j m ~~18C75 _ Newsletter THE CONSULTATIVE GROUP TO ASSIST THE POOREST _ [A MICRO FINANCE PROGRAM] ACCESSING COMMERCIAL SHORT-TERM MICRO- CAPITAL FOR MICRO- FINANCE: COMMERCIAL FINANCE: THE ACCION BANKS CAN DO IT! E X P E R I E N C E - Klaas Kuiper, International Agency - Maria Otero, ACCION International for Economic Development (Speech delivered at a seminar on Could commercial banks extend Rural Finance at the World Bank, their standard operations in the micro- October 24, 1996, summarized by finance sector? Whv not? Consider £ D Gregory Chen of the CGAP howv commercial banks use computers Secretariat.) and automated tellers to handle the ACCION International is a non- current accounts of their customers. profit development agency currently Customers can regularly overdraw working wvith a network of 18 local their accounts, -within a limit, xvithout micro-finance institutions (MFIs) hearing from the banker. The bank's throughout Latin America. Since it computer calculates interest and became involved with poor microen- charges the account monthly. The trepreneurs in the late seventies, interest rate is substantially higher ACCION has discovered that its local than nornmal, as the banker is obviously affiliates can become financially, self- awxare of the higher costs involved. sustaining. This has been an impor- The practice must be profitable too, or tant breakthrough, holding the else wvhy xvould banks advertise their promise of continued financial services overdraft facility' Add credit cards to for the poor without reliance on donor this system and customers can give support. Accessing c;ommercial capital themselves a small loan any time of the was kcy to achieving growth and self dav, any day of the wveek, -with niO sustainabilitv, and over the years, forms, no meetings xvith a loan officer, ACCION has explored different no appraisal procedure, and no securi- mechanisms for overcoming barriers to ty pledged. The securitv is the bank's accessinig this capital. Two of these access to the customer's account. The nmechanisms will be discussed here. bank's computer can hiandle thousanids of such transactions while the bank I;f^> lll|n s t i t u t i o n alI G r o w t h staff is fast asleep. Clearly this is the miost efficient and fastest credit pro- grmever designed. The conclusion is At its inception, ACCION affiliates gram ere a no sytm ps t#. s > *+^4le **5. tl ought to provide a range of financial banks prevecnting coiommercilbanks romi and business development services to very poor microcntreprenicurs on a sub- enaignthstpofldn. sidized basis. Two earlv discoveries fin- Small, short, and unsecured? danmentally chianged AC'CION's Cm eca ak approach: first, that microenterprisce Can Do It! 4: ~~~~~~~~~~activities themtselves were profitable and g i, ~v iable, and second, that newv lending What are the obstacles to moving technologies (or mcthods) made into the itormal sector i-ith such (coiltilifd 177 painc 12) (Con ctiiuted o pIfl c) 1 Acesin Cmmecil CpialEMERGING MARKET? foE ir4nnc:TeAco Mohini Malhotra, CGAP Secretariat continued on page 12From a relatively obscure orphan in the early 1980s to everyone's favorite Short-Term Mcro-finance,child today, micro-finance is attracting a lot of attention. WThile early voices were continued ~~~~~~ savTing that micro-finance institutions (MFIs) can . . perhaps . .. someday.. 2-3 Micro-finance: The Ne cover their costs, today, private investors are entering this arena, discussing the Emergng Market seuitization of micro-loan portfolios and "taking institutions public." They are 4-5 Ban Daang Baji: trvingr to play match-maker betwveen poor people's demand for financial services Pofitable Commerca and advanced capital markets. Has micro-finance become the new emerging mar- Micro-finance ~~~~~ket for investors? S New CGAP Publictin 6 CGAP~ Member4 Donors Some Major Industry Break-Th roughs Bringing icro-finace to theThe evidence regarding micro-finance success stories has provoked private Private sector Recn Codnferencs inLndond investors' 'interest. A number of MFIs have proved that they can provide financial Syny anOd WashntnD services to poor people on sustainable and even profitable terms. A 1994 analysis 7-8 WestAfrica igh Leve Poiyof 1 1 leading MFIs (CGAiP Focus Note 2) shows that a number of institutions are Forum on Micro-finance.financially, self-sufficient -they are covering expenses wNith revenues from provid- 9-10 BanoSol: Cossing Bridgeing financial services to poor people. In 1993, ACEP in Senegal, BancoSol in Between GO and cmmercialBolivia, and LPDs in Indonesia were covering 100, 103 and 137 percent of their 11 Scaling tMir-iac:Tecent for BancoSol. AHattGon Nationalb Bank A few commercial bankers are peering into this vast potential market. To date, 13 Practitioner Networksthe banks that have been involved, such as Grameen Bank in Bangladesh, Sewa 1-1 5 Updat Bank in India, BRI and BDB (this issue) in Indonesia are specialized banks that serve this clientele, or are banks that grew out of micro-finance NGOs, such as CONTRIBUTORS ~~~~Bancosol in Bolivia and K-REP Bank in Kenya. The industry is still awvaiting the entry of "regular" commercial banks, but the success of Bank Dagang Bali (this Accion Interntional and isue), and the steps of the Hatton Bank in Sri Lanka (this issue), Banco de CG~A 0p Poicy AdvHIorDesarrollo in Chile, and BANCOTMER, the second largest commercial bank in Klaas Kuiper ~~~~~Mexico, are encouraging. iniernationa Agency forAs a growing number of MFIs explore deposit mobilization or leverage com- Economic Devlopment andmercial capital, bank regulators in Peru, Bolivia, Ghana, Kenva and other coun- CGAP Policy Advis or tries are creating laws or special regulations for this new breed of institutions. In CGAP Secretariat ~~Bolivia, Bancosol, a private commercial microenterprise bank established in 1992, ~CGAP SertritadPrivateigrqieet staiinlbns u ihsmlrla ouetto n Sector Development risk classification rules. To encourage newvMFIs, Boliv,ia has begun lcensing a Department new class of intermediaries called private financial funds (PFF), subject to the same David Wright ~~~~solvncy and reserve requirements as banks, but xvith lower minimum capital Sara Webb and Niki Ruler reqiuirements. AUSAID ON A small number of MFIs have linked with domestic and international capital Liza Valenzuela ~~~~~markets. In 1995, the Paraguay Foundation fr Development and Cooperation USAID ~~~~~~~~was the first non-profit institution in Paraguay to sell bonds on the securities exchang to finance the portfolio for loans to microentrepreneurs. ACP in Peru and FED in Ecuador plan to securitize microenterprise portfolios through issuing ~M corporate debentures backed and serviced by the microcnterprise portfolio. In i 1994, BancoSol issued certificates of deposit (CDs) in the United States. M ~Grameen Bank has floated bonds in Bangladesh w,ith yields commensurate with the corporate sector. The debt instruments purchased by Paraguayan, Peruvian, Ecuadorian, U.S., and Bangladeshi investors are backed by the promise of primar- ily poor urban and rural women to repay their US$100 to USS200 loans. But Still Some Way to Go With this activity, one may think that the industrv has moved from the 'fringe' into the 'mainstream.' However, only about 20 to 25 institutions have achieved industry break-throughs - a small proportion of the total number of active MFIs. A recent worldxwide inventory of MFIs done by the Sustainable Banking with the Poor Project (SBP) of The World Bank estimates that there are over 900 institu- tions in 101 countries, each with over 1,000 clients and 3 years of experience. The vast bulk of MFIs has not heard of or is not convinced by the emerging con- ventional wisdonm that financial services can be provided to poor people on sus- tainable terms. Many institutions are undergoing the same groving pains that the leading institutions experienced a decade or more ago, and are debating the earlier arguments about the feasibility of cost-recovery. Most do not see the potential for their specific institution to become financially viable in the foresee- able future and expect to continue their dependencc on public donor funds for their operations and survival. Of the 116 institutions that applied for funding from the CGAP Secretariat as of June 30, 1996, an estimated 5 percent covered their expenses from revenues, although most had bccn in operation for over 3 vears. Weak or non-existent financial reporting systems for the majority of MFIs con- strain their capacitv to attract private sources of funds. A striking result of the SBP survey was the inability of many institutions to provide basic financial data, such as the size of the gross portfolio outstanding, or annual administrative costs. The availability of reliable and standard financial data and loan portfolio information has The availabiity of played a critical role in permitting the 'break-througli institutions to access com- mercial and other financial resources. The Paraguay Foundation mentions that the r e Ii a b i e a n d st a n d a r d overwhelming acceptance of its bonds was due in large part to the CAMEL diagno- sis it conducted. Private investors, and increasingly public funders, shy axvay from f i n a n c i a i d a t a a n d l o a n funding a financial institution that cannot account for its funds nor attest to the partfaia informatian h as quality of its loan portfolio. Financial reports in and of themselves do not help MFIs to access funds, but they do make the MFI more transparent and understand- p I a ye d a c r i t i c a I ro I e i n able to potential investors. Beyond financial reporting svstems, investors increasingly care about other key p e r m itt i n g t h e 'br e a k - institutional and operational issues related to MFIs' performance. The challenge t h r oug h' i f st in t ut i o n s to of building capacity in young institutions to reach the scale, efficiency, and results achieved by the few industrv leaders still remains. These challenges include defin- a cc e ss co m m e r c ia a n d ing management, governance, and institutional structures, attracting and training ot h e r f i n a n c i a I r e s urces. personnel, and designing appropriate financial products for their clients. Emerging Market or Infant Ind ustry? Micro-finance has made notable steps in the last decade, as evidenced by the selection of articles in this ne\vsletter issue. The industry has come a long way from the 'fringe' but is still far from the 'mainstream.' Serious effort and invest- ments are still needed to build the capacity of a significant number of institutions, beyond the current 20 or 25 strong MFIs. When a respectable number of MFIs demonstrate "emerging market" returns, the industry wvill not escape the notice of private investors and commercial bankers. B A N K D A GA N G BALI: meeting and there learned much to its services, the bank permits sav- A PRO F I TA B L E CO M M E R CIA L more about how formal banks func- ings accounts with low minimum BANK IN MICRO-FINANCE tion. They began to seriously con- deposits. The bank's 353,838 sider opening a licensed bank deposit accounts in 1995 had an M To date, few private commercial themselves. With further loans and average account size of US$270. banks have been active in their ow-n capital, the Okas estab- BDB also emphasizes customer rela- micro-finance. One of the earli- lished Bank Dagang Bali in 1970. tions and outreach. One important est to get involved is the Bank Though a successful commercial component of BDB practice is the M Dagang Bali (BDB) in bank, BDB has continued to main- mobile savings team, first established Indonesia. This private com- tain patterns set initially by the Okas at a time when Indonesian bank reg- mercial bank has served micro- in their informal moneylending days, ulations prevented bank branches. finance clients profitably since it including involvement in the micro- These teams travel to clients' homes C was founded in 1970-and even finance sector, close knowledge of and workplaces by foot, motorcycle, before. the market, careful attention to cus- or car. Covering a specified route tomers, and wvillingness to use innov- each day, they collect deposits and T h e F o u n d e r s ative methods. provide withdrawals, serving virtually The historv of BDB is inter- as mobile banks. twined with the personal stories Produ c t s a n d P e r f o r m a n c e Among BDB's other innovative of its founders, I Gusti Made As a commercial bank involved devices is the use of a lottery as a Oka and Sri Adnyani Oka, who not only in the micro-finance sector, means of savings mobilization. Aware continue to own and manage the BDB makes loans of all sizes, from that smaLL savers are attracted to lotter- bank. This husband-and-wife team under US$100 to over US$100,000. ics because these are perceived as an had been poor themselves and At the end of 1995, BDB had a total escape route from poverty, BDB worked in the informal sector as tai- loan portfolio of US$82 million. sought to satisfv this interest to the lor and typist, getting a small loan in Roughly 20 percent of all loans were benefit rather than risk of participants. order to buy a sewing machine. The under US$500 and about tvo-thirds It therefore created a lottery in which couple eventually accumulated were under USS2,300. Many of the every depositor receives a free month- enough to open a savings account in large borrowers of the 1990s are lv lottery number for each RplO,000 a commercial bank. Realizing, how- long-term clients who began at BDB (about US$4.60 in 1994) in the ever, that they could make more on as small savers and borrowers during account. Lottery drawings, with such that capital by lending it out them- the 1970s. BDB's approach is to prizes as a house, car, or motorcycle, selves, they became informal money- provide continued financial services are held four times a year. The draw- lenders. They made short-term loans to its good customers, whether their ings have attracted great attention, with daily repayment schedules and enterprises remain small or grow which BDB uses as an opportunity to immediatelv re-lent the capital. Mrs. large. educate villagers about banking and to Oka handled transfers and repay- Most BDB loan terms are for less explain and publicize its own services. ments in daily visits on bicycle to than onie year, but loans may be Following BDB's example, many customers, while Mr. Oka kept the rolled over. Interest on most loans is banks in Indonesia as welL as Bolivia, accounts. As their own funds were set at about 30 percent a vear. KIenya, and Mexico have adopted this too small for demand, the Okas also Repayment has been consistently strategy of savings mobilization. served as intermediaries between high throughout the bank's history, BDB's assets have grown substan- those wanting to borrow and other with less than 1 percent of loans tially from about US$162,000 in individuals with excess liquidity who more than three months overdue. 1970 to about USS 115 million in trusted the Okas' judgment. Perhaps BDB's greatest innova- 1995. There has been a steady As a consequence of obtaining a tions have been in the design and increase over the years in the further loan in 1956 from Bank implementation of voluntary savings amounts of both deposits and loans, Perniagaan Umum, the Okas found instruments and services for lower- wvith total deposits always exceeding themselves at a bank shareholder's income people. To facilitate access the loan portfolio. At the close of 1995, BDB had approximately BDB was one of the first com- N EW CGAP US$95 million in deposits and mercial banks to understand the PU B LI CAT I O N S US$82 million in credit outstanding. demand for micro-finance, given the J u I y D e c e m b e r, 1 9 9 6 The total number of deposits personal experience of its founders. (353,838) dwarfed the total number It xvas also one of the first to operate of loans (11,646). This pattern profitably in the micro-finance sector. F O C U S N O T E 4 reflects both BDB's impressive local- Its role in this area goes bevond mere level savings mobilization and a relative- involvement to successful innovation, Regulation and Supervision of Micro- ly conservative lending policy. In 1994, establishing practices that have been finance institutions: Stabilizing a New the bank began increasing its lending implemented elsewhere. Financial Market. Maria Otero, Rachel operations at the local level. As a result, Rock, and Richard Rosenberg. the loan/deposit ratio increased from This articlc vwas prepared by Anne-Marie Smith. It vas drawn from, "`Where the 68 percent in 1993 to 86 percent in Microfinancing Revolution Began: The 1995. BDB has been consistentiv prof Bank Dagang Bali, 1970-1995," by F O C U S N O T E 5 itable throughout its history, but it is Marguerite Robinson, Chapter 6 in The Micro-finance Revolution: Sustainable Financial Sustainability, Targeting the likelv that the bank could become more Banking for the Poor, Manuscript under Poorest, and Income Impact: Are There profitable if the credit side of its activi- prepararionl. ties xvere expanded. ~~~~~~~~~~~~~Trade-offs for Micro-finance Institutions? Paul Mosley and Brigit Helms. Short-Term Micro-finance OCCASIONAL PAPER 1 (continywrdfrom page 1) Microcredit Interest Rates, Richard practices? Most poor people do not have access to financial services. Rosenberg Commercial banks need to change their policies so that the poor can open cur- rent and savings accounts and prove they can handle such accounts successful- ly. Other bottlenecks are the lack of computers, automated tellers, and credit N E W S L E T T E R card facilities-but that may only be a question of time. The village bank of C O N T R I B U T 10 N S the future may well be an automated teller. Perhaps international donor agencies Please send contributions (between 600 should consider making resources available for these technologies, as one way to and 700 words) at the address listed include the involvement of commercial banks in the rmicro-finance sector. under contact information on the last page. The selection of articles for publi- cation will be at the editors' discretion. CGAP ONLINE All CGAP publications and general infor- mation about CGAP can be accessed through the World Wide Web at: http://www.worldbank.orgl html/cgap/cgap.html ff4BXf}ai faUf; }3af' Aii00 'za3et 'f3>' f':'at 93"i 00 i lt j ii M i M B E M E M B Au a 5 t a a BRINGING MICRO-FINANCE bv the Parliamentary Secretary to the TO THE PRIVATE SECTOR: Minister of Foreign Affairs, the Bei iua m RECENT CONFERENCES IN HonorableAndrewThomsonMP,who LONDON, SYDNEY, AND encouraged greater involvement by the Ca n a da ' ' Australian private sector in development W A S H I N G T 0 N D C as a matter of corporate self-interest Denmark rather than as an act of charity. Overall, ta Most micro-finance programs were the seminar introduced micro-finance to F xf n 1 a d started and continue to be man- attending participants, and helped facili- J aged by non-governmental (non- tate a discussion on how Australian com- F r !Cn < e g profit) organizations. Their sources panies can seek to support micro-finance of funding have included grants activities in their offshore operations. and "soft" loans from donors, Between November 18-20, 1996, trusts, foundations, and occasional- USAID sponsored a conference on L u x e m bv u r, 1- ly goxernments. As they grow and "Commercial banks in Micro-finance." f proliferate, however, these pro- The event brought together twenty com- ,5^ f,z,>0 Wi e X F et tzxa r.' e gm grams begin to reach the limit of mercial banks from Asia, Africa, and T such resources. A next likely place Latin America -all of whom are N "' to turn is the international capital engaged in micro-finance. The bankers 4 markets. Bringing the micro- present felt that micro-loans and savings finance and commercial private sec- was a large untapped market that could tors together was the aim of three be profitable. They identified key ele- a recent conferences. ments required to enable banks to carrv S -,A? i ?z f r u~ F, r, d On June 12, 1996, the Overseas out micro-finance operations on a signifi- g Development Administration and cant scale. Most important was a com- CGA1P Secretariat held a round- mitment to micro-finance among the table for the financial community in highest level of management. Moreover, U3 ed _ f London. There were 85 participants at there is a need to: change the existing the meeting that included representatives corporate culture that treats micro-busi- Atf 'ic 3 D(fave1?tnt ment, Ba' k from Barclays Bank, Triodos Bank, the ness loans as "second class" activity; Barings Foundation, and the develop the internal controls necessary to Aw s f oa fn D 3-- v e a I o rn e 3 a z '7 International Finance Corporation. The track thousands of tiny loan and deposit recent experience of organizations, such accounts; educate public regulators about E Pu 3 o p e a n C o p m i 's s a i m f as ACCION International, in gaining this specialized segment; design appro- access to commercial funds was dis- priate institutional structures to handle I a t e C . a n cussed. It was noted that interfacing micro-finance within the existing corpo- v e I 3 ra e f t f a n , . \fw MFIs and international capital markets rate structure; and provide training and will require some creativitv and innova- incentives to staff to maintain high pro- a t t aat a i 3 d" f F r tion to develop new and appropriate ductivity. A a g , a f , . (1 i u 3a 1 D e vt e I p m e nn financial instruments. The roundtable The higher costs of micro-finance sought to raise awareness on micro- operations compared to traditional bank- a ita a ' La a b f f r 3f ft e finance among participants and help ing concerned many participants, them explore steps for future involve- although thev agreed that costs can be a n e d f aQt a a n f ment in the field. controlled bv seeking efficiencies and 'p ..' r` f3 fet'few ment Fi'a OnnAugust29,1996,theAustralian appropriate pricing. For further informa- Agency for International Development tion, please contact Lisa Valenzuela, i+a d 3 . t >3 > Pa t T j 7 f f g : 33 C>aaa aa e E n >> O hosted a seminar in Sydney that brought phone: (202) 663-2321. T a3Q a a ad Pt - e Q ? Q Sa ane t together representatives from some of Australia's largest companies, as well as Sources: "Roundtable on Micro-finance," micro-finance practitioners and non-gov- Summary Report, David Wright, ODA, d at t ernmental tions ne 12, 1996; "Bringing Micro-finance to Pa aaiaat'a tP a p ia :ra ANZ rganiztions.Westpa Bank, the Private Sector," Sara Webb and Niki D 0v e o rQ e n j'97' p r o g - a m ?n ANZ Bank, and Commonwealth Bank Ruler, AusAID, August 29, 1996; and "A were among the 60-plus attendees at the New Breed of Micro-financiers?" Liza I7' Q a,i Wa 7 fd a a k Q seminar. The proceedings were opened Valenzuela, USAID, November 21, 1996. Out- ReaitA y T P v i T e E M Forum P LIC 0e R m Uv Mi th Cetr Inentoa de ing governmen authoriti:esncm 0 N-, C - F I NANCEDeoppmn et> d Rehrh mercal baner are tha it i NOur~ ~ ~ ~~~~~Mai They objective ofntn the Forumtepenu intiuton that sevethupor ...The West Africa High Level were to establish dialogue and The key policy issue discussed at P.lolicy Forum on Micro-finance understanding between the stake- the Forumn was the Lawv on Usury held in Bamako, Mali from holders in the region on: the impor- prevalent in the seven countries of . * Jne 1921, 196, bought tance of micro-finance as a poverty L'Union Economique et Monetaire Jungeter 19-21cy1996,erought alleviation tool; the policy and regu- Ouest Africaine (Economic and -° - ~~~~~~~latory environmnent conducive to the Monetary Union of West Africa~ mir-iac rciinr development of MFIs; and the prin- UEMOA). It sets a ceiling on inter- from 16Ws.fia onre ciples that underpin the operations est rates at twice the discount rate of .oV(Benin, Burkina Faso, Cape of micro-finance institutions (MFIs). 7 percent, thus constraining the abil- ^Verde, Cote d'Ivoire, Ghana, The Forum w as opened by Prime itv of the MFIs to reach sustainabili- ..The Gambia, Guinea, Guinea Minister Ibrahim Keita of Mali and ty. The monetary authorities of the 6.Bissau, Mali, Mauritania, Niger, Mr. Jean- Louis Sarbib, Vice UEMOA recognized the need to i!.Nigeria, Sao Tome and President, Africa Region, the World liberalize interest rates. MFIs, sub- Principe, Senegal, and Togo) as Bank. The 200 participants agreed ject to the Lawv on Usury, wvere -well as donor agencies. on the importance of self-employ- urged by UEMOA Ministries of It was jointly organized by ment and the informal sectors in their Finance to seek an exemption from .-CGAP (the CGAP Secretariat, local economies, and that improving the ceiling by approaching their *-.The French Ministry of the access of poor entrepreneurs to respective Ministry. They also com- Cooperation, IFAD, UNDP, financial services wvould increase and mitted to reviewing ways to remove and UNCDF), The WA;orld Bank, stabilize incomes of the poor. The this ceiling. Participants agreed that regula- defined. Moreover, unlike credit dons for MFIs, when necessary, unions, these institutions do not should be flexible, simple, and receive any benefits from registering, accommodate a range of intermedi- such as tax breaks, etc. Practitioners aries, and that MFIs should develop requested for a national level consul- internal controls to ensure sound tative process to review the latest financial performance. There was lit- draft of the prototype agreement and tle consensus, however, between provide input into the regulatory practitioners and authorities from requirements of non-credit unions. I n s u m, the Forum brought UEMOA countries on the new Many participants, particularly from together key stakeholders to Credit Union Law. While the intent the non-UEMOA and Anglophone of the law was to formalize institu- countries, expressed the desire to raise awareness on the issues tions mobilizing large amounts of learn more about recently promul- savings, many practitioners felt that it gated legislation for MFIs in The requires all MFIs to register as credit Gambia and Ghana, and on the micro-finance industry in the unions, thereby restricting MFIs in South African code of conduct. the region to a particular institutional There was general consensus region, and began a process of structure. Although MFIs can seek among practitioners that MFIs consultation among the part i ci - not to register as credit unions by should strive for financial sustainabili- signing a prototype agreement with ty by establishing appropriate pricing pa n t s to address them. the Ministry of Finance, they are at policies, controlling costs, ensuring some risk because their legal status is low delinquency, mobilizing savings, i unclear and the rules under which building financial linkages with com- they can operate are not well- mercial banks, utilizing external funds to mobilize domestic sources of financing, and above all develop- ing good governance, management, and staff. They also saw the need to define national and (in the case of .q UEMOA) regional strategies for the - l l l l > < | development of MFIs, and identified f ~~~~capacity bniilding as a means for MFIs t'o move towards increased out- T ~~~~~~~~~~~~~~~~~reach and sustainability. LVY ~~~~~~~~~~In sum, the Forum brought together key stakeholders to raise awareness on- the issues facing th-e development of the micro-finance T% ~~~~industry in the region, and began a p1 -~~ ~~ r ~ process of consultation among the participants to address them. Source: Anne-Marie Chidzero, CGAP Marketing Soweto-style Secretariat/Private Sector Development Department, The World Bank. B A N C O S O L: CR O S S I N G PRODEM realized that its clients vations necessary to create the new A BR I D G E B E T WE E N N G o lacked not only credit but a fill line bank xvere costly. COBANCO and A N D CO M M E R CI A L B A N K of banking services, including savings PRODEM spent nearly US$560,000 facilities. PRODEM's poor clients on the transition process, excluding E s t a b I s hi n g t h e B a n k were excluded from the traditional renovations and the purchase of fixed - rg BancoSol in Bolivia is the result banling system by requirements of assets. With the completion of this of the transformation of a sue- high minimum deposits and literacy, phase in February 1992, Banco -;--4 cessful NGO into a commercial as wvell as by the distant location of Solidario, SA, or BancoSol, opened OS bank, while maintaining the most banks. A history of bank fraud its doors for business. original mandate to serve the also inspired little confidence. To PRODEM and BancoSol operate micro-finance sector. The roots PRODEMI, providing savings facili- within a mutual relationship. The for- . aO of BancoSol are in the NGO ties would not only be a service for mer sold a large portion of its portfo- < . Fundacion para la Promocion y its clients, but also a viable source of lio to the new bank in exchange for Desarrollo de la Micro Empresa funds to expand its loan program. A shares. This arrangement put (Foundation for the Promotion and final impetus to create a new institu- BancoSol in a strong starting posi- Development of Microenterprise, or tion was the desire to find a sustain- tion, with nearly half of its paid-in PRODEM). This non-profit able market approach to equity capital available for lending. microlending program was estab- micro-finance, avoiding dependence PRODEM also transferred its 20,000 lished in 1986 by ACCION on donated funds. Thus, the very clients to BancoSol, making the bank International with members of the success of PRODEM highlighted its the largest in the country in terms of Bolivian business community, using limitations as an NGO in this sector: number of clients from its very start. funds from USAID, the Bolivian inability to grow enough to meet Staff and offices of the NGO were Fondo Social de Emergencia (Social demand without access to other also transferred to the new bank. Emergency Fund), the Bolivian pri- funds; inability to provide full bank- vate sector, and the Calmeadow ing services; and limitations of being S e r v i c e s o f f e r e d Foundation of Canada. PRODEM a nonmarket entity. BancoSol makes much smaller was a real success, educating clients In 1990, PRODEM's organizers loans than most commercial banks, in the use and management of credit therefore formed a steering commit- with a minimum of US$80 rather and providing small short-term loans tee, COBANCO, to examine the than the standard minimum of for small-scale production and com- possibility of creating a private com- US$3000 of most Bolivian banks. mercial activities. PRODEM's track mercial bank which would serve the From February 1992 to December record in micro-finance opened the microenterprise sector. The new bank 1994, the bank's outstanding loan door to new funders and larger would be able to mobilize additional portfolio grew from US$3 million to grants. sources of funding, expand its vol- US$27 million, with the total number Despite PRODEM's strong per- ume of lending by raising deposits, of borrowers increasing from 14,446 formance, however, studies indicated and provide multiple financial ser- to 61,225. While arrears increased, as that it was reaching less than 2 per- vices to clients. For two years this would be expected with such rapid cent of the estimated demand for committee undertook to design such expansion, they remained at 5.2 per- small loans in Bolivia. The organiza- a bank, find investors (including the cent, below the financial system's tion needed to expand its loan port- Inter-American Investment average, and the default rate was close folio, yet potential sources of funding Corporation and the International to zero. In 1992, its annual percent- were finite. Only a limited amount Finance Corporation), obtain an age rate of interest on loans was 5 5- could come from international fund- operating license for the new bank, 57 percent, compared to 28-32 ing agencies and donations-not and oversee the transfer of resources percent for other commercial banks. enough to meet demand. In addi- from PRODEM to the new bank. As a means of credit evaluation, tion, as an NGO, PRODEM was The additional management BancoSol depends upon "solidarity legally restricted from raising funds information systems, software, securi- groups" rather than assets, cash flow in the commercial capital market or ty, personnel, training, consultants, or collateral. Community members from client savings. Furthermore, travel, transition seminars, and reno- choose to be in a group with others wvho are creditworthy and on whom US$120. From February 1992 to they can rely to make timely loan December 1994, savings on deposit payments. In each solidarity group, more than tripled, from the individual borrowers act as co- US$953,600 to US$3.05 million. guarantors of each other's loans. Substantial growth in deposit mobi- These loans are typically given to lization has contributed to an groups of four to seven individuals. increase in the amount of credit Loans start at US$100 per individual available to microenterprises borrower for terms that do not throughout Bolivia. exceed 60 days. The amount of the BancoSol has sought to fulfill the loan may increase, or its terms may microfinancing goals of its NGO be changed, subject to the clients' roots, xvith some of the resources, repayment records. skills, and scale of a private commer- Interaction between staff and cial bank, as well as new procedures clients is an important aspect of and programs designed to meet cus- BancoSol's lending operation. The tomer needs and market demand. It With respect to savings mobilization, bank's operations are largely decen- expanded lending, recovered repay- tralized vith 29 branches in or near ments successfully, mobilized savings, market districts to facilitate client and became profitable in the micro- no minimum amount required to open an interaction. Loan officers are recruit- finance sector xvithout having to ed from these same communities and depend upon subsidized sources of account. The average size of a savings neighborhoods. They undertake funds. account is US$120. extensive fieldwork to survey local needs and concerns, as well as to This article was pared by An-rie Smith. It is drawvn from tw~o sources: "The acquaint themselves with potential View from the Field: Perspectives from clients and the purposes for wvhich Managers of Micro-finance Institutions," loas mPresentations bv K imanthi Mutua, Pittyapol loans may be needed. They also workQ Nataradol, and M1aria Otero, compiled and closely vvith solidarity groups, meeting edited by Beth R. Chung, Journal of xvith each group on a weekly basis. Internati°onal Development, Vol. 8, -aNo. 2, Withrespct t savngs obilza- pp. 179-193 (1996); and "The Creation of With respect to savings mobiliza- BancoSol in Bolivia" by Amy J. Glosser in tion, BancoSol is the only bank in The New WVorld of Microenterprise Bolivia with no minimum amount Finance: Building Healthy Financial Institutions for the Poor, edited by Maria required to open an account. The Otero and Elisabeth Rhyne, West Hartford average size of a savings account is CT: Kumerian Press, 1994, pp. 229-250. S CA L I N G T O M I C R O- for worlking capital and financing of their customers. About one-third of F I N A N C E: T H E H AT TO N equipment. HNB launched the first the loan accounts in the GP program N AT 10 N AL B A N K GP units at 13 village locations. By are repeat customers. Many clients 1995, it wvas operating from 45 bank have graduated to the SMI program. Some established commercial branches and 33 village-based units. Until recently, the loans made banks are entirely new to the The key personnel in this program under the GP program focused most- field of micro-finance, lacking are the Gami Pubuduwa Upadeshakas ly on individual borrowers. HNB has either an NGO past such as (GPUs) or "barefoot bankers." The now begun to venture into group- BancoSol or a tradition of GPUs arc expericnccd banling offi- lending methodologies. It perceives engagement in the micro- cers from HNB's mainstream opera- solidarity group lending schemes as °t. finance sector like Bank Dagang tions who receive special training in building upon the shramadana or . - Bali. As the experience of microenterprise finance and project community-based sharing tradition Hatton National Bank Limited development and analysis. Most are of villagers, and can be the means to (HNB) demonstrates, this lack from the same geographical areas as reach village households on lower of background need not hinder the villages in which they work. These levels of the poverty pyramid. >o a bank from entering into the village banking advisors bring to rural The full range of HNB's deposit -