Volume 1, Issue 4
May/June 1998

In This Issue

The World Bank: Making a Difference with Microfinance

Connie Evans Speaks Out

Opportunity International in Eastern Europe and the NIS

What's Happening

Office Service Success

Message from the Summit Campaign Director

In Memory of Bella Abzug

Back Issues

Volume 1, Issue 3

Volume 1, Issue 2

Volume 1, Issue 1

Sustainability in Industrialized Countries

The Challenge of Achieving Financial Self-Sufficiency in Industrialized Countries

Mary Coyle, Coady International Institute, Canada

Excerpted from audio-cassette AC011, Moving Toward Instutional Susatinability in Industrialized Countries There are internal and external factors which can either contribute to or detract from a microcredit organization's ability to achieve financial self-sufficiency....

The first one, of course, is the market. The microenterprise market is huge in developing countries. It is often more than 50 percent of the population. It is often also concentrated; it is visible-you can see these people, you can see what they are doing because they are often outdoors doing it, in marketplaces, on sidewalks, in front of their homes. . . . Economies of scale are possible in this environment. . . . With 15 to 20 years of experience [in microcredit], there are successful models to learn from.... And there is relative freedom... it is not always that way - but in many countries you are free to set the interest rates you need to set in order to earn the revenues to cover your costs....

In contrast, in industrialized countries, achieving scale and self-sufficiency is more difficult. First of all, the microenterprise market is much smaller.... [T]here are all kinds of estimates, some say 10 to 25 percent [of the population]. And of that 10 to 25 percent, they're not necessarily poor; they're not necessarily low-income. It's a better educated market, but it's a less experienced market in terms of business. It's often home-based. It's therefore more invisible. . . . Demand for credit is not as great here. People may have other options. Both microenterprise and microcredit are relatively new concepts.... [T]here is a regulatory environment which discourages micro-, and in particular, home-based businesses. And there are often disincentives built into our social welfare system for people who want to engage in self-employment or microenterprise.... Businesses in our context are also more complex and they're operating within a more complex market environment. And the needs for some of them may be greater than for just a small infusion of capital. Delivery costs here are higher, again largely due to the human resource expense. And we have more limited latitude on interest rates. . . .

[T]here are also a number of internal factors [that] have impeded self-sufficiency [in industrialized countries].... The first one is vision.... Many microcredit initiatives in North America were not, and still are not, striving for self-sufficiency. . . . And if you haven't got that as a goal, you're not going to achieve it. . . . The second is that many of these initiatives, like early overseas microcredit initiatives, were started up as short-term projects or programs and didn't take a long-term institutional approach.... The necessity of creating a permanent institutional base wasn't recognized in the early days. And it wasn't overseas either. It's now that this is becoming important....

How programs are meeting that challenge

Marcy Goldstein-Gelb, Working Capital, USA

Excerpted from audio-cassette AC013, Designing Cost-Effective Business Development Services for Poor Clients in Industrialized Countries

In Working Capital's quest to achieve greater self-sufficiency, one of our primary strategies has been to minimize the role of staff and maximize the role of community partners and volunteers. Though we're in seven states, the national office only has a staff of two and an office manager, and we only have three people in the loan department monitoring several hundred outstanding loans. So it's a very small national staff, and the way we do that is through partnerships....

The first step of the program is, of course, recruitment of entrepreneurs. This role is often played by a number of community partners, rather than Working Capital staff. I can talk to Massachusetts as an example. I have partnerships with 15 community-based organizations. They are the link to the community. They know the people in the community. They have constituents that use their other services. . . . There are also church-based organizations that are wonderful organizers and also know the lowest income people in the community. And of course the entrepreneurs themselves are well-networked as well. Having the community-based organization link those institutions together for outreach is going to bring in the most number of people, rather than having an outsider come in and say, "Come to our program." That's the outreach strategy.

The peer lending model allows the talents and skills of the entrepreneurs to be tapped-often in place of hiring staff. The peer groups, they actually make all the decisions. It's entrepreneurs organized into groups of six to 10 that are fully responsible for all the loan decisions, for determining what their business education needs are, and for providing a forum for mutual support and for networking. . . . [T]he peer groups make those loan decisions, so we don't need paid loan officers to go out and interview and check references. We actually use the entrepreneurs in effect as volunteers, going out into the community in their groups and reviewing each other's loan applications. So they are the lenders and they are also the borrowers. They also are responsible for collecting on those loans, so they are providing that service as well. And because, of course, the peer lending model requires that everyone must be up to date on their payment in order to advance to the next loan level, people are going to provide a lot of peer support... to ensure that their loans are repaid. That's a way of saving money, of reducing the cost to make the program sustainable. . . .

[T]here's a lot of need for business education. There are regulations and there are financial complications, the tax systems, that have additional complexities and require business education. What we've strived to do was, again, not re-create an extensive business training system that involves a lot of staff, but rather to use the peer groups as the primary mode of learning. They have a great deal of "street smarts" in what works and what doesn't work. That's not necessarily all that they require of course. They need to understand a little bit about how you deal with cash flow, how you improve your marketing strategy. So we developed a business curriculum that they can use within their groups-basically a series of tutorials that they can work themselves, so that you don't need a paid expert.... They work in their groups; they work on these exercises; they actually immediately apply the learning. To supplement that, since it's always helpful to have someone who's really very experienced in accounting or marketing, you have business people in the community that are very experienced-CPAs, lawyers-that are willing to volunteer for groups, which they wouldn't do for individuals. So we have an extensive network of business volunteers right in the community. There are also other very important business training programs that are in the community that we partner with. But we ourselves don't add the additional staff to provide that training-to save money....

Another important factor is the networking. In order to get that wealth circulating and staying in the community, people [the microentrepreneurs] have to buy from each other and engage in these joint ventures. So not only do the individual peer groups provide a forum for that, but groups are linked together and they buy from each other. And there are directories and trade shows, and ways for these members to get together to enhance that networking. But it is done by the entrepreneurs themselves. You don't have to hire a paid professional... because the entrepreneurs do that quite well.

[T]hese strong peer groups [don't] happen naturally. A staff person is needed to guide the groups in their formation, to train them in addressing conflicts and running effective meetings. But the training is conducted with the goal of transferring the skills to the entrepreneurs so they may become the future trainers. And the training materials, as well, are developed with the goal of creating a model that can be replicated in any community.

Martin Connell, Calmeadow, Canada

Excerpted from audio-cassette AC044, Moving Toward Institutional Sustainability in Industrialized Countries

When we use the term "sustainable" we are talking in practical terms about a microcredit program that will cover its operating costs, cover the costs of capital, cover its loan losses.... To do that... the first thing you have to do is to be an efficient operator. For us, being an efficient operator means making sure that your only business is lending. Do not... try to do anything more than lend money. If you do, you're going to get bogged down and your staff will be distracted and your costs will go up. The second thing is... shoot for a high volume of loans and portfolio per employee....

It's also absolutely critical that you have a fair but appropriate interest rate. We use the word "fair" inasmuch as we're not trying to gouge anybody here, but we have to make sure that the interest rate is high enough that it will cover costs....

The market is sometimes difficult to locate, as it is seldom visible. In order to build volume, you must have an aggressive marketing strategy. In the final analysis sustainable lending will not work unless you have volume.... You have to go out and look for your customers. You have to be visible and you have to be fairly aggressive in getting the story across.

We also believe that it's absolutely critical to be customer-friendly... and understand the needs of the customer.... In Toronto, we are right on the subway line.... And we also have elements in the office that make it user-friendly. We have a resource center where people can come in and get how-to books; there's a computer there that we hope in the not-too-far future will be wired up to the Internet so people can go in there and get information....

As we grow our business, we recognize the need for an operational subsidy for the first five years. Our long-term goal is to be self-sufficient. And to make all of this work, of course, you need a rigorous and effective collection program and strategy.

I'm going to show you... how we propose to get to self-sufficiency. First thing we talk about is loan size. Right now our average loan size is around US$1,500. We believe we should slowly but surely build that up in real terms over the five-year term to approximately US$2,500. That will be achieved in part by doing individual lending on top of group lending.

The next key issue is productivity and the ability of each loan officer to carry a significant number of customers.... We believe that our loan officers can, with a simplified loan program, carry as many as 250 accounts per employee.... We believe that by keeping their job simple, with good management information systems in place and a good operating system, we should be able to attain that.

Obviously we've got a long way to go; right now we're only at 125 customers per loan officer... but I believe our optimism is based on some realistic expectations of what we can do.... Our idea is to grow the portfolio from current levels of around US$120,000 per loan officer all the way up to US$750,000 [per loan officer] over the five-year period. If this is achievable, and I do believe it is, then we're going to see a situation where our operating costs and our revenues are gradually going to come together.... I hope by the end of the fifth year we will have achieved a level of self-sufficiency that will no longer require subsidy....

I believe we can do it within the framework of 18 to 20 percent interest rates. And I use the word interest rates as being an all-out effective rate, which would include any fees, any timing issues that come into the context of the rollover of a loan.... And if we can do that, then I think we have a good shot at success and sustainability.

Janie Barrera, ACCION Texas, USA

Excerpted from audio-cassette AC044, Moving Toward Institutional Sustainability in Industrialized Countries

We have two requirements [for selecting clients]. One is that [the client] live in the city of San Antonio or the metropolitan area of San Antonio and that they are not bankable....

We use a step lending model, which means that we begin at small amounts, which can be as small as US$500, up to US$25,000. But when they come in, obviously the customer thinks they need the US$25,000. But it doesn't make any difference who they are; they start out at the very basic [level] and the maximum amount for the very first loan is US$3,000. The second loan maximum is US$5,000. At that point, when they've gotten into their third loan, they've been with us at least six to eight months. They've established a business relationship with us and we with them, and at that point we'll look at all the different factors to be able to go into those larger loans.... Our average loan size right now is about US$2,600. The term of the loan itself is about six months....

[W]e've partnered with many, many institutions in the city. We [use an] office downtown at a local bank free of charge. That's, obviously, kept the costs down. The technical assistance that we do is minimum, so therefore we go to the institutions of higher learning. We've really gone out and networked with these folks and asked them to volunteer their services. [We've used] board members' expertise in terms of fundraising, in terms of opening doors for [us]....

We have subdivided the metropolitan area into quadrants for the loan officers because we require the loan officers to go out to the place of business [of the client] before the loan is approved. By doing it in quadrants, it keeps the cost of gasoline down; they [our loan officers] don't have to be traipsing all over the city....

We have a centralized accounting system where everything is in the computer; we're networked together. A customer calls in: "How much do I owe?," they just go to the [computer] network, so they're able to access that....

And we ask the staff: "What do you think? What's gonna work?" They're the ones out there doing this every day. "Let's come up with new ideas; let's keep costs down. How can we do that?" Asking them has been very, very important....

Loan process is very important, especially with the one-on-one with the customer. There has to be that relationship there that they're committed to the program.... Remember, they were turned down everywhere else, so they feel like they're giving back to the community the interest that they're paying on their loans. They know we're a non-profit, and it's going back into the organization. They're helping other small business people, so they feel good about themselves....

We had one default in 1996; it was a Christian bookstore. So the collateral came into the office and we sold it from the office to recoup the loan. We've recouped everything-plus expenses. Customers came in and saw the collateral, and they saw "Whoa, this is real. You're going to take my collateral...." You know this is a business; this is not a grant program. This is truly a business and to see that was a sobering effect....

We have monthly customer service meetings where they [the clients] come in the evening and we provide sessions for them. But they also give us input on how we can improve the program. We have an ambassador program where they take an oath to go out and continue to promote the program. And we also will be starting an incentive program for the customer, so that if he/she brings in two people, then they will get a US$425 gift certificate from a local grocery store who has donated that to us....

In 1995 we were 27 percent self-sufficient; in 1996 we are 35 percent self-sufficient. Each year we still do have to raise about US$150,000, and that will be for the next five years. But we hope in five years to be about 75 percent self-sufficient....