Zambia - CARE Peri-Urban Lusaka Small Enterprise (CARE PULSE) Project

54856 No. 147 December 1999 CARE Peri-Urban Lusaka Small Enterprise (CARE PULSE) Project Zambia In January 1992, at the invitation of the Zambian Government, CARE International commenced operations in Zambia and set up a local branch named CARE Zambia. The initial focus of its programs was emergency relief in response to the severe drought of the early 1990s and interventions to mitigate against the effects of escalating inflation and extreme poverty in urban areas. Two years after its inauguration, CARE Zambia launched the Peri-Urban Lusaka Small Enterprise (PULSE) Project. The overall goal is to increase household income, economic security and employment opportunities among the families of poor micro-entrepreneurs in peri-urban areas of Zambia, through the provision of sustainable savings and credit services. The program provides working capital to micro and small-scale entrepreneurs, mostly women, who reside in the peri-urban areas of Mtendere and George. This service has recently been extended to Mandevu, Chawama and some peri-urban areas of Lusaka. The Lending Methodology CARE PULSE provides short-term loans to individuals through mutually liable groups. The borrowers must accept joint liability and be willing to make a compulsory minimum savings of 10% of the proposed loan amount. This contribution goes into a Loan Insurance Fund (LIF) which serves as the group's collateral for subsequent loans. There are three basic methods of group formation. Existing groups are adopted from informal financial systems that are already being used by the micro-entrepreneurs, such as the rotating savings and credit associations (called chilimba), mainly dominated by women. Some new groups may be formed through members' self selection. Finally, in situations where there are several potential clients, but no existing groups such as chilimba, CARE PULSE may facilitate the formation of groups of 25 to 35 persons (called gulu). Subsequently, the gulu is broken-up into self-selected sub-groups of 5 persons each (called sano). Participants undergo eight weeks of training (of one hour per week), after which they are registered as members of the CARE PULSE organization. The lending methodology begins with sano members contributing to the LIF. After the eighth week, two loans are disbursed to the first two members of the sano. After the twelfth week, the third loan is disbursed. After the sixteenth week, two loans are disbursed to the remaining two members of the sano. For repeat loans, the group has to be reorganized and trained, after which the first two members of the group receive their loans. After four weeks the third loan is disbursed, and after eight weeks the last two loans are disbursed. A week after loans are disbursed, the chairperson for each gulu confirms the purchases of materials and items for which each sano member has used the loan. The credit officer provides follow-up visits on a regular basis to the project participants, providing on-the-job advice and systematically verifying at least 25 percent of loan utilization. If the loan was used for a different purpose than originally indicated, then the total loan amount would immediately fall due. Any subsequent delinquency would hinder the borrowing privileges of all the members of the sub-group. Each sano member is a guarantor for the loan of the other members. In turn, each gulu is a guarantor of the sanos. If a sano fails to repay the loan, then the gulu would be required to do so. This mechanism creates two levels of peer pressure to ensure high repayment rates. A loan guarantee form is signed by all members of the gulu, jointly with the elected committee of the gulu. The loan amounts range between ZK50,000 and ZK250,000 to first applicants and up to ZK500,000 to second applicants (US$1 averaged ZK2000 in 1998). The participants use the loans as working capital in street vending, small manufacturing and food processing. Loans are repayable in twenty-five weeks for first loans and fifty weeks for the second. The repayment frequency is weekly for first loans and bi-weekly for the second. During the initial stages of the program, no collateral was required apart from the LIF. However, from the second year, household assets were accepted as collateral: furniture, refrigerators, radios etc. The change was initiated by the clients themselves upon realizing the inadequacy of character reference and LIF as collateral. This has been the only major shift in CARE PULSE policy so far. Apart from financial services, non-financial services are also provided by CARE PULSE such as client training in business management and counseling on social issues. Regulatory Environment and Sustainability Under the Banking and Financial Services Act of 1994, CARE PULSE is not permitted to accept direct deposits from the public. However, group contributions (savings) as a percentage of loan amounts (the LIF) are an important part of the credit methodology, principally used as collateral. The yearly average amount collected increased from ZK94 million in March 1996 to over ZK122 million in December 1996. The number of group savers rose from 2,021 in March 1996 to 3,340 in December 1996. Total group savings was equivalent to 72 percent of the total volume of loans outstanding as at December 31, 1996. The major sources of funds for on-lending are grants from CARE Canada (52 percent) and DFID (formerly ODA - 30 percent). Internally generated funds (interest income and fees) contribute less than 10 percent. This dependence on grants is reflected in a high subsidy dependence ratio of 1,146 percent. The interest income is inadequate to cover operating costs. The cost per unit of principal lent by CARE PULSE is ZK0.87, which is slightly lower than the effective lending interest rate of ZK0.96, suggesting that CARE PULSE could cover variable operating costs. However, financial viability is subject to accounting for the use of grant funds. When an imputed cost of ZK0.65 per unit of principal lent (being effective market interest rate) is introduced, the cost per unit of principal lent increases to ZK1.52, implying that the program would not be financially viable if CARE PULSE were to borrow funds at market interest rate for on-lending. It is to break this high dependency on grants that CARE PULSE developed a five-year Strategic Development Plan (1996-2001). The main objective is to achieve a sustainable path and become independent of CARE, the NGO, as a financial service provider. The activities planned as part of the five-year development plan are to: