Rabeya feels secured about her future

Ms. Rabeya Boshri a beneficiary of the "Jonaki Samiti" of Coast Trust, Cox's Bazar is a successful borrower of microcredit loan operations. She lives with her husband, Mr. Abdus Salam, a daughter and two sons. At present all her children go to school and she is able to bear both the educational and family expenses. Along with that she is now able to make some personal savings additional to general savings of "Jonaki samiti". But things were not the same even few years earlier. Her husband was a day labourer and it was very hard to bear family expenses with his single income. Their life was becoming tougher day by day and Rabeya wanted to do a bit by herself to help her husband from this growing desolation. One day she came to know that a samiti named "Jonaki" operated by Coast Trust, provides loan wih nominal conditions for a number of Income Generating Activities (IGAs). Sooner she spoke to the Chairperson of the "Jonaki Samiti" and became a memeber of that samity. After accomplishing all the regulations together with general savings she got her first loan installment of Taka 7000. She invested the money in vegetable cultivation. Subsequently she was able to sell some amount of vegetable per week after meeting her own family demand which helped her husband with additional income. In the intervening time she was able to save Taka 3000 along with the ragular savings of samiti and gradually she repaid the loan. After the repayment of first loan amount she applied again for an amount of Taka 20,000. Considering her financial condition and determination "Jonaki Samiti" sanctioned the loan. Inspired by this, Rabeya started a large scale plantation of betel-leaf and this time she involved her husband into her work. Thier conscientious and diligent effort finally resulted into a teeming betel-leaf plantation. At present they sell betel-leaves of an amount of Taka 2500-3000 per week. After deducting all sort of costs they redeem a profit of Taka 1500 per week. Rabeya is now confident and feels secured about their future. They have a future plan to own a land where they can build a large scale betel-leaf plantation.

Confident Nurul Huda expands his business

Mr. Nurul Huda is a small seasoned fish entrepreneur who lives in Kutubdia, Cox's Bazar. He started his business with his very little personal investment. Initially he used to buy fresh fishes from the local market and then he seasoned those fishes to sell them in the local market. But he didn't have enough money to run a business that can generate enough income to maintain a family of 9 members. It was impossible for Nurul Huda to bear the additional cost of educational expenses of his all 7 children also. In the midst of such circumstances he got affiliated with the "Sugondha Samiti" of Coast Trust in the year 2010. Sooner he arranged a field visit for the officer of that organization in order to demonstrate his business skills. Seeing his perseverance and expertise the officer sanctioned him loan amount of Taka 40,000 for the expansion of seasoned fish business. Nurul Huda was adroit enough to combine his own savings with loan amount in order to expand his business in a newer way. Gradually his capital started accelerating which resulted into his business expansion. It has not only ensured sustainable and secured income generation for his own but also employment generation for few other people.
At present he supplies seasoned fish in several markets of Chittagong. Coast Trust now provides him technical assistance in order to introduce latest technologies to dry and preserve fish without using pestisides and salt. Nurul Huda is now confident that this new technology will add new horizons in his business. He is proud to be a self-made and successful enterpreneur as even in smaller scale but nevertheless he has been able to generate employment oppurtunities for a few other people.

Case Study # 1 GKSS

Mobilizing communities for enlightened change- “Use eco-friendly fertilizer “
Md. Zahurul Prang lives at a remote village, called Ragnagar, under the jurisdiction of Sariakandi Upazilla of Bogra district. He had been using chemical fertilizer for enhanced productivity of farming for years, amid numerous adversities. But, all on a sudden, his wife came up with an eye-opener experience for him, which had transformed their way of living into a very pragmatic one and diminished their hard up condition to a great extent.
Zahurul’s wife Ms. Dholi Begum is a credit borrowing member of Grameen Krishak Sahayak Foundation (GKSS) of Hatfulbari unit. She had participated in a training session on “Benefits and Usage of Vermi-Compost for Better Productivity”. After the completion of the training programme, the GKSS authority distributed five kgs of Vermi-compost1 among each of the participants free of cost. As per the instructions of the GKSS officials, Zahurul had applied the fertilizer to only one decimal area of his brinjal field, out of the total area of six decimals. And the result was amazing- the plants of that one decimal field grew healthier, compared to the rest of the filed. There were fewer incidents of infestation by pests, so he had to use less pesticide. Eventually those plants yielded nice, softer and larger-sized brinjals. Moreover, that compost fertilized area gave away brinjals almost six weeks earlier, compared to the other part of the field. In that situation, Zahurul felt interested about to know how to and from where he could procure compost.

Being trained and equipped with skills and knowledge, Zahurul has realized the benefits of using eco-friendly fertilizer. This shift from enigma to enlightenment inspires him to mobilize the villagers for taking self-reliant actions to improve their living conditions in the communities. Innovative LIFT financial service helped her to achieve this goal.
Then Zahurul went to GKSS office, where the officials showed him a compost producing heap from where he purchased some more fertilizer. Sensing his enthusiasm, the officials counseled him for producing compost by himself. They also set up a compost production plant with three rings and two tin-sheds at his home, free of charge. (At the same time) they also supplied him with about 1000 to 1200 earth-worms and provided him with some more necessary tips on producing the eco-friendly fertilizer. “After a month, my plant yielded about 25-30 kgs compost that I used on my jute field. In the next month, I got about 40-45 kgs compost from the heap and I applied that on my brinjal field, with an area of ten decimals. At present, the condition of my brinjal field is very good”, said the self-turned microentrepreneur. Optimistic Zahurul also commented, “The advantages of using compost in agriculture inspired me for setting up another two compost production plants of my own accord. I hope that I will use the compost in the coming Boro paddy cultivation on my three Bigha land.

Then Zahurul went to GKSS office, where the officials showed him a compost producing heap from where he purchased some more fertilizer. Sensing his enthusiasm, the officials counseled him for producing compost by himself. They also set up a compost production plant with three rings and two tin-sheds at his home, free of charge. (At the same time) they also supplied him with about 1000 to 1200 earth-worms and provided him with some more necessary tips on producing the eco-friendly fertilizer.

“After a month, my plant yielded about 25-30 kgs compost that I used on my jute field. In the next month, I got about 40-45 kgs compost from the heap and I applied that on my brinjal field, with an area of ten decimals. At present, the condition of my brinjal field is very good”, said the self-turned micro-entrepreneur. Optimistic Zahurul also commented, “The advantages of using compost in agriculture inspired me for setting up another two compost production plants of my own accord. I hope that I will use the compost in the coming Boro paddy cultivation on my three Bigha land.

Expressing his sanguinity about the upcoming bright days, Zahurul is frank to expose his simple future plan, “I consider that it is possible for me to run another ten compost production plants from the cow-dung produced by my four cows. These plants can produce about two to two and a half tonnes of compost without any cost. I can sell the extra (left-over after my use) compost and every farmer is interested to buy this cheap but effective fertilizer.”

Case Study # 2 RDRS

Hanufa will have her own cultivable land someday

Manushmara union is a char land under Chilmari upazilla of Kurigram district. Hanufa Begum has been living in Mudafat village of this union with her husband and daughter. They had no cultivable land of their own and no other source of income for their livelihood. So the only option for them for survival was to work as labourers. Hanufa worked as a maidservant and her husband usually migrated to Dhaka and other places in search of work. Even with their joint efforts they could just live their lives from hand to mouth; it became extremely tougher day by day to run the household.

Hanufa felt there should be some other path for sustenance, so after difficult days in the work as a maidservant she began to think about changing their lives. One day Hanufa heard from one of her neighbors that RDRS Bangladesh (PO of PKSF) had introduced land lease loan programme for the ultra poor on simple and flexible conditions. Hanufa Begum right away got involved in a group named Modafat Chandramollika Samity and took a loan amounting Tk. 10 thousand from there. With that money she leased 30 decimal lands from her father-in-law.

Her husband Md. Farhad Hossain also engaged in the process and received a 2-day long training on spice farming from RDRS Bangladesh. According to the suggestion of PA technical officer of RDRS they cultivated onion and chili in 20 decimals of lands and they harvested 35 Mon onion and 27 Mon chili, worth about 62 thousand taka on existing market price. On the other hand, they cultivated rice in 10 decimals of land and harvested 7 Mon rice which they used for consumption. Consequently, Hanufa and her husband Farhad have observed an improvement in their living condition after joining the programme and success of land lease loan was evident in case of Hanufa’s family.

RDRS makes many others interested to use microcredit as a key to change their fate. Hanufa says that there has been a real change in their attitude on how to tackle their financial problems. “Our life has transformed the villagers’ perception of microcredit. Before joining the programme," she says, "I had a problem with just making my both ends meet. Now, after receiving the loan from the association and utilizing it for improving agricultural productivity, our incomes had increased to a great extent. Now my family is growing healthier, my only daughter goes to school, eat regularly, and dress well. My husband needs not migrate anywhere for searching work and we are now saving to buy some land. We believe, one-day we will have our own cultivable land.”

Anyone who sticks to the stereotype of the submissive, oppressed Bangladeshi woman hasn’t met Hanufa, an empowered woman who is now capable to meet her family’s basic needs and on the way to build a better future for her child.

Case Study # 3 SDRS

Let them shower into beams of hope

Sunlight is peeping through a small window into Arifa Begam’s one-roomed dwelling at Harzipara village in Sadar upazila of Gaibandha district, where she lives with her husband and three year old son. Arifa, a pleasant young woman is working energetically hand embroidery on an Omanian cap, between the spaces of cooking. She is sitting beside the kitchen and stitching on an elegant specimen of her hand embroidered works. Colorful beads and threads spread on the rust colored mat on the floor are just adding vibrancy to the calm rural scenario.

Arifa’s husband Forhad Hossen works as a laborer and makes bags. Before Arifa got involved with an innovative project that enables her to earn, the meager income of her husband ranging from Tk. 2,400-2,800 per month was not enough to sustain the family. To make ends meet she most often tried to utilise her child-hood skill on hand embroidery. But despite her repeated appeal to neighbours, she could manage too scanty orders of stitching and embroidery works to stop the helplessness.

Recalling those days a thoughtful expression comes on Arifa’s face and she says, “I used to remain worried all the time…there was a constant problem of not having enough money to pay the daily consumptions. Often I had to borrow from other people to meet household expenses.” It was during this time that Arifa decided that she had to find work and support her husband.

A year ago when Arifa heard of the project- “Monga-mitigation through self-employment scheme by producing exportable textcrafts”, being implemented by a local Social Development Rural Society (SDRS), she instantly decided to work with the project. The innovative project run by SDRS has been supported by Learning and Innovation Fund to Test new ideas (LIFT) programme with assistance from Palli Karma-Sahayak Foundation (PKSF) and UKaid (formerly known as DFID) under PROSPER programme. At the onset of the scheme, she was provided with a three day long training on hand embroidery and essential needlecrafts. “I learnt about SDRS from women in the neighboring areas who had received training from the organization to initiate income generating activities. I also applied to SDRS for inclusion in a Mohila Samity (Women’s self-help group) and after attending two group meetings, my turn came, I was enlisted to receive the training and from the next week I started producing Omanian caps.”

Now Arifa is earning Tk. 600-800 for every cap she embroiders, depending on the delicacy of the design. SDRS supplies her all the inputs- cloth, threads and beads with which she did embroidery and sequins work. She is paid instantly just after the completion of her needlecrafts. “After I had started working, things slightly improved at home. I no longer have to worry about arranging money for paying monthly household bills,” says Arifa.
Now Arifa earns working at her own small-home, at her own ease after or amid the household works. She also regularly invests her profits in SDRS’s savings account. “The knowledge that in the case of an emergency I can easily withdraw my savings from SDRS relieves me from daily agonies,” says Arifa. She considers that just over the last year, a phenomenal change has taken place in her life. Not only has her life improved considerably, she has also gained a greater sense of self-respect and independence. She says, “I am happy that I have been able to support my husband and he admires and respects me for that.”
Referring to her son, Arifa’s eyes light up. “I would like to see a bright future for my son – much better than my own. I want him to be very well educated and prosperous”, Arifa wistfully says. “I could not pursue my studies after sixth grade due to my mother’s illness…I had to leave school and work at home. If I had the opportunity to study ahead, I would have been placed much better in life,” says Arifa.

Arifa is also the Leader of Samity of her area, under with SDRS. A Leader of Samity is chosen from amongst the women who have taken loans from the PKSF microcredit programme. As a Leader of Samity, Arifa is responsible for the return of installments from the 25 women of her group. She says that the 25 members of her center support each other and collectively resolve the matter if a problem occurs at the center. Arifa proudly claims that all members of her group have utilised their loans very effectively.

THE APEX MICROFINANCING ORGANIZATION IN BANGLADESH (Case Study)

Presented by :
Dr. Salehuddin Ahmed
Managing Director

Palli Karma-Sahayak Foundation (PKSF)
(Paper for course on "Identifying Funding Options", Microcredit Summit Meeting of Councils,
24-26 June, Abidjan, Ivory Coast)

PALLI KARMA-SAHAYAK FOUNDATION (PKSF) :
THE APEX MICROFINANCING ORGANIZATION IN BANGLADESH (Case Study)

1. Objectives of PKSF

PKSF was set up in 1990 by the government of Bangladesh with the overall objective of alleviating poverty and improving the quality of life of the rural poor, the landless and the assetless people by providing them with resources for creation of self employment for enhancing the economic conditions. The specific objectives of PKSF are:

(a) to provide various types of financial help and assistance to non-government, semigovernment, and government organizations, voluntary agencies and groups, societies and local government bodies, so that, as Partner Organizations (POs) and in consistence with the Foundation's image and objectives, they can undertake activities with a view to generating income and employment opportunities among the economically most disadvantaged groups in the society;

(b) to assist in strengthening the institutional infrastructure of the Partner Organizations, so that they can improve their present operations.

2. Operational Strategy of PKSF

The basic operational strategies of the Foundation have been drawn from its objectives:

(a) It does not directly lend money to the landless and the assetless people of the rural areas rather reaches its target groups through the Partner Organizations, the delivery mechanism for reaching the poor.

(b) It provides greater thrust to institutional development.

(c) It favors no particular model, instead innovations and different approaches based on experience are encouraged.

3. Legal Structure of PKSF
Legally PKSF is a "company limited by guarantee" meaning "company not for profit" and is registered under the Companies Act of 1913 with the Registrar of Joint Stock Companies. The legal structure of PKSF allows flexibility, authority and power to take programs and implement them throughout the country and managing its affairs. PKSF can receive grants and loan from local and/or international sources. It can lend and approve grant as well.

4. Organizational Structure and Membership
a. General Body: Maximum number of the members in the General Body will be 25, out of which government may nominate not more than 15 members from amongst persons associated with government agencies, voluntary organizations or private individuals. The remaining 10 members may be from amongst persons representing the Partner organizations and/or private individuals. The General Body usually meets once a year for overall policy guidance. Presently, PKSF has a General Body of 15 members consisting of distinguished personalities in the country.

b. Governing Body: The composition of the Governing Body is as follows:
(i) Chairman of the Foundation (nominated by the Government),
(ii) The Managing Director (appointed by the Governing Body),
(iii) Two members nominated by the Government and
(iv) Three members elected by the General Body. That Makes a 7-member Governing Body of PKSF. Present Governing Body comprises persons of international repute including Professor Mohammad Yunus, Manging Director of Grameen Bank.

c. Chairman: The Chairman of PKSF is nominated by the government from persons not in service of the republic, usually for a term of three years. The present Chairman is a leading economist and a Professor of Dhaka University.

d. Managing Director: The Managing Director is the Chief Executive Officer (CEO) of the Foundation. The present Managing Director has been appointed by the Governing Body. He is the ex-officio member of the Governing Body.

e. Management: PKSF has two divisions headed by two General Managers: Loan Operations and Administration & Finance. Each department is supported by required number of officers. PKSF from its inception has been following a policy of recruiting officers with high academic standing. Loan Operations Division is the program division of PKSF that selects POs, disburses and recovers the loan, monitors and evaluates the programs and provides the training and advisory services to the POs. PKSF has an internal audit unit which reports directly to the Managing Director.

PKSF has a small research and training unit to conduct research related to poverty alleviation and to impart training to the staff of the Partner Organizations.
5. Programs

PKSF implements three complementary programs:

(a) Loan program for the rural landless and the assetless people through Partner Organizations;

(b) Institutional Development Program for the POs, and

(c) Research

Loan program is the core program. The institutional development program is a support program to strengthen the POs for making them sustainable delivery systems for the poor. It consists of training of PKSF and PO staff; development of Management Information System (MIS); provision of interest free loan to POs for buying computers/motor cycles etc.

6. Program Implementation

Application in prescribed form: PKSF receives application for loan in a prescribed application form that requires the applicant to include details of the information about the organization, program, financing, etc.

b. Preliminary appraisal: If an organization has experience of managing credit program for the poor, PKSF preliminarily selects it for field visit if all information provided by the organization are consistent. PKSF judges experience in rural credit program using several criteria;
(a) number of years of experience,
(b) amount of loan disbursed,
(c) number of members and borrowers,
(d) recovery rate of loan,
(e) adequacy of skilled salaried staff and
(f) credibility of the sponsors.

(Criteria of selection in Annex-1)

c. Field visit: Once an organization is selected for field visit, an officer visits the organization. If the performance of the applicant is found satisfactory it is recommended for acceptance as PO. If there is some deficiency, the concerned organization is kept under observation and suggestions are given for improving the performance. On the other hand, if performance of an organization is found unsatisfactory, the application is rejected. Usually, the main reasons for rejection are the financial mismanagement, gross inconsistency between information in the application and that gathered from field verification.

d. Approval by the Governing Body: The final power of accepting a PO rests with the Governing Body. If the management considers an organization to be accepted as PO, the proposal is placed with detail description of the organization along with the field report, rationale for accepting it as PO and recommendation of the MD, in the meeting of the Governing Body. The Governing Body after deliberation accepts or rejects or puts certain conditions for accepting the organization as PO.

e. Signing of Loan Agreement:
(a) Final step in disbursing loan to the newly selected Partner Organization is the signing of a standard loan agreement with PO. The loan agreement contains terms and conditions of loan (e.g. rate of service charge, area of loan disbursement, number of instalments etc.). The loan is collateral free. In addition to a loan agreement, a promissory note is signed by the representative of PO.
(b) The loan agreement is signed from PKSF's side by the Managing Director and from PO side by the Chief Executive of the PO or sometimes jointly by the Chief Executive and the Chairman.

(Credit Products : Terms and Conditions in Annex-2)

f. Verification of Loan Utilization : After the first loan is given, the PO is supposed to disburse the loan immediately after receiving the fund and give a list of borrowers to PKSF. An officer from PKSF in charge of the PO visits the PO to verify the loan disbursement and utilization of loan by the members. Usually, PKSF officials visit the POs at an interval of 3 months.

g. Application for Successive Loans: The approval of successive loans to a PO depends on several factors:

(a) satisfactory utilization of previous loan,
(b) maintaining high rate of recovery of loan at the field level (>98%);
(c) giving reports regularly to the PKSF,
(d) potential for expansion of loan program, and
(e) repayment of loan installments to PKSF, if due. The successive loan proposals upto Taka 2.5 million are approved by the Loan Committee. Similar loan agreement is signed for each instalment of loan. Loan beyond Tk. 2.5 million limit is approved by the Governing Body.

h. Monitoring: Monitoring of credit program is crucial for its success. POs monitor their programs at the field level and Since PKSF monitors the programs both at their field and office levels. Since PKSF provides collateral free loan to POs the only way to reduce the risk is to monitor the programs regularly Several complementary steps are taken to monitor the activities of POs, especially the credit program and fund management. A brief account of the monitoring system is given below:

Collection of program information: As already mentioned above that PKSF collects information on changes in borrowers, savings, loan disbursement and recovery, every month in a prescribed form.

Financial position: POs submit cumulative and monthly income, expenditure and cash flow statements to monitor financial health of the PO.

POs regularly send the list of borrowers to PKSF. These are borrowers from fresh instalment of loan from PKSF or loan from revolving fund.

Field visits: Field visit by the officers of PKSF is the backbone of monitoring of programs of POs. PKSF places utmost emphasis on field visits. Usually, the concerned officer visits each PO every three month. However, if the PO is big and has multiple, branches, a team of PKSF officials visit the program. During the visits the information submitted by POs as mentioned in (a), (b) and (c) are verified. Suggestions are made for improvement. The field visit is used for verification of the program as well as an effort for institutional development of the PO.

100% audit by internal audit team: PKSF conducts 100% audit of borrowers, usually annually, before embarking on major expansion of loan. The audit reports are submitted to the CEO of PKSF directly.

Audit by audit firm: As a part of annual financial auditing of PKSF, external audit firm is engaged to verify the financial position of sample POs.

7. Human Resources Management

Human resources in PKSF is considered as its main strength and engine for its fast growth. A combination of above average academic standing of officers, training and an compensation package for the officers, and an open environment contributed to the success of PKSF.

a. Recruitment Policy

PKSF has a well developed 'service rules' for policies regarding the human resources management of PKSF. Most important policy of PKSF is the recruitment policy. PKSF recruits graduates of above average academic results. This policy has greatly contributed to the quality of services delivered, working culture within PKSF and advisory role played by PKSF.

PKSF follows an elaborate screening process to recruit officers and support staff. An elaborate written test with viva-voce test is taken to recruit officers. This ensures transparent recruitment process and ensures quality of officers.

b. Training Program for Officials

The objectives of training program for PKSF officials are to give them expertise in credit program management, various approaches and aspects of poverty alleviation programs, auditing techniques, PKSF management.

PKSF provides theoretical as well as field experience and on the job training to its officers:

Main theoretical training on poverty alleviation programs, credit programs and auditing techniques are provided within PKSF.

Besides officers are sent to Bangladesh Rural Development Academy (BARD), Public Administration Training Centre (PATC) to have overview of rural development and poverty alleviation programs.

(c) Practical training are acquired from Grameen Bank and other NG0s. Officers stay at least 2 weeks at the branch level of Grameen Bank. That gives the real exposure of credit program for the poor.

(d) PKSF sends its officers to stay in the POs as a part of training to learn about the program. After each visit either to Grameen Bank or to PO, trainee officers submit elaborate reports on the organizations.

(e) The most effective part of the training is the attachment of each trainee officer to a senior officer. Trainee officers visit the POs along with senior officers. In this fashion he/she learns about the appraisal process of a PO, auditing techniques, minor details of field activities, working ethics and culture of PKSF.

8. Achievements of PKSF

a. Enlistment of PO: PKSF has accepted POs every year since its inception. Starting with 23 POs in its first year of operations, PKSF enlisted 182 POs upto March 1999. POs are dispersed all over the country. As on March 1999, the POs of PKSF have been working in 60 out of 64 districts of Bangladesh.

b. Membership: POs of PKSF have covered nearly 1.4 million borrowers.
Loan disbursement: PKSF in its first year of operations could disburse only Taka 2.995 million. That was the preparatory year for formulating policies and a period of learning to disburse loan to institutions. Upto March 1999, it had disbursed Taka 4965 million. With the revolving nature and with additional fund the POs have extended about Taka 15260 million at the field level.

c.Loan Outstanding: PKSF has Taka 3554 million loan outstanding with POs as on March, 1999.

d. Borrowers: As on March, 1999, total number of borrowers financed by PKSF fund was 13.96 million of whom more than 90% were women.

e. Recovery of Loan: PKSF has two different recovery rates:
(a) recovery rate of loan between the PO and PKSF, and
(b) recovery rate of POs. Recovery rate of PKSF over the last 6 years has been nearly 98%. This rate is defined as the percentage of due amount has been received on time. Loan recovery of POs at the field level is 99%.

f. Strengthening of the POs: One of the main achievements of PKSF is the development of local institutions. Most of the NG0s are running their program by receiving loan only from PKSF. Still they are successful to cover almost full amount of their cost of operations. Many have approached towards financial viability. Aside from financial viability, local POs are now better prepared to manage their program, because of training, advisory services and institutional development program of PKSF. These include training, development of accounting system and MIS, continuous management suggestions for improvement of the program management.

g. Potential for Expansion: This is another indicator for measuring achievement. Total borrowers of PKSF's POs are 1.4 million (including that of BRAC, ASA & Proshika). So, there is scope for further expansion of loan to the POs. In addition, PKSF is accepting new POs every year and existing POs are also expanding their coverage.

h. Training and advisory services: PKSF arranged several workshops for the directors of POs. These workshops mainly discussed policy issues to introduce uniform systems across the POs. Training sessions were arranged for giving training in accounting and MIS for the accountants and credit co-ordinators. PKSF has prepared 19 modules for training of its staff and different levels of staff of POs. One of the effective way of training of staff are those practical training given by the officers of PKSF during their routine visits to each PO. During these visits problems are identified and solutions are given. Regular discussions are held with the organizers and field staff during the field visits.

i. Research programs: So far, PKSF has conducted two research on the impact of its program on the beneficiaries. There have been several studies on PKSF by varrious authors at home and abroad. Recently, PKSF has contracted out a multi-year impact study to the Bangladesh Institute of Development Studies (BIDS), the premier research institution in Bangladesh.

j. Impact: Various reasearch studies have shown positive impact of microcredit on the lives of the rural poor in Bangladesh. A set of indicators ( Annex-3 ) has been suggested to study the impact further.

k. Fund : PKSF has received Taka 110 million from the government as grant since its inception. In addition, it is borrowing US$ 105 million from the IDA through the Government. USAID has provided a grant of Taka 500 million and the Asian Development Bank will provide US$ 18 million as loan. PKSF has also received some project related funds.

9. Sustainability of POs and Role of PKSF

a. Institutional sustainability of POs: Fundamental policies to run a successful rural credit program are in place in many POs Selection of members, savings and loan policies, portfolio management, financial control, monitoring and evaluation are some of the fundamental areas of policy formulation.

So far, many POs within their limited capacity tried to recruit competent staff. POs do not have adequate financial resources to recruit staff with better educational attainment and competence. Many POs are being managed by their founders and expected to be so for quite sometime. Leadership by the present Directors at this early stage of the organization is important for growth and sustainability. Many POs either have physical assets like office buildings and land or purchased land for construction of office, training center etc. This show a clear commitment from the part of the organizers for giving POs a solid foundation.

Financial sustainability of POs: The basic issue in financial viability analysis is whether, POs can cover their costs of managing the credit program from the income of the program, mainly the service charge from loans. Some POs have been successful to gradually cover the cost of operations from the income of the credit program and generate moderate surplus. It expected that all POs will continue to improve their profitability conditions.

Role of PKSF: Directors of POs have identified several areas where PKSF made significant contributions:
(i) by providing funds, PKSF fueled the expansion of programs and enabled them to become financially viable,
(ii) PKSF assisted developing the credit management system, MIS and accounting system,
(iii) PKSF's regular advisory services helped gradually improve the capacity of POs in managing programs.

Future role of PKSF: The future expected role of PKSF has also been identified by the Directors of PKSF which are:
(i) continuation of providing loan fund should be the main role of PKSF
(ii) PKSF should help train all staff of POs for further improvement of capacity of POs which will be the basis for sustainability,
(iii) Continuous advisory service will also be an important area of assistance, and
(iv) PKSF should have action research not only in micro-credit but also in other related areas of poverty alleviation. PKSF has recently decided to provide fund on a pilot basis to microenterprises, to the urban poor and to the hardcore poor.

b. Sustainability of PKSF

Institutional sustainability of PKSF: PKSF has a competent and dynamic Governing Body capable of guiding the management, changing policies and introducing programs as and when necessary. It has well established transparent policies regarding the loan program as well as management of its affairs. It has gradually increased its outreach by enlisting increasing number of POs. PKSF has been able to mobilize the financial resources to embark on a large scale expansion of its activities. These factors will continue to contribute towards expanded operations of PKSF.

Financial Viability: PKSF has been able to gradually improve its financial position. It has been successful in increasingly covering cost of operations by charging a reasonable service charge, increasing loan disbursement, keeping the operating expenses low and keeping the loan loss expenses very low by maintaining high recovery rate. Overall, PKSF has posted surplus every year since inception.

10. Lessons from PKSF Model

PKSF is a unique organization in its organizational structure, activities and management practices. Few factors can be identified that made it possible to register such an impressive performance.

PKSF has been established and funded by the government, but it has been kept as an independent organization outside government bureaucracy. That enabled PKSF to form its own policies and develop own management practices suitable for its activities.

The outstanding quality of the Governing Body has contributed most in guiding the management and forming and revising policies whenever it was felt necessary.

The policy of recruiting officials of above average quality has contributed most to the growth and performance of PKSF.

PKSF has been successful in utilizing the capacities of local NG0s in quickly reaching the poor and developing the POs to deliver the financial services to the poor. Selection of right PO was the most crucial factor for the success.

The key to the sustainability of POs is the assured source of fund and improvement in capacity of human resources backed by good management practices. In both areas, PKSF has proven itself to be effective.

Financial intermediaries (NG0s) backed by resources from PKSF has been found to be effective in reaching the poor. PKSF and POs can also become sustainable in the process.

The rural poor men and women have proven to be capable of managing fund and improve their income. Given an opportunity they can help themselves. The POs of PKSF have proven capacity to select right target groups and deliver the desired services.

One area that needs top priority from the part of PKSF is enhancing the capacity of POs. This can be done by more investment in development of human resources of POs.

PKSF model (as an apex second-tier organization) shows potential for replication. It can further grow and make significant contribution in improving the quality of life of the poor.

References

The Role of An Apex Financial Institution to Finance Micro Credit Programs: The Palli Karma-Sahayak Foundation (PKSF) in Bangladesh by Dewan A.H. Alamgir, CDF/CGAP, Dhaka, 1997.

PKSF, Annual Report 1997-98.

The World Bank, Staff Appraisal Report : Bangladesh Poverty Alleviation Micrfinance Project, August, 1996.

Annex-1

Guideline for selection of Partner Organization (PO) of PKSF for its "OOSA" (organization operating in small area) microcredit programme

PKSF is presently carrying out its operations through various partner organizations, therefore, selection of PO is a crucial task of PKSF and this is an ongoing process. Under this process PKSF appraises various types of non-government, semi-government and government organizations, voluntary agencies, societies and local government bodies to select these as POs which have gained experience and expertise or which have the potentials to operate a successful microcredit programme for self-employment and income generation of the landless and assetless. In appraising an organization, PKSF follows a clear guideline which can be divided into the following areas:
(i) Organization;
(2) Organizer;
(3) Management;
(4) Human Resources;
(5) Working Area;
(6) Field Activities;
(7) Past performance;
(8) Management Information System (MIS) and
(9) Accounting System.

According to the above mentioned guideline, to become a PO, an organization should have the following features.

(i) Organization :The organization should have a legal basis i.e., if it is a non-government and voluntary organization it is to be registered under the appropriate registration authority such as the Directorate of Social Welfare, Department of Women's Affairs, Registrar of Cooperatives, NGO Affairs Bureau etc.

It should have a constitution duly approved by the concerned registration authority.

It should have a General Body and an Executive Committee approved by the concerned registration authority.

In case of government, semi-government and local bodies it must be formed lawfully.

The organization should have the mandate to operate credit programme for self-employment and income-generation activities of the landless and assetless with an admissible service charge.

It should have a mandate to borrow money from the government, semi-government, private and any other organizations.

(2) Organizer :

The organizer or founder(s) should be socially reputable, respected, honest with intention to serve the poor people

Organizers are to be acceptable to the staff, group members and to the community in general.

The organizers should have the capability and vision to develop a future perspective and strategic plan of a development organization.

(3) Management :

The organization should have an organogram.

The chief executive should be full time and should possess the mentality to work on a long term basis. In case of local organization the chief executive have to stay in the working area.

The chief executive should have good and dynamic leadership quality and should demonstrate good management capability and be able to formulate strategic plan for the organization.

The organization should have adequate number of regular and fulltime staff to ensure proper implementation of microcredit programme.

The chief executive should have a good reputation and should be acceptable to the staff, group members, and to the community in general.

(4) Human resource:

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

Staff should be honest, dedicated, and should possess missionary zeal.

(5) Working Area :

Working area of the organization should be well suited for microcredit operation. It should have good communication network, banking facility and easy access to market so that the borrowers can utilize their loan profitably.

It should be poverty stricken and such rural areas will be given preference.

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

(6) Field activities :

Members organized would be the landless and assetless; the characteristic features of whom would be as follows: those residing in rural areas owning less than .50 decimal of cultivable land or having total asset of the value less than that of one acre of land in the locality, would be considered as landless-assetless.

Members are to be organized in groups and groups must be formed with like minded people who should be conscious/careful about group discipline and regular in attendence in group meeting, and making saving deposits. Members should have a minimum 6 months practice of regular saving deposit.

The organization should have at least 400 organized members, Tk. 0.2 million operating loan outstanding at field level and should have experience of at least 6 months successful microcredit operation.

Number of organized members should be consistent with the working/operating capital of the organization.Groups should be organized within the 10 Km radius of the project office.

In case of local organization 'Head Office' should be situated in the working/operational area.The organization has to maintain a minimum loan recovery rate of 98% on a continuous basis. For a program operating for more than three years a minimum loan recovery rate of 95% has to be maintained on a continuous basis.

Overlapping with the activities of other organization in the same area must be avoided.

(7) Past Performance :

The organization should have a demonstrated experience of ensuring proper utilization of loan money with maintaining a high rate of recovery on a continuous basis.

It should have the evidence of successful implementation of all the programmes undertaken by the organization.It should have properly organized members and groups for successful operation of microcredit programme.

(8) Management Information System (MIS)

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

Adequate information should be available regarding microcredit operation.

(9) Accounting System :

The organization should maintain a sound, systematic, correct, detailed and transparent accounting system.

The organization should not have case of any misappropriation or illegal withdrawal of fund.

Savings account of the group members must be complete, detailed, transparent and correct.

All the accounts should be duly audited by the proper authority and the reports should be readily available.

All the accounts must be correct and updated.

Annex-2

CREDIT PRODUCTS : TERMS AND CONDITIONS

PKSF's services to various types of organizations (mostly NGOs) called the Partner Organisations (POs) are given through two windows for two groups with respect to their volume of operations. Small and medium sized POs and large POs are termed as OOSA (Organizations operating over a small Area) and BIPOOL (Big PO operating over a large Area) respectively. For OOSA, the amount of first loan is 1,00,000/- taka or less. Amount of subsequent loans is not restricted by any specific amount. It depends on the performance and absorption capacity of a PO. Service charge varies from 3% to 4.5% per annum depending on sanctioned amount of loan in favour of a PO under OOSA window of PKSF.

Amount of sanctioned loan (in taka) Service Charge

1. Upto 5 million 3%
2. Above 5 million to below 75 million 4%
3. Above 75 million 4.5%

The loan repayment period for each loan disbursed to a PO is 3 years. First six month is considered as grace period and the loan is to be repaid in 10 quarterly instalments along with service charge within the rest 30 months.

At present PKSF is considering to impose 2% additional service charge on POs as penalty for late payment of instalment to PKSF.

For BIPOOL (Big POs), service charge is 5% per annum. Loan repayment period is 10 years. First 4 year is treated as grace period. However, service charge has to be paid by the PO on a semi-annual basis during the grace period. The loan is to be repaid in 12 semi-annual instalments along with service charge within the rest 6 years.

Summary of Foundation's Loan Programme

A..PKSF-PO Level

Sl.No.
Description
Cumulitive upto Last Year
1998-99 FY
Total

Upto Last Month This Month End of This Month 1

Partner Organization Active
Suspended
Dropped
Total

2
Loan allocation (in lac) 3
Loan disbursed (in lac) 4
Loan recoverable (in lac) 5
Recovered (in lac) 6
Overdue loan (in lac) 7
Loan outstanding 8
Default POs PO - Member Level

Sl No
Description
Cumulitive upto Last Year
1998-99 FY
Upto Last month
This month
End of this month
Total
1
Loan disbursed (in lac) 2 Loan Recovered (in lac)
3 Savings Generated (in lac)
4 Rate of Recovery
5
Group Members
Male
Female
Total

6
Borrower
Male
Female
Total Recovery Rate of Foundation's Loan Programme ( in percentage)

Description
Considering Pr. & Sc.
Last Month
This Month
Considering Pr. & Sc.
Last Month
This Month
(Loan Recovered)/(Loan Recoverable) x 100
(Loan Recovered - Advance Collection)/(Loan Recoverable)
(Loan Recovered)/(Loan Recoverable - Deferred installments of one PO) x 100
(Loan Recovered - Advance Collection)/(Loan Recoverable - Deferred installments of one PO) x 100

1. Advance collection ....... lac (hundred thousand)
2. Total Overdue loan includes deferred installments of Tk. ........ lac on account of one PO.

Loan Performance Report of POs for the Month of-----------
SL.No
Code No
Name of the Organisation
Number of Members
Number of Loaness
Cumulative Loan Disbursed (in lacs)
Cumulative Loan Recovered (in lacs)
Loan Outstanding (in lacs)
Loan Recovery and Overdue Situation of this Month (in lacs)
Group Savings (in lacs)

Male
Female
Total
Male
Female
Total

Grade-A

Sub Total

Grade-B

Sub Total

Grade-C

Sub Tota

Grade-D

Sub Total

Grand Total
(in lacs)
(in lacs)
(in lacs)
(in lacs)
(in lacs)
(in lacs)

Loan Performance Report of PKSF for the Month of--------

Code No
Loan Code
Name of the Organisation
Cumulative Loan Disbursed (in Taka)
Cumulative Recoverable
Cumulative Recovered
Loan Outstanding (in Taka)
Cumulative Overdue Male Female Total Male Female Total
Grade-A

Sub Total Grade-B

Sub Total Grade-C

Sub Tota Grade-D

Sub Total

Grand Total

Report of Default POs for the Month of---------

Sl. No.
Loan Code
Name of the Organisation
Cumulative Loan Disbursed (in Taka)
Cumulative Recoverable
Cumulative Recovered
Loan Outstanding (in Taka)
Cumulative Overdue Principal (in Taka)
% of Total Overdue (in Taka)

Principal (in Taka)
S.Charge (in Taka)
Principal (in Taka
S.Charge (in Taka)

Grand Total
0
0
0
0
0
0
Annex-3
Some Selected Impact Indicators for Evaluating PKSF POs` Microcredit Program

Indicators Measures Standard / Norms
Economic Indicators for current gains :
1. Income % of beneficiary household members living below the poverty line income Tk. 448 and Tk. 740 per capita per month respectively for rural and urban areas.
2. Food and Nutrition Intake % of beneficiary household member below poverty line intake · 2112 kcal per day per capita intake for the moderate poor.
· 1800 Kcal per day for the hardcore poor

3. Housing % of beneficiary households having below poverty level housing Semi-durable roof (CI sheet) with one + room
Indicators of Longer-term Material Gains :
A. 4. Land % of beneficiary households owning below poverty level arable land 0.50 acres of arable land.
5. Crisis proneness % of beneficiary households facing deficit months in a year Occasional deficit (3-4 months a year)
Social Gains Indicators :
6. Education
· education of beneficiary household heads

· primary school enrollment rate of the children of beneficiary households

up to the level of class V (implies functional literacy)
60 - 65 %

7. Sanitary condition % of beneficiary household members using sanitary toilets Toilets¾ Pucca slab with rings.
8. Drinking water % beneficiary household members having access to safe drinking water Tubewell water
REGULATORY FRAMEWORK FOR MICROFINANCE INSTITUTIONS : A CASE STUDY OF BANGLADESH

Presented by :
Dr. Salehuddin Ahmed
Managing Director
Palli Karma-Sahayak Foundation(PKSF)

(Paper for course on "Legal and Regulatory Framework", Microcredit Summit Meeting of Councils, 24-26 June, Abidjan, Ivory Coast)

1. Context

Financial services in Bangladesh come from three areas: informal sources (family, friends, ROSCAs and savings clubs, and moneylenders); the semi-formal sector of NGO microlending; and the formal sector of agricultural and nationalized commercial banks, along with some privately owned banks. Like many countries, only the formal sector is regulated, with no regulation or supervision specifically focused on MFIS. The public policy reasons for regulating the financial sector are:
(i) individual depositors need protection from fraud and mismanagement by financial institutions because the public does not have the information or expertise to evaluate those risks; and

(ii) if the government provides deposit insurance or financial support to the financial sector, it imposes some risk parameters on those institutions. As MFIs push further into financial intermediation and use member savings as a major funding source, some degree of oversight under the first rationale may be appropriate. At present, depositors and funders of NGO microfinance institutions rely primarily on the integrity of management to protect their funds.

2. The Formal Sector

As of December 1996, the formal financial sector in Bangladesh consisted of thirty-two banking institutions: fifteen national commercial banks (state-owned commercial banks), two agricultural bank networks (also state-owned), ten privately owned banks, and a few recently established non-bank finance and leasing companies.

The Regulators

Bank regulation is conducted by the Bangladesh Bank and the Ministry of Finance. The Bangladesh Bank has the responsibility to establish regulations and supervise the banking sector. It has the power to license and examine all banks in the country and exerts great influence over the state-owned banks and their directors, in part due to its accountability to the Ministry of Finance. It has a staff of approximately six thousand and is headed by a governor appointed by the Ministry of Finance.

The Ministry of Finance is a cabinet-level position within the government, and the Minister is a direct political appointee. Where the jurisdictions of the two agencies meet or overlap is unclear, but the Ministry of Finance is influential over the Bangladesh Bank.

3. The Semi-Formal Sector: Microrinance Institutions

Most MFIs in Bangladesh are NG0s registered under the Voluntary Social Welfare Agencies Ordinance 1961, Societies Act of 1860, The Foreign Donations (Voluntary Activities) Regulation Ordinance 1978 and The Foreign Contribution (Regulation) Ordinance 1982 exempting them from central bank oversight. Most have a donor-funded loan pool and hold member deposits in a low-risk investment portfolio to pay interest on their savings. Several large MFIS, however - including ASA, Buro Tangail, and BRAC - use member savings to fund their lending activity as loan demand has outstripped the supply of donor capital.

The permissiveness of the current regulatory environment allows NG0s to undertake nearly all the activities they need to meet their development objectives. They can accept deposits, extend credit, and raise capital from donors and private sources. While many organizations have used this flexibility to achieve impressive development impact through creative design, efficient branch networks, and visionary leadership, their members and funders rely solely upon management to avert fraud, mismanagement, and/or unforeseen circumstances.

The few MFIs that have adopted a legal form with some regulation face minimal oversight and monitoring. Although a legally chartered bank, Grameen faces minimal supervision. Financial co-operatives are chartered under the Co-operative Societies Ordinance of 1984, permitting them to mobilize deposits from the general public in addition to their members. While the government's Registrar of Co-operatives regulates these institutions, the registrar has little preventive or protective regulation and conducts minimal to no supervision.

So far, the regulatory framework has not caught up with the evolution of microfinance in Bangladesh. The few NG0s that have considered applying for a standard commercial banking license have either been denied approval or have found the process too time-consuming and uncertain to warrant the pursuit.

Structure of The Semi-Formal Sector

A few large institutions dominate the microfinance industry in Bangladesh. In June 1996, Grameen Bank and three NG0s served eighty-five percent of the active micro-borrowers. Grameen, ASA, BRAC, and Proshika have traditionally been the largest microlending organizations.

4. Existing Regulation: The Grameen Bank

The only central bank-regulated MFI in Bangladesh today is the Grameen Bank. Grameen's formal and legal bank status allows it to raise capital and collect deposits to finance its commitment to provide banking services to low-income persons. In theory, this forms the basis for Grameen's permanence as a banking institution. Grameen Bank evolved from an initiative sponsored by Chittagong University, to a project of the Bangladesh Bank, to a specially chartered institution in 1983 with the passage of the Grameen Bank Ordinance by the Bangladesh Parliament. While Grameen does not attract private capital with market rates of return, and still receives substantial donor funding for its development activities, the Bank's operating costs are covered more than one hundred percent by internally generated revenues.

The major features of the Grameen Ordinance parallel most of those requirements, but were adapted to fit the microfinance mission. Specifically:

• Capital Requirement: Grameen began with an initial capital base of Taka 10 crore (US$2.5 million), with additional paid-in capital of Taka 7 crore (US$1.75 million), or US$4.25 million compared to US$3.25 million for a standard commercial bank in Bangladesh. However, there are no ongoing capital adequacy or liquidity ratio requirements for Grameen Bank.

• Ownership stake by the Bangladesh Bank: Ownership of Grameen Bank is shared by Bangladesh Bank and Grameen's clients (member-shareholders). The central bank amended the ordinance in 1990 to reduce its ownership from 60 to 25 percent, with member-shareholders increasing their stake proportionately.

• Compliance with standard (relatively weak) portfolio risk classifications, including delinquency, loan-loss provisions and write offs. While Grameen has developed more detailed and useful internal reporting systems, it reports delinquency to the Bangladesh Bank using the same measures as formal banks (i.e., loans more than one year past due are delinquent, and loans more than two years past due are considered bad debts).

• Branching Restrictions: Grameen must request Bangladesh Bank approval to open a new branch. In practice this has been a formality since no request has ever been denied. For new branch approval, the central bank prepares a brief "feasibility study" that describes the area, the population, demographics (percentage of women and landless; literacy rates, if available; and typical occupations), and the opinions of local politicians and local national commercial bank officers.

• Access to Bangladesh Bankfunds: While Grameen Bank cannot access central bank lines of credit, the Bangladesh Bank amended the Ordinance in 1990 to add a provision for the issuance of bonds and debentures that are guaranteed by the Government of Bangladesh, dramatically increasing Grameen's access to the capital markets. The interest rate is 1-1.5 percent below market rates, with interest-only payments during the term of the bond.

• No limitations on the scope of activities: As long as business functions are conducive to the objectives of the Grameen Bank, they are permitted activities. Grameen has been authorized to collect savings from non-members since 1987, but has only recently emphasized savings mobilization.

• Board Structure: According to the 1990 amendment, governance is by a twelve-member board of directors, of which three are government appointees and nine are elected by member-shareholders. Member-shareholder representatives are elected through a regional process of a series of local elections. The Chair of the Board is appointed by the government from the board's appointed directors. All directors serve three-year terms. The managing director is an ex-officio Board member with no right to vote.

• Bangladesh Bank Approval on Senior Management: While the board appoints the managing director, any selection must have prior approval of the Bangladesh Bank. To date, the only managing director has been Dr. Mohammed Yunus, Grameen Bank's founder.

• Taxable Status: For at least the first ten years, no taxes were due on any profits. The board of directors determines the permitted use of profits.

5. Proposed Framework for Regulation of MFIs

In view of the historical emergence and evolutionary process of MFIs (most of which are NGOs) in context to Bangladesh comparing to the experiences of other developing countries in micro-finance industry, it can be argued that the conventional regulatory framework like that of formal banks and financial institutions is not considered appropriate and hence not required under the circumstances prevailing in Bangladesh particularly in view of the fact that MFIs are not accepting deposits with chequing facilities from public. The unique features of MFIs in the mode of social and financial services with the core objective of poverty alleviation that differentiate the industry from the formal financial sector further justify the proposition. However, the above proposition (non-requirement of conventional regulatory framework) does not, in any way, downplay the importance of having some strategic monitoring measures that lie compatible and appropriate to their objectives, institutional operation and development culture. And that it should incorporate user's friendly prudential norms/indicative guidelines (preventive measures) in the form of a concrete 'Code of Norms/Conduct' which would ensure sound and organized growth of MFIs on sustainable basis.

5.1 Self-Regulation For NGO-MFIs

The self-regulation mechanism for the MFIs is a prerequisite for their smooth functioning and sound growth. It is admitted that the effective self-regulation is one of the important key elements of an well-managed and viable institution which can hardly be substituted by external measures.

It is, therefore, proposed that self-regulation through development of own strong governance -body, efficient management system and effective supervision and internal control (on-site and off-site) should be introduced within the fold of an agreed 'Code of Norms/Conducts' for the growth of MFIs in Bangladesh. The following elements of self-regulation are suggested which the MFIs must abide by under the agreed 'Code of Norms/Conducts':

(a) A strong and capable board of directors that establishes sound program interventions, financial and risk management policies and holds management accountable for implementing those policies effectively,
(b) Developing of standard accounting system that is transparent and acceptable universally,
(c) Effective internal control and an intensive and extensive internal audit function to conform that the approved policies are followed and procedures are effective,
(d) Development of effective mechanism of saver's protection,
(e) Efficient management and effective Management Information System (MIS),
(f) Development of effective financial and operational performance standard,
(g) High quality external auditing by those auditors who are knowledgeable and competent in micro-finance as an objective check on internal systems to protect against fraud and mismanagement, and
(h) Strategic monitoring of the financial performance standards, program performance and compliance of the code of norms/conducts by an appropriate and competent monitoring organization.

5.2 Strategic Monitoring Framework for NGO-MFIs

Side by side with the self-regulation mechanism for MFIs, there has been a strong felt need for overseeing the financial and program performance through an appropriate monitoring mechanism based on certain standards compatible to the MFIs activities unlike the conventional financial performance standards being used for formal banks and financial institutions. As most of microfinance institutions undertake both financial and non-financial services, the ratio analysis should also be different from formal banking institution. However, the non-financial services, i.e. the social development activities of the MFIs bring no direct financial return to the institution, the assessment of such activities could be made through impact studies. Usually financial performance evaluation for a bank is being done by CAMEL rating that includes the capital adequacy ratio, portfolio quality ratios, management efficiency, earning quality ratios and liquidity ratio. In case of micro-finance institutions, some of the proponents suggest for more or less similar set of measures to assess the performance which is known as SCALE (includes self-sufficiency ratio, capital adequacy ratio, asset or loan portfolio quality, liquidity ratio and earning quality ratio) and in addition to evaluate the development objectives suggest using OSI (outreach, service quality and impacts). A mix of contextual indicators from the above rating measures as a ‘package’ based on the important features ( Annex-4 ) can be suggested for assessing financial performance situation of the micro-finance institutions (irrespective of size and outreach).

The program monitoring of the MFIs is recommended to be periodically undertaken (off-site) by the monitoring agency through regular periodical statistical reporting from the micro-finance institutions. The periodical information should include the extent of coverage in terms of membership and geographical area, loan disbursement (by term), loan recovery, loan outstanding, amount of gross and net savings (obligatory and voluntary), amount of arrears due with actual recovery against the due, loan recovery rate etc.

5.3 Organizations to Undertake Strategic Monitoring

(a) Bangladesh Bank

Bangladesh Bank does not have, at present, adequate expertise and manpower to undertake strategic monitoring and supervision of the NGO~MFIs. And as the number of such organizations are many (more than 1000) with varied size, outreach including their operation at different locations in the country, it will not be appropriate and feasible for Bangladesh Bank to play the role of monitor and to undertake supervision functions. It is often suggested that the Bank should only be responsible for registration of MFIs.

(b) Palli Karma Sahayak Foundation (PKSF)

PKSF has a great potential to administer and monitor the system of self regulation. It has qualified expertise. PKSF devoted considerable resources to monitor and supervising its partner organization to ensure that they meet those standards. The supervision responsibility would need its charter to be amended further.

(c) Apex MFI as Apex Body of NGO-MFIs

The thire-option is to establish an exclusive and independent organization as Apex Body through the government enactment. It will be responsible for undertaking strategic monitoring of MFIs in line with the agreed 'Code of Norms/Conducts'. It could be a corporate body having representatives of formal and semi formal MFIs, the government and the Bangladesh Bank.

(d) Apex Body as Unified Organization for Registration, Monitoring & Supervision : Alternate Option

Instead of having more than one organizations (Bangladesh Bank for registration and Apex Body for monitoring and supervision) involved in the process of registration, monitoring and supervision, it would be an alternative option to have one unified organization to deal with the whole affairs of NGO-MFIs. In that case, the proposed apex body will be in a better position to play its role effectively as monitoring organization. Such quasigovernmental organization can be established through special enactment by the government. The main features of the organization will be
(a) a non-profit corporate body to be established under Companies Act limited by guarantee,
(b) a capable Governing Body with mixed stake-holders and
(c) sources of funding to run the organization will be from the subscriptions of member institutions,contribution from the Government and donations from the international organizations.

6. Special Enactment

There is the need for special enactment for the MFIs (mainly the semi formal ones) for formally recognizing them as legal entity by the Government for providing limited financial services with the objective of poverty alleviation. The enactment should clearly identify the appropriate organization delegating the authority of providing registration or issuing certificate of recognition as NGO-MFI in favor of the Government based on certain eligibility criteria. The eligibility criteria should be simple and appropriate in context to the usual features of the existing micro-finance institutions working in Bangladesh. Any existing NGO-MFI who fulfills the eligibility criteria will get the registration irrespective of whether it was previously registered under any act of the Government or not. A new NGO which wish to undertake micro-financial services will be eligible to obtain the registration from the concerned authority if it fulfills the criteria/conditions. The above Government enactment and incorporation of the NGOs to function as micro-financial service providers would legally allow and authorize the NGO-MFIs to undertake contract/ agreement to get access to funds with formal financial institution or other national and international organizations. For various reasons PKSF as regulating agency might emerge as viable option. To avoid the conflict of interest the lending function and regulatory function can be clearly demarcated. For this, PKSF should be organizationally restructured and appropriate legal authority should be bestowed on it by the government.

References

PKSF, Annual Reports of various years.

Bangladesh Bank/Development Planners & Consultants (DPC), "Final Report on Regulatory Framework", January 1999, Dhaka.

Microfinance Network, Occasional Paper No. 2, "Regulation and Supervision of Microfinance Institutions: Case Studies", Washington D.C., 1997.

M.A. Baqui Khalily & M.O. Imam, "Behaviour of Microfinance Institutions and the Case for Regulation and Supervision", Paper presented at a Seminar arranged by PKSF/Proshika, Dhaka,
June 1998.

Annex-4
Important Ratio Analysis Tools for Appraising a Micro-Finance Institution
Ratio

Formula

Purpose

A. Financial Sustainability Ratios
1. Return on Performing Assets Financial Income/Average Performing Assets Indicates financial productivity of credit services and investment activities
2. Financial Cost Ratio Financial Cost/Average Performing Assets Shows cost of funds, affected by mix of net worth, sotf loans, hard loans.
3. Loan Loss Provision Ratio Loan Loss Provision/Average Performing Assets Indicates provisioning requirements on loan portfolio for current period.
4. Operating Cost Ratio Operating Expenses/Average Performing Assets Key indicators of efficiency of lending operations.
5. Imputed Cost of Capital Ratio Quantity of loans X Rate of inflation Indicates cost of maintaining purchasing power of net worth and soft loans.
6. Donations & Grants Ratio Donations & Grants/Average Performing Assets Shows dependency of institution on outside funding for operations.
7. Operating Self-sufficiency Ratio Financial Income/Financial Cost+Operating Cost+Loan loss Provision Shows ability of institution to cover costs of operations with the internally generated income.
8. Financial Self-sufficiency Ratio Financial Income/Fin.+Op. Costs + Loan Loss Provision+Imputed CC Shows ability of institution to be fully sustainable in the loan-run covering all operating costs & maintain value of capital.
B. Operating Efficiency Ratios
Ratio Formula Purpose
1. Cost per Unit of Money Lent Operating Cost/Total Amount Disbursed. Indicates efficiency in disbursing loans (in monetary terms).
2. Cost per Loan Made Operating Cost/Number of Loans Made. Indicates efficiency in disbursing loans (in terms of number of borrowers).
3. No. of Active Borrowers per Credit Officer No. of Active Borrowers/No. of Credit Officers. Indicates performance of Credit Officer and efficiency of methodology.
4. Portfolio per Credit Officer Value of Loan Outstanding/No. of Credit Officers. Indicates potential financial productivity of Credit Officers.
C. Portfolio Quality Ratios
1. Portfolio in Arrears Payments in Arrears/Value of Loan Outstanding. Indicates amount of loan payments past due.
2. Portfolio at Risk Balance of Loan Arrears/Value of Loan Outstanding. Measures amount of default risk in portfolio.
3. Loan Loss Ratio Amount of Written Off/Average Loan Outstanding. Indicates extent of uncollectible loans over the past period.
4. Reserve Ratio Loan Loss Reserve/Value of Loan Outstanding. Indicates adequacy of reserves in relation to portfolio.

Next Page

CREATING AUTONOMOUS NATIONAL AND SUB-REGIONAL MICROCREDIT FUNDS

Dr. Salehuddin Ahmed
Managing Director
Palli Karma-Sahayak Foundation(PKSF)
Dhaka
Bangladesh

Executive Summary

In order to fulfill the Microcredit Summit goal of reaching 100 million of the worlds' poorest families by the year 2005, several measures must be taken to ensure that more resources reach the poorest in cost-effective ways. The mechanism of channeling funds, especially government and donor funds to microcredit institutions through autonomous apex funding organizations can prove to be efficient, quick and cost effective. Therefore, there is a need to credit such microcredit funds (MCFs) at the national level and sub-regional level. MCFs can perform two major functions : financial intermediation and development of sustainable microcredit institutions. The institutional structure of such microcredit funds has to address the legal/ownership issue, governance issue, management issue and autonomy of MCF. The ownership structure should have a judicious mix of state, civil society and private sector. In order to keep the fund free from political interference and bureaucratic tangles, autonomy of the fund must be recognized by the government and all other stakeholders. It must be remembered that autonomy does not come as 'gift from heaven'. It has to be derived from political commitment from the government. This is difficult, but not an impossible task as the case study of PKSF in Bangladesh shows. A major advantage of autonomous microcredit funds is their ability to screen and monitor microcredit programs (MCPs) according to some standard criteria, compared to inconsistent 'ad hoc' evaluations of individual MCPs by donor and government agencies. Funding sources of MCFs may consist of government, donor agencies, international financial institutions, central bank of a country and commercial banks within a country. The 'necessary' condition of funding is that the government of a particular country should commit its own resources thereby making a firm pledge for helping the poor through autonomous microcredit funds. The microcrdit funds should have some pragmatic standards and procedures for evaluating the partner organizations, accounting and auditing, default management, management information system, human resource development, performance evaluation of partner organizations and creating sustainable microcredit institutions. The case studies of PKSF in Bangladesh, Foncap in Argentina and LID in Bosnia- Herzegovina bring out the salient features of microcredit funds. Both the "process" and "output" aspects are analyzed (though in brief manner) in the three case studies which are diverse in nature and in its geographical settings. However, there are some common features present in the three case studies namely : commitment of the government and other stakeholders to microcredit operations, some degree of autonomy of the funds, quick and cost-effective implementation systems, good management and reporting system and evaluation of partner organization based on performance. The organization for setting up microcredit funds are sometimes brushed aside by some skeptic voices who might have some preconceived notions. No system is perfect, and the preconditions to set up a system may not be perfect, but one must take a bold decision to introduce an innovative practice like that of a microcredit fund which has already proved to be a best practice in some places on the globe.

Section 1. Rationale of autonomous microcredit fund

It's like a dream come true, loan brings good luck for rural women
Not long ago Razia Begum of Charfashion thana in Bhola district of Bangladesh could hardly manage three meals a day. Now the 35 year old housewife earns more than she needs a month and dreams of prosperity. A mother of six, Razia once had little idea about primary health care and sanitation. Now the members of her family use sanitary toilets and consult doctors when they fall sick. When her children study at night, Razia too reads and writes with them. "I could never imagine that I would ever be able to sign my name. It has been possible thanks to Family Development Association (FDA) that has changed my life," said a gleaming Razia who weaves household appliances with bamboo and cane. Her husband also helps her in her work. Goods and articles made by her have a good demand in her area because of their quality and standard. She never goes to market. Instead, buyers themselves come to her house for the items she makes. It all began eight years ago with a loan of Tk. 3000 from Paribar Unnayan Sangstha (FDA), a local non-government organization affiliated with Palli Karma-Sahayak Foundation (PKSF). The fund of PKSF, the world's largest apex microcredit funding institution, goes to NGOs, cooperatives and the government sponsored ANSAR VDP Bank. The PKSF has got 174 active partner organizations (POs), including BRAC, PROSHIKA and ASA in 63 districts of the country while the total number of its beneficiaries is about 1.8 million. PKSF not only provides loans to its POs, but also imparts training to their staff members for development of their skill and provides them other institutional development services for better loan management. PKSF also provides interest free loans to its POs for buying computers, motor cycles and bicycles.

1.1 Need

Microcredit has proved itself to be an effective tool for poverty alleviation by creating opportunities for the poor to get access to financial resources and services. In most of the countries around the world donors, business houses, private individuals and governments are providing funds to various domestic microcredit institutions (MCIs) to carry out microcredit programs (MCPs). In order to fulfill the Microcredit Summit goal of reaching 100 million of the world’s poorest families with microcredit by the year 2005, measures must be taken to ensure more resources to promote microcredit and also provide those resources to MCIs in cost-effective ways. The present mechanism of channeling funds, especially government and donor funds to MCIs is not appropriate. Moreover, the amount of loan fund ultimately reaching the poor is quite low. The total cost of providing fund directly to microcredit programs (MCPs) or "retailers" is usually high when the cost of feasibility studies, appraisal missions, monitoring, evaluation, reporting and so on are included. This even more in the case when the funding agency does not have a permanent office or adequately trained personnel near to the MCP to be funded. The unique nature and needs of MCP contrary to the relief-type programs require flexible, user-friendly, consultative and fast moving processes located near to the areas of operations. As a result of the high costs involved in providing funds directly to MCPs, as well as the high costs incurred by many MCPs in receiving and administering these funds, a relatively small amount of these funds are actually provided as loans to the poorest. Therefore, there is a need to create autonomous and cost-effective microcredit funds (MCFs). In a large country or in a country where MCPs have a great potential, national funds can be created. In small countries where MCPs are not well developed, sub-regional funds can be created.

1.2 Major objectives of MCFs

A major advantage of antonomous microcredit funds is their ability to screen and monitor microcrdit program (MCPs) according to some standard criteria, compared to inconsistent 'ad hoc' evaluations of individual MCPs by donor and government agencies. Funding and support on uniform standards would create a level playing field, while standard monitoring requirements would contribute to more professional MCPs which may be converted to professional microfinance institutions for poverty eradication. The rational emphasis recently put by many donors and governments to fund "institutions" rather than "ad hoc projects", is in line with the arguments put forward for creating autonomus microcredit funds.

The core objective of the national and sub-regional MCFs should be "reaching the poor and poorest with financial services through sustainable MCPs under viable institutional arrangements". While the national and sub-regional microcredit funds (MCFs) may engage in providing a number of diverse services to promote development of MCP in their respective areas of operation, two major functions should be focused which are: financial intermediation and development of sustainable institutions.

The two major functions mentioned above are expected to produce two important outcomes:

The microcredit fund (MCF) will mobilize funds from governments and donors, in the form of loans and equity grants and provide these funds to local MCIs to finance grassroots MCPs. These MCIs will be autonomous and outside direct control of the government and engaged in retailing loanable funds to the poor people.

The "intermediation" role of MCF will therefore build up local organizations with local capacity for a sustainable system of financial services for the poor and poorest. This will be in line with efficiency and competitiveness of MCIs because the MCIs which will provide quick, efficient and cost-effective credit will be sustainable and the ad-hoc and rootless organizations will wither away. At a more matured stage, the MCF can mediate between the MCIs and private capital markets by providing credit rating of MCIs and by securitization of portfolios of MCIs.

1.3 Impact on the poor and poorest and achieving summit goals MCFs are closer to the grassroots organizations. Funds provided by MCFs are cost-effective and reach the poor and the poorest without any leakage. Out of one dollar worth of fund, it is expected that 100% of it will go to help support institutions serving the poorest. Since the ultimate borrowers will get the credit in a cost-effective and quick method, the borrowers will be able to utilize these on various income generating activities (IGAs) and thereby increase their incomes. Studies of such MCFs in Bangladesh (PKSF) has shown that it has helped improve the social awareness of the poor (Alamgir 1997). It is expected that due to the operations of MCF for on-lending through the MCIs, there will be changes in asset levels, savings, housing patterns, occupation, education, health status and financial self-reliance of the microcredit borrowers compared to those of non-borrowers in a given area.

Another very important impact will be on ‘gender’ sensitization for the poor women in rural areas. A substantial portion of the borrowers of MCPs are women. The credit received by women not only makes them active economic agents but also makes them socially important. This ‘awareness’ on the part of the women is reflected in the increasing number of women participating in other development activities and in local council elections (like Village, Union/ Panchayet and sub-district councils). The three essential elements of social mobilization, economic integration and political participation of the poor are facilitated, by MCPs, among others.

From the above analysis, it is clear that creating MCF at national and sub-regional levels will help achieve the following core themes of the Microcredit Summit by the year 2005:

reaching the poorest families with MCPs. reaching and empowering women. building financially self-sufficient MCIs. ensuring a positive measurable impact on the lives of the poor clients of MCPs and their families.

The ultimate test of a MCP is the impact on the borrowers. This impact may be direct (primary) like impact on income and employment or indirect (secondary) like awareness in education, health program, improvement of housing condition. Some selected indicators for evaluating the impact of a MCP on borrowers are:

(i) Economic Indicators for current gains (Income, Food and Nutrition Intake, Housing)
(ii) Indicators of Long-term Material Gains (land)
(iii) Proneness to crisis
(iv) Indicators of social gains (e.g., education, sanitary conditions, drinking water).

Section 2 Institutional Structure of the Fund

1. Legal/Ownership Structure:

Types of MCFs that can facilitate fulfillment of Microcredit Summit goals can be under two broad categories, as mentioned earlier, one is an autonomous national fund the other is a sub-regional fund. The legal/ownership structures of the two types will vary primarily because the first one will work within a national boundary (and as such be within national legal framework) and the second one across national boundaries (and as such be within a broad framework of consensus of different countries).

National MCF

(a) The government may set up such fund under a special legal enactment ensuring full autonomy to it. One may argue that MCF under government patronage will not work. While there is some truth in the statement, it may be pointed out that without government support a national MCF will not be as robust as it should be.

The idea here is to mix state, civil society, and private initiatives and the ‘core requirement’ is autonomy. We shall come to this point later.

(b) Donors and private financial institutions may form a consortium and create a MCF. However, this may require guarantee from the government to allow the donor money to come to this fund on a loan basis. Moreover, a legal entity must be created either under existing law or under a special enactment by government. It will be easier if the MCF could be set up under existing

(i) Voluntary Societies Act
(ii) Trust Act
(iii) Societies Registration Act
(iv) NGO Act
(v) Financial Institution Act. If such kinds of laws do not exist or if the proposed MCF can not be set up under these laws (if these exist) then there will be the issue of enacting a special law which will be a lengthy procedure and for which political commitment may also be lacking. Fortunately, a particular country will possibly have some feasible options under existing law if there is a consensus among the government, donors, MCIs and other stakeholders.

(c) Government may, set up MCF under the existing Company’s Act of the country and the company may be set up as a ‘not for profit’ company by the government. This is how the Palli Karma-Sahayak Foundation (PKSF) in Bangladesh was set up by government in 1990 under the Company’s Act 1913.

Sub-regional MCF

(a)MCF of such nature can serve a number of surrounding countries in a region. For example: For Sub-Saharan African countries, for West African countries, for Central American countries or for the Pacific Island Nations such MCF can be established. Since such MCFs will cover several countries, legal coverage under a particular national law may not be feasible. One alternative may be to set up a MCF under the auspices of an inter governmental organization like Asian-Pacific Development Centre (APDC) in Kuala Lumpur for small countries in South-East Asia: Centre on Integrated Rural Development for Asia and the Pacific (CIRDAP) in Dhaka for countries of the Pacific Island nations: Centre on Integrated Rural Development for Africa (CIRDAFRICA) in Arusha for countries of that region. All these organizations have already got the member countries’ support for programs on poverty alleviation, MCFs created under these organizations can reach the poorest of the poor in their respective member countries.
(b)Sub-Regional MCFs can be formed with the initiative of some sub-regional networking organizations which may already exist for the purpose of exchanging information and technical knowledge on regional development issues. If such organizations do not exist, then organizations like the Consultative Group to Assist the Poorest (CGAP), Friends of Women’s World Banking (FWWB) and even the Microcredit Summit Secretariat (MSS) could take the initiative to discuss with the respective countries to set up such fund.

2.2 Governance Structure

The governance structure of the proposed MCFs should be based on three principles:
a) Autonomy
b) Accountability to the stakeholders
c) Efficiency and Cost-Effectiveness in Management.

A set of policy making bodies like General Body/Governing Body; Governing Council/Executive Committee; Board of Trustees Working Committee and so on should be formed. In each pair of the above bodies, the first one should be usually a representative body of about 25 members which will be responsible to set out broad guidelines of operations, approve budgets and audit reports and adopt strategic policy options. The second body in the pair should be responsible for the management and administration of the affairs of the MCF in accordance with mandate of the MCF and rules set forth by the first body. The second body should consist of a relatively small number of people, preferably 10 members, and should meet frequently as required, while the first body will meet once or twice a year.

In order to preserve the autonomy the foremost thing is the political will of the government reflected in its committment for poverty alleviation through microcredit. Government will possibly support other interventions like health, education, infrastructure development and social mobilization for poverty alleviation. Since, microcredit has proved itself to be an important and effective tool for poverty alleviation, support to MCP seems to be an altarctive political agenda for any government. Having political support, a set of dedicated and highly committed persons with knowledge on microcredit from both government and private sectors will make MCFs really autonomous and at the same time efficient organization. This point has been further elaborated in section 2.4.

2.3 Management

Management through core professional and support staff should be the next important aspect of the MCF after the governance aspect. The Chief Executive Officer (CEO) should have good dynamic leadership quality and should demonstrate good management capabilities and be able to formulate good strategic plans for the organization. The CEO should be selected by the General Body/Governing Body through an open and competitive process. As far as possible, nomination by the government should be avoided. The CEO should have experiences of the government system and the systems of the civil society and private sector and the CEO should be free from traditional bureaucratic attitude. The organization should have a dynamic and flexible operational procedure and good Management Information System (MIS). Hierarchy in decision making should be avoided and collective decision making process should be adopted, as far as practicable, so that decisions are owned by all staff to ensure its smooth implementation.

2.4 Autonomy

The critical aspect of the institutional structure of the MCFs is its independence and freedom from political intrusion. One of the strengths of PKSF in Bangladesh is that under the guidance of the highly respected General Body and Governing Body, PKSF has been able to operate without political interference. The extent to which organizations are able to operate independently partly reflects the commitment of the governments, and in some cases it may be extremely difficult to avoid political interference completely. Nevertheless political influence may be minimized with techniques which include spelling out the objectives and policies as simply and clearly as possible, making the Governing Body members directly responsible for achieving the objectives, limiting the number of public sector representatives on the board, appointing Chairman, CEO and Board members for fixed terms, and enabling various private and non government bodies to appoint representatives to the Board directly.

Section 3. Funding

3.1 National MCF

Seed money from the government should be the first source. In fact, when the Government itself initiates such a fund, as in the case of PKSF in Bangladesh, International Financial institutions and donor agencies will come forward with matching funds in the form of loans or grants. The National Government may provide seed money in the form of a grant to the MCF as a revolving fund or may give it as a loan at a concessional rate (1-2%) for a long term period (minimum 10 years).
Multilateral International Finance Institutions (IFIs) like the World Bank, IMF, IFAD, ADB which usually work through governments can provide funds to the MCFs established under governments initiatives. Alternatively, IFIs may provide fund to other privately established MCFs with a government guarantee.
Donor agencies (both multilateral and bi-lateral) can provide funds to national MCFs instead of channeling their funds directly to MCPs, which is not a cost-effective method, as mentioned earlier.
National MCFs can also borrow on commercial terms from International Finance Corporation (IFC) and other international private capital sources. Borrowing can be done from the Central Bank and other commercial banks within the country. One must consider commercial borrowing by MCF at a more advanced phase of its operation not at the initial phase because at the initial stage high cost of commercial borrowing will put heavy pressure on the sustainability of MCFs.

3.2 Sub-Regional MCF

Sub-Regional MCFs can start with initial grant contributions from the member countries. Donor agencies can provide grant money for a sub-regional MCF for loan programs as well as capacity building programs.

CGAP, FWWB and other international microcredit networking organizations can also provide some funds. The host country and the host institution (APDC, CIRDAP, CIRDAFRICA) may also be requested to put in start-up and regular funds for the MCF.

3.3 Market Sources of Fund

At the advanced stage of operation national MCFs can provide a bridge between the private capital market and domestic MCIs by rating the credit worthiness of MCIs and securitization of the portfolios of MCIs. National MCFs may consider raising funds from the domestic private capital market by issuing special type of bonds (such as a social bond) which may be subscribed by companies, banks and private individuals.

Section 4. MCF Policies for funding partner microcredit institutions (MCIs)

One of the most important challenges of the MCFs is to select partner MCIs. Sometimes it is difficult to find an adequate number of efficient MCIs running MCPs at the grassroots level. As we have mentioned earlier, besides providing funds for MCIs, the other important objective is the institution building of sustainable MCIs. MCF will not stifle innovation and will not impose any particular model as the experience of PKSF shows that its partner organizations are diverse in nature.

4.1 Strategies of credit programs of MCF

The operational methods for credit programs of MCF should consist of innovative, transparent and standardized procedure for MCI selection, loan processing, monitoring and supervision at the field levels. One of the strengths of PKSF in Bangladesh has been regular contact and consultation with partner MCIs and adoption of the approach of learning by doing. One must remember that standardization of procedures should not exclude flexibility and the need to adapt to varied conditions and new challenges coming from the field as well as the from the MCIs.

MCF will not stifle innovation and will not impose any particular model as the experience of PKSF shows that its partner organizations are diverse in nature.

MCF is expected to implement three interlinked programs :

(i) Loan fund to partner MCIs for on lending to the poor and poorest families. MCFs should not be engaged in direct lending to the poor.

(ii) Institutional Development (ID) Program for MCF and Partner MCIs. This will consist of, among other things, training of MCF/MCI staff, Developing management information system (MIS), and capacity building programs for MCIs so that they become sustainable institutions.

(iii) Research: This will include periodic monitoring and special focus studies. The emphasis on action-research will be helpful in identifying strengths and weakness of MCP to make it more robust and effective. The primary and secondary impacts of MCP on the poor and poorest families should also be evaluated periodically to sharpen the focus of the program and meet the goals of the Microcredit Summit.

4.2 Salient Features of the Credit Programs of MCIs

The credit programs of the MCF should be run through its partner MCIs for cost-effectiveness and for better management at the field level. The characteristics features of the loan programs undertaken by partner MCIs should be as follows :

1.MCIs provide loans to the poor and poorest families selected on some pre-determined criteria like land owned, total wealth, nature of the dwelling house etc.

2.The borrowers are organized in small groups.

3.Groups formed with like-minded people from the same economic strata of life having confidence and trust in each other.

4.MCIs get service charges (interest) from their beneficiaries depending on the field situation of the MCIs and target clients. The administrative and related expenses of MCIs are met from the service charges received from beneficiaries.

5.The repayment period for the poor, landless-assetless people (i.e., beneficiaries) to the MCIs should be based on the nature of the income generating activity. However, it is preferable to keep it within 1 year period (with some grace period).

6.The rate charged by the MCF to the MCIs should be set at minimum level, allowing a greater spread between MCF rate and the rate charged by MCI to the ultimate borrowers.

7.Loans received by MCIs from the MCF may be for a period of 1 to 5 years. If the fund is given for 2 to 5 years the MCIs can revolve the funds at the field level by providing loans to different groups for a one-year period.

4.3 Eligibility criteria of MCIs to be funded

A set of selection criteria for MCIs has to be formulated so that MCIs can be screened by the MCF on the basis of the criteria. The criteria can be divided into the broad areas
(1) Nature and mandate of the organization
(2) Governance and Management structure
(3) Quality and Experience of the Senior Management Staff
(4) Human Resource
(5) Geographical coverage
(6) Field Activities including the profile of the poor and poorest clients
(7) Demonstrated performance
(8) Management Information System (MIS)
(9) Account and Audit System
(10) Portfolio and debt-equity ratio.

It must be pointed out that all criteria may not have the same importance. It will also vary depending on the number of borrowers of the potential MCIs and funds required by them.

MCF should not provide start up capital for MCIs and MCF may stipulate a minimum period of 1 year of satisfactory working of MCIs.

4.4 Accounting and Auditing Principles

One of the key pre-conditions for the success of a collateral-free microcredit program (MCP) is having a sound accounting and auditing system. Therefore, the following steps should be taken by the MCF:

Prepare detailed and separate sets of accounts manual one for the MCF itself and the other for MCIs.

Prepare terms of reference (TOR) of the internal control and audit system of MCF
Prepare TOR for audit of MCF to be carried out by external and independent auditor.
Prepare separate TORs for audit of MCIs to be carried out by MCF and by external and independent auditors.
Prepare guidelines for the internal control system to be followed by MCIs.

4.5 Managing the Savings of beneficiaries

The ultimate beneficiaries of microcredit are encouraged to save regularly which is an integral part of group formation and group activities of MCPs. The MCIs under which the beneficiaries are organized usually manage and keep accounts of these savings. Every member of a group saves regularly (for example weekly) according to his/her ability. The savings collected are recorded in the passbooks of each borrower. Though each borrower is a net-debtor (in the sense that borrowing is for more than the accrued savings), mobilization of savings by MCIs is a sensitive issue because it is a financial service which can only be undertaken with specific permission from the government or central bank. Recently, savings (both regular and voluntary) have been quite substantial for many MCIs, therefore prudent norms and regulations should be introduced to ensure the safety of savers. MCF can take up the issue with the government to create an enabling environment for MCIs in savings collection by providing the MCIs with license and giving a legal identity for such activities by the MCIs. The MCF can formulate policy guidelines in six important areas:
(i) collection
(ii) maintenance of accounts
(iii) withdrawal by depositors
(iv) investment of savings funds by MCIs
(v) using some portion as credit fund for borrowers
(vi) rate of return on savings paid to the depositors by MCIs.

4.6 Default Management

Full implementation of the policies and guidelines and the creation of new policies to manage default should constitute a major thrust of the program of the MCF. Default may originate from basically six sources;
(i) misappropriation of funds or any major governance problem of MCIs;
(ii) weakness in the MCI appraisal system, resulting in the selection of inappropriate MCIs incapable of managing microcredit and
(iii) weakness in the management of microcredit by once successful MCIs.
(iv) natural disasters
(v) serious political disturbances
(vi) severe economic downturns. The dominant position of the MCF with respect to averting default should be preventive in nature so that this kind of crisis does not appear. This is to ensure good governance of the MCIs through strong monitoring and supervision and policies and guidelines for good governance. The internal control system instituted among the MCIs should be strengthened. The efficiency of microcredit management should be enhanced through training and other institutional development programs.

To prevent default, the MCF has to prepare an early warning system based on critical indicators of the performance of MCIs. The system should be implemented to detect any potential default and to avert the default.

4.7 Performance evaluation of MCIs

There are remarkable differences among the MCIs in terms of their credit operation and quality of service delivery. Therefore, there is a need to develop some performance evaluation criteria to categorize various MCIs. The obvious reasons are

(a) to help the MCIs to emerge as viable credit delivery organizations;
(b) to help the MCIs to gain institutional strength; and
(c) to help them to expand their credit operation systematically.

The MCF can use performance indicators for MCIs belonging to the following broad categories:

viability of the microcredit borrowers, including: dropout rate, percentage of loans outstanding, savings rate, functional literacy, member/ borrower ratio, etc.

institutional viability, including: avoidance of overlapping with other MCIs, (where there are numerous MCIs), accessibility of borrowers, marketing prospects, banking service, governance, equity base, etc.

program implementation, including: group members as percentage of total target population, group cohesiveness, attendance of the borrowers in weekly meetings, loan disbursement and recovery rate, skill of field workers, accounting system of the POs, capacity of the top management, etc.

human resource development program (HRDP), including: recruitment, performance appraisal of personnel, and training. periodic study on impact of microcredit on poverty alleviation, etc. creation and maintenance of expected institutional culture, including: sound governance, incentive base for management, staff, and employees, etc. financial management and internal control, including: MIS, accounting system, internal audit, internal supervision, budgetary practice, etc. status of physical assets, including: ownership of building, land, furniture vehicles, etc. financial and economic viability, including: operational, financial and economic self-reliance, quality of portfolio, etc.

Section 5. Implementation strategies

Program implementation through a set of standard procedures is a vital element for successful MCFs. The major elements of implementation are
(1) Procedures for application for funding by MCIs
(2) Preliminary appraisal of MCIs
(3) Field visits to assess field operations of MCIs
(4) Recommendations by the management of the MCF to select MCIs
(5) Approval by the MCF’s governing body
(6) Signing of loan agreement
(7) Verification of loan utilization
(8) Application for successive loans to MCIs
(9) Monitoring.

5.1 Management Information System (MIS)

Monitoring of the credit program is crucial for its success. MCIs should monitor their MCPs at the field level, while MCFs have to monitor the MCIs’ programs in order to reduce their risk. For the MCFs to be successful, it is important that these institutions establish and enforce appropriate performance and reporting standards for the MCIs that they fund. A sound MIS based on regular reports from the field to MCIs and from MCIs to MCFs are vital. A computerized system at MCF and MCI head office levels will greatly enhance the management capabilities of these organizations. Insufficient attention to MIS by MCFs may represent a missed opportunity to improve the outreach and sustainability of MCIs and MCPs, which are important goals of the Microcredit Summit.

5.2 Human Resource Development

In most countries the endowment of human capital for the MCP is very limited. However, this limitation can be overcome by a comprehensive human resource development (HRD) package implemented jointly by MCFs and MCIs. Training of MCF and MCI staff is an important aspect. A Proper training needs assessment (TNA) to be done for both MCFs and MCIs and pragmatic, operation-orientated training and orientation to be provided. PKSF in Bangladesh has formulated 7 training modules for its staff and 12 modules for the staff of MCIs funded by PKSF.

A good compensation package and incentive system has to be formulated for the MCFs and MCIs to recruit and retain talented, efficient and committed people in the MCPs. Finally, a HRD program with the objective of building and maintaining the right kind of institutional culture with a view to ensure effective management succession has to be developed for the sustainability of MCFs and MCIs.

Section 6. Institutional Development

The institutional development components for both the MCFs and MCIs should be determined in line with attaining sustainability of each microfinance program as a whole. Three interrelated sustainability issues in microfinance must be addressed properly. These are:

Sustainability of clients of MCIs
(b) MCFs’/MCIs’ financial & economic viability
(c) MCFs’/MCIs’ institutional viability.
For the purpose of setting the general direction of activities undertaken by the MCFs/MCIs, sustainability of the clients must be monitored on a regular basis by using some appropriate indicators (both process and impact indicators). For the MCF, monitoring the sustainability of both the MCIs and their clients will be required.

Using four sets of indicators related to
(i) outreach,
(ii) operating efficiency,
(iii) portfolio quality and
(iv) profitability, the sustainability mentioned in
(b) and

(c) can be assessed. PKSF in Bangladesh and CGAP have done some works on this line.

Section 7. Regulatory Framework

This issue has come to the forefront for the simple reason that MCIs are assuming an important role in providing financial services and products to the poor, outside the formal banking system.

In view of the historical emergence and evolutionary process of MCIs (most of which are NGOs/SHGs), it can be argued that the conventional regulatory framework like that of formal banks and financial institutions is not appropriate and hence not required under the circumstances prevailing in many countries. This is particularly in view of the fact that MFIs are not accepting deposits with checking facilities. The unique features of MCIs in the field of social and financial services with the core objective of poverty alleviation that differentiate the industry from the formal financial sector further justify the proposition. However, that does not in any way downplay the importance of having some strategic monitoring measures that are compatible and appropriate to their objectives, institutional operation and development culture. The measures should incorporate user friendly prudential norms/indicative guidelines in the form of a concrete ‘Code of Norms/Conduct’ which would ensure sound and organized growth of MCIs on a sustainable basis.

A set of financial standards, reporting formats and performance standards may be an effective way to keep the MCIs on the right track. There is a broad range of experiences to draw from in establishing appropriate standards, including the works being done by PKSF in Bangladesh, the biggest and most successful national microcredit fund (MCF) in the world. Recent attempt to establish such MCFs in other countries is a move in the right direction, because, among other functions, MCFs will be an effective institutional option to fund start-up MCPs within a poor/poorest-friendly regulatory framework. An independent autonomous apex body outside the government control may be formed to ensure that the 'code of conduct' and the microcredit standards are complied with by the MCIs and non-compliance by the MCIs may ultimately result in cancelling the permission/registration of a defaulting MCI. This apex regulatory body for MCIs has to work very closely with the MCFs.

Section 8. Interface among sub-regional MCF, national MCF and national MCIs

A broad framework of interface between three types of institutions should be kept in mind in a "dynamic and process" dimension because such an interface cannot be imposed once-for-all; rather it will be evolved. However, the following guidelines may be considered:

In a country where there is huge potentials for MCPs and emergence of MCIs, a national MCF should be the apex funding agency of MCIs of that country.
In a country where MCPs and MCIs have limited scope, that country can link with similar countries and form a sub-regional MCF, which will be the apex funding agency for the MCIs of the member countries.
Two types of MCFs (i and ii) may form a network to exchange information and ideas and through that network, the MCIs of various countries may exchange information and ideas.
Section

9. PALLI KARMA-SAHAYAK FOUNDATION (PKSF) :

THE APEX NATIONAL MICROCREDIT FUND IN BANGLADESH (Case Study)

9.1 Objectives of PKSF

PKSF was set up in 1990 by the government of Bangladesh with the overall objective of alleviating poverty and improving the quality of life of the rural poor, the landless and the assetless people by providing them with resources for creation of self-employment for enhancing their economic conditions. The specific objectives of PKSF are:

(a) to provide various types of financial help and assistance to non-government, semigovernment, and government organizations, voluntary agencies and groups, societies and local government bodies, so that, as Partner Organizations (POs) and consistent with the Foundation's image and objectives, they can undertake activities with a view to generating income and employment opportunities among the economically most disadvantaged groups in the society;

(b) to assist in strengthening the institutional infrastructure of the Partner Organizations, so that they can improve their present operations.

9.2 Operational Strategy of PKSF

The basic operational strategies of the Foundation have been drawn from its objectives:

(a) It does not directly lend money to the landless and the assetless people of the rural areas: rather it reaches its target groups through the Partner Organizations, the delivery mechanism for reaching the poor.

(b) It provides greater thrust to institutional development.

(c) It favors no particular model, instead innovations and different approaches based on experience are encouraged.

9.3 Legal Structure of PKSF

Legally PKSF is a "company limited by guarantee" meaning "company not for profit" and is registered under the Companies Act of 1913 with the Registrar of Joint Stock Companies. The legal structure of PKSF allows the flexibility, authority and power to take programs and implement them throughout the country. PKSF can receive grants and loan from local and/or international sources. It can lend and approve grant as well.

9.4 Organizational Structure and Membership

a. General Body: The maximum number of the members in the General Body will be 25, out of which the government may nominate not more than 15 members from amongst persons associated with government agencies, voluntary organizations or private individuals. The remaining 10 members may be from amongst persons representing the Partner Organizations and/or private individuals. The General Body usually meets once a year for overall policy guidance. Presently, PKSF has a General Body of 15 members consisting of distinguished personalities in the country.

b. Governing Body: The composition of the Governing Body is as follows:
(i) Chairman of the Foundation (nominated by the Government),
(ii) The Managing Director (appointed by the Governing Body),
(iii) Two members nominated by the Government and
(iv) Three members elected by the General Body. That makes a 7-member Governing Body. The present Governing Body is comprised of persons of international repute, including Professor Mohammad Yunus, Managing Director of Grameen Bank.

c. Chairman: The Chairman of PKSF is nominated by the government from persons not in service of the republic, usually for a term of three years. The present Chairman is a leading economist and a Professor of Dhaka University.

d. Managing Director: The Managing Director is the Chief Executive Officer (CEO) of the Foundation. He is the ex-officio member of the Governing Body.

e. Management: PKSF has three broad divisions :

(i) Loan Operation (divided into two windows : one for big POs and another for medium/small POs),

(ii) Administration & Finance, and

(iii) Audit: The Audit division reports directly to the Managing Director.

PKSF has research and training units to conduct research related to poverty alleviation and to impart training to the staff of the Partner Organizations.

9.5 Programs

PKSF implements three complementary programs:

Loan program for the rural landless and the assetless people through Partner Organizations;

(b) Institutional Development Program for the POs, and

(c) Research

The Loan program is the core program. The institutional development program is a support program to strengthen the POs for making them sustainable delivery systems for the poor. It consists of training of PKSF and PO staff; development of Management Information System (MIS); provision of interest free loan to POs for buying computers/motorcycles, etc.

9.6 Program Implementation

a. Application in prescribed form: PKSF receives applications for loans in a prescribed application form that requires the applicant to include details about the organization, program, financing, etc.

b. Preliminary appraisal: If an organization has experience of managing a credit program for the poor, PKSF preliminarily selects it for a field visit if all information provided by the organization is consistent. PKSF judges experience in rural credit program using several criteria;
(a) number of years of experience,
(b) amount of loans disbursed,
(c) number of members and borrowers,
(d) loan recovery rate,
(e) adequacy of skilled salaried staff and
(f) credibility of the sponsors.

c. Field visit: Once an organization is selected for field visit, an officer visits the organization. If the performance of the applicant is found satisfactory it is recommended for acceptance as PO. If there is some deficiency, the concerned organization is kept under observation and suggestions are given for improving the performance. On the other hand, if performance of an organization is found unsatisfactory, the application is rejected. Usually, the main reasons for rejection are financial mismanagement or gross inconsistency between information in the application and that gathered from field verification.

d. Approval by the Governing Body: The final power of accepting a PO rests with the Governing Body. If the management considers an organization to be accepted as a PO, the proposal is placed with a detailed description of the organization, along with the field report, rationale for accepting it as a PO, and recommendation of the MD, in the meeting of the Governing Body. The Governing Body accepts or rejects or puts certain conditions for accepting the organization as a PO.

e. Signing of Loan Agreement:

(a) The final step in disbursing a loan to the newly selected Partner Organization is the signing of a standard loan agreement with the PO. The loan agreement contains terms and conditions of the loan (e.g., rate of service charge, area of loan disbursement, number of installments, etc.). The loan is collateral free. In addition to a loan agreement, a promissory note is signed by the representative of the PO.

(b) The loan agreement is signed for PKSF by the Managing Director and for the PO by the Chief Executive of the PO or sometimes jointly by the Chief Executive and the Chairman.

f. Verification of Loan Utilization: After the first loan is given, the PO is supposed to disburse the loan immediately after receiving the funds and give a list of borrowers to PKSF. An officer from PKSF in charge of the PO visits the PO to verify the loan disbursement and utilization of the loan by the members. Usually, PKSF officials visit the POs at an interval of 3 months.

g. Application for Successive Loans: The approval of successive loans to a PO depends on several factors:

(a) satisfactory utilization of previous loan,
(b) maintaining high rate of recovery of loan at the field level (>98%);
(c) giving reports regularly to PKSF,
(d) potential for expansion of loan program, and
(e) repayment of loan installments to PKSF, if due. The successive loan proposals up to Taka 2.5 million are approved by the Loan Committee. A similar loan agreement is signed for each installment of loan. Loans beyond the Tk. 2.5 million limit are approved by the Governing Body.

h. Monitoring: Monitoring of the credit program is crucial for its success. POs monitor their programs at the field level and PKSF monitors the programs both at their field and office levels. Since PKSF provides collateral free loans to POs, the only way to reduce the risk is to monitor the programs regularly Several complementary steps are taken to monitor the activities of POs, especially the credit program and fund management. A brief account of the monitoring system is given below:

(a) Collection of program information: As mentioned above, PKSF collects information on changes in borrowers, savings, loan disbursement and recovery every month in a prescribed form.
Financial position: POs submit cumulative and monthly income, expenditure and cash flow statements to monitor financial health of the PO.

POs regularly send their lists of borrowers to PKSF. These are borrowers from fresh instalments of loans from PKSF or loans from revolving fund.

Field visits: Field visits by the officers of PKSF is are the backbone of monitoring the PO programs of POs. PKSF places the utmost emphasis on field visits. Usually, the concerned officer visits each PO every three months. However, if the PO is big and has multiple branches, a team of PKSF officials visit the program. During the visits the information submitted by POs as mentioned in (a), (b) and (c) are verified. Suggestions are made for improvement. The field visit is used for verification of the program as well as an effort for institutional development of the PO.

Audit by internal audit team: PKSF conducts audit of all its POs, annually. The audit reports are submitted to the CEO of PKSF directly.

Audit by audit firm: As a part of the annual financial auditing of PKSF, an external audit firm is engaged to verify the financial position of sample POs.

7. Fund : Total funds received and committed from different sources as follows:

(i) Grant from government = US$ 21.6 million

" " World Bank = US$ 5.0 million

" " USAID = US$ 12.7 million

(ii) Loan from government = US$ 10.0 million

" " World Bank = US$100.0 million

" " ADB = US$ 18.0 million

" " Others = US$ 0.6 million

Total = US$ 167.9 million

9.8 Achievements of PKSF

a. Enlistment of PO: PKSF has accepted POs every year since its inception. Starting with 23 POs in its first year of operations, PKSF has enlisted 187 POs up to December 1999. The POs of PKSF have been working in 62 out of 64 districts of Bangladesh.

b. Loan disbursement: PKSF has disbursed Taka 7049 million (about US$140 million). With the revolving nature of the fund and with additional funds, the POs have extended about Taka 21000 million (about US$411 million) at the field level.

c. Loan Outstanding: PKSF has Taka 5244 million (about US$103 million) in loans outstanding with POs as on December, 1999.

d. Borrowers: As of December, 1999, the total number of borrowers financed by PKSF was 1.87 million, of whom more than 90% were women.

e. Recovery of Loan: PKSF has two different recovery rates:
(a) recovery rate of loan between the PO and PKSF, and
(b) recovery rate of POs. PKSF’s recovery rate over the last 6 years has been nearly 98%. This rate is defined as the percentage of the amount due received on time. Loan recovery of POs at the field level is 99%.

f. Strengthening of the POs: One of PKSF’s main achievements is the development of local institutions. Most of these NGOs are running their program by receiving loans only from PKSF. Still, they are successfully able to cover almost the full amount of their cost of operations, and many have approached towards financial viability. Aside from financial viability, local POs are now better prepared to manage their programs, because of the training, advisory services and institutional development program of PKSF. These include training, development of accounting system and MIS, and continuous management suggestions for improvement of their programs.

g. Potential for Expansion: This is another indicator for measuring achievement. The total number of borrowers of PKSF's POs is 1.87 million (including that of BRAC, ASA & Proshika). So there is scope for further expansion of loan to the POs. In addition, PKSF is accepting new POs every year and existing POs are also expanding their coverage.

h. Training and advisory services: PKSF arranged several workshops for the directors of POs. These workshops mainly discussed policy issues to introduce uniform systems across the POs. Sessions were arranged for giving training in accounting and MIS for the accountants and credit coordinators. PKSF has prepared 19 modules for training of its staff and different levels of staff of POs. One of the effective way of training of staff are those practical training sessions given by the officers of PKSF during their routine visits to each PO. During these visits problems are identified and solutions are given. Regular discussions are held with the organizers and field staff during the field visits.

i. Research programs: So far, PKSF has conducted two research studies on the impact of its program on the beneficiaries. There have been several studies on PKSF by various authors in Bangladesh and abroad. Recently, PKSF has contracted out a multi-year impact study to the Bangladesh Institute of Development Studies (BIDS), the premier research institution in Bangladesh.

j. Impact: Various research studies have shown positive impact of microcredit on the lives of the rural poor in Bangladesh. A set of indicators has been suggested to study the impact further.

9.9 Sustainability of POs and Role of PKSF

a. Institutional sustainability of POs: Fundamental policies to run a successful rural credit program are in place in many POs. Selection of members, savings and loan policies, portfolio management, financial control, and monitoring and evaluation are some of the fundamental areas of policy formulation.

So far, many POs within their limited capacity have tried to recruit competent staff. POs do not have adequate financial resources to recruit staff with better educational attainment and competence. Many POs are being managed by their founders and expected to do so for quite sometime. Leadership by the present Directors at this early stage of the organization is important for growth and sustainability. Many POs either have physical assets like office buildings and land or purchased land for construction of office, training center, etc. This shows a clear commitment from the part of the organizers for giving POs a solid foundation.

Financial sustainability of POs: The basic issue in financial viability analysis is whether POs can cover the costs of managing their credit programs from the income of the programs, mainly the service charge from loans. Some POs have been successful to gradually cover the cost of operations from the income of the credit program and generate moderate surplus. It expected that all POs will continue to improve their profitability conditions.

Role of PKSF: Directors of POs have identified several areas where PKSF made significant contributions:

(i) by providing funds, PKSF helped expansion of programs and enabled them to become financially viable,

(ii) PKSF assisted in developing the credit management system, MIS and accounting system,

(iii) PKSF's regular advisory services helped gradually improve the capacity of POs in managing their programs.

Future role of PKSF: The future expected role of PKSF has also been identified by the Directors of PKSF which are:

(i) the continuation of providing loan funds should be the main role of PKSF

(ii) PKSF should help train all of the POs' staff for further improvement of their capacity, which will be their basis for sustainability,

(iii) continuous advisory service and

(iv) PKSF should have action research not only in micro-credit but also in other related areas of poverty alleviation. PKSF has recently decided to provide funds on a pilot basis to microenterprises, to the urban poor and to the hardcore poor.

b. Sustainability of PKSF

Institutional sustainability of PKSF: PKSF has a competent and dynamic Governing Body capable of guiding the management, changing policies and introducing programs as necessary. It has well established transparent policies regarding the loan program as well as management of its affairs. It has gradually increased its outreach by enlisting an increasing number of POs. PKSF has been able to mobilize the financial resources required to embark on a large-scale expansion of its activities. These factors will continue to contribute towards the expanded operations of PKSF.

Financial Viability: PKSF has been able to gradually improve its financial position. It has been successful in increasingly covering the cost of its operations by charging a reasonable service charge, increasing loan disbursement, keeping its operating expenses low and keeping the loan loss expenses very low by maintaining high recovery rate. Overall, PKSF has posted a surplus every year since inception. Some of the financial data of PKSF as on 30 June 1999 are as follows :

Debt-equity Ratio 1.63:1 Cumulative Loan Recovery Rate 98.16% Reserve Rate (Loan loss reserve/loan outstanding) 2.67% Operational expenses to loan disbursed (operational 5.28%expenses/disbursement of the same year) Operational self sufficiency (Total income/operation 161%expenses including financial expenses + DMR) Percentage of total expenditure to total income36.43% Financial ratio analysis shows that PKSF is in sound position. The debt-equity ratio, the portfolio and self-sufficiency ratios show that performance of PKSF is good in terms of operational and financial self-sufficiency. The cost structure and the profitability analysis also show that PKSF is covering all the expenditures from its income from loan operations and also having surplus of income over expenditure.

9.10 Lessons from PKSF Model

PKSF is unique in its organizational structure, activities and management practices. A few factors can be identified that have made it possible to register such an impressive performance.

PKSF has been established and funded by the government, but it has been kept as an independent organization outside government bureaucracy. That enabled PKSF to form its own policies and develop its own management practices suitable for its activities.

The outstanding quality of the Governing Body has contributed most in guiding the management and forming and revising policies whenever necessary.

The policy of recruiting officials of above average quality has contributed most to the growth and performance of PKSF.

PKSF has been successful in utilizing the capacities of local NGOs in quickly reaching the poor and developing the POs to deliver the financial services to the poor. Selection of the right POs was the most crucial factor for PKSF’s success.

The key to the sustainability of POs is the assured source of funds and the improvement in the capacity of human resources backed by good management practices. In both areas, PKSF has proven itself to be effective.

Financial intermediaries (NGOs) backed by resources from PKSF have been found to be effective in reaching the poor. Both PKSF and the POs can also become sustainable in the process.

The rural poor men and women have proven themselves to be capable of managing money and improving their income. Likewise, the POs of PKSF have proven the ability to select right target groups and deliver the desired services.

One area that needs top priority from PKSF is enhancing the capacity of POs. This can be done by more investment in development of the POs’ human resources of POs.

The PKSF model (as an apex second-tier organization) shows potential for replication. It can further grow and make significant contribution in improving the quality of life of the poor.

Section 10.Foncap S.A.-Fondo de Capital Social Argentina (Case Study)

Date of creation of the fund

The "Fondo Fiduciario de Capital Social" (FONCAP) is an innovative initiative of the government of Argentina created at the end of 1997.

10.1 The rationale for creating the fund

There was a need for microcredit funds because in Argentina institutions did not exist with the necessary capability, economic strength, and, the commitment to serve the poor and the poorest.
The purpose of the fund is to fight poverty and unemployment. Foncap's aim is to create a self-sustaining and self-perpetuating scheme that will provide financial and non-financial services to poor microentrepreneurs across the country, operating as a second tier institution.
Foncap is the response to an unavoidable reality: the existence of almost two million microentrepreneurs in Argentina, striving to survive amidst one of the toughest economic transformations of the country's recent history.

Foncap has been designed with the intention of coordinating the strengths of three sectors - social, private and public - in order to develop an organization which aims at maximizing the contributions that each party can make in terms of their capacity to serve the poor, as well as neutralizing their particular weaknesses in the same respect.

Foncap's mission is to eliminate the barriers to access to credit for the poor, safeguarding their interests and linking them with the other sectors of society.

C) Foncap’s objectives match the Microcredit Summit’s goals in almost all of its work, including: reaching the poorest families, empowering their female members and building financially self-sufficient institutions. With regard to the impact on the lives of clients and their families, FONCAP is developing tools in order to measure as accurately as possible the results of the practitioner's operations in terms of social welfare and improvement of quality of life.

10.2 Institutional Structure of the fund

A) Legal/Ownership Structure: Foncap’s microcredit fund amounts to US$ 40 million which is at present entirely funded by the Argentine government. Through a 30 year fiduciary agreement, the fund is managed by Foncap SA, a private corporation whose stockholders are: the government, with 49% of the shares, and private NGOs, with the remaining 51%. This scheme, with the majority interest in private hands, ensures the autonomy of the fund and allows it to set long-range policies and strategies regardless of the changes in the public administration.

B) Governance Structure: The governing body in of Foncap is the Board of Directors. Its composition reflects the primacy of private sector, which is represented by 9 members, while the government is represented by only 4. To ensure effectiveness and autonomy, only the Board is empowered to hire and dismiss the managers and mid ranking managers.

C) Management: The microbank and microenterprise area managers constitute the core staff of the organization.

Organizational Chart

BOARD
AND MANAGEMENT

MICROBANK AREA MICROENTERPRISE AREA

MICROBANK STRATEGIC AND TECHNICAL ASSISTANCE MICROBANK FINANCIAL SERVICES
ADMINISTRATION FINANCE AND CONTROL
INSTITUTIONAL DEVELOPMENT AND COMUNICATION
RESEARCH AND ANALYSIS In the microbank's area, the core portion is the microbank financial services sector, which has the following assignments:

Evaluate the financial viability of microbank projects, submitting business plans to the Board for their approval, and administrating the disbursement of loans and grants according to the correct allocation of these resources by each microbank. Then, supervising and controlling these operations in order to identify any deviations either in terms of the outreach and expansion of the operation or the population being served.
Prepare monthly reports on the progress of each microbank, the quality of the service provided, and the population being served, with respect to the goals established in each business plan.
To lead in the development and utilization of other financial instruments suitable to meet the special circumstances of certain practitioners which provide services to urban and rural microenterprises.
The support staff - Microbank Strategic and Technical Assistance - has the following responsibilities:

To transfer and adapt the practitioners' microcredit technologies and methodologies which have proven to be effective and efficient, for use by other practitioners.

Introduce and educate potential practitioners in microfinance best practices.

To encourage participants representing the corporate and financial markets to support, create and develop microbank operations.

To facilitate generation of an increasing supply of human resources specialized in microfinance.

To promote the specialization of microfinance support services in fields such as market consulting, human resources, computer systems, and training.

10.3 Funding: how to forge partnerships and obtain funds while ensuring autonomy

Foncap's bylaws allow the creation of new microcredit funds and new trustees. The initial US$40 million in stock is considered as seed money, available to match investments with other donors for the development of new funds to assist poor microentrepreneurs. These funds can be focused on regional (a microlending operation in a province) or sectorial criteria (e.g., poor women in the agricultural sector). The goal is to identify these regional and sectoral needs and set partnerships with corporations and NGOs with specific and local interests in developing these initiatives. The efforts for replication of Foncap's model across the country will encourage the decentralization process, ensuring more and more autonomy.

At this time Foncap does not consider it necessary to require institutional or commercial borrowing. Funding has not been a constraint so far. The real bottleneck is the capacity of microcredit programs to deliver services to the poor and poorest.

10.4 Policies for selecting partner MFIs

Strategies of credit program: Foncap intends to promote the Argentine micro-finance sector through the creation, strengthening and expansion of local microbanks. It also aims to create the infrastructure necessary to scale-up financial services to microentrepreneurs and to create a promising network of practitioners.
The most important thing for Foncaps' future, after building a new governance structure, is to strengthen its capacity of reaching the poor with financial services through sustainable partner organizations similar to the approach successfully taken up by PKSF in Bangladesh.

b) Eligibility criteria of MFIs to be funded:

The MFls who either directly or indirectly use resources of Foncap shall meet the following requirements:

To be part of the private or social sectors, showing an express commitment to the provision of services to microentrepreneurs;

To demonstrate an exclusive dedication to the provision of services to the microenterprise sector (by the Institution, or by a program of the Institution with separate and auditable accounting independent from other activities);

To have a core management team with exclusive dedication;

To adopt criteria of action which favor effectiveness, efficiency and the self-maintenance of the Institution or of the programs thereof:

To submit a Three-Year Action Plan which demonstrates: reasonable levels of technical knowledge for corporate leadership and management; quality of the organization to fulfill its objective; adequate physical environment for performing its activities; adequate methodology for technical, economic, financial and institutional evaluation of entrepreneurs to be financed and trained;

To hire an external auditing firm among those approved by the Board of Directors, to audit their balance sheets and their business performance;

To allow the National General Auditing Department or whoever the latter appoints within its budget estimates, acting as Auditor of Foncap management, to audit its balance sheets and business performance.

c) Accounting, Auditing principles: As discussed, the MFIs agree to be audited and monitored by Foncap's staff or outside contractors. Basically, Foncap performs three types of control:

Monitoring the development of the microcredit program according to the goals established in the Business Plan: this monthly exercise focuses on evolution of number of clients, outstanding portfolio, operational income and expenses, and all relevant information essential to determine the degree of accomplishment of activity level and operational self-sufficiency.

Auditing of portfolio quality: This exercise occurs 4 times a year and consists of checking the payment behavior of a representative sample of the outstanding clients of the MFIs. The results of this auditing process may lead to adjustments in MFI's credit methodology and amount of provision for bad debts.
Clients Auditing: This exercise occurs 4 times a year and consists in of checking the profile of the clients the MFI has in its portfolio. Foncap controls, in this way, if funds are reaching the poor microentrepreneurs or are being used in an illegal way.

d) Management of savings: Foncap has a neutral role with regard to this item. The mission of the microcredit fund is to develop a countrywide lending capacity to serve the poor and poorest microentrepreneurs.

e) Default management and performance evaluation of MFIS: The information provided by the MFIs and the reports from the auditors and monitoring personnel set the basis for performance evaluation that includes:

Channeling of funds to Foncap's target population. If the MFI does not fund poor microentrepreneurs, its contract may be terminated. Portfolio quantity analysis: amount of outstanding portfolio and number of clients. Portfolio quality analysis: determination of the amount of bad debts and its impact on the MFI's net worth. Analysis of the ratio liabilities/net worth: it must not exceed seven. Analysis of the audited operational income statement to check if self-sufficiency has been attained or is possible to be attained in a reasonable period. Foncap is developing measurement tools to evaluate the impact of microcredit on the poor and poorest.

10.5 Implementation strategies

a) Management Information Systems (MIS): The members of Foncap's Board have information available on Foncap and MFIs operations.

b) Human resource development: One of the Foncap’s main goals is to facilitate the generation of an increasing supply of human resources specialized in microfinance through training courses complemented with field work for practical and concrete experience.

c) Institutional Development: Through the support credit line, Foncap has made available an yearly amount of $4 million for creating capacity, institutional and financial sustainability of MFIs and also has additional resources to strengthen its own capacity. This type of loans, convertibles to grants, are demonstrating to be a powerful tool in order to reach financial sustainability and institutional strengthening for MFIs, specially those who are new comers.

d) Regulatory Framework: Foncap has developed a project to prepare a regulatory framework for the microcredit sector. Two consultants are engaged in this work. Foncap’s goal is to get a sanction from the government for a law setting a legal framework that will contribute to the consolidation of the microfinance industry.

Section 11. Local Initiatives Department in Bosnia - Herzegovina (Case Study)

11.1 The Local Initiatives Departments (LIDs) were established in 1996 to administer the World Bank-sponsored Local Initiatives Project. The LIDs are departments of government-created Employment and Training Foundations (ETFS) established in each of the constituent Entities of Bosnia and Herzegovina - the Federation and the Republika Srpska. The ETFs channel donor fund to employment-related programs. The LIDs operate with a great deal of autonomy within the ETFs and the LIDs from each Entity work in close cooperation and share certain functions and staff.

11.2 Implementation Arrangements

The LIDs operate as apex institutions. They channel donor fund to microfinance institutions (MFIs) that provide credit to target clients. The LIDs monitor the performance of the MFIs and make financing decisions based on performance. The LIDs also provide technical assistance and training to their partner institutions to help strengthen their institutional capacity and knowledge of microfinance best practices. And they work to establish a more favorable legal and regulatory environment for the legal establishment of MFIs in Bosnia.

Promotion of the Local Initiatives Project was carried out in early 1997, after a pilot project implemented by six NGOs during 1996. After an intensive screening process, the LIDs selected seventeen NGOs as implementing partners, twelve in the Federation and five in Republika Srpska. Contracts were signed with these organizations in the Federation in April/May 1997 and in the Republika Srpska in September/October 1997. Out of the 17 institutions, 14 are local and three are international non-governmental organizations.

MFIs are initially contracted as agents under a performance-based Agency Agreement. The LIDs provide loan capital to the MFIs to manage and on-lend to target clients. Financing for start-up capital investments and operating costs is also provided as a grant, on a declining basis. Technically, the LIDs own the loan funds, but the MFIs manage this lending capital as if it were their own. From the interest income earned, the MFIs cover losses, pay a fee to the LIDs for the use of their funds, and pay a growing portion of their operating expenses. This arrangement allows the LID to test out institutions' capacity and recover the loan capital in case of poor performance and bad repayment. It also provides a legal basis for such on-lending in an environment where NGOs have no explicit legal authority to lend.

11.3 MFI Performance

In late 1998, the LIDs carried out a performance assessment of their 17 partner MFIs based on institutional and financial criteria. The purpose was to assess which organizations had demonstrated the capacity to become sustainable microfinance institutions. All institutions have performed well. The number of active clients per MFI ranged from 150 to 1,500 with average outstanding porfolio ranging from DM250,000 (US$125,000) to DM2.2 million (US$1.1 million). MFIs had developed varying capacity for loan analysis, loan tracking and portfolio reporting, delinquency management, financial management and internal controls. Key performance indicators were also good:

Key Performance Indicators (average for 17 MFls)

Portfolio at Risk (past 30 days due)
1.92%

Write-offs (% of average outstanding portfolio)
0.66%

Cost per 1 DM lent
0.11

No. of loans per credit officer - individual lending
122

No. of loans per credit officer - group lending
210

Financial self-sustainability
68%

However, not all MFIs were able to meet the LIDs assessment criteria. Based on the assessment, the LIDs decided to continue financing five MFIs in the Federation and three MFIs in Republika Srpska.

11.4 Institutional Capacity Building

Supporting the institutional capacity building of the partners is one of the LIDs' main goals. Technical assistance and training have taken the form of seminars, study tours and technical advice.

During 1997-98, eleven seminars were held in the following topics: Principles and Methodologies of Microcredit; Credit Officer Training; Accounting and Financial Management; and Planning for Sustainability. Three study tours were also organized to Bolivia, Egypt and Poland.

The 1999 Technical Assistance program was designed based on the inputs of the MFIs provided during a participatory planning workshop held in December 1998. The program aims to reflect the MFIs' requests that TA is:

responsive and demand driven; provides continuity and consistency; and is tailored to individual organizations' needs.

The 1999 TA program comprises seminars, study tours and individual consulting in the following areas: information dissemination on microfinance best practice to all MFIs in Bosnia and Herzegovina; accounting and financial management training; study tours to Bangladesh, Colombia and Poland; management training; board development training; and training on the new legal framework and institutional development.

11.5 Legal and Regulatory Reform

A primary goal of the Local Initiatives Project is to create a clear legal and regulatory framework for the provision of credit and saving services to the self-employed and microentrepreneurs. In 1998, a participatory process was launched to develop such a framework with the support of the World Bank and USAID. Expert teams were established in each Entity comprising representatives from the microcredit practitioner community, the Ministry of Finance, the Banking Agency and the Local Initiatives Department.

By the end of 1998, a draft proposal had been developed establishing four legal forms:

Microcredit association (credit only, non-profit organization, no formal supervision) Finance company (credit only, for profit corporate entity, no formal supervision) Credit and savings association (membership-based credit and savings services, licensed and supervised by Banking Agency) Microfinance institution (credit and savings, corporate form, licensed and supervised by Banking Agency)

The draft proposal will be further discussed and presented to the government for consideration and legal enactment.

11.6 LID Portfolio Performance (December 31, 1998)

Total loans disbursed : 14,347

Total value disbursed : 41,373,660 DM (US$ 20,694,974)

Total no. of active clients : 8,864

Total portfolio outstanding : 149,467,435 DM (US$ 74,763,139)

The Local Initiatives Project has raised a total of US$ 19 million from the Governments of Australia, Italy, Japan, The Netherlands, Norway, Switzerland; World Bank; UNDP; and UNHCR. Over 70% of funds so far received have been used in the microcredit loan fund.

11.7 Future Perspective

The LID’s strategic goal is to support microfinance institutions that have demonstrated the capacity to reach financial sustainability and provide continued services to large numbers of low-income entrepreneurs.

All MFIs that meet mutually agreed performance standards will be eligible for capitalization by the LID as independent, financially viable microfinance institutions. These standards include:

a clear vision and commitment to low-income entrepreneurs viable strategic business plan an accounting system which meets international standards with internal controls. first loan less than 5000 DM (US$2500) and average loan size of less than 10,000 DM (US$5,000) Less than 5% portfolio at risk after 30 days Less than 3% write off (of average outstanding portfolio - annually) Less than 5% rescheduled loans within active portfolio Cover all costs from non-grant sources (i.e. income from operations) including loan loss reserve and the cost of funds adjusted for currently subsidized costs by donor 10 % of assets funded by local resources other than retained earnings.

LIDs will study to learn more about the impact of these loans on the clients' businesses and their family income and well-being, as well as to learn more about other constraints facing self-employment and microenterprise development. The LIDs will also continue to work on putting in place an appropriate legal and regulatory framework for MFIs.

References

The Role of An Apex Financial Institution to Finance Micro Credit Programs: The Palli Karma-Sahayak Foundation (PKSF) in Bangladesh by Dewan A.H. Alamgir, CDF/CGAP, Dhaka, 1997.
PKSF, Annual Report 1997-98.
The World Bank, Staff Appraisal Report : Bangladesh Poverty Alleviation Microfinance Project, August, 1996.
FONCAP S.A – Fondo de Capital Social; Various Reports.
LOCAL INITIATIVES PROJECT: Microenterprise Lending in Bosnia and Herzegovina; Report dated January 1999.

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