1. included in the term micro and small enterprises are a wide range of enterprises (industry , transport, commerce, services, agriculture, etc.) ranging in size from part-time, seasonal activities of a single person to small, formal enterprises employing several non-family members.
I. Institutional Performance Standards and Plans
Intermediaries seeking support should be able to demonstrate the following
characteristics, either in current operations or through credible plans
underpinned by concrete measures. Since institutions are at different
stages of development, it may be appropriate in some cases to adopt
modified standards for limited support to new or transforming institutions.
A. Institutional Strengths
- Institutional culture, structures, capacities, and operating
systems that can support sustained service delivery to a
significant and growing number of low income clients.
Requirements include a sound governing structure, freedom from
political interference, good fit to local context, competent and
stable staff, a strong business plan for expansion
and sustainability, and mission and vision which create a
sense of purpose, ownership, and accountability
- Accurate management information systems that are actively
used to make decisions, motivate performance and
provide accountability for funds. Such systems are essential for
effective and efficient management.
- Operations that manage small transactions efficiently,
with high productivity, as measured by variables such as
loans per staff and operating costs as a percentage of average
annual portfolio (while maintaining portfolio soundness).
- Meaningful reporting standards. Transparent financial
reporting that conforms to international standards and allows
prospective funders to evaluate performance adequately At a
minimum, the raw data listed in the Annex should be reported, and institutions should regularly monitor financial
condition using appropriate financial ratios derived from
such data.
B. Quality of Services and Outreach
- Focus on the poor. Evidence of service to low-income
clients, women and men, especially clients lacking access to
other financial institutions. The focus need not be exclusive, as
mainstream institutions such as banks are encouraged to
become providers, but it must entail a distinct commitment to
reaching the poor.
- Client-appropriate lending. For example, for micro-level
clients, institutions should feature quick, simple and convenient
access to small, short-term loans, often short-term, that are
renewed or increased based on excellent repayments. Use of
collateral substitutes (e.g., peer guarantees or repayment
incentives) or alternative forms of collateral to motivate
repayment. Emphasis on character-based lending for smaller
loans, with simple cash flow and project appraisal for larger and
longer term loans.
- Savings services. Offering savings mobilization services, where
legally possible and economically feasible, that facilitate small
deposits, convenient collections, safety, and ready access to
funds - either independently or with another institution.
- Growth of Outreach. Making significant progress in expanding
client reach and market penetration, demonstrating both strong
client response to services offered and competence in service
delivery management.
C. Financial Performance
- Appropriate pricing policies. Offering loans at rates sufficient
eventually to cover the full costs of efficient lending on a
sustainable basis (after a reasonable start-up period),
recognizing that poor entrepreneurs are able and willing to pay
what it costs an efficient lender to provide sustainable financial
services. Interest charges by the retail unit should be set to
cover the costs of capital (at the opportunity cost, including
inflation), administration, loan losses and a minimum return on
equity. (2)
- Portfolio quality. Maintaining a portfolio with arrears low
enough that late payments and defaults do not threaten the
ongoing viability of the institution. For example, organiza-
tions with loans in arrears over 30 days below 10 percent of
loans outstanding and annual loan losses under 4 percent of
loans outstanding satisfy this condition.
- Self-sufficiency. Steadily reducing dependence on subsidies
in order to move toward financial self-sufficiency. Achieving
operational efficiency, i.e., covering all administrative costs
and loan losses with client revenues within a reasonable time
period, given local conditions. International experience
shows that successful intermediaries have achieved opera-
tional efficiency in three to seven years, and full
self-sufficiency, i.e., covering all financing costs at non-subsi-
dized rates within five to ten years.
- Movement toward financial independence. Building a
solid and growing funding base with clear business plans,
backed by operational capacities, that lead to mobilization of
commercial funds from depositors and the financial system,
and eventually to full independence from donor support.
Financial performance standards apply only to activities that are an integral part of providing financial services. If programs also provide
non-financial services, such as business advisory services, health, or
education they must account for such services separately from financial services. Standards for financial self-sufficiency do not apply to
such services, and defining appropriate standards for non-financial
services is beyond the scope of this document.
2. It should be understood that costs of non-financial assistance provided to entrepreneurs may continue to receive subsidies. However,
it is crucial that these costs be separated from the costs of lending operations, so that the financial viability of lending
operations can
be assessed.
II. Strategies for Donor Support
Funding based on large, ongoing subsidies with a charity rationale
has failed. Such programs have drained resources without becoming
sustainable, and have contributed to the mistaken notion that the
poor are unbankable. Funders should provide financial and other sup-
port in forms that foster the movement to scale, financial
self-sufficiency, and independence from donor support, taking into
account the particular characteristics of different types of institutions.
A. Appropriate uses for grants.
- Institutional development. Support for institutional
development is appropriate at all stages of an institution's life,
and for a wide range of institutions, although the nature and
extent of such support should evolve with the institution. Such
support should become more selective, as institutions become
able to meet more of their organizational development needs from
within. It should also become more specialized, as institutions
tackle more difficult problems.
- Capitalization, or grants for equity are of strategic importance
in enabling organizations to build a capital base. Capitalization
can be used to generate investment income, build the loan
portfolio, and leverage funds from local banks. One of the key
purposes of providing capital funding is to enable institutions to
mix costs of grant funds with commercial sources during the
period it takes to build efficient operations and scale. Externally-
financed capitalization should be used as a catalyst and
complement to domestic mobilization of funds by local
institutions. Grant equity contributions can also help institutions
seeking to become formal financial intermediaries to meet
minimum capital requirements.
- Operating losses. Donors should avoid covering operating
losses except during a clear, time-limited start-up or expansion
phase. By the nature of the small loan business every program
will take some time to reach a break even point. Donors should
be willing to provide support during that time. Afterwards,
however, such support becomes counterproductive.
- Fixed assets. Donors may wish to support purchase of fixed
assets, such as computers, vehicles or premises. Such funding
may be seen as contributions to the equity base of the
institution.
B. Appropriate uses of loans.
Donor support through loans is appropriate for lending-based
institutions that meet performance standards. However, loan capital
from local and commercial sources should be sought as early as
possible, even at start-up. Care should be taken to avoid burdening
young institutions with foreign exchange risk in loans denominated
in foreign currency, unless adequate precautions are taken. Donors
are also advised to be careful not to undermine savings mobilization
efforts of savings-based institutions, such as savings and credit
associations by making loans available to them below the cost of
mobilizing funds locally.
C. Commercial sourcing of funds.
The transition to fully commercial sources of funding requires
special forms of support that help introduce institutions to the
financial system. Donors can act as catalysts to effect this
transition through means such as.
- Investor equity, from both official and private sources.
Donor support can help leverage private investment
- Second-tier operations, which raise funds from commercial
sources and onlend to microenterprise finance institutions.
- Partial guarantees of loans made by commercial banks to
NG0s.
D. Coherence of donor policies.
Institutions following sound principles for sustainability must not be
undermined by others providing competing services below cost or in
ways that cannot be sustained. When providing subsidies (grant or
loan) to small and microenterprise institutions, donors should
ensure that they coordinate that support with other funders, such
that institutions are given clear incentives to become financially
viable, In particular, donors need to consult each other regarding
appropriate interest rates and other terms on which assistance to any given institution is
supplied. Donors should also coordinate institutional support with
sectoral policies such that financial institutions, including informal
and semi-formal sectors, find enabling conditions for institutional
development and growth.
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