Principled Practices in Microfinance

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CRS has a niche in the microfinance industry, but we can lose sight, from time to time, of why we do what we do. This guide reminds us of the bigger why. It has two purposes for two audiences: First, it is an attempt to get those who are consumed with the "here and now" to glance up and remember why we are in the business of microfinance. Second, it spells out to newcomers, or even seasoned practitioners new to CRS, the principles that guide our work.

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  • Principled Practicesin Microfinance

    Kim Wilson

    MICROFINANCE

  • Principled Practicesin Microfinance

    Kim Wilson

    Catholic Relief ServicesMICROFINANCE UNIT

    2001

  • ii

    Published By

    Catholic Relief Services209 W. Fayette StreetBaltimore, MD 21201September 2001

    Catholic Relief Services (CRS,) founded in 1943, assists the poor anddisadvantaged outside the United States. CRS works to alleviatehuman suffering, promote the development of people, and foster charityand justice in the world. CRS assists the poor solely on the basis ofneed, not creed, race or nationality, and maintains strict standards ofefficiency and accountability. CRS currently operates in over 88countries and supports microfinance activities in 33 countries.

  • iii

    Acknowledgements

    Catholic Relief Services gratefully acknowledges thesupport of the USAID BHR/PVC in the publication anddistribution of this guide under CRS/USAID Matching GrantFAO-A-00-99-00054-00. The views expressed in thisdocument are those of the author and do not necessarilyrepresent the views of USAID. This document may bereproduced without notification, but please give appropriatecitation credit to the author and to Catholic Relief Services.Comments are welcome and may be addressed to CRSMicrofinance or the author at .

  • iv

  • vForeward

    What are we doing?

    We go through big pieces of our day with incrementalprogress on our minds. We are intent on the details and gettingthem right; we can lose sight, from time to time, of why we dowhat we do. This guide was written to remind us of the biggerwhy. It has two purposes for two audiences:

    First, it is an attempt to get those who are in the thick of the here and now to glance up and remember why we are in this business of microfinance. Second, it spells out to newcomers whether they be new Microfinance Fellows or CountryRepresentatives, or even seasoned practitioners new to CatholicRelief Services those principles that guide us.

    It draws on the work of our partners, on CRS managementstaff and CRS technical staff. It also draws heavily ondocuments1 in Catholic Social Teaching and the CRS JusticeLens.

    Kim WilsonSenior Advisor

    Microfinance UnitSeptember 2001

    1 The CRS Summary of Catholic Social Teaching (Baltimore:CRS, August 1997);The CRS Justice Lens (Baltimore:CRS, November 1999); and Larissa Fast,Janis Lindsteadt, and Andrea Scharf (ed.), Applying the Justice Lens toProgramming (Baltimore:CRS, July 1998).

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  • vii

    Contents

    Section 1: The Big Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . .1The Purpose of Our Work: Mission and Principles . . . . . . . .3The Roots of Our Work: Catholic Social Teaching . . . . . . . .5

    Section 2: The Microfinance Sector . . . . . . . . . . . . . . . . . . . .11The Microfinance Sector: History, Trends and CRS Niche . .13How We Operate: Proven Methods . . . . . . . . . . . . . . . . . .17

    Section 3: The Six Microfinance Principles . . . . . . . . . . . . .25The First Principle: Serve the Poorest Clients . . . . . . . . . .27The Second Principle: Link Loans to Savings . . . . . . . . . .33The Third Principle: Use Solidarity Guarantees . . . . . . . . .39The Fourth Principle: Practice Participatory Management . .43The Fifth Principle: Invest in Scale and Self-sufficiency . . . .47The Sixth Principle: Plan for Permanence . . . . . . . . . . . . .53

    Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

    Cover Photograph: Kim Wilson

  • viii

  • Section One:

    The Big Picture

  • 2

  • 3The Purpose of Our Work

    Mission and Principles

    MissionOur mission in microfinance comes from our Catholic social

    mission: to serve our poorest clients, to honor the dignity of theirwork, to advance their work in relation to their community, and tostrengthen our partners who work with them.

    Reflecting our agencys commitment tosocial justice, our goal in microfinance is toenable the self-employed poor, especiallywomen, to access reliable financial services.To further this goal, we have focused ontransforming viable microfinance activities intopermanent institutions. In doing so, weconnect those who operate at the fartherreaches of the economy to the enduringservices of the financial mainstream.

    The Client

    Terecia fries dough and vegetablesand other delicacies on her stoveon a sidewalk near BMMS, a ruralbank in Java. Throughout times of

    political unrest, the fall of thecurrency, and scarcity of resources,Terecia has continued this humbleeconomic activity. Over the years,

    she has managed to save $2,000, orabout five times her annual income.She deposits her savings in BMMS,now owned by Ukabima, a CRS

    investment company in Indonesia.Terecia is now part of the financial

    mainstream. She can access loans andcontinues to save in the rural bank.

    STELLAREXAMPLE

    Guiding PrinciplesAs part of an agency-wide program quality

    agenda in 1997, CRS microfinancepractitioners came together to agree on sixguiding principles. These principles describethe common values underlying our currentprogramming and provide the foundation for future programming.In 1999, we updated these principles to reflect new lessons fromour expanding microfinance sector. The six principles are:

    Serve the poorest clients. To forward the CRS goal ofadvancing social and economic justice, we shape our services toserve the poorest communities. Women make up the majority ofour clients, as they generally have the least means to supportthemselves and the least access to credit.

  • 4Link loans to savings. Credit and savings are bothimportant means to finance the growth of economic activities.We connect the amount lent to the amount saved to help clientsbuild wealth as they borrow.

    Use solidarity guarantees. Group guarantees replacecollateral as a means to secure loan repayment. Solidarityguarantees link new loans to the repayment of old loans. Agroup of clients guarantees the loans of fellow group memberswith the understanding that no one in the group will receive anew loan until all loans are repaid. This strategy keepsrepayment high.

    Practice participatory management. Democratic processesare key to empowering the poorest in a community. Clients aredirectly involved in the design, management and administrationof the services they receive, from creating by-laws to voting onloan applications to choosing repayment schedules. In this way,CRS includes those most affected by decisions in the decision-making process.

    Invest in scale and self-sufficiency. The investment that aprogram makes in research, design, staffing and training iscrucial to its success. Achieving scale (reaching at least 5,000clients per partner) advances our mission to serve the poor. Weachieve self-sufficiency through efficient operations and bycharging market rates of interest.

    Plan for permanence. Prior to launching a new program,CRS plans how the program will evolve into a sustainableresource for the poor. Permanence may include creating a formalfinancial institution, helping our partners transform programs intospecialized microfinance organizations, or consolidating pilotactivities and integrating them into larger local entities.

  • 5The Roots of Our Work

    Catholic Social Teaching

    CRS asks all practitioners to assess excellence in our work inrelation to the broad themes of justice and Catholic Social Teaching(CST). Below are highlights of key CST principles Option for thePoor, Human Dignity, Community, Rights and Responsibilities, theCommon Good, Subsidiarity, Solidarity, andStewardship and the ways in which the CRScommunity of microfinance practitioners hasagreed to honor them.

    The Family

    In Ethopia, a borrower who lost herhusband, her three sons and threesons-in-law in the war with Eritrea

    inherited a family of 18 dependents.Because of war and massive famine,

    she had few remaining means ofsurvival. Yet, through perseverance,

    she was able to create a web ofentrepreneurial activities from

    trading in baskets and grain alcoholto animal raising and managing herown kiosk that allowed her to send

    all the children to school and toclothe and feed them. How did shedo this? Through microloans from

    the diocese of Wenji, through steadysavings, even in times when saving

    was difficult, and by buying her way,with her microloan, into various local

    rotating savings groups.

    STELLAREXAMPLE

    Option for the PoorThis principle argues that those members

    of society with the greatest needs require thegreatest response and attention. Moreover,this principle applies to women as a whole,since they are the victims of a long history ofbeing treated as second-class humans, andeven yet suffer discrimination as women. 2

    CRS microfinance responds by focusingservices on women. Three reasons compel usto do so. First, women are the principalvictims of poverty. Of the 1.3 billion peopleliving on less than $1 per day, 900 million arefemale.3 Second, women increasingly head uppoor households and are often the solesource of support. Third, studies4 have demonstrated thatwomen are far more likely than men to channel increased

    2 Judith A. Dwyer, The New Dictionary of Catholic Social Thought (CollegevilleMN:The Liturgical Press, 1994), 757.

    3 Microcredit Summit, Meeting the Challenge of Reaching the Poorest: One Yearof the Microcredit Summit Campaign, June 1998.

    4 See, for example: Report of the UN Expert Group on Women and Finance:Transforming Financial Systems (1994).

  • 6income from their business activities into essential benefits fortheir spouses and children, including improved health care,housing, education and nutrition.

    Human DignityEach individual is a person worthy of dignity and respect.

    Ones dignity is not related to ones race, ethnicity, gender, age,nationality, physical abil i ty, rel igion,economic status or any other potentiallydiscriminatory factor. Rather, it is aninalienable right that has been granted tous by the very fact of our human nature.5

    In microfinance, we respond bydignifying the poorest clients with theservices they need to grow theirbusinesses. CRS gives borrowers thesame respect a traditional bank gives acommercial customer. We treat ourpoorest borrowers as clients, worthy ofprofessional services and able to putfinancing to good use.

    The Village

    The Zadruga, a multi-ethnic villagebank project, has broken withtradition and shattered myths in

    Bosnia. In the city of Kakanj, the bankmembers had come from widelyvarying backgrounds: some were

    refugees or displaced persons, otherswere returnees from foreign lands,

    and some were permanent residents.Working together, these womenfound that they could accomplish

    great things with small loans. Theyalso reported that forming a Zadruga

    provided a way for people of allreligious backgrounds to get together

    for the betterment of all.

    STELLAREXAMPLE

    CommunityHuman beings can only thrive and achieve their full dignity

    in community with other people. People see their individualdignity and equality expressed and confirmed in socialsituations and relations how they are treated by society, bytheir community, and by each other.6

    In microfinance, we respond by delivering financial servicesthrough group-based means village banking, Grameen bankingand solidarity group lending. These group activities rely on andstrengthen the web of economic and social connections that bind

    5 The CRS Summary of Catholic Social Teaching (Baltimore:CRS, August 1997), 2.6 Closely paraphrased from The CRS Summary of Catholic Social Teaching

    (Baltimore:CRS, August 1997), 4.

  • 7individuals to each other and to their communities.

    Rights & ResponsibilitiesCatholic Social Teaching understands

    human rights as moral claims that eachperson is able to make on a variety of goodsand necessities because of his or her humandignity. 7

    Among the six categories of inalienablehuman rights identified by CST, two stand outas particularly relevant to microfinance: theRight to Life, which includes the right to aworthy standard of living and EconomicRights, where individuals have a right tomeaningful employment.

    In microfinance, we fully acknowledgeour responsibility not only to recognize therights of individuals but also to promote their rights and assistthem in the same pursuit of a full life. 8 We respond by grantingeconomic opportunity to clients through provision of importantfinancial services and by supporting the very work that clientsdeem most meaningful.

    The Household

    In Lebanon, brothers and husbandsinitially repudiated village banking,deeming it inappropriate for womenand forbidding their wives and sisters

    to join. Now that the women areprospering, they see the importance

    of the service. Husun Aloud, ahairdresser, says, I feel the social

    impact on the relationship with mybrothers, most of whom are joblessand are turning to me for pocket

    money. I am now feeling respected,and I am making an importantcontribution to the household.

    STELLAREXAMPLE

    The Common GoodThe common good is understood as the

    total of all conditions necessary economic,political, material, and cultural which allow allpeople to realize their human dignity and reachtheir full human potential... The common goodis best protected when the rights of theperson are preserved and promoted, and it isthe state which should be responsible for theprotection of our basic human rights.9

    The State

    In Cambodia, Bosnia, El Salvador,Bulgaria, Senegal, Vietnam andother countries, CRS is playing a

    major role in shaping judicial andlegislative reform as it pertains to

    economic services for the poor andoppressed. New regulations to

    capture savings, lower capitalizationrequirements for microfinance

    institutions and eliminate interestrate ceilings can make the difference

    between distributing temporaryeconomic charity and creating

    lasting financial services for the poor.

    STELLAREXAMPLE

    7 The CRS Summary of Catholic Social Teaching(Baltimore:CRS, August 1997), 3.

    8 Ibid., 4.9 Ibid., 6.

  • 8In microfinance, we respond by viewing our local role inconnection with larger social structures. We advocate forsystemic change in legal, political and government policies tofoster the institutions we support. Our hope is that financialservices for the poor may find a permanent home within thegreater framework of the local sociopolitical environment.

    SubsidiarityJust as it is gravely wrong to take from individuals what they

    can accomplish by their own initiative and industry and give it tothe community, so also it is an injustice and at the same time a

    grave evil and disturbance ofright order to assign a greater orhigher association to what lesserand subordinate organizationscan do.10

    In microfinance, we respondby placing the power to makedecisions with those who are mostaffected by the consequences ofthose decisions. The villagebanking method, our preferredmodel, relies on the community todecide the composition of thevillage bank itself and the natureof its services.

    Our preferred strategy fordelivering financial services to a

    community is to continue working through local partners untilsuch time that the partner no longer requires our support. In thisway, we can be assured that resources for our clients will beavailable on a lasting basis.

    The Partner

    Caritas Thies, a CRS partner inSenegal, was one of the firstorganizations to become a CRSmicrofinance partner using the

    village banking model. Soon, CaritasThies reputation as a very strongexample of village banking spreadthroughout West Africa. Along the

    perimeters of the famous Djoudwildlife refuge, the villagers outside

    of the refuge had little economicopportunity. When another NGO

    decided to establish a village bankingprogram in that region, it was not

    CRS that was solicited for assistance,but Caritas Thies.

    STELLAREXAMPLE

    10 Quadragessimo Anno (After Forty Years): On Social Reconstruction. Encyclicalof Pope Pius XI promulgated on May 15, 1931.

  • 9SolidaritySolidarity is a call to recognize each individual person as a

    part of one human family regardless of ethnic, national, racial,gender, economic, political, or ideologicaldifferences... We are called on not only torecognize the dignity of each individual inword only, but also to fully respect thatpersons or groups human dignity in ourdaily lives by seeing and understandingothers as our brothers and sisters forwhom we have responsibility.11

    In microfinance, we respond byhonoring the connection between thebusiness-like attitude of our clients and ourown perspective as financial practitioners.Perhaps of all our stakeholders, we standmost in solidarity with our poorest clientswho in order to survive must be spare,resourceful, disciplined and diligent inreaching their economic objectives. Ourresponsibility then becomes to meet theentrepreneurial goals of our clients with acorresponding level of professional services.

    The Community

    Some of the village banks inSenegal, are truly banks forthe community. For various

    reasons, including lack of familiaritywith borrowing, fear of making atime commitment and lack of selfconfidence, some of the poorest

    village members initially chose not tojoin the bank. In response, bank

    members set Internal Account loanterms to be attractive to others inthe community: very small loan

    amounts, short loan terms and littletime commitment. Through theInternal Account loans, villagers

    learned more about the village bankand increased their self-confidence

    about being able to repay a loan. Intime, some even became bankmembers. Their savings thencontributed to making loans

    accessible to others, as had beendone for them.

    STELLAREXAMPLE

    StewardshipAt its foundation, stewardship is based on the principle of

    responsibility and is intrinsically linked to the common good. [Asindividuals in the human community,] we are called to respectand justly share the resources of the earth in a way that providesfor the needs of all. The resources of this world are reflected inthe many goods found in society, and those goods are intendedto be for the benefit of all persons.12

    11 The CRS Summary of Catholic Social Teaching (Baltimore:CRS, August 1997), 8.12 Closely paraphrased from The CRS Summary of Catholic Social Teaching

    (Baltimore:CRS, August 1997), 10.

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    In microfinance, we respond by caring for the resourcesentrusted to us with the same regard evidenced by clients in

    caring for their own resources. We seekpartners who share our commitment togood resource management, including: adrive to keep costs to a minimum;dedication to transparency andaccountability; a mandate to retain high-performing staff; and a plan for ensuringthe permanent availability of economicservices to the entrepreneurial poor.

    The Partnership

    The CARD Bank, a CRS partner inthe Philippines, served 20,000clients in 1999. CARD agreed to

    test the new CRS system ofassessment/accreditation, the MAGI

    (Microfinance Alliance for GlobalImpact), because they believed it wasimportant to establish a system that

    measures the performance of partners against standards. Equallyimportant, CARD believed that bydiagnosing weak areas, they and

    CRS could find appropriate ways tosupport a partners efforts to improve

    its organizational capacity.

    STELLAREXAMPLE

  • 11

    Section Two:

    The Microfinance Sector

  • 12

  • 13

    The Microfinance Sector

    History, Trends and the CRS Niche

    More than 1.3 billion people live on less than $1 per day, andmore than 3 billion live on less than $2 per day13. Most survivethrough their skills to operate very small businesses. Many arewomen. For them, self-employment is the mainstay of theireconomic life. They harvest rice, bring fruit to market, craftpottery and perform thousands of other tasks to support theirfamilies. Most operate without financial resources and thereforecannot expand their businesses beyond a minimum level ofsubsistence.

    Microfinance the practice of bringing financial services tothe poorest evolved as a sector to meet the needs of the poor,especially the women. A modest loan, perhaps as little as $50,buys a box of merchandise, a few tools, or helps build a vendingkiosk. Microfinance also provides options for clients thatencourage them to save and create buffers for familyemergencies, send a child to school or re-invest in theirbusinesses.

    HistoryMicrofinance was made possible by two discoveries in the

    late 1970s. The first discovery proved that the poor can and willrepay loans at market interest rates. Efforts in Latin America,Asia and Africa demonstrated that poor entrepreneurs wantedcredit, and that they were prepared to pay sufficient interest toenable the lender to recover the cost of doing business. Thisdiscovery dispelled the notion that the poor were unable to repay.Today most microfinance institutions have arrears rates (laterepayments) of less than 5%. With these low arrears rates, the

    13 UNDP, Human Development Report, 1997http://www.undp.org/hdro/1997/97overview.pdf

  • 14

    potential for creating sustainable microfinance institutionsbecame a realistic opportunity for efficient service providers.

    The second discovery was that peer pressure can substitutefor physical collateral. Microfinance practitioners found thatgroups of women responsible for guaranteeing the loans of fellowgroup members experienced excellent repayment. Since thevery poor by definition lack assets, this discovery opened thedoor for using solidarity group lending to provide financialservices to the very poor.

    Pioneering work in Bangladesh became an important catalystin microfinance when an economics professor wondered if a fewdollars might help a very poor woman buy her own materials andmake a profit. The first loans of Muhammad Yunus in the 1970sled to the creation of the non-governmental organization (NGO)that became the Grameen Bank, which now serves more than twomillion clients.

    Microfinance came later to other regions of the globe,especially as the needs of the poor escalated in the mid 1980s,and international Private and Voluntary Organizations (PVOs)and national NGOs began to integrate microfinance into theirpoverty alleviation programming. PVOs, such as CRS, CARE,and Freedom From Hunger, provided funds, training, andtechnical assistance to local partner NGOs, which became thedirect providers of microfinance services to communities.

    CRS Special Niche in MicrofinanceDozens of international organizations, local non-profits and

    national and local banks currently offer financial services to theself-employed poor. Among these varied institutions, CRS is oneof the largest PVO microfinance lenders in the world, reachingover 300,000 clients in 33 countries.14

    In keeping with our principles of Catholic Social Teaching, CRSpractices microfinance with an eye to reaching the poorest clients.Many programs reach the poor, but CRS takes special care toreach extremely poor, self-employed women. We bring financial

    14 CRS Microfinance Unit, Microfinance Status Report 2001 , Vol 7, No 2(Baltimore:CRS, August 2001).

  • 15

    services to remote areas and to hard-pressed economic sectors inurban slums. These areas are often ignored by other agencies thatseek immediate cost recovery from more promising clients.

    Our average loan size of $138 is far lower than that of mostother institutions, and our low arrears rate attests to the repaymentcapacity of even our poorest clients.

    TrendsPerhaps the most salient trend in microfinance is the creation

    of sound financial institutions to provide permanent services to thepoor. Banco Sol in Bolivia, Calpia in El Salvador, and BRI inIndonesia have all managed to sustain themselves while reachinga relatively poor clientele. The challenge for CRS is to createsustainable financial institutions while bringing services to the verypoorest clients. Few organizations have been able to createformal financial institutions while reaching those with few assets.Grameen Bank and CARD Bank (a CRS partner in thePhilippines) are notable exceptions and inspirations. We expectCRS-supported Enlace in El Salvador and our programs inCambodia and various European countries to transform soon intoregulated financial institutions.

  • 16

  • How We Operate

    17

    Proven Methods

    CRS implements several proven methods to achieve ourmicrofinance mission. Each closely adheres to our guidingprinciples. These methods include village banking, Grameenbanking, self-help groups, solidarity groups, and BusinessInvestment Groups (BIGs).

    Village BankingPioneered by FINCA International a US PVO then working

    primarily in Latin America in the 1980s, village banking iswidely practiced by CRS and our microfinance partners. Thevillage banking method of delivering services to clients reflectsour first five guiding principles and offers full promise to completeour last principle, achieving permanence.

    Briefly, CRS implements village banking by first training alocal partner an NGO or specialized microfinance institution inthe village banking methodology. The partner hires credit officers,who in various programs are called promoters, field agents, or byother titles. The credit officer, after building confidence withimportant community leaders, visits a community and holds ameeting for self-employed members, usually women. Themeeting explains who may receive loans and how the communitycan form a village bank. Village bank services include:

    Small loans (called external loans). Relying on groupguarantees as social collateral, small loans often for lessthan $50 initially are disbursed to the self-employed. Loanterms are generally between four and six months. Once aborrower has paid back her/his first loan, s/he may request anew loan that is equal to the first loan plus the amount s/hehas been able to save.

  • 18

    Savings. Village bank members are encouraged to save.Many pool savings in an internal account and lend thesefunds to village bank members in need of short-term loans tocomplement their external loan. Some village banks also lendgroup savings to neighbors who are not village bank members.

    Typically, village banks are comprised of between 30 and100 members. Thirty is a common size for Latin America, whilevillage banks with as many as 100 members are not unknown inrural parts of Africa. The steps to forming a village bank include:

    Creating by-laws. This process asks members todetermine the following: how often they will meet to collectpayments; who can receive a loan, such as age or residencyrequirements; how will loan requests be approved; and whathappens if a member is late in making a loan payment ormisses many meetings? These by-laws form the constitutionof the village bank.

    Electing officers. Members elect officers usually achairperson, vice-chairperson, treasurer and secretary. Intheir by-laws, members have already established theresponsibilities and term lengths for the officers.

    Assessing credit worthiness of members. Membersassess the enterprises of other members. They visit theirplaces of business, examine cash flow and evaluate theirtrust-worthiness as borrowers. In some countries, programsfocus on a clients personal history in the community. In others, members review economic trends and the kind ofbusiness activity the borrower has in relation to those trends.

    Requesting and receiving first loans. Borrowers apply forloans, and if the investment committee usually the villagebank officers approves of the loan, borrowers generallyreceive their loans within a week of the request.

    Institutionalizing the Golden Rule. No member of a villagebank may receive a new loan unless all members are currenton their last loan.

  • 19

    Why is village banking CRS preferred model? Becausevillage banking does the following:

    Reaches the poorest (first CRS microfinance principle).15Since village banks do not rely on collateral to guaranteeloans, they can serve those lacking land or other assets.

    Places emphasis on savings (second principle). Newloan sizes are based on the previous loan size plus theamount saved in previous loan periods.

    Uses members of the village bank to guarantee loans(third principle). Members may not get a new loan unlessfellow members are up to date on their payments. Socialpressure substitutes for collateral.

    Fosters a democratic process and communityownership (fourth principle). Village bank membersparticipate in the decisions most likely to affect them. Theycreate their by-laws and are given choices about theirservices. Because members are involved in key decisions,they feel that the village bank and its future belongs to them.

    Is sustainable and able to reach scale (the fifth principle).Village bank loans are issued to borrowers at market rates.The interest charged covers the cost of forming village banksand providing savings education services. The villagebanking model reaches many individual borrowers throughforming large groups and thus allows a program to reach anunlimited number of the rural self-employed. Reaching tensof thousands of clients is entirely possible in a well-managedvillage banking program.

    Grameen BankingFounded in the 1970s by Muhammad Yunus, the Grameen

    Bank in Bangladesh has been able to serve millions of the

    15 The six CRS microfinance principles were introduced Section One. A moredetailed discussion of these principles follows in Section Three of this document.

  • 20

    poorest clients through a method very similar to village banking.CRS practices the Grameen Bank methodology in countrieswhere clients may be best served by Grameens highlydisciplined approach. Where prior government credit programshave not required borrowers to fully repay, many otherwise goodclients have adopted lax borrowing and repayment practices.The Grameen banking method supports increased clientdiscipline through precise rules and procedures, extensivetraining, and fairly rigid services. Grameen banking closelyresembles village banking with the following exceptions.

    Grameen centres, the local equivalent of a village bank,are physical structures built by bank members. All membersare required to attend regular group meetings at the centre.

    Grameen centre memberships are an exact number,typically 40 clients, and consist of eight solidarity groups withfive members each.16 Village banking provides the opportunityfor greater variance in numbers of members. Similar to theGrameen system, some CRS village banks have smallersolidarity groups within them, but in the village bank system thenumber of members in the solidarity group is more variable.

    Grameen centres do not offer clients the opportunity tocreate their own by-laws. Moreover, they require clients tomemorize and adhere to a list of decisions that guide notonly borrowing behavior but often social behaviors as well.

    Grameen loans often have longer terms than villagebanking loans, typically one year versus four or six monthsin the village bank. Repayment schedules also vary. Clientsmust repay Grameen banking loans weekly, compared to bi-weekly or monthly loan payments in village banks.

    Grameen loans are not tied to the same savings formulaas village banking loans. The amount of required savings isgenerally less in Grameen banks.

    16 For more information on solidarity groups, see the following section: SolidarityGroup Lending

  • 21

    Grameen loans are issued to members (usually fivemembers) of solidarity groups in sequence, rather than toall members. Initially, only two members of the group maytake out loans. The next two members wait one monthbefore receiving their loans. Finally, the last memberreceives her/his17 loan after another month. This pattern isrepeated with each new series of loan releases. In contrast,all members of the village bank receive loans at the sametime and repay at the same time.

    In countries where government programs have not damagedthe credit practices of the self-employed poor, CRS clearlyprefers to use the village banking method. Village banking ismore flexible, emphasizes client savings and adheres moreclosely to the democratic principles of self-government.However, CRS is very committed to the Grameen methodology inareas where increased credit discipline is necessary for thecreation of sustainable programs.

    Self-Help Group ModelThe self-help group model was developed in India to reach

    very poor people isolated from mainstream financing. Self-helpgroup models work best when:

    Groups are kept to 20 members or fewer. (This is tocomply with Government of India laws, but groups may belarger outside of India, probably up to 35 women members).

    Groups may consist of women or men, but not mixedtogether.

    Loans are highly flexible. Loans with terms longer thanthree months require regular monthly installments. Loanswith terms less than three months may be paid in a lumpsum fashion. Lines of credit are also possible, though fewgroups seem to be doing this.

    17 Ninety-four percent of the Grameen Bank clients are female. In comparison,83% of all CRS microfinance clients are female.

  • 22

    The stages of developing a self-help group include:

    The pre-formation stage. An NGO or commercial bankpromoter approaches a community and asks if some of themembers would be interested in forming a self-help group(SHG). The promoter explains the benefits and mechanicsof a self-help group. Community members decide if theywould like to participate.

    The formation stage. The promoter organizes participantsinto groups of 15-20 members, usually all women. The groupthen creates its ground rules, such as, deciding how muchcan they save on a monthly basis for six months. The groupalso chooses a president for the group and a secretary. It isthe presidents job to manage the group and ensure that loanand savings payments are made and disbursed on time. Thesecretary keeps minutes of the meetings. During theformation stage, the group learns to keep its own financialrecords. The group can begin lending deposits to itsmembers one month after it has taken its initial savings fromgroup members.

    The bank linkage stage. The SHG may link to a local bankafter six months, if the group has demonstrated regularsavings, consistent meeting attendance, low arrears, goodfinancial record-keeping, and the fostering of strong internaldemocratic processes. After linking, the bank can lend theSHG up to four times the groups corpus (its total savings,including savings lent out, plus any interest accumulated).

    The Advantages of Self-Help Groups:

    The SHG model eases members into good borrowinghabits through very small loans (necessarily smallbecause loans initially are based on group savings).

    The SHG model is easy to understand. It is simple, hasclear rewards for good performance and is veryadaptable. Loans have flexible terms and can be

  • 23

    tailored to meet client purpose and cash flow. Moreover,members do not need to borrow continuously to stay ingood standing with the group.

    The SHG minimizes unnecessary debt by insisting thatmembers save first before becoming eligible to borrow.Since SHG member savings comprise a minimum ofone fourth of the loan capital available to the group, atleast a quarter of the interest income remains in thecommunity.

    The SHG model allows each actor to play its naturalrole. SHG members make all lending and savingdecisions based on local knowledge that only they canpossibly have. Banks lend to groups using their ownsystems and infrastructure. NGOs conduct communityorganizing and training. The governmentas is thecase in Indiashould assume some degree of risk tomotivate the market (banks) to do what they might notdo without such measures.

    The SHG system is excellent for remote areas, wheregroups cannot be highly concentrated--as is frequentlyrequired for efficient MFI group organizing. If groupshave the know-how, they can link directly with banks.

    Solidarity Group LendingSolidarity groups are often part of village banks and

    mandatory in Grameen centres. They consist of about five toeight members, depending on the program. Members know eachother well and are willing to add a second level of guarantee forthe village bank or centre. If a member of a solidarity group islate in her/his payment, it is usually up to the solidarity group tomake sure the member makes the repayment or assists themember to pay.

    In some CRS programs, solidarity groups alone function as alending unit, with a single level of group mutual support andguarantee. They are not necessarily part of the larger envelopeof a village bank or Grameen centre. Conversely, village banksmay exist with no sub-structure of solidarity groups. Memberssimply meet as large groups and guarantee one anothers loans.

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    Benji Investment Groups The Benji Investment Group (BIG) is a relatively new

    methodology for providing microfinance services, that offers aparticularly interesting potential for operation in remote, ruralareas. In East Africa, CRS partners are taking a lead in testingthis model. Our Kenyan partners one already has 40 BIGs are seeking to demonstrate that the BIG model fulfills all sixmicrofinance principles. CRS will continue monitoring the pilotingof the BIGs programs before making unqualif iedrecommendations to other interested partners.

    Briefly, the BIG model is an adaptation of Financial ServicesAssociations (FSAs) pioneered by Ahmed Jazayeri, a formerWorld Bank expert in credit unions. BIGs organize communitiesin much the same way as village banks do. However, instead ofsimply saving money, members invest in shares of the BIG.Members may purchase as many shares as they wish and maysell their shares. Potentially, these shares can earn members ahigh return on investment. The shareholders of the BIG appointthe Board, which hires a paid manager and cashier.

    CRS BIGs in East Africa currently average about 125members. The optimal size for a BIG is about 500 members.CRS is still testing whether the model can cover its costs at thepartner level and consistently provide services for the poorermembers of the community, CRS preferred clients. Eventually,each partner might support 40 to 100 BIGs or more, which wouldindicate that BIGs have the potential for permanence and to fulfillall six CRS microfinance principles.

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    Section Three:

    The Six Microfinance

    Principles

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  • 27

    The First Principle

    Serve the Poorest Clients

    Cautionary AdviceA number of programs have

    tried to build in financialincentives for promoters totarget the poorest. But truecommitment to reach the

    poor must be personal andmust reflect the philosophyof leadership. Recognition is

    the best form of behaviorreinforcement.

    CRS, in keeping with its mission to reach the poorest, bringsfinancial resources to those most in need. We focus on self-employed individuals who require savings and credit services tohelp their economic activities grow. For our services to sustainthemselves, clients must have the capacity and commitment torepay loans.

    Our programs ensure that women have priority in receivingfinancial services. Women are often the poorest members oftheir communities, controlling the fewest resources. Moreover,they typically convert loans and savings into productive inputs fortheir economic activities. They also transfer additional incomeinto benefits for their families, such as paying school fees,improving household nutrition, and building up savings to bufferagainst emergencies.18

    Three factors contribute to the success of a microfinanceprogram in serving the poorest cl ients: organizationalcommitment, product design, and client identification.

    Organizational CommitmentNo strategy to reach the poorest will succeed

    without total management commitment. Theleadership of an organization must choose servingthe poorest clients as its priority and make thatpriority known to staff and supporters and to allprofessing to be stakeholders.

    18 See, for example: Report of the UN Expert Group on Women and Finance:Transforming Financial Systems (1994).

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    Principled Practices

    Leadership has a clear mission statement of itscommitment to providing services to the poor.

    Leadership takes an unflagging interest in working withemployees to reach the poorest.

    Leadership hires staff who share its commitment and thenrewards them through recognition.

    Product DesignProduct design is key to ensuring that the poorest members

    of a community have access to the financial services they need.The small initial loan size, for example, is purposely geared toaccommodate the needs of the poorer client, while being toosmall to attract wealthier members of the community.

    Group-based credit methodologies provide a comfortableenvironment for the poor. Clients self-select their fellow groupmembers and are able to self-verify the business activities offellow members. Clients also participate in the loan approvalprocess. The formation of such peer groups for accessing andguaranteeing loans provides added reassurance for poor clientsunaccustomed to accessing financial services.

    Marketing and Client Identification StrategiesMicrofinance practitioners use several methods to identify the

    poorest individuals in a community. We recommend using thesemethods during feasibility and piloting phases to profile thecharacteristics of the poorest. They also can be useful forevaluations. To use them in program implementation is costly andmay undermine sustainability.

    Two common methods for identifying clients are wealthanalysis and housing indices.19 Wealth analysis involves workingwith the community to rank its members from wealthiest to

    19 For more information about wealth analysis or housing indices, see the followingFavorite Tools and Resources section.

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    poorest, and housing indices use proxyindicators to gauge the poverty level ofindividuals based on the exterior constructionmaterials used in their dwelling.

    EL SALVADORENTERPRISE PYRAMID

    LargeEnterprise

    MediumEnterprise

    Small andMicroenterprise

    Subsistence & SimpleAccumulation Entrepreneurs

    Estimated national market (people) 400,000% of total microenterprise market 80%

    ENLACECLIENTBASE

    Other CRS programs identify clients byassessing where the smallest or poorestbusinesses fit into a hierarchy of allbusinesses, as in the example of theEl Salvador Enterprise Pyramid.

    While these methodsare useful in identifyingthe poorest, they can be expensive as a screening method. Insome cases, they exclude potentially productive members of avillage bank.

    CRS practitioners prefer a strategy of inclusivity. First-timeclients, especially the poorest, may beafraid to risk their time their only income-producing resource in order to receivefinancial services. However, if creditoff icers set up a vi l lage bank in onecommunity, then wait six to twelve monthsto set up a second one in the samecommunity, the more cautious villagershave had an opportunity to observe thesuccess of the clients in the first villagebank. The poor then can more accuratelyaccess the value of membership andbecome interested in joining the secondbank. This strategy can greatly reduceoutreach costs, as it takes full advantageof word-of-mouth marketing.

    Principled Practices

    Serve the poorest based on need without regard toethnicity, class, caste or creed.

    Use a strategy of inclusivity to reach the poorest.

    The Spouse

    In Homa Bay, Kenya, the socialdevelopment arm of thediocesan office found that excluding

    men was harmful to the family.Women needed to share theresponsibility of running theirbusiness and attending loan

    meetings. Now, the CRS counterpartoffers each family the choice of whoholds the loan and allows spouses

    to change their decision from loan toloan. This flexibility increases the

    involvement of men and has madethem more accountable for sharing

    in the work of the household.

    STELLAREXAMPLE

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    Use targeting strategies to identify the very poor duringfeasibility and program design stages.

    Client ConsiderationsSome programs go to great lengths to exclude men. While

    women are the focus of CRS programming, some programsassist women by helping men. If men are not working to theirfullest capacity to responsibly contribute to a household, thenperhaps excluding them from activities, such as attending villagebank meetings, only hurts their chances to learn and only placesa greater burden on women to shoulder the work of thehousehold. Be sure to look at cultural and gender issues in yourarea before determining how you will focus on women.

    Favorite Tools and Resources

    Microfinance and Poverty: Questioning theConventional Wisdom, by Hege Gull i , Inter-AmericanDevelopment Bank, 1998. A simple, comprehensive explanationof key issues and myths about reaching the poor. Coverseverything from methodology to institution-building. Good forCountry Representatives and a nice refresher for seasonedpractitioners. Best of its kind. To order, contact: Inter-AmericanDevelopment Bank, 1300 New York Avenue, NW, Washington,DC 20577 or HYPERLINK http://www.IADB.org

    Cost Effective Targeting: Two Tools to Identify thePoor, by David Gibbons and Anton Simanowitz with Ben Nkuna.A practical guide on how to do Participatory Wealth Ranking andthe Cashpor Housing Index. To order, contact PACTPublications: HYPERLINK http://www.pactpub.com

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    1999 Meeting of Councils, Microcredit Summit, FinalReport. A compendium of plenary papers, some very practicalfrom the Microcredit Summit Campaign. To order, contact:HYPERLINK http://www.microcreditsummit.org

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    The Second Principle

    Cautionary AdviceCredit to the lender is debt

    to the borrower. Somedebt is good and creates

    leverage in a smalleconomic activity. Too

    much debt can become aburden to clients. Savingsalso can pose risks. Some

    clients fear holding savings,which can be subject to the

    needs of kin or to theft.Before offering financial

    services, programleadership should study the

    local cultural perceptions of savings and borrowing

    and the relationshipsbetween the two.

    Link Loans to Savings

    Savings and credit are two sides of the same coin. Credit isused to make investments today that are paid back tomorrow.Savings, conversely, constitute the accumulation ofassets today to be invested tomorrow. We respect thereciprocity between savings and credit and work to linkthem wherever possible. Credit linked to savings helpsclients build wealth as they borrow.

    SavingsClients save for many reasons. They save to

    create a cushion for times of household emergency, topay for medicine, funerals, or other unforeseendifficulties. They save for school fees, for dowries andto make seasonal investments for improving their

    businesses.Clients savein small bitsthroughoutthe year to ensurethey have enough toeat between harvestand the next planting.S a v i n g s t h a toutdistance plannedand unplanned eventscan be converted intoassets, such as animproved home orcattle, gold or othermarkers of prosperity.

    Many clients do

    Savings and Sustainability

    PT Ukabima, a CRS holding companyin Indonesia, recently opened avillage banking window in a rural

    bank that it owns. In this adaptationof village banking, the members ofthe village bank do not manage aninternal account for group savings.Instead, the credit officers deposit

    the members savings still linked toloan amounts in the rural bank.This allows members to: 1) get a

    good return; 2) draw on theirsavings whenever they wish; and 3)feel confident that their savings are

    safe. But just as important, thisallows the rural bank to increase itsown sustainability and supports the

    village banks expansion.

    STELLAREXAMPLE

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    not save cash. Some clients fear the loss of cash and wouldprefer to protect it from the demands of kin, spouse, or householdby converting it to less liquid forms. Converting cash into hardassets is also a way to stem the effects of inflation. Traditionalnon-cash saving methods range from hiding rice in bamboo tofattening animals to purchasing gold.

    In some instances, clients find it difficult to convert a portionof their non-cash savings into cash. For example, it is difficult tosell just part of a pig in an emergency; grains stored as a form ofsavings are vulnerable to insects, rot and weather; gold can bestolen. Savings in the form of cash can be more useful inemergencies. Sometimes clients shelter their cash by entrustingit to a local money keeper.

    Principled Practices in Savings Services

    Provide easy, quick access to savings. Programs thatallow clients partial or full access to savings are giving themthe freedom to manage their household and business cashflows as they see fit. Access also refers to ease and speedof access.

    Offer a safe place for savings. Savings placed in thevillage banks internal account are very safe, if most of themoney is lent out. If much of the funds are idle, the risks offraud or theft increase, not to mention the unrealized interestearnings. Wise programs offer villagers a safe place to storeindividual savings, wherever possible.

    Offer a high return on savings. CRS programs do not setinterest rates on village savings. These rates are set by thevillage bank members themselves and are often quite high. Ininstances where no internal account exists such as in non-village bank group-lending methodologies CRS programsshould identify local services that offer a reasonable return.

    LoansClients borrow money to supplement savings, and clients

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    use these loans for the same purposes as they use savings.Loans, however, are best used for productive purposes only.CRS encourages loans for investment in the clients economicactivity; these activities generate income with which to pay backthe loan and create additional savings for the client. Loans foreconomic purposes include:

    Loans for working capital and seasonal capital. Workingcapital is the difference between short-term assets andliabilities. It is used to give credit to customers and purchaseinventory, agricultural inputs and small animals.

    Loans for fixed assets. Fixed assets include equipment,draught animals and any building structures or assets with alife expectancy greater than a year.

    Principled Practices in Loan Services

    Link loans to savings. Most quality CRS programsincrease loan amounts to each client based on the amountthat client has saved in the previous period.

    Use appropriate loan amounts. Theloan product, properly designed, shouldfilter out the more prosperous members ofa community. Small loans, building insteps and linked to savings, help clientsdevelop money management skills whilekeeping pace with the growth of theirenterprises.

    Use market rates of interest.Underpriced loans with subsidized interestrates encourage wealthier members of acommunity to use their clout to receivelow-cost credit. Loans issued at market interest ratesdiscourage this behavior so that the poor are not edged out.

    Savings Linked to Loans

    Aclient borrows $50. After paying back the loan, s/hemay request a new loan that isequal to the first loan plus the

    amount s/he has saved during theprevious period, typically 20% of

    the loan amount. If s/he borrows $50 and saves $10 (20%of $50), s/he is eligible to borrow

    $60 for the next loan term.

    STELLAREXAMPLE

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    Avoid usury. Programs may be tempted to cover costs bysetting interest rates extraordinarily high. While clients maypay these rates because they have no alternative, usuryundermines our goal of social justice. So price loansreasonably in relation to local market rates and work toreduce operating costs.

    Make loan terms flexible whenever possible. Instead ofconfining borrowers to rigid loan cycles, look to matchingloan uses with loan terms.

    Offer quick turnaround time and hassle free paperwork.Speedy loans, delivered within a few days of application, winloyal clients.

    Favorite Tools and Resources

    A3-Partners Loan Tracking and AccountingSystems. (Forthcoming) Developed as a joint venture betweenCAYLX, a Seattle-based software company, and CRS, A-3Partners also allows for increased flexibility in loan services.Check the CAYLX website: HYPERLINK http://www.caylx.com

    Internal Account Management Toolkit. Developed byCRS as part of a grant from SEEP, this is a comprehensive toolkit about managing the internal savings account of a village bank.Copies can be downloaded in English, French, or Spanish:HYPERLINK http://www.mip.org

    The Poor and Their Money, by Stuart Rutherford,Institute for Development Policy and Management, University ofManchester, 1999. A wonderful essay on how and why the poorsave. Available through HYPERLINK http://www.oup-usa.org/search97CGI/S97-CGI

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    MicroSave Africa, spearheaded by DFID and UNDP.Many tools and articles that can be downloaded. To sign up, emailHYPERLINK mailto:msa@info.com.co.ug msa@info.com.co.ug orcheck their website HYPERLINK http://microsave-africa.com

    How Gambians Save, by Parker Shipton, World Bank,Pre-Working Paper series, WPS395. A fascinating brief thatdebunks many of the myths of rural savings. To order, contact:The World Bank, Country Economics Department, PolicyResearch and External Affairs, 1818 H Street, NW, Washington,DC 20433.

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  • 39

    The Third Principle

    Use Solidarity Guarantees

    Solidarity guarantees comprise the nucleus of CRSmicrofinance programming. By solidarity guarantees, we arereferring to any financial peer agreement in which groups ofclients stand behind the loans of fellow group members bypromising to repay delinquent loans. In this way, the poorestclients may borrow without pledging collateral.

    To clients, one of the key benefits of forming a group is theclose working ties that develop among members. Memberssupport one another, offer advice and beginto take on increased pride, discipline andresponsibility toward their business activities.Members feel that they have true ownershipin the vil lage bank because of theirinvolvement in the banks most importantdecisions. The members themselves decidethe profile of new members joining the group,the actions to take on a members latepayments, and the interest rate charged onloans they issue from locally-managedinternal account savings.

    The Group GuaranteeCRS encompasses many examples of

    group-based lending. Among them, villagebanking, Grameen banking, and solidaritygroup lending. 20

    The group guarantee is simple and flexible, and CRSprogramming reflects a wide variety of expressions of this

    The Group and the Community

    In the Fort Portal Diocese in WesternUganda, the group spirit is aliveand well. Members of a local villagebank, all women, decided to use a

    portion of their savings to purchase acow. They all agreed that the

    children of the local orphanageneeded fresh milk, but just as

    important, the orphanage could usethe extra income from the sale of

    surplus milk to local retailers. Oncethe cow was purchased, the village

    bank members gave it to theorphanage. They also retained theservices of a local expert to train the

    children on how to properly care for their new asset.

    STELLAREXAMPLE

    20 See Section Two, How We Operate: Proven Methods, for more details about thesemethodologies.

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    method. Groups work best when all or at least some of themembers know each other well. Groups review the first loans offellow members carefully. If any member of the group is latewhen her/his loan is due, no other member of the group mayreceive a new loan. The following examples illustrate how groupguarantees differ from program to program.

    Single level of guarantee. In many village banks and insome Grameen Replication centres, partners ask clients foronly one level of guarantee. In these village banks, smallersolidarity groups of five to eight members may not exist atall, and the solidarity principle functions solely at the banklevel. In contrast, in Grameen centres the essential loanguarantee is at the five-member solidarity group level. In yetother group-lending methodologies, only the small solidaritygroups provide the loan guarantee, with no functional largergroup envelope.

    Double levels of guarantee. In some village banks, creditofficers form a larger group of 50 members and then also

    ask members to gather into smaller solidaritygroups. The smaller group is the first line ofguarantee. If a group member is late on aloan payment, the other members must comeup with the payment. If they cannot, then thelarger group must make good on the loan.

    The Work of GroupsGroups, be they small or large, often do

    more than simply underwrite the loans offellow members. Group members becomevery involved in all levels of the lendingprocess. If members know one another well,are committed to their economic activities,and trust and respect the credit officer, thegroup may be motivated to strengthenlending operations from increased

    The Group and the Village Bank

    In El Salvador, Enlace understandsthe economic rewards of engagingclients in all facets of the credit

    process. For example, Enlace clientsare involved in the initial assessmentof the economic activities of villagebank members. Enlace has a very

    simple process where members of avillage bank visit one anothers homes

    or places of business and verify theactivity and all collateral that the

    client is pledging to the village bank.Members also learn to calculate, on asimple form, the cash flow of the new

    member to determine how muchdebt s/he can afford to repay.

    STELLAREXAMPLE

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    involvement in initial loan assessment, toattracting new members, to volunteering forbank leadership positions.

    Groups have built wells, constructedschoolhouses and taken up collections forthe local orphanage. The credit officer cannever insist on these collective initiatives, buts/he can encourage them by helping thegroup leaders run l ively, stimulatingmeetings and by giving members the tools todevelop the groups potential.

    Principled Practices Group-guaranteed lending works best

    when keeping in mind our fourth principle,Practice Participatory Management.21 Otherkey practices include:

    Partner organizations need tounderstand and use adult education techniques so thatthey can teach group leaders to conduct lively meetings inwhich all feel welcome to participate.

    Groups work best where members know and trust oneanother.

    Implementing partner NGOs monitor and act quickly toremedy all repayment problems in the group. Nothingdemoralizes a group faster than too many members with latepayments.

    Partner NGOs refuse to accept partial payments from avillage bank or Grameen centre. Accepting partial paymentsends the wrong signal and can seriously undermine thegroup guarantee.

    Solidarity Beyond Guarantees

    When an earthquake struckGujarat, India in 2001,microfinance clients of a CRS-sponsored partner in Andhra

    Pradesh, a region far from Gujarat,felt compelled to act. Twenty-fivehundred women mobilized fortycents each, or about $1,000, to help those left homeless in theearthquake. Nearly all thesegenerous clients were of the

    "untouchable" caste and struggle tosave one penny per day. Whenasked why they gave to others

    when they themselves had so little,they responded by saying that they

    were pleased to give to those in greater need.

    STELLAREXAMPLE

    21 See the following section for more details.

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    Favorite Tools and Resources

    Internal Account Management Toolkit. Developedby CRS as part of a grant from SEEP, this is a comprehensivetool kit for creating a village banks most important solidaritysystems. Copies can be downloaded in English, French, orSpanish: HYPERLINK http://www.mip.org

    CRS Cambodia Village Banking Manual, developedby CRS Cambodia. This guide explains group formation, thegroup guarantee and managing delinquency. Draft copy availableto CRS programs: HYPERLINK mu@catholicrelief.org

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    The Fourth Principle

    Practice Participatory Management

    Key to Catholic Social teaching is the principle of subsidiarity.Subsidiarity calls for appropriate decisions at appropriate levels.Let no higher level of organization do what a lower level cando.22 This principle is highly democratic; it seeks to justlyempower all levels, including grass-roots institutions and theindividuals whom they serve.

    In microfinance, we seek to engender full communityparticipation as an expression of subsidiarity. In fact,participatory management is built into villagebanking. Bank members make keydecisions regarding loans, new membersand the management of group savings.However, more than its implicit reality in ourcredit models, participatory management canalso be crucial in stages of program design,implementation and evaluation.

    The Program Design StageEngaging a local community in program

    design is a sure way to shape a strongmarketing plan, develop an appealing productand gain strong support during program roll-out. Participatory Rural Appraisal (PRA), atechnique for gathering information at locallevels, is an outstanding tool to use in theearly stages of program design.

    PRA tools can be adapted to urbansett ings as well . The techniques are

    Participatory Program Design

    In Homa Bay, Kenya, our partnerbelieves Participatory RuralAppraisal is too important not to use

    it in every community. The staffargue that in the long term the

    practice of PRA will increasesustainability. Communities with

    sound PRA practices prior toprogram inception, will require lessstaff time later and enjoy long-run

    efficiencies. Homa Bay uses a varietyof tools, including: a 24-hour activity

    chart to identify surplus labor in afamily; wealth analysis to profile the

    poorest people in a community;village mapping to identify where

    the poorest members live; andbusiness and seasonal trend analysisto help microentrepreneurs select the

    most profitable activities.

    STELLAREXAMPLE

    22 Quadragessimo Anno (After Forty Years): On Social Reconstruction. Encyclicalof Pope Pius XI promulgated on May 15, 1931.

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    important in determining just how microfinance fits into acommunity structure. While PRA is excellent for determininggeneral features of communities at large, and informs initialprogram design, most programs find the process too costly to usein every community.

    The Implementation StageDuring the implementation stage, involving the community

    can inspire creative approaches. Community members maybecome staff, and both staff and community may have manyideas on how to better serve clients. Creatively engaging allparts of a community, including the faith community, can improveprogram quality and expand outreach to more clients and topoorer members of the community.

    Monitoring and EvaluationOften monitoring and evaluation procedures call for cold

    surveys and data collection. Staff and community are removedfrom the process while external consultants determine programquality. To address this flaw and to improve transparency of CRSmicrofinance program quality standards, CRS developed andlaunched a system for assessing and accrediting partnersorganizational capacities. The MAGI Alliance (MicrofinanceAlliance for Global Impact) assessment process encouragespartner staff to participate as one member of a team thatassesses other partners (when no conflict of interest exists.)Using a standard tool, team members assess and rate a partnersstrengths and weaknesses. Information gathered in the processallows CRS and its partners to design appropriate technicalassistance plans to assist partners in improving their institutionalcapacity. By involving CRS and partner staff wherever possible,rather than hiring consultants, CRS and partners can grow andlearn together.

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    Principled Practices

    Include clients and staff wherever possible in programdesign, implementation and evaluation activities.

    Listen more than talk. Worry less about formal survey dataand more about what clients, staff and partners say that theyreally want.

    Use tools and methods wisely to ensure a participatorystructure. Pay attention to costs to strike an appropriatebalance between sustainability and participation.

    Participate in the MAGI by volunteering appropriateassessment team members and by preparing partners forthe assessment process..

    Favorite Tools and Resources

    The People Part: Common Sense Advice inMotivating Microfinance Clients and Staff, by Susan Gibson,Catholic Relief Services, 2000. The People Part has excellenttips on client appreciation, quality service delivery, marketing,staff development and team building, and much more. To order, contact: HYPERLINK http://www.pactpub.com

    Rapid Rural Appraisal and Participatory RuralAppraisal, by Karen Schoonmaker-Freudenberger, CatholicRelief Services, 1999. This comprehensive guide to PRA includessome sections on microfinance and has broad potential formodification for client identification. Available for downloading:HYPERLINK http://www.catholicrelief.org/publications/index.cfm

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    The Fifth Principle

    Invest in Scale and Self-sufficiency

    Together, scale and self-sufficiency form the backbone ofsuccess in microfinance. If our partners do not serve manyclients (achieve scale), or cannot cover costs (achieve self-sufficiency), programs will not fulfill our mission to provide lastingservices to the poorest. Growing, profitable programs are thefirst step in creating sustainable financial institutions.

    Why Scale?Scale has a double meaning: to reach

    many clients and to achieve healthy andconsistent f inancial growth. We arepresuming that reaching many clients meansreaching them in a concentrated geographicarea. Scale offers these advantages:

    Scale allows programs to achieveefficiencies. Small programs have highcosts per client served. Large programsare able to spread their costs over manyclients.

    Scale reduces the need to chargeunusually high interest rates. Smallprograms often must charge very highrates to cover costs primarily for theabove reasons. Reaching scale allowsprograms to charge reasonable rates.

    Scale gives programs the best chanceof reaching the poor. The more clientsserved, the more chances that the verypoor are reached, assuming appropriate

    Scale in Cambodia

    In December 1996, a relatively newCRS microfinance program inCambodia provided services to

    almost 2,000 clients. By the end of1999, CRS Cambodias microfinance

    services had expanded to reachnearly 30,000 clients. The benefitsof this increase in scale have been

    dramatic: Due to improved efficiencyof service delivery, 100% of

    operating costs are now covered byinterest revenue. At the same time,the rate of interest charged on loans

    remains well below the ratesdemanded by local money lenders.Perhaps most significant for long-

    term sustainability, CRS Cambodia isconsolidating its microfinance

    operations under a single institution.In addition to further anticipated

    gains in operational efficiency, thisstructure will enhance staff

    development and retention, as staffmembers now see the opportunities

    for long-term employment andadvancement.

    STELLAREXAMPLE

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    product design and targeting methods are in place.

    Scale offers staff a career path. Small programs stifle thegrowth of staff seeking career opportunities. Largeprograms retain good staff by giving them new levels toreach and new skills to learn.

    Scale and growth keep a microfinance institution vital.A dynamic of growth keeps staff busy refining systems,innovating new ways to better serve clients, and generallymaking for a robust institution.

    Principled Practices in Reaching Scale

    Plan to reach 1,000 clients in a partners first year ofoperations.

    Within three years, plan to reach at least 4,000 clientsthrough a single partner.

    Ensure sufficient staff are hired in order to organizethem into teams to reach the above goals. Four or fivecredit officers provide the basis of a good team for a brandnew microfinance program.

    Why Self-sufficiency?Self-sufficiency simply means that a partner is able to cover

    costs with interest income from clients. Full cost coverage hasmany benefits.

    Self-sufficiency allows partners to sustain operationswithout continual external subsidy. This allows otherCRS partners in other sectors to access subsidies to supportimportant programs that cannot sustain themselves.

    Self-sufficiency gives partners access to morecommercial forms of capital to fund expansion. Sociallyresponsible and commercial lenders and investors are morelikely to loan funds to self-sufficient partners than those whoare dependent on operational subsidies.

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    Self-sufficiency offers staff and clients a sense ofsecurity. Partners capable of efficiently covering costscreate a sense of permanence and stability that serves toretain both clients and staff.

    Principled Practices in Self-sufficiency

    Seek to cover variable and direct costs immediately.Cover the costs of borrowed funds including the actualcosts for these funds if they were unsubsidized and the costof inflation. Also cover the cost of loan officers, delinquencyand anticipated loan losses. Price loans to cover these costs.

    Seek to cover fixed and semi-variable costs within threeto seven years, depending on expansion plans. Covercosts of operations including administrative and supervisorystaff, rent, depreciation, and other administrative andoperating expenses.

    If interest rates are high initially to help cover costs,seek to lower them once break-even, full-cost coverageis attained.

    Critical Moments of InvestmentMany programs reflect similar patterns in growth. They tend

    to reach certain plateaus beyond which they cannot grow further.At these plateaus, they may languish or even collapse. Programleaders must plan for these ceilings that constrain growth andbe ready to invest in staffing, structures and systems so that theycan move safely past them into a new growth phase. KeyGrowth Thresholds and Typical Investments for each thresholdare suggested in the following table.

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    Key GrowthThresholds

    TypicalInvestments*

    InitialProgram Design

    A plan for geographically concentratedservices that include market studies.Investment in at least four to five staff and training.Investment in low cost transportation. Hiring/training of bookkeeper.A plan for permanence (See Principle Six).

    1,000 CLIENTS

    Additional staffing and staff supervision.Promote good credit officers.Additional investment in equipment andvehicles, new branch openings.

    3,000 CLIENTS

    Leadership training.Training in managing growth.Strategic planning.Investment in internal audit systems.

    5,000 CLIENTS

    Training in skills for transforming into aspecialized microfinance institution.Leadership exposure to growth programs.Training in managing multiple staffing levels.Investigating plans for transformation.

    10,000 CLIENTS

    Investment in a plan for transformation into aformal financial institution (if appropriate).More investment in leadership and inmanaging growth.

    20,000 CLIENTS More of same, real systemic stresses canhappen at this stage.

    *The Management Information System (MIS) of a microfinanceorganization should correspond to the needs defined in its strategicplan. If the business plan calls for an aggressive growth strategyand offers a number of different products, the organization shouldinvest in a robust system. Alternately, if the strategy is for slowergrowth with only a few standard products offered, the organizationcan continue for a longer period with a basic MIS. A good rule ofthumb is that the organization should be financially capable ofrealistically amortizing the upfront investment in the MIS withina three to five-year period.

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    Principled Practices in Program InvestmentInvest up front, before a program begins, in market studies,program design, excellent staffing and in training so thatprograms can reach scale quickly and maintain vital growth.

    Make substantial investments at critical expansionthresholds by investing in increased staffing, systems,training, strategic alliances, and important consultancies.

    Favorite Tools and Resources

    An Institutional Guide for Enterprise DevelopmentOrganizations, by Elaine Edgecomb and James Cawley, TheSEEP Network, 1993. A dog-eared friend with many relevantchapters. A good reference sti l l . Available from PACTpublications: HYPERLINK http://www.pactpub.com

    Banking Services for the Poor: Managing for Success:An Expanded and Revised Guidebook for MicrofinanceInstitutions, by Robert Peck Christen, 1997. A comprehensivereview of financial management. Available from ACCIONpublications: HYPERLINK http://www.accion.org/pubs/main.asp

    Financial Ratio Analysis for MicrofinanceInstitutions, by the SEEP Network/Calmeadow. Good summaryof 16 key ratios in microfinance. A companion training guide withcase studies is also available. Available from PACT publications:HYPERLINK http://www.pactpub.com

    MICROFINANCE HANDBOOK: An Institutional andFinancial Perspective (Sustainable Banking with the Poor),by Joanna Ledgerwood, The World Bank, 1999. A good soup-to-nuts review of all relevant aspects of creating a sustainableinstitution. To order, contact: HYPERLINK http://www.worldbank.org/html/extpb/abshtml/14306.htm

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    The Sixth Principle

    Plan for Permanence

    Disbursing a loan is the beginning of a long-termrelationship. It is not a one-time transaction. The borrower paysher/his loan back over time and the lender collects paymentsover time. In village banking, we make the further promise that ifa borrower and her/his fellow group members pay promptly, eachmay receive a new loan. We tell the borrower that if s/he fulfillsher/his part of the bargain, s/he may rely indefinitely on ourfinancial services. It is a promise without end.

    To honor this promise, we, together with our partners, havesought ways to serve clients over the long term. While we knowthat a very few clients may move on to other credit sources, mostwill never be attractive to a commercial bank. Their loan sizesare simply too small and the transaction costs too high. So whatdo we do about the many clients who will never qualify forcommercial funds?

    To answer this question, we must change our perception ofmicrofinance. Rather than thinking of it in terms of a project with a beginning, a middle and an end we must instead viewmicrofinance as a stream of resources flowing to our poorestclients.

    From the very inception of a new microfinance program, weask our partners and our technical advisors to examine possibilitiesfor permanence. In this way, we fulfill our goal of enabling the self-employed poor, especially women, to have access to reliable,ongoing financial services by transforming viable microfinanceservice providers into permanent financial institutions.

    Strategies For PermanenceWe may use many strategies to advance our goal of

    permanence. We may help partners create specializedinstitutions or spin-offs from their multi-purpose development

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    activities; we may help partners consolidate microfinanceactivities into a single, vital entity capable of national service; we

    may establish permanent sources of capitalfor these institutions to support their stabilityand growth. The following are just a fewoptions to promote permanence.

    At the partner level. Partners interested increating specialized institutions may look todevelop for-profit companies where thepartner plays a key role as shareholder andboard member. They also may look tocreating a separate NGO. A legal reviewalways helps to determine the structure that ismost tax-advantageous and most favorable topreserving our mission to reach the poorest.

    At the CRS level. In some countries CRShas extended financial services directly toclients. This activity has come about in twosets of circumstances: Either we have notidentified suitable partners to carry out theservice, or partners have asked CRS to takea more direct role in catalyzing the creation ofa financial institution. If CRS is directlyinvolved in extending financial services, wehave three options to localized services.First, CRS can transfer its clients and portfolioto an existing entity interested in acquiring ourportfol io. Second, CRS may spin offmicrofinance services by creating a newinstitution. And third, CRS may helpconsolidate a number of portfolios into asingle local institution.

    Wholesale institutions. CRS and its partners might lookclosely at establishing an investment company to extendloan funds to local partners. Funds may be offered in theform of loans, guarantees, or equity investments.

    Planning for Performance

    CRS Cambodia lends directly toclients through branches, butalso assists local partner organizations

    in their microfinance activities. Asthey collectively reach the 30,000client mark, the various parties arewell into discussions to consolidateactivities into a new microfinance

    institution (MFI). To guide the processof creating a new formal financial

    institution, CRS Cambodia has createda transitional advisory group that notonly includes key CRS staff from the

    Southeast Asia region, but alsoimportant members of the

    Cambodian banking and legalcommunities.

    CRS Armenia had beenextending credit services to1,000 clients when an opportunity

    to localize came from Save theChildren. This internationalorganization had created an

    Armenian MFI that was qualified tomanage CRS microfinance activitiesin addition to its own operations.CRS has transferred its client base,staff and portfolio to the new MFIcalled Kamurj Microfund. CRS willhold two board seats for six years.

    This new MFI can now draw on thestrengths of both CRS and

    Save the Children.

    STELLAREXAMPLE

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    Our Role in TransformationIn approaching an ethical plan for the permanent survival of

    a microfinance institution, we must carefully look at our role in theprocess. During the course of a partner institutions expansion,CRS may have different roles, based oninstitutional need and local conditions. Whileall of Catholic Social Teaching applies to ourpractice, four principles may factor mostsignif icantly into the evolution of atransforming microfinance program:stewardship, solidarity, subsidiarity and thecommon good.

    We must balance these dif ferentprinciples in relation to the growth stage ofthe insti tut ion. At the start-up stage,stewardship may be most important. As theorganization grows, local investors maywant CRS continued involvement as a showof solidarity. As the organization matures,subsidiarity plays a crucial role.

    Institutions initiated by CRS should havean ownership structure that reflects multiplestakeholders. The institution will include,preferably, a corresponding degree ofownership and commitment from the localCatholic Church. CRS must produce aclearly defined localization strategy for bothour investment and our involvement. As apolicy, our role in f inancing, providingtechnical assistance and governance willincreasingly move to local partner agencies.Throughout each stage, the notion of thecommon good is at play. CRS hasexpressed this principle by engaging important political andgovernment players in the development of new laws favorable tomicrofinance.

    Good Governance: CRS Bosniaand Herzegovina in 2001

    In 2001, CRS Bosnia andHerzegovinas microfinanceprogram was successfully localized.

    "Mikra," the new registeredmicrofinance institution, absorbedthe CRS microfinance staff, clients

    and loan portfolio. In this ethnicallystratified country, Mikra foresaw the

    need to recruit the right combinationof Board members, representing

    diverse backgrounds and ethnicities,who collectively brought expertise in

    microfinance, leadership, andpolitical influence. The foundingBoard of Directors included theDeputy Minister of Finance (aMuslim), an expert in capacity

    building for microfinance institutions(a Croat), an NGO board member

    with expertise in labor issues (a Serb),a Catholic priest (a Croat), and the

    Executive Director of Mikra, who willserve for one year until the newBoard feels cohesive enough to

    recruit a new member. The Boardincludes three women members,

    and all members have a socialdedication to reconciliation andpoverty alleviation in Bosnia and

    Herzegovina

    STELLAREXAMPLE

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    The Importance of a PlanA key concept in Plan for Permanence is the creation of a

    written business plan. A plan works best when all stakeholdershave had the chance to participate in shaping its broad strategies.The plan must include strategic, operational and financialelements. Equally important, it should articulate a rationalstrategy for ensuring ownership and control by local entities andindividuals.

    Principled Practices

    Work with partners prior to launching a program toensure that a vision of permanence is part of the plan.

    Ensure that any direct role that CRS may have is cededto local actors over time. Work to balance theorganizations needs for stability and the principle ofsubsidiarity.

    Engage key players in political and governmental circlesin passing laws favorable to the formation of healthymicrofinance institutions.

    Work with partners in using business planning modelsto create a professional business plan.

    Favorite Tools and Resources

    Business Planning and Financial Modeling forMicrofinance Institutions: A Handbook, by Tony Sheldon andChuck Waterfield, CGAP. Now being revised to improve user-friendliness. Comprehensive analysis tool (Excel model on disk)with guide. Order from PACT publications: HYPERLINKhttp://www.pactpub.com

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    Institutional Metamorphosis: Transformation ofMicrofinance NGOs into Regulated Financial Institutions,Occasional Paper No. 4, by Anita Campion and Victoria White,Microfinance Network, 1999. Very useful framework and casestudies for guiding transforming institutions. Order from PACTpublications: HYPERLINK http://www.pactpub.com

    Regulation and Supervision of MicrofinanceInstitutions, Occasional Paper No. 1, by Shari Berenbach andCraig Churchill, Microfinance Network. Useful framework andcase studies for guiding transforming institutions. Order fromPACT publications: HYPERLINK http://www.pactpub.com

    Regulation and Supervision of MicrofinanceInstitutions, Occasional Paper No.2, Craig Churchil l .Microfinance Network. Useful framework and case studies forguiding transforming institutions. Order from PACT publications:HYPERLINK http://www.pactpub.com

    Guidelines for the Effective Governance of MicrofinanceInstitutions, Occasional Paper No. 3, by Anita Campion andCheryl Frankiewicz, Microfinance Network, 1999. Very useful tipsin creating and managing a board of directors. Order from PACTpublications: HYPERLINK http://www.pactpub.com

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    Final Thoughts

    This document is a first effort to define our microfinanceprinciples in light of our agency values rooted in Catholic SocialTeaching. A distinction must be made here. Catholic SocialTeaching represents the core values of CRS. These values areof an essential nature and they are enduring. They guide us incompleting our mission, in choosing our strategies and increating policy.

    Our microfinance principles draw on these values, but alsoreflect our experience and lessons specifically in microfinance.At any given time, they mirror how we believe we can best honorthe values in Catholic Social Teaching.

    As our experience in microfinance accumulates along withour collective lessons, we may choose to modify our principles.In fact, we already have. For example, our original principlesdeveloped in 1997 did not include Plan for Permanence. Wechose to add this principle to ensure that we honored the long-term nature of bringing financial services to poor clients. Thisprinciple seemed important in light of the values of human dignity,stewardship, solidarity and the common good.

    That said, we plan for this guide to be a living document, tobe modified and enhanced as we gain more experience. To theextent possible, it will reflect the practical nature of what we doand will attempt to reconcile and challenge the expediency ofour practices within the context of Catholic Relief Services core values.

  • Catholic Relief Services, founded in 1943, assists the poorand disadvantaged outside the United States. CRS works insolidarity with all people of good will and similar vision topromote human dignity, alleviate human suffering, promotethe development of people, and foster charity, justice, andpeace in the world. CRS assists the poor solely on the basisof need, not creed, race, or nationality, and maintains strictstandards of efficiency and accountability. CRS currentlyoperates in 88 countries and supports microfinance activitiesin 33 countries.

    West AfricaBeninBurkina FasoGhanaNigerSenegal

    Eastern AfricaEthiopiaKenyaRwandaUganda

    Southern Africa MadagascarZimbabwe

    Middle East and NorthAfricaEgyptJerusalem, West Bank, andGaza

    South AsiaIndiaEasternIndiaHyderabadPakistan

    South East AsiaCambodiaIndonesiaPhilippinesThailandVietnam

    EuropeArmeniaBosnia-HerzegovinaBulgariaCroatiaMacedonia

    Latin America and theCaribbeanBoliviaDominican RepublicEcuadorEl SalvadorGuatemala HaitiNicaraguaPeru

    CRS Microfinance

    Catholic Relief Services209 W. Fayette StreetBaltimore, MD 21201

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