bank. It took nearly a year to identify investors who were willing to join KREP in this venture. This was followed by a lengthy due diligence mission by each potential investor. The process was concluded in November 1996 when all the investors met to review the new institution’s shareholder’s agreement. The next step is to complete the legal requirements. The K-REP Bank is expected to begin operations by mid-1997. The information below describes the regulatory challenges that K-REP has faced in establishing a microfinance bank, and the organization’s strategies for dealing with those challenges.

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Initial Contact Before conducting the pre-feasibility study for the bank, K-REP realized that the first step was to sensitize and educate key decision-makers about microfinance. This was critical because the bank supervision division had limited exposure to microfinance and had no experience with an NGO owning a bank. It was also clear that the Central Bank of Kenya was reluctant to make any exceptions for a microfinance bank. In addition, the banking industry in Kenya had been severely hit by a significant number of bank collapses, which made the bank supervisor even more wary of new ideas. K-REP worked with highly placed and respected individuals to secure the attention of decision makers, and to garner political and media support. Once this was accomplished, it embarked on an education process for the bank supervisors. This was achieved by providing them with appropriate literature about successful regulated microfinance institutions elsewhere in the world. Finally, K-REP organized an exposure visit for the Deputy Governor and the Director of Bank Supervision of the Central Bank of Kenya to see BancoSol and to meet their Bolivian counterparts. This visit was instrumental in shaping their understanding of the vast potential, and the inherent risks, of microfinance.

Key Issues Raised by the Bank Supervisor In discussing the K-REP bank with the bank supervision division, a number of issues were raised. Some of the key issues are discussed below: Ownership. The bank supervisor found it difficult to accept an NGO as a legitimate owner of a bank because NGOs themselves have no owners and their lives are unpredictable. With an NGO as the owner, the supervisor worried about who to hold responsible in case of crisis. Bank laws in Kenya forbid any person or institution except banks and public companies to own more than 25% of a bank. Eventually, the supervisor decided to allow K-REP to be a shareholder of the bank as long as it did not hold more than 25% of the shares. This forced KREP to find other investors. Governance. The bank supervisor was also concerned about the governance of K-REP’s proposed bank because NGO boards do not usually have experience governing banks or running businesses. The supervisor needed to review lists of proposed board members and advised that candidates have proven experience managing commercial businesses. The supervisor also insisted that K-REP included in its management team at list three bankers. Security. There was concern about the security of the proposed bank, given that K-REP operations are located in areas that conventional banks consider to be “security risks”, but this is of course the focus of K-REP’s activities. Relationship between the NGO and Bank. The future relationship between K-REP Bank the NGO was also discussed at length. There were concerns about both institutions conducting similar lending operations. A clear distinction of functions was required. Lending methodology. Regarding the lending methodology, the bank supervisor needed to review K-REP’s loan contracts because the loan agreement is between K-REP and the groups. The supervisor questioned whether the borrower groups could be considered legal entities. The

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supervisor wants K-REP to have a more formal legal contract with the individual group members. The supervisor does not know how to treat the non-traditional collateral for the purposes of risk weighting. Although no law specifies how to categorize risk, supervisory practice considers loans without collateral as the riskiest. To address this, K-REP is trying to influence supervisory practice, but this does not require regulatory changes. Also the supervisor does not know how to treat the group meetings where repayments are made. This is important aspect of K-REP’s lending methodology, but does not fit into the traditional supervisory process.

Looking Forward During the course of these negotiations, the bank supervisor agreed to consider a special legislation for MFIs to create a new regulatory category. K-REP intends to become a full commercial bank, in part because it wants to challenge the thinking of the financial sector regarding the acceptance of low-income communities as a legitimate market. K-REP’s efforts appear to be opening the door for other MFIs in Kenya to follow.

EDPYME in Peru Manuel Montoya, Executive Director, Accion Comunitaria del Peru (ACP) Although in 1995 ACP disbursed a total of US$39 million in loans with an average size of US$485, reaching over 19,000 clients, the institution estimated that this represented only 1.6% of the market for microcredit in Lima, the capital city. As with most MFIs, the major constraint to ACP’s growth was access to sufficient lending capital. To circumvent this obstacle, ACP reached the same conclusion as K-REP, that it needed to transform into a regulated financial institution. Not long after his inauguration, President Fujimora identified the development of Peru’s microenterprise industry as an important priority. This political support enabled ACP to make a presentation to the Superintendent of Banks about microfinance. In June 1994, ACP’s President and members of its Board met with the Superintendent Banks to express their interest in establishing a regulated institution to provide financial services to Peru’s growing informal sector. This initial contact received a positive response and in July 1994, ACP’s representatives had a follow-up meeting with the Superintendency to discuss operational aspects of ACP’s activities and the projections for the proposed institution. This was the beginning of a period of learning for both parties, and it allowed ACP to develop a personal relationship with the Bank Superintendent. Now, they are working together to design the supervisory procedures for MFIs. ACP originally considered transforming into a finance company (a financiera), which can capture savings and requires a minimum capital base of US$2.7 million. The minimum capital requirement for incorporation as a commercial bank is US$6 million. However, the Peruvian development bank, COFIDE, proposed the formation of a new category for non-bank financial institutions to meet the financing needs of small and microenterprises. In December 1994, the

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Superintendency issued a resolution creating a new structure called an EDPYME.12 As an EDPYME, a microfinance institution with a minimum capital requirement of US$265,000 can access capital markets, additional bank funding and special rediscount credit facilities from COFIDE. An EDPYME is required to maintain a loan loss reserve equivalent to 25% of capital, and at least ten percent of after-tax profits must be transferred to this reserve annually. The resolution specifies that EDPYMEs must provide financing to persons engaged in activities characterized as small or microbusinesses. Ownership. As of October 1996, ACP’s application to establish an EDPYME, known as Accionsol, was approved, but operations had not yet begun. ACP will become the major shareholder of Accionsol, with Profund and ACCION International also participating as shareholders. ACP’s Board of Trustees is named as the owner of the portion of shares held by ACP, in response to the Superintendency's concern about NGOs owning financial institutions. Eventually, 10% of Accionsol’s shares will be offered to third parties, including employees and directors of ACP, and the institution will be listed on the Lima stock exchange. Accionsol plans to access local and international capital markets to fund portfolio growth, beginning with an issue of fixed income securities in the Peruvian market. Costs and Benefits of Regulation. For ACP, the most immediate benefit of becoming a regulated institution is access to new sources of capital through lines of credit and the issuance of stock in the capital markets. Access to capital in the form of savings deposits is a potential benefit, although ACP does not plan to mobilize savings in the near future. In principle, EDPYMEs are authorized to accept deposits from the public, but access to the line of credit from COFIDE diminishes ACP’s motivation to accept the challenges of mobilizing savings. The EDPYME structure also gives MFIs the legal capacity to employ real guarantees as security for its business obligations. Previously, MFIs could use these guarantees to secure a loan, not to access a line of credit. Throughout the process of developing regulations and operational systems for the EDPYME, a key consideration is to ensure that the supervisory requirements enforce operational efficiency while accounting for the unique characteristics of MFIs. For example, the Superintendency will not impose new documentation requirements for loans less than US$10,000. ACP does not foresee that client relationships will be affected when it transfers its portfolio to Accionsol. The EDPYME is a work in progress. As such, aspects of its supervision are being addressed provisionally. Some of the regulation and supervision requirements include: • the submission of various reports to the Superintendency on a daily, weekly and quarterly basis; • annual inspections and special inspections according to the criteria determined by the Superintendency; • total liability no more than ten times net equity; • portfolio classifications defined by the Superintendency, but the provisioning percentages determined by ACP; • EDPYMEs are subject to a 30% tax on income; • EDPYMEs cannot dismiss the internal auditor without the approval of the Superintendency; 12

Entidades de Desarrollo para la PequeZa y Microempresa, or Development Entities serving Small and Microbusinesses

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• the institution must request authorization before opening new branches. Implementation and Adaptation. The process of establishing the EDPYME category has drawn on the joint efforts of the Superintendency and the NGOs. The Superintendency has solicited input from ACP and other organizations to develop the regulations that govern the new entities. The spirit of supervision is to accommodate the distinct operational characteristics of microfinance institutions, while enforcing standards of efficiency and financial capacity. ACP has anticipated many of the changes that are required of EDPYMEs, and it is putting the infrastructure in place while still an NGO. It has hired key staff with extensive private sector backgrounds, such as a chief accountant from a commercial bank to prepare the reports and documents requested by the Superintendency, and an internal auditor to design control procedures. ACP has implemented a new information system in preparation for its transformation, including: a client tracking database that contains all portfolio information; accounting software designed to comply with the procedures required by the Superintendency; and a software package for monitoring fixed assets. It has also created a treasury system, including tellers, security guards and special insurance policies. Yet much work remains to be done. The legal framework for EDPYMEs leaves much to be addressed, as both the Superintendency and the new institutions gain experience. The legislation takes into account that both the government and the MFIs need room to grow, and opportunities to learn from each other. It underscores the importance of a transparent relationship between the two, and the need to maintain open communication channels so that future regulations promote the sustained growth of the microenterprise sector without compromising the financial markets. ACP believes that the capital to begin an EDPYME, US$265,000, is too small for a financial institution and will allow weak lending institutions into the market. Although ACP has sufficient capital to become a financiera, the transformation to an EDPYME will lead to a transitional period during which the staff can become familiar with supervisory requirements and a for-profit institutional culture. It may take time for the new institution and its employees to internalize an orientation towards profit maximization and responsibility to investors, which may conflict with the social mission of the parent NGO. With experience as an EDPYME, ACP eventually expects to become a financiera, and ultimately a commercial bank.

Non-Bank Financial Institutions in Ghana Christine Dadson, Executive Director, Citi Savings and Loans, Ghana Unlike other Network members which began as NGO lending programs, Citi Savings and Loans was created in 1993 as a non-bank financial institution (NBFI). In Ghana, the NonBank Financial Institutions Law was enacted in 1993 to create an alternative financial market to cater to the needs of the broad sector of the Ghanaian economy that was not being served by traditional financial institutions. This was a bold and laudable attempt to introduce diversity in the financial markets by creating an enabling environment for local private participation. However, the prudential regulations that accompanied the law exhibited serious mismatches. In Ghana, people regularly pay informal savings collectors to provide a daily savings service. Instead of receiving interest on their deposits, customers pay a commission to have their

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savings collected and kept safe. Consequently, sixty percent of Ghana’s money supply is outside the formal banking sector. However, the original regulations that governed savings and loans institutions limited the frequency of deposits to once a week. To address this issue, regulated institutions lobbied for changes in the legislation to permit unlimited client deposits. Similar to the case in Peru, it is the opinion of Citi Savings and Loans that the initial capitalization for NBFIs is too low. When the category was created, the minimum capital requirement was US$100,000. After advocacy efforts by the financial sector, this is being reconsidered. Citi also takes exception to the high reserve ratios mandated by the Superintendency. Regulations require NBFIs to place 57% of their deposits in first and secondary reserves, leaving the institution with too little to invest in productive activities. Another issue with the banking regulation involves the reporting format. The Superintendency is trying to supervise nine separate categories of financial institutions with an omnibus prudential guideline and reporting format. Since mortgage companies, commercial banks and savings and loans, for example, provide very different services, they cannot report the same information. To respond to this issue, Citi Savings and Loans and other NBFIs have created an association to advocate on their behalf. Bank supervisors need to learn how to supervise the special characteristics of microfinance institutions. Although Citi is required to provide daily, weekly, and quarterly reports, it does not receive any feedback from the Central Bank. The Central Bank is supposed to visit NBFIs quarterly, but this does not happen. The microfinance industry is in its formative stages in Ghana, as elsewhere. Both the microfinance institutions and the supervisors need to learn and educate each other. There is a need for a more involved and active supervisory service provided perhaps by an apex institution or subcontracted to an external body. The Central Bank is busy and is not able to focus on small financial institutions. A new apex body could supervise all the non-bank financial institutions and report to the Central Bank. The Central Bank has shown understanding in exercising checks and balances as it wades through the pioneering waters in establishing a microfinance industry in Ghana. The existing regulations are a synthesis from the banking act, new ideas and inputs from practitioners, but there remains significant room for improvement, particularly regarding the involvement, or lack thereof, of the supervisory body for NBFIs. An important missing ingredient is an understanding about what is happening in this field in other countries.

Regulation and Supervision Summary From these three cases, it is possible to draw some interesting conclusions about this critical issue. The most obvious conclusion is the importance of forming a close relationship with supervisory agencies. In all cases, the regulatory environment is evolving as bank supervisors and microfinance professionals learn more about each other’s perspective. To ensure that this evolution occurs in a timely fashion, and that it reflects the unique characteristics of MFIs, microfinance professionals need to have personal contact with regulation policy makers. The Peruvian case suggests that this relationship can be bolstered by political will. Familiarity with international experience is an enormous asset, as evidenced by the Kenyan case. Bank regulators and supervisors are inherently conservative, and therefore the demonstrated success of new regulations in other countries is the most persuasive argument for

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creating an enabling environment for MFIs. The MicroFinance Network is currently preparing a series of case studies about the regulation and supervision of MFIs in eight to ten countries and will make this information available to microfinance professionals who require international evidence to support their advocacy efforts. It is noteworthy that, in both Kenya and Bolivia, although the MFI sought to become a full-fledged commercial bank, the experience of licensing an MFI as a commercial bank has encouraged conservative regulators to create a separate category for microfinance institutions. Establishing an appropriate minimum capital requirement appears to be a significant challenge. The minimum capital requirement is one of the biggest hurdles for NGOs that want to transform into banks, but in Peru and Ghana where they have created NBFI categories, the microfinance institutions believe that the requirement is too small. Most supervisory bodies are understaffed and under-funded, and they will have difficulty closely monitoring a large number of small financial institutions, especially if they require a new supervisory strategy. Another common thread that unites most of these cases is the issue of ownership. In Kenya and Peru, regulators are wary of NGOs having an ownership stake of regulated financial institutions. The Finansol case demonstrates why this apprehension is appropriate. The microfinance industry needs to carefully examine this issue and consider alternative models, including staff ownership (being tried by K-REP), client ownership (Grameen Bank and credit unions), and special investment vehicles like Profund. It is also important to understand why NGO ownership appears to be working in the BancoSol case. Finally, the Ghanaian example presents a completely new experience. Most microfinance institutions begin as microcredit programs, and one of the reasons they want to transform into regulated financial institutions is to mobilize savings to have a stable source of funding for their loan portfolios. Citi Savings and Loans skipped the NGO phase altogether, and began by mobilizing savings. Is this model possible because of unique conditions in Ghana, or can a similar approach work in other countries with the appropriate regulatory environment? This issue requires further investigation.

Reflections on Accessing Capital Markets Michael Chu, ACCION International, USA Accessing capital markets is the capability to tap into the vast pool of society’s savings through the financial market, the clearing mechanism that matches those resources with the myriad of competing alternatives for investment. There are two basic ways to achieve such access: through debt and equity. Debt itself can take two forms: the mobilization of savings or the issuance of financial paper, formal IOUs given by the issuer to investors in exchange for their funds. Equity, or ownership, is applicable only in the case of entities which, unlike foundations that are based on collective stewardship, are structured to have actual individual owners, whether these are persons or institutions. Because of this, they are almost invariably for-profit and issue shares to reflect the distribution of ownership.

Debt Mobilizing Savings. In accessing capital through savings accounts, an organization is receiving funds through the provision of a service, the safekeeping and management of funds

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for the owner of those resources. By offering savings, a microfinance institution accomplishes two important objectives. First, it provides the most fragile sectors of society with a financial service that is more critical than credit, since all people of scarce means, whether they have a microenterprise or not, have to save. Precisely because they are poor, savings is a prerequisite to funding any expenditure, even if it is as simple as an aspirin for a sick child. At present, in the absence of instruments tailored to the size and pattern of their savings, liquidity needs and geographic location, poor people must channel their savings into illiquid, inefficient and risky vehicles such as physical inventory and livestock—cement bags, chickens or under the proverbial mattress. Secondly, by providing a key service, the microfinance institution develops a source of funds for its loan portfolio that may prove to be its most stable and lowest in cost. As in all services, success is determined by how well the demands of the customer are met. This poses a particular challenge since, of all the factors that define customer satisfaction in savings, the microfinance institution can determine only one, the interest rate paid. All the other variables, such as the time, frequency and size of deposits and withdrawals, are all set by the customer and are unknown to the microfinance institution at the time the savings account is opened. This makes savings fundamentally different than loans. When an institution issues loans, it can say, “be here on Tuesday at 10 o’clock to receive your check in an amount we have determined and come back every second Friday to make your payments.” With savings, the customer makes all those decisions, but with the added challenge of not communicating them beforehand. Yet the inability of the MFI to meet its customers requirements on demand will lead to the failure of the initiative. Issuing Paper. The other form of borrowing money is to create an investment opportunity by issuing a paper with a fixed date on which the debt will be paid (maturity) and a preestablished interest payment (yield). The financial market then evaluates the paper in terms of yield versus risk, comparing it to every other investment opportunity available. In order to succeed in the financial market, a microfinance institution must offer at least an equally attractive yield to alternatives that are perceived to be as risky. Accordingly, for a new entrant in the market whose risk profile is unknown, a higher yield may be necessary. For a microfinance institution, operating in an industry that is itself unknown, establishing the correct risk is especially important. For example, in 1994 when ACCION was placing paper issued by BancoSol to North American financial institutions, investors began with an expectation of returns reflecting both country and venture capital risk. While Bolivian country risk was unquestionably a relevant consideration, ACCION argued successfully that the appropriate business risk, instead of being compared to venture capital, should reflect a methodology proven by microlending activities deployed since 1987 by BancoSol’s NGO predecessor PRODEM. This long track record of success is evidenced by a consistent historical loss record of less than 1% of portfolio. On that basis, the yield offered by BancoSol paper was highly attractive relative to its real rather than perceived risk. Comparison of Debt Approaches. The experience in the field indicates that, where debt is concerned, it is easier to access capital markets through the issuance of paper than by mobilizing savings. As financial paper is essentially a contractual obligation with clearly stated terms, an institution may enter into it without major changes in its management information systems (MIS) or operational structure. In most countries, it is necessary to become a regulated financial institution before mobilizing individual savings, a requirement not needed in the case of financial paper. For example, in 1995 the ACCION affiliate in

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Paraguay, Fundación Paraguaya de Cooperación y Desarrollo, as an NGO, issued 350 million guaraníes of debt through the Asunción Securities Exchange. In addition, although it is clearly preferable, it may not even be necessary for the issuing institution to be 100% financially self-sufficient to issue paper, as in the case the Grameen Bank in Bangladesh. In the debt market, it is possible to find buyers as long as there is the firm expectation that the cash flow (whether generated by operations or donations) is sufficient to service the debt. On the contrary, individual savings often necessitates meeting minimum regulatory and reporting requirements, and a solid and viable economic operating performance. Savings requires its own infrastructure and information system that can indicate the balance available in an account regardless of when the latest deposit or withdrawal took place. This challenge is made more daunting by environments characterized by power cuts and unreliable telephone connections. In addition, the MFI may need to modify its staff culture and physical infrastructure to ensure appropriate customer service for clients who have different expectations when dealing with their own money rather than a bank’s. The problems encountered by BancoSol in the implementation of its savings program confirm all these considerations. Nevertheless, the outstanding success of BRI, where the amount of individual savings (at rates lower and less volatile than any other alternative funding source) is nearly double the microloan portfolio, remains an example of the enormous promise of savings mobilization.

Equity In addition to debt, capital markets can be accessed through equity, the sale of shares of ownership of the microfinance institution. In order for this to be possible, the institution must be structured as a commercial enterprise with ownership held by individual persons or organizations. Because shareholders are the owners of the enterprise, should the company go bankrupt, all other obligations (to employees, the state, suppliers and financial creditors) must be met before anything is left to the shareholders. When an institution floats shares in the capital markets, the seller offers the future of a company for review and acceptance. While debt has an established yield and maturity (or a maturity that can be determined by the investor through withdrawals in the case of savings), none of these parameters are set beforehand for a shareholder. Accordingly, for an MFI to sell shares, the market needs to be well educated about the microfinance industry before it can understand the place occupied by the issuer. Because of these characteristics, the placement of shares is the ultimate test of the insertion of microfinance in the capital markets. The ability to attract investment funds as equity will prove that microfinance, far from being an exotic derivation, lies in the mainstream of the business world.

Credibility and Governance Because both debt and equity represent a willingness to accept financial risk, the fundamental factor that determines the sustainability of access to capital markets is the institution’s credibility as perceived by investors, whether as lenders or shareholders. This completes the circle to the first theme of this document, governance. If microfinance is to link with capital markets, the field must provide clear and solid answers to critical questions of governance, such as:

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•

Can institutions with NGO parents provide financial markets with the assurance that they will make decisions with the same standards of prudence as enterprises that have traditional shareholders with commercial monies at risk?

•

Will NGOs be able to resist the temptation to let non-financial considerations overwhelm return considerations—whether for lofty or base reasons—since, in the absence of commercial shareholders, they are ultimately accountable only to their institutional mission?

•

Can NGO boards of directors effectively control management?

•

Will donor agencies be able to distinguish between those NGOs that can live up to the required standards from those that cannot?

•

In some cases, particularly in Asia, as part of the methodology clients become shareholders—will such atomized owners be able to participate in a meaningful way and, if so, will the cumulative effect of minuscule portions of ownership lead to commercially sound results?

•

Will NGOs that have generated their equity through grants and donations be able to exhibit the same discipline and rigor as a private investor? For example, can an institution like ACCION invest in BancoSol with funds provided by donor agencies and behave like any commercial investor?

ACCION is responding to this last question by, among other things, creating the Gateway Fund, a microfinance investment vehicle capitalized by both donors and financial investors. By combining these two type of shareholders in Gateway, ACCION is including both the business approach of commercial investors and the developmental mission of the donor agencies. These vital questions will all be put to the test in the next few years.

Vision and Management Underlying the issue of governance is the ability of microfinance institutions to survive and prosper as they grow exponentially to meet the huge unsatisfied demand for their services. Their ability to do so, and hence their ability to access capital markets on a permanent basis, depends on the marriage of two key components: vision and management. Today, the microfinance field is dominated by visionaries. If an institution runs on vision alone, it may begin by achieving enormous success. This is possible because the microenterprise field is so under-banked. If a traditional banker receives the order to double his or her portfolio, the first question to management is “what increase in loss rate will the institution be willing to accept?” because the market is so over-banked that such growth is impossible unless it comes from the competition. And often the first clients “stolen” include a disproportionate share of the worst ones. In microlending, on the other hand, portfolios can double annually for years without a degradation in quality because growth is driven primarily by market penetration. But this is true if, and only if, the newest loan officer deploys the successful methodology in the same way as the first officer did. The only way to ensure this happens, when the number of clients goes from hundreds to thousands and then to tens and hundreds of thousands, is through management. No matter how great the social or economic impact of a microfinance program—how many lives changed, families fed and children educated—the program is not exempt from economic realities. If

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explosive growth requires doubling the intake of loan officers and the mushrooming of branch offices, the microfinance institution will face the same problems of any corporation in a stage of enormous expansion. Management skills, accountability of performance, sound information systems, clear definition of responsibilities, effective delegation of authority, implementation of controls and procedures, the weeding out of under-performing staff, all become vital, in microfinance as in any organization grown large, regardless of vision. The other extreme is a commercial institution that is all management and no vision. An institution may have the most efficient MIS capable of recording exactly what happens the precise moment it is happening; board decisions may flow expeditiously to the farthest reaches of the corporation where they are immediately implemented; management may consist of the stars from the most elite business schools—but if the organization lacks vision, it will eventually become smaller and smaller in the microenterprise sector. This is because an institution that operates in the microenterprise market without an overarching vision will seek to opportunistically exploit the economic distortions of this market. Since the alternate source of funding for microentrepreneurs is the local money lender at exorbitant rates, the question is not “can microfinance make money?” but rather “how can it fail to do so if the competition is charging 5, 10 or 20% a day?” A vision-less institution will seek to maximize the short-term profits that these conditions allow, tailoring its policies to fit its own internal requirements, regardless of the impact on the client base. In so doing, it will create the umbrella under which its market will be stolen by a competitor with both vision and management, who understands the needs of its clients and delivers services tailored to those needs with the rigor, efficiency and discipline of a well-run company. In some microfinance institutions, both at the top of the organization and in the ranks, vision and management are seen as contradictory forces. Nothing could be farther from the truth. Sometimes, there is a perceived conflict in microfinance institutions between the social workers or community organizers that comprise the early employees compared to the bankers and analysts that may join the institution afterwards. No cancer could be deadlier to the emerging microfinance industry than the false perception of a struggle for primacy between vision and management. The microfinance institutions that will really make a difference will spawn a new generation of bankers unlike any that have come before: social workers who understand balance sheets and former chrome-and-marble bankers with mud on their shoes. These new bankers will constitute the synthesis of the best of both stereotypes. There are no easy answers or guaranteed solutions. The members of the MicroFinance Network are ships of a flotilla entering uncharted waters. In the next few years, a handful of these pioneers will succeed in forming crews embodying the union of vision and management. Those that sail with such crews will pierce through to the boundless ocean of the world’s capital markets, and their wake will contribute in no small measure to changing the world.

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Appendices Welcoming Address John Robinson, Vice President, Policy Branch, Canadian International Development Agency (CIDA) Good evening. I am pleased to join Martin Connell, the host for this gathering and the head of Calmeadow, Canada’s premiere and path breaking microfinance institution, in welcoming you to this conference on the microfinance industry. C'est une fete pour les yeux et pour l'esprit de reunir tant d'experts dans un si bel endroit. Niagara-on-the-Lake is one of the most beautiful conference sites in Canada. Though you have three very full days ahead of presentations and discussions on some of the more critical topics and themes in microfinance, I hope you are able to take advantage of the tours and other events that have been built into the conference agenda. Gathered in this room from around the world are some of the leading lights in the field of microfinance, including practitioners, donors, and academic experts. It is thus with a certain sense of humility that I have agreed to say a few words, or—in microfinance terms—provide my two-cents worth, on the subject at hand from the perspective of a Canadian government development agency. That perspective includes the utility of microfinance as a development tool, the major developments on the subject internationally which relate to this conference, what Canada is doing at the policy level, and a few examples of how that policy translates into our programs.

Microfinance and Development The overriding objective of Canada's overseas development assistance program is to reduce poverty through the promotion of sustainable development. While there is a mix of strategies and programs that we rely on to achieve this objective, the provision of microfinancial services for the poor is becoming prominent among them. It recommends itself on several counts. First, because it flies in the face of conventional wisdom which tells us that the poor are destitute and helpless and must depend on aid in the form of subsidies and grants. Such approaches to development, while sometimes necessary, often smack of paternalism and lead, more often than not, to dependence on behalf of the recipient. Microfinance on the other hand is not charity. The relationship between lender and borrower is a commercial one, based on mutual respect. Microcredit does not promote dependence, but self-sufficiency. In this way, it instills in the recipient self-esteem and reinforces self-reliance. These are important principles in the effort to make development sustainable. And herein lies the key ingredient that recommends microfinance as an important tool in development. Microfinance has the potential—and is unique in this way among development strategies addressed to the poor—to become a financially viable, even profitable, form of intervention.

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By increasing individual wealth through the support of solid microenterprise businesses, microfinance can make both the entrepreneur and the institution that funds him or her selfsufficient and sustainable. This increased wealth can lead to more economic, political, and social opportunity in the system as a whole. It can also open access to better services and hopes for a better quality of life for the poor. Above all, from a development perspective, microfinance has the potential to be a technique to increase individual wealth at the lowest levels of economic activity where other development strategies cannot reach. In this connection, Canada is happy to be chairing the CGAP Working Group on Poverty Yardsticks and Measurement Tools, which is seeking to refine our methods for having credit reach the poorest of the poor. Achieving this is a major challenge for the industry as a whole. Even if we can do so, it will not be the answer to all our problems. The roots of poverty are far too entrenched and complex to be overcome by any single development technique or strategy. But microcredit is a well-tested and promising contribution to strategies of sustainable development aimed at alleviating poverty. Promising because, successful schemes have already shown that poor people throughout the world have the motivation and the capacity to help themselves. One key requirement is financial systems through which resources, advice and services become quickly, efficiently, and broadly available on a sustainable basis.

Issues in Building Microfinance Institutions But for all the promise and excitement surrounding microfinance, as an industry it remains in its infancy. For instance, there are still only a handful of permanent financial institutions dedicated to the poor, most of which have representatives in this room. This is what makes the topic so engaging as we seek to collect lessons learned and develop best practices in order to harmonize commercial financing with economic development and increase the number and types of microfinancial institutions. And while we certainly will not all agree on the answers to many questions—indeed, it sometimes seems that practitioners and donors do not even speak the same language—we can agree on what the most pressing issues are in microfinance at the international level. Without presuming to provide you with answers, let me run through what I perceive to be among the urgent issues in microfinance today—again from the perspective of a development agency. One of the significant issues we face, and a theme of this conference, is the transformation of development non-governmental organizations—or NGOs—into microfinance institutions. I am sure that Mr. Kimanthi Mutua will address this issue in his presentation, so I will not dwell on it. Let me just address the worries about the potential for conflict between the development and humanitarian goals of an NGO and the commercial imperatives of a financial institution. I think that in many—though not all instances—the potential for conflict is more apparent than real, given that microfinance, rather than clashing with development objectives, is increasingly becoming recognized as a viable and valuable development tool. Still, careful attention to institutional development of NGOs as microfinance institutions must be the watchword. Which leads to a series of other critical issues that are currently being addressed in microfinance circles, issues that go to the heart of institution building. The first relates to the important areas of institutional development for strengthening the capacities of microfinance institutions. Is governance—the role of the board and management—more important than

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credit management capabilities, for instance? The answer will surely depend on the type of institution we are talking about, NGO or bank. Another issue relates to the type of institutional support that is most effective for NGOs. We can probably all agree that practitioner exchange, technical services, and training are critical. And the need will vary between NGO and bank. But who should provide this support? This is another critical issue. Should it be development consulting firms, practitioner consulting firms, or practitioners themselves? Can the international finance institutions or major donors play a role in providing support to microfinance operations? Then there is the issue of how support is delivered. This is a critical issue from the development perspective. And here I will venture a comment, which I hope will find a receptive audience. It is imperative to let the local institution decide what they need in terms of support, services, and training and to build on local competencies. This issue goes to the very core of the sustainability of the enterprise.

CIDA and Microfinance Policy Let me turn now to some of the thinking going on about microfinance at the policy level for CIDA. A paramount concern for us is the benefits that microfinance can provide for women. We have all heard it said before that while most of the world's people are poor, most of the world's poor are women. Because of this, Canada's development strategy has a strong and distinct focus on women's needs. In fact, women in development is one of our six programming priorities. In our view, women should be given special consideration in microfinance. They not only make up a large proportion of the microenterprise marketplace, they are proven good borrowers. Without belaboring the point, it is our position that strategies for microfinance must attend to the special needs of women by taking gender differences into account. More generally, we envisage two strategic roles for CIDA in the field of microfinance: the first is to strengthen viable institutions which already exist, helping them on the road to further success. This we can do by determining with them what else needs to be done to further their success, for instance, to increase scale and to reach full financial viability. We can provide them with expertise in areas crucial to their increased success, for instance in integrated accounting design, in loan monitoring systems, and in legal and regulatory areas for institutions contemplating a change from an unregulated to a regulated structure. Our second role is to fund innovative activities in the hopes that the lessons learned will contribute to advancing the frontiers of this field. This may mean sponsoring and providing forums like this that bring the different sectors involved in microcredit programs together to share information and to harness lessons learned. An example was the CIDA-sponsored International Forum on Microenterprises held in August 1995. And of course, CIDA will continue to consider financing innovative project proposals or experiments as examples, perhaps in the areas of financially sustainable structures for underpopulated rural areas or in credit products for micro-businesses in Islamic countries.

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Policy into Action: CIDA Support at the Operational Level Let me close by referring to a number of microfinance projects that CIDA is supporting, projects instigated by some of our best partner NGOs that are helping us to translate our policy into operational activities. In Vietnam, CIDA is supporting Developpement International Desjardins by providing technical assistance to the development of a rural credit savingsnetwork, an important contribution in a country where agriculture employs 70 percent of the labour force, where access to finance is limited, and where bad experiences with banks have led to mistrust. This project will mobilize rural savings to ensure self-generated and stable financing for small farmers and businesses in Vietnam. In Tanzania, we support the Mennonite Economic Development Association in providing technical and administrative assistance, training materials and trainers, funds for a loan fund, and monitoring and project assessment to enhance the role of microenterprises in the economy. The target group for this project is the poorest women and men among Tanzania's microentrepreneurs. And in Bolivia, we are contributing to a Calmeadow project that will be familiar to Mr. Connell. This support helps provide technical assistance, investment, training, and research funds to improve production opportunities in that country's microenterprise sector. It is a valuable contribution to a society in which 60 percent of the urban and 90 percent of the rural economically active population is employed in the informal sector.

Conclusion I think I have said more than enough. I will be interested in learning the results of your deliberations over the next few days. CIDA looks forward to benefiting from your informed analysis and discussion of the many issues you will tackle. Vous enrichissez ainsi le processus de reflexion continu qui a lieu? l'ACDI et ailleurs sur les moyens les plus efficaces pour lutter contre la pauvret? Je vous en remercie. Thank you.

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List of Conference Participants Network Members ACCION International ACCION International ACCION International Accion Comunitaria del Peru Alexandria Business Association Bandesarrollo Microempresas BancoSol BancoSol BRI Unit Desa BRI Unit Desa Calmeadow Calmeadow Calmeadow Calmeadow Citi Saving and Loans Cooperativa-Emprender Finansol Fundacion Ecuatoriana de Desarrollo Fundacion Emprender K-REP K-REP K-REP MicroFinance Network PRODEM TSPI Development Corp. TSPI Development Corp.

Michael Chu Maria Otero Carlos Castello Manuel Montoya Nabil El Shami Alberto Undurraga Hermann Krutzfeldt Pancho Otero Mr. Fatchudin Anita Retnani Martin Connell Barbara Calvin Stefan Harpe Kerri Moloney Christine Dadson Claudio Higuera Martinez Maria Eugenia Iglesias Cesar Alarcon Juan Padilla Kimanthi Mutua Janet Mabwa Stephen Mirero Craig Churchill Eduardo Bazoberry Benjamin Montemayor Dennis Isidro

President and CEO Executive Vice President VP, Latin America Director Ejecutivo Executive Director Gerente General Managing Director Former Managing Director General Manager Assistant Manager President Director, Int’l Operations Advisor, Int’l Operations Programme Officer Executive Director Gerente President Director Ejecutivo Director Ejecutivo Managing Director Finance Manager Deputy Managing Director Network Coordinator Director Ejecutivo Executive Director President

Sergio Avila Gilles Lessard John Robinson Jenny Hoffman Shari Berenbach David Wright Damian von Stauffenberg Alex Silva James R.B. Odgers Henry Jackelen Max Clarkson Michael Deck Elisabeth Rhyne Magdy Khalil Ira Lieberman Ms. Mohini Malhotra

Sub-Director, Planning Senior Advisor VP, Policy Branch Head of Finance Consultant Senior Advisor Executive Director Investment Manager President Deputy Manager Faculty of Management Faculty of Management Director, Microenterprise SME Branch Chief Manager, Private Sector Operations Manager

Special Guests Bancomer CIDA CIDA Khula Enterprise Finance Ltd. MicroFinance Network ODA PSIF Profund Face-to-Face Foundation UNDP, Private Sector University of Toronto University of Toronto USAID USAID - Egypt World Bank/C-GAP World Bank/C-GAP

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MicroFinance Network Member List ACCION International

Banco del Desarrollo

Maria Otero Executive Vice President 733 15th Street, Suite 700 Washington, DC 20005 USA Tel (202) 393-5113 Fax (202) 393-5115 Email [email protected]

Bandesarrollo Microempresas Alberto Undurraga V. Gerente General Av. Libertador Bernardo O'Higgins 2310 Santiago CHILE Tel 56-2-674-5671 Fax 56-2-678-4944

Accion Comunitaria del Peru

Bank Dagang Bali (BDB)

Manuel Montoya Director Ejecutivo Av. Republica de Chile 683, Lima 11 Calilla Postal 1744, Lima 100 PERU Tel 51-1-433-5916 Fax 51-1-433-5903

I Gusti Made Oka President Director J1. Gajah Mada No. 2 Denpasar 80111 - Bali INDONESIA Tel 62-361-263-736 Fax 62-361-231-226

Agence de Credit pour l'Entreprise Privee (ACEP)

Bank Rakyat Indonesia (BRI) Unit Desa

Mayoro Loum Director General 35 Avenue Bourguiba B.P. 5817 Dakar SENEGAL Tel 221-25-29-32/3 Fax 221-25-29-35

Mr. Fatchudin General Manager Jl. Jend. Sudirman No. 44-46 P.O. Box 1094 Jakarta 10210 INDONESIA Tel 62-21-251-0313 Fax 62-21-251-0314

Alexandria Business Association (ABA)

Bangladesh Rural Advancement Committee (BRAC)

Nabil A. El Shami Executive Director 52 El Horeya Avenue Alexandria EGYPT Tel 20-3-483-4062 Fax 20-3-482-9576 E-mail [email protected]

Fazle Hazan Abed Executive Director 66 Mohakhali C.A. Dhaka 1212 BANGLADESH Tel 880-2-884-180 Fax 880-2-883-542

Calmeadow Banco Solidario, S.A. (BancoSol) Hermann Krutzfeldt Managing Director Nicolas Acosta #289 P.O. Box 13176 La Paz BOLIVIA Tel 591-2-392-810 Fax 591-2-391-941

Barbara Calvin Director, International Operations 365 Bay Street, Suite 600 Toronto, Ontario M5H 2V1 CANADA Tel (416) 362-9670 Fax (416) 362-0769 E-mail [email protected]

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Citi Savings and Loans Company Ltd. Christine Dadson Executive Director Watson House P.O. Box 353 Accra GHANA Tel/Fax 233-21-772-409

Fundacion para la Promocion y Desarrollo de la Microempresa (PRODEM) Eduardo Bazoberry Director Ejecutivo Almirante Grau #625 Casilla No. 14963, La Paz BOLIVIA Tel 591-2-366-950 Fax 591-2-353-438

Cooperativa – Emprender Claudio Higuera Martinez Gerente Carrera 33 No. 89-68 Santafe de Bogota COLOMBIA Tel 57-1-618-0394 Fax 57-1-618-0483

Get Ahead Financial Services

Emprender

K-REP

Juan Padilla Director Ejecutivo Sobremonte 2097 - 1er Piso 1646 San Fernando Provincia de Buenos Aires ARGENTINA Tel 54-1-746-4004 Fax 54-1-746-3993 E-mail [email protected]

Kimanthi Mutua Managing Director Ring Road, Kilimani P.O. Box 39312, Nairobi KENYA Tel 254-2-718-301 Fax 254-2-711-645 E-mail [email protected]

Finansol Maria Eugenia Iglesias President Carrera 62 No. 81-45 Piso 5 Santafe de Bogota COLOMBIA Tel 57-1-630-5349 Fax 57-1-630-5729

P.O. Box 3776 227 Minnaar Street Pretoria 0001 SOUTH AFRICA Tel 27-12-320-6530 Fax 27-12-320-8287

Shri Mahila SEWA Sahakari Bank Jayshree Vyas Managing Director SEWA Reception Center, opp. Victoria Garden Bhadra, Ahmeabad-1, INDIA Tel 91-079-550-6477 Fax 91-079-550-6446

TSPI Development Corporation Fundacion Ecuatoriana de Desarrollo (FED) Cesar Alarcon Director Ejecutivo 9 de Octubre #1212 y Colon Apartado 17-01-2529 Quito ECUADOR Tel 59-3-570-904 Fax 59-3-512-447

Benjamin Montemayor Executive Director #2370 Antipolo St., Guadalupe Nuevo, Makati P.O. Box 12690, Emerald Avenue Pasig, Manila PHILIPPINES Tel 632-631-5721 Fax 63-2-892-8389 E-mail [email protected]

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MicroFinance Network Member Statistics13 No. of Borrowers

Annual Growth Rate

% Female

Average Loan Size (US$)

Portfolio at Risk14

Outstanding Portfolio (M US$)

Value of Deposits (M US$)

11,066

35%

12%

$760

1.5%

$7.4

na

3,372

81%

20%

$1,600

1.0%

$5.0

na

ACP (Peru)

19,120

119%

62%

$405

7.3%

$7.7

na

BancoSol (Bolivia)

63,038

3%

75%

$472

3.0%

$36.5

$7.1

Banco del Desarrollo (Chile)

10,785

106%

50%

$1,200

5.4%

$10.5

$2.0

BRAC (Bangladesh)

1,415,147

67%

92%

$65

8.8%

$56.0

$20.0

BRI Unit Desa (Indonesia)

2,263,767

10%

25%

$613

3.5%

$1,387.0

$2,616.0

650

126%

58%

$588

35.9%

$0.5

$0.7

CooperativaEmprender (Colombia)

33,520

33%

49%

$15.1

$0.05

Emprender (Argentina)

2,255

21%

40%

$1,202

10.8%

$1.9

na

11,760

-9%

54%

$475

10.4%

$3.4

$0.5

9,847

56%

91%

$225

5.2%

$1.5

$0.2

K-REP (Kenya)

15,031

51%

53%

$583

7.2%

$5.5

$1.3

PRODEM (Bolivia)

18,309

84%

52%

$247

1.2%

$4.5

na

SEWA Bank (India)

10,000

43%

100%

$160

4.0%

TSPI (Philippines)

3,983

42%

67%

$721

5.2%

3,891,650

27%

51%

$621

Network Member

ABA (Egypt) ACEP (Senegal)

Citi Savings and Loans (Ghana)

FED (Ecuador) Get Ahead (South Africa)

NETWORK TOTALS 13

$1.6 $2.9

$0.4

$1,545.5

$2,648.1

For the year ending December 31, 1995. Data is self-reported by the Network members. Data was unavailable for Bank Dagang Bali and Finansol. 14 Principal balance of loans one payment or more overdue / total value of loans outstanding.

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