Ms Chhun Pen from Banteay Meanchey, Cambodia. Photo by Mak Remissa
Concern Worldwide’s
Microfinance Policy
Concern Policies
• Greater participation leads to greater commitment.
Concern is a voluntary non-governmental organisation devoted to the relief, assistance and advancement of people in need in less developed areas of the world.
• Democracy accelerates development.
Concern believes in a world where no-one lives in poverty, fear or oppression; where all have access to a decent standard of living and the opportunities and choices essential to a long, healthy and creative life; a world where everyone is treated with dignity and respect. Its mission is to help people living in absolute poverty achieve major improvements in their lives which last and spread without ongoing support from Concern. It will work with the poor themselves and with local and international partners who share its vision of democratic and just societies. To achieve this mission Concern engages in long-term development work, responds to emergency situations and undertakes development education and advocacy on those aspects of world poverty which require national or international action. Concern’s core values derive from a single central value: Concern must target its work so that those living in extreme poverty benefit to the greatest possible extent. Other values are subsidiary to this central value: • Respect for people comes first. • Gender equality is a prerequisite for development. Microfinance Policy
• Development is a process, not a gift.
• Emergencies call for rapid response. • The environment must be respected. • Good stewardship ensures trust. • Experience is the best teacher. • All governments have responsibility for poverty elimination. Concern’s work is guided by a series of policy documents which are translated into practice through the implementation of Organisational and Country Strategic Plans and Organisational Programme Plans. Country Plans are operationalised through projects designed using Concern’s Project Cycle Management Process. Concern has a range of policies: • General Policies. • Programme Approach Policies. • Programme Sector Policies. • Resource Policies. • Programme/Project Management Policies. Details of policies approved by Council are listed inside the back cover. The policies have been written to complement each other. For example, in its Health Policy Concern states that it will help to build the capacity of local government health services and that the approach to be used will be found in the Capacity Building Policy. Its general approach and resource policies cover all sectors. All policies are dynamic and are reviewed from time to time.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
Contents Microfinance Policy Summary Glossary
i iii
1. Introduction
1
2. Policy Environment 2.1 HIV/AIDS 2.2 Donors 2.3 Regulation 2.4 Technological Innovation 2.5 Industry Confidence
1 2 2 2 2 3
3. Concern’s Experience to Date
3
4. Concern’s Microfinance Policy 4.1 Policy Aim 4.2 Reaching those Living in Absolute Poverty 4.3 Interventions Partnerships with MFOs 4.4 4.4.1 Commitment 4.4.2 Structure 4.4.3 Governance and Management 4.4.4 MFO Best Practices 4.4.5 Relationships and Capacity Building 4.5 Delivery Mechanisms 4.5.1 Products 4.5.2 Savings 4.5.3 Loans 4.5.4 Other Financial Services 4.5.5 Microfinance and Other Development Services
3 4 4 4 5 5 5 5 6 6 6 7 7 7 8 8 9 9 9 9 10 10 11 11 11 12
6. Concern’s Capacity and Learning
12
7. Review Process
13
Concern Worldwide Microfinance Policy: Approved by Council March 2004
Microfinance Policy
5. Programme Approaches 5.1 Sustainable Livelihoods 5.2 Equality Microfinance, Rights and Advocacy 5.3 5.4 Emergencies and Microfinance 5.5 HIV/AIDS Programme Monitoring and Evaluation 5.6 5.6.1 Effectiveness of Services 5.6.2 Financial Performance 5.6.3 MFO Competence
Microfinance Policy Summary Introduction Over the last twenty years the poorest people in the world have proved that they can save and that they are credit worthy. Even so, those living in poverty, and especially women, are usually subject to economic and social forces which exclude them from microfinance services. Concern believes that the poor should have access to microfinance services to assist them to lift themselves out of poverty. Microfinance is characterised by the frequency and small size of transactions and by the absence, in most cases, of physical collateral. Microfinance services can include savings, credit and loan insurance. They may also include facilitation of access to insurance such as health and crop insurance, encashment of foreign remittances and other services. In order to increase access for the poorest to microfinance, Concern’s interventions will include policy advocacy, mobilisation of the poor and support to microfinance organisations (MFOs).
Policy Environment
Microfinance Policy i
Provision of microfinance for the poor has become a major development sector. By the end of 2002 just over two thousand microfinance organisations had reached a combined total of fifty-five million clients with a current loan. When they first took a loan, twenty-seven million of these clients, including twenty-one million women, were in the bottom half of those living below their country’s poverty line. The microfinance sector faces a major challenge in terms of the threat to all development progress caused by HIV/AIDS. Computerisation offers scope for reduction of administrative costs and hence for increasing sustainability of MFOs. Increasingly stringent regulation by southern governments has the potential to ensure security for clients but may at times lead to excessive bureaucracy.
Policy Aim Concern’s microfinance policy aim is to enable people living in poverty to achieve their basic human rights by reducing their vulnerability and increasing their incomes through increased access to efficient, responsive and sustainable microfinance services. Concern will be as rigorous in microfinance targeting as it is in all other aspects of its work and will therefore target those living in absolute poverty. Special attention will be paid to women. Characteristics of microfinance which make it attractive to the poorest are: • Convenience and lack of bureaucracy. • Openness and clear accountability. • No need for physical/financial collateral. • Frequent and small transactions. • Client-driven and environmentally appropriate approach. • Sensitivity to gender relations.
Interventions A decision to make a microfinance intervention and the selection of the most appropriate intervention can only be made following a broad livelihoods analysis. Concern is a promoter rather than a provider of microfinance and hence the order of preference for the provision of financial services is: 1. Creating a link between the target group and an existing well established and sustainable MFO, or supporting those who are developing links between the target group and such MFOs. 2. Strengthening existing MFOs already on course to achieving institutional sustainability. The need to support such MFOs typically arises where such existing providers are not reaching Concern’s target group. Such support should be for a limited period until sustainability has been achieved.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
3. Developing emerging MFOs. Such MFOs should grow or plan to grow at a solid pace while developing the capacity for continued sustainable growth without continuing external support.1 In assisting MFOs Concern will consider being a shareholder long enough to enable the organisation to achieve sustainability. Concern will ensure that all interventions strive for best practice to ensure that products are suitable for its target group and that the providing organisations are sustainable.
Programme Approach Concern’s approach will be to work towards sustainable livelihoods, to promote equality between women and men and to use advocacy to uphold the rights of those most in need of services. It will seek to develop appropriate responses to the challenge posed to microfinancial services by the HIV/AIDS pandemic.
Microfinance Policy
1
Adapted from: Alain Plouffe, 2001,Young and Promising Microfinance Institutions.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
ii
Glossary2 Accounts Officer This term (as also the terms agent, loan officer, and mobiliser) refers to field personnel who interact regularly with the client, and not to administrative staff or cashiers. An accounts officer is the staff member who is directly responsible for arranging and monitoring a client’s loans and in some cases her/his savings. Accounts Officer Productivity measures the average client caseload of each accounts officer. This is a common measure but it is difficult to compare MFOs when their definitions of an accounts officer vary. MFOs should explain their particular definition. Business Plan Business planning is an essential management function that includes two closely related processes3: a) Strategic planning, which establishes the MFO’s mission and goals, assesses the current situation and develops an overall strategy for the future. b) Operational planning, which provides an implementation plan for the proposed strategy and typically includes development of detailed financial projections. CGAP The Consultative Group to Assist the Poorest is a consortium of 29 bilateral and multilateral donor agencies supporting microfinance. CGAP serves microfinance institutions, donors and the microfinance industry through the development of technical tools and services, the delivery of training, strategic advice and technical assistance and also action research on innovations. Its website is at www.cgap.org
Microfinance Policy
Client The person accessing microfinance services. For clarity, other terms such as ‘participant’, ‘user’, ‘member’ are subsumed under the term client in this policy document. Cost Per Borrower A meaningful measure of efficiency for an MFO, allowing it to determine the average cost of maintaining an active borrower or client. It is calculated as follows: 2
iii
This glossary is based on definitions adapted from the following a) Joanna Ledgerwood, 1999, Microfinance Handbook: A Financial and Institutional Perspective; b) SEEP, 2002, Definitions of Selected Financial Terms, Ratios, and Adjustments for Microfinance;, c) 1998, Chuck Waterfield, 1998, Management
Operating expense Average number of active borrowers Cost Per Currency Unit Lent A benchmark for looking at efficiency over a period of time (e.g. 1 year) which is also used for making comparisons with peer MFOs. Collateral Traditionally, collateral such as property, land, machinery and other fixed assets have been used to secure loans. In microfinance, alternative forms of collateral are common and include group guarantees, compulsory savings, nominal assets and personal guarantees. Delinquency Unsatisfactory repayment performance. It is the cumulative position of all loans where repayment is more then one day late. Depth of outreach The poverty level of clients reached by an MFO. Empowerment The situation whereby individuals acquire the power to think and act freely, to exercise choice and to fulfil their potential. Equality The exercise of equal rights and entitlements leading to fair and just outcomes which enable women to have the same power as men. Equity Equity is distinct from equality in that it underlines the rights of women to define the objectives of development for themselves, and to seek outcomes not necessarily identical to those enjoyed by men but instead reflecting women’s different needs and aspirations. Financial Capital The financial resources used by people to achieve their livelihood objectives. These resources include available stocks such as savings and regular inflows of money. Remittances are a common type of inflow. Financial Sustainability measures how well an MFO can cover its costs taking into account a number of adjustments to operating revenues and expenses. The purpose of most of these adjustments is to model how Information Systems: A Handbook; and d) DFID, 2001, Sustainable Livelihoods Guidance Sheets, ‘Glossary’ 3
Shirley A. Lunde, 2001, Using Microfin 3, Technical Series No. 2, CGAP.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
well the MFO could cover its costs if its operations were unsubsidised and it were funding its expansion with commercial-cost liabilities. Group-based Lending Provision of credit involving the formation of groups with a common wish to access financial services. It often includes group guarantees. Human Capital The skills, knowledge, good health and capacity to work that together enable people to pursue different livelihood strategies and to achieve their livelihood outcomes. Loan Write Off The percentage of the loans removed from the balance of the gross loan portfolio because they are unlikely to be repaid. This is calculated as follows: Value of loans written-off Average gross loan portfolio MFO or Microfinance Organisation Any organisation which provides microfinancial services to low-income clients. MFOs include regulated microfinance institutions; NGOs and banks providing micro-financial services; non-regulated and informal service providers; member-based organisations such as credit unions and cooperatives. Microfinance Financial services such as savings and loans involving small amounts to low-income clients, including the self-employed.
Operational Sustainability measures how well an MFO can cover its costs through operating revenues. In addition to operating expenses, it is recommended that financial expense (cost of borrowing funds), where applicable, and loan loss provision expenses are included in this calculation as they are normal (and significant) costs of operating. Operating & Efficiency Ratios Calculations providing information about the rate at which an MFO generates revenue to cover expenses. Portfolio at Risk (PAR) The most accepted measure of portfolio quality. PAR is the outstanding principal amount of all loans that have one or more repayments of principal overdue by a certain number of days. When referring to PAR, the MFO should always specify the number of days the payments are in arrears, for example, some MFOs include loans that are one day late and others include loans that are 30 days late. Portfolio in Arrears Ratio measuring the amount of loan principal due but not received. It does not include overdue interest. This item is also known as total arrears and should not be confused with portfolio at risk. When used alone, this method tends to understate the real level of portfolio risk. Portfolio Quality Indicators Calculations providing information on repayment performance on outstanding loans. Social Capital The formal and informal social relationships (or social resources) from which people can draw various opportunities and benefits in their pursuit of livelihoods. It includes those features of social organisation, such as networks, indigenous organisations, norms and trust, that facilitate coordination and cooperation for mutual benefit.
Natural Capital The natural resource stocks (e.g. trees, land, clean air, coastal resources) upon which people rely.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
Microfinance Policy
MIS A Management Information System (MIS) is the series of processes and actions involved in capturing raw data, processing the data into usable information and then disseminating the information to users in the form needed. An MIS is not simply a computer programme and it involves more than just calculating numbers. Information management is first and foremost people communicating with one another about events that affect the work of their organisation. Accounting and loan tracking are core elements of an MIS.
NGO is an abbreviation of non-governmental organisation.
iv
1. Introduction Concern knows from experience that microfinance can unleash the human dynamism and creativity which so many poor people possess, enabling them to achieve marked social and financial progress. Over the last twenty years the poorest people in the world have demonstrated that they can save and that they are credit worthy. Recovery rates in microfinance schemes are generally much better than in traditional commercial banking. Even so, those living in poverty, especially women, are usually subject to economic and social forces which exclude them from microfinance services. Concern believes that the poor should have access to microfinance services to assist them to lift themselves out of poverty. Microfinance services can include savings, credit and loan insurance. They may also include facilitation of access to insurance such as health and crop insurance, encashment of foreign remittances, and other services. Microfinance is characterized by the frequency and small size of transactions, and by the absence, in most cases, of physical collateral. In order to increase access for the poorest to microfinance, Concern’s interventions will include policy advocacy, mobilization of the poor and assistance to microfinance organisations (MFOs).
Microfinance Policy 1
All organisations providing any microfinance services to poor people, or groups of poor people, are considered to be MFOs. They include non-regulated and informal service providers, banks and memberbased organisations such as credit unions and cooperatives. International or local NGOs conducting microfinance operations come under the umbrella of microfinance organisations and are subject to this policy (such as those services currently provided by Concern in Bangladesh). The reason for this is to ensure that clients benefit from the development of appropriate and sustainable services. MFOs may be providers of funds and services only or both receivers and providers. Thus many small microfinance organisations borrow from banks and lend to their members or groups of members.
This policy, which guides Concern’s involvement in microfinance, has been developed in the light of its experience over many years in several countries. It is rooted in its core values, especially those relating to targeting poverty, participation, gender equality and good stewardship. It has emerged from a comprehensive and widely consultative review of the first Microfinance Policy Document. It confirms Concern’s commitment to microfinance, while not seeing it as a solution to all the problems of the poor, nor indeed as appropriate for all poor people. That commitment is founded on Concern’s experience that microfinance is a powerful tool which can assist many absolutely poor people to achieve sustainable improvements in their livelihoods.
2. Policy Environment Microfinance has for some time been an important factor in commercial private sector development. It is now a major development sector focused on poverty alleviation. By the end of 2002 just over two thousand microfinance organisations had reached a combined total of fifty-five million clients with a current loan. When they first took a loan, twenty-seven million of these clients, including twenty-one million women, were in the bottom half of those living below their country’s poverty line.4 The Consultative Group to Assist the Poorest5 (CGAP) found that several agencies were implementing programmes in which 50-60% of new clients were in the bottom economic third of their community. In one of the programmes, an even higher percentage of new clients were living on less than $1 day purchasing power parity.6 Such programmes contribute directly to the International Development Target of halving by 2015 the percentage of people living in absolute poverty. Even so there are many situations where the poor do not benefit from any form of microfinance and suffer from the following problems: 4
Sam Daley-Harris, 2002, State of the Microcredit Campaign 2002 p.3. The Microcredit Summit verified the data of 211 institutions representing 21,806,559 of the poorest.
5
CGAP is a consortium of 29 bilateral and multilateral donor agencies supporting microfinance development.
6
Sam Daley-Harris, 2002, State of the Microcredit Campaign 2002, p. 4.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
• Lack of savings so that they have to avail of usurious credit to meet urgent needs. • Indebtedness which may lead to loss of assets, bonded labour and so on. • Difficulties in raising physical collateral. • Lack of money to invest in income-generating activities. There are several major factors in the external environment which impinge on the development of microfinance for the absolutely poor. These include HIV/Aids, donor funding, regulation and technology.
2.1 HIV/AIDS At the end of 2003 there were more than 40 million people infected with HIV/AIDS worldwide, 95% of them in developing countries. Over 28 million sufferers were living in Africa. Infection rates within an MFO normally mirror those of the wider community, with the result that HIV/AIDS affects all MFOs supported by Concern. The effects are twofold. The condition leaves people unable to support themselves and their families and makes it difficult for them to access credit or repay loans. It also reduces fitness for work and, through high mortality levels, increases staff turnover. As MFOs are staff intensive organisations, these human resource effects create serious difficulties.
2.2 Donors
7
Doug Pearce, Investors in Africa, see http://www.microfinancegateway.org/extra_investors.htm.
2.3 Regulation Regulation is the set of government rules that apply to microfinance. It is usually administered through the Central Bank and compels organisations to conform to financial sector norms. For previously unregulated organisations this generally entails significant transformation. More countries are moving to regulate microfinance service providers. Often the introduction of regulation means that Concern must either create or support a formal independent MFO, or not get involved in microfinance at all. Regulation typically authorises a licensed MFO to capture and on-lend savings and improves its access to commercial funds. However, weak supervision means that many MFOs attain a licence when in fact they are insolvent and unsustainable. A government may provide an additional regulatory framework for cooperatives and/or credit unions outside the jurisdiction of the Central Bank. In many countries the emergence of regulation is compelling microfinance service providers to confront issues of ownership, governance and risk management. In addition to promoting a high level of protection for clients, regulation can stimulate the growth of microfinance services. An example of this is provided by the Indian Government’s promulgation of instruments to facilitate widespread lending to informal self-help groups without the need for physical collateral. To support these instruments, funds are being provided to commercial banks to refinance such lending.
2.4 Technological Innovation This has begun to affect MFOs and will almost certainly revolutionise microfinance in Africa and Asia in future years. The use of hand-held computers, Debit Cards, Smart Cards and laptops reduces costs and increases speed and overall efficiency. This, allied to 8
Microfinance Policy
By funding capacity building and technical assistance to MFOs not yet attractive to investors but with the potential to reach sustainability, donors can play a key role in improving the level of access to services.7 However, most donor funds are concentrated in a few countries and on a few strong and/or nearly sustainable MFOs with a good track record. Other donors fund MFOs or projects with very limited potential for sustainability, while more promising candidates face funding shortages. The current levels and concentration of funding means that many potentially
strong MFOs do not get the support necessary for rapid increase in the number of poor people being served.8
2002, Helping to Improve Donor Effectiveness in Microfinance: Water, Water Everywhere, But Not a Drop to Drink CGAP Donor Brief No. 3.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
2
the consequent possibility of providing new services, enables MFOs to attract more clients.
are instances where competition has led to better services.
Electronic Management Information Systems (MISs) for accounting and loan tracking have also developed rapidly. The CGAP website now has overviews of twenty-eight different systems.9
• Failure of institutions which are not well managed financially. This can lead to non-collection of outstanding loans, which leads to lowered credit discipline with other institutions and loss of savings. Such loss causes hardship and reduces client confidence.
2.5 Industry Confidence The success of many MFOs has generated confidence that the poor are credit worthy and can use microfinance to lift themselves out of poverty. Impact data from microfinance services supported by Concern has revealed that clients’ incomes, their ability to cope with shock and their social standing have advanced more rapidly than those in control groups. Against this policy background, and in order to expand the numbers of poor people getting access to microfinance, there has been a strong industry-wide trend in recent years towards higher levels of professionalism, commercialisation and scaling up, on the one hand, and towards small-scale innovative experiments on the other. The major issues in providing appropriate services to the poorest include: • High administrative costs relative to the amount of each transaction. This is especially a problem in remote areas with low population densities and resulting low levels of economic activity. It is also a problem when dealing with small individual loans.
Microfinance Policy
• Need for improvements in other services which can support the effectiveness of microfinance. These include education and health services, markets and communications. In some cases there is a need for coordination between services with differing objectives. • Saturation of markets by MFOs in some cases, particularly in heavily populated areas. This has brought with it more aggressive, competitive behaviour which can result in poorer financial discipline and over-borrowing which in turn disadvantages the client. On the other hand there 9
3
3. Concern’s Experience to Date Responding to underemployment and providing a stimulus to rural households in particular, Concern has been delivering microfinance services for the past fifteen years. By the end of 2003, Concern’s support to microfinance services included outreach in seven countries to 75,000 clients of whom 87% were women. The clients were mainly survivalists and micro entrepreneurs. Two thirds of the clients were in rural areas. The services were mainly credit or savings with an average loan size of 52 dollars. Concern works with community based organisations, cooperatives and dedicated microfinance institutions, as well as directly implementing financial services. Concern has become an industry leader in the area of research and innovation of microfinance in post conflict environments. Concern’s commitment to working with disadvantaged populations has influenced partner organisations to maintain and develop pro-poor methodologies. Demand for Concern support remains strong and clients are generally extremely satisfied with the services because they provide concrete opportunities to develop their livelihoods.
4. Concern’s Microfinance Policy This policy is consistent with the Values, Vision and Mission of Concern and sets the framework for the development of microfinance as a sub-programme of the Organisational Livelihoods Programme.
www.cgap.org.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
4.1 Policy Aim
4.3 Interventions
The microfinance policy aim is to increase access for our target group to efficient, effective and responsive MFOs. This is to enable them to achieve their basic human rights by reducing their vulnerability and increasing their incomes.
A decision to intervene, and the selection of the most appropriate intervention, can only be made following a broad livelihoods analysis. When a community identifies access to microfinance as a priority, an indepth assessment of a number of factors must then be made. These include:
4.2 Reaching those Living in Absolute Poverty Concern will be as rigorous in microfinance targeting as it is in all other aspects of its work and will select MFO partners who are committed to targeting those living in absolute poverty. Special attention will be paid to women. As clients benefit from microfinance, their economic standards will improve towards the point where they can escape from absolute poverty. It is very difficult for an MFO to draw hard and fast lines between those in absolute poverty and those just above it. However, Concern is committed to supporting partner MFOs to direct 50% or more of savings services and loan funds into reaching clients who are living on less than $1 per day purchasing power parity when they first become clients of the MFO. To ensure that this commitment is met, Concern will support partners to fully understand the livelihood circumstances of marginalised and excluded groups so as to develop and use cost-effective targeting tools and strategies as well as financial products and services which deepen their poverty outreach as much as possible. Characteristics of services which attract the poorest include:
• Openness and clear accountability. • No need for physical/financial collateral. • Frequent and small transactions. • Client-driven and environmentally appropriate approach. • Sensitivity to gender relations.
• Demand for microfinancial services. • The economic activity and/or opportunities of the target group. • Existing bank and non-bank financial services and the target group’s access to these. Until the environment is shown to be appropriate for microfinance, Concern will not support microfinance interventions except to help to create conditions, such as economic activity and good regulation among the target group, which will enable the development of appropriate microfinance. It is inappropriate for Concern, as an external agency, to act as a banker for the poor.10 Concern will therefore consider involvement in any intervention which creates effective access to relevant microfinance for our target group. Such interventions may include advocacy for improvements to the policy environment; promotion with the target group of the relevance of microfinance; support to MFOs rather than the provision of financial services; and support to appropriate non-financial support services. In short, Concern is a promoter rather than a provider. Concern’s order of preference for the provision of financial services is: 1. Creating a link between the target group and an existing well established and sustainable MFO, or supporting those who are developing links between the target group and such MFOs.
10
Microfinance Policy
• Convenience and lack of bureaucracy.
• The wider environment including pertinent political, economic, social, technological and legal factors.
In the past Concern has undertaken the role of banker and so must now develop exit/handover strategies in those programmes where this role is currently being performed.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
4
2. Strengthening existing MFOs already on course to achieving institutional sustainability. The need to support such MFOs typically arises where they are not yet reaching Concern’s target group. This support should be for a limited period until sustainability has been achieved.
Commitment to and success in delivering financial services in an efficient, responsive and financially sustainable manner. This means that clients should not have to pay the unnecessarily high cost of inefficient operations and that sustainability is planned from the start.
3. Developing new or emerging MFOs. Such MFOs should grow or plan to grow at a solid pace while developing the capacity for continued sustainable growth without continuing external support.11 An example is AMK in Cambodia.
Commitment to enhancing movement out of poverty. MFOs should promote cost-effective ways to track and enhance the impact of their programmes on clients.
In assisting MFOs Concern will consider being a shareholder for a sufficient period to enable the organisation to achieve sustainability.
MFOs are generally owned by one or a combination of the following; members, shareholders, NGOs and employees. Owners appoint the governors. Concern will work to develop forms of ownership of partner MFOs which promote the widest and deepest possible outreach.
Concern will support innovations to extend the frontiers of microfinance in terms of depth of outreach, geographical outreach and effectiveness in unfavourable environments such as conflict-affected areas. Innovations will be conducted on a pilot basis and will be supported by intensive research and monitoring. They will be documented in such a way as to disseminate learning to the wider microfinance community. Concern will create a long-term strategy for each intervention. It will include financial and social objectives, the necessary technical and financial support and timescales for all of these. It will also include risk assessment and management as well as an exit strategy. Replication of individual microfinance interventions will only be encouraged where it has been shown that MFO sustainability and positive impact for clients can be achieved. Microfinance Policy
4.4 Partnerships with MFOs As the preferred options are to facilitate services through partners it is important to define the essential features of intended partnerships.
4.4.1 Commitment There is a common commitment to a twofold approach to microfinance:12 11
5
4.4.2 Ownership
In working on structural issues with partners Concern will avoid structures designed to avoid regulation, as this may increase risk for clients.
4.4.3 Governance and Management Effective governance is one of the key challenges facing the microfinance sector. Governance is the process by which a board of directors, through management, guides an institution in the fulfilment of its mission and protects the institution’s assets.13 With self-governing bodies, the board of directors is made up of member clients and others who are nominated by the membership body (known usually as the General Assembly). The appropriate governance structure is dependent on a variety of factors, such as remoteness and population density. As good governance and management are critical to success in achieving sustainability, the governance and management structure must be clearly defined. Concern will support the strengthening of management and governance of MFO partners, and especially of community-based MFOs. Such MFOs are normally most suited to remote rural areas. 12
Adapted from Sam Daley-Harris, 2002, State of the Microcredit campaign 2002, p.16.
13
M. Otero, 2001, Governance and Ownership of Microfinance Institutions p. 1.
2001, Adapted from A. Plouffe, Young & Promising MFIs.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
4.4.4 MFO Best Practices Best practices are the principles, practices and procedures used by those MFOs which have been successful in achieving operational sustainability and social impact.
4.4.5 Relationships and Capacity Building In developing partnerships Concern will work closely with partners to define the following:
• Trust in and close relationships with the client.
• Concern’s relationship with client groups. As Concern will not directly provide finance to clients this will centre around poverty assessments and monitoring of effectiveness.
• Motivation and training of staff.
• Responsibility for policy, advocacy and research.
• Reliability and professionalism in financial service provision and long-term commitment.
• The support elements that Concern can provide to its partners. They could include one or more of the following:
Such success comes from good performance in the following areas:
• A clearly defined client group, geographic area and a selection process based on repayment capacity, character assessment and collateral substitutes rather than physical collateral. • Loan policies which include sufficiently high interest rates to cover costs and to ensure growth of capital. • Designing the frequency and size of payments to suit the resources and needs of the target group. • Allocation of responsibility for disbursement and collection to loan officers. • Fast response time to ‘alarm signals’ indicated by delinquency. • Incentives to reward those who pay on time and penalties for late payments. • A broad-based product portfolio which helps to minimise risk.
Partner selection will involve assessment of performance in these areas and interventions will help to improve performance. Concern will strive to ensure that the simplest effective processes and standards possible are used.
• Institutional strengthening including research and development. • Financing of operational expenses. • Provision of loan fund or matching funding (e.g. of interest revenue generated to grant donation). • Loan guarantee mechanism. • Facilitation of a sustainable relationship between partner and clients. • Advocacy. Concern will seek to assist MFOs to develop their capacity and improve the professionalism of their services. This may entail audits; executive and managerial training; use of management accounting and internal audit tools; assistance in elaborating strategic and business plans.
4.5 Delivery Mechanisms The most appropriate mechanism(s) will depend upon the local context and consideration of cost effectiveness and MFO partner capacity. Group-based savings and lending methodologies, and some individual lending methodologies, have in general proved to be effective both in terms of
Concern Worldwide Microfinance Policy: Approved by Council March 2004
Microfinance Policy
• An always up-to-date and reliable Management Information System (MIS) providing timely information on the performance of the financial portfolio.
• Methodological assistance.
6
reaching the poor and achieving good repayment performance. However, certain contextual factors need to be taken into account, including population density (which when very low, as in Sub-Saharan Africa, can increase transaction costs) and the strength of social networks. The specific methodology applied must be based on the local demand, the nature of social capital and the external environment.
4.5.1 Products At a minimum both savings and loan products should be focused on reducing risk and vulnerability of the client. Where possible they should also be aimed at increasing income. It is probable that savings may be more appropriate for the poorest people but this is not always so. As circumstances change, MFOs may need to adapt or develop their financial products. Any alteration to product design should be client driven, take into account the financial self-sufficiency of the organisation and be clearly understood by all parties. Key products for those living in poverty are outlined here below.
4.5.2 Savings
Microfinance Policy
These are a vital part of any microfinance intervention. They are useful to clients as a reserve for emergencies and/or a means of accumulating a significant amount of capital. They are important to the MFO as a means of building working capital and of broadening and deepening outreach. They may be voluntary, whereby clients save and withdraw their savings as they wish, or compulsory, whereby access to a loan is contingent on clients saving a certain amount in advance or whereby membership of a loan group is tied to regular, locked savings. The MFO can use mobilized savings as a revolving fund for on-lending, if it is legally allowed to do so, or for use by the savings group. Savings may also be viewed as de facto collateral for loans. However, the use of compulsory savings as collateral restricts flexible access to savings which poor clients often value most.
distinguish clearly between compulsory and voluntary savings. In general, the savings of the poorest are small and come in uneven trickles. Concern will encourage partners to focus on pro-poor savings mobilisation strategies that allow for frequent deposit making, flexible withdrawal and flexible transaction amounts. Where possible, interest should be paid on deposit accounts to encourage clients to save. On-lending of savings will be necessary if interest is to be paid to savers, or if the cost of savings mobilisation and safekeeping is to be recouped. Such on-lending raises the question of protecting the savings. Partner MFOs should pay special attention to the protection of savings, which is often regulated by government policy or law. In the absence of such legislation, savings should only be on-lent if there is an adequate savings reserve arrangement.
4.5.3 Loans These must be designed in order to be appropriate to the needs of the target group, while also taking into account implications for financial sustainability. During design, attention must be given to: • Loan size. This should be based on demand rather than supply considerations. • Loan use. The customer should decide this, but the MFO should ensure that loan terms and conditions encourage productive loan use and that loans are not used for non-ethical purposes or for environmentally damaging practices. • Guarantees and collateral substitutes. These should be developed around social and character based models so as to eliminate, or at least to reduce, the need for asset-based collateral. • Interest rate and/or service charges. These should be realistic both in terms of achieving financial sustainability and attracting clients. • The size and frequency of repayment. These can be designed to minimise delinquency.
For good financial management it is important to
7
Concern Worldwide Microfinance Policy: Approved by Council March 2004
organisations provide separate but coordinated services. For example an MFO provides microfinance services in coordination with a government-run health team providing vaccination services after a microfinance meeting.
• Diversity of loan types. Diversity helps to reduce portfolio risk.
4.5.4 Other Financial Services Insurance, currency exchange, dividends on savings and cash transfer can be valuable services for poor clients. All must be developed within existing legal frameworks and may be most easily arranged by working with existing large-scale service providers. For example small MFOs do not normally have the capacity or capital needed to develop and deliver insurance products, and it is therefore more effective for them to link to competent, recognized insurance providers. The exception to this is loan insurance, which is a relatively straightforward product to design and manage.
4.5.5 Microfinance and Other Development Services The provision of microfinance together with other development interventions may make it more difficult for independently-owned MFOs to generate a strong repayment culture and create a sustainable service. It will lead to complications in separating costs and charges for financial and non-financial services. In most cases it is unlikely that interest charges and fees will generate sufficient surplus to cover the cost of nonfinancial services. However, some specialist agencies have shown that objectives of sustainability and scale can be met while providing access to additional services. This is known as an integrated approach to microfinance. It can be delivered in one of the following ways:
• A unified approach whereby the accounts officer provides two services such as microfinance and literacy training.
Concern recognises that providing an integrated service is highly challenging and should be considered only when the following criteria are met: • A clear demand for such non-financial services is identified in market research, and subsequent client satisfaction or impact surveys show significant added value of the additional service. • It is judged that Concern’s partner has or can develop the expertise for effective delivery of all the services. • It is calculated that the microfinance provider can become financially self-sufficient in 5-10 years from start-up date.14 • There is additional funding for the non-financial activities. If the criteria outlined above are met, Concern will support MFOs providing public messaging, unified services (such as literacy or primary health care) and linking the MFO clients with other service providers. Concern particularly encourages all partner MFOs to deliver basic messages on issues relating to HIV/AIDS as this should not add significantly to costs and is in the best interests of both clients and the institution. Concern will not support MFOs to provide services that routinely provide handouts or heavily subsidised goods. While there are notable exceptions, it has normally proved impossible to maintain good credit discipline when providing both types of service. 14
• Through linking services whereby two separate
Microfinance Policy
• A public messaging approach whereby the MFO uses the forum of a finance meeting to deliver development-orientated messages especially on issues relating to critical illness and disaster preparedness.
• A parallel approach whereby the one organisation provides more than one service from more than one department. An example of this is an NGO supplying microfinance services while also running schools through a different department.
In certain cases, such as those affected by conflict, reaching the poor on a sustainable basis may take 10 years or longer.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
8
5. Programme Approaches Greater detail relating to the approaches outlined below can be found in other Concern policy and strategy documents.
5.1 Sustainable Livelihoods Livelihoods result from access to a mix of tangible physical, financial and natural resources, as well as human, social and political resources. They are constrained by vulnerability to economic and environmental shocks and conflict as well as government capacity and national and international policies and processes. Microfinance organisations are concerned in the first instance with building financial capital. The more progressive are also concerned with the development of human and social capital. An important challenge to all MFOs is to promote the preservation of natural capital. Traditionally, it has been held that this broader focus would divert them from financial sustainability. However, over the last five years numerous MFOs have demonstrated that they can reach really poor people while achieving financial sustainability. The goals of widespread improvements in sustainable livelihoods and sustainability of microfinance organisations have been shown to be mutually reinforcing. This link is significant in the context of Concern’s aim to facilitate the provision of microfinancial services to progressively larger numbers of poor people while at the same time enabling them to grow away from dependence on donor funding. It provides the logic for Concern, including microfinance in its Livelihoods Programme. Microfinance Policy 9
5.2 Equality In Microfinance Concern will promote equality of opportunity and gender of those living in poverty. While women’s advancement can be promoted through microfinance it is by no means automatic, and indeed negative effects may occur. Therefore in all its work Concern will take into account the roles of men and women, and service providers will be expected to
monitor the impact of their work on gender roles and equity. Microfinance services supported by Concern will seek to be unbiased on ethnic and religious grounds. However, Concern will support a skew of services towards those living in absolute poverty and will accept biases which may emerge as a result of this.
5.3 Microfinance, Rights and Advocacy While the right to credit is not an internationally accepted right, the poor can use credit to attain many of the human rights enshrined in international agreements. Lack of access to credit may contribute to many basic rights being denied. Policies and programmes developed in isolation from the poor, or with poverty elimination tacked on as an afterthought, inevitably lead to the poor becoming worse off or falling further behind economically and socially. Such impacts may lead to discrimination against the poor in the allocation of international aid and government resources, and thus violate internationally accepted concepts in relation to nondiscrimination, gender, and the right to development. Concern will help its microfinance partners and target groups to obtain a fair share of public resources, to have a role in policy development and to campaign for pro-poor financial sector polices and financial processes. All clients should have a right to fair treatment from MFOs. In some cases, clients can feel undue pressure to borrow and ultimately may have their means of livelihood threatened due to difficulty in making repayments.15 They may not always be aware of the extent of their credit commitments or the value of their savings. Concern will encourage partner MFOs to develop a Code of Practice for Client Protection16 in consultation with clients and their communities.
15
Patrick McAllister, 2003, Adapted from a presentation: Consumer Protection.
16
SEEP, 2003, Template for Code available at http://www.seepnetwork.org/codeofpractice.html.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
Concern’s approach to advocacy will be as set out in its Advocacy Policy. In essence it prefers to enable local client groups to carry out advocacy directed at changing policy positions or government strategies which impede their development, rather than engaging directly in advocacy. Accordingly, the issues which call for advocacy and the most appropriate methods to use will be agreed with partners and their clients. Inevitably much of the advocacy will focus on creating conditions for access to microfinance by the poorest and for regulation to prevent exploitative practices.
5.4 Emergencies and Microfinance Emergencies such as conflicts, natural disasters, economic shocks and environmental degradation can have massive negative effects on the poor.17 They can result in geographic and/or economic dislocation. Emergencies arising from environmental degradation and climatic change are likely to become more frequent and to be of greater intensity.18 MFOs should therefore seek to develop measures which protect both the client and the institution from these shocks. Access to insurance products may be one such measure. When clients suffer loss as a result of an emergency, MFOs, out of compassion, may feel compelled to assist. While it is important to consider an appropriate response, measures should be developed on a case-bycase basis, should follow sound financial principles and help to further mutual trust. It may be that relief, such as grants to victims, is more appropriate than the rescheduling of existing loans or the issue of new loans. The response should be developed in discussion with clients so that the longer term financial relationship is not jeopardised.
17
• In-depth market research should be conducted before an intervention is designed. War-affected situations are quite different from those where microfinance is normally found. However, while microfinance products must be adapted to their environment, they should always adhere to basic microfinance principles. • Experience has shown that poor people will pay market rates of interest for a service that they value and that the cost of the savings or credit products is less important than accessibility and convenience. Charging market rates of interest helps create a microfinance service that can grow and consequently help more people. • Consideration should be given to loans for individuals. Individual loans can be successful, especially in areas where social capital has been eroded, but they are more risky than group-based loans. They require a combination of supporting factors, including close follow-up of late payers the day after their repayment falls due, an effective alternative guarantee, support of community leaders and the incentive of future loans to encourage repayment. • Sustainability should be planned from the beginning. Whereas it is normally expected that MFOs will achieve self-sufficiency in 5-10 years from start-up, it may take a few years longer in harsh post-conflict environments. Concern will not start microfinance activities in postconflict situations if it cannot adhere to these principles.
5.5 HIV/AIDS HIV/AIDS may affect microfinance programmes, and programmes may impact on the epidemic. Examples of interactions are:
Microfinance Policy
Post-conflict microfinance sits on the edge of the mainstream microfinance sphere but it should not be considered a separate discipline. From research which Concern has carried out on microfinance in conflict-
affected countries,19 the following guiding principles have emerged:
Concern Worldwide Livelihoods Policy 2003.
World Bank Paper 2003, Poverty and Climate Change - Reducing the Vulnerability of the Poor through Adaptation. 18
19
Tamsin Wilson, 2003, Lessons from a Microfinance Pilot Project in Rwanda.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
10
• Positive. Increased savings, income and insurance will help clients and their families to cope with the additional costs of illness. • Negative. Increased mobility in relation to trading may increase risk of infection. • Direct. Illness may reduce ability to repay, leading to institutional difficulties. • Indirect. Group solidarity community caring mechanisms.
may
enhance
There are no easily designed universal answers to the problems posed. Accordingly, each MFO must analyse its own situation and seek to define actions which both protect it and assist the infected and affected as far as possible. This includes messaging as outlined above. It is important to remember that the effects on individuals and families are becoming progressively worse and that the impacts on MFOs will be greater as prevalence increases.
breadth and depth of outreach, and social and economic changes experienced by clients. Concern accepts that it is difficult for small MFOs to bear the full cost of such monitoring and evaluation and will therefore make finance available towards such costs.
5.6.2 Financial Performance Financial performance relates to delivering a cost effective and financially sustainable service. Key ratios will be used to promote and measure performance and therefore enhance management capability. There will be less stringent requirements for small communitymanaged organisations and/or those with manual accounting systems. At a minimum, Concern supported microfinance operations will measure the following: • Portfolio quality indicators: portfolio at risk, portfolio in arrears and loan write off. • Operating efficiency indicators: accounts officer productivity, cost per borrower, cost per currency unit lent.
5.6 Programme Monitoring and Evaluation
• Sustainability indicators: financial, operational and institutional sustainability.
Monitoring of microfinance interventions is essential for successful management and requires the measurement of the effectiveness of services, financial performance and organisational competence. Concern will support partners and MFOs to develop and use management information systems that facilitate reporting appropriate to the needs of MFOs and clients.
Analysis of the indicators will be crucial in assessing the performance of the loan fund, e.g. showing if sustainability targets are being met, how much at risk the loan fund is from default, how efficiently loans are being dispersed etc.
5.6.1 Effectiveness of Services It is Concern policy to monitor, for every project, the impact of our work on the elimination of poverty.20 Microfinance Policy
Concern and partner MFOs must therefore collect data to show that they are reaching those living in poverty and that they can provide demand-driven services which can help bring about a positive impact on the lives of clients in a cost-effective manner. Data collection will be kept as simple as possible so that it is not too time-consuming or costly. It will include market research, client satisfaction levels,
As with all financial interventions, microfinance is susceptible to financial mismanagement and fraud, especially with new organisations experiencing rapid growth. Annual audits, supplemented by the development of strong internal controls of the partner MFO, are therefore a standard requirement of all Concern interventions. Audits should conform to international standards unless the local standard is more exacting. As most MFO failures stem from deterioration in the quality of the loan portfolio, an audit should provide real assurances about the state of the portfolio. Conventional audits (internal or external) do not 20
11
2001, Concern Worldwide Capacity Building Policy.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
automatically prevent fraud. Internal control systems should therefore encompass functions to rapidly detect and deter fraud and to detect dangerous deviations from the MFO’s methodology. They should also recommend improvements and recognize positive developments which can help improve management and product design.
5.6.3 MFO Competence Organisational competence encompasses vision, governance, legal status, funding/resourcing, management, systems, staff, delivery structure, loan tracking and performance and organisational culture. Organisational competence is evident through ability of the MFO to conduct and implement business planning. Business planning is an essential management function that includes two closely related processes:21 • Strategic planning, which establishes the MFO’s mission and goals, assesses the current situation, and develops an overall strategy for the future. • Operational planning, which provides an implementation plan for the proposed strategy and typically includes detailed financial projections. Concern will promote institutional self-assessment or will assess and monitor the organisational competency of partner MFOs. Taking the results into account, Concern will seek to provide support that strengthens the MFO to achieve its objectives.
6. Concern’s Capacity and Learning.
In view of this Concern will carefully analyse its current ability before embarking on new initiatives. If 21
Good quality research will be carried out to ensure that programmes have the best possible likelihood of success. All Concern supported microfinance interventions will be actively involved in sharing information internally and externally, particularly through the growing number of microfinance networks. Individuals within Concern with specialist skills in particular aspects of microfinance (e.g. regulation, impact assessment) will be expected to contribute to the development of organisational competence in this area. Concern will continue to make resources available to optimise learning. All microfinance programmes will use the Concern Project Cycle Management (PCM) processes so as to draw on organisational knowledge, avail of technical support and maximize programme potential. It is important to differentiate between programmes being managed by Concern and those being implemented by partners. All Concern programmes must have budgetary approval, and this is sanctioned on the understanding that the Overseas Director is satisfied that the PCM has been followed. This does not mean that a small community-based organisation must develop a project using the PCM. However, the development by Concern of relationships with these organisations would be included in concept notes and proposals which are an integral part of the PCM used internally in Concern. Countries wishing to test an innovative idea not currently covered by the microfinance policy must specifically draw such initiatives to the attention of their Regional Director. The initiative can then be carefully assessed for policy implications in the course of the Project Cycle Management process. Concern cannot support a microfinance intervention which falls outside its microfinance policy.
Microfinance Policy
In recent years Concern has invested considerable resources in the development of competence in certain areas of microfinance. At the same time it recognizes that microfinance, like many other areas of development work, calls for long-term commitment, empathy with the poorest and high levels of expertise.
new skills or additional capacity are required Concern will either access them externally or, if appropriate and practical, invest in internal development of them.
Shirley A. Lunde, 2001, Using Microfinance. 3, Technical Series No. 2, CGAP.
Concern Worldwide Microfinance Policy: Approved by Council March 2004
12
7. Review Process Concern recognises that both internal and external environments change. Consequently the scope and content of this policy will be reviewed periodically to reflect these changes. This review process will, in line with Concern’s values, be consultative and participatory in nature. The responsibility for initiating the process rests with Concern Senior Management and Council.
Microfinance Policy 13
Concern Worldwide Microfinance Policy: Approved by Council March 2004
Notes:
Microfinance Policy
Concern Worldwide Microfinance Policy: Approved by Council March 2004
14
Notes:
Microfinance Policy 15
Concern Worldwide Microfinance Policy: Approved by Council March 2004
General Policies
Approved
• Policy Statement
April 2005
• How Concern Targets Countries for Poverty Elimination
August 2000
• Concern’s Approach to Emergencies
March 2002
• Security
April 2003
Programme Approach Policies • Capacity Building • Human Rights
April 2001 March 2002
• HIV/AIDS
April 2003
• Advocacy
April 2003
• Equality (including gender equality) • Programme Participant Protection
December 2005 March 2004
Programme Sector Policies • Microfinance
March 2004
• Health
March 2002
• Basic Education
June 2003
• Livelihood Security
June 2003
Resource Policies • Finance
Various. Refer to FD
• Human Resources
April 2003
• Procurement Policy and Guideline Manual
June 2004
• Fundraising Relationships with Companies
March 2004
• Project Cycle Management • Programme Monitoring and Evaluation
December 2002 Under preparation
Concern Worldwide Microfinance Policy: Approved by Council March 2004
Microfinance Policy
Programme/Project Management Policies
16
First printed in 2006
Concern Worldwide Place of registration – Dublin, Ireland. Registered No 39647. Registered Charity number CHY5745
Dublin: +353 1 417 7700 • Belfast: +44 48 90 33 1100 • London: +44 207 73 81 033 Glasgow: +44 141 221 3610 • New York: +1 212 557 8000 Website: www.concern.net
