The author acknowledges that financial risk can yield high profits, but urges microfinance institutions (MFIs) to maintain proper asset and liability management (ALM) to find a level of risk the institution can bear. As the financial activity of MFIs grows more complex and funding increasingly comes from commercial sources, the careful examination of the balance sheet can help MFIs measure and evaluate risk. Risk, in this case, is defined as a mismatch between assets and liabilities. In this paper, the author examines three types of risk: liquidity, interest rate, and foreign exchange. Although each type of risk is distinct, ALM strategies for all types include gap analysis to match assets and liabilities over time and volatility analysis to determine the typical fluctuations in the discrepancy between assets and liabilities. The multifaceted approach to ALM proposed by the author includes an official risk-management strategy written by the MFI based on the institution’s own priorities, matching tables for assets and liabilities, and the institution a special committee for ALM. The author provides several matching tables as examples of how to compare assets and liabilities.

Claiming that the priority of an MFI ought to be the creation of straightforward products for its client base, unlike the average commercial bank, the author states that ALM should lean towards reacting to discrepancies between assets and liabilities rather than willfully create them. The author believes that MFIs ought not to rashly attempt profiting from financial risk. But if risk is taken, it should be limited to credit risk rather than interest rate or foreign exchange risk. MFIs also differ from commercial banks in terms of assets. MFIs generally maintain long-term, fixed rate assets in the form of loans. In order for assets to match liabilities, liabilities too must exhibit these characteristics, taking the form of either stable savings deposits, bonds, or equity.

The author admits that it is difficult for MFIs to match assets and liabilities. If the MFI can calculate the profitability impact of a mismatch, then the institution at least has awareness of the risk and, allowing the risk to persist, can set a limit for risk the institution is willing and able to undertake within a specific time frame.

Going on to describe the various forms of risk, the author states that liquidity risk is the most significant financial risk because an MFI could never survive a liquidity crisis. While MFIs often pour liquidity into the loan portfolio, the author insists that MFIs maintain liquidity reserves in case of a crisis. Because there is a time gap in the maturing of loans and deposits, the author describes gap analysis which determines how liabilities, which mature at a different rate, can compare with assets over time. While loans have long term maturity, depositers have the right to withdraw savings at any time. On average, there is a base of deposits that the MFI can expect to maintain. The author also recommends volatility analysis of deposit liabilities to determine the rate of withdrawals and the amount of deposits that can be relied upon.

The second major type of risk discussed is interest rate risk. The author describes its manifestation for MFIs as the repricing of assets or liabilities due to fluctuations in interest rates. In order to price the assets correctly, the MFI must know how much of its budget will come from profits and how much will come from new financing. Unlike the case of liquidity risk, where the MFI must consider that savings deposits might be claimed at any time, savings deposits in the case of interest rate risk can reduce the cost of funds by precluding the need for new financing at a new cost.

On the balance sheet itself, changes in assets and liabilities due to interest rate appear as changes in equity. If MFIs calculate the average and maximum volatility of interest rates as well as expected profits, it is better prepared to undertake risk. Another method of assessing interest rate risk is duration gap analysis, which reveals the market value change of assets and liabilities due to interest rate changes. Although this method directly applies to bonds, MFIs can treat assets and liabilities like bonds to assess the magnitude of the effect on profit. Duration analysis is intended to assist MFIs in matching the duration of assets and liabilities rather than their maturities.

The last type of risk evaluated is foreign exchange risk, which arises out of a mismatch in the currencies in which assets and liabilities are expressed. Often, the loan portfolio is in local currency while liabilities are a mix of foreign and local currency. If local currency is tied to another currency like the US dollar, there is effectively no risk to protect against since the exchange rate will remain the same. Again, risk can be minimized when the currencies are matched. Measurements of foreign exchange risk maybe made in two ways. In net open foreign exchange position, Assets and liabilities in different currencies can be separated into multiple columns; in each column, liabilities can be subtracted from assets to determine the difference for each currency. Afterwards, the net open foreign exchange position can be compared with capital. In the second method, the MFI could calculate the impact of devaluation of a certain currency. Volatility analysis of exchange rates can be useful in this calculation. Beyond these measurements, MFIs can conduct liquidity gap analysis on each currency, which can reveal the maturity of foreign currency liabilities. To protect against risk, the MFI can deal in forwards, swaps, and options.

Although external regulation can encourage proper ALM, the author believes that it is the responsibility of each MFI to sensibly and carefully evaluate the risk level the institution can handle. The author concludes the article by describing how ALM strategies can be incorporated into the operations of an MFI. Chiefly, this involves the creation of a team dedicated to ALM that brings together all the parties involved in the balance sheet. For all types of risk, the author insists that the team agree on a limit for the amount of risk the MFI is willing to undertake. The author urges regular gap analysis on all types of risk and especially stresses the need for the calculation of liquidity ratios as well as an official plan for a liquidity crisis. Although good ALM can improve the resilience and performance of an MFI, the author acknowledges that MFIs cannot always perfectly manage assets and liabilities. Nonetheless, this is no excuse to not try.

By Goda Thangada, Research Assistant

Although CRDB MF does not directly lend to the public, the company provides a range of services including technical support for its selected partner MFIs. The four criteria for eligibility set for potential partners are a reliable administration, participating in CRDB’s MFI training programs, good loan performance reports, and clean finding reports. CRDB MF also offers the MFI Juhudi Account for partners, with a minimum opening balance of USD 75. As of December 2008, deposits of the MFIs in CRDB Bank stood at USD 7.2 million. During 2008, a new microfinance support centre was opened in Kilombero while there are currently plans to open four further centers in Njombe, Mbozi, Geita and Zanzibar.  

CRDB MF does not report to the MIX Market and has not released its annual report to the public. However, several annual and quarterly financial reports are available for CRDB Bank. The Bank as a whole reported total assets of USD 1.2 billion in March 2009 as well as USD 1.05 billion in liabilities and paid up share capital totalling USD 40.6 million. Net income for the quarter was USD 7 million. According to a 2008 annual report, profit before tax rose 16 percent year over year to USD 45.3 million and assets grew 27 percent to USD 1.09 billion. Operating income for the year was USD 102.5 million. The net loan portfolio grew 42 percent from the previous year to USD 631.5 million. Agriculture loans constitute 28 percent of the loan portfolio, followed by trade and commerce loans at 15 percent. Deposits in the bank grew 26 percent to USD 933.2 million.  

Both CRDB Bank and CRDB MF are involved in more extensive microfinance schemes. CRDB MF has disbursed USD 17.3 million to 203 microfinance institutions through the government’s Uwezeshaji Credit Guarantee Scheme, exceeding the government’s goal by USD 679,000. CRDB MF also participated in the Mwananchi Empowerment Scheme, a program of the National Economic Empowerment Council aimed at increasing loans in select regions. CRDB Bank itself participates in the Bank of Tanzania’s SME Credit Guarantee Scheme, providing loans between USD 3,800 and USD 377,000 to SMEs. CRDB Bank approved 2,463 SME loans in 2008 for USD 45.6 million in loans disbursed.  

Further developments for CRDB Bank in 2008 include the shareholders’ positive vote to list the bank’s shares on the Dar Es Salaam stock exchange. 2008 was also the first year of CRDB’s 5 year Strategic Business Plan to improve bank services and develop new products, described in the annual report. In terms of physical expansion, CRDB built 9 new branches, for a total of 56 branches, and 27 ATMs.  

As for country indicators, the CIA World Factbook, reports the GDP, in terms of purchasing power parity, of Tanzania is USD 54.26 billion with a growth rate of 7.1 percent and a GDP per capita of USD 1,300. 80 percent of the labor force is engaged in agriculture although agriculture constitutes only 27 percent of GDP. The MIX Market lists 11 MFIsin Tanzania, most of which are NGOs.

Additional Resources:  

 “Microfinance Firm Gets Sh254m Profit”, By Zephania Ubwani, Published by The Citizen, June 2009

 “The National Microfinance Bank of Tanzania helps Bail out the Tanzania Electric Supply Company (Tanesco) with a USD 56 million Loan“, by Amy Rennison, Published by MicroCapital, September 2007

CRDB Bank: Home

CRDB Microfinance

CRDB Bank: 2008 Annual Report

CRDB Bank: March 2009 Balance Sheet

Bank of Tanzania: SME Credit Guarantee Scheme

CIA World Factbook:Tanzania

MIX Market:Tanzania  

By Goda Thangada, Research Assistant

Event Name: 2009 International Forum on Remittances

Event Dates: October 22-23rd, 2009

See Our Comprehensive Event Calendar Here: http://microfinanceassociation.ning.com/events

Location: Tunis, Tunisia (Venue To Be Announced)

Cost: Free

Who Is Invited to Attend: Everyone

Online Registration Address : http://webapps.ifad.org/ert/

Background on Organizer: The International Fund for Agricultural Development (IFAD) is an agency of the United Nations founded in 1977 to combat hunger by supporting agricultural development. IFAD has previously organized the 2007 and 2005 International Fora on Remittances. Based in Rome, Italy, IFAD’s Strategic Framework for IFAD 2007-2010: Enabling the Rural Poor to Overcome Poverty is available here and a list of projects by country, here. IFAD also provides loans and grants to other organizations and selected developing countries. Financed through loans and grants, IFAD itself has invested USD 10.6 billion in 796 special projects that have impacted 330 million people since the organization’s founding. Other donors have contributed USD 24.8 billion to IFAD projects. Due to its connection with the UN, IFAD is guided by the Millenium Development Goals.

Summary of Event: The forum will focus on remittances to Africa as well as between African countries. Discussions will raise awareness about the popularity and volume of remittances as well as the potential of remittances to facilitate economic development in Africa. The Remittances, Business Models and Rechnology Fair will also be held simultaneously to showcase products relevant to remittances. The topic of remittances is relevant to microfinance because microfinance institutions (MFIs) can play key roles in distributing and guiding the use of remittances to poor people. In 2006, migrants remitted USD 300 billion around the world.

Event Themes and Discussion Topics: The major themes of the Forum are mechanisms for sending remittances and the uses to which remittances can be put in Africa.

The Main Sessions are:

• Financial inclusion- This session will discuss methods of making remittances and banking services available to a greater client base. Other topics will include the potential of remittances to make a development impact in Africa and case studies on how to successfully develop inexpensive remittance products.

• Migrant investments and gender dimension- This session examines the behavior and choices of migrants who send remittances as well as the impact of women, who are very often the recipients of remittances.

• Technology and innovation- This session will present new technologies in processing remittances, including mobile and internet money transfer systems. The session will also highlight accessibility to such technology in rural areas.

• Development and remittance- This session will specficially discuss how remittances can be harnessed to further African development and will allow for networking between organizations dedicated to directing remittances into development projects.

Contact: remittances@ifad.org

Website: http://www.ifad.org/events/remittances/index.htm#3

This 85 page report presents the results of the African Development Bank (AfDB)’s 2007 extensive study on migrant remittances. The study involved a survey of emigrants from Morocco, Senegal, Mali, and the Comoros as well as beneficiaries in the countries. The African countries, while very different from one another, all have a French colonial background while the emigrants surveyed lived in France, Italy, and Spain. The study examines the use of remittances and preferences for various transfer mechanisms to ultimately present various challenges in dealing with remittances as well as a number of suggestions for how to improve the method and use of remittances. Among the suggestions is the recommendation that microfinance institutions (MFIs) expand or mobile banking services be offered, so that beneficiaries of remittances might readily access the transferred money through a formal mechanism. Remittances constitute a great volume of cash inflow to the countries surveyed, totaling between 9 percent of GDP in Morocco and 24 percent in the Comoros, or between 80 and 750 percent of the countries’ official development assistance (ODA).

One transfer method is Money Transfer Companies (MTCs), which sprung up in Africa in the 1990s and are now growing at a rate of 15 percent annually. The two major companies, Western Union and MoneyGram, have also established linkages with various banks and microfinance institutions (MFIs) to distribute the money. The MTC network is most elaborate in Senegal and least so in Mali, where MTCs cover only 29 percent of the money transfer market. Western Union is universally more popular than MoneyGram, commanding 47 percent of the Moroccan money transfer market versus MoneyGram’s 17 percent, and 60 percent in the Comoros where MoneyGram does not have a presence. Transfer through MTCs can take as little as 10 minutes. However, the transfer charge of MTCs is rather high, at between 5 and 20 percent of the amount transferred. The share of MTCs ranges from 16 percent in Mali and the Comoros to 36 percent in Senegal.

Among other options for money transfer, banks, another formal transfer mechanism, have more competitive transfer rates. However, the beneficiaries are unbanked. The percentage of bank transfer across all remittances ranges from 10 percent in both Mali and Senegal to 41 percent in Morocco. In Morocco, 4 of 20 total commercial banks share 85 percent of the remittance market due to their wide presence in the host countries and the wide range of services, including transfer and investment mechanisms, offered to the remitters. In Mali and Senegal, banks can be inefficient, taking 1 to 3 weeks to complete the transfer. In the case of Senegal, only 5 percent of the population is banked and able to receive bank transfers.
Informal transfer mechanisms include the simple task of sending money by post. Another system, called “Fax”, involves the collection of the funds at one site and a telephone call to a partner at another site that releases funds to the beneficiary. According to the study’s survey, the criteria for choosing formal and informal transfer mechanism are generally speed and accessibility on the part of beneficiaries and cost, security, and accessibility on the part of remitters.

The countries themselves differ in the availability of transfer services. Morocco has a mature and highly developed banking system while the Comoros has a rather undeveloped banking sector with only one commercial bank. The neighboring countries of Senegal and Mali have a rapidly developing informal transfer market. The average annual amount received by transfer per household is USD 2 470 for Morocco, USD 2 925 for Senegal, USD 7,700 for Mali, and USD 2,460 for the Comoros. The amount of transfer ranges from 7 in the Comoros to 10 in Senegal. Percentage of informal transfer ranges from 27 percent in Morocco to 82 percent in the Comoros.

In countries with fewer banks, the authors suggest that microfinance institutions (MFIs) are preferable to informal means of transfer. However, transfers are less profitable than loans and may exhaust funds from which the MFI could make a greater profit. But in some countries, MFIs can reach people that banks can’t. In Senegal, formal transfers have increased 8 to 10 percent due to the growing presence of MFIs. MFIs in Mali and the Comoros will soon begin to offer direct transfer facilities.

The second major topic of the report is the use to which remittances are put. Remittances can either be invested or used for consumption of beneficiaries, a practice which does not directly yield financial returns. Migrants in lower income brackets send between 10 and 15 percent of their income solely for the consumption of beneficiary households while higher earners also invest their remittances in real estate or productive enterprises. About 30 percent of migrants surveyed have invested in an investment project including real estate or production. Because the typical profile of a remitter is a first generation migrant in his or her early forties, and low skilled workers constitute 66 percent of the migrant population, the study reflects that more could be done to yield benefits for the migrants.

As for beneficiary households, 80 percent of beneficiary households surveyed were on the poverty threshold of less than USD 1.3 per day. Remittances constitute 50 to 75 percent of household budgets. Therefore, household expenses and healthcare take precedence among uses for remittance money, with education coming in at third in terms of priority. Interestingly, in the Comoros, the practice of celebrating weddings in grand style are common and weddings can often exhaust lifetime savings; here, remittances also fund extravagant social events. In terms of the sources of beneficiaries’ incomes, 34 percent of beneficiaries in Morocco are unemployed while the lowest percentage of unemployed is found in Mali, at 5 percent. 31 percent of beneficiaries in the Comoros are insecurely employed and 28 percent unemployed. 39 percent of Senegalese beneficiaries are self-employed while 52 percent of Malinese beneficiaries are workers.

Before segueing into its own suggestions, the study identifies three approaches to governing remittances:
* The Anglophone Approach favors the free market guiding innovations and the popularity of transfer mechanisms
* The Hispanic Approach favors improving banking services for migrants and offering low cost transfers to attract the business of migrants
* The Francophone Approach encourages both migrants and beneficiaries to invest a portion of remittances in community or productive investments

The study itself recommends that measures be taken to encourage competition between transfer services, to drive down the cost of transfer. The study also favors both migrants and beneficiaries opening bank accounts with commercial banks or MFIs so that they receive a full range of financial services, including savings plans. Mobile banking is presented as a means of reaching beneficiaries in remote areas. To specifically benefit migrants who sacrifice their income to send money to family, the study advise banks to offer special savings plans and insurance along with transfer facilities. Banks are also encouraged to offer investment products in the African countries so that this portion of remittances can yield further income and also contribute to economic development. For the African countries themselves, the authors advise improvement in healthcare and education since these are areas that a great volume of remittances is directed towards.

By Goda Thangada, Research Assistant

The by-laws of the UCA, updated in 2005, state that any registered cooperative society may become a member. However, this contradicts the Cooperative Societies Statute of 1991, which authorizes the UCA to advise the government on policies for cooperatives and established the UCA’s Board of Directors. The UCA is also the body that is meant to resolve disputes amongst registered societies. Individual cooperatives must have a minimum membership of 30 individuals whereas collectives must include at least 2 indiviual cooperatives. Apex bodies must consist of two or more collectives. The Statute names the UCA as the apex body for all cooperatives in the country.

The government has been orchestrating a revival of cooperatives in Uganda, primarily to bolster the agriculture industry by allowing farmers to pool products to sell in bulk. In the budget for this financial year, the Ugandan government has allotted USD 16 million for cooperative societies and USD 1 million for market research. Before cooperatives, middlemen could cheat farmers to take a large share of profits. Cooperatives emerged in the 1930s, but in the 1990s, the World Bank encouraged the disbanding of cooperatives in favor of farmers selling their own products in the free market. However, this was not successful due to price fluctuations in the market and the fact that farmers were not able to sell a small volume of products to bulk buyers. The UCA was created to act as a government agent in logistically supporting cooperatives and undertaking capacity building for societies. The UCA is not a regulatory body.

The conflict between the UCA and the collectives stretches back several months. In January, the UCA submitted a concept note entitled “Empowering farmers through an integrated marketing system” to the Microfinance Support Center, a government owned company that handles rural microfinance. The note states that the UCA will create 1500 individual cooperatives and 300 area cooperative enterprises. Furthermore, the concept note also states that the UCA will provide storage facilities, deliver produce to warehouses, provide market information, and sell products in bulk. These are activities typically undertaken by collectives themselves.

The collectives had gone to court to demanding that the UCA to stop accepting individual cooperatives as members and to restore the previous board of directors. The case was settled out of court before an official from the Finance Ministry notified the collectives about the UCA’s note. Lawyers of the collectives commented, “To our surprise, on February 2, 2009, Uganda Cooperative Alliance had opted out of the court settlement by approaching your ministry to directly finance their activities by a concept paper which is to be presented to your ministry. Our clients’ complaint is that the concept paper excludes them and yet they are members of Uganda Cooperative Alliance.”

Examples of past UCA projects can be found in its annual reports. One current project is the Empowering Farmers Through Agribusiness and Financial Services Project (EFTAF), scheduled to last from July 2007 to December 2010 and undertaken in cooperation with the Norwegian Society for Development (Norges Vel) and the Swedish Cooperative Centre-Vi Agroforestry (SCC-Vi). The project supports 300 individual cooperatives in developing agriculture productivity and marketing. The project also aims to create 45 SACCOs that will cumulatively raise USD 659,000 in share capital, USD 742,000 in savings deposits, and USD 1.24 million in outstanding loans.

Microfinance is quite active in Uganda. The MIX Market, the microfinance information clearinghouse, lists 22 microfinance institutions (MFIs) in the country, many of which are cooperatives or credit unions. A previous MicroCapital story has discussed the USD 133.7 million worth of subsidized loans made available in 2009 by Salim Saleh, the Ugandan State Minister for Microfinance. The loans are to be distributed through SACCOs, in accordance with emphasis on development through cooperatives found in the Finance Ministry’s document “The Plan to Achieve Prosperity for All Ugandans.” In April 2009, MicroCapital also reported on the creation of the new regulatory body for SACCOs.

Uganda has an estimated 2008 GDP, in terms of purchasing power parity, of USD 35.88 billion with a growth rate of 6.9 percent and a GDP per capita of USD 1,100. Agriculture constitutes 29 percent of GDP although 82 percent of the labor force works in agriculture.

Additional Resources:

“War over funds threatens co-op revival”, by David Malingha-Doya, Published by The East African, June 2009
“Gov’t asks Cooperatives to solve in house wrangles”, by Ephraim Kasozi, Published by Daily Monitor, February 2009
Cooperative Societies Statute of 1991
Uganda Cooperative Alliance: Home
Uganda Cooperative Alliance: 2008 Reports
“Uganda’s Cooperatives Rise Again”, Published by African Loft, January 2009
CIA World Factbook: Uganda
MIX Market: Uganda
“Infamous Brother of Ugandan President Floods Microfinance Market with $133m of Subsidized Capital Over 5 Years“, by Ryan Hogarth, Published by MicroCapital, February 2009
“Uganda Government to Set up Regulatory Body to Monitor Work of Savings and Credit Co-operative Organizations (SACCOs)“, by Bharathi Ram, Published by MicroCapital, April 2009
“The Plan To Achieve Prosperity for All Ugandans”

By Goda Thangada, Research Assistant

The announcement comes less than a year after Peace became licensed by the CBN to practice microfinance in September 2008 and about one year after the incorporation of the bank in May 2008. Peace has just launched a 24 hour internet banking service that allows clients to check account balances and receive a Short Message Service (SMS) alert for all banking transactions. The service is available to customers from anywhere in the world. Recently, Peace has also planned the installation of ATMs to reduce traffic to bank branches. In response to a query that the bank was neglecting rural customers in the wake of this expansion, the managing director of the bank, Innocent Ukasaonya, responded, “The challenges of the 21st century are numerous and we have to adopt strategies of satisfying our customers. The rural populace have not been neglected at all we have a range of products and services to cater for their needs too”.

Peace is a very new bank that has been expanding rapidly. When Peace became a private limited company in May 2008, the company self-reported share capital of USD 1.35 million. There are Peace branches in 11 locations in the FCT, 1 location in the state of Nassarawa, and 1 location in the country of Niger.Five further branches are under construction. Because Peace has not yet completed one year of microfinance operations, Peace is not among the 12 microfinance institutions (MFIs) in Nigeria that report to the MIX Market, the internet microfinance information clearinghouse. A list of members of Peace’s Board of Directors and the management team can be found here.

Products and services of Peace include the Current Account, which requires no minimum balance and comes with an ATM card. The basic savings account has a minimum opening balance of USD 3.4 dollars. Peace additionally offers separate savings accounts for education and festivities. Clients become eligible for microventure loans, home loans, and leases six weeks after opening an account with the bank and pay an annual interest rate is 30 percent. To attract new customers, Peace has offered promotions including the Bus Leasing Scheme, in which clients can lease a Foton bus by paying 30 percent of the price, and the NYSC Savings Account, meant for army corps members.

The FCT is a small area and the hub of Nigerian politics. Total purchasing power parity GDP of the FCT was USD 5.01 billion in 2007, with a per capital GDP of USD 3,285. Natives of the FCT are engaged in agriculture, producing yam, maize, guinea corn, beans and millet. Woodwork and ironwork, as well as weaving on the part of women, is also common. The territory is administrated by a system of emirs and chiefs responsible for certain areas, which are in turn divided into districts that report to the authority of the emir. The emirs themselves are under representatives of the government. Major ethnic groups in the area include the Bassa, Gade, Gwandara, Koro and Ganagana. Because Abuja is a candidate city for the 2014 British Commonwealth Games, the city is in the process of modernizing and expanding. Abuja replaced Lagos as the capital of Nigeria in 2004.

As for Nigeria as a whole, the country received USD 1 billion in credit in the year 2000 from the IMF, contingent on economic reforms. President Yar’ Adua’s current Seven-Point Agenda includes areas of focus like agriculture, mass transportation, and wealth creation and employment. In 2008, the CIA World Factbook estimated the purchasing power parity GDP of the country at USD 338.1 billion with a growth rate of 6.1 percent, driven chiefly by rising oil prices. GDP per capita was USD 2,300. Although 70 percent of the labor force is engaged in agriculture, agriculture constitutes just 18 percent of GDP.

Additional Resources:
“Nigeria: Peace MFB Commences Internet Banking”, by Abubakar Buba, Published by AllAfrica, June 2009
“Peace Microfinance Bank To Hit N1bn Capital Base”, by Chinedu Aroh, Published by Leadership Nigeria, October 2008
Peace Microfinance Bank: Home
Federal Capital Territory: Home
Microfinance Policy, Regulatory and Supervisory Framework for Nigeria, Published by Central Bank of Nigeria, December 2005
“Central Bank of Nigeria (CBN) Closes Failed Community Banks”, by Mary Fu, Published by MicroCapital, January 2008
CIA World Factbook: Nigera
MIX Market: Nigeria
Wikipedia:: Federal Capital Territory
President Yar’Adua’s Seven Point Agenda

By Goda Thangada, Research Assistant

Furthermore, BURO has received the highest rating of five diamonds from the MIX Market, the microfinance information clearinghouse, for financial disclosure According to the MIX, BURO serves 496,603 active borrowers and maintains a gross loan portfolio of USD 45.4 million as of December 2008. Total assets in 2007, the most recent year of reporting, were USD 32.59 million, the debt to equity ratio was 241.13 percent, and the return on assets, 3.19 percent. In 2008, the loan portfolio increased 64 percent and the savings portfolio, 38 percent. The savings portfolio constitutes 32 percent of the revolving loan fund. A 2008 annual report can be found here.

BURO has been establishing linkages and has made a number of agreements in the past year or so. In June 2009, BURO signed an agreement with international banks AB Bank Ltd and Prime Bank Ltd. to distribute the remittances of non-resident Bangladeshis through BURO’s branches. In April 2008, BRAC Bank Ltd., one of the major MFIs in Bangladesh, facilitated a loan of USD 7.26 million to BURO on the part of lending institutions AB Bank, Bank Alfalah, Mercantile Bank, ONE Bank, Prime Bank, Pubali Bank, Trust Bank, United Commercial Bank. BURO’s membership in networks includes the Federation of NGOs in Bangladesh, the Credit and Development Forum of Bangladesh, and France’s International Association of Investors in the Social Economy.

As for loan procedures, BURO groups clients into three categories. The Extreme Poor earn an annual income of USD 87 or less and possess assets valued at less than USD 174. The Moderate Poor have an annual income of or less than USD 261 and hold assets totalling less than USD 1452. The Micro Entrepreneurs and Small & Marginal Farmers have an annual income from USD 261 to USD 871 and hold assets ranging from USD 1452 to USD 4356 in value. Savings products include the general savings account with a minimum balance of 15 cents and an annual interest rate of 4.5 percent. The micro life insurance product requires a premium between 44 cents and USD 2.9 for compensation of 100 times the premium amount and waiver of outstanding loans after the death of the policy holder. Loan products include the microenterprise loan, which ranges from USD 726 to USD 4356 and carries an annual interest rate of 15 percent over a maximum of three years. The agriculture loan ranges from USD 145 to USD 726 and must be repayed in one year with an interest rate of 15 percent. Non-financial services include disaster relief, water supply, and business development.

The loan facilitator, Citibank Bangladesh, is a branch of the holding company and its sole shareholder Citigroup Inc. In March 2008, Citibank Bangladesh itself lent USD 65 million to Bangladeshi MFIs, including BURO. A June 2008 MicroCapital story also reported that Citibank provided the Bangladeshi MFI ASA with USD 10 million in financing. Citibank Bangladesh commenced operations in 1995 and currently maintains five branches in the country, including the main branch in the capital city of Dhaka. Services include commercial banking, treasury management, remittances, foreign exchange, and financial structuring. The bank reported total assets of USD 580.77 million in 2008 as well as USD 495.68 million in liabilities.Total operating income was USD 874,300 and net profit after tax, USD 184,500. Loans and advances totalled USD 31.6 million.  Other banks participating in raising the USD 21.74 million loan are local banks Sonali Bank Ltd, Janata Bank Ltd, Agrani Bank Ltd., The City Bank Ltd., Eastern Bank Ltd., Dutch Bangla Bank Ltd., Mutual Trust Bank Ltd., National Bank Ltd., Prime Bank Ltd., Pubali Bank Ltd., Southeast Bank Ltd., Standard Bank Ltd. and United Commercial Bank Ltd.

Microfinance has a rich history in Bangladesh. As of 2007, 535 MFIs in the country served 23.95 million clients. Bangladesh is also the birthplace of the renowned Grameen Bank, founded by Nobel Prize winner Mohammed Yunus. As for the country itself, according to the CIA World Factbook, Bangladesh has an annual estimated GDP in terms of purchasing power parity of USD 224 billion and a growth rate of 4.9 percent. GDP per capita is USD 1,500. Although 63 percent of the labor force is engaged in agriculture, agriculture constitutes only 19.1 percent of GDP. About 77 percent of the population lives in rural areas. Agriculture can be disrupted by frequent flooding. Individual farms are usually small, but farmers have begun to use and purchase modern equipment through cooperatives.

Additional Resources:

“Citibank Arranges Farm Loan For Microfinance Institution In Bangladesh”, by Siddique Islam, Published by All Headline News, June 2009
Citibank Bangladesh: Home
BURO Bangladesh: Home
“Bangladesh Central Bank Push for Agricultural Finance Triggers Citibank-led Loan Syndication: BURO Bangladesh to Raise $14.5m to Support Agriculture Microfinance Program“, by Jaclyn Berfond, Published by MicroCapital, April 2009
MIX Market: BURO
BURO: Annual Report 2008
“Citi Gives $65m Equivalent for Rural Development”, Published by The New Nation, March 2008
“Citibank Bangladesh Provides Microfinance Institution ASA of Bangladesh with $10m in Financing”, by
Emily Liu, Published by MicroCapital, June 2008
Citibank Bangladesh: Financial Statement 2008
CIA World Factbook: Bangladesh
Discovery Bangladesh: Agriculture

By Goda Thangada, Research Assistant

This study, claimed by the authors to be the first randomized evaluation on the effects of microfinance, comes to the pessimistic conclusion that microfinance has only a small effect on the fortunes and almost no effect on the lifestyles of poor people after the opening of a microfinance institution (MFI) in their neighborhood. In this case, the term randomized refers to the random selection of 52 of 104 similar poor areas as locations for new branches of the MFI Spandana in the Indian city of Hyderabad. Dubbing the randomly selected areas with microfinance the “treatment” group and the areas without microfinance the “comparison” group, the authors distributed a survey amongst an average of 65 households in each area fifteen to eighteen months after the openings of the branches. The authors ultimately find that there is some difference, albeit not a major difference, in business profit and consumption patterns between households in treatment and comparison areas.

Characteristics of treatment and comparison areas were similar, save the presence of a microfinance branch. After the opening of the Spandana branch, the probability to receive a microloan was 27 percent in treatment areas and 18.7 percent in comparison areas. The baseline study conducted in the areas before the introduction of a Spandana branch showed that 69 percent of households had at least one outstanding loan of about USD 400 with an interest rate of 3.85 percent per month. 34 percent of the households had a savings account, 26 percent had life insurance, and a negligible amount had health insurance.

The authors follow three groups of households which may alter consumption patterns with the advent of microfinance. The first group, consisting of households who will use loans to start businesses, reduce consumption to contribute to the fixed cost of the project. The second group, consisting of households who do not use their loans for starting businesses, increases consumption due to the extra funds provided by the loan. The third group, consisting of households who use loans to improve existing businesses, increases consumption because the extra investment leads to immediate profits. The first and third groups were typically the most prosperous, with an average consumption per capita of USD 5 per day prior to microfinance. The third group borrowed 8.5 percent more from an MFI in treatment areas versus comparison areas while the first and second groups borrowed 9.6 percent more in treatment areas.

As for comparisons between treatment and comparison areas, 7 percent of households in treatment areas opened businesses versus 5.3 percent in comparison areas. Additionally, business owners in treatment areas reported higher profits of an average of about USD 200. Although about 90 percent of this was nondurable expenditure, households in treatment areas spent about 50 cents more per adult on durable goods versus comparison households. Treatment households also spent 25 cents per adult on durable goods used in the household business versus 10 cents in comparison households. The authors also correlate changes in consumption with households’ propensity to start a business. The households most likely to start a business reduced nondurable spending as well as consumption of temptation goods, including alcohol and cigarettes, by 17 percent.

No significant changes in lifestyles or culture were observed. Although Spandana is an MFI that aims to impact women in particular, women in the treatment areas reported that they were not any more likely to make important household financial or education decisions than women in comparison areas. Furthermore, treatment and comparison households spent equal amounts on medicine and sanitation, were equally likely to have enrolled children in school, and spent equal amounts on tuition and school fees.

Rather than evaluate success on absolute terms across all businesses, the authors examine the change in profits in businesses of different sizes. In the 50th percentile of business profit, the effect of microfinance on profits is zero. However, the effect on the least and most successful businesses is more significant, with businesses with profit at the 95th percentile reported average increased profit of about USD 130. The authors conclude that in the 15 to 18 month period after the opening of the Spandana branches, there are changes in household expenditure and profits in some businesses although there is little change in aspects of lifestyle including healthcare and education.

Spandana’s loans are typical microfinance loans and follow the Grameen model, popularized by Nobel Peace Prize winner Mohammed Yunus. Spandana granted group loans to 6 to 10 women and grouping 25 to 45 groups in a center. With a first loan amount of about USD 200 and an interest rate of 12 percent, the loan takes 50 weeks to repay. All clients must be women aged 18 to 59 who have lived in the same area for a minimum of 1 year. Distribution of loans was as follows: 30 percent of loans were granted to clients for starting new businesses, 22 percent to buy stock for an existing business 30 percent to repay an existing loan, 15 percent to buy a durable good for the household, and 15 percent to smooth household consumption. Clients were permitted to use loans for multiple purposes and were not obligated to use the loan for businesses.

Comments on the validity of this study are available at the Private Sector Development Blog of the World Bank.

By Goda Thangada, Research Assistant

CRBs can help banks financial institutions identify potential borrowers and gauge repayment rates. In the case of Compuscan, the information will be submitted by customers, who will sign a waiver allowing the information to be released by Compuscan. Information will also be verified by the bureau. Customers will all submit their new national ID number.

Rwanda’s earlier credit bureau, the Centrale des Risques et des Impayés (CRI), was a public institution managed by the central bank. The BNR pins the blame for the World Bank’s low rating of Rwanda’s credit information system on CRI and will effectively replace CRI with Compuscan. The CRI serves most commercial banks in the country in addition to 13 microfinance institutions (MFIs). The information database contains information on 61,000 accounts possessed by 50,000 borrowers. The CRI collects information on both loan payments and loan defaults for loans over USD 881. There are no records for smaller loans.

Rwanda has a history of low loan repayment as well as a low percentage of adults utilizing bank services. According to a 2008 MicroCapital story, Rwanda’s non-performing microfinance loans stood at 13.8 percent at the end of 2007, falling to 9.8 percent by the end of 2008. Mr. Malan claims that Compuscan will help reduce non-performing loans to between three percent and four percent.

Compuscan, founded in 1994 and based in South Africa, works in 8 African countries and with 4,900 lending institutions. The company manages 58.9 million accounts and represents 21 million borrowers. Countries of operation include South Africa, Uganda, Botswana, and Namibia while countries utilizing Compuscan services include Zambia, Mozambique, Lesotho, and Swaziland. In addition to establishing CRBs, Compuscan also provides credit-related software including a credit application processing system called XCellerator, a credit decision matrix called Codix, the loan management system Proloan, and a fraud and identity management system. Additionally, Compuscan offers credit scoring and credit skills training. No financial information is available for the company.

The CIA World Factbook estimates Rwanda’s national GDP in terms of purchasing power parity at USD 9.1 billion and per capita GDP at USD 900 in 2008. 90 percent of the labor force was engaged in agriculture while agriculture constituted only 35 percent of GDP. Rwanda’s economy suffered from the 1994 genocide although the economy has been growing between 5 and 7 percent annually in recent years. In 2008, MicroCapital reported on the arrest of fifteen fraudulent microfinance institution managers following the government closure of eight bankrupt MFIs in 2006. In 2009, MicroCapital followed up with a story on depositors’ attempts to reclaim money from the MFIs.

According to the MIX Market, the microfinance information clearinghouse, the seven MFIs in Rwanda report a cumulative gross loan portfolio of USD 10.65 million and serve 50,372 borrowers. The largest MFI, Urwego Opportunity Bank , is also the only microfinance bank listed for Rwanda. All the MFIs have received a MIX rating of three diamonds or more for level of information disclosure. Every MFI was founded after 1994.

Additional Resources:
“Rwanda: Country Gets Private Credit Bureau”, Published by Symbiotics, May 2009
Compuscan: Home
BNR: Home
“Rwanda’s Microfinance Industry Struggles with Low Portfolio Qualities”, by Lori Curtis, Published by MicroCapital, December 2008
“Credit Bureaus: The Pain or Pleasure of Data Supply?”, Published by Compuscan
CIA World Factbook: Rwanda
“Crackdown on Crooked Microfinance in Rwanda”, by Melissa Duscha, Published by MicroCapital, April 2008
“Depositors in Rwanda Approach the Ombudsman’s Office for Help to Recover their Deposits From Corrupt Microfinance Institutions”, by Bharathi Ram, Published by MicroCapital, January 2009
MIX Market: Rwanda

By Goda Thangada, Research Assistant

Kinnevik, founded in 1936, invests in companies including Tele2, Modern Times Group MTG, Millicom International Cellular S.A., Metro International, and Transcom WorldWide. Microfinance investments are classified as New Ventures, a category that also includes investments in agriculture, renewable energy, and online media. Other non-microfinance investments in this category include R2 International, Rolnyvik, Black Earth Farming, Sia Latgran, Relevant Traffic, Kontakt East, and Exits. In a 2008 annual report, Kinnevik reported USD 980.6 million in revenue, gross profit of USD 102 million, and net loss for the year of USD 3.2 billion mainly due to change in value of assets. Total assets were reported as USD 4.6 billion.

Microvest II is a member of the MicroVest Group, which also consists of the funds MicroVest I, LP, MicroVest II-A, LP, and MicroAccess Trust 2007. The MicroVest Group is a Delaware-based fund founded in 2004 by the non-profit institutions CARE, MEDA and Seed Capital Development Fund. The group invests in 150 microfinance programs in 75 countries. According to the MIX Market, the microfinance information clearinghouse, MicroVest I reports USD 33.1 million in fund assets of which USD 28.8 million are allocated to microfinance investments as of March 2008. In 2009, MicroVest reported that it had exceeded USD 100 million in assets and commitments. In May 2009, MicroCapital reported on MicroVest’s USD 1 million loan to the SEEDFINANCE Corporation of the Phillippines. Individual information for the MicroVest II fund is not available.

Kinnevik’s only other microfinance investment, Bayport was founded in 2002 and offers micro credit and financial services in Ghana, Uganda, Zambia and Tanzania. The MFI serves 150,000 clients through 61 branches. Bayport does not report to the MIX Market.

Additional Resources:

Kinnevik: Home
MicroVest Capital Funds: Home
“Kinnevik invests USD 10 million in the micro finance fund microvest and acquires 30% of a farming company in the Ukraine”, Published by Kinnevik, June 2009
“Kinnevik Invests $14m in African Microfinance Institution Bayport Financial Services”, by Elizabeth Nelson, Published by MicroCapital, October 2007
“Annual Report 2008″, Published by Kinnevik
MIX Market: MicroVest I
“MicroVest Crosses $100 Million Mark”, Published by MicroVest, January 2009
“SEEDFINANCE Corporation of the Philippines receives $1m Microfinance Investment Loan from MicroVest I during May 2009″, by Sally Levy, Published by MicroCapital, June 2009

By Goda Thangada, Research Assistant