95037 Small Beginnings for Great Opportunities LESSONS LEARNED FROM 20 YEARS OF MICROFINANCE PROJECTS IN IFC The IFC Global Microfinance program is implemented in partnership with Belgium, Japan and the Netherlands. Disclaimer SmartLessons is a World Bank Group program which enables development practitioners to share lessons learned in development operations. The findings, interpretations, and conclusions expressed in these papers are those of the authors and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of the World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. This publication is printed using New Leaf Reincarnation matte, and Ecoprint inks and process. Printing 2500 copies saved: 2693 pounds of virgin wood, 1335 pounds of greenhouse gases, 422 pounds of solid waste, 3961 gallons of liquid waste, 3 pounds of harmful chemicals, 1 cubic yard of landfill space, and 606 kWh of electricity. International Finance Corporation Copyright © 2014, 2015 - All rights reserved Foreword By increasing access to finance for out-of-reach households and families, microfinance continues to be an essential tool for improving livelihoods at the base of the pyramid. The last 20 years have seen remarkable growth in the microfinance sector. From its early stages in small-scale microenterprise lending, through its commercial expansion to offer savings and a broad array of financial services to low-income customers, to its entry into new markets and incorporation of technological innovations, microfinance is ensuring that an ever-greater number of households have permanent access to a range of high-quality and affordable financial services. The microfinance industry is estimated at $60 to $100 billion globally, where several thousand microfinance organizations reach an estimated 200 million clients, most of whom were not previously served by the formal financial sector. However, 2.5 billion adults still lack access to formal financial services. Financial services for low- income people are an important factor when it comes to poverty reduction, as it enables them to build assets, increase incomes and reduce their vulnerability to economic stress. Moreover, microfinance continues to be an important tool when it comes to empowering women. IFC is the World Bank Group’s main investor in microfinance, working with around 300 microfinance institutions (MFIs) and SME-focused financial institutions, which provide financial services in 91 countries. IFC is also one of the leading global investors in terms of volume. In fiscal year 2014, we committed $519 million in 43 projects with MFIs. Our cumulative investment portfolio in microfinance exceeded $3.5 billion, with outstanding commitments of $2.0 billion. In fiscal year 2014, IFC advisory services comprised $74.2 million, representing advisory assistance for 86 projects.We have taken an active role in advising microfinance institutions and building or strengthening comprehensive and robust credit reporting systems such as credit bureaus, which are critical to avoiding over- indebtedness and supporting responsible lending practices. In addition, IFC’s work has been critical in post conflict countries: we have engaged in 32 IDA and 10 post-conflict countries, including Bosnia and Afghanistan, and with a particular emphasis on Sub- Saharan Africa, where we supported the creation of greenfield microfinance institutions in 33 countries. This SmartBook, titled From Small Beginnings to Great Opportunities, presents practical lessons learned from the work that we have been doing on microfinance projects over the last twenty years. From launching the Microfinance Enhancement Facility to help the industry stay afloat during the time of crisis, to working on a project to support microfinance clients to fulfill their housing dreams, these narratives are both engaging and insightful and we hope you will learn from them. We would also like to acknowledge the efforts made by IFC staff in not only working on microfinance, but also documenting some of these lessons for others to learn. Martin Holtmann Momina Aijazuddin Chief Microfinance Specialist Principal Investment Officer Financial Instititions Group IFC SMARTLESSONS Index GLOBAL LESSONS The Need for Speed: Helping the Microfinance Industry Stay Afloat in Times of Crises Vladimir Hrkac...................................................................................................................... 1 Network Holding Companies: A Pillar of IFC’s Commitment to the Microfinance Industry Gerald Matthé and Sheirin Iravantchi...................................................................................... 7 Keeping a Stumble from Becoming a Fall: Lessons Learned from Global Workouts with Microfinance Institutions Momina Aijazuddin and Sheirin Iravantchi............................................................................ 13 LESSONS FROM EAST ASIA & THE PACIFIC Resonating to the “Kundu” Beat: Rural Banking in Papua New Guinea Dominic Sikakau...................................................................................................................19 Serving China’s Rural Poor through Sustainable, Prudent Microfinance Growth Mohini Bhatia, Lory Camba Opem and Li Ren........................................................................25 LESSONS FROM EUROPE & CENTRAL ASIA Applying Corporate Governance to the DNA of a Transforming Microfinance Institution: Mission, Culture, and Risks Kiril Nejkov, Oliver Orton, Merima Zupcevic and Marie-Paule Claes....................................... 29 Applying the Pareto Principle in the Kyrgyz Republic: Microfinance Matters for Job Creation Assel Choibekova and Cholpon Kokumova............................................................................... 37 LESSONS FROM LATIN AMERICA & THE CARIBBEAN Avoiding Altitude Sickness in the Andes of Peru: Implementing a Rural Agricultural Microcredit Product in Urban-Focused Microfinance Institutions Martin Spahr, Alvaro Tarazona and Felipe Portocarrero........................................................... 45 An Old Innovation for a New Era: Lessons Learned from Financial Cooperatives in the Latin America and the Caribbean Region Terence Gallagher...................................................................................................................51 LESSONS FROM MIDDLE EAST & NORTH AFRICA Managing Credit Risk in Microfinance: Challenges in the Wake of the Arab Spring Matthew Leonard.................................................................................................................. 57 Lessons From Transformation: Recognizing When a New Strategic Investor Is the Best Way Forward in Bridging a Financing Gap Faeyza Khan......................................................................................................................... 63 Scaling Up from Micro to Small and Medium Enterprises in Yemen: Islamic SME Banking Matthew Leonard.................................................................................................................. 67 LESSONS FROM SUB-SAHARAN AFRICA From Micro to Small: How Do Microfinance Banks in Sub-Saharan Africa Scale Up to Small Business Lending? Julie Earne, John Gutin, Adam Sorensen and Meritxell Martinez.............................................. 77 Breaking Out of the Branch: Designing Alternative Delivery Channel Projects for Microfinance Banks in Africa John Gutin........................................................................................................................... 83 Greenfielding in Africa: A Model for Building Capacity and Scale in Nascent Markets Julie Earne........................................................................................................................... 87 LESSONS FROM SOUTH ASIA Fulfilling the Housing Dreams of Microfinance Clients Friedemann Roy, Shilpa Rao and Sachin Bansal...................................................................... 97 The India Microfinance Story: Putting the Focus on Borrowers Girish Nair, Farzana Bijur, Poorna Bhattacharjee and Sakshi Varma...................................... 103 SMARTLESSONS Global Lessons The Need for Speed: Helping the Microfinance Industry Stay Afloat in Times of Crises Microfinance has been a lifeline for many low-income people at the base of the pyramid, helping them break the cycle of poverty and improve their lives. Yet the rapid growth of the microfinance industry, combined with limited financial literacy among its customers, made it particularly vulnerable during the 2008–2009 global financial crisis. To expand short-term financing solutions to the microfinance industry following the crisis and to keep credit flowing during a period of unprecedented financial strife, IFC together with KFW and other DFIs launched the Microfinance Enhancement Facility, one element of its comprehensive Counter-Cyclical crisis-response package. A timely response was critical, and implementation risks were high. This SmartLesson shows how strong cooperation with partners and the decision to develop an outsourced model contributed to the success and reliability of this crisis-response initiative. Prior to the crisis in 2008–2009, the microfinance quickly dried up in many markets, and in some industry had experienced nearly 15 years of successful cases deposits began to erode. Therefore, leading growth and had been recognized as a valuable microfinance investors and partners agreed that financial-service tool for the poor, with strong the foregoing developments required an immediate growth potential at the base of the pyramid. While and coordinated response. As one of the industry’s microfinance institutions had faced various local or main players, IFC, together with its partner KfW regional crises such as political threats, inflation, Development Bank, recognized the need to instill recessions, and financial meltdowns, these prior continued confidence in the microfinance industry, threats were quite different from those prevailing catalyze uninterrupted access to funding, safeguard at the time of the global financial crisis. The greater deposits, and counterbalance the potential reduction integration of microfinance into the financial sector of access to financial services to underserved lower- and further commercialization of the industry were income segments of the population. necessary to foster the growth and broad outreach of the industry. At the same time, these factors had In February 2009, IFC and KfW, along with drastically changed the beneficial circumstances and other partners (EIB, FMO, OeEB, OFID, BMZ, exposed the industry to new threats, putting its past and SIDA) 1, launched the $500 million global achievements at risk. Microfinance Enhancement Facility (MEF), designed to provide short-term and medium-term financing Consequently, the financial crisis had an adverse to sound microfinance institutions that were facing impact on microfinance institutions by reducing their 1 EIB = European Investment Bank; FMO = The Netherlands ability to tap commercial (local or international) Development Finance Company; OeEB = Oesterreichische Entwicklungsbank AG (Development Bank of Austria); OFID = funds for growth through loans, securitizations, OPEC Fund for International Development; BMZ = Federal Ministry or deposit mobilization. Resources for refinancing for Economic Cooperation and Development; SIDA = Swedish International Development Cooperation Agency. 1 20 YEARS OF MICROFINANCE PROJECTS IN IFC funding shortfalls during times of unprecedented Box 1: The ACBA Story financial stress. MEF’s objective was to serve as a defensive facility to support strong institutions The Agricultural Cooperative Bank of Armenia (ACBA) around the world that required liquidity so that was established in Armenia in 1995, initially to finance they could conduct regular lending activities and small and medium agricultural enterprises and individuals. keep serving their core clients with fresh credit. In 2006, Credit Agricole S.A. of France made an equity (For an example, see Box 1.) investment in ACBA, and the bank was reorganized and renamed ACBA Credit Agricole Bank CJSC. The largest MEF, established as a special-purpose vehicle in shareholder is Credit Agricole, with 28 percent. The Luxembourg with three classes of shares, is executed other main shareholders are 10 agricultural cooperative through the industry’s largest and most experienced regional unions. fund managers (Blue Orchard Finance, Cyrano Fund The impact of the global financial crisis on Armenia Management, and ResponsAbility Social Investments was severe because of significant decreases in 1) trade AG) to provide a rapid and flexible response to market with Russia and other major trading partners, 2) foreign needs, achieve maximum possible outreach, and ensure investment, and 3) remittances (accounting for 20 efficiency. MEF also hired a general secretary responsible percent of GDP) from Armenians in Russia, the United for coordinating activities and communication among States, and Europe. As a result, GDP decreased by 14.4 the investors, investment managers, custodian bank, percent in 2009, and the Armenian dram was devalued and hedging manager. (See Figure 1 for the detailed by over 20 percent on March 3, 2009. organizational structure of MEF.) In keeping with its track record of conservative financial Overall, MEF succeeded in providing the important policies and a strong management team, ACBA had signaling effect required during the worst of the crisis implemented a variety of preventive measures both and has contributed to the stabilization of the sector. before and during the crisis. As a result of these proactive MEF’s investment pace picked up considerably during measures, the impact on the bank was minimal despite 2011–2013, with a growing pipeline and disbursements the economic turmoil that gripped the country. As to a wider range of microfinance institutions that now of the end of 2009, the portfolio at risk greater than cover all of the world’s regions. The graphs in Figure thirty days (PAR>30) was only 1.3 percent, and this 2 provide details of MEF’s regional distribution and was well provisioned. By December 2010, PAR>30 country distribution. had decreased to under 1.0 percent. ACBA maintained strong profitability during the crisis, along with low As of December 2013, the outstanding microfinance leverage and high levels of liquidity. institution investment portfolio was $441 million in 150 loans to 86 institutions across 33 countries. As a sign of its confidence in the bank, MEF extended Since its launch, MEF has cumulative disbursements a $15 million loan to ACBA in October 2009. During of $651 million in 214 loans to 99 institutions. MEF the first nine months of 2009, in U.S. dollar terms, has also responded to the market demand for local senior debt had decreased by over 10 percent, but currency loans and has significantly increased its it increased by nearly 11 percent in the six months local currency lending to microfinance institutions, following MEF’s loan. While not the only factor, we amounting to 20 percent of its portfolio as of December believe that MEF’s loan had an important signaling 2013. The whole local currency portfolio of MEF is effect on the market. fully hedged to the U.S. dollar through five different SMARTLESSONS 2 Figure 1: Microfinance Enhancement Facility Organizational Structure Source: Microfinance Enhancement Facility (http://www.mef-fund.com/about-mef/structure.php) counterparts, including IFC. Portfolio quality has responding to unexpected local crises. As demonstrated consistently remained strong, with impairments below by the crisis situations in Bosnia and Herzegovina, 1 percent of the total portfolio, and the financial Nicaragua, India, and most recently in Cambodia, performance of MEF has exceeded targeted returns crises will likely continue to occur in the microfinance since 2011. industry (with the current eurozone crisis as a salient example), and MEF will serve as a flexible vehicle MEF has continued to evolve over the years, expanding that can respond quickly and decisively to provide into new regions, providing new products, and stability. 3 20 YEARS OF MICROFINANCE PROJECTS IN IFC portfolio USD 460.7 M USD 685.2 M Short term investments USD 47.1 M Total assets USD 507.8 M Microfinance portfolio as a % of total assets 90.7 % Total net asset value USD 411.3 M Number of MFIs 84 99 Number of loans 155 227 Number of countries 33 33 09 09 10 10 11 11 12 Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Figure 2: Microfinance investment portfolio Regional distribution in % Investment Manager distribut Microfinance investment portfolio Microfinance investment portfolio - Equ MENA responsAbility SA 2% 6% 117,360,775 SSA 25 % 7% EECA 48 % EECA : Eastern Europe * and Central Asia Quarterly Factsheet EAP 14 % LAC : Latin America A Specialised Investment Fund Supported by : and the Caribbean EAP : East Asia and the Pacific March 2014 Oesterreichische Entwicklungsbank AG SSA : Sub-Saharan Africa LAC SA : South Asia Cyrano 23 % 165,898,282 MENA : Middle East and 36 % S North Africa Cumulative Country distribution disbursements Portfolio growth Microfinance investment portfolio Total assets 550 Cambodia 62.9 14 % Microfinance investment portfolio 500 USD 685.2 M Azerbaijan 57.0 12% 450 Peru 39.6 9% 400 Ecuador 39.0 8% Equivalent USD M 350 Equivalent USD M 300 Georgia 35.0 8% 250 Kyrgyz Republic 33.0 7% 200 Mongolia 27.5 6% 150 Armenia 24.8 5% 99 100 Tajikistan 21.0 4% 227 50 India 16.6 4% 33 Others 9 9 0 0 1 1 2 2 3 3 14 104.3 23 % Jun-0 Dec-0 Jun-1 Dec-1 Jun-1 Dec-1 Jun-1 Dec-1 Jun-1 Dec-1 Mar- Investment Manager distribution in % Currency distribution in % Microfinance investment portfolio - Equivalent USD Total portfolio responsAbility OTHER 5 % 117,360,775 ZMW 1 % 25 % NGN 1 % AZN 1 % ECA : Eastern Europe EUR 1 % nd Central Asia KHR 2 % AC : Latin America INR 3 % BlueOrchard All investments nd the Caribbean 177,481,327 PEN 4 % hedged to USD AP : East Asia 39 % nd the Pacific A : Sub-Saharan Africa USD A : South Asia Cyrano 82 % ENA : Middle East and 165,898,282 orth Africa 36 % Other includes: AMD, THB, KZT, MXN, RUB, COP, XOF, GHS, XAF, PLN, CRC 1/4 Source: Microfinance Enhancement Facility (http://www.mef-fund.com/about-mef/structure.php) SMARTLESSONS 4 LESSONS LEARNED and flexible response, achieve maximum possible outreach, and ensure efficiency and rigorous risk Lesson 1: Strong cooperation with key management. To achieve these objectives, IFC and partners is a critical element behind quick its partners decided in the structuring phase to launch and successful mobilization efforts. outsource the origination, execution, and monitoring of loans and to proceed with an outsourced While IFC played a leading role in the structuring model that would execute the program through of MEF through the combination of its sectoral the industry’s largest and most experienced fund expertise, knowledge of operational best practice, managers, Blue Orchard Finance, ResponsAbility, and expansive network, the partnership with KfW and Cyrano Management. was critical in creating a sustainable and efficient liquidity facility with sufficient firepower to adequately These three investment managers were selected based support the microfinance industry and quickly react on their reputation, professionalism, track record, to market needs. IFC worked closely with the many and reach in the microfinance sector. To avoid any stakeholders to react quickly and to create a structure conflicts among them, each investment manager that mitigated implementation risk resulting from the was assigned specific microfinance institutions from complicated structure and number of players involved. a list of systemic institutions. To ensure strong Using lessons learned from EFSE, a previous regional accountability from the investment managers and initiative established by IFC and KfW, the partners to be sure investments are made according to the developed an efficient structure in a timely manner MEF objectives, an investment committee composed to meet market needs. of representatives from the largest investors was created and given the authority to make all final IFC and KfW stepped up and committed $150 million investment decisions. The investment committee’s and $130 million, respectively, to provide comfort and oversight of the investment process also ensures that send an important market signal to other investors to investment managers present quality investment participate. IFC’s strong cooperation and partnership proposals in a consistent and standardized manner. with KfW facilitated significant mobilization from Investment managers are also required to report various governmental and quasi-governmental entities on a monthly basis to the fund administrator and and other international organizations. Through the are rewarded an incentive bonus at the end of the efforts of the two anchor investors, MEF was successful year, based on their performance and achievement in raising over $470 million in investor commitments of selected indicators. in a short time. This coordinated effort continues today as the investor group helps bring MEF additional By streamlining the investment process and bypassing funding from such private sector players as Deutsche internal investor bureaucracy, the MEF structure is Bank and other like-minded investors to meet the capable of achieving a two-week to four-week turnaround increasing demands of the facility. for a loan, as opposed to the months-long process typically required for IFC to book a senior loan. Lesson 2: An outsourced funding structure resulted This reduced transaction time was critical for many in reduction of the transaction time required to microfinance institutions that required immediate deliver crisis relief. liquidity funding, and it has created a strong reputation for MEF as a reliable and speedy source of funding The MEF structure was created to deliver a rapid for the microfinance industry. 5 20 YEARS OF MICROFINANCE PROJECTS IN IFC Lesson 3: Multiple tranches of shares linked to one CONCLUSION another can create complications in implementation if disbursements of specific tranches are delayed. Delivering a crisis-response initiative quickly was critical in providing the confidence needed to calm While the structuring and mobilization efforts of investors and markets and meet short-term liquidity the anchor investors proved to be effective and needs of microfinance institutions. But ensuring that the timely, MEF experienced a slow deployment of initiative is efficient and effective in its implementation funds after its launch in 2009. The inability of is just as important in delivering the desired impact. MEF to disburse loans following the first closing was mainly due to delays in receiving the first loss Participation of the industry’s main players, successful tranche from one of the investors. The delay was mobilization of funding to create a sizeable response, caused by administrative complications of disbursing and creation of an efficient processing structure—all the allocated funds, and it severely affected the have contributed to MEF’s ability to successfully serve ability of MEF to disburse other classes of shares the microfinance industry and to counterbalance the due to restrictions agreed to in the structure of potential reduction of access to financial services to the facility. As part of an effort to keep the risks underserved lower-income segments of the population. appropriately balanced among the different classes Given the never-ending strong demand for its funding of shares, risk ratios were introduced that required and the likelihood that the volatility of capital markets a minimum outstanding balance of each class of will persist, the investors of MEF decided in 2013 shares compared to the overall investment portfolio to extend the life of MEF another five years so it can and outstanding balances of the other classes of continue to respond quickly and decisively to local shares. In this case, the delay in the receipt of the crises and provide a stable source of funding for the first loss tranche limited MEF’s ability to disburse microfinance industry. A and B tranche shares until the agreed risk ratios were met. The introduction of risk ratios is a necessary component of the risk structure of MEF. However, it is important to understand the ramifications these restrictions can have if there are any delays ABOUT THE AUTHOR in disbursing specific tranches of shares, and their impact on a timely response in a crisis situation. Vladimir Hrkac is an Investment Officer in IFC’s While this was the main reason behind the early Financial Institutions Group (FIG) based in Washington delays, the functioning of the facility—with the DC. He has worked in private and financial sector development for ten years. processing complexities involved with having three investment managers—also took some time to work itself out. MEF has since increased its efficiency Approved by Martin Holtmann, Chief Microfinance in processing transactions and has picked up its Specialist. investment pace considerably since 2011, with a growing pipeline and disbursements to a wider range of microfinance institutions, which is expected to continue in the years ahead. SMARTLESSONS 6 Network Holding Companies: A Pillar of IFC’s Commitment to the Microfinance Industry An early supporter of the development of the microfinance holding model, IFC has been investing in network holding companies since the early 2000s. The structure has been fundamental in quickly expanding access to finance in numerous regions and in bringing microfinance to several IDA and post-conflict countries for the first time. Holding companies have helped microfinance expand its reach and achieve commercial viability. This SmartLesson shares experiences from IFC’s involvement in microfinance networks at the holding and subsidiary levels. The rise of microfinance institutions as sustainable three types of network holding companies1: providers of access to finance—leading to their global presence today—is a remarkable success story. Some • Consulting-led holding companies are sponsored by of this success can be attributed to the microfinance technical consultancy organizations that expanded into holding network, a model first pioneered by ProCredit microfinance institution management. Examples of at the end of the 1990s. As with other networks, this type (with the technical sponsors in parentheses) holding networks have allowed microfinance institutions are Access (LFS), Advans (Horus), ProCredit (IPC), to achieve significant economies of scale, replicate SMH (Fides), and MicroCred (Planet Finance). successful models, and expand product offerings towards universal banking. In addition to these benefits, the • Network-support-organization-led holding companies ProCredit holding network model brought sponsors and originated as collectives of microfinance organizations, development finance institutions together to develop with a holding company subsequently formed as a commercially-oriented microfinance institutions, centralized management entity. Organizations of pairing operational expertise with much-needed capital. this type are FINCA Microfinance Holding (FINCA Once the model had demonstrated its success, others International), BRAC International Holdings (BRAC followed suit, with microfinance actors such as Advans, NGO), ASA International Holding (ASAI), and AccessBank, FINCA, and MicroCred, forming their Opportunity Transformation Investment (Opportunity own holding network structures. International). A holding company is a company that owns other • Local bank-led holding companies use the holding companies; in microfinance, a holding company network company model to expand microfinance institution owns multiple microfinance institutions. As the parent operations in collaboration with a technical partner. company, a microfinance holding company typically Ecobank-Accion is an example of this type. helps to raise funding for and provide operational support to its network of subsidiary microfinance institutions. Depending on the historical background 1 Adapted from Earne, Jansson, Konig, and Flaming, “Greenfield MFIs in Sub-Saharan Africa: A Business Model for Advancing Access of the founding investors, or “sponsors,” there are to Finance,” The Partnership for Financial Inclusion (IFC, Sub-Saharan Africa, February 2014). 7 20 YEARS OF MICROFINANCE PROJECTS IN IFC Figure 1: Sample Holding Company Structure Source: Adapted from “Independent Evaluation Group. 2008. Financing Micro, Small, and Medium Enterprises: An Independent Evaluation of IFC’s Experience with Financial Intermediaries in Frontier Countries. Washington, DC : World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/6485 Figure 1 illustrates a sample structure of holding LESSONS LEARNED companies. The network holding model is useful to support the launch of new subsidiaries, mobilization of Lesson 1: The market development facilitated investment capital, and transformation and integration of through holding companies, often in post- network affiliates. In addition, when holding companies conflict countries, can have transformative are equipped with robust corporate governance and effects beyond just direct outreach to a strong board of directors, they can also be effective subsidiaries. In many cases, holding networks in providing oversight and strategic support. were market pioneers in countries where no other bank or MFI had focused on the MSME The scale of the impact achieved by the five network segment. holding companies in which IFC invested at the holding level (Access, Advans, FINCA, ProCredit, IFC’s work with partner FINCA International is illustrative and MicroCred) is substantial: the networks operate of the impact that holding companies can provide. FINCA a combined 63 subsidiaries and collectively serve was founded in 1985 as an NGO in Latin America, where more than 5 million clients in 41 countries (19 IDA it pioneered village banking. Although it had already countries), and they have a loan portfolio of more achieved significant outreach across four regions, operating than $5 billion (See Table 1). in 16 IDA and five FCAS countries, FINCA sought SMARTLESSONS 8 Table 1: Overview of Different Network Holding Companies HoldCo / Network Promoter Est. #FIs IFC Projects El Salvador, Nigeria, Ghana, ACCION International 1961 22 Cameroon Network BRAC Bank in Bangladesh and BRAC International BRAC NGO 1972 10 Afghanistan Afghanistan, Syria, Tajikistan, Aga Khan Agency for Microfinance Aga Khan Dev’t Network 2004 13 Kyrgyz Republic Holding, Romania, Moldova, ProCredit Holding** IPC 1998 22 Ukraine, Ecuador, El Salvador, DR Congo Opportunity Transformation Investment Opportunity International 2000 15 OI Serbia Holding, Nigeria, Ghana, DR Advans** Horus 2005 8 Congo, Cote D’Ivoire Holding, China, Senegal, MicroCred Holding** PlaNet Finance 2005 6 Holdco Madagascar, Nigeria ASA International Holding* ASA International 2006 10 Holding, Azerbaijan, Tajikistan, Access Microfinance Holding** LFS 2006 8 Madagascar, Nigeria, Tanzania, Liberia, Zambia Swiss Microfinance Holding Fides 2007 2 Senegal, Namibia Holding, Georgia, DR Congo, FINCA Microfinance Holding Company** FINCA International 2011 22 Tanzania, Azerbaijan, Kyrgyz Rep *Not an IFC client **IFC Holdco-level investment to better serve its clients by reorganizing its operations Doing so has allowed FINCA to transform 19 out into a holding network at the end of 2011. The holding of its 21 subsidiaries into commercial microfinance network model would allow it to raise funding to transform institutions, of which nine are now deposit-taking its network affiliate MFIs into commercially operated institutions, which provide low-income clients with financial institutions, introduce new products, expand access to safe and affordable savings accounts. This is outreach, and achieve scale. remarkable not only given the heavy investment and time commitment required to undertake a successful IFC was the lead investor of this project, providing transformation, but also because FINCA’s model is key insights and technical expertise at the country, to operate in the most difficult and frontier regions. regional, and global level, in addition to equity Critical to this success was that, with IFC support, investment. Restructuring to a holding company FINCA was able to set up a team dedicated to the model is a major undertaking, but doing so itself transformation process, both at the holding and the yielded lessons on the importance of a strong center subsidiary levels. In just two years following its transition to standardize operations across the network in order to a holding network model, FINCA expanded its to gain efficiencies, supported by regional hubs to outreach by over 30%, reaching more than 1 million implement the necessary training and technical support. clients in 2013. 9 20 YEARS OF MICROFINANCE PROJECTS IN IFC While FINCA and others have used the holding Lesson 2: Alignment of interests and a sound network model to consolidate, transform, and ownership structure are important for long- manage a variety of operations, the model has also term success of the network. been very effective in establishing completely new microfinance projects, or “greenfields. ” Greenfield A holding network structure inevitably involves a projects occur where no prior capacity exists in the large number of actors working together. As a result, field; in some cases, these have been undertaken in coordinating the various interests of each to achieve fragile and conflict afflicted states, such as FINCA mutually-agreed upon goals can be challenging. This Congo. In these cases, the holding company plays is greatly aided by a strong corporate structure that a critical role in establishing and developing the includes a technically able board. IFC’s most successful greenfield’s mission, strategy, institutional capacity, experiences with microfinance holding companies and governance, transferring knowledge between have typically involved highly committed sponsors subsidiaries. It also heavily invests in human capable of forming and executing a clear, structured resources, typically spending about 3 percent to 5 strategy. percent of operating budget on staff development. An unintended consequence of this high investment In these ventures, all of IFC’s partners– including is that the good reputation of training programs sponsors, management, or other important decision makes their graduates a sought-after resource: staff makers– had significant financial ownership. This turnover rates are high, and some holding companies ensured a high level of commitment, as all of these expect to train more than twice the required number actors had positive interests in the long-term success of staff to compensate. Although this can make of the network and its subsidiaries. Without this, it is operations more challenging to manage, it has the much more difficult to resolve operational difficulties virtue of building capacity across the communities that may arise, as they may require additional services where MFIs operate by providing an infusion of for which no immediate compensation is available. A freshly-trained skilled workers. clear management service agreement can help reduce the potential for such conflicts of interest. Holding network microfinance institutions also function as conduits for innovation in products, IFC has also encountered that it is equally essential delivery channels, and service processes, as the for owners to agree upon the strategy and long- central team can provide the backing for research term vision of the organization from the outset. and development. For example, ProCredit Bank- Strategic decisions, such as share issues or the DRC introduced the first ATMs in the Democratic procurement of technical assistance and management Republic of Congo, which were adopted by services, should require majority and supermajority commercial banks soon after. AccessBank board votes. IFC has worked with our partners to Madagascar has developed an agricultural loan establish these shared objectives from the outset product with flexible terms to accommodate of each project. Establishing clear goals has been farmers’ cash flows. MicroCred Nanchong has vital to ensuring the long-term success of all of its paved a pathway for microfinance in China as a network holding company partners by avoiding pilot microcredit company, offering microcredit any potential for fundamental disagreements. To and SME loans that were previously unavailable, do so, IFC has been a proactive partnering investor while demonstrating that responsible finance is to its holding company partners through its board good business. member nominees, prioritizing a sharp strategic SMARTLESSONS 10 focus: emphasizing a double bottom line mission CONCLUSION and prudent expansion to regions with low access to finance. As a founding shareholder of Access The network holding model is a pillar of IFC’s Holding, for instance, IFC played a significant role commitment to the microfinance industry. It is a not just in aligning other shareholders to carry complex model, requiring continuous collaboration on out the microfinance business strategy but also in strategy, implementation, and relationship management. establishing its strong governance, with a proactive Nevertheless, the approach has been fundamental in and experienced board, that could provide oversight, expanding financial inclusion to some of the most expertise, and governance standards to subsidiaries. challenging markets and providing access to finance to millions of beneficiaries. These institutions are the Lesson 3: Network affiliation is not a standard bearers for best practices and are important guaranteed pathway to success: performance product innovators in their markets. depends on on-the-ground capacity, style, and business model. Even in the best-in-class microfinance networks, not all subsidiaries perform equally well: having a successful subsidiary in one country does not automatically ensure success in the next. While the management capacity, financial resources, and expertise of the holding company are all crucial to the success of a microfinance institution, it is important to judge each new subsidiary engagement on its own merits. Holding company subsidiaries certainly benefit from standardized operational policies, procedures, and information systems. Nevertheless, these should still ABOUT THE AUTHORS be tailored when entering new markets, since many Gerald Matthé is an Associate Investment Officer local variables can affect the operational performance in IFC’s Microfinance business line and is based in Washington, DC. He joined IFC in 2013 and has of a network subsidiary, and must be incorporated to worked in the financial sector since 2006. its business model. Sheirin Iravantchi is part of the IFC Microfinance team based in Washington, DC. She has over ten years of IFC is a co-investor with its holding company partners experience working in private and financial sector in 26 of their subsidiary operations—a testament to development. both IFC’s level of commitment to its partners and its confidence in their strategy and operational capabilities. Approved by Martin Holtmann, Chief Microfinance Nevertheless, each investment decision is based on Specialist. the financial sustainability, development impact, and locally-contextualized risks of the subsidiary in its own right. So too should the viability of the project within the entire network be assessed: management capacity is a scarce resource in many countries where networks operate, making overexpansion a considerable concern. 11 20 YEARS OF MICROFINANCE PROJECTS IN IFC AccessBank Liberia opens its doors. SMARTLESSONS 12 Keeping a Stumble from Becoming a Fall: Lessons Learned from Global Workouts with Microfinance Institutions For the last twenty years, IFC has invested in microfinance projects, committing $3.5 billion to 215 clients across 400 projects in 73 countries. During this time, IFC’s microfinance team has learned several lessons from our projects with microfinance institutions (MFIs) that we can apply to help propel our partners to financial success. Many such lessons can be drawn from cases in which IFC had to undertake workouts, or deal restructuring, for projects that faced significant challenges in the start-up phases. In most cases, this involved delays in reaching financial and operational sustainability. In all cases, IFC portfolio teams in conjunction with the sponsors and other shareholders, had to provide very proactive supervision and onsite monitoring. IFC’s microfinance portfolio has been protected from a nascent MFI. The sponsor is often an experienced complete failures such as bankruptcy or the collapse microfinance operator, bringing a combination of of a MFI. Instead, problematic investments have capital, microfinance expertise, and strategies for featured significant losses in capital or the inability operational improvement. IFC has participated in several to reach financial sustainability or break even. Another microfinance workouts that illustrate the importance tendency is for MFIs to experience minimal growth of the NGO or corporate owner’s role in providing and development. MFIs that have suffered these issues leadership and strategic resources to fledgling MFIs. usually face heavy deterioration in capital that jeopardizes In some cases, the sponsor’s inability to recapitalize financial solvency. When this occurs, management and the MFI when times were tough led to insolvency. In shareholders must evaluate options to recapitalize, other cases, the sponsors failed to provide adequate merge, restructure, or sell the MFI in a process is called a technical assistance to the MFI, leading to managerial workout. There are several common overarching themes and operational problems. that emerge from MFIs that have faced a workout as a result of these issues. These themes are helpful One microfinance bank found itself undercapitalized as to examine as they have also manifested to varying a result of operational challenges and bank regulatory degrees in institutions throughout IFC’s portfolio. changes. The cohort of social investors that supported this institution was unable to recapitalize the bank LESSONS LEARNED when need for a capital injection arose. Another internationally-sponsored microfinance NGO faltered Lesson 1: The role of the sponsor is essential as a result of the sponsor’s inability to provide on- in providing leadership and resources. the-ground financial intermediation expertise. A management crisis led to high staff turnover and In microfinance investment projects, the sponsor is a operational failures such as fraud and high portfolio lead investor (whether NGO or corporate owner) in at risk (PAR). As funders saw this occurring, they 13 20 YEARS OF MICROFINANCE PROJECTS IN IFC Figure 1: Workout Processes and Outcomes pulled commitments, leading to a liquidity crisis. lesson from this is to work alongside local partners and staff to develop proper knowledge and understanding These examples illustrate how effective strategy and of the local environment. governance are crucial for rapid intervention and infusion of capital when a MFI faces issues. Unfortunately IFC’s experiences with greenfield MFIs, new local for these MFIs, they were the main sponsor’s first institutions set up by a regional or international network experience in new markets. These were particularly or holding company who act as the main sponsor, are difficult market environments, and the sponsors were especially illustrative of the importance of leadership. unable to play the needed role of a deep-pocketed and Generally speaking, a greenfield can be considered a technical sponsor. In other cases, financial resources type of franchise, where the holding company can were not the issue, but rather the staff deployed did be expected to guide strategy, backstop operations, not have the managerial depth or expertise to deal with and provide standards for policies and procedures, a tough new operating environment. For instance, in among other duties. some cases management selected branch location in areas that had significant security concerns. One clear However, in some cases this expectation has not been SMARTLESSONS 14 fulfilled. One greenfield in the Latin America and and practices of existing loan products, without any Caribbean (LAC) region, for instance, did not have the tailoring to the new segment. This pitfall has occurred strategy and management structure to control growing in particular when MFIs that IFC worked with tried operations in a very competitive market. Although to upscale from micro to MSME or SME lending, or strategic plans had called for opening only four branches from group to individual lending. For instance, two in the first year of operations, instead six were opened, MFIs in LAC and the Middle East and North Africa and PAR without write-offs soon reached 25 percent. (MENA) that had been highly successful with their Weak managers and young, inexperienced staff proved original methodology for the micro sector, but then unable to successfully achieve the aggressive growth stumbled when they changed their target clientele. strategy with a quality loan portfolio. In the LAC region, the MFI’s leadership was very keen Other factors that can affect workout situations are “key to meet the demand of clients for larger individual loans man risk,” or the effect of losing a focal team member, and so used the same principles to serve larger micro and weak governance. Both of these factors can also enterprise loans without adequate risk management result in ineffective board guidance through crises. In procedures. In a short span of time, the portfolio went another example, a workout scenario occurred with from being 100 percent microfinance to 60 percent a MFI with a strong network that had moved into a SME loans. Little attention was given to the fact that post-conflict environment and learned the hard way the risk profile of a portfolio with larger loan sizes that the transfer of a credit methodology from one was higher, as each default has a greater impact on the country to another is not always a successful strategy. portfolio at risk. This showed a lack of understanding of the different client segments within the market and In this case, the board was comprised of different resulted in an increase in PAR and write-offs, and an institutional investors but dominated by the lead foreign eventual need for recapitalization as a result of poor sponsor and strategic investor, which had neither the operational performance, which was then compounded resources nor the ability to facilitate a turnaround. by unanticipated contemporaneous regulatory changes. The sponsor was in a foreign market with no ‘on-the- ground’ presence, as well as an insufficient ability to Lesson 3: Avoid the peril of uncontrolled grasp key cultural understandings required to operate growth. a credit company in that market. They were unable to offer adequate management support, which led to In some of these cases, the start-up entities that we high turnover, fraud, and other operational issues that have worked with did not have a corporate control could have been avoided by partnering more closely structure which could effectively curb loan losses. In with local experts and implementing stronger credit these situations, there was rapid growth in branch risk management. network or loan approvals without appropriate or effective risk assessment, audit, monitoring of loan Lesson 2: Look out for flaws in the business officers, or internal controls. The management instead model and technology, as these can lead to focused on growth in portfolio and profitability over significant failure. short time horizons and sacrificed the quality of their loan book as a result. As touched upon above, in some of the projects that IFC has undertaken, our partners have entered new market This situation is clearly exemplified by the previously segments by using the same principles, methodologies, mentioned greenfield MFI in LAC, which involved an 15 20 YEARS OF MICROFINANCE PROJECTS IN IFC international sponsor entering a highly developed and organizations which are working to improve financial competitive microfinance market, with an aggressive inclusion, has played an effective lobbying role by growth plan and insufficient human capital to manage sharing best practices and helping to prevent market this growth. By opening six branches within the first distortions. year while relying on a poorly trained loan officer workforce and foreign interns, this MFI ran into CONCLUSION inevitable operational issues that could have been avoided by employing qualified managers and properly In most of these cases, IFC responded by working with trained loan officers. the main sponsor and other minority shareholders to effect a resolution – whether trying to make the sponsor The example of the LAC MFI that aggressively pursued accountable in terms of providing more resources, the SME market segment also illustrates the risks of or changing management to avoid failure. IFC often uncontrolled growth in the microfinance industry. deployed in-house technical microfinance experts to Poor credit appraisals and subsequent defaults were the conduct on-the-ground assessments in order to fully result of the MFI’s rapidly shifting focus to the SME understand where missteps had taken place, and create segment while still utilizing microcredit technology action plans to quickly resolve any short-term crises and microcredit loan officers. Such cases showed clearly and prevent losses from further spiraling on a medium- that rapid growth without attention to strong credit term basis. Though some of these conversations were and underwriting criteria are not sustainable and can difficult, particularly working with network partners rapidly erode a MFI’s equity. in multiple countries, the main lesson was that if the sponsors were unable to play a leading role in turning Lesson 3: Safeguard against adverse around the institutions, it was time to find a new government intervention by engaging sponsor who could. Ultimately, all was not lost as proactively. with a change in strategy, along with stronger credit procedures, many of these MFIs were able to recover In certain cases, government intervention has also led in their local markets. to operational challenges for MFIs. In South Asia, political interference in one rural region where a MFI operated led to fraudulent letters being distributed among clients announcing a loan waiver program. This led to a sudden wave of defaults among customers ABOUT THE AUTHORS who believed falsely that they no longer had to repay Momina Aijazuddin is a Principal Investment Officer their loans. Premature or restrictive regulations can within IFC’s Microfinance Unit and has over 15 years stifle innovation, especially in a nascent sector: overly of experience working globally in the microfinance sector. prescriptive conditions on maximum loan size, interest rate restrictions, or subsidized lending programs have Sheirin Iravantchi is part of the IFC Microfinance team also hampered some of our microfinance clients from based in Washington, DC. She has over ten years of experience working in private and financial sector time to time. development. IFC, together with other commercially-oriented donors Approved by Martin Holtmann, Chief Microfinance and partners such as the Consultative Group to Assist Specialist. the Poor (CGAP) – a global partnership of 34 leading SMARTLESSONS 16 Lessons from East Asia & the Pacific Resonating to the “Kundu” Beat: Rural Banking in Papua New Guinea Innovative solutions are helping people in rural areas gain access to basic banking services. But actually implementing those solutions and providing those services entails many challenges. Take, for example, the Electronic and Mobile Banking project in Papua New Guinea with Bank South Pacific (BSP), an IFC investee institution. The project aligns with the strategic interest in Access to Finance to support mobile banking projects across the Pacific to reach underserved segments of the population through the provision of electronic and mobile banking. The integration and collaboration of BSP with BSP Rural (its wholly-owned subsidiary) as a single bank have provided an extraordinary opportunity to offer a variety of banking options for the bank’s diverse customers. This SmartLesson details the lessons learned from BSP’s experiences with rural banking. Papua New Guinea is predominantly a cash-based Box 1: Rural Banking Innovations economy. The geography and demographics make The BSP Rural banking project continues to expand traditional banking operations extremely challenging. with innovative banking options to meet the needs of For example, over 800 languages are spoken in Papua rural populations that lacked access to banking services. New Guinea, and 80 percent of the approximately 7 million people live in the rural areas. Only 10 percent For example, the bank uses hand-held tablets to open of the total population have access to a bank account. and issue an instant working debit card—called the on the other hand, about 30 percent of the people “Kundu Card”—for new rural customers when they have access to mobile phones. This growth of mobile- open new bank accounts. phone reach and use has provided an opportunity Also, an expanded network of rural branches, cash to introduce mobile banking into the country, with the aim of reaching potential customers in the rural agents, EFTPOSa merchants, commodity buyers, and areas where there has been no access to banking. container branches, along with a close collaboration (See Box 1.) with local communities, has proven to be a success. Many people—and especially women—in the rural areas Meanwhile, the Papua New Guinea economy continues have signed up for new bank accounts and are using to expand with the natural resources boom. Rural the rural banking services through BSP’s “ecosystem.” communities are slowly feeling the positive effects This growing “ecosystem” equips BSP to deliver basic of this boom, and there is an increasing demand for banking services to its rural customers as well as offer domestic remittances from those employed to send back entrepreneurial opportunities for rural businesses to to their families in the villages. Domestic remittances act as agents and EFTPOS merchants. have been a norm but are now growing, and with the growth come rising risk and cost. a. EFTPOS = electronic funds transfer at point of sale. 19 20 YEARS OF MICROFINANCE PROJECTS IN IFC In June 2012, IFC and BSP introduced mobile banking to reach the rural population in Papua New Guinea with the BSP Rural Mobile Banking pilot project. The pilot proved successful and laid the foundation for extending banking services to new areas. At this writing, BSP Rural is continuing to expand this innovative banking solution to the rural population with a refined business model based on lessons learned. This expansion includes the introduction of hand-held tablets to open new, fully functional bank accounts with debit cards as well as mobilization of savings from new customers in rural Papua New Guinea through the BSP Rural branch and BSP agents. As the largest bank in Papua New Guinea, BSP takes its community service obligations seriously and was committed to expand banking services to the rural population. However, expanding traditional banking Kundu drums accompany songs for many occasions, including into much more sparsely populated areas was not an at various ceremonies. A kundu is a hollowed-out tree trunk easy or cheap option, so BSP has had to innovate. This cut to about one meter in length and shaped. The striking innovative approach was critical in its establishment surface is usually made from snake, lizard, or goanna skin in the rural areas. stretched across one end, and resin is used to fine-tune the kundu. The rollout of the business beyond the pilot areas is continuing, together with the container branches and In September 2010, IFC conducted a feasibility study tablet services. As of March 31, 2013, BSP Rural had among coffee growers in Papua New Guinea on the 94,894 rural customers, 9,866 EFTPOS merchants, 37 concept of mobile/electronic banking. The purpose branches, 25 commodity buying points, 120 agents, of the study was to validate prior ad hoc research that and 148 trained staff. The BSP Rural customers had suggested that the entire coffee supply chain, from have conducted more than $31.9 million worth of the growers to the international exporters, preferred electronic transactions through EFTPOS merchants, a cashless transaction mechanism because of security various branches, and ATMs. The value of deposits as risks—and that they preferred a mobile-money solution of March 31, 2013, was more than $6 million and is as an alternative to cash. anticipated to increase as the service continues to grow. Based on the study’s findings, IFC had discussions with LESSONS LEARNED BSP, the largest commercial retail bank in Papua New Guinea. BSP was keen to serve the rural population Lesson 1: The service points for deposits and through its subsidiary, BSP Rural, to develop savings withdrawals must be ubiquitous. and other financial services through a mix of branch and electronic banking solutions, including mobile The physical presence of a network of agents, merchants, banking and EFTPOS terminals. and rural branches in the rural areas is critical to SMARTLESSONS 20 effective provision of rural banking services. Access customers in the rural areas, encouraging them to to banking services in Papua New Guinea is an issue have the trust necessary to sign up for the services. because of the road system, infrastructure, security, and geography—not to mention the time and cost of Lesson 3: The technology and product must traveling to a town to access banking services. Having be appropriate. service points closer to home and at peoples’ doorsteps has been the key factor in BSP Rural’s success. This An important aspect of the project was to implement convenience is particularly important for women, given appropriate technology and processes. BSP initially the time and risk involved in traveling. used an SMS -based banking product, which it found to be unsuitable to the rural customer because of a Face-to-face interaction is important in reaching more combination of technical limitations and procedural clients. Given the geographical difficulties, the key is to obstacles that would have to be overcome to make have a continually staffed rural branch. Otherwise, the the product convenient to new rural bank customers. difficulties and cost of travel would prevent customers from signing up and using the rural banking system. Given the limitations and challenges of SMS banking, BSP introduced the USSD protocol for its mobile Lesson 2: Community participation and trust banking. The USSD features—including facilitating real- are vital elements. time payment clearance and settlement—complemented and enhanced rural banking services. However, signing For customers in rural areas to take advantage of the customers up with mobile handsets—and then getting opportunity to use the rural banking services, they must them to use the system—was not feasible. Customers trust them and feel free to participate in them. This is also generally resisted the cost of calls, and it often especially important where the majority of the people are is too difficult to educate them over the telephone. illiterate and have had bad experiences with Ponzi schemes. And the concept of a call center does not work in rural settings. To engage the community in the services, BSP recruited staff from the local communities and trained them Given these challenges, BSP modified the model and to perform their roles in the rural branches. BSP also adopted hand-held tablets linked to a wireless card engaged branded agents and merchants living in the swipe. BSP Rural staff and agents use these tablets to local areas. Besides building a rapport and creating create and open bank accounts anywhere in Papua trust with the community, the recruitment of local staff New Guinea where there is a Digicel signal. IFC’s and branded merchants and agents from the local areas investment in Digicel has made possible the rollout serves another important purpose: staff, merchants, of Digicel’s network coverage, which provided the and agents are part of the community and can speak foundation for the technology. to the community in their local languages, educate them about the new bank services, and answer any The product design—featuring instant issuance queries people may have regarding the services. This of a working bank card with new accounts—has is important in a country such as Papua New Guinea also contributed to the success of this product. The with over 800 languages. services reduce the need to handle cash and checks, increase electronic auditing capability and oversight, The branding and association with a reputable and and improve overall security. In conflict-affected recognized entity such as BSP are also important to Bougainville, the impact of the tablet and issuance 21 20 YEARS OF MICROFINANCE PROJECTS IN IFC of a working bank card has economically empowered management, and reduce the ever-growing demand women and dramatically reduced travel time, cost, on physical cash. and security risks for them. CONCLUSION Lesson 4: Liquidity management at rural branches is critical. This remarkable story of the establishment and continued expansion of the BSP Rural banking project—and The rollout of business beyond the pilot areas—and the the issuance of Kundu Cards for rural customers who success of the project—created a liquidity problem at previously had no access to banking—could not be the rural branches. This is because customers were not told without the unwavering commitment from the saving money in the rural branches, and the demand board and management of BSP. The successful BSP for physical cash resulted in withdrawals that exceeded Rural banking model has had a positive impact on the cash available at those branches. the lives of the rural population—and especially on women in the rural areas, including women public In response to this problem, BSP carried out a pilot servants such as teachers and health workers in some program in Simbu Province to encourage small-to- of the remote parts of the country. medium businesses in rural areas to deposits their cash with the rural branch rather than the metro branch. BSP Rural is taking full advantage of the existing The pilot has been successful and helped alleviate footprints, technology platform, container branches, the shortage of cash in the rural branch. BSP is now and marketing of the BSP Group to achieve its targets looking to expand the program to other areas in Papua and expand its services and reach. But while the services New Guinea to address the cash liquidity problem and network continue to grow, the liquidity problems that the rural branches currently face. at the rural branches suggest the customers are using their Kundu Cards to make purchases and withdraw Lesson 5: Technology training and financial cash in their accounts without making any regular literacy are vitally important. savings. The challenge for BSP going forward is to address the liquidity issue at rural branches, and one For the agents and merchants, training on the use of way this can be achieved is though financial literacy in the technology and its functionality is important to the rural areas. A further challenge in the near future ensure that they can perform their roles and deliver is to include and support micro and small businesses the required service to the customers. The agents and in those areas. merchants are not only service providers, but they also are the focal point for customer interaction. That puts them in an excellent position to educate the customers about the banking services and financial literacy. ABOUT THE AUTHOR Dominic Sikakau is an Operations Officer, Access to In Papua New Guinea, where the literacy rate is low, Finance Advisory Services, Central East Asia and Pacific. training in financial literacy is important, to educate customers and would-be customers on the importance Approved by John Vivian, Senior Operations Officer, and value proposition of banking services and especially Access to Finance Advisory Services, Central East Asia and Pacific. savings. In the rural areas, financial literacy will be the key to encourage savings, assist with liquidity SMARTLESSONS 22 Serving China’s Frontier Regions through Sustainable, Prudent Financial Inclusion Responsible finance—the pragmatic way forward in the global microfinance community today—is helping IFC have an impact on its clients’ operations and bottom lines, as well as influence on the markets where they operate. Responsible finance brings the focus back to clients and encourages financial institutions to build client-centric operating practices that support prudent and sustainable financial growth over the long term. This Smart Lesson uses recent projects in China to show how responsible finance is breaking new ground for IFC in microfinance, enhancing IFC’s relationships with its existing partners, and providing demonstration results to share with potential new partners, within the microfinance sector and beyond. More than 600 million Chinese people have moved inclusion. Since 2005, when China’s central bank out of poverty over the past 30 years. From 1981 to launched a microfinance initiative in five provinces, 2008, the number of people living on the equivalent the Chinese microfinance market has experienced of $1.25 or less per day decreased from 835 million explosive growth. Over 8,000 microcredit companies to 173 million. However, inequality—of income, now provide more than $100 billion in loans to micro, consumption, assets, and opportunity—is increasing, small, and medium enterprises, and these numbers with the gap between rural and urban populations are constantly increasing. Yet the majority of China’s wide and growing. And it is even starker at the bottom poorest, especially in rural and frontier regions, remain of the pyramid. largely underserved, making the case for continued growth in the sector. The Gini index, measuring income-distribution inequality, increased from near 0.30 in 1985 to about However, microfinance crises around the world have 0.47 in 2007—the most sustained increase in the world, shown the often disastrous results of aggressive growth placing China at the high end of income inequality combined with diluted focus on clients—demonstrating among Asian countries. Although this increase has the need for consumer-centric practices. The Chinese leveled off, thanks in part to more transfers of public financial market is establishing ground rules for resources to poor rural areas, other dimensions of responsible finance and consumer protection to manage inequality—such as asset ownership, particularly this rapid growth, avoid market overheating, and avert housing—continue to rise and are mirrored and future crises. For financial institutions to effectively exacerbated by large disparities in opportunities to serve lower-income populations and assure long-term access quality social services and social protection. sustainability, they must “build in” responsible lending practices into operations. Over the last several years, the Chinese government has adopted many initiatives to promote financial A pioneer in responsible finance, IFC has worked with 23 20 YEARS OF MICROFINANCE PROJECTS IN IFC A microfinance client in her shop in rural China. the Smart Campaign, since its inception in 2011, to pilot, Credit Company) are some of the fastest growing test, and refine client protection principles through IFC microfinance institutions operating in urban, rural, investees in India and Bosnia. IFC brought lessons learned and frontier regions. Responsible finance is becoming from implementing those principles to the microfinance a core part of their mission, vision, and way of doing sector in China. To expand microfinance lending to business. The following are lessons learned through China’s poor, IFC partnered with 13 microfinance the work of these three microfinance institutions. institutions with investment and advisory services and international best practices. As of May 2014, IFC’s MICROCRED NANCHONG: committed investment in China’s microfinance sector LEADING THE WAY TOWARDS GREATER amounted to $266 million, reaching about 700,000 CLIENT AWARENESS microfinance customers as a whole, including in frontier, rural, and remote areas, and incentivizing microfinance IFC invested $2.9 million of equity in MicroCred institutions to implement responsible finance practices Holding, a global microfinance holding company with from the outset. subsidiaries in Madagascar, Senegal, Nigeria, and China. MicroCred Nanchong (MC Nanchong), one of two LESSONS LEARNED subsidiaries of MicroCred China, provides working capital and investment capital microloans (to purchase Among IFC’s partners in China, MicroCred Nanchong, fixed assets) ranging from RMB 5,000 to RMB 75,000 CFPA (China Foundation for Poverty Alleviation) (about $800 to $12,000) to microentrepreneurs in Microfinance, and Xinjiang Tianrong MCC (Micro the frontier region of Nanchong. SMARTLESSONS 24 Today, with IFC support on responsible finance, MC charged for microfinance loans from market providers. Nanchong is a pioneer in the field in implementing Because microfinance loans are short-term, fees of even declining interest rate balance practices and offering 1 percent upfront can add double digits to the annual pricing transparency and financial awareness to its percentage rate. Understanding these elements allows clients. MC Nanchong trains staff to inform clients clients to calculate and compare the true cost of using about all costs, fees, terms, and conditions prior to different loans. While Chinese regulation has not yet signing a loan. This responsible finance program— mandated this level of transparency, MC Nanchong reaching some 10,000 clients in Nanchong—is a first- has been a market leader in ensuring that clients have of-its-kind client-centric financial awareness activity full information to make optimal decisions, thereby on responsible pricing and transparency. promoting personal financial well-being, institutional sustainability, and the health of the sector as a whole. Lesson 1a: Establish core responsible finance standards as a management tool to inform Lesson 1c: Train staff on the client-centric decisions. mission and vision and align staff incentives with client protection. MC Nanchong established core responsible finance standards and indicators—such as percent of borrowers MC Nanchong trains staff on the importance of that never had a relationship with a financial institution responsible and transparent communication with clients before MicroCred and percent of borrowers with increased at each stage of the product lifecycle—originations (in turnover in activity(ies) by 25 percent during the credit marketing materials and outreach), appraisal (on pricing, period—to track the impact of its products and services rights and responsibilities), and collections (treating on clients over time. Senior management uses this clients fairly and respectfully). MC Nanchong also periodic analysis to 1) ensure that MC Nanchong explains to staff the negative impact of non-transparent is meeting its mission and vision; 2) understand the pricing on the whole microfinance sector. When prices impact of microfinance loans for its clients; and 3) are unclear, microfinance institutions are vulnerable to make strategic decisions on modifying or offering new a domino effect, where 1) consumers don’t understand products and services to better serve its client base. the full implications of products and borrow too much; Understanding which products and processes are most 2) market competition is hindered; 3) the prospect beneficial to clients increases MC Nanchong’s client of high profits is a strong temptation for staff who, if base, laying the foundation for long-term institutional incentivized by volume and growth targets alone, strive stability, profitability, and growth. for high client acquisition; 4) clients struggle to repay; 5) the institution’s reputation suffers when clients are Lesson 1b: Conduct a widespread in default, and efforts to recover the loan are perceived transparency campaign for clients to as aggressive collection practices; and 6) governments encourage responsible client decisions and step in with stringent regulations and caps that curb avoid issues of over-consumption of credit and microfinance institutions’ growth and profitability. MC potential over-indebtedness. Nanchong trains staff on its mission and vision—and the link between treating clients responsibly and long- MC Nanchong clients learn that the “flat” rate charges term institutional sustainability. Staff incentives are interest on the original loan amount, resulting in nearly also aligned with responsible practices and portfolio double the cost of declining-balance interest. MC quality rather than growth targets alone. Nanchong also helps its clients understand the fees 25 20 YEARS OF MICROFINANCE PROJECTS IN IFC Lesson 1d: Build client protection into audit sector. Today, with IFC support, MC Nanchong has guidelines and train auditors to monitor compliance received global recognition and is the first SMART and capture red flags, including through client certified microfinance institution in China. interviews. CFPA MICROFINANCE: MC Nanchong auditors are trained in client protection INFLUENCING THE MICROFINANCE SECTOR principles and their importance to the MC mission THROUGH SUSTAINABLE, RESPONSIBLE and vision. In addition to regular audit procedures to GROWTH validate consistency of data collected by loan officers and the use of loan proceeds, auditors check with The China Foundation for Poverty Alleviation, clients to ensure that ethical and respectful collection established as a nongovernmental organization (NGO) practices are followed, that no items intended to meet in 1989, started microfinance operations in 1996. With a client’s basic needs (beds, clothes, dishes, and so on) advisory and financial support from IFC, it transformed have been compromised because of the loan, and that from an NGO to a competitive and commercially clients have an opportunity to provide feedback and sustainable microfinance institution, emerging as a have their issues heard and resolved in a systematic market leader in the provision of microfinance and way. Senior management directly reviews these audit nonfinancial services to some of the poorest rural reports to ensure that even remote branches are treating households in China. CFPA has experienced strong clients fairly and respectfully—avoiding risks inherent growth and today is the microfinance institution with in institutional growth through locally-based staff the largest outreach in China, working in rural parts serving low-income communities in rural, remote, of over 107 counties in 16 provinces—80 percent of and diverse geographies. the country’s poorest counties. It has over 200,000 clients, with a $230 million portfolio and PAR > 30 Lesson 1e: Partner with local institutions to (portfolio at risk greater than 30 days) at less than introduce microfinance as a career path and 1 percent. begin to build a cadre of trained, qualified resources for the sector. Lesson 2a: Deliver investment jointly with performance-based advisory services to One of the biggest challenges in the microfinance achieve a multiplier effect toward greater sector in China is a lack of locally-trained staff to move financial inclusion. into operational and middle management positions at microfinance institutions. To tackle this issue, MC In 2005–2006, when microfinance was first formally Nanchong launched a microfinance module with launched by China’s central bank, stakeholders Nanchong University to offer students an overview of were not convinced that a microfinance institution the microfinance sector, business model, implementation could achieve commercial sustainability. In China, challenges, and operational realities in the field. As part microfinance institutions were nascent and lacked of the program, students follow senior MC Nanchong technical experience and know-how on microfinance. loan officers as they conduct client appraisals and In early 2008, IFC organized a visit by CFPA senior interact with clients, providing practical know-how on management to several microfinance institutions working with low-income, vulnerable communities. in neighboring Cambodia, including ACLEDA, The pilot, which was well-received by students and CEB, Prasac, and Amret. Particularly impressed with university staff, piqued interest in the microfinance the successful transformation of ACLEDA from an SMARTLESSONS 26 NGO into a commercial bank, CFPA management CFPA, which positions itself as a socially responsible decided to transform into a commercial microfinance enterprise dedicated to providing microcredit in poverty- institution. stricken rural areas of China, developed a three-year (2012–2014) strategic plan on social performance and Also in 2008, CFPA co-sponsored a workshop with set up a social performance committee to supervise IFC on “microfinance NGO transformation” for and monitor it. CFPA reports its social indicators to field staff and local government, to gain buy-in for MIX Market and was one of the earliest microfinance the transformation. IFC staff also worked with the institutions in China to endorse the Smart Campaign. It board to introduce international best practices and also communicates responsible finance practices with staff influence a responsible, sustainable approach for and clients through training and broad-based financial the microfinance institution. IFC’s microfinance awareness, and has developed a standard procedure to specialists helped the company build core processes, effectively handle customer complaints. CFPA continues such as credit and risk management, for long-term to improve its client protection practices and is one of institutional sustainability. the few microfinance institutions in China that conducts an annual customer satisfaction survey of its clients. After the successful transformation, IFC made an equity investment in CFPA of about $5.80 million CFPA’s solid financial and social performance has in 2010 and subsequently participated with the first positioned it to 1) become one of the microfinance and second capital increases of the company, for a institutions in China with highest leverage (its total total equity investment of about $15.65 million (19.2 borrowing from commercial banks is about three times percent of shares). In 2013, IFC also approved a $20 its equity value); 2) access privileged interest rates from million loan to CFPA, which is successfully serving commercial banks; 3) achieve strong client and staff some of the poorest, most vulnerable rural populations loyalty; 4) increase productivity through loan officers as a market-based institution. (from 205 in 2009 to 255 in 2013); 5) attain success and recognition locally and globally through numerous awards, Lesson 2b: Introduce responsible finance at a including the Best Performer in Responsible Finance nascent stage to build client protection in the in 2013; and 6) act as a key influencing stakeholder DNA of an institution. across the broader microfinance sector in China. As part of the performance-based advisory services, Lesson 2c: Introduce good practices and share IFC introduced responsible finance to CFPA and results—for a vibrant demonstration effect. encouraged it to formalize responsible lending principles in its people, policies, procedures, and CFPA Microfinance has been active in policy advocacy practices. Today, in addition to financial viability with government authorities and shared its experiences and performance, CFPA remains committed to with other microfinance institutions, resulting in a responsible finance and poverty outreach with its strong demonstration effect. With IFC support, it rural, poor clients. The average loan outstanding is launched a series of knowledge products for the sector RMB 7000 ($1,200), one of lowest of microfinance on such topics as 1) the need for a sound regulatory institutions in China. Of its clients, 93 percent are environment on microfinance; 2) the difference between women, 89 percent previously had no access to microfinance and SME lending; 3) international formal banking services, and 21 percent are ethnic best practices on microfinance; and 4) CFPA’s own minorities. responsible finance practices. 27 20 YEARS OF MICROFINANCE PROJECTS IN IFC XINJIANG TIANRONG MCC: CONCLUSION BANKING AT THE FRONTIER The experiences and lessons learned from MC Nanchong Lesson 3: Leveraging existing microfinance good in China are being documented for implementation practices through knowledge sharing and successful across MicroCred’s entire operations in other subsidiaries South-South investments, contributes towards in Africa and Asia. CFPA Microfinance has a stable developing the whole sector. senior management team, the majority of whom joined before its commercial transformation. Its NGO Xinjiang is one of the most sparsely populated frontier background and commitment to responsible finance regions in China and home to 47 ethnic minority groups. and client impact has allowed CFPA to mature into Although the region plays an important economic a large, commercial, sustainable institution with a role in connecting China with Europe, its GDP per strong reputation. To demonstrate its commitment person is 20 percent lower than the country’s average. to responsible finance, Xinjiang Tianrong MCC In 2012, to enhance financial inclusion in Xinjiang, has appointed a social and environmental manager/ IFC partnered with XacBank, a successful microfinance coordinator. It also has plans to establish a responsible bank in Mongolia, and invested $1.6 million to set finance working group, under which a monitoring team up the greenfield microfinance institution, Xinjiang and an implementation team will be set up to integrate Tianrong MCC. responsible finance throughout the organization, building a quality institution to serve one of China’s Along with the investment, IFC provided performance- poorest rural areas. based advisory support to develop the institution and embed responsible finance principles into its mission and operations from inception. In May 2013, Xingjiang MCC management visited CFPA to learn from the earlier advisory support provided to CFPA and its current microfinance practices. As ABOUT THE AUTHORS part of the project, Xingjiang MCC also developed Mohini Bhatia, Responsible Finance Specialist, is a and submitted its long-term responsible finance member of International Finance Corporation’s global strategy to IFC in December 2013. At that time, Responsible Finance team based in Washington D.C. Mohini initiated and led IFC’s work in India on its loan portfolio included 562 loans totaling $6.5 Responsible Finance. million, double the projections for its first full year of microfinance operations. It completed its first two Lory Camba Opem is a Program Manager and has been working with IFC for over 15 years in both advisory years of operations in September 2014. and investment services in the financial sector. She currently leads IFC’s Responsible Finance initiatives. Today, Xinjiang Tianrong MCC has successfully Li (Linda) Ren is a former Senior Investment Officer integrated responsible finance and client protection based in Beijing, China. She led IFC’s microfinance principles into its operations, expanded its branch investment activities in the East Asia and Pacific Region. network from three to four offices, and served some of the most remote, vulnerable, low-income communities Approved by Martin Holtmann, Chief Microfinance Specialist, Financial Institutions Group. in China. It is creating new opportunities for those previously without access to finance—in a responsible, transparent way. SMARTLESSONS 28 29 20 YEARS OF MICROFINANCE PROJECTS IN IFC Lessons from Europe and Central Asia SMARTLESSONS 30 Applying Corporate Governance to the DNA of a Transforming Microfinance Institution: Mission, Culture, and Risks When IFC introduced advisory projects to help companies improve their corporate governance, it expected the client base to be real sector companies and regulated financial institutions. However, in Europe and Central Asia, IFC started receiving requests to help microfinance institutions run by non- governmental organizations (NGO-MFIs) develop their governance standards as they transformed into regulated for-profit entities. This SmartLesson describes how IFC responded to this demand, and sets out some lessons learned. In 1992, through the transformation of Prodem, a LESSONS LEARNED Bolivian microfinance institution, BancoSol became the world’s first private commercial bank devoted Lesson 1: The Risk: The institution views corporate exclusively to microfinance, and the microfinance governance as simply a “new” compliance industry witnessed the birth of a new trend: the obligation within the context of a complex transformation of NGO-MFIs into regulated financial institutional change process—leading to weak institutions. Such transformation has become a governance from the outset. The Lesson: Prepare strategic objective for many NGO-MFIs around and plan for the intervention carefully, in a timely the world. In microfinance, “transformation” most fashion—and sensibly. commonly refers to the transfer by an “ownerless” NGO-MFI of all or part of its business to a for- In advising an NGO-MFI during transformation, profit, shareholding entity. IFC has been engaged any corporate governance team needs to conduct its with many such transformations globally including intervention in the context of a wider, fast-paced, and ACLEDA Bank in Cambodia, K Rep in Kenya and often uncertain transaction. This requires allocating NRSP in Pakistan. sufficient time to properly understand the situation, particularly: Until recently, corporate governance was of secondary interest in the transformation process, but the recent • Timing. If the intervention comes too early, before economic downturn and the risk exposure of a number key structural issues have been identified, advice of microfinance institutions have led many in the will be at best theoretical and at worst erroneous. If industry to consider it a primary differentiating factor too late, it may fail to take into account important between those institutions that survive crises and those governance considerations in defining the structure that do not. The following lessons address specific of the new entity. risks associated with NGO-MFI transformation. (See Table 1.) • Reasons for transformation. These will affect how 31 20 YEARS OF MICROFINANCE PROJECTS IN IFC Table 1: Matrix of IFC Corporate Governance (CG) Advisory Support Tools and Transformation Risks Lesson 1: CG Beyond Tools Lesson 2: Mission Preservation Lesson 3: Facilitating Culture Change Compliance Before intervention Timing of submission aligned with Focus on maintaining/enhancing MFI Focus on using CG as platform for supporting CG Offer any investment transaction and mission culture change transformation calendar Interview Cover reasons for transformation. Ask interviewees to define mission of new Open-ended questions on existing and Questionnaire; Document review includes outline entity expected culture Document Review transaction terms Based on best practice rather than Charter minimum legal requirements. Mission clearly stated Defines roles of all key governance functions Properly reflects realities Values on which MFI is based, with clear Values include business-related as well as Code of Conduct As per Charter reference to mission social/mission ones As per Charter. Refers to benefits Defines CG as platform for comprehensive CG Code of CG “beyond compliance” Refers to mission change Defines role of Corporate Greater scrutiny over management Board Rulebook Secretary as leadership CG Focus on new structure and responsibilities function Higher remuneration for non-executive Development of CG Report For executive and nonexecutive directors. directors compared to NGO. Define non-linear Remuneration Policy – Long- and short-term incentives linked to criteria based on attendance, membership in profit and social mission committees, etc. Director ToR As per Charter Refers to responsibility to maintain mission – Refers to corporate values emanating from Management Refers to responsibility of managers to As per Charter culture change. Board refers to values during Contracts maintain mission and to report on same selection of managers Refers to responsibility of employees to Employee Contracts – respect Codes Refers to any Employee Share Ownership Plan Includes mission in its section on “internal Introduces comprehensive system of internal Internal Control Policy – environment” controls Includes responsible lending principles (e.g., Covers range of risks (financial, market, legal, Risk Policy – SMART Campaign) compliance, reputational) Includes reference to compliance with Code Defines full scope of function (beyond AML/ Compliance Policy – of Conduct and CG Code CFT) Stronger skills mix in internal audit; move to Internal Audit Charter – – risk-based audit Subscription/ May envision managers becoming Shareholders – Shareholders state commitment to mission shareholders. Refer to any Employee Agreement Shareholding Ownership Plan committed to corporate governance the transformed shareholders. In some cases, the transformed entity’s entity and its personnel are. Reasons vary: delivering sole shareholder may be the NGO-MFI itself. However, additional services, attracting investors, enhancing certain jurisdictions may require a minimum number legitimacy, allowing existing management and staff to of shareholders, restrict foreign ownership, or require become owners, and meeting regulatory requirements. a fit-and-proper test. The team should request details of agreed transaction terms. • Ownership structure. As an “ownerless” entity, the NGO-MFI will not be familiar with having • Regulatory requirements. Advice must take into account SMARTLESSONS 32 regulations that did not apply to the NGO-MFI. The Robust corporate governance instruments. New team will need a deeper understanding of local regulation structures and policies that come with the introduction than may be necessary with other interventions. of corporate governance should clearly reflect—and enhance—the original mission. The “tone at the top” Microfinance institutions typically have limited requires significant attention. Detailed bylaws should clarify capacity to implement all changes at once, and the board, management, and staff roles and responsibilities, team should be ready to provide advice that results in ensuring that those in each governance layer are clear quick wins. The intervention will likely span a long as to their role in preserving the mission. (See Box 1.) time but include labor-intensive bursts with strict deadlines. The team should exercise common sense in Box 1: SMART Campaign addressing the scope and timing of the intervention. The process will require many short-term practical A tool to embed responsible lending into the operations decisions, and these may conflict with the long-term of transformed entities is the SMART Campaign, developed under the leadership of Acciona through view on the establishment of quality governance. a consultative process. Its purpose is to protect low- income clients from disadvantageous financial services Throughout the process the team should continually and ensure excellence in service. SMART principles make the corporate governance business case—through comprise appropriate product design and delivery, written material, presentations, and informal discussions. avoidance of over-indebtedness, transparent and The team should identify quick fixes through which responsible pricing, fair treatment of clients, privacy of corporate governance could have impact. For example, client data, and mechanisms for complaint resolution. early appointment of a corporate secretary as custodian of good practices could contribute to better navigation IFC has assisted a number of microfinance institutions with Client Protection Certification, an independent, of the intervention. public certification of adherence to SMART principles, and has assisted other microfinance institutions with Lesson 2: The Risk: The NGO-MFI loses its a detailed assessment of adherence to the principles. development mission as it transforms into a for- profit entity. The Lesson: Strategize early ways a. Accion is a global nonprofit organization that supports microfinance institutions in their work to provide financial to maintain and reinforce the mission through services to low-income clients. better governance. A common concern among transformed entities is that they might lose their core reason for being an Board’s strategic oversight. NGO-MFIs are often NGO-MFI—to help the poorest people gain access advised to change their boards, which typically have to finance. With transformation, the initial reasons been less focused on profit and thus considered weak for establishment as a non-governmental organization in skills necessary for a regulated financial institution. seem to disappear: the entity becomes profit-focused, While it makes sense for the transformed entity to with a financial bottom line at odds with the original introduce industry-relevant skills to its board, it risks social one. The introduction of owners brings a new losing sight of its mission or making it subsidiary to allegiance—to shareholders. This risk is exacerbated financial returns, depending on the individuals. The if the original NGO-MFI is diluted by the addition following actions can help preserve the original mission: of new commercial partners. Through the following means, IFC can help avoid mission drift: • Ensure that a number of members of the former 33 20 YEARS OF MICROFINANCE PROJECTS IN IFC board stay on for an agreed period to avoid abrupt, Based on principles of transparency, integrity, irreversible changes. responsibility, and accountability, corporate governance is well-suited as a platform for introducing culture •Have at least one microfinance expert on the board. change and ensuring a system for proper communication between stakeholders. Corporate governance can include •Develop institutional targets and an aligned the following to ease culture change: remuneration policy for board and management, linked not only to financial performance but also to Support for the board in leading culture change. the development mission. (Indicators developed for Management cannot, and should not, drive change tracking success should include outreach, number of without the board. One key area of needed change is rural branches, and so on.) within management, where there may be inherent conflicts of interest that only the board can resolve. The board •Establish a board committee to monitor social has a primary role in incorporating culture change into performance. the transformation plan and strategies. It should lead efforts to introduce culture change through the following: No radical investor-base changes. Investors in microfinance institutions constitute a distinct investment • Clear articulation of the values of the transformed community and are instrumental in preserving the entity; mission. Engaging only with the commercial investor base in the early life of the transformed entity increases • Incorporation of these values into the recruitment risk of mission drift. Ensuring that the board scrutinizes and evaluation of managers; and investor policy helps avoid abrupt changes to the mission through this channel. • Building consensus in the market—and including this in strategic documents. Lesson 3: The Risk: The transformed for- profit entity retains the culture of a non- Alignment of interests of directors, managers, and governmental organization. The Lesson: Use staff with those of the transformed entity. During corporate governance as a platform to introduce transformation, alignment (or lack thereof ) of personal comprehensive culture change. interests of key decision makers can affect the ultimate success of the new entity. Typical concerns of those When the NGO-MFI starts its life in the nonprofit affected include financial implications, personal status, framework, everyone accepts those ground rules. The recognition, social mission, and desire for control. situation dramatically changes with the establishment of The following are some tools to help align interests: the transformed entity, which may lead to culture clash. • Severance packages for managers who leave and Culture change usually benefits the transformed entity, remuneration packages for managers who stay— helping it prosper in its new market environment. But including long-term and short-term components to take advantage of its new status without lowering staff based on financial elements (profits, relevant ratios) morale, the transformed entity needs to navigate culture and nonfinancial elements (such as dissemination of change carefully. As with many strategic decisions, new values); the process and communication of culture change are as important as its content. • Considerations as to the price at which managers SMARTLESSONS 34 become shareholders (and alertness to concerns about CONCLUSION enriching owners at the expense of the public good and donors); and Embarking on a transformation is a far-reaching institutional decision, with challenges often • Development of ESOPs (employee share ownership underestimated by the NGO-MFI. All layers of the plans). organization need to be involved in and committed to this process, and a proper corporate governance Priority strengthening of controls. The transformed framework should be part of it from the outset. To entity will face new and complex risks; not only will achieve the desired benefits, the team needs to be management of them need to be more systematic, but sensitive to the specific nature of the institution, also reporting to regulators and the market must be and patient enough with the stop-and-go aspects more holistic. A first step is to establish an internal of the process to provide hands-on implementation control system through board-adopted policies related of corporate governance tools. We have found this to key functions in the control environment, such as: approach valuable and hope our colleagues working in this area will find it helpful in focusing on the • Risk management: One of the most significant DNA of these transforming entities as they develop differences in the transformed entity’s risk profile is the a governance environment conducive to enhanced requirement for a more complex spread management outreach and impact on people’s lives. capacity in the taking of deposits and offering of other services. Often, NGO-MFIs have only a credit risk function, and even if a risk management department exists, it will need to be revamped to respond to these ABOUT THE AUTHORS new realities—and will likely require hiring external Kiril Nejkov is a Corporate Governance Operations management capacity. Officer for Europe and Central Asia based in Skopje, Macedonia. He joined IFC in 2006. • Compliance: If a compliance function did previously exist, it would have focused mostly on AML/CFT and Marie-Paule Claes is a Principal Investment Officer, Microfinance Specialist, overseeing IFC’s microfinance would not cover the full spectrum of responsibilities investment program in Europe and Central Asia. She usually associated with compliance. joined IFC in 2007 and has 11 years of experience in microfinance investments. • Internal audit: Similarly, while the NGO-MFI may Merima Zupcevic is a Corporate Governance have had an internal audit function, it typically would Operations Officer for Europe and Central Asia based not have the proper skills mix needed for performance of in Sarajevo, Bosnia and Herzegovina. She joined IFC in 2008 and has seven years of experience in corporate audits in a regulated financial institution. This function governance advisory. in the NGO-MFI also is often compliance-based and would need to be developed into a more risk-based Oliver Orton is Corporate Governance Program approach. Manager for Europe and Central Asia based in Belgrade, Serbia. He joined IFC in May 2010 from the Asian Development Bank. • Audit committee: An independent audit committee should be established to oversee the internal controls Approved by Patrick Luternauer, Regional Business Line Manager, Sustainable Business Advisory, Europe system and report to the board, even when not legally and Central Asia. required to do so. 35 20 YEARS OF MICROFINANCE PROJECTS IN IFC An apple farmer in Central Asia stands by his product. SMARTLESSONS 36 Applying the Pareto Principle in the Kyrgyz Republic: Microfinance Matters for Job Creation By increasing access to finance for micro and small enterprises, IFC helped unlock opportunities for job creation in the Kyrgyz Republic. The synergy of a two-pronged approach—improving a regulatory framework and supporting a microfinance company in expanding its outreach objectives—resulted in the successful transformation of a nongovernmental organization (NGO) into a microfinance bank. The client, Bai-Tushum, received a banking license in November 2012, becoming the first microfinance bank in the Kyrgyz Republic. This SmartLesson describes how IFC Azerbaijan and the Central Asia Micro and Responsible Finance project contributed to this progress—and applied the Pareto principle to help make it happen. Micro, small, and medium enterprises (MSMEs) vastly Why become a bank? We aim at responding to the growing contribute to the creation of jobs in any economy— client needs—some of them grow their business up to rich or emerging. But to create jobs, MSMEs need a size when they need bigger loans for further business access to finance. In poor countries, this remains expansion. In addition, it will enable us to offer services an acute issue, because bank credit continues to be our clients need: lending, savings, money transfers, and inaccessible to many entrepreneurs. In this situation, forex [foreign exchange market] operations. efficient and effective microfinance institutions play an important role. —Gulnara Shamshieva, General Manager, Bai-Tushum and Partners To increase access to finance in the Kyrgyz Republic for MSME businessmen like Tilek Aripov (see Box institution in the republic in June 2011, and later 1), IFC contributed to the creation of the country’s improved its status by becoming the first microfinance first microfinance bank. The key objective of IFC’s bank in November 2012. Azerbaijan and Central Asia Micro and Responsible Finance project is to support microfinance institutions’ 2. Going beyond working with clients, the project transformation into deposit-taking institutions or even supported regulatory change to legally enable banks—to increase outreach by bringing new products transformation of microfinance institutions in the such as deposits, money transfers, and cash management republic. to more clients, thereby increasing access to finance for larger numbers of people. The project supported As of June 30, 2014 , Bai-Tushum had served over this objective in two ways in the Kyrgyz Republic: 45,000 clients, with loans worth $99 million and over 25,000 deposits worth $11 million. Seventy percent 1. Through capacity building, the project helped Bai- of the bank clientele consists of MSMEs, a driving Tushum become the first deposit-taking microfinance force for job creation in the republic. 37 20 YEARS OF MICROFINANCE PROJECTS IN IFC The project is improving the responsible lending practices Box 1: The Success Story of Tilek Aripov of microfinance institutions and generally bringing about more transparent operations by cooperating A great imbalance of social and economic development with the SMART Campaign.1 Bai-Tushum Bank exists throughout the Kyrgyz Republic. Isfana, a town became the first and so far the only bank in the Kyrgyz located in the south in Batken oblast and near the Tajikistan Republic that received “Client protection certification” border, has few advantages. Its challenges include poor international certificate officially recognized by the infrastructure, little or no access to finance, and high levels SMART Campaign in May 2014. of poverty and unemployment. Business origination is rare—and if it does happen, it is the result of tremendous LESSONS LEARNED entrepreneurial talent. Lesson 1: In applying the Pareto principle (see One such entrepreneur is Tilek Aripov, a 42-year-old Box 2), aim at 20 percent of the targeted owner of a little brickyard that employs 12 permanent intervention in the regulatory environment to staff and over 70 seasonal workers (from May to September, bring about 80 percent of a desired change. the peak construction season). It sells 60 percent of its production to a nearby province and exports 40 percent to According to the Kyrgyz law, microfinance institutions Tajikistan. Increasing demand for bricks in both countries are permitted to transform into deposit-taking companies eventually meant the existing brickyard facilities couldn’t that, in addition to making loans, may extend their meet market demand. product offering with term deposits. This service is essential for very small enterprises and farmers, who Tilek decided to expand his business—to double the might earn interest from deposit accounts where they brick production by purchasing a new processing line can save their excess cash flows generated from sales from China. But how would he pay for it? The existing or harvest seasons. business generated only enough cash to finance working capital, not to purchase the equipment. He needed access Although the regulatory framework for transformation of to capital of $110,000. an NGO into a deposit-taking commercial microfinance institution existed in the Kyrgyz Republic, none of those Bai-Tushum microfinance company had been fast and institutions took advantage of the opportunity to offer reliable in servicing Tilek’s first loan. He also valued the deposit products to clients because of lack of legislative advice and financial coaching he received from loan officers clarity and know-how—on both sides: regulators and on business planning and loan structuring. So he turned institutions. To fill this void, we narrowed our focus to the newly transformed Bai-Tushum and obtained the to improving regulations only for transformation of microfinance institutions. needed capital. The new brickyard, built right before the start of the The project started small, working with individual season, required Tilek to contract 10 more permanent microfinance institutions, and over time it expanded employees and an additional 35 seasonal workers. Thus to support regulatory changes. To address the lack of Tilek’s business creates employment for 22 permanent clarity of deposit-taking regulation for microfinance staff and 105 seasonal workers in Isfana. 1 The SMART Campaign provides criteria for financial institutions to set objectives to protect low-income clients from disadvantageous financial services and ensure excellence in service. SMARTLESSONS 38 IFC’s workshop in Mongolia helped us implement changes Box 2: The Pareto Principle in licensing policies and procedures. We initiated a The Pareto principle (or the 80-20 rule) was created in dialogue with Bai-Tushum and Partners, encouraging 1906 by Italian economist Vilfredo Pareto to describe them to apply for a license. During the application period, wealth distribution in Italy, but people also apply it in we tested and streamlined deposit-taking procedures for other disciplines. For example, project managers believe that other MFIs in the country. 20 percent of the work (the first 10 percent and the last 10 —Samatbek Jumashev, Chief, percent) consumes 80 percent of the time and resources. BKR Non-banking Organizations Control Division The Pareto principle says that any problem we encounter it to test its functional capabilities and gain credibility can be broken down statistically in the order of its severity with the NBKR regarding compliance with prudential or importance by the largest and smallest elements to help regulation. It took one month for the NBKR to review us understand its complexity and significance. It suggests that 80 percent of progress achieved is earned from just 20 the application and make a favorable decision according percent of the time worked, and that 80 percent of resources to the procedures. spent will produce only 20 percent of the benefits. It reminds us to focus on the 20 percent that matters. The project targeted a series of interventions to the regulatory environment and supported the NBKR’s development of the Decree on Procedures of Transformation institutions, the project team—in cooperation with of a MFI into a Bank. The head of the NBKR licensing Mongolia Financial Regulatory Commission and department acknowledged during the Central Asia Microfinance Development Fund—organized a study Microfinance Summit that drafting of the regulation tour in Mongolia on microfinance-related policy. was inspired by Mongolia’s success in microfinance Participating in the tour were 14 policymakers from transformation. Bai-Tushum followed the decree in Azerbaijan, Bosnia and Herzegovina, Kazakhstan, the applying for a banking license, and on November Kyrgyz Republic, and Tajikistan. A delegation from 14, 2012, became the first microfinance institution the Kyrgyz Republic included representatives from the to achieve legal transformation into a commercial legal department, non-banking organizations control bank—not only in the Kyrgyz Republic but also in division, and licensing division of the National Bank the region of Central Asia. of the Kyrgyz Republic (NBKR). Focusing on only a few vital areas of regulation The tour acquainted policymakers with international helped us support the desired change for microfinance best practices and with XacBank’s2 transformation institution transformation. This change enabled these experience. After the tour, the NBKR improved the institutions in the Kyrgyz Republic to transform into Deposit Licensing Procedures. When the procedures more commercially sustainable entities (See Box 3). were officially approved, the NBKR representative (one of the delegates on the tour) visited Bai-Tushum Lesson 2: Often it is the final 20 percent of advisory and discussed the pros and cons of being a deposit- services that will produce a targeted change for taking organization. This meeting eventually led Bai- a client. Tushum to take on the challenge of deposit product introduction, correctly assuming that this would allow Bai-Tushum was ready for the new deposit-taking service 2 XacBank is one of Mongolia’s largest banks, serving MSMEs as well as when it received the NBKR’s official permission to start large corporations. It offers a range of inclusive banking, fair investment, it. A stakeholder engagement advisory module delivered and other financial products and services. 39 20 YEARS OF MICROFINANCE PROJECTS IN IFC by the project provided the impetus to kick off a new will enable Bai Tushum to offer an even broader range product. The module included advice on promoting of financial services to microentrepreneurs and low- deposits to customers, designing communications income customers. Also, Bai Tushum’s new status will strategies and actions, and developing internal deposit- help set an example for other microfinance institutions collection policy and procedures for employees. across Central Asia. Bai-Tushum’s deposit products were designed specifically Lesson 3: A microfinance institution’s legal to address the needs of low-income customers and local transformation to a bank after obtaining small businesses—in opening accounts, accruals and a banking license takes it only 20 percent withdrawals, and interest rate and duration. Bai-Tushum of the way to full operation in the banking considers a deposit business to be first an effective tool marketplace. Integrated investment and for developing a savings culture in the region and then a advisory support will bring another 80 low-expense source of funding for its lending business. percent, to make the bank a solid credit provider to MSMEs. However, the public continued to see the company as only a provider of loans. This perception hindered the After Bai-Tushum received a banking license, the launch of a piloting stage for deposit mobilization, and company found itself competing with well-established it was our job to help Bai-Tushum change its public and experienced banks for banking market share. image. Following our advice, the company promoted Meanwhile, its internal structures were designed for its deposit products through, for example, participating microfinance functions only; they didn’t support the in five television programs and publishing 10 articles bank in performing a full range banking operations. highlighting its deposit activities as well as its lending. This along with a lack of banking experience and As a result, the number of deposit accounts opened in expertise made Bai-Tushum’s entry into the bank arena selected pilot branches more than doubled, from 150 even more challenging. to 419, during the last two months of 2011. A key element of IFC’s continued support during this The fifth component (the last 20 percent of the advisory stage of development is the broadening and scaling up intervention) is stakeholder engagement. The first four of Bai-Tushum’s products. We designed and negotiated components were successful in helping the company with the bank an engagement to introduce SME banking, become eligible for banking license consideration (see and Bai-Tushum has designed several MSME and SME Box 3). loan products and piloted them in several branches. Newly developed credit methods enable the bank to The last 20 percent became the grand finale, carrying measure risks during loan application by incorporating the company through the submission of an application a scoring mechanism to assess a client’s ability to repay for a banking license in April 2012 according to the a loan. This will help Bai-Tushum expand upmarket. NBKR decree. Finally, on November 14, 2012, it became the first microfinance institution in Central Simultaneously, IFC—in line with the financial markets Asia to be awarded a full banking license by the strategy for the Kyrgyz Republic, aimed to increase access National Bank of the Kyrgyz Republic—a major to finance for MSMEs through a long-term investment— step forward! approved an $8 million senior loan to Bai-Tushum in 2014 and a cross-currency risk-management support. Becoming the first microfinance bank in the country This will support Bai-Tushum’s strategy to scale up its SMARTLESSONS 40 Box 3: Bai-Tushum’s Successful Transformation Bai-Tushum bank became an IFC client after signing a $1.2 million loan in 2005 and a subsequent $4 million deal in 2009 to finance micro and small entrepreneurs through individual and group lending products. In 2014, IFC approved an investment package to Bai-Tushum bank that included risk-management facilities and senior loan of $8 million to support MSMEs in the Kyrgyz Republic. IFC was engaged in the company transformation, first with the deposit-taking organization and next with the bank, through contributing to the following four components of the transformation: Component 1: In strategic planning of the company, the project provided mentoring support to the management for producing an investor presentation for potential equity investors in 2009, moderating a shareholder seminar in August 2010, and advising on investor relations and negotiations. As a result, Bai-Tushum attracted the first equity investor to the newly registered LLC in 2011 and a year later formed a joint-stock company with two other social investors. Thus Bai-Tushum fulfilled the first two legal and regulatory requirements (the joint-stock company structure and charter capital requirements) to become eligible for a banking license. Component 2: To strengthen Bai-Tushum’s institutional structure in preparation for becoming a bank, the project provided advice for internal control and audit as well as an inventory of all business processes, which entailed development of a complete set of policies—another prerequisite for a banking license. Component 3: To help Bai-Tushum build institutional capacity to introduce deposits and obtain a deposit-taking license prior to the banking license, the project supported the design and implementation of a stakeholder-engagement advisory module that included advice on promoting deposits to customers, designing communications strategies and actions, and developing internal deposit-collection policy and procedures for employees. The module also helped Bai-Tushum strengthen relations with the NBKR, which gradually became strongly supportive of the company’s plans to become a bank. Component 4: The project supported Bai-Tushum with an IT (information technology) audit and assessment of the budget allocated for capital investment in hardware to make full use of a newly acquired MIS (management information system), support considerable expansion, and acquire a bank license planned in 2012. The consultant’s recommendations were highly valued and served as guidance during the company expansion in 2012. Component 5: Stakeholder engagement (see Lesson 2). As of June 30, 2014, Bai-Tushum provided loans to over 45,182 customers, an increase of 45.5 percent over the same indicator in June 30, 2013. Bai-Tushum expanded business considerably upmarket and increased the average loan size to $2,200. The value of outstanding loans is $99 million—a 24.6 percent increase over the same indicator in June 2013. lending activity to MSMEs and stimulate competition idea of a change—and you’ll receive 20 percent in the banking sector. Therefore, integrated advisory support for the change. and investment support will enable Bai-Tushum to expand its market and supply more credit to SMEs, Microfinance has been a hot topic of discussion at the which contribute to more than 40 percent of GDP highest level in the Kyrgyz Republic. At the Central Asian and about 60 percent of employment in the republic. International Microfinance Summit in July 2011, the president of the country described microfinance as “very Lesson 4: In spite of the Pareto principle, actively important to the Kyrgyz Republic.” To build momentum, engage 100 percent of the stakeholders in the IFC created four videos, showing how microfinance is 41 20 YEARS OF MICROFINANCE PROJECTS IN IFC making a difference in the Europe and Central Asia In 2012 in the Kyrgyz Republic, as in a number of region, and featured an interview with the president. other countries, there were public reprisals against the industry because of perceived high interest rates and The project’s contribution to the transformation of Bai- excessive indebtedness. There were frequent protests Tushum included engagement of stakeholders on the idea against the overall sector including microfinance of transformation. We used several communications tools: companies, pawnshops, and private moneylenders, where borrowers had stated that suffered from the • During the first quarter of 2011, we extensively actions of creditors. In some individual cases, owners of publicized the Mongolia study tour and generated pawnshops and microcredit companies in the south of over 70 media mentions of the event. This helped the country were blamed in creating pyramid schemes build momentum to make transformation possible that ruined savings and hopes. By the end of 2012, within the regulatory environment. however, the crisis was over thanks to a consolidated microfinance sector effort, a stabilized political situation, • We increased the project’s visibility on national and and improved microfinance legislation in the country. global levels. For instance, we organized and moderated the IFC microfinance institution transformation sessions We in the project believe that progress in microfinance during several conferences and summits. will allow the expansion of the range of products offered to populations in remote regions of the republic and • We kept key stakeholders updated on the transformation stimulate job creation. And—even though we realize progress via a legal framework update, proactive investor that 80 percent of all our work may produce only 20 relations, and participating in and moderating three percent of the results—we are committed to making conferences and summits in 2009–2011. During those that change happen. three years, more than 240 participants—representing the microfinance community, policymakers, and donors—attended the events. • In October 2011, we initiated production of a set of documentary videos to raise stakeholder awareness of the ABOUT THE AUTHORS positive impact that microfinance has had on individuals, communities, and economies in the region. Assel Choibekova is a Communications Consultant for IFC in the Kazakh Republic. Assel has worked for IFC for over 10 years in leasing, corporate governance, and • We engaged the highest-ranking politicians in the Kyrgyz microfinance development projects in Central Asia. Republic in the microfinance transformation goals. Cholpon Kokumova, Project Manager of the IFC Microfinance Transformation Support project, has CONCLUSION worked for IFC for over six years in leasing and microfinance development projects in Central Asia. President Roza Otunbayeva told IFC she was a “big Approved by Natasa Goronja, Program Manager, fan” of microfinance, having seen the role it plays in Europe and Central Asia Micro and Responsible tackling rural poverty, supporting the development of Finance Program. women, and helping her country recover from political and ethnic upheaval in 2010. She also acknowledged that the sector faces challenges. SMARTLESSONS 42 43 20 YEARS OF MICROFINANCE PROJECTS IN IFC Lessons from Latin America & the Caribbean SMARTLESSONS 44 Avoiding Altitude Sickness in the Andes of Peru: Implementing a Rural Agricultural Microcredit Product in Urban-Focused Microfinance Institutions Altitude sickness, or “soroche,” is a pathological effect on humans caused by acute exposure to low partial pressure of oxygen at high altitudes. Similarly, a loan product oriented to small farmers that is introduced in the Andes could suffer from many “illnesses.” Here we propose a few “treatments” that can help smooth the path when you are bringing new financial services to rural areas. Peru has one of the most developed microfinance chains with very limited access to formal financial services. industries in the world, and its microfinance business They raise staple crops sold through local and regional environment is ranked first in the 2012 edition of Global markets. Productivity is low, because the farmers do not Microscope on the Microfinance Business Environment.1 have access to modern production technologies. Their However, most of Peru’s economic and microfinance land plots are quite small (in many cases less than one development has occurred in cities and peri-urban hectare), and because of the landscape they tend to be areas. Rural households, representing a quarter of on steep slopes that are difficult to access and where the total population, have been left behind. In fact, tractors cannot be used. That also makes it difficult for more than half of rural households live below the the farmers to bring their crops to market. poverty line and have limited access to basic services, including financial services. Only 5 percent of rural IFC is working with two leading microfinance institutions households have a loan, compared to 21 percent of on this project and expects to work with at least one households in urban areas of Peru. more. Combined, the two institutions have 670,000 loans outstanding that total more than $1.6 billion, a In partnership with the Canadian International network of 248 traditional branches, and more than Development Agency, IFC is implementing a project 6,000 employees. Each institution disburses 30,000 to that promotes economic and social integration of rural 60,000 loans a month. Financiera Edyficar was the first populations in provinces where extractive industries microfinance institution to try the pilot loan project operate, mainly in the highlands of Peru. The project and completed it in December 2012. At this writing, supports microfinance institutions in launching micro the project is being tested by Caja Arequipa.2 agricultural loans to poor farmers in those areas. The main product is small agricultural loans that are designed As of April 2013, one year after launching the pilot, to meet the financing needs of small farmers. The small there were encouraging results: 1,100 small farmers farmers targeted by the project are in fragmented value 2 Project implementation started early 2011 and continues until June 2015. The SmartLesson was written early 2013 based on the experience 1 Global Microscope on the Microfinance Business Environment is an working with two MFI. As of August 2014, the agri-lending product annual IFC/Inter-American Development Bank study that offers an in- has been rolled out at EDYFICAR and is going to be rolled out at Caja depth analysis of the enabling environment in microfinance for countries Arequipa soon. Additionally, one MFI is benefiting from the project and around the world. Peru is also ranked #1 in 2013 as well. exploring the option of introducing the product. 45 20 YEARS OF MICROFINANCE PROJECTS IN IFC Figure 1: Loans Disbursed to Farmers in the Highlands of Peru in two regions in the highlands of Peru received loans increasing their regional outreach by opening branches totaling almost $1.6 million; and more than 20 loan in rural areas and offering financial products to farmers. officers were trained in the new method of evaluating agriculture loans (See Figure 1). However, it is one thing to consider growth into new areas and another thing altogether to embrace the changes Even though we are working with highly developed that such growth implies. Even microfinance institutions and mature financial institutions, introducing a new that are interested in expansion tend to shy away from product in a remote rural setting is very challenging. micro agricultural loans in rural areas. We found that We have found that many of the lessons we learned the more the institutions understood about the realities in the process are applicable in other countries in the of the highlands, the more their interest weakened. region and may be in other regions as well. Urban-based institutions are reluctant into expand to LESSONS LEARNED remote areas because 1) demand in rural areas is limited compared to demand in urban centers; 2) lending in Lesson 1: Find one institution willing to pilot rural regions with traditional credit methods is costly an expansion in a rural area—and work hard and risky because of low and highly variable average to make it a success. Then attract others on the household income, as well as scattered populations and basis of the strong value proposition created. poor infrastructure; 3) all activities in rural regions are affected by significant agriculture-specific risks, namely Increased competition between microfinance institutions weather, price volatility of agricultural products, and lack in urban areas is becoming an issue, and growth potential of knowledge about the agricultural sector; and 4) there in existing urban markets is limited. As a consequence, is a greater risk in rural areas of political interference, the institutions are exploring new options for growth. such as debt forgiveness before elections and direct Specifically, they are looking at product diversification and subsidies by the government. A successful pilot by a SMARTLESSONS 46 peer institution is the best way to overcome resistance. effect is that high-value positions are created, and local people are getting opportunities for professional careers Since IFC began this project, our team has met with 11 that were unthinkable a few years ago. microfinance institutions.3 All of them were interested in the micro agricultural loans, and in most cases Lesson 3: Microfinance institutions ideally should discussions moved forward rapidly. But at different have dedicated loan officers to test an agricultural stages of the negotiations, many of the institutions microcredit product. If a pilot program uses decided not to engage or to postpone making a decision. nonspecialized microloan officers, the institution Now that the pilot with one institution has concluded should modify its incentives to adequately motivate successfully and we can show some results, interest in the officers to work on agricultural loans. the product is increasing and attracting the attention of the management of leading institutions in Peru and Experience shows that hiring loan officers to work exclusively in other countries in the region. on agricultural loans results in greater productivity than using loan officers with existing portfolios. The explanation Lesson 2: Expansion of a microfinance institution for this difference in productivity is twofold: 1) dedicated into rural areas requires a new type of loan officer, agricultural loan officers can devote their full attention to often less well-trained in finance and agriculture, farmer clients, whereas credit officers who simultaneously but with deep roots in the local area. manage a mature microfinance loan portfolio have to spend time monitoring and making collections in their existing It is generally thought that it is easier to train an portfolio, and 2) while incentives for both types of loans agricultural engineer to become a loan officer than to are the same, agriculture financing is more complex and teach the secrets of agriculture to a person with a business takes more time than the methods used for traditional administration background. Hence we recommended loans (because farmers are more dispersed, and average that our two pilot microfinance institutions hire and train amounts for agriculture loans in the highlands tend to agriculture engineers to work as rural agricultural loan be low). officers. But it became a challenge to find appropriate, well-educated candidates willing to live and work in Therefore, if a microfinance institution uses non- rural areas. Living conditions in the “sierra” are tough, specialized loan officers, it is critical that it adjust its and people from the city have problems adapting. bonus system to provide adequate incentives for working on the more labor-intensive agricultural finance product. In the end, we realized that the loan-officer profile had to be adjusted to the reality of the region, and much more Lesson 4: Implementation of the agricultural flexibility was needed when selecting the candidates. For microcredit product may require complex example, young people with strong personal roots in and time-consuming adjustments to the loan the region, who grew up in farmer families and have an module in the microfinance institution’s core understanding of the behavior of the rural population, have banking system. But don’t wait for lengthy turned out to be excellent candidates. They understand adaptations of IT systems before launching and speak the local language and often have plans to your project. stay in the region for personal reasons. A positive side 3 Besides the two microfinance institutions that finally engaged in the When designing a project, it is easy to underestimate project, the team had promising talks, which have not yet resulted in projects, with CRAC Nuestra Gente, Caja Trujillo, Caja Sullana, Caja the time needed to make adjustments to a microfinance Tacna, CRAC Los Andes, CRAC Chavin, EDPYME Nueva Vision, institution’s core banking system. Adequate launch of the MiBanco, and Financiera Crediscotia. 47 20 YEARS OF MICROFINANCE PROJECTS IN IFC agriculture loan product methodology in bank branches requires specific adaptations to the way loans are made. For Box 1: Agricultural Loan Portfolio: example, one of the basics of assessing the creditworthiness Hidden Risks and Missed Opportunities of farmers is to consider irregular cash flows from specific Most institutions expanding into rural areas have not crops (instead of doing a static analysis of a typical month) adjusted their credit methodology and instead only offer and to allow irregular repayment schedules. A farmer might loans to the traditional sectors they are familiar with in be able to make either one payment after harvesting a crop, urban areas: trade, services, and some small factories. for instance, or more than one payment if he or she has Agricultural activities are usually not eligible. But in reality multiple but smaller sources of income. microentrepreneurs in rural areas have diversified businesses with different sources of income and quite complex risk To accommodate this complexity, a microfinance profiles and financial needs. Since money is fungible, institution’s core banking system loan module might clients apply for loans by presenting the loan officer with need to be adapted, which could take one to six months, an eligible activity—for example, a small grocery shop or transportation service firm—and also use the funds to depending on such factors as the state of the existing finance their agricultural activities, which are not evaluated loan module and whether the adaptation is done by the loan officer. internally or through an external system provider. When IFC engaged with one institution in Peru, This practice has two negative effects: The first is hidden the team and the client estimated that the system risk, because if the client has a problem in the agricultural adaptation could be done in one to two months and activity, it will affect his or her overall repayment capacity. expected that loan disbursements could start in the Second, because the loan officer only considered the eligible fourth or fifth month of the project. This estimate activities, the client’s profile (and hence potential needs) proved to be overly optimistic, because the institution’s are not registered and cannot be evaluated and used for cross-selling activities or any other commercial targeted loan module did not have the necessary capabilities. campaign. The system adaptation ended up taking six months. As a result, loan disbursements were delayed and the It is important to draw microfinance institutions’ attention team had difficulty reaching project outcome targets. to this critical issue and create awareness of the hidden risks and the missed business opportunities they have Lesson 5: To reach remote rural areas, microfinance in their loan portfolios. In some branches, 30 percent institutions must find ways to adapt their to 50 percent of their loan portfolio is affected by this distribution strategies and use “light” branches phenomenon, according to interviews with loan officers. that are smaller and offer only products needed in the rural areas. IFC should prepare the use in rural areas. To operate at a sustainable cost level institution’s management to be more flexible while remaining close to clients, institutions should with its distribution channels. learn to rely more on agent networks and on basic or temporary branches such as kiosks. Urban-based microfinance institutions have expanded into rural areas in the last 10 years by opening branches in Before adjusting its distribution system, the institution medium-size cities with strong links to rural agricultural should conduct market research to understand local regions (See Box 1). Mature institutions have well- client preferences and should customize its distribution thought-through branches, with all the facilities required accordingly. In addition, the institution will need a in urban areas. However, microfinance institutions have strong marketing and communications strategy to had difficulties adopting a lighter branch model for promote its use of alternative channels. SMARTLESSONS 48 Lesson 6: It’s essential for IFC to be vigilant CONCLUSION in its supervision and to have a product champion at the microfinance institution. The task of introducing and expanding the micro agricultural loan product in a developed microfinance Introducing agricultural microcredit loans in remote institution with an urban background involves much more locations requires close supervision by IFC and than simply adding a new product to the institution’s significant attention from the microfinance institution’s existing portfolio mix. Although an institution may have management team. However, the very remoteness of solid organizational structures, policies, and procedures, the projects makes this particularly challenging. It is it takes time for its management to understand a new often difficult to provide adequate remote backstopping reality. An institution’s strategy developed for expansion support to a resident advisor working in the highlands in urban areas must be modified to ensure the success for as long as 12 to 18 months to launch a loan product. of a new product in rural areas. It will be necessary to revise and fine-tune management tools that have been Meanwhile, the MFI’s management team does not in place for years, such as the process used to open new always pay enough attention to a project taking place branches, recruitment and selection criteria for new staff, far from headquarters. However, management attention and incentive plans for middle management and loan is critical to success, given that the project requires officers. Institutions also must adjust their targets to the many adjustments at the loan officer and branch new market to keep them ambitious but realistic, and manager levels and even in some departments in the they must differentiate the rural targets from the targets head office (mainly human resources, marketing, IT, set for urban-based branches. and procurement). ABOUT THE AUTHORS Under these circumstances, IFC must take a frequent and Martin Spahr is Senior Microfinance Specialist for active approach to supervision of the implementation Latin America and the Caribbean, based in Lima, team. In Peru, we took two actions to strengthen Peru. Before joining IFC in August 2011, he spent supervision. First, we required the team to present brief five years in Madagascar setting up and managing an urban-based microfinance bank, where he monthly reports summarizing progress in each area, and successfully launched a micro agricultural loan when cultural barriers arose with staff in branches, we product. scheduled biweekly calls with the resident consultant. Alvaro Tarazona is a former Operations Officer in Second, we conducted field visits every two or three the Andean Region based in Lima. Before joining months. IFC in 2007, he spent five years consulting and doing research in microfinance and rural finance On the client’s side, it is essential to have a product for international organizations and microfinance institutions. champion with enough seniority to ensure that the product has credibility and receives attention at Felipe Portocarrero is a Microfinance Consultant in headquarters. That champion also helps monitor and Latin America and the Caribbean based in Lima. Before joining IFC in 2007, he was coordinator of a collect statistics about the product and can take the project funded by the Inter-American Development lead in monitoring the product once IFC leaves. This Bank in which the Peruvian Cajas Rurales is especially true when institutions implementing the (microfinance institutions specialized in rural credit) piloted rural microcredit. product are large and do not have enough time to closely supervise and learn from the external expertise Approved by Ghada Teima, Manager, Latin America provided by a regional specialist. and the Caribbean. 49 20 YEARS OF MICROFINANCE PROJECTS IN IFC Client Sixta Mamani visited by a loan officer. Field visits are an essential part of the risk assessment, which is required to get a better understanding of the activities of the farmer. SMARTLESSONS 50 An Old Innovation for a New Era: Lessons Learned from Financial Cooperatives in the Latin America and the Caribbean Region Cooperative financial institutions (cooperative banks, credit unions, and building societies) have prospered in many markets around the world and have come to play a major role in financial inclusion. According to the latest data from the World Council of Credit Unions, there are 51,000 credit unions in 100 countries, with a total of 196 million members. IFC’s Financial Institutions Group team has traditionally found it difficult to engage with cooperative financial institutions because of challenges of democratic governance, low financial returns, and limited possibilities to acquire equity. However, in recent years there has been a concerted effort to develop partnerships with leading institutions in a number of markets. This SmartLesson highlights some of the experiences from IFC’s engagement with cooperatives in the Latin America and the Caribbean (LAC) region. In 1844, a group of 28 tradesmen got together in Rochdale, Lancashire, in Great Britain to discuss how the new Box 1: The Rochdale Seven Principles of machines of the Industrial Revolution were forcing skilled Cooperatives workers into unemployment and poverty. The group 1. Voluntary and open membership. formed the Rochdale Society of Equitable Pioneers and met regularly for the following months, struggling to save 2. Democratic member control. together a total of one British pound per person ($1.55 at 3. Member economic participation (limited return on today’s exchange rate) to serve as the capital for a store that equity; surplus to support other organizations or to be would sell low-cost food items to the local community. returned to the members). This was the birth of the cooperative movement, which now involves millions of people around the world and 4. Autonomy. continues to be based on the seven principles proposed 5. Education, training, and information (for members and by the Rochdale tradesmen (see Box 1). I was born the public about the nature of cooperation). just a few miles from Rochdale and have always been fascinated by the subject of cooperativism. This might 6. Cooperation among cooperatives. be an old innovation, but it is still very relevant in today’s economic era. 7. Concern for the community. Business model dramatically from country to country. Although the cooperative-movement principles may trace their heritage Financial cooperatives’ business models can vary quite back to Rochdale, financial institutions are a blend of 51 20 YEARS OF MICROFINANCE PROJECTS IN IFC those original principles, together with practices from are typically neglected by most financial institutions. local cultures that predate the international cooperative movement. Some form of rotating savings and credit • Form partnerships with other cooperatives and associations can be found in villages and communities financial entities and play an important role in the on every continent (such as the esusu system in Nigeria, growth and development of financial sectors in many and tontines in Cambodia). countries around the world. In general, cooperative financial institutions differ IFC’s experience in the LAC region markedly from the banks IFC typically invests in. For instance, they are nonprofit organizations and Investment and Advisory Services teams are working sometimes unregulated. The ownership structure of together on a number of transactions with cooperative cooperatives is typically diverse, as they are owned institutions in the Latin America and the Caribbean by their clients with an extreme form of democratic region. Over the last three years, IFC has invested in ownership: each member of the organization has two wholesale banks that are owned by and fund their one vote, independent of the share of capital he or respective cooperative systems: Bansicredi in Brazil, she owns, and some form of regular contribution to and Fedecredito in El Salvador. IFC has also invested capital is levied on all members. Cooperatives tend to in and provides advisory services directly to Coopenae, offer a broad range of products rather than focus on a cooperative in Costa Rica (see Box 2). Investments lending, as many microfinance institutions do. Profits in two more cooperatives in Costa Rica were recently are usually invested in growing the capital base of the approved by IFC investment committees (for a total institution, but over time they tend to be seen as an of $15 million in debt), and cooperative institutions indicator that lending rates can be lowered and/or in Colombia and Paraguay are being appraised. savings rates increased, squeezing margins. LESSONS LEARNED Even though the governance structure can be a challenge, and the lack of focus on profit and growth a source of Lesson 1: Financial cooperatives play an concern, there are many reasons why these institutions important role in financial sector development. are interesting to IFC. Cooperative financial institutions are very close to their owners—the clients. They In many economies, significant proportions of the appreciate their financial needs and the potential of population are members of cooperatives. Cooperatives their cash flows. They also tend to play an important do not always provide all the financial services that role in the communities they serve and understand individuals or companies need, and indeed they may the industries and value chains that make up the local be prohibited from doing so, as in Costa Rica, where economy. For this reason they usually do the following: the regulator, SUGEF (Superintendencia General de Entidades Financieras), limits cooperatives to working • Develop innovative financial products. only with individuals and nonprofit organizations, according to the legislation (Law 7391). However, they • Expand outreach by penetrating underserved regions often are clients’ first choice because of pricing or their and rural communities. position in the community. An IFC engagement with the cooperative sector should always be considered as • Promote broader access to financial products, part of a comprehensive financial sector development particularly for micro and small enterprises, which strategy. SMARTLESSONS 52 Lesson 2: Cooperatives promote outreach. Box 2: IFC Investments in LAC Cooperatives Cooperatives have proven to be extremely successful Sicredi is a network of Brazilian financial cooperatives in reaching market segments that are traditionally present in more than 800 towns and cities—typically underserved by the rest of the financial system, such smaller communities in the interior of the country, where as women, SMEs, and rural populations. For example, banks have little presence. In 2012, the network grew by Bansicredi is the only financial institution present in 20 percent, closing the year with $15.7 billion of assets, 100 of the 800 Brazilian towns served by the Sicredi equity of $2.3 billion, $10 billion of deposits, and net cooperative system. In countries with smaller institutions, income of $336 million. The total membership of this it is a good idea to work with a wholesale entity or cooperative system grew by 13 percent in 2012 to reach aggregator, such as Bansicredi in Brazil and Fedecredito 2.3 million. The Sicredi cooperative system is the owner in El Salvador. IFC can contribute to the expansion of of a bank, Bansicredi, created in 1995, with equity of access to financial services by supporting the growth $239 million. It was the first cooperative bank in Brazil of cooperatives and, by interacting systematically with and allows the network members to access government a number of players, can be a factor in reaching IFC Development Goals targets. lines of finance and the national payments platform. Fedecredito is an integrated system that includes the Lesson 3: Cooperatives develop innovative federation, 48 financial cooperatives (cajas de credito), products and services. and seven workers banks. In December 2012, the system had 671,000 shareholders, a total loan portfolio of $893 Because of the position that cooperatives have in their communities and the proximity to their clients, they are million, $518 million of deposits, and equity of $246 often innovators in product and service development. million. In fiscal year 2012, IFC committed $30 million For example, cooperatives in Costa Rica intimately to the federation, backed by a securitization of remittances understand the production chain of a variety of from migrant workers sending money from their U.S. agricultural products and thus adjust loan tenors to homes to their families in El Salvador. harvests, and payment mechanisms to client cash-flow variations. For instance, milk purchasers pay biweekly Coopenae is the largest regulated financial cooperative loan installments for farmers. It is also common to see in Costa Rica. It is the sixth-largest private financial cooperatives encourage savings practices by promoting institution in assets and fifth-largest in equity and is accounts for children of their members. Financial owned by its 73,000 members. Coopenae closed 2012 cooperatives are also interested in returns on investment. with $830 million of assets, $154 million of equity, and Although they are essentially nonprofit entities and $14 million of net income. In FY12, IFC committed a tend to maintain slim margins to satisfy their owners $15 million A loan, and mobilized a further $15 million (the clients), in practice their desire to grow and offer from FMO.a In parallel, Advisory Services initiated a broader product platforms provides an incentive to project with $367,324 to support Coopenae in building generate healthy returns. expertise with financial services for Costa Rican small and medium enterprises (SMEs). Lesson 4: Different strokes for different folks. a. FMO is The Netherlands Development Finance Company. The business model for financial sector cooperatives appears to be standard, but actually it varies significantly 53 20 YEARS OF MICROFINANCE PROJECTS IN IFC across countries and even within markets. It is essential management. For this reason, many cooperative systems to understand local legislation as well as the origins have evolved complex checks and balances, such as the and drivers of each institution. For example, closed appointment of several corporate bodies (regional and cooperatives act like clubs and seek to grow within a delegate meetings, electoral and oversight committees), predefined client group (like IFC’s own credit union, restrictions on board membership (typically allowing which is limited to employees). However, open only eligible cooperative members to be appointed as cooperatives seek to capture new members and as a result directors), incorporation of wholesale banks run by have much more commercial, competitive practices, experienced bankers (as with Bansicredi), and limits which makes them more interesting targets for IFC on members’ withdrawal of capital (as in Costa Rica, engagement. For instance, Coopenae began life as a where regulation limits it to a maximum of 10 percent cooperative for teachers but is now seeking to attract a year). Caution is called for, particularly when a members across all segments of Costa Rican society. potential investee is not regulated. Lesson 5: More complex funding options are CONCLUSION attractive. IFC has engaged with a number of cooperative financial Financial cooperatives tend to be liquid, because they institutions in the LAC region and has found them can capture member deposits quite cheaply (especially to be professional, well-managed organizations, where they participate in national deposit insurance operating at the frontier of access to services in their plans). This means that short-tenor debt financing usually markets. This renewed focus on cooperatives, together is not attractive to such institutions. However, they are with innovative transactional structures, is making a likely to be capital constrained, because their governance significant contribution to international development structure and limited returns do not attract equity goals in the region. There is an opening to build on this investors. Therefore, subordinated debt (particularly experience and evaluate the opportunity to support the in second-tier banks, such as Bansicredi), longer-term development of cooperative sectors in many markets credit lines, structured products, and straight equity around the world. I encourage colleagues who have from IFC may be interesting products to propose. worked on transactions with similar organizations to share knowledge and continue to build on this Lesson 6: Examine issues of governance early experience. in the process. Given their typically dispersed ownership base, financial cooperatives face governance risks deriving from the separation of ownership and control. (These risks differ from those caused by concentrated ownership ABOUT THE AUTHOR structures commonly found in developing countries.) Terence Gallagher is the Regional Microfinance It is important to study governance carefully, with the Specialist for the Latin America and Caribbean region. He has spent more than 20 years financing economic close involvement of IFC’s specialists. development in the region and has been with IFC for four years. Though the clients are the ultimate owners, it is often in their long-term interests to implement mechanisms Approved by Martin Holtmann, Chief Microfinance Specialist. that effectively guarantee stability and professional SMARTLESSONS 54 Lessons from the Middle East & North Africa Managing Credit Risk in Microfinance: Challenges in the Wake of the Arab Spring Enda Inter-Arabe (ENDA), a market-leading microfinance institution in Tunisia, was one of the first such institutions affected by a repayment crisis linked to the Arab Spring. However, rather than spiral out of control, ENDA took quick steps to limit the damage while demonstrating an unwavering commitment to its clients. Today, IFC is helping ENDA remain at the vanguard of regional microfinance institutions through the adoption of advanced risk management practices. This SmartLesson highlights the lessons learned from the crisis, explores the nuances of effective credit risk management, and shows how microfinance institutions like ENDA can remain ahead of the curve in the years ahead. Tunisia, where a micro-entrepreneur’s self-immolation Box 1: Enda Inter-Arabe in December 2010 set off the chain of events now known as the Arab Spring, was at the forefront of a wave Founded in 1990 as part of the international ENDA Third of revolutions in the region that brought both promise World network, Enda Inter-Arabe rose to become one of (the evolution toward more democratic governance) the largest and most successful microfinance institutions and distress (socio-economic disruptions). in the Arab World. In 2003, it became the first, and only, sustainable microfinance institution in Tunisia. In 2011, Despite the conventional wisdom that microfinance it achieved full autonomy when it registered as a local is countercyclical and typically more resilient in the non-governmental organization. face of macro-level shocks, the country’s microfinance sector (the MENA region’s third largest, with between ENDA offers an array of credit products as well as non-credit 300,000 and 400,000 borrowers1) was affected by the business development support and training aimed primarily economic malaise that followed the revolution. With at low-income households and female microentrepreneurs. Tunisia’s economy in crisis, its leading MFI, ENDA By January 2013, ENDA had over 218,000 active clients, Inter-Arabe (ENDA), began to accumulate loan 68 percent of them women, and an active loan portfolio delinquencies across its portfolio. of $87 million. IFC is currently providing ENDA with an investment and advisory services package focused on building over 6% by October 2011. capacity in key areas, including nonperforming loans and risk management. This support has been During the revolution, ENDA had to temporarily timely. ENDA, which had always enjoyed exceptional close some branches, and many of its microcredit portfolio quality, saw its Portfolio at Risk as of 30 clients were deeply affected by the contraction of the Days (PAR>30) rise from 0.3% in December 2010 to economy. For example, small entrepreneurs near the 1 Ministre de Finance de Tunisie “Vision Concertée pour le Dével- Libyan border were unable to continue cross-frontier oppement de la Microfinance,” 2011 57 20 YEARS OF MICROFINANCE PROJECTS IN IFC trade (commerce à valise), while much of the wider LESSONS LEARNED population faced difficulty as inflation rose, revenues from tourism and other key sectors declined, and Lesson 1: Stand by your clients, and they will households refrained from spending. stand by you. Like many MFIs, ENDA finances the majority of As a mission-driven organization that was determined its credit portfolio through repayments, and thus to help its clientele in a time of difficulty, ENDA rising delinquencies presented not only an increased did not merely adopt a reactive approach to rising credit risk but operational and liquidity risks as well. delinquencies by panicking, turning off the faucet Fortunately, the people, processes, and systems that on new loans, and focusing entirely on repayment. ENDA had nurtured and put in place over many Instead, it remained true to two tenets of (micro-) years proved resilient. Furthermore, before the dust banking orthodoxy: know your client (KYC) and had fully settled, ENDA began working with IFC relationships matter. The staff held meetings with to proactively implement new measures to enhance clients in all branches to better understand their its risk management—particularly in credit and problems and how best to support them. operational risk, which historically are the most serious risk areas affecting MFIs—to minimize the The outcome of these meetings included the likelihood of such a situation recurring and, if it did, development of a new “disaster” loan product, which to mitigate its severity. was made available to distressed clients at a subsidized rate, and the selective use of rescheduling and Figure 1: ENDA Key Trends (2010–2013) SMARTLESSONS 58 repayment grace periods. ENDA also went on the into different categories, such as willful default radio and television to reiterate its commitment to its (estimated at just 1% of clients) as opposed to default clients and the fight against poverty in Tunisia. Taken due to economic hardship. This allowed the staff to together, these steps helped assuage the concerns of better target its efforts, including negotiation of new both clients and the broader public. terms and/or collection of partial payments from clients. Later, ENDA further tailored its recovery This is not to say that ENDA continued, in the strategy to: differentiate loan officers following up on aftermath of the crisis, to grow apace as it had loans less than 90 days overdue from recovery agents before. Rather, it slowed its expansion and adjusted focused on loans more than 90 days late; categorize its incentive system to emphasize portfolio quality clients by relative likelihood to repay; highlight more over volume. However, it did not turn away from at-risk segments of overdue loans; and understand the those clients that were most in need. It continued to effect on provisioning. To assure success, these efforts serve agri-entrepreneurs in at-risk rural areas, opened were well-documented and integrated into ENDA’s new branches in the south of the country, and even management information system (MIS) to enable provided specialized services targeting refugees and effective monitoring and appropriate follow-up by returnees from Libya. recovery agents or supervisors. ENDA’s financial partners (including IFC) likewise Lesson 3: Nurture strong relationships with stood by it and continued to make available new loan your staff. facilities and support. By 2012, as its portfolio began to stabilize and improve, it even began piloting a start-up Often overlooked in a crisis is the importance of loan product for youth entrepreneurs (Bidaya) as well the relationship between a MFI and its staff, and as exploring new channels (mobile banking) as a way to consequently its staff and clients. ENDA employs serve clients more efficiently and cost-effectively. over 1,000 staff spread across more than 65 branches. After the revolution, many employers in Tunisia When the revolution started, in many cases, our began to face more confrontational attitudes from their employees, which challenged work clients protected the ENDA branch from potential environments and also led to higher turnover rates. looters. While ENDA likewise experienced this change, the —Essma Ben Hamida, strong organizational culture it had built over the ENDA Co-founder and Executive Director years assured it the support and loyalty of its long- time staff, many of whom protected branches or Lesson 2: Develop a tailored recovery strategy. volunteered to assist clients in affected areas. A deliberate, well-tailored recovery strategy is a critical However, ENDA’s management also needed to take element of any effective response to rising repayment quick and decisive action with regard to its personnel. issues. ENDA quickly put in place a dedicated For example, it adjusted salaries to ensure employees recovery team, organized high-profile campaigns to had a stable income to offset the lower incentives collect overdue amounts, and even instructed some that ensued from declining loan volumes. It also gave of its call-center agents to follow up with delinquent branches and staff new autonomy to resolve issues clients by telephone. It also segmented its past-due in the field, and used IFC assistance to invest in loan portfolio, based on conversations with clients, additional training on recovery strategies. And rather 59 20 YEARS OF MICROFINANCE PROJECTS IN IFC than give its more experienced staff the difficult task economic slowdown and the closing of border with of recovering overdue loans (which they often viewed Libya, a close analysis of field activity revealed that negatively), ENDA wisely shifted younger and more staff often deviated from its standard loan appraisal recently hired field employees into these roles. As and approval process. For example, loan officers often ENDA fielded this new team of dedicated recovery focused their analyses exclusively on a client’s business agents (RAs), it became necessary to weigh cost and failed to factor total household income and against benefit. Indeed, when RAs began collecting expenses in calculating loan size or a client’s ability to smaller amounts than expected, ENDA reduced the make monthly payments. Furthermore, it was clear fixed amount it paid RAs and increased the incentive- that adherence to credit policy varied from branch to based portion of their monthly salaries, leading to branch and region to region. better results. Despite challenges, ENDA’s swift human resource interventions yielded significant To address these challenges, ENDA sought additional dividends, including keeping staff morale high and training and reinforcement of oversight mechanisms improving recovery of overdue loans. in the field to improve and standardize the loan- making and review processes. In addition, experts Lesson 4: Go back to basics: reinforce credit helped ENDA build an automated anomaly- underwriting. detection system that could be linked to the MIS. The system uses a linear-regression model that detects While much of ENDA’s delinquency was linked to discrepancies between financial analyses of a client the revolution, coupled with Tunisia’s subsequent (for example, summaries of business revenue and income, household income and expenses) and the loan amount requested; any anomaly will automatically trigger further analysis. Finally, to reinforce solid credit-underwriting decisions, the institution began deploying credit analysts who helped further develop a risk culture by scrutinizing specific applications. Lesson 5: Harness data to create an early- warning system... Relying on the portfolio-at-risk metric, a conventional but lagging indicator of microfinance portfolio quality, merely permits the assessment of risk events “after the fact.” Instead, ENDA began to adopt and integrate new tools into its monthly reporting system to monitor the accumulation of credit risk before a repayment problem involving a few clients becomes a portfolio issue. These include vintage curves which graphically represent default in a given set of loans over time, allowing disbursements to be further segmented An entrepreneur and ENDA client. by region, product, or business unit. ENDA also has adopted the use of transition matrices which monitor SMARTLESSONS 60 arrears in a tabular format by predicting the likelihood of previous customers and make predictions on the of deterioration or improvement in a given category relative credit risk of new clients (e.g., likelihood of of arrears (30-day, 90-day). Tools of this sort, which default). It was prudent to pilot such a tool offline constitute leading indicators, can be used for more for up to a year to allow for testing and adjustments accurate loan portfolio provisioning as well as to guide to the model. Thus far, the pilot test has shown or monitor the effectiveness of collection and recovery strong results, and the tool demonstrates strong strategies, and thus allow MFIs like ENDA to take predictive ability. ENDA is currently training its proactive risk mitigation measures in a timely fashion. staff in the implementation of the credit scoring tool, and hopes to roll it out formally by the summer of Lesson 6: ...and a predictive credit scoring model. 2013. However, credit scoring should neither replace nor undermine the qualitative research typically Beyond simply measuring and monitoring risk, effective undertaken by ENDA loan officers in the field, nor risk management should help avoid or at least mitigate should it substitute for sound underwriting practices, the key risks facing an organization. In the case of adequate financial analysis, or strong customer financial institutions, credit risk is usually of primary relationships. importance. Given its already extensive database of client information, ENDA was well-placed to develop a Lesson 7: Credit analysts under a risk creditscoring tool that would help it analyze and approve management unit provide an independent view. loans with greater sophistication, and ultimately reduce losses from avoidable loan defaults. Taking a page from the playbook of banks and advanced MFIs (such as those in the Latin America By mid-2012, a credit risk expert was brought in to and Caribbean region), ENDA took the difficult help ENDA design an initial scoring model that used step of placing an independent check on its lending predictive statistical methods to analyze the behavior and commercial activity: the creation of a credit Figure 2: ENDA Vintage Curve Analysis (2010–2011) 61 20 YEARS OF MICROFINANCE PROJECTS IN IFC analyst position. In principle, a credit analyst’s role country’s regulatory body for microfinance prepares is straightforward: to focus exclusively on portfolio to enact new legislation that may transform the sector quality by assisting with ongoing credit scoring; to by allowing for new commercial entrants. further analyze loans that meet certain risk criteria; and to assess incidents and/or default patterns. Given its strong foundation and adept decision- making, ENDA has absorbed the lessons of the crisis However, implementation has been challenging, and and relatively quickly returned to sustainable growth ENDA continues to face a number of key questions. and strong portfolio quality. It has also, with the One of these is how to select the right candidates. Thus support of IFC, set high standards among MFIs in far it has begun using high-performing loan officers who the region in the management and handling of risk. have aspirations for greater responsibility and who view Its success is critical: estimates put the number of the role of credit analyst as a step forward career-wise. micro-entrepreneurs still with limited or no access to A second important consideration is how many credit finance in Tunisia at 1.2-1.4 million (nearly 12% of analysts are sufficient vis-à-vis the portfolio or staffing the population). size, and how to quantify their contributions against the costs they incur. Furthermore, should credit analysts be In fact, as part of its regional strategy, IFC is now based in the field or at headquarters? How should they providing risk management advisory support to other be deployed? To whom should they report? MFIs in the region to help them adopt and integrate advanced risk management tools and systems Risk management units typically do not insert into their operations, measure and mitigate risks, themselves into the daily business of MFIs. They and continue to expand outreach to low-income should ideally retain an independent outlook and households in a more sustainable manner. Given its focus on making recommendations about risk rather achievements, Tunisia and ENDA are well-placed to than getting pulled into real-time decisions typically remain at the forefront of MFI developments in the the purview of operations staff, whose commercially- MENA region. driven goals may seem at odds with their own. However, credit analysts involved in credit decisions typically do the opposite: they are incentivized to say ‘no’ to any borderline new loans and thus bedevil staff and managers who have their own portfolio growth targets linked to incentives. Still, these conundrums are not unusual; each MFI must find its way, taking ABOUT THE AUTHOR into consideration sound practice, as well as its own unique character and risk tolerance. Matthew Leonard, an Operations Officer with IFC’s Cairo office, has 12 years of experience in livelihoods and microfinance. He works with the Microfinance CONCLUSION Advisory Services program in the MENA region. Today, Tunisia and the wider region continue Approved by Xavier Reille, Manager, EMENA. to suffer from political and social tension, rising unemployment, and slower economic growth, all of which present an elevated risk environment for MFIs. This is particularly relevant to the sector as the SMARTLESSONS 62 Lessons from Transformation: Recognizing When a New Strategic Investor Is the Best Way Forward in Bridging a Financing Gap “Transformation” in the microfinance world began with the creation of BancoSol in 1992, inspiring a host of non-governmental organizations (NGOs) to become regulated financial institutions. The boons were easy to see: access to commercial capital, opportunity to exponentially increase outreach, and diversification into other financial products such as savings and payment transfers. From an industry perspective, this model meant private sector ownership and accountability from a formerly “rudderless” institution—and, ultimately, improved governance, strengthened internal control structures, and financial sustainability. And these improvements spurred strong regulatory support. Many NGOs achieved the desired objectives, but for some the journey was not without pitfalls and challenges. This SmartLesson examines the transformation and subsequent experience of one such institution, Kashf Microfinance Bank (KMB). It illustrates the challenges facing a transformed entity as well as the pivotal role that IFC can play in salvaging a deteriorating situation and turning it around for the benefit of the bank, the investors, and the sector. Pakistan has significant potential for the enhancement priority for both IFC investment and advisory services, of microfinance services, with an unmet demand given Pakistan’s large population, IDA status, and from approximately 30 million clients with market underdeveloped financial markets. penetration at only 9 percent. The portfolio value of the microfinance sector was $375 million (36 KMB was created through the transfer of the larger- billion Pakistani rupees) at end-2012 and expected ticket portfolio of the NGO, Kashf Foundation to reach $980 million (94 billion Pakistani rupees) (KF). Following a decade of success by KF, KMB was by 2016. The number of active borrowers is expected established in June 2008 with a vision to become a to increase from 2.07 million to 3.2 million for the leading microfinance bank by offering a diversified range same period. Hence over 90 percent of the demand of financial products and services to low-income wage remains unmet. The sector comprises 10 microfinance earners and microentrepreneurs. The name “Kashf ” banks, 9 specialized microfinance institutions, 5 rural means “miracle” in Urdu; the concept was modeled support programs, and 30 other providers (NGOs, after Grameen Bank and aimed to encourage people leasing companies, and so on). Approximately 56 to change their lives through this miracle. KF was the percent of the portfolio market is controlled by main sponsor, with 51 percent shareholding through microfinance banks, while 60 percent of borrowers a holding company, Kashf Holdings Limited (KHL). are with non-bank microfinance institutions. With IFC held 19 percent, and Women’s World Banking, this dynamic backdrop, supporting microfinance is a Triodos, and ShoreCap held 10 percent each. 63 20 YEARS OF MICROFINANCE PROJECTS IN IFC sponsor. The analysis yields many lessons that put into context the potential pitfalls that a transformation may face and the options available to support the client while protecting IFC’s position. LESSONS LEARNED Lesson 1: The parent entity needs to ensure that solid credit and operational procedures are passed on. At the outset, KMB experienced some operational problems such as a deteriorating portfolio quality, staff turnover, and link between the NGO and the Bank. These problems were exacerbated by challenges that developed relative to the relationship dynamics between the management, board, and staff, which were partially responsible for the eventual resignations of the chief executive officer, the chief financial officer, and the head of risk management in 2011. This situation has improved over the years by shoring up the internal processes, and as a result, PAR improved significantly in April 2013 to just above 2 percent, albeit at the cost of important write-offs. The development impact that IFC anticipated was also below target as the average annual growth in outreach was lower than the industry KMB’s branch network. average. Some of these weaknesses could have been averted The vision was for KMB to leverage KF’s outreach through better handholding and technical support and expertise and commence lending operations in from the NGO, which had the capacity to do so, November 2008. In June 2009, KMB also introduced given that it was running its own independent training a deposit product. It is currently present in 37 cities in programs. Initially, KMB did not have a preemptive Pakistan, with a network of 31 branches and 15 service strategy to counter some of the political influences centers with an outreach of 27,313 customers as of which had weighed down the portfolio quality. The April 2013. However, the bank was unable to meet its NGO had a deeper understanding of the clients as planned targets and was acquired by Finca Microfinance well as of the political playing field and was expected Cooperatief U.A. (Finca) in May 2013. Finca took a to swiftly assist with implementing a strategic plan for sizable 82 percent shareholding in April 2013. the credit issues as well as the external factors leading to the problems. While there was some collaboration, We will trace the events that led to this transformation KF was unable to play the role required as the bank’s experience, which resulted in the bank seeking a new “technical backbone.” SMARTLESSONS 64 Lesson 2: Carefully assess capital was already in 21 countries across Latin America, requirements—with a clear plan for how to Eastern Europe, Sub-Saharan Africa, and MENA, raise additional equity if needed. and was looking for an entry into the South Asian microfinance market. During its first year of operations, KMB became aware of a capital shortfall. It had made its initial budget Finca found a good fit with KMB; the pricing was projections in 2007/8, but by the time operations took favorable, the bank already had a network of branches, off in 2009, the U.S. dollar had depreciated by 30 the franchise was well-recognized across the country, percent, resulting in high inflation. As a consequence, and other shareholders—namely IFC and Triodos— costs spiraled—something KMB had not budgeted for. were reputable development finance institutions that Moreover, in November 2010, the central bank, State Finca was already involved with globally. IFC’s stated Bank of Pakistan (SBP), raised the minimum capital intention to stay in KMB also influenced Finca’s requirement for microfinance banks to $10.9 million decision, because that allowed it to work with a global (1 billion Pakistani rupees) to take effect incrementally partner in an unfamiliar market. Other international by 2013. shareholders, such as Acumen Fund, Women’s World Banking, and ShoreCap, decided to sell their stakes, The bank’s shareholders looked to the holding company, mainly because their investment horizons were nearing KHL, to lead the effort to get it through this crisis. completion, among other internal factors. Although To avoid a situation where all shareholders looked at KMB had not achieved its targets on the microcredit each other for capital to the detriment of the bank, side, it has managed to attract sizable deposits, an IFC engaged with all shareholders to explain its important and decisive factor for Finca, as KMB has policy of not becoming the single largest shareholder, no expensive commercial lines, with deposits providing exposure constraints, and its understanding that the ample liquidity. sponsor shareholder is expected to take the initiative in recapitalizing the bank, should the need arise. Lesson 4: Advisory assistance can be beneficial only if the recipient has absorption capacity. Conferring with the other investors brought about a consensus that KMB needed to find a deep-pocketed KMB has benefited from substantial advisory investor who could also provide technical guidance. assistance from IFC and ShoreCap, amounting As a temporary fix, IFC and other investors raised to about $200,000 each, which has been used for capital by way of a rights issue in September 2012, such activities as conducting a feasibility study, which improved the capital adequacy requirement to developing a business plan, creating an IT platform, 28.3 percent in September 2012. and providing international training programs for the bank’s management team. As an important part Lesson 3: IFC can leverage its global of the advisory program, IFC conducted a corporate relationships to find interested investors. governance assessment aimed at ensuring continuity of the board and commitment to the for-profit objectives KMB tried soliciting investor interest on its own at of both KMB and KHL. various junctures, but its efforts fell through because of the high level of risk associated with the country’s The substantial advisory assistance could have yielded overall political and macroeconomic position. IFC better results had the bank’s absorption capacity been was able to leverage its relationship with Finca, which stronger and policy application more rigorous across 65 20 YEARS OF MICROFINANCE PROJECTS IN IFC all areas. A more systematic and organized effort to CONCLUSION internalize the advisory recommendations might have led to better overall indicators and avoided the Although KMB did not achieve the fundamental heavy write-offs that became necessary. The Bank’s objectives of the transformation within the stipulated absorptive capacity was hampered by a lack of focus time-frame, IFC reoriented its role in the engagement, on implementing the core learnings due to the pre- which led to the successful entry of a specialized occupation with the capital raising exercise and the microfinance agency. These augur well for the sector, rise in outstanding dues. In hindsight, more involved since Finca’s investment of approximately $9 million oversight at the board level could have been pivotal is to date the highest foreign direct investment in a to the success of the TA. On a positive note, however, microfinance bank in Pakistan. That this has been KMB has amassed significant deposits in three years welcomed by the regulators is a testament to the in the amount of $20.52 million, providing liquidity stewardship of the original investors, amongst which support. The association of the Bank’s franchise with is IFC, and heralds new opportunities for this sector, that of the well-recognized NGO contributed to success holding enormous relevance and potential. on the liability side. Finca’s entry was the first investment in an existing Lesson 5: When the sponsor shareholder is microfinance bank in Pakistan by a specialized unable to fulfill its obligations, IFC must take international microfinance institution and materialized on the role of honest broker. after almost two years of IFC’s constant engagement with a client that other investors had metaphorically IFC actively supported the bank by encouraging all written off. Finca, which brings global expertise, an stakeholders toward the common goal of finding a extremely high profile, and an accomplished board of strategic investor, despite initial pushback. There was microfinance professionals, is expected to review and intensive internal coordination within IFC that made revise KMB’s business plans. IFC will remain engaged this possible. IFC committed resources by becoming with this promising entity as KMB redefines itself in part of a strategic investor committee that held biweekly the microfinance space. This is also an opportunity meetings to coordinate efforts and align all stakeholders. to reinvigorate the Bank’s operations and focus on IFC also joined meetings with regulators and helped core objectives, such as product development and expedite the process of regulatory approvals. outreach penetration, as it is now unfettered by capital constraints. IFC continues to remain engaged during It was important for IFC to articulate and demonstrate this journey. its sincerity because of its 15 percent shareholding in Finca at the global level. In a crisis situation like the one KMB faced, IFC’s honest and sincere efforts needed to remain clear. It is extremely important to ABOUT THE AUTHOR get all parties on the same page and to find common Faeyza Khan, an Associate Investment Officer with a ground, because every shareholder has its own interests focus on microfinance projects, joined IFC in 2008 and has worked in financial markets globally. She covers and position, which may be at cross-purposes with financial markets in Europe and the Middle East and others, depending on the situation. Cooperation North Africa. can be accomplished through frequent, intense, and candid communication with all parties, as was the Approved by Martin Holtmann, Chief Microfinance Specialist. case here. SMARTLESSONS 66 Islamic SME Banking: Upscaling from Micro to SMEs in Yemen Al Kuraimi Islamic Microfinance Bank (KIMB)—one of the fastest growing and most innovative new microfinance institutions in the Arab world—is all the more remarkable given that it operates in the fragile and conflict-affected environment that pervades Yemen today. The private sector is a key pillar of the country’s development strategy, and SMEs (small and medium enterprises), a core driver of economic diversification and job creation, have become a key focus. But many SMEs lack access to finance, with banks reluctant to lend and microfinance institutions unfamiliar with this segment. To address this gap, IFC is working with KIMB, its long-term partner, to design and pilot a new SME financing product. This SmartLesson shares insights from the product design and early pilot phase that may prove useful for other regional microfinance institutions looking to enter this important space. Despite recent progress, Yemen—one of the Arab world’s Box 1: KIMB’s Story poorest countries—remains in a difficult transition period. In the wake of the 2011 uprising, its economy Al Kuraimi Islamic Microfinance Bank arose from a highly contracted by nearly 12.7 percent and the poverty regarded family business that provided money transfer rate rose to 54.6 percent. Today, despite early signs and exchange services since 1995 and had a large branch of recovery, businesses still face challenges from poor network. An innovative new participant in the micro and infrastructure, frequent power cuts, petroleum shortages, SME finance space in Yemen, KIMB received a microfinance and fragile security. However, Yemen’s transitional bank license from the central bank in 2010. government, agencies, and outside donors such as the After the uprising in 2011 slowed its new activities, KIMB European Union and IFC have begun supporting the approached IFC for help in adopting international sound development of the SME sector, which is critical to practices in micro and SME banking. IFC saw an opportunity job creation and, ultimately, the nation’s economic to help the bank expand access to finance in the country— development. sustainably and profitably. KIMB began introducing new financing (credit) and savings products more seriously. Although SMEs make up nearly 96 percent of the Today, it offers a range of products through an extensive nation’s GDP, banks remain hesitant to lend to them. network of branches and agents, as well as mobile banking. And the growing microfinance sector has focused almost exclusively on the microenterprise segment, with an average loan size of about $400. This has left IFC is helping one such institution, KIMB, address SMEs in a broad “missing middle,” forced to rely on this gap (see Box 1). families, moneylenders, or short-term finance options from suppliers. It has also opened the door to a large Today, IFC supports KIMB through such capacity- and potentially profitable SME market for financial building activities such as product diversification institutions ready to take advantage of the opportunity. into SME and housing finance, risk management 67 20 YEARS OF MICROFINANCE PROJECTS IN IFC Figure 1: KIMB Portfolio Growth from June 2012 to June 2014 and governance, strategic planning, IT (information IFC commenced its support by assembling a team of technology), and human resources. Since the support specialists in both SME banking and microfinance began, the number of people opening savings accounts at and engaged a specialized consulting firm to assist the bank has taken off, and the microfinance institution with implementation. The work began in mid-2013 has achieved an astonishing level of liquidity (see Table with a rapid market assessment to better understand 1). Although KIMB has always taken a cautious and both the supply side (including existing and potential prudent approach to extending financing, as it builds competitors) and the demand: e.g., characteristics of capacity it has already more than tripled its financing the SME segment, including key sectors, average size portfolio (see Figure 1). (employees, turnover), as well as current financing habits, preferences and needs. While KIMB was an The Opportunity Table 1: KIMB Indicators (June 2014) In the large and underserved SME segment, KIMB saw an opportunity to contribute meaningfully to Indicator Value their country’s development, as well as a means No. of Financings 8,094 to deploy the banks excess liquidity. Inspired by Value of Financings US $11,278,900 successful examples of SME financing, such as PAR>30 days 0.40% ProCredit Bank, it sought IFC’s global expertise No. of Deposit Accounts 317,376 to help it upscale from financing micro- and very Value of Deposits US $109,469,000 small enterprises (VSEs), to the new frontiers of SME finance. SMARTLESSONS 68 A new KIMB branch office in Yemen. “early mover,” other banks and MFIs were primed to With IFC’s assistance, KIMB established a separate SME enter the space. unit with a team of SME finance officers (front-line and back-office) led by an SME unit manager—reflecting the Next came a product design phase to define the key new SME business line and the differentiation necessary product features, including eligibility, size, maturity, within the bank to serve this segment effectively. KIMB pricing, collateral, and repayment—while respecting developed clear job descriptions, clarified reporting the principles of shariah (Islamic finance), which lines, and recruited (internally and externally) staff are not only important to KIMB, but better reflect for these positions. the market demand. KIMB started with a typical murabaha1 product, financing working capital or Accompanying the product development process fixed assets for existing businesses in all sectors, with was the design of the process flow of the new SME amounts from $10,000 to $100,000 and terms of financing business line, ensuring that it was backed 12–24 months. by clear policies and procedures (including shariah compliance). Finally, the time came to train KIMB 1 An Islamic financing structure similar to “rent to own,” whereby an staff and senior management on the SME financing intermediary buys an asset/property and then agrees on a sale price technology—a rigorous market and financial analysis (including a profit for the intermediary) that can be made through a series of installments or as a lump-sum payment. technique that is critical for determining the structure 69 20 YEARS OF MICROFINANCE PROJECTS IN IFC of the business customer’s balance sheet and reliability KIMB’s screening process and their own tried and of its cash flow, market size, and profitability. true SME lending technology. Early in 2014, KIMB began pilot testing the new Lesson 2: Consider the importance of segmentation. product in two branches in Sana’a, Yemen’s capital and economic hub. It is proceeding quite cautiously KIMB hoped to use the market assessment as clear as it explores the new segment, disbursing 81 loans guidance on the characteristics of the new market ($1.1m) as of June 2014. However, many more are it was entering. Not only was the SME segment a already approved and awaiting appropriate collateral completely new territory for the bank, but also the from clients before disbursing. Furthermore, KIMB higher financing needs of small businesses in Yemen is tackling a larger segment of SMEs, with a greater ($10,000 to $100,000) meant that it was putting larger range of financing from $5,000-$100,000 (avg. amounts of its own capital (and effectively, in Islamic $15,000). finance, its customers’ savings) at risk. The consultants’ first attempt at the market study resulted in rather LESSONS LEARNED generic findings — e.g. trying to define ‘SME’ in the Yemeni context, and quantifying the SMEs broadly Lesson 1: Relearning the rule of thumb: understand by city, sector, years in business, employees, financing the local context. needs, and size. Understanding (and adapting) to the local context However, IFC worked with KIMB and the consultants represents a fundamental lesson that we are continually to go deeper into describing the different segments and re-learning. Because of the lower income levels, an SME sub-segments—which ones were typically more risky in Yemen (with a GDP per capita of close to $2,500) and which activities had stronger markets and offered doesn’t look like those operating in higher-income more opportunities. Understanding the characteristics of countries—in number of employees, average turnover, different business activities and which types to target or and financing needs. Also, the level of education, avoid, for example, has since helped underpin a smarter informality, and lack of training and support services client acquisition strategy by KIMB, while exposing mean SMEs in Yemen often do not have comprehensive the bank’s staff to the actual risks and opportunities financial records or documentation for loan officers in the local SME segment. to analyze. Lesson 3: Start slow, make small mistakes and Another challenge is how to manage credit risk during learn from them. the underwriting process. The traditional model relies primarily on a rigorous financial analysis of KIMB’s senior management had a right to be nervous the SME, together with a check of the local credit about venturing into the new frontier space of SME bureau. That may suffice in some countries, but finance, especially since many of the staff had little in Yemen—where informal family and business formal banking training or background. Indeed, because relationships are central to the local economy—a the company’s original business model consisted of detailed reputation/background check (talking to the offering money transfer and exchange services, it had neighbors, suppliers, and so on) is equally important little experience putting its own capital (and that of its in determining risk. IFC’s support and quality control depositors) at risk. An early default with a significant helped ensure consultants leveraged the best of both sum of money ($75,000 to $100,000) could sour the SMARTLESSONS 70 Figure 2: KIMB SME Portfolio Growth Path (Early 2014) management on this strategic entry into a potentially to learn more about the business (Figure 2 illustrates large and important new market. llustrates early SME pilot results for early 2014). To accommodate these concerns, IFC helped KIMB Lesson 4: Work around the limitations of not to scale back the pilot phase targets (for example, being a full-scale bank. disbursing 4–5 SME financings in the first months, rather than the initial targets of 15–20). This allowed As a microfinance bank, KIMB is not licensed to SME staff to receive proper training and coaching, provide a complete array of banking services, including rather than rushing to meet their targets in a new and checking accounts and trade finance. This could pose unfamiliar landscape. Such a slow start also meant a limitation, as when microfinance providers seek to that any small errors or oversights were captured in scale up to SME lending (a customer segment with credit committees before disbursement. Furthermore, more sophisticated banking needs), its services must during the initial months the SME pilot was run evolve. The institution should also begin to look beyond largely out of KIMB’s head office, with substantial a single product focus to a more holistic SME banking senior management involvement. Even when some approach. Furthermore, it might begin to study its finance officers were decentralized to the branch, all customer value proposition and look for ways to credit committees continued to take place at the head better serve small business clients (while enhancing office. This allowed the bank’s senior management to profitability) by tying SME finance in with other relevant fully participate, remain involved, and provide effective services, including savings and checking accounts, bill oversight—all while giving themselves the opportunity or supplier payments, money transfers, and so on. 71 20 YEARS OF MICROFINANCE PROJECTS IN IFC KIMB does in fact offer many of these products, but as its expanding agent network, ATMs, and even the lack of a collateral registry in the country means mobile banking. KIMB must ask its SME customers to “guarantee” its finance through checks obtained from another bank. Lesson 5: Islamic SME finance is a new frontier. While today KIMB is one of the few institutions offering SMEs the financing they need today, as banks Yemen has a strongly conservative culture governed monitor their more reliable SME customers, they by Islamic values and with shariah law prevalent in may one day decide to serve these same businesses the financial sector. This is particularly relevant, as themselves. In the meantime, to retain a competitive low-income Muslims throughout the Arab world are foothold, KIMB is exploring different value-added often doubly-excluded from finance, because 1) most services to enhance its value proposition to SMEs, financial institutions remain inaccessible to the poor, including not only providing money transfer and and 2) many people either refuse or prefer not to take exchange services, but also linking its clients to savings out loans on a commercial basis (charging interest), accounts and using alternate delivery channels such believing that it goes against their principles. KIMB clients queue at a modernized bank branch office. SMARTLESSONS 72 While some microfinance institutions and Islamic pay attention to details and to question consultants, banks do provide Islamic finance to either the micro whose financial projection models and assumptions or corporate sector, IFC is helping KIMB push the were sometimes flawed. For instance, the consultants’ boundaries further by reaching out to SMEs with recommendation that KIMB could afford to lower shariah-compliant financing. KIMB has begun providing the cost of financing to SMEs, and their proposal the murabaha form of financing to cover primarily the to bring down the costs for longer-tenor financing working capital needs of SMEs, whereby customers (where risk is actually higher), did not make sense. select the goods they wish to own, but KIMB’s own As an early mover in the SME market space, KIMB staff negotiate and purchase the goods themselves could set the market rate and was already providing before transferring them to the customer. Payments financing at a fairly low effective markup relative to (plus markup) are then made monthly over the life its competitors. of the arrangement, usually 12 months. Another issue in Yemen was how to price on assets/ KIMB is also exploring a novel revolving murabaha amounts denominated in different currencies such product that will help small businesses with recurring as Yemeni rial, U.S. dollar or Saudi riyal, which working capital needs to top up their financing at any had consequences and risks for the bank’s foreign point during the year (much like a line of credit). exchange position. Indeed, many customers sought However, it will wait before trying to test a lease-like financing in dollars because of a lower initial rate Ijara2 product for SMEs, whereby the bank finances offered, even if they were earning income from their the goods and promises to transfer ownership to the business in rial. Eventually KIMB adjusted the price of SME at the end of the term, if all of the payments U.S. dollar-denominated finance to prevent currency have been made. To further mitigate risk in such a mismatches on its balance sheet. IFC’s presence helped product, the financing amount should not cover the ensure they were taking into consideration correct entire cost of the goods, but instead the SME pays a assumptions about the market (external) and the percentage up front (usually 10–30 percent). However, bank itself (internal) while including such items because there is no fixed asset registry in Yemen to as the cost of funding, staff, and productivity in formerly register ownership, there is no meaningful financial projections. It also ensured that a critical way to collateralize an Ijara transaction (for example, pricing mistake wasn’t made at the outset of the SME the asset itself ), and the asset may lose value or be pilot, when demonstrating the product’s viability to transferred to someone else before KIMB recovers management was key. its costs. Lesson 6: Pilot testing, coaching and implementation In Islamic finance, the more profit the bank makes, support are critical. the more the depositors will gain on their saving accounts and vice versa—-an almost venture capital- Product design, theoretical training, and development type partnership between banks and their customers of policies and procedures for a new SME unit are that represents a truly “responsible” form of finance. important steps in framing a bank’s movement into This, coupled with KIMB’s sustainability concerns, the SME space. However, when staff actually begin made pricing an important discussion item during the analyzing SME applicants and issuing the first new product design phase. Both IFC and KIMB had to loans, that’s typically where the “rubber hits the road,” 2 An Islamic form of financing similar to conventional leasing, whereby and when sufficient training, coaching, and on-site the lessor agrees to sell the asset/property at an agreed value at the end, implementation support are most critical and should be but the lessee is not obligated to purchase. 73 20 YEARS OF MICROFINANCE PROJECTS IN IFC to stimulate job creation and spur economic growth Box 2: Key Issues for a New SME Unit through the financing of SMEs – are increasingly critical. Indeed, we are already seeing a demonstration effect • Who should be the first point of contact for as new actors (including a greenfield microfinance new SME clients? bank and new private entrants) prepare to enter the • How do we analyze or cross-check sales figures micro- and small finance space, and other MFIs also from a business that has nothing documented? move up from targeting strictly “micro” clients and • What is the role of the branch managers relative begin to serve the very small or SME space. to the SME unit manager? • Why was initial financing and customer Furthermore, the IFC-KIMB project has brought acquisition so slow? important learnings on the key challenges one faces • When should we take the pilot into new and how best to support an institution that is planning branches? to set up a dedicated SME unit and begin serving SMEs • Who should join the credit committee, and with appropriate products – including the unique and how long should it stay in the head office? relevant angle of how to provide socially responsible, Islamic SME finance. This learning couldn’t be more timely, given that today many MFIs in the MENA woven tightly into any project plan for SME product region (including other important IFC Advisory and development. Investment partners) are looking for support to upscale and serve SMEs. KIMB was no exception. Despite its rich expertise in the money transfer and exchange business, none of the staff had the SME banking background necessary to address all the challenges and special cases they initially encountered in the field. The bank’s new SME financing officers faced numerous questions when analyzing the early SMEs. Its SME unit manager was likewise new to small business finance and needed strong training and even a coach to help him learn how to effectively guide his team and develop new ABOUT THE AUTHOR business while controlling for risk. Meanwhile senior Matthew Leonard, an Operations Officer with IFC’s management could still benefit from the presence of an Cairo office, has 12 years of experience in livelihoods experienced SME manager to help them understand and microfinance. He works with the Microfinance how to strategically roll out and oversee this new Advisory Services program in the MENA region. business line (see Box 2). Approved by Xavier Reille, Manager, EMENA. CONCLUSION As Yemen struggles to emerge from internal political and social divisions, boost its economy and forge itself a new and more promising future, efforts like those of IFC and Al Kuraimi Islamic Microfinance Bank – SMARTLESSONS 74 Lessons from Sub-Saharan Africa From Micro to Small: How Do Microfinance Banks in Sub-Saharan Africa Scale Up to Small Business Lending? You probably already know that small and medium enterprises (SMEs) play an important role in global job creation and economic growth. Since the onset of the global financial crisis and the ensuing unemployment fallout, “SME” has become a veritable buzzword, and by now most people have heard the headline statistics: in OECD countries, SMEs account for over two-thirds of formal employment, while the 2013 IFC Jobs Study and other recent World Bank research suggest that the statistic is similar—or even greater—for developing countries. Similarly, there is a growing consensus that access to finance— while certainly not the only barrier to SME growth—is a significant constraint. This SmartLesson shares some experiences of IFC’s microfinance clients with SMEs. What are SMEs? The term applies to a heterogeneous IFC is closing in on the missing middle from two group of businesses with diverse characteristics and directions: top-down and bottom-up. From the top requirements. It is particularly difficult to define the down, IFC already works with mainstream commercial SME market in Africa, because official definitions banks to develop strategies, systems, and products often focus on formal, registered businesses, while to reach SMEs that traditional commercial banks Africa’s high level of private sector informality renders would otherwise have been unable or unwilling such a definition unusable. Other definitions, based to target. on number of employees, annual turnover, assets, or financing needs, are also problematic or simply difficult At the same time, IFC’s maturing network of specialized to estimate accurately. African microfinance institutions (many of them specialized regulated banks) are increasingly targeting It is probably easiest to understand SMEs as the the “S” of the SME spectrum as a natural extension of so-called “missing middle,” occupying the space their core business. African SMEs share many of the somewhere between corporations and microenterprises. characteristics of informal microenterprises, and many While larger than a typical microbusiness, they often of the same tools and approaches used to profitably fail to meet one or more of the criteria for accessing serve this market can also reach SMEs. traditional bank finance, such as the ability to generate formal financial statements or to provide collateral Within three to four years of starting operations, such as titles or bank deposits. small businesses already become an important market for IFC’s microfinance clients in Africa: SME loans The “missing middle:” IFC’s response in Africa (defined by IFC as any loan of $10,000 or greater) already represent more than 25 percent of the Given the diversity of the SME market, a single total portfolio outstanding held by IFC’s African approach to financing SMEs does not suffice. Instead, microfinance bank clients as of December 2012. This 77 20 YEARS OF MICROFINANCE PROJECTS IN IFC growing share is driven by new microfinance clients level of education. They soon realized that because entering this space as well as underlying growth of SME clientele are not reached by most traditional approximately 60 percent for IFC microfinance clients banks, the newly hired loan officers were unable to already targeting SMEs. One client, ProCredit Bank piece together the necessary cash flow analysis and Congo, is essentially fully dedicated to this segment, were unwilling to work with customers outside of with an average loan size of about $10,000. Most the office. Of the six initial SME loan officers hired important, the quality of the SME loan portfolio by Advans Cameroun, for example, only one remains built by IFC’s microfinance clients is excellent, with with the institution. PAR>90 averaging 0.8 percent across the 10 clients now serving this segment (see Table 1). Instead, most institutions have taken a hybrid approach to loan officer staffing, allowing some of the better- LESSONS LEARNED performing microloan officers to graduate to offering SME loans. These loan officers receive additional Lesson 1: SME lending departments can build training. Most of the institutions found homegrown on skills in microlending—but need a distinct talent to be much more capable of understanding structure and capacity building plan. the needs of SMEs and respectful of the institution’s mission and credit culture, and to view the opportunity Most of IFC’s African partners entering the SME to work in this segment as an incentive for career segment created a specialized department with dedicated advancement. staff to serve the new segment. Generally, the SME lending department tends to be more centralized at Lesson 2: SME loan products and operations headquarters, with oversight responsibility for SME need to be developed specifically for this business development carried out at the branches. segment. Some institutions initially hired new SME loan officers All of the IFC microfinance clients surveyed adapted with a more traditional banking profile and higher their policies and processes to serve SME borrowers. Table 1: SME Lending by IFC’s Microfinance Clients in Sub-Saharan Africa Summary   2011 2012 Growth MF clients with >$3m outstanding to SMEs 7 of 18 10 of 19 +3 clients SME loans outstanding # 3,684 5,905 60% SME loan portfolio $ million 75 129 73% SME loans disbursed #   7,526   Value of SME loans disbursed $ million n.a. 176 n.a. PAR>90 of SME loans %   0.8%   Note: Summary excludes K-Rep Bank, for which data collection was ongoing at the time of publication. SMARTLESSONS 78 Most important, the credit and collection methods According to IFC’s clients, many of the key elements become more sophisticated and operate on a shorter in the SME credit process are similar to those used turnaround time from origination to disbursement for lending to microbusinesses, including regular and (many cite 15 days on average), and they include spot-check business visits, integrity checks, personal more urgent follow-up on delinquent loans. For guarantees, and, most important, cash flow analysis example, many institutions prepare collection reports of the business. However, the minimum operational in advance of due dates to allow SME loan officers track record of new SME borrowers is usually longer to remind borrowers, while others have a regularly than that required of microbusinesses, averaging at updated “watch list.” least nine months, and the cash flow analysis for Box 1: Advans Cameroun’s Experience with SME Lending In 2010, in its third year of operations, Advans Cameroun launched an SME loan product with loans ranging from CFA 5 million to CFA 50 million (about $10,000 to $100,000). The average loan disbursed is CFA 7.75 million ($15,500) and has an average tenor of 14 months. In the first three years, the SME loan portfolio grew to CFA 6 billion ($12 million), with 1,077 loans outstanding as of the end of 2012. It had a major impact on the institution—accounting for 48 percent of the total loan portfolio by volume and 10 percent of the number of loans outstanding. Performance and quality of the SME loan portfolio are very good by industry standards. Although PAR>30 increased to 4.7 percent in 2012, by the end of 2013 it came down to about 3.5 percent. To be eligible for an SME loan, a business must have annual turnover of at least CFA 100 million ($200,000), a minimum of five employees, and sufficient skills to provide historical financial information and a vision to project the business over the next 12 months. Formal financial statements are not necessary, but the relevant inputs for loan officers to piece together an income statement, balance sheet, and cash flows are required. Besides the initial eligibility criteria, the primary differentiating factor is the combined historical and projected business analysis. A key risk the institution has identified is underfinancing or overfinancing the business. If it is underfinanced, the proprietor may need to abandon the proposed plan in favor of a less capital-intensive option that was not evaluated in the loan application process. When overfinanced, a business may move into uncharted territory, beyond the scope and capacity of the owner to manage. Overfinancing was also cited as a reason why PAR has been seen to dip after the third loan cycle in the portfolio. In these cases, there may be adverse incentives for the loan officer to increase loan size for consistently well-performing borrowers. This risk can be compounded by overly optimistic borrowers with visions of vertically integrating their core business by taking over parts of the supply chain or distribution but without the proper planning or evaluation of such expansion. The institution has found that profitability of the SME loan portfolio is driven by revenues on larger loan sizes. However, it has also found limited, if any, cost savings on the SME loan portfolio. Loan officer productivity, as measured by SME loan portfolio per loan officer, is not much higher than for the microloan portfolio, meaning that SME officers make fewer larger loans, whereas microloan officers make many smaller loans. Overall, Advans Cameroun views the SME segment as a core part of its business model, serving the poor and underserved population in Cameroon by filling the gap between the traditional microfinance and commercial banking sectors in the country. 79 20 YEARS OF MICROFINANCE PROJECTS IN IFC Box 2: SME Lending in Liberia: When Regulatory Changes Add to Risk When AccessBank Liberia—the first microfinance bank in the country—started operations in February 2009, the business plan included SME lending as a core component of the loan portfolio and business model, which would launch in the second year of operations. However, as AccessBank prepared to launch the product, the Central Bank of Liberia introduced a new definition of SME loans, starting at $7,000, and prescribed an 18 percent declining interest rate, roughly half the rate assumed in the original business plan. In March 2012, the bank launched the SME loan product and intentionally grew the portfolio slowly. One year after launching, the SME loan portfolio consisted of 104 loans, representing a portfolio of $1 million, or approximately 11 percent of the overall portfolio. The average loan size at disbursement is $18,000, whereas the largest single loan disbursed to date is $25,000, and the maximum loan size is $50,000. If higher interest rates were allowed in the Liberian market, the bank would target SMEs to represent 50 percent of the portfolio by volume. As with other countries in the region, there is a high demand for SME loans in the market, but many of the traditional banks will not lend to SMEs, given the mix of low maximum interest rates, poor credit culture, and weak legal infrastructure for recourse. This combination of high demand and limited supply contributes to an elevated risk of fraud, particularly involving collusion between borrowers and loan officers. As a result, AccessBank has had to insist on tight controls and oversight of the SME loan portfolio, including the centralization of all credit decisions. This shift has also reinforced its focus on existing customers, who are already familiar with the bank’s operating procedures, rather than using the new product to attract new customers. Regarding profitability, the high cost of training loan officers capable of evaluating SMEs and managing the credit process, combined with the more competitive market for SME lending, makes margins relatively tight. Spikes in arrears or worsening portfolio quality leading to write-offs can have a direct impact on profitability in this segment, making careful and constant management of the underwriting standards essential. SMEs tends to be both historical and projected. and external debt collectors are often used for long- In addition, credit appraisals for SMEs typically overdue loans. Overall, though, it is evident that incorporate credit reference checks and credit scoring IFC’s microfinance clients have been able to manage tools as well as expanded use of collateral (80 percent these fluctuations and currently report outstanding of the microfinance banks surveyed require it from PAR>90 figures averaging 0.8 percent at the end of SME borrowers). The types of collateral include fixed 2012. To successfully run the SME lending business, assets, land titles, vehicles, and sometimes social it is necessary to have enough flexibility to adapt collateral (for example, guarantors). the processes and procedures rapidly and have the ability to monitor portfolio quality on a real-time Despite detailed processes to manage risks, the basis. evidence among IFC’s existing microfinance banks tells us that portfolio quality in SME loan portfolios Lesson 3: SMEs are attracted to full-service can be more volatile than in microloan portfolios. offerings, and they value greater flexibility. When these bigger loans do go into arrears, the collection process is also more complex: legal action Almost all of the IFC clients interviewed consider the seems to be more frequent with SME borrowers, provision of a package of products and services beyond SMARTLESSONS 80 credit as essential to satisfying SME customers. Non- credit products, including deposits, micro insurance, trade finance, and payment/transfer services, are taken up by SME customers, who can participate in surprisingly dispersed and complex value chains in many countries. Additionally, the fee structure and distribution channels also tend to be more favorable to the customer, including free local debit cards, reduced fees (50 percent) for international debit cards, free tokens for e-banking, and lower cashwithdrawal fees (see Box 1). ABOUT THE AUTHORS In addition to the internal factors identified above, Julie Earne is a Senior Microfinance Specialist who was many IFC clients cited external factors that can have based in the Africa region for seven years supporting an impact on the SME market. Common external the development of the Africa microfinance program. factors include competitive pressure from commercial She is now based in Myanmar, where she leads IFC’s financial sector work. banks targeting the best customers, regulatory pressure from governments that want to prioritize John Gutin is an Operations Officer with IFC’s Africa the microfinance sector’s services at the lower end microfinance team, based in Johannesburg. He has worked on access to finance in several roles across the of the market segment, and fraud, where borrowers World Bank and IFC over the past six years. and loan officers are complicit in distorting credit appraisals (see Box 2). Meritxell Martinez is an Associate Operations Officer based in Dakar. Before joining IFC, she worked with the European Commission, the World Bank, and the CONCLUSION IFMR Trust in areas ranging from financial inclusion to human development. The early experiences of IFC’s African microfinance Adam Sorensen is a former Associate Investment partners in serving the SME segment have been Officer at IFC. For six years, Adam worked with the positive. SME portfolios are growing consistently, Africa microfinance program on the investment and with good portfolio quality, and are increasingly advisory sides of IFC. contributing to the institutions’ sustainability. Approved by David Crush, Manager, Access to Finance This complements IFC’s downscaling efforts in the Advisory – Sub-Saharan Africa. traditional commercial banking space by closing the gap between the minimum lending amount of traditional commercial banks (about $100,000) and the maximum amount of SME loans for IFC’s microfinance partners ($50,000 to $100,000). At the same time, microfinance institution clients face unique risks when they start serving the SME market and will need to adapt their risk management, policies, and procedures accordingly. 81 20 YEARS OF MICROFINANCE PROJECTS IN IFC A market woman in Kinshasa depositing her daily earnings at a FINCA Express bank agent in a pharmacy next to a market. SMARTLESSONS 82 Breaking Free of the Branch: Designing Alternative Delivery Channel Projects for Microfinance Banks in Africa Nearly 80 percent of adults in Sub-Saharan Africa do not have an account with a formal financial institution. Despite recent well-publicized successes in increasing financial inclusion in a small number of African markets, such as Kenya, hundreds of millions of African adults still lack access to affordable financial services. In response to this need, IFC and The MasterCard Foundation partnered to introduce alternative delivery channels in IFC’s key microfinance partners in Africa. Although the partnership is still at an early stage, this SmartLesson distills some general lessons from two of the first alternative delivery channel engagements. These lessons may be useful for other IFC teams in structuring such projects with microfinance clients. During the past seven years, IFC focused mainly on microfinance business models that can deliver large- closing the access gap by supporting retail microfinance scale, low-cost banking services. To accelerate the banks, which provide a strong platform for increased development of low-cost mobile financial services, outreach. Until now, these banks have generally the program provides advisory assistance to mobile replicated the traditional branch-based banking network operators, microfinance institutions, banks, model, an approach that is inherently slow and and payments systems providers.1 expensive to deploy in challenging African frontier markets. To achieve the necessary transformational Through the partnership, IFC aims to scale up eight outreach, IFC and our microfinance clients recognize to ten of our strongest African microfinance clients— that alternative delivery channels (ADCs)—including including key partners FINCA and MicroCred— agent and mobile banking—are potentially powerful by supporting the development of innovative new tools to scale outreach in the face of these unique products, expansion into hard-to-reach locations, challenges. However, because of a combination of especially rural areas, and the deployment of new low capacity, inherent risks, and high upfront costs, cost-effective alternative delivery channels. most microfinance banks operating in underserved markets have not yet taken advantage of the ADC LESSONS LEARNED model. Lesson 1: Upfront support is crucial for In January 2012, IFC and The MasterCard Foundation success. launched the $37.4 million Partnership for Financial Inclusion, with the goal of bringing financial services The IFC Africa microfinance team intended its initial to an estimated 5.3 million people previously without approach to microfinance channel engagements to banking services in Sub-Saharan Africa—within five be a relatively light-touch process: a full IFC team years. The program aims to develop sustainable 1 For more information, go to www.ifc.org/financialinclusionafrica. 83 20 YEARS OF MICROFINANCE PROJECTS IN IFC composed of the project leader and relevant specialists would conduct a due diligence mission and aim Box 1: FINCA DRC to get most of the way toward a detailed project Although FINCA DRC’s alternative delivery channel implementation plan within a few days. However, strategy is ambitious, it is modest in scope compared to the approach has changed substantially following lessons learned from our first ADC engagements FINCA’s initial proposal during due diligence discussions under the partnership—including with FINCA DRC. with IFC. In addition to developing an agent network, After just one day of due diligence meetings with FINCA DRC’s original plans included the following: FINCA, the IFC team realized that even relatively • a costly branch expansion ($200,000 per branch in mature microfinance clients such as FINCA DRC lack infrastructure investment alone) that would almost capacity when it comes to a channel project—which is understandable considering the nascent state of double the physical branch infrastructure; branchless banking globally. • a mobile banking channel, with the aim of directly integrating FINCA with the e-wallet of a mobile network Initial proposals from microfinance clients thus operator; and tend to be either 1) overly ambitious, as the client underestimates the level of resources and capacity • a card-based channel—likely in partnership with necessary to implement a project, as with FINCA a bank—to give FINCA clients access to one of the (see Box 1), or 2) overly conservative, as the client Democratic Republic of Congo’s proprietary ATM is unwilling to commit to specific targets, given a networks and to allow them to transact when abroad lack of direct experience with the ADC. As a result, (mainly for clients running trading businesses). most microfinance institutions will require substantial expert input and upfront advisory support well before The proposal was very agressive and likely to pull beginning to draft an implementation plan. They FINCA DRC in too many directions. In response, will need assistance in defining the magnitude of IFC provided specialist consultants to work with the project, the broad strategic priorities, and the FINCA for two weeks onsite to develop a narrower specific activities to be covered under the project, plan that would reflect FINCA’s real priorities. The as well as in thinking through the practical aspects resulting project, with a focus on building the savings of the plan in detail. outreach and an aggressive but realistic expansion of As a result of these early lessons, IFC now uses a revised FINCA’s agent network, has thus far exceeded the client engagement strategy for channel projects that initial targets. As of May 2014, FINCA already had 173 incorporates significant early-stage advisory support: agents operational, $21 million in deposits mobilized, before even conducting initial due diligence, the IFC and 51,000 transactions processed through FINCA project team works with the client to complete a detailed agents monthly. Based on this early success, FINCA questionnaire to help the client think through the DRC has committed to an ambitious new target of necessary strategic, financial, and operational aspects becoming the Democratic Republic of Congo’s first of mobile and agent channel development—and to true mass-market financial institution and reaching ultimately be more prepared to engage with the IFC over 1 million customers within five years. team during due diligence. Depending on client capacity, IFC may also provide SMARTLESSONS 84 significant support—after the due diligence but before activities—so the client can realize the core business implementation—in developing the business case benefits of the channel. The IFC team has reinforced for the channel, including financial and operational this message during due diligence discussions and projections. For FINCA, this involved sending a pre-implementation advisory assistance; that’s when team of specialist staff and consultants for two weeks discussions of the business case and financial projections following the due diligence to develop a more prudent provide a good forum for debating various scenarios business case by working through the market size and assumptions regarding the impact of the channel and client uptake assumptions, agent network rollout on the overall business of the bank. plan, and budget. Lesson 3: Partnership is key. Lesson 2: Keep your eye on the ball. There is a reason why “partnership” is the first word in The novelty of channel implementations can make it the name of the IFC-MasterCard Foundation program. easy for both IFC and the client to lose sight of the As already noted, branchless banking is still relatively ultimate goal, and technical complexities can quickly new territory for almost all microfinance clients, and overwhelm the client and dominate the design phase the investment required to roll out a new channel is of the project. In both the FINCA and MicroCred daunting: a $2 million to $4 million initial outlay projects, the IFC team spent significant time discussing for staff and systems is not uncommon, with more the technical questions, such as point-of-sale solutions, than half of this outlay coming in the form of parallel switches, and integration with third-party payment providers. Also, both FINCA and MicroCred initially Box 2: IFC’s Channel Partnership with focused heavily on the channel potential for direct MicroCred in Africa revenue from fees or other charges during due diligence and follow-up discussions (see Box 2). The following factors characterize the IFC-MicroCred channel partnership in Africa: However, it is equally important to remember that, for • The relationship leverages one of IFC’s key greenfield microfinance banks, an alternative delivery channel is network partners in Africa. MicroCred Senegal and MicroCred a means to an end and generally not an end in itself. Madagascar, two of IFC’s strongest greenfield clients, were While the channel itself has naturally been an area of selected through a competitive process by an IFC team significant focus in our discussions with clients, it is composed of Advisory Services and Investment Services staff. equally critical to give sufficient attention to the bank’s • In addition to support in business modeling and providing broader business strategy—and product overhaul, if performance-based grants, IFC is delivering advisory services relevant. in the areas of strategic planning, agent network management, and network optimization. The discussions and project implementation plan should address the following key issues: which clients the • The partnership includes significant investment in capacity bank wants to target with the channel; what type of at the MicroCred Holding level—including support for a savings, credit, or other products it may need to add global director of channel development, who is responsible or adapt to the channel; what volume of deposits, for the performance of all of the alternative delivery channels and will make lessons learned in Senegal and Madagascar loans, or other business it can reasonably expect to available across the MicroCred network. mobilize; and how to grow its business through the right mix of products, promotion, places, and field 85 20 YEARS OF MICROFINANCE PROJECTS IN IFC contributions from the client. Microfinance institution The Africa microfinance team’s partnerships also go clients require a true partnership with IFC to feel beyond the individual project level. For example, based comfortable undertaking a channel project, and they on positive initial outcomes from the partnership in want to share the risk of innovation proportionally. the Democratic Republic of Congo and the strength Without some assurance of continuing support, of this relationship, FINCA has asked for IFC’s clients are unlikely to feel comfortable committing assistance in rolling out its alternative delivery channel to outcome-related targets, which can be problematic strategy worldwide—with additional support from when structuring the project. Moreover, given the IFC as a provider of advisory assistance and as a many uncertainties inherent in such a new area, shareholder. clients expect some degree of flexibility to refine and revise their approach based on early experience CONCLUSION and lessons. Although it is still early days, IFC’s initial experience IFC has addressed the need for unambiguous in supporting ADC projects with African microfinance partnership and risk sharing in the structure of the partners has been largely positive. Nonetheless, our project legal agreements: continuing advisory assistance initial engagements in this space serve to highlight the in the form of a specific cooperation agreement, reality that branchless channel development is new combined with grant support. In addition to the territory for both IFC and our clients—even those design phase advisory support described above, IFC that are more mature and relatively sophisticated. commits to provide advisory services during at least This means IFC cannot expect our microfinance the first part of the implementation phase, to support clients to hand us a fully-baked project, signed, the client’s testing and refining of key assumptions sealed, and delivered. We are all figuring this out as made during the design phase. The details of this we go along, and success in ADC implementation advisory assistance are formalized in a cooperation will require a true partnership to reach the mutual agreement—usually at the same time as the signing goal of expanding access to finance for those who of a performance-based grant agreement. With IFC’s are least served. advisory support, the project and grant targets can then be amended as necessary, based on the initial results of the project to ensure realistic but sufficiently aggressive objectives. To avoid placing undue risk on the client during the early stages of the project, the grant agreement is also ABOUT THE AUTHOR structured with a significant upfront payment and John Gutin is an Operations Officer working on microfinance advisory and investment projects with with the first performance-based tranche linked to the Financial Institutions Group in Sub Saharan Africa. output-based targets (for example, number of agents) He is based in Johannesburg, South Africa. that the client has more control over; later tranches Approved by Greta Bull, Manager, FIG Advisory, Sub- are more closely tied to the outcomes and impact of Saharan Africa and Latin America the project. Even mature microfinance institutions are unlikely to push ahead without some reassurance that early stumbles will not result in the withdrawal or curtailing of IFC’s financial and advisory support. SMARTLESSONS 86 Greenfielding in Africa: A Model for Building Capacity and Scale in Nascent Markets Sub-Saharan Africa (SSA) has the lowest level of access to finance of any region, with banking services available to only about one-quarter of the population. The banking systems are small, and the microfinance sector has been relatively slow to expand. Services are concentrated in larger urban centers, with meager service delivery in rural areas. Until a few years ago, the main providers of financial services to base-of-the-pyramid customers were credit unions, savings and loan associations, and nonprofit credit programs. Now new players include specialized greenfield microfinance institutions, downscaling pan-African commercial banks, and mobile network operators. This SmartLesson describes how the IFC Microfinance Program for Africa’s greenfield model is increasing the number of commercially viable microfinance institutions in the region. In Liberia, Sierra Leone, and the Democratic Republic frontier markets. Key elements of the program include of Congo, fewer than 1 percent of people have access 1) designing strategic IFC-led projects with early to a bank account. Yet as these countries continue to and consistent engagement in frontier countries; 2) stabilize, the demand for secure financial—particularly ensuring that projects have adequate resources to make microfinance—services is exploding, because subsistence- an early-stage venture bankable in the medium term; level micro and small enterprises are often the only 3) applying the greenfield model to new microfinance surviving businesses after a conflict. In 29 countries institutions with global standards and strong commercial for which survey data are available, only 11 percent of orientation, targeting sustainability in three to five households had access to savings accounts, as contrasted years and lasting impact on market development; with 25 percent in other low- and middle-income and 4) ensuring a menu of products and channels to countries and 90 percent in industrial countries. In support extended reach and scale. Liberia, fewer than 1 percent of people have access to deposit accounts, and in the Democratic Republic of The greenfield business model expands financial services Congo it is fewer than 0.5 percent. Access to credit by creating a group of new “greenfield microfinance is even more limited. institutions” without preexisting infrastructure, staff, clients, or portfolios. In Sub-Saharan Africa, IFC’S RESPONSE the greenfield model—where a centralized holding company provides investment and expertise for the In 2006, IFC decentralized a specialist microfinance development of commercial microfinance entities— team dedicated to expanding the Microfinance Program began in 2000, when ProCredit Holding opened a for Africa. To increase the number of commercially bank in Mozambique. Essentially alone in pursuing this viable microfinance institutions in the region, the strategy, ProCredit opened a bank in Ghana in 2002, program works with sponsors that have demonstrated in Angola in 2004, and in the Democratic Republic of expertise in managing microfinance institutions in Congo in 2005. While other network operators and 87 20 YEARS OF MICROFINANCE PROJECTS IN IFC local institutions started nongovernmental organizations onward). Each stage is characterized by milestones related (NGOs) and cooperative microfinance entities much to management, product development, infrastructure earlier, the greenfield model of a centralized holding build-out, outreach, funding structure, and sustainability company providing investment and expertise for the (see Box 1). development of commercial microfinance entities began in earnest at the turn of the millennium. LESSONS LEARNED In 2005 and 2006, Advans, Access, and MicroCred Lesson 1: Designing appropriate interventions holding companies were formed with a structure similar requires early and consistent IFC engagement. to that of ProCredit and had collectively launched five greenfield microfinance institutions in Sub- Acting early can preempt the proliferation of poor Saharan Africa by the end of 2007. During the same practices and provide significant first-mover advantages, period, Accion started its first greenfield microfinance such as shaping the sector with appropriate best practice institution in partnership with three commercial banks models and building strong relationships with key in Nigeria. Then Ecobank and Accion entered into a stakeholders. IFC supported the development of the partnership and opened two such institutions in Ghana greenfield cohort in Africa by engaging directly during and Cameroon. From that point, the Access, Advans, all stages of the institution’s lifecycle. A decentralized and MicroCred networks each created roughly one team of investment and advisory microfinance specialists new microfinance institution per year. Toward the based in Africa worked closely with investors, sponsors, end of the decade, ASA and BRAC from Bangladesh government, regulators, and in-country stakeholders began establishing greenfield microfinance institutions to incrementally facilitate the program and the specific in Africa. From late 2006 through 2012, a total of 27 institutions created under its scope. additional greenfield microfinance institutions were launched (see Table 1). When deciding to intervene in Liberia, IFC learned that conventional wisdom said the market was far from The greenfield lifecycle in Sub-Saharan Africa, has ripe for a greenfield commercial microfinance bank. three stages: 1) foundation (preparation and first year However, with strategic initiative funding from the Africa of operation), 2) institutional development (year two region, the microfinance team fielded one of the first through financial breakeven typically in year three, IFC missions to Liberia to draft a feasibility study. Even four, or five), and 3) scale-up (from financial breakeven though one of the largest UN military peacekeeping Table 1: Greenfield Microfinance Institutions Created 2006–2012 2006 2007 2008 2009 2010 2011 2012 Greenfield MFIs 7 12 18 22 27 30 31 No. of Staff 1,564 2,512 4,856 6,685 8,009 10,137 11,578 No. of Branches 37 56 261 392 514 625 701 No. of Loans Outstanding 107,887 141,231 332,349 449,973 570,017 743,640 769,199 Gross Loan Portfolio (USD mn) 57.4 94.7 144.5 203.6 285.8 409.5 527.0 No. of Deposit Accounts 220,377 317,943 595,008 780,497 1,050,087 1,574,750 1,934,855 Total Deposit Balance (USD mn) 50.7 106.7 177.9 211.6 291.3 371.8 445.5 SMARTLESSONS 88 (CBL) and the government to build confidence and Box 1: Greenfield Lifecycle Stages establish the appropriate regulatory and supervisory Foundation—typically includes legal creation and partial framework was critical to the CBL’s acceptance of capitalization of the new entity, shareholder negotiations, the license application and laid the groundwork for a licensing process, and onsite operations preparation. Initial vibrant and sustainable microfinance sector. By early management—usually staff seconded from the holding 2008, when AccessBank Liberia submitted its license company—is responsible for tailoring policies and procedures application, UBA (a commercial bank from Nigeria) to the local market, designing and adapting products, installing already had a provisional license, and other banks an information technology (IT) system, providing physical were lining up to enter the market. space for branches, managing the relationship with regulatory authorities, and recruiting and training loan officers (usually Lesson 2: Accept that building from the 20–30). Preparation for operation usually takes four to six months from preliminary approval from the regulator, then ground up is expensive—but the impact is another two to four months until the central bank inspects proportionate. the institution and grants the final operating license. Operations in frontier markets require heavy upfront Institutional development—focuses on building staff capacity investment to compensate for a lack of physical and installing risk-management systems that will create the infrastructure and capacity. The severe lack of the most core foundation for future growth. As operations grow, basic public infrastructure, particularly for countries there is increased institutionalization of risk management emerging from a conflict, forces all private sector systems, such as policies and procedures for decentralized companies to invest disproportionately in infrastructure management, internal audit, cash and liquidity management, and regulatory compliance, including anti-money-laundering to ensure safety and access to electricity, water, and measures. The board’s asset-liability committee becomes transportation. The cost of establishing a branch in more active as deposits increase and begin to account for post-conflict Africa is about $300,000, roughly four a greater portion of funds for intermediation. times the cost in Eastern Europe. Compensating for lack of capacity can be equally costly, as years of conflict Scale-up—occurs after breakeven, when the focus shifts to have brought education systems to a standstill and few product diversification and delivery channel development young adults have any significant formal education. to attract new clients, deepen existing client relationships, Lack of technical skills is often aggravated by social and gain market share. New products target secondary tensions from lingering divisions among communities, market segments, such as agricultural lending for rural clients. Expansion of small and medium enterprise lending making extensive training and coaching of local staff can be a critical driver of profitability by offsetting the critical to scaling up operations and building local high cost of smaller microloans as institutions expand into management capacity. more rural areas. To address these issues, greenfield projects are normally accompanied by advisory services packages. Advisory and forces in the world was still on the ground, this early related funding allow the introduction, application, and mission provided information about the market, costs, transfer of skills and knowledge necessary to successfully security, and the degree to which the economy was operate a commercially viable microfinance institution changing—providing information necessary for IFC and enable it to internalize appropriate microfinance to engage with potential co-investors and sponsors. methodologies, social and environmental standards, internal controls, corporate governance, and so forth IFC’s early-stage work with the Central Bank of Liberia (see Box 2 and Table 2). 89 20 YEARS OF MICROFINANCE PROJECTS IN IFC Table 2: Calculation Example Month 6 Month 12 Month 18 Month 24 Month 30 Month 36 Month 42 Month 48 Month 54 Month 60 Net Income for the period 386,569) 410,387) 359,666) (178,023) (33,527) (26,280) 174,318 419,463 553,862 395,553 Add'l Cost to MFI if no external TA funding (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) Net Income if no external TA funding (886,569) (910,387) (859,666) (678,023) (533,527) (526,280) 174,318 419,463 553,862 395,553 Equity 2,974,906 3,553,198 3,510,502 3,558,164 3,839,706 4,324,016 4,480,075 5,267,880 5,284,887 6,558,059 Equity if no external TA funding 2,474,906 2,553,198 2,010,502 1,558,164 1,339,706 1,324,016 1,480,075 2,267,880 2,284,887 3,558,059 Annualized ROAE -26.0% -24.4% -23.7% -15.1% -5.8% -1.5% 3.6% 12.4% 19.9% 16.1% Annualized ROAE if no external TA funding -71.6% -71.5% -78.9% -74.8% -72.3% -73.5% -25.0% 33.1% 51.7% 32.6% The actual average net income and equity positions for the greenfield cohort were used as a starting point. The $3 million received in external grants for advisory (“TA funding” in the table) is spread evenly across the first 36 months of operations. The remaining $1 million funded by the microfinance institution is already reflected in the average net income and equity figures. Box 2: Impact of Advisory Services on Financial Performance Greenfield microfinance projects generally include substantial grant funding for advisory assistance, largely because of investor constraints and because of donor and investor belief in the potential benefits of well-run and (eventually) large microfinance institutions offering a range of financial services to microenterprises, small businesses, and low-income populations in Sub-Saharan Africa. Although it is possible that these institutions may turn out to be good investments for the initial investors, it is unlikely that this will happen over any reasonable time horizon, which most investors consider to be five to eight years. Development-oriented investors may accept lower expected returns for higher expected impact, but they also have limits on how far this can be stretched. Greenfields receive on average $3 million in external advisory-assistance grants for start-up, and they typically pay about $1 million more out of their own pocket, for a total advisory budget of $4 million. The Table 2 model illustrates what could happen if the full advisory cost were borne by the institution. It shows that typical greenfields would experience higher retained losses if paying fully for the advisory services. The model also indicates more volatility in the return on average equity, fueled by higher initial losses and diminished equity. The time to reach the monthly breakeven point, however, remains the same, at month 42. But since the retained losses are higher and will take longer to recover, the expected return to investors is lower. Without advisory grants, the expected internal rate of return (IRR) at five years is approximately 1 percent; with advisory grants, it is about 14 percent. An IRR of 1 percent is too low for direct foreign investors (DFIs) to justify, even with an important development effect on the local market—even 14 percent is below what many DFIs and social investors consider acceptable in a region like Africa. SMARTLESSONS 90 Lesson 3: Starting up a new institution in a nascent time, they have pushed operating expense ratios lower. market will have a tremendous demonstration effect—an incredible opportunity to leapfrog However, despite the appearance of a stable progression older methods that have not succeeded and toward sustainability, these institutions typically less formal programs that are not designed to experience significant swings between profits and be sustainable in the long run. losses during this period.1 Many register substantial losses over the first 24 months before achieving initial Many investors in greenfield microfinance institutions breakeven at about 24 to 36 months, but then fall back care almost as much about financial returns as about into losses for the next 6 to 12 months as they begin development impact. They want to see a steady to assume the full cost of any additional management progression toward financial sustainability through service contracts. Only after about 42 to 48 months rising revenues, falling cost ratios, and improving do they emerge fully self-sustainable. margins and returns. Table 3 shows that the institutions in the cohort have sustained fairly rapid revenue Greenfields also play an important role in market growth over their first 60 months, increasing on average by $500,000 every six months and reaching 1 This SmartLesson does not attempt to remove the advisory support from the figures presented, because the amount of the support is difficult $5 million by the five year anniversary. At the same to precisely quantify and attribute among different accounting periods. Table 3: Growth of Greenfield Microfinance Institutions over Five Years Month Month Month Month Month Month Month Month Month Month 6 12 18 24 30 36 42 48 54 60 Total Revenue ($ 0.41 0.62 0.98 1.59 1.98 2.46 2.75 4.03 4.27 5.02 million) # in sample 28 28 26 25 23 21 19 17 14 13 Portfolio Yield 30% 59% 55% 56% 56% 54% 54% 55% 54% 52% # in sample 26 28 25 23 20 21 19 16 14 13 Op. Expenses / Avg 278% 200% 108% 82% 57% 53% 45% 38% 37% 36% Portf (%) # in sample 26 28 26 24 21 21 19 16 14 13 Net Income ($ million) (0.39) (0.39) (0.35) (0.17) 0.01 (0.03) 0.17 0.42 0.55 0.40 # in sample 28 28 27 26 23 22 20 17 14 13 Net Income / Revenue -408% -120% -69% -26% -13% -11% -5% 10% 12% 8% (%) # in sample 28 28 26 25 23 21 19 17 14 13 Net Income / Avg -6.7% -12.4% -8.8% -4.1% 0.4% -0.1% 1.8% 3.3% 3.8% 3.1% Assets (%) 28 28 27 26 23 22 20 17 14 13 Net Income / Avg -13.0% -44.6% -24.2% -13.7% -0.3% -0.4% -3.9% 20.0% 26.0% 18.9% Equity (%) 28 28 27 26 23 22 20 17 14 13 91 20 YEARS OF MICROFINANCE PROJECTS IN IFC development by demonstrating professionalism and Greenfields typically have an intensive and systematic good practices. They generally apply high standards of approach to staff selection, recruitment, and training. transparency with clients, are often active contributors Staff development accounts for 3–5 percent of their to national credit reference bureaus, and sometimes operating budget—and a significant portion of the advocate changes on behalf of the microfinance initial advisory resources. Most greenfields have sector to enhance transparency, raise standards, and company-specific training facilities with courses for improve the quality of regulations. Many endorse induction and professional development, and they and train their staff to practice the Client Protection provide intensive on-the-job training—all leading Principles.2 In the Democratic Republic of Congo, to a reputation for high-quality staff development. Advans and ProCredit led the way in transparency, and now two traditional commercial banks also Lesson 4: Product and channel diversification is publish their prices and terms on their websites. In critical for scale. Ghana, greenfield banks are seen as more open and transparent in their dealings with clients, making Among microfinance institutions, greenfields tend to client-oriented material available on their websites. In be at the forefront of innovation in low-income retail Madagascar, AccèsBanque Madagascar is one of only banking. Other financial institutions replicate their two microfinance institutions that publish effective new products, credit policies, and service standards. interest rates to their clients. In the Democratic Republic of Congo, ProCredit attracted large numbers of savers by introducing free The greenfields’ most significant effect is the savings accounts with no minimum deposit when professional development of staff, introducing human most banks had minimum requirements of more than resources practices that positively affect the financial $1,000. Following this example, some other banks sector. Other than a few international staff, all 11,600 relaxed their account-opening requirements, and the employees in greenfield microfinance institutions number of deposit accounts in the Democratic Republic as of December 2012 are nationals. In Ghana, they of Congo grew from 30,000 in 2005 to 1 million in employed more than 2,000 staff in 2011 (mainstream 2012. Similarly, Malagasy microfinance institutions banking employed 16,000). The two greenfields in adapted their internal procedures, processes, and IT Madagascar have more than 1,000 staff—23 percent systems to keep up with the new greenfield competition, of staff in the microfinance sector and almost 19 evidenced by the reduction in loan processing times percent of banking sector employees. Greenfield from weeks to five days. employees—typically young adults with little or no previous work experience—receive extensive In Ghana and the Democratic Republic of Congo, training and skills development in several areas of greenfields were the first to introduce new technologies credit and banking. Eventually, they become attractive in banking for low-income populations. Ghana’s EB- candidates for mainstream banks, extending their Accion, Opportunity, and ProCredit introduced ATMs skills to the larger market. These positive results (previously available only at commercial banks), and to the financial sector reduce the potential market EB-Accion Ghana and Advans Ghana introduced mobile distortion from providing advisory grant funding deposit collection. In the Democratic Republic of Congo, to individual institutions. ProCredit established the first ATMs, and mainstream banks soon followed; clients now have access to point- 2 The Smart Campaign website (www.smartcampaign.org) lists as endorsers Access, Accion, Advans, BRAC, FINCA, MicroCred, OI, and of-sale devices at over 300 locations, facilitating the Swiss Microfinance Holding as well as some of their affiliates in Sub- withdrawal of funds and cashless purchases. Saharan Africa. SMARTLESSONS 92 Some greenfields have pioneered the development of partnerships can help maximize greenfields’ investment financial services perceived as risky and challenging in alternative delivery channels. Regulated banks provide in their markets, such as microinsurance and credit risk analysis and secure regulatory-compliant agricultural finance. Opportunity International started deposit management, while technology partners bring an agricultural finance program in Ghana in 2010 best-practice marketing, distribution, and agent network with a pilot credit plan for cocoa farmers. It now management. serves 9,000 farmers and has introduced geographic information system technology to more accurately Acquisition: Shareholding of greenfields has been stable, map the smallholder farmers. but return on equity for some is more than 25 percent, attracting greater interest from local investors, who are CONCLUSION expected to replace foundation-stage DFIs. Sales of entire greenfield entities or networks are also possible Almost 15 years in the making, the greenfield as commercial banks seek to enter growing markets microfinance model has strong foundations in Sub- in Africa with an immediate geographic footprint, Saharan Africa. Sponsors and investors of these license, and skilled staff, thanks to the early success greenfield banks did not invest and take on high levels of the pioneers. of start-up venture risk to create a handful of boutique banks for the poor. Rather, the promise of this model lies in the ability to leverage strong foundations to serve the market and reach scale. Few commercial ABOUT THE AUTHOR microfinance institutions in Africa have been able Julie Earne is a Senior Microfinance Specialist who was to do this through productive lending and savings based in the Africa region for seven years supporting the development of the Africa microfinance program. products, as opposed to consumer finance. So how She is now based in Myanmar, where she leads IFC’s does this proof of concept give way to mass-market financial sector work. sales and shareholder returns? Three promising paths span strategies for organic growth as well as growth Approved by Momina Aijazuddin, Principal Investment Officer, Financial Institutions Group. through partnerships and acquisitions. REFERENCES AND FURTHER READING Organic growth: Many greenfield banks are successfully tailoring products and services for the micro, small, This SmartLesson draws from three previous publications: and medium segments, using revenues from larger clients to subsidize smaller ones. At the same time Earne, Julie, Tor Jansson, Antonique Koning, and they cultivate a pipeline of clients that will eventually Mark Flaming. 2014. “Greenfield MFIs in Sub-Saharan grow and graduate.3 Africa: A Business Model for Advancing Access to Finance.” Forum. Washington, D.C.: CGAP and IFC. Partnerships often result from the emergence of Earne, Julie, John Gutin and Jumoke Jagun. 2008. alternative delivery channels and technology-based “Frontier Finance – Microfinance as a Prudent First Intervention in Post Conflict Countries”. Smart Lesson. solutions that require broader collaboration between the Washington, DC. IFC. banking and technology sectors. By expanding reach and leveraging partners’ complementary core competencies, Earne, Julie. http://cfi-blog.org/2014/03/06/greenfield- microfinance-in-africa-where-to-from-here/ 3 See SmartLesson in this publication titled: From Micro to Small: How Do Microfinance Banks in Sub-Saharan Africa Upscale to Small Business Lending? 93 20 YEARS OF MICROFINANCE PROJECTS IN IFC An AccessBank Tanzania loan officer goes over details with a client. SMARTLESSONS 94 Lessons from South Asia Fulfilling the Housing Dreams of Microfinance Clients Rahees Mohammed and his wife lived in a rented house in a slum and had one wish—to build a house that would be a permanent home for the whole family. Aadhar Housing Finance Private Ltd. helped Rahees realize his dream by offering a housing finance product that corresponded to his needs, preferences, and capacities. This SmartLesson, building on Aadhar’s experience and that of our other housing finance clients in South Asia, provides a brief overview of the dos and don’ts for the implementation of housing finance products. Aadhar offers housing finance loans to households earning $1,200 to $4,800 per year and with no proof of income, such as self-employed business owners like Rahees. It offers smaller loans for repairs or incremental construction as well as mortgage loans. Aadhar entered the housing finance market in 2010 with IFC’s support. In addition to financial, IFC provided advisory services covering market-entry strategy and product design, sales and marketing approach, and a risk management framework. As of June 30, 2014, Aadhar’s housing finance portfolio amounts to $102.5 million. Why enter the housing microfinance business? Housing microfinance (HMF) is a subset of microfinance and fits well into the microfinance mission. It is designed to meet the housing needs and preferences of low-income groups, especially those without access to the banking sector or formal mortgage loans. HMF is intended for low-income groups who wish to expand or improve their dwellings or to build a home in incremental steps, relying on sequential small loans. Loan sizes vary from $800 to $3,000, and the tenor ranges from 24 months to 60 months. Interest rates in India are from 22 percent to 24 percent. Microfinance institutions require Rahees Mohammed and his family enjoy their collateral for loans exceeding $1,500. new home. 97 20 YEARS OF MICROFINANCE PROJECTS IN IFC For many microfinance clients, the home is also the DOs AND DON’Ts FOR ENTERING THE place of production for their micro or small business. HOUSING MICROFINANCE MARKET Clients who can improve their housing conditions experience an increased quality of life and well-being The following dos and don’ts for the implementation and, as a result, become more productive, creative, of housing finance products offer guidance for and satisfied. Those clients who take out HMF loans microfinance institutions that plan to develop a are considered lower credit risks and more satisfied strategy to enter the housing finance market. customers. Lesson 1: Do understand the demand patterns HMF also allows microfinance institutions to retain of your customers. existing clients or attract new clients. According to anecdotal experience, about 10 percent to 20 percent Depending on the size of the housing project, the of microfinance loans are used for housing. By offering demand for financing differs. The three elements listed HMF products, a microfinance institution improves below influence customers’ needs (improvement or its risk management framework (especially through extension), preferences (type of material used), and diversification and better identification of risks). capacities (whether the work will be completed by the customer or by hired professionals): Because of rising demand for housing finance in South Asia, entering this market offers an unrivaled 1. Income and title. Microfinance clients may have a opportunity for microfinance institutions. They are formal salary and an informal title or vice versa. To likely to benefit from enhanced profitability and assess creditworthiness, microfinance institutions sustainability of their overall operations. Key to can rely on the same methods as for microfinance achieving sustainable and profitable operations is loans. having the right product and right strategy. This includes a good understanding of the difference 2. Housing needs. Clients may use the loan proceeds between needs, preferences, and capacities, as well for home improvement, extension, or appliances (such as clear market segmentation (see Figure 1). as toilets). Figure 1: Illustration of Market Segmentation SMARTLESSONS 98 3. Location. Depending on where the microfinance • Funding and other resources needed for pilot implementation institution operates, loan amounts may vary. They and scale-up. As HMF loans typically have longer tenors tend to be higher in urban areas than in rural areas. than microfinance loans, microfinance institutions should also have access to longer-term funding in local currency Lesson 2: Do a detailed market assessment. to keep asset-liability mismatches at a minimum. Also, sufficient staff resources should be available or be recruited The goal of the market assessment is to identify the to ensure smooth implementation. These people should have potential and effective demand: 1) to identify the potential appropriate knowledge of banking and housing finance. target clientele, 2) to determine the potential demand and the size of the market (effective demand), and 3) to Lesson 4: Do build capacity and appropriate ascertain the affordability levels of the target segment. incentive systems for staff involved in housing. Other important aspects of the market research are a thorough assessment of the enabling environment (such as Capacity building of existing and new staff members is economic development, legal and institutional framework, critical to a successful rollout of HMF product offerings. housing sector) as well as a competitive analysis. The Also, management should appoint a dedicated and fully findings of the market research will provide the basis empowered project manager (“product champion”) to be for the final design of the housing finance products. in charge of the implementation process. In South Asia, microfinance institutions that have invested in appropriate Lesson 3: Do assess institutional readiness and capacity-building measures (particularly in individual capabilities. credit assessment and basic construction and technical knowhow)—from the beginning of the implementation The goal of this evaluation is to identify the necessary process—have demonstrated superior performance. organizational adjustments needed within the institution and the costs of implementation. It should take into Some institutions expand the duties of staff members consideration the following elements: whose current job is handling the group lending portfolio, having them offer housing loans as well. • Interest and willingness to expand into housing products. In this case, management needs to align the incentives To ensure sustained institutional interest, it is essential and targets of these twin goals appropriately. to get support from all key management, board of directors, and investors. Lesson 5: Do consider introducing housing support services (HSS). • Financial and operational performance. The institution should already have some experience with lending HSS or construction technical assistance (CTA) services operations. In India, the asset base of a microfinance are products and services that enable households to institution should be at least $20 million. Prior experience improve their houses on their own. They can range from with individual lending products is not a requirement; it providing process support for registering land titles, or can be obtained through the launch of HMF products. advice on construction and materials, to community In other regions, microfinance institutions have often development. There are three broad categories of these used HMF products to offer loans to individuals. The products and services: management information system, however, should have the capacities necessary to process individual loans of 1. Pure technical information. The lender provides longer tenor and larger ticket sizes. brochures, videos, contact lists of masons, and so 99 20 YEARS OF MICROFINANCE PROJECTS IN IFC on, to customers. These services can be provided by Lesson 7: Don’t fail to upgrade internal systems lender staff. Professional support is required to design and processes. the brochures or any other material. Individual lending—and in particular housing finance— 2. Professional services. The lender provides support requires a clear diagnostic and an overhaul of all key for the design and planning process, trainings, permit internal systems and business processes. The move from processing, and so on, possibly including visits by joint-liability-based lending to detailed cash flow-based technical staff to the borrower’s home. The lender may assessment necessitates revisiting and modifying (or cover these services through a cooperation agreement establishing) the following internal business processes: with an architect or other service providers. • Technical appraisal. Incorporate technical appraisal 3. CTA or engineering advisory. The lender provides capabilities within the institution to improve credit onsite support at the borrower’s housing unit, ranging appraisal, disbursements, and loan-use checks (preferably from basic (repairs) to structural work (such as masonry with the field-level loan officers). or plumbing). Structural work is the most intensive • Documentation requirements and pre-sanction process. form of housing support services and typically requires Understand the particulars of legal documentation the employment of an engineer. for a specific geography and incorporate this learning into loan sanction and documentation requirements. In determining how to deliver housing support services, it is important to create an effective link between the • Loan-use checks and repayment processes. Be sure loan- provision of these services and the HMF offering. use checks (such as photographs to accompany staged Market research should clarify whether customers would disbursements for larger ticket sizes) are in place; also consider the availability of CTA an added benefit, gear your systems for monthly repayments, as opposed which types of services they prefer, and how much to the weekly or fortnightly collections for a typical they would be willing to pay for the services microenterprise loan. • Delinquency management process. Upgrade the Lesson 6: Don’t underestimate the aberrations delinquency management process to account for longer- of an uncertain regulatory environment. term housing finance loans as well as prepayment possibilities. In countries such as India, where the regulatory framework for microfinance institutions is still unclear, implementation success could be negatively affected by Lesson 8: Don’t fail to set up robust responsible ambiguous regulations and directives. Current regulations lending, customer protection, credit bureau of India’s central bank do not allow microfinance reporting, and disclosure practices early on. institutions to lend more than 30 percent of their loan book for non-income-generating loans, which includes From the beginning of the implementation process, build housing finance. At present, an amendment to this rule, a responsible housing finance framework, because it will which envisages a relaxation of this limit, is pending result in enhanced customer awareness and consequently approval by Parliament. It is therefore prudent to conduct better risk management. To ensure robust credit appraisal a thorough review of all the laws and regulations dealing and an appropriate product design, it is advisable to with HMF operations. This work should be covered embed customer-centric practices across the entire business within the market assessment. operations. Such practices include the following: SMARTLESSONS 100 • Clear and full disclosure of housing loan terms (such CONCLUSION as interest rate and tenor); • Efficient grievance handling mechanism for individual Microfinance institutions, such as Aadhar, that have lending; pursued a rigorous, albeit flexible, approach to the rollout of their HMF product offering have been quite • Credit bureau reporting, beyond basic compliance successful and are today’s market leaders. Thorough requirements, to aid credit assessments of clients; market research and internal capability assessment are • Staff trainings that incorporate ethical behavior for critical success factors, and an HMF product champion staff and sales agents; ensures a smooth implementation process—so long • Customer-friendly collection practices, which could as he or she enjoys the full support of management. involve exploring electronic transfers; Another crucial element is a critical review of the pilot to • Raising awareness on documentation requirements, allow for further changes, to hone the product offering technical assistance, and so on. and the sales and marketing approach. However, to retain Lesson 9: Do consider scaling up the HMF offering a competitive edge in the microfinance institution’s after the pilot and some operational experience. housing finance market, management should constantly review the performance of the HMF loan portfolio Before a nationwide or statewide rollout, the HMF and be ready to make further adjustments. product offering should be tested through a pilot, and the results should be reviewed and adjustments made. According to experience in South Asia, the following ABOUT THE AUTHORS areas may require modifications: Friedemann Roy is the Global Product Lead of the • Loan size sought by customers; IFC Housing Finance Advisory Services, Financial Institutions Group and is responsible for the Global • Down payment requirements from customers to Housing Finance Advisory Program and Strategy. He has worked in over 50 countries covering areas in ensure their willingness to repay the loan; banking, housing finance, and microfinance. • Disbursement in tranches or in one lot. Shilpa Rao, former Associate Operations Officer, Access to Finance Advisory, South Asia, participated in seven Once the pilot is completed and after a year of IFC projects in housing finance with microfinance institutions and housing finance companies across operations, management may consider scaling up India. HMF operations. Within the Indian context, there are the following models: Sachin Bansal, former Operations Officer, Access to Finance Advisory, South Asia, from July 2011 to • Continue with HMF lending within the existing December 2013, managed 10 projects with banks and microfinance institutions across microfinance, setup through organic growth; payments and alternative delivery channels, and financial awareness sectors in South Asia. • Act as a sourcing and collection agent for larger banks or housing finance companies (HFCs) that plan Approved by Jennifer Isern, Practice Manager, Finance to go down-market. & Markets, Global Practice, South Asia region; and Douglas Grayson, Principal Financial Specialist, Housing Finance, Financial Institutions Group. • Establish a stand-alone HFC, bank, or nonbank financial institution, as specific country regulations allow. 101 20 YEARS OF MICROFINANCE PROJECTS IN IFC A client of Ujjivan Microfinance Pvt. Ltd., in New Delhi. SMARTLESSONS 102 The India Microfinance Story: Putting the Focus on Borrowers IFC has worked on client protection issues since its first microfinance investment in the early 2000s. These activities took on a more defined shape when seeds of the Responsible Finance program were sown with the Microfinance Credit Reporting Initiative in 2009, which aimed at reducing the significant information asymmetry between microfinance borrowers and lenders by supporting increased links between microfinance institutions and credit bureaus. This SmartLesson shares the lessons learned during the implementation of components of the Responsible Finance program of IFC’s Advisory Services—and how that program is having a clear and defined impact on India’s microfinance industry. In Andhra Pradesh, high growth in the microfinance project components of the program (Box 1) span industry led to an overemphasis on the supply side, sector, institutional, and client levels: ignoring the impact on clients, and brought the sector under scrutiny with the onset of a microfinance crisis • The Microfinance Credit Reporting project promotes in August 2010. The state government’s restrictions on use of credit bureaus for decision making and links new lending and recovery led to huge nonperforming credit bureaus to microfinance institutions, the key to loans in microfinance portfolios, and consequently bank reducing multiple borrowing and over-indebtedness. lending to microfinance institutions plummeted across The project design incorporates increasing awareness India, falling to almost zero for those with exposure in of end borrowers as well as a study of the impact of Andhra Pradesh. Microfinance operations reached a credit bureaus on microfinance institution borrowers’ standstill, and only $835 million is estimated to have behavior and dissemination of results. The project has been lent to the sector in fiscal year 2012, compared a database of more than 100 million client records to $2.38 billion during fiscal year 2011. and has received 45 million incremental inquiries to credit bureaus. Given the changed circumstances, with microfinance portfolios having deteriorated across Andhra Pradesh, • The Responsible Finance Sectoral project works IFC expanded the scope of its Responsible Finance with the stakeholders at the sectoral level and aims at program by promoting initiatives that incorporate building the capacity of industry associations, facilitating greater customer-centricity into operations and raising adoption of a common code of conduct, supporting decision makers’ and stakeholders’ awareness of the policy advocacy measures, carrying out benchmarking need to effectively address the reputational issues facing studies, and creating forums for stakeholders to the sector. The program focused on multidimensional arrive at consensus on key issues facing the sector yet interlinked interventions, pitched at different and potential solutions. The project, with its work stakeholder levels, that would address the multiple with the industry associations, covers more than 90 challenges the industry faced. The following key percent of the microfinance sector. 103 20 YEARS OF MICROFINANCE PROJECTS IN IFC IFC also worked with SMART Campaign1 India—at the institutional level—for the adoption of global client Box 1: Some Responsible Finance protection principles (CPPs) by Indian microfinance Program Milestones institutions. The project supports training on CPPs for • Under the Responsible Finance Sectoral initiative, IFC microfinance institution staff and onsite assessment of the worked with the World Bank to bring together a core group institutions, as well as guidance on appropriate product of stakeholders to form the “Responsible Finance Forum” design and delivery, enhancing transparency, responsible in 2011. One outcome was the adoption of a common pricing, fair and respectful treatment of clients, privacy approach to responsible finance through a harmonized of client data, and mechanisms for complaint resolution. India Microfinance Code of Conduct. • The Financial Awareness program works on the • The SMART project contributed to the development of demand side and aims to roll out an effective and global standards for client protection in India and completed sustainable financial awareness program for low- 20 client protection assessments covering about 20 million Indian microfinance clients. IFC also helped five partners income households so that clients make informed receive global Client Protection Certification, carried out choices about financial services—and microfinance eight trainings on CPPs for microfinance institutions, and institutions and financial institutions experience better conducted 10 assessor training workshops to create a pool business outcomes. of regional resources. •The Risk Management project contributes to • The Risk Management project team conducted risk- strengthening risk management systems and practices management diagnostics of eight microfinance institutions in the microfinance sector in India. It aims to promote and formulated a customized risk management strategy for global risk management practices in Indian microfinance each one. Phase 2 should reach 20 smaller microfinance institutions in low-income states. The team also conducted institutions and integrate them with responsible finance a series of five workshops/trainings with 210 participants practices. On completion, it is expected to cover 28 from microfinance institutions, covering more than 70 microfinance institutions. percent of the Indian microfinance sector. LESSONS LEARNED • IFC-supported credit bureaus, High Mark and Equifax, have a combined database of more than 100 million micro- Lesson 1: The microfinance crisis demanded a client records, the world’s largest repository of such data. rapid and multi-pronged response. Post-crisis, the need to reinforce responsible lending role by initiating a comprehensive effort through the practices in microfinance institutions increased multifold, Responsible Finance program. With its different project and it was critical for the sector to come together and components focusing on stakeholders at sectoral, propose concrete next steps to ensure adherence to institutional, and client levels, the program quickly responsible finance. IFC immediately took a leadership began to address the sector’s multiple challenges. 1 Committed to embedding client protection practices into the IFC’s neutral role was critical in bringing the sectoral institutional culture and operations of the microfinance industry, the SMART Campaign encompasses the following client protection stakeholders together to address differences and principles: appropriate product design and delivery, prevention of harmonize their efforts, such as in the negotiation over-indebtedness, transparency, responsible pricing, fair and respectful treatment of clients, mechanism for complaint resolution, and privacy of the Unified Code of Conduct for the sector. The of client data. SMART Campaign India is housed under Accion individual project components, with their focused International. SMARTLESSONS 104 deliverables, helped address such sectorwide concerns Lesson 3: Engage with key stakeholders for as multiple lending and client over-indebtedness. IFC’s maximum sectoral outreach. credibility in the sector, ability to mobilize strong links with stakeholders, and expertise in project delivery A multistakeholder approach is critical for a large sectoral helped microfinance institutions develop the necessary project where it is important to holistically address the partnerships with clients and adhere to client protection underlying gaps. The project’s credibility and acceptability principles and codes of conduct. is heavily influenced by how successfully the team can mobilize strong links with stakeholders—to clearly Lesson 2: In project design, propose holistic gauge the stakeholders’ expectations and willingness to solutions. participate in the project and take collective responsibility. For a project to have a sustainable impact on the sector As the primary strategy, IFC successfully engaged and to be appreciated by the clients, it needs to shift with sectoral stakeholders such as development from a piecemeal approach to providing solutions. IFC’s institutions, lenders, investors, credit bureaus, and recognition of the need for an integrated approach to network associations, thus ensuring that everyone was address challenges in the Indian microfinance sector on the same platform—and lending more credibility guided all its interventions. to IFC’s efforts. This stakeholder engagement resulted in a high level of participation by microfinance Identifying a lack of consensus in the sector on the institutions, technical vendors, and consultants in credit direction to be taken post-crisis, IFC reached out bureau workshops and risk management workshops first to the important stakeholders. The result was and trainings across the country. This approach the Responsible Finance Forum, formed in 2011, generated buzz about the IFC project and made it and the Unified Code of Conduct for the Indian easier to get buy-in for the project’s implementation. microfinance sector. To ensure integration of Code Similarly, reaching out to key stakeholders can lead to of Conduct principles into microfinance institutions’ further expansion of the project to a large number of systems and processes, IFC then worked strategically microfinance institutions, as with SIDBI, which has with SIDBI to carry out Code of Conduct assessments, seen value in the risk management initiative and will which analyzed existing systems and processes of a support the rollout of the risk management framework microfinance institution, rated its compliance with the for another 15 microfinance institutions. Code of Conduct, and identified gaps in adherence to Code principles. Then the team worked with each Lesson 4: Master the balancing act: customize institution to integrate CPPs into its operations. This content and standardize quality. holistic approach of working at the sectoral, institutional, and end-client levels has increased the success rate and Differences in regulatory framework, operating models, pace of institutionalizing responsible finance practices and political environments make it important to customize in the Indian microfinance institutions. a project to suit the local context. The key is to identify the optimal level of customization without undermining One of our clients, Cashpor Microcredit (based in Uttar the quality of the project. This balancing act requires Pradesh) underwent CPP assessment and worked with IFC close collaboration with clients, consultants, and other on institutionalizing client protection principles. Cashpor stakeholders to determine the optimal level. Microcredit is among the first microfinance institutions in the country to be certified by the SMART Campaign. An example of the effectiveness of this approach was 105 20 YEARS OF MICROFINANCE PROJECTS IN IFC Indian women go over their paperwork with a loan officer. the customization of IFC’s Global Risk Management management standard framework into organizational Assessment toolkit to suit the Indian microfinance context. strategy and processes without huge modifications or cost Recognizing that direct application of global tools and implications. On the other hand, for larger microfinance frameworks might not be effective, the project team institutions with better-developed systems already in put in extra effort through stakeholder workshops and place, we need to demonstrate value addition through onsite experience to customize the toolkit to include, more nuanced and system-specific recommendations. for example, 1) measures to identify hidden group delinquency, because group lending is the common model; Lesson 5: Ensure client buy-in early on. and 2) social performance management, considering its importance in the risk management context in India. Any new process or system involving a considerable shift from the norm requires the institutions dealing with it to During implementation of the Risk Management project, be willing to change and to be supportive of the efforts to the team identified the need to customize according to do so. So it is important for the project team to be actively the scale of operations or size of clients. For instance, involved with the client right from the design phase—and small institutions usually have nascent risk management at all levels. This implies a substantial investment in time systems and find it easier to integrate the project’s risk by senior management and staff across the organization. SMARTLESSONS 106 Hence we emphasize a consultative approach, which helps institutional, and client levels. These collaborative in outlining priorities and concerns, thereby preventing efforts aim to build sustainable partnerships in Indian unrealistic expectations on either side. microfinance—partnerships that clearly demonstrate the social impact of the work being done and that do a With one of our clients, Ujjivan Financial Services, we better job of communicating the microfinance success engaged right from the inception for the integration of story. The systematic approach this program follows client protection principles in its operations. This helped has had a profound impact on the sector. Ujjivan set up its service quality department in line with its decentralized operational structure by empowering We hope these successes—and how the program the branch-level staff to handle client complaints and addressed the challenges—can provide insights that grievances. Engagement with the client from an early will help those developing similar approaches in other stage significantly improved IFC’s understanding of regions. IFC’s Responsible Finance advisory program operations and enabled us to consistently support and can continue to be a key factor in building capacity strengthen the organizations’ efforts. and revamping the sector in fledgling and mature microfinance markets throughout the world. IFC is The project team also ensures the involvement of a geared to play a critical role by replicating lessons microfinance institution’s senior management right learned from successful interventions globally. from the project design stage. For instance, under the Risk Management project, the team makes detailed presentations to the senior management on the proposed risk management framework prior to the diagnostic to understand expectations and concerns. We also send the final list of recommendations from IFC as a letter to the board for its approval. Implementation does not begin until the board approves. ABOUT THE AUTHORS Girish Nair is the regional lead for Microfinance Advisory in South Asia. He spearheads IFC’s Responsible Finance CONCLUSION initiatives in the region. Through its Responsible Finance program, IFC with its Farzana Bijur is a consultant with the Access to Finance partners has helped microfinance institutions institutionalize department in South Asia. client protection principles and codes of conduct. Across Poorna Bhattacharjee is an Operations Analyst with South Asia, the Access to Finance team is managing 16 the Access to Finance Advisory Services in South Asia. microfinance institution projects with a built-in Responsible Finance component. The Indian microfinance institutions Sakshi Varma is an Operations Officer in the Access to Finance department in South Asia. are nearly 60 percent of the banking sector’s outreach to small lenders; therefore, the impact of these IFC initiatives Approved by Jennifer Isern, Regional Business Line may be felt by as many as 26 million clients. Manager, Access to Finance, South Asia, Advisory Services. Commitment to responsible finance requires participation from all stakeholders, and this program serves to bring them together on the same platform. It requires innovative and proactive approaches at the sectoral, 107 20 YEARS OF MICROFINANCE PROJECTS IN IFC Credits PHOTOS Cover page © IFC Page after index © IFC Pages 12,17-18 © IFC Page 20 © Dominic Sikakau Pages 24, 29-30 © IFC Pages 43-44, 50 © Martin Spahr Pages 55-56, 60 © IFC Pages 69, 72 © Matthew Leonard Pages 75-76, 82, 94, 95-96, 102, 106 © IFC DESIGN & PRODUCTION Abiola Johnson Emil Caillaux Sheirin Iravantchi Shannon Roe PRINTING World Bank Group Printing and Multimedia Services Lessons Learned from 20 Years of Microfinance Projects in IFC HEADQUARTERS Washington DC, USA 2121 Pennsylvania Avenue NW T: +1 202 473 1000 EAST ASIA & THE PACIFIC EUROPE & CENTRAL ASIA SOUTH ASIA Hong Kong, China Belgrade, Serbia New Delhi, India 14/F, One Pacific Place Bulevar Kralja Aleksandra 86-90 3/F & 4/F,1 Nelson Mandela Road 88 Queensway Road 11000 Vasant Kunj, New Delhi 110 070 T: +852 2509 8100 T: +381 11 302 3750 T: +91 11 4111 1000 LATIN AMERICA & CARIBBEAN MIDDLE EAST & NORTH AFRICA SUB-SAHARAN AFRICA Rio de Janeiro, Brazil Cairo, Egypt Johannesburg, South Africa Rua Redentor, 14 Nile City Towers, North Tower, 24th Floor 14 Fricker Road, Illovo, 2196 Ipanema 22421-030 2005C T: +27 11 731 3000 T: +55 21 2525 5850 Cornich El Nil, Ramlet Boulac T: + 20 2 2461 9140 SmartLessons is a World Bank Group program which enables development practitioners to share lessons learned in development operations. This collection presents first-hand and straightforward project stories with pragmatic useful analysis, written by professionals for professionals. Through the prism of their own experience—positive and negative—these authors aim to capture practical insights and lessons that could help advance development-related operations for private sector-led growth across the globe.