Moving Toward Institutional
Sustainability
![[Islam]](http://www.microcreditsummit.org/graphics/islam.jpg)
Dr. Humaira Islam, Shakti Foundation
The Shakti Foundation, a Grameen replication and Women's World Banking affiliate in
Bangladesh founded in 1992, lends to more than 15,000 poor urban women. Here, Dr. Humaira
Islam, Executive Director, explains three key issues for building sustainable institutions: loan
repayment, appropriate interest rates, and keeping costs down.
Since its inception in 1992 the organization has been providing small loans to [poor urban]
women for income generating activities and has encouraged women to save.... The organization
has followed the Grameen Bank model and so far has a membership of more than 15,000 women
and has disbursed loans of more than 87 million Taka [US$2 million], with an average loan size
of about 4,000 Taka or US$100. The rate of recovery is almost 100 percent.
The organization has experienced tremendous growth in terms of volume of operation and
membership coverage. In 1992-93, we had membership of only 1,200 women, which increased
to more than 15,000 in 1996. Our present loan outstanding is more than 28 million Taka
[US$600,000].
But if we are to fly to a poverty-free world, we must have institutional sustainability as well. A
number of factors contribute to organizational sustainability, but here I shall talk about the three
main ones.
Loan repayment
The first is loan repayment. We have been able to maintain a stable recovery rate since 1992. The
recovery, however, fell in 1993 due to the eviction of a major slum.... Since last year the rate of
repayment has risen back to about 100 percent.
The following factors have helped us in ensuring repayment: regular attendance in the weekly
center meeting; group pressure-if someone is defaulting, then we also have a center fund to take
care of defaults; and continuous interaction with borrowers through different kinds of workshops.
In some cases when people default, letters were sent to their families and influential relatives.
Sometimes also absconding borrowers are tracked down by the group, who then creates pressure
on the woman to pay back her debts.
Appropriate interest rates
The second point which is important for institutional sustainability is to have appropriate interest
rates.... So far, Shakti Foundation has charged 16 percent interest rates on a reduced [declining]
balance, and it was initially estimated that it would take seven years for the organization to attain
self-reliance. However, it soon became apparent that the staff were low-paid compared to market
rates, and unless they were given better salary and benefits, it would become difficult to retain
them. Also, as the organization began to expand, its operational expenditure increased, and
therefore to meet the costs the interest rate has now been increased to 20 percent. By so doing we
hope not only to retain staff, but also projections show that the organization will be able to obtain
self-reliance by 1998, assuming that expansion will continue at present rates. While in 1992-3 we
were able to recover only 10 percent of our costs, in the four years [since], we have been able to
recover more than 70 percent of operational expenses.
Keeping costs down
The third factor here is keeping costs down. What has helped us most in this regard is the
participation of the branches in formulating their own annual work plan and cost-estimations in
relation to their income. The branches are free to spend, as long as it is commensurate with their
earnings. They are told that if they earn more, they can take more salary. And they can also spend
more. This makes the branches very competitive. Each branch tries to perform better than the
others, while keeping their expenditures low. In fact, we have raised the salary of branch staff
twice in the last four years, because of the high performance rate and increased income
earnings.
However, I'd like to mention here that the cost of funds so far has been zero because we get
grants, but we are now planning to borrow at concessional rates. And if we continue to disburse
loans at the present rate, prevent drop-out of clients and staff, and improve staff performance,
then Shakti Foundation will be able to attain financial self-reliance, even if takes a little longer
than the projected period [of] 1998.
![[Velasco]](http://www.microcreditsummit.org/graphics/velasco.jpg)
Carmen Velasco, Pro Mujer
Pro Mujer, founded in 1991, provides loans to almost 10,000 poor women in Bolivia. In
this section, Carmen Velasco, National Director, explains the importance of information
systems, client relations, and monitoring program progress. She also warns of the
consequences of being in arrears.
[R]epayment turns into a key issue that will define success and failure in two ways-that of the
institution and that of the clients. We [must] think not solely about payment and repayment
problems that institutions face but also about what is happening [to the client] when the client
does
not pay....
The importance of information systems
[O]ne of the first principles of controlling repayment is information system-- information
systems
that allow the institution to move data as quickly as possible, and have reports on the state of
payment and repayment and the distribution of credits, so that the institution can make the most
important, measured, and timely decisions possible.... [O]ne of the greatest risks [to a microcredit
program] is a portfolio in arrears. In Bolivia we have seen many programs that begin in arrears
that
seem to be under control, but because of a lack of information, the debts begin to grow and grow;
it is
extremely terrible and you cannot come back from it. Consequently, I think that having quick
and
timely information is one of the keys for a successful program.
This information should not be restricted solely to those who lead the program, but should also
be in
the hands of the client, in the simplest form possible, so that the client has access and knows the
rules
of the game--she has ways to inform herself about what she is getting into, what conditions she is
getting into, so that she does not have any surprises.... [And] the access to information would be
based, above all, on immediate decision making regarding the resolution of non-repayment
situations.
Monitoring program progress
The second principle that we believe is very important is the monitoring system.... How do they
use
the information to ensure better repayment? Who will use it? [T]he centralization of clients can
help
information be used in a very efficient and timely way. At what levels should the information be
handled? What information will arrive at which levels and with what degree of speed? For
example,
it is very easy [to spread information] within solidarity groups and community banks, because
with
one repayment plan you have information about the entire group or community bank. On the
other
hand, when you are working with individual clients it is slower and much more costly. The
reasons
behind immediate action are to avoid growth in [the repayment problem]; to assume that the
client is
responsible, or that the client knows exactly the conditions that she is going to encounter; and,
through monitoring, the institution is supporting the client to quickly resolve whatever problem
she
could have.
Client relations
The third principle is client relations. We think that good client follow-up-which is very difficult
and
increases costs-is a necessity. I think that it is the responsibility of the institution to know how
much
debt the clients are capable of assuming. Many overdue debts have accrued because a client has
indebted herself above and beyond her capacity for repayment. By having knowledge of where
the
client is starting from and by building credit bit by bit as the client improves her economic
situation
and her income, you do not put the client in a risky situation and consequently do not put the
institution at risk. That requires doing follow-up on the business of the client and assuring the
client's
investment in her source of income. When working with the extremely poor, training should be
precisely directed to ensure that the client, especially when she is initiating a business and
starting in
a credit program, knows exactly what the conditions are, what credit is, and what she is subject to
in
case...she does not make her payments.
I think that it is very important to listen to the client. An institution that listens to the needs of the
client, her urgencies, is an institution that will not readily meet with non-repayment situations
because [the institution] continues to adjust its methodologies and its follow-ups according to the
needs of the clients. Because ultimately, the sustainability of an institution is going to be directly
related to the well-being and the growth of its clients.
The cost of being in arrears
Now as a final point, we will look at the cost of being in arrears. The cost of being in arrears is
not
only terrible for the institution's image, but also in terms of the institution's sustainability. It is
known
by everyone that in a situation of arrears we are faced with a lack of portfolio turnover. It causes
an
erosion of the institution. It has been seen in institutions that fall into arrears that the clients
inform
themselves of the chance that the institution will fail and debt begins to grow rapidly. The image
of
the institution begins to wear away. There is a weakening among the personnel because they
begin
to look for people to blame. The institution's prestige plummets, which again hurts institutional
sustainability.
Now, something in which I have insisted a lot, which is very controversial, is that being in
arrears is
related to very high interest rates... it is very controversial and there are those who hold that it
does
not matter what interest rate is charged because clients will pay out of the necessity that they
have.
But I think that it is directly related to the amount of indebtedness that the client is capable of
having
and how much this client will have to generate to be able to cover very high interest rates.
Especially
if the interest rates are very high because they have to cover the inefficiencies of institutions or
very
high operating costs.
