CGAP Newsletter 4

\.CGAP Newsletter THE CONSULTATIVE GROUP TO ASSIST THE POOREST [A MICRO-FINANCE PROGRAM] EAR READERS, GOVERNANCE INTERNAL CONTROL This issue weighs a little heavily on OF THE MFI IN MICRO-FINANCE the "hardware" side as it deals with - Martin Connell, Calreadow INSTITUTIONS some of themicro-finance industry is - Gilles Galludec, CGAP Secretariat fronting micro-finance institutions growing, and micro-finance institu- MFIs maintain internal control (MFIs), such as governance, man- tions (MFIs) are quickly maturing. through an integrated set of proce- In the past few years, some MFIs dures and activities at various levels agement information systems, and have begun the transition to com- of their operations. Internal control internal control. Although none of mercial financial service institutions. preserves the safety of assets, these elements by itself makes an By raising shareholder equity capital, improves the quality of services pro- market debt capital, and local public vided to customers, ensures reliability institution successful, all are critical savings, the once uniquely of financial information, and ensures in ensuring safe and prudent expan- donor-funded lenders are now staff adherence to management poli- sionas F[s eekto Iillthebecoming fully regulated, debt-lev,er- cies and guidelines. A \\,ell-designed sion aged enterprises seeking commercial internal control system is the corner- greater social mission of'servicing profitability. Because investors and stone of sound micro-finance opera- larger numbers of poor and disen- lenders purchase the securities of tions, enabling an institution to these MFIs without deposit insur- achieve scale and efficiency safely. franchised people. ance programs, guarantees from Although the extent and perhaps the third parties, or other protections, sophistication of internal control sys- investor risk can be addressed only tems are usually adapted to the size through prudential enterprise man- and objectives of an institution, their agement and Sound governance. design and objectives are virtually Sound governance, like parent- identical for all MFIs. ing, is a delicate balancing act. Along An effective internal control svs- with the growing requirement for tem should be able to identify and commercial viability and sustainabili- prevent the main sources of risk: tv is the challenge of fulfilling the * Risk of delinquency from the loan original and guiding social mission of portfolio (the main risk for MFIs); the founding shareholders: the dcliv- * Liquidity risk linked with cash cry of credit and other financial ser- management that arises if there is a vices to low-income and capital- mismatch between the sources and deficient microentrepreneurs. uses of funds (especially crucial if Twenty years of international experi- the MFI collects public savings); ence have clearly demonstrated the * Operating risk arising from errors powerful effect of making available in estimating income or unforeseen to small borrowers timely and acces- expenses that may affect the earn- sible business credit. Thousands of ings or profitability of the MFI; MFIs have been created worldwide * Risk of asset mismanagement or in the last decade on the strength of the ability to protect the value of (Cotitimucd on poa 4) nconntincd on pturc 5) CONTENTS THE ROLE OF A BOARD OF DIRECTORS 1 Governance of the MFI FOR MICRO-FINANCE INSTITUTIONS continued on page 4 .. - An Interview with Ira Lieberman, CEO, CGAP Secretariat Internal Control in Micro- Finance Institutions What is the purpose of a board of directors? 2-3 The Role of a Board of Directors for Micro.Finance A board of directors or a board of trustees is mandatory for most legally institutions registered institutions such as corporations, charitable foundations, and other 5 Nlev CGAP Publications non-profit organizations. The board of directors has a fiduciary role to ensure 6-7 Member Donor Outlook that the institution under its direction is run prudently and honestly, in confor- The Inter-American mity with the wishes of its shareholders, donors, or benefactors. Usuall the Development Bank's minimum composition of the board and its responsibilities are established by Microenterprise Development legislation. In many countries, board members are legally liable for their Strategy actions and can be tried in court if they act imprudently 7 Financial Standards: Donors at Fault? But boards of directors have roles beyond their fiduciary responsibility. A continued on page 9 well-functioning board can assist management in setting the strategic direction 8-9 Managing Performance of an institution. Board members bring unique skills such as banking, accoun- through Reporting and tancy, social welfare, knowledge of government, and fund-raising skills. During information Systems: How.. SHARE did it difficult times, the board of directors is essential. It makes difficult decisions on 10-11 information Systems the future of the institution, such as replacing senior management or restruc- Development-How to Meet turing the institution. the Need Without Going Bankrupt: PRODEM's Story Is there a large difference between boards of directors 12-13 Tools for practitioners of private, for-profit corporations and those of 14-15 Update non-profit institutions? I would like to think there is no distinction, but, in fact, boards of charita- CONTRIBUTORS ble and non-profit institutions are often stacked with prestigious individuals or Martin Connell individuals who contribute funds to these institutions. Often these same peo- Calmeadow ple, who have been successful in business, fail to apply the rigor or discipline Gilles Galludec they have learned in their own field to the institution they are serving. This can CGAP Secretariat result in the board's being held captive by the institution's management. A Ira Lieberman well-run board of directors of a non-profit institution should be as rigorous as CGAP Secretariat that of any profit-making institution. Miguel Taborga IDB Are the size and composition of boards important? David Wright DFID Boards of directors can range between two extremes: boards of conve- Udaia Kumar nience, formed with the minimum number of members needed to meet legal SHARE requirements, and boards that are too large to operate effectively, often Eduardo Bazoberry because, as noted before, they are loaded with prestigious appointees who do PRODEM not serve in a serious capacity. Small, closed, or famil-run corporations usually operate with boards of convenience, as do small MFIs. This model does not allow for enough autonomy of the board because board members are close friends and relatives of the institution's managers. Small MFIs that cannot afford to hire all the diverse talent they need can nonetheless seek individuals with complementary talents to serve on their board. Getting the balance right is difficult. For a mid-sized NGO, a board of seven to nine members-unless legal statutes dictate otherwise-should be manageable, as well as contributory. In the event that a larger board of direc- tors is necessary for fund-raising or community and government relations, committees of the board then become important. For example, an executive committee can be appointed to meet in interim periods, as required, when the full board is not in session. A personnel or compensation committee of the board of directors is often established to review senior management perfor- mance and compensation. An audit committee is generally appointed to review the annual audit with the institution's external auditors. Committees of the board of directors can be perpetual; they may serve a special purpose, such as evaluating the option for the NGO to convert into a commercial bank. Board composition is very important. Procedures for electing board mem- bers are usually defined in the statutes of the corporation and may even be pre- scribed by law. Senior management generally occupies a few places on the board of directors, and other representatives may include the principal share- holders or contributors. Often the chairperson of the board represents the dominant shareholder group or largest benefactor. However, the chairperson of widely held public corporations or large MFIs is generally chosen for man- agerial competence. The chairperson usually plays an active or full-time role in steering the corporation or institution. In all cases, it has proven valuable to appoint at least a few independent board members, who are connected neither to management nor to a particular shareholder or benefactor, for their overall experience and wisdom. How long should board members serve? It is important for the board of directors to be renewed. The board of directors should be rotated to allow fresh thinking and the introduction of new ideas. A staggered rotation of board members on a three-year cycle is one way to ensure continuity and still bring in fresh faces. What is the role of the board regarding management of the institution? There is a dynamic tension between the board of directors and senior man- agement. The board of directors can be too intrusive and try to manage the day-to-day affairs of the institution, infringing on management's role. In con- trast, the board of directors can become captured by the institution's manage- ment and fail to exercise its fiduciary role. The board should approve the overall strategic direction of the institution and ensure that management is operating the institution in conformity with that strategy; if the board is displeased with There is a dynamic management's performance, the board should replace management. But let me stress that the board of directors is most valuable when things tension bet ween the go poorly. Then, the board of directors should play a very active role in re-ori- enting the institution's strategy, making the decision-if necessary-to replace existing management, and taking all measures necessary to restructure the senior managemen t. institution. That is why a board of directors needs to be an autonomous body. Boards of directors can be very diverse and adapted to the needs of their institutions. MFIs should seek to develop professionally run boards of directors and utilize them to provide overall strategic direction. Moreover, the skills of board members should be tapped to provide skills not available within the MFI. Dr Ira Lieberman is the Chief Executive Officer of the CGAP Secretariat and a Senior Manager in the World Bank's Private Sector Development Departnent. During his 20-year career in private industry, he has served on the boards of publicly listed companies and closely held corporations in the United States and Europe, and on the boards of a non-profit charitabli institution and a cooperative institution. Governance of the MFI (continuedfrom page 1) this experience, and successes such as the Grameen Bank and BancoSol have shown the way to reach large numbers of people through a commercial approach. Infancy In the early days of an MIFI's development, it typically courts private donors and a handfil of supportive bilateral agencies. It is modest in size, managed by a local credit delivery team, and overseen by a local board of directors whose involvement revolves around good will. Because commercial aspirations are seldom well developed at this stage, governance expecta- tions by the institution's management are loose and oriented to moral and practical support. Adolescence Transition to the commercial sector brings a dramatically ditTerent level of expectations and requirements in the governance process. New partners or shareholders appear. Donors join with international private agencies, foundations, and local commercial and social investors. The mission or social objectives of the MFI are for the first time put into a context of market condi- tions including profitability, capital market access, savings mobilization, regulatory compliance, and shareholder accountability. The abstract or "soft" side of the mission meets the hard edge of the market. Managers strive for profit and not just social objectives. Mission and commerce may come into conflict, and the need for strong, pro-active governance by the board of direc- tots becomes vital. The board's ability to provide strong governance depends on the qualifications and dedica- tion of its directors, the skill of the chairperson, and the policies and procedures the board fol- lows. Because they are responsible for ensuring that prudential management protects and grows the enterprise, directors should have business and governance experience. Further, direc- tors should be able to coinit the time to attend niondily meetings. For foreign nonprofit organizations, the attendance challenge is onerous and expensive and usually requires alternate representation. The outcome is frequently a board that is constantly in flux. To management, this creates mixed messages or leadership vacuum. The choice of chairperson is critical to keeping the board on track. As the person who drives the agenda, the chairperson sets the tone and often controls group dynamics. Diverse corporate cultures are represented on the board-MFI investors, motivated by the pursuit of sustain- ability and profitability; local business leaders drawn by the social mission and the prestige of association; and donor agencies' delegates, whose participation is frequently marked by turnover and inconsistent participation. The chairperson must be experienced and ever-present Operating an MFI ... req uires to achieve consensus. The often disparate points of view must be resolved so that management receives consistent expectations and feedback. the conver gence of social Board policies and procedures provide continuity when board members and chairs depart. Policies should quickly be put in place to ensure staggered rotation of board members; a plan andcommercialob] jectives... for succession of the chairperson; a balance between local and foreign directors; a balance between major investor members and independent outside directors; and appropriate and functioning committees of the board that focus on management succession, audit, executive compensation to key staff, incentives, and the board nomination process. Operating an MFI commercially is a new experience for most micro-finance managers. It requires the convergence of social and commercial objectives within the framework of a diverse and often dispersed group of shareholders. As we move forward into what is clearly one of the most exciting periods in the development of the micro-finance industry, we must protect our often fragile MFIs. Recognizing the important role of governance in the successful stewardship of the institutions is central to ensuring the future viability of the sector. Governance cannot be left to chance or good will. Martin Connell is the founder and President of Calmeadov, a Canadian -based development agency, that provides MFIs with investmsent and advisory services. He also served as a member of CGAP's Policy Advisory Group betveen June 1995 and June 1997. Internal Control Step 3: Determine tasks that NEW CGAP (continued from page 1) need cross-checks or verifications to P U B L I C ATI 0 N S cash and maintain asset value; prevent error or fraud, and separate J anuar y - J une 1 9 9 7 * Accounting and book-keeping them-for example, collecting and risk that may arise because of booking repayments. weak or erroneous record-keep- Step 4: Create an annual work FOCUS NOTE 6 ing, inadequate provisioning for plan to implement the internal con- bad debts, and incorrect treat- trol system, specifiTing staff assigned The Challenge of Growth for Micro- ment of default; and to carry out particular functions. finance Institutions: The BancoSol * Risk of computerization (an Step 5: Organize the internal con- Experience. Claudio Gonzalez-Vega, increasing risk in the next few trol system so that each step is linked Mark Schreiner, Richard L. Meyer, Jorge years) stemming from incorrect with some detailed control documents Rodriguez, and Sergio Navajas. use of software, bad database man- that are cross-checked by an assigned agement, weak security, and so on. person or team (see table). Once an MFJ's management All comments, worksheets, and FOCUS NOTE 7 identifies its sources of risk, it can reports issued by the people involved design measures for an effective sys- in the process of internal control Effective Governance of Micro-finance tem of internal controls. There are should be kept on record to track Institutions. Max Clarkson and Michael five basic steps in the design of an achievements and plan systems for Deck. internal control system. the next fiscal year. Accountants, Step 1: Define and describe the controllers, inspectors, and external objectives of the internal control system auditors have different objectives and FOCUS NOTE 8 in the operative context of the MFI. different ways of carrying out their Introducing Savings in Microcredit Step 2: Describe the system: list responsibilities. Yet their common Institutions: When and How? Marguerite services offered, include a flow chart goal is to preserve the integrity of the s. Robinson. of operations, detail organizational information being collected and the structure and procedures, provide a system of internal control. chart of accounts, and specify staff chartofaccond s, r nsies f Gilles Galindec was the Financial Controller of NE WSLETTER CONTRIBU - positions and responsibilities. the FECECAM Credit Union network in Benin T I 0 N S Particular attention should be paid to prior to joining CGAP as a Financial the guidelines for inspection and Miagenent specialist. Helhasalsoservedaesa Please send contributions (between 600 banking expert in Gabon for four years and and 700 words) to the address listed internal audit. worked in commercial banks in France. under contact information on the last Frequency Stafflindiviml to Cross-Check RiskAverted page. The selection of articles for publi- Perform cation will be at the editors' discretion. Daily Book-keeper Check vouchers, cash journal, Administrative and and client accounts before accounting risk, and faulty recording into journals computer entries 4 CGAP ONLINE Daily Branch Manager Check the book-keeper's Liquidity and operating risk All CGAP publications and general infor- mation about CGAP can be accessed Monthly Supervisor(s) *hc-:1 ..r. .:: . 1.4 siJ -*:;o- r..t, . .j..r. through the World Wide Web at: ,. ,- - . : ,.- ,:1 :* ,-1.- ,ie.,: http://www.worldbank.org/html/cgap/ a' cgap.htm] Quarterly Internal auditor(s) e t r :i r'r:ce lui . -.-.:- a. -11 p.. rc : .i..:ntir.1 Annually External Auditors rto i Irr . . d11* ;I*I II Ilrj Th r r. irii'o .I rL :I r it.I EE K M Daenark 1 J a ' Lu rn bur g A Nicaraguan Microentrepreneur The Nethrads THE INTER-AMERICAN Microenterprise Global Credit DEVELOPMENT BANK'S Progran, developed in 1990, IDB Norwa y MICROENTERPRISE funds were rediscounted by second-tier DE VELOPMENT STRAT EG Y banks, normally central banks, and Migue Taboa aB channeled through formal financial institutions to reach microenterprises. Sw ze ar and c In February 1997, after a consul- As of 1996, the IDB had approved 13 Unatea K in dm an tative process with governments, such credit lines, totaling USS242.2 MFIs, and other donors, the million. The Multilateral Investment tn t d a s Inter-American Development Fund (MIF), created in 1991, has Bank (IDB) approved a five-year given the IDB a new instrument for AfricanDeaaa ve pen an k microenterprise strategy called microenterprise development. It uses MICRO 2001. This strategy innovative mechanisms, such as equity builds on nearly 20 years of lDB investments, to strengthen the financial experience working to expand institutions that service microenterpris- economic opportunities in Latin es. Through all these initiatives, nt ra ame rican America and the Caribbean between 1990 and 1996, the IDB D veopmenta n k through sustainable and dynamic approved 471 microenterprise opera- microenterprise development. By using tions totaling US$452 million. anternat a F d fr the IDB's resources to catalyze the MICRO 2001 focuses on two gruurl o rn et infusion of private resources, the strate- fundamentals: policy reform and gy seeks to expand low-income and institutional development. To tea:n a t i onadisadvantaged microentrepreneurs' encourage policy reform, the IDB access to financial services. During the will develop country strategies for its UnitedNation ) next five years, the IDB plans to member countries to specify steps for Capit a D velopment Fund finance USS500 million worth of creating a favorable environment for Urfite4 a amicroenterprise programs. microenterprise development. These MICRO 2001 is a natural out- strategies are tailored to the legisla- growth of IDB involvement in the tive and regulatory frameworks in UniadNatioans region. Since 1978, IDB- sponsored each country. The IDB will use these Deve a raan antPea gramn e Small Projects programs directed to strategies to focus the design of its NGOs have reached 600,000 microen- new MIF projects, technical coopera- Thea We rd a an trepreneurs. As part of the tion projects, global microenterprise loans, and other types of projects. FINANCIAL STA NDARD S: organizations, in particular those Institutional development is also a DONORS AT FAU LT? seeking to move into the provision of central feature of MICRO 2001. The David Wright, DFID savings and credit services, depend IDB will support the efforts of formal heavily on donors for support. and non-formal financial intermediaries A recent issue of this newsletter Managers of young MFIs seeking to to reach financial and institutional sus- noted the weak financial report- expand their operations rarely feel tainabilitm. For example, it will work ing systems of many MFIs, as they are in the position to deny the with financial intermediaries to help shown in their applications to demands of donors. These managers them develop innovative financial tech- CGAP's core fund facility. This feel strong pressure to comply with nologies to create new credit and finding echoed one of the world- every donor request. deposit services. In addition, it will assist wide inventory of MFIs, carried This unbalanced relationship has a non-formal financial institutions such as out by the Sustainable Banking number of consequences. For exam- NGOs and credit unions to graduate with the Poor Project of the pie, when a young MFI becomes visi- into the formal financial sector. World Bank: many institutions are ble as a potential success, it often The implementation of MICRO unable to provide basic financial attracts support from different donors. 2001 rests with the IDB's data, such as the size of the portfolio At one level, this support is desirable: Microenterprise Network, which outstanding, or annual administrative the more sources of funds, the better. includes the regional departments, costs. The availability of reliable and Unfortunately, donors frequently country offices, the MIF, and the standard financial data and loan portfo- require different reports in different Microenterprise Unit. Regional lio information is recognized as playing formats, even at different times in the departments are responsible for a critical role in enabling mature MIFIs year. The burden of preparing numer- - preparing national private sector and to gain access to commercial funds. ous reports can be considerable, in microenterprise development strate- Such access is critical to the sustainabili- both staff time and production costs. gies, as well as for designing loan oper- ty of the institutions and also-a link- A more fundamental problem lies ations. Country offices-the IDB has age that is often overlooked-to in the structure of many bilateral and one in every borroving country- extending services to more clients. multilateral donors. In many cases, develop nationwide microenterprise Organizations such as the SEEP donors have adopted a decentralized projects, and are in charge of design Network, ACCION, and the organizational structure, which dele- and supervision of operations. International Financial Advisory gates authority to national, regional, Country offices are also the initial con- Group, which have sought to define or sub-regional levels. Although such tact points for those submitting pro- key performance standards for MFIs, decentralized operations have signifi- ject proposals. The MIF provides say the most frequently cited reason for cant advantages, donor staff in the technical cooperation for policy reform the widespread inability of MFIs to field-who in many cases are charged and institutional development, and produce reliable financial data and with wide-ranging responsibilities- innovative financing modalities, such operate to high financial standards is vary in their understanding of and as equity, quasi-equity, and guarantee institutional weakness-inadequate interest in micro-finance. funds. It has also become a major management information systems, fee- As a result, the local representa- funding source for programs offering ble financial discipline and procedures, tives of different donors differ widely non-financial services. The a lack of appropriate professional staff, in their knowledge of, for example, Microenterprise Unit plays an impor- and conflict between social and finan- reporting standards. Indeed, some tant role in strategy development, cial objectives. All these shortcomings local representatives are indifferent, if information sharing, and technical may occur together, especially as many not hostile, to what they see as too support, but its major responsibility is institutions struggle to make the transi- much attention being paid to financial to coordinate and monitor the imple- tion from NGOs carrying out social performance at the expense of, say, mentation of MICRO 2001. programs to MFIs offering savings and social goals and achievements. Miguel Taboiga is a Senior Financial credit services to large numbers of Consequently, an MFI may receive Specialist in the IDB's Microenterprise Unit. clients on a sustainable basis. very different signals as to what is He has also served as the Project Manager on There is, however, another important and what is required, and the Promoting Conmmnittee of BancoSol and as its Financial and Planning Manager important reason-the donors. Most (continned on page 9) MANAGING PERFORMANCE availability of funds, the need for a THROUGH REPORTING AND good reporting system that would INFORMATION SYSTEMS: enable SHARE's management to HOW SHARE DID IT keep a finger on the pulse of its operations was acknowledged, and the investment made. SHARE is an NGO operating SHARE's strategy in developing in the southern Indian state of its MIS was to build a home-grown, Andhra Pradesh that lends to cost-effective system from the poor rural women without any ground up. At the end of last year, collateral, following the solidari- SHARE hired a local MIS specialist tv-group methodology pio- to design and develop an MIS, neered by Grameen Bank.' The install computers in branch offices, management and staff of and train staff in the use of the new SHARE have a common vision: system. Perhaps the most important to provide high-quality and effi- feature of building the system was cient financial services to large that the specialist lived and worked numbers of very poor women in one of SHARE's branch offices and become a financially inde- for a few months to learn and pendent MFI by 2000. understand its operations and Since its establishment in 1993, design a system accordingly. He SHARE has seen its clientele grow to also received continuous feedback roughly 3,500 members, 2,000 of from SHARE's management and 7- whom are active borrowers. As of staff about their information March 1997, the organization had an reporting needs. outstanding portfolio of In addition to developing an US$250,000. SHARE has grown MIS, the specialist trained SHARE's rapidly. Between March 1996 and staff members in the use of the new 1997, the number of SHARE clients system. SHARE has plans to equip rose by 133 percent, and the balance each of its branch offices with one of loans outstanding trebled. This Pentium computer as a way to decen- expansion in outreach and portfolio tralize the system. The staff members is likely to continue; SI-ARE plans to now being trained are working close- Ultimately, the effectiveness reach an active client base of 11,000 ly with the MIS specialist to iron out over the next few years by doubling any kinks in the system, after which of an MIS depends on how its four branches and the size of its the new system will be installed in all well it is used. staff. branches. These same staff members From the start, SHARE's man- will then help train other staff in the agement has sought to turn use of the computerized MIS. It is SHARE into a household name rec- anticipated that the former manual ognized for providing micro- system and the new computerized finance services in Andhra Pradesh. systems will co-exist for as long as six One element in this process has months until staff adjust to the new been to develop a management MIS. information system (MIS) that pro- SHARE's MIS builds on a vides accurate, timely, and relevant weekly report generated by branch information. Despite the limited offices. This report contains a brief The methodology involves organizing clients into groups of five individuals and making loans to two group members at a time, on a staggered basis, with all five group members jointly liable for repayment. To access loans, group members are also required to pool a small amount of savings in a group fund. Financial Standards - , (continued fromt pagc 7) T may have little incentive to adopt improved financial reporting, let alone improved performance. Turnover among donor representatives, who typically serve three years in overseas posts, erodes institutional memory, further compounding these problems. q During the last 10 years, donors have beg-un to form informal donor coordination groups and formal donor . -5 - .consortia. These have helped address some of the problems cited above, SHARE's Dachepally branch team notably common procedures for appraisals, reporting, monitoring, and narrative from the branch manager analysis of financial ratios for indi- evaluation. Yet some of the problems on key statistics for the week: num- vidual branches-all treated as remain, and new problems have ber of groups forming, number and profit centers-and for the institu- emerged. The establishment of a donor amount of loans disbursed, repay- tion as a whole is prepared and consortium does not guarantee agree- ment rate, cash position, projec- reviewed monthly. Quarterly and ment among donors that, for example, tions for the following week on the annual reports are generated by an MFI should adopt "best practice" same items, and any issues that aggregating the statistics from the standards of financial reporting. emerged during the week. In addi- weekly and monthly reports. Further, the more mature an MFI, tion, branch offices also prepare The internal control system is the more complex its relationship with concise reports highlighting ongo- set up so that documentation and donors. Given that donors rarely con- ing activities, documenting staff reporting for each group and group vert traditional grants into equity, and attendance and performance, and member are cross-checked by two thus have no ability to exercise influence listing new members and groups. or three people including the when their funds are filly disbursed, Branch-office reports arrive every branch manager to ensure accuracy how is it possible to ensure that an MFI Monday morning at the head and prevent manipulation. From maintains the necessary standards in office, where they are computer- the head office, the monitoring and financial reporting that allow donors ized by the planning and monitor- internal audit departments periodi- and others to assess performance? ing department to generate cally supervise the flow of funds and Donor enthusiasm for micro- consolidated statements for verify the accuracy of financial finance is currently high and exten- SHARE by Wednesday. These records. sive. Hardly an agency, multilateral reports are used mainly by the Ultimately, the effectiveness of an or bilateral, can be found that is not planning department and by MIS depends on how well it is used. active in this area. Such a level of SHARE's Executive Director. In SHARE, the information generat- interest and the resulting funds avail- In addition to the weekly ed by the system guides the actions able surely require that more atten- report, branch managers and of its management and staff toward tion be paid to training donor staff in branch office accountants prepare achieving their mission of extending the key principles of micro-finance, monthly balance sheets, as well as financial services to extremely poor especially in standards for financial reports of receipts and payments, women. reporting. Otherwise, the funds dis- group fund (member savings) bursed may prove highly destructive position, monthly progress toward Udaia Kumar is the founder and Managing in the micro-finance industry Director of SHARE. This article is drawn achieving targets, cash flow pro- from the CGAP Appraisal report prepared by jections for the following month Mohini Malhotra, Jo yita Mukherjee, and the David right is Senior Advisor on Enterprise (by xeek), approved loan applica- staff of SHARE. Development in the U.K.'s Department for International Development (formerly known tions, and staff evaluations. An as ODA), and a member of the Consultative Group (CG) of Donors in CGAP IN FORM AT ION SVSTEMS their information management DEVELOPMENT-HOW TO needs. Branch credit officers needed MEET THE NEED WITHOUT to manage portfolios and liquidity GOING BAN K RUPT locally, as well as to monitor informa- tion on cash flow and expenditures, self-sufficiency indicators, and petty Among the greatest challenges cash. Regional and national credit facing the micro-finance sector officers needed a system that could are the development and use of aggregate balances and calculate sta- information systems. MFIs need tistics quicldy. Bank auditors and information systems that are supervisors, a third group of relevant U responsive to the needs of many users external to PRODEM, had different kinds of users, capable other needs; PRODEM's system of managing an array of data, development staff solicited their and flexible enough to adjust to input as well. The requirements of changing requirements. these different types of users were Meeting these objectives vhile incorporated into the design of keeping costs down has present- PRODEM's information system. ed many MFIs with a dilemma. PRODEM's staff developed two PRODEM, a Bolivian NGO software packages, Excelsior and and an ACCION affiliate, serv- Confin, that could be used on the ing more than 27,000 clients 386 computer in each branch. through 40 branch offices, estab- Excelsior manages information relat- lished in-house capacity to develop a ed to clients, communities, and activ- customized information system for ities (Table 1), and Confin provides its operations and has created one of the finance and accounting system the most efficient and cost-effective (Table 2). With this software, data systems in the industry. are validated at the moment they are At the beginning of the process, entered, and then sealed (preserved PRODEM hired seven new staff in "read-only" format). Information members experienced in systems is transferred and statistics calculated development. This team worked with automatically. Control features pre- the full range of users to identify vent entry error and fraud. The soft- Table 1: Excelsior Portfolio System Characteristics * System was designed in FoxPro/DOS and LAN Novell environments * Data are validated at moment of entry * High-speed processing allows for 35,000 clients per branch and 5,000 loans per month * Daily, monthly, or annual reports can be obtained readily for any date * System allows for storage of automatic back ups * System can interface with other systems in FoxPro * System permits consolidation of information from all branches System Services Branch State National Elaboration of disbursements Control of branch portfolios National consolidation of portfolio Payments Projection of cash flows for each Elaboration of statistics Local Statistics: -.r-n - National arrears rates * Default :. r rm,-t- ..L r,r.: Stratification of terms, amounts, etc. * State of portfolio Cr.:. h * Growth Th I *,*,.*I ah.:rr... I 1-i * Central risk unit 1,-r.-- , :.. Tl..:rh r , Table 2: Confin: Integrated Accounting and Finance System Characteristics *~~~~ ~ ~ C-0n *'.cei F:F.......J L -IJr C- jt :,t,-i.31 t r:.rflci r i-,fn:r , * H , ..._-..i ,. allhi i .:.r r...r . :I r p. r .r n.r. 5 .,1 ..r I : * £ .1, r. C.r,Th I r r , t r pKfL *:3r r , r I.t. irE.1 , :.r RI .1tr.' * t.rec RIK :1.104 . . .t, , -t :.r, u r:.. 1 * , 1.'.. all.s ,:.r%:.:.Ii,.l :l.an.:. *: rf .r 3f:1 fup.= System Services Branch State Nat-.nal : .: 3 : " T''ci -J3 .1 , 3 I .I.iJj . - .t t 6 pe ...j[.re- to sK.: 1 * . KII, a1 .1 uIl..Ile: Irf ,t . .. . I, fi:Th - . :1. I Int.,.rri,3rIf,: *Lii 3Jilin eI 1. 1 -- .*'_.1 iLifi K r&(...r .).* -o -,-r.11nin,,-frr3..n ifs...1, .: 'I; :.3-r.:11 i'i fr,Sr Ir3... 41 . 1 Tj jT3ICIIT(3 n,.' 11. t .1 .. , t r jlr..j ..ar.:.n .fT T - . -.r r 1.i :4 *..r II.:.rr .13 i . I r-rr.. If...P.-r f,.i.. I r ware also integrates all of system to handle more clients and PRODEM's information systems, new products. including accounting and budget Having its information secure and data, payroll, and fixed-asset register, accessible has helped PRODEM with automatic depreciation. innovate new financial products and The information system created services. Among the innovations are by PRODEM's in-house staff has tailored loan terms and repayment served the institution well. The sys- schedules that suit the cash flow of tem's key advantages are its participa- clients. Using Excelsior, for example, tory development and its long-term credit officers can monitor a client's flexibility. The participation of users cash flow over several loan cycles and in the development process ensured customize a payment schedule to that the information system was serve the needs of that client's designed to meet the actual nceds of business. the users; gave users a sense of own- Internal capacity for system devel- ership of the new system, making opment allows PRODEM to upgrade Having its information them more willing to accept it and its software and hardware acquisi- integrate it into their work patterns, tions incrementally and refine its sys- secureandaccessiblehas and expedited training because users tems continuously, making the most were already familiar with the new of its investment in information man- helped PRODEMin novate system. agement. syWith in-house staff,ag new financial products has the flexibility to update and Eduardo Bazoberry is the Executive Director and services . of PRODEM. This article was prepared by change its information system gradu- Anne-Marie Smith from "The Information ally, to meet user needs and broaden Systems Challenge: How to Develop an client services. After gaining experi- Effective S,ystemn without Putting the Organization into Bankruptcy!' bY Eduardo ence with the system, users may iden- Bazoherry in Establishing a Micro-finance tify deficiencies or suggest Industry, edited by Craz Churchill, Micro- enhancements that will help them Finance Network, 1997. The original paper can be obtainedifront dieAMicro-Tinance perform their duties better and faster. Network at 733 15th Street NW, Suite 700, PRODEM can call on its in-house Washington, DC 20005 USA; telephone information specialists to address (202) 347-2953; fax $202) 393-5115. these needs, as well as to upgrade the During the course of CGAP's opera- clusions and recommendations Finance Facility (South Africa), and SEEP tions, four areas-appraising micro- 2. 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'- , eingu. adi filrms,ird tot abouht MFImsu nIdnoersainl expecteeoromasfo ontr and ~~i tiro mir-ia sevc agennc.e- JUNE 17, 1997 JUNE 18-19, 1997 Ismail Serageldin, Vice President, Fourth CGAP Consultative CG Meeting, Manila World Bank, was voted in by the Foru m, M anila The Consultative Forum was fol- CG members to continue to serve The fourth meeting of CGAP, host- lowed by a two-day meeting of as Chair of the CG. ed by the Asian Development the CG and the PAG. Both groups Two committees of CG members Bank, was opened with a gave favorable feedback on the were formed, one to review Consultative Forum attended by discernible impact in the field of CGAP's operationsto date and pro- the Consultative Group (CG, com- CGAP's efforts to mainstream vide recommendations for the next posed of representatives from the micro-finance lessons and best p program, co-chaired by Beth Rhyne 25 member donor agencies), the practices into donor agencies, gov- of USAID and Kathryn Imboden of Policy Advisory Group (PAG), and ernments, and MFIs. Key items Swiss Development Corporation; participants from Asia. This year, emerging from the meeting were and a second one on governance the forum focused on the role of the following: issues in CGAP, co-chaired by David donors in micro-finance. - . Wright of DFID (U.K.), and Peter Participants were divided into Mousley of CIDA. Both committees three working groups on (1) donor instruments and procedures, (2)arexctdorprtnthi dnrptns wit proceduracti (2 U P D A T E work by January 1998. donor partnerships with practi- tioners, and (3) measuring perfor- mance of projects and partners, to discuss and recommend ways in which donor agencies can address Grameen Trust is a global network the needs of MFI practitioners The CGAP Secretariat's efforts in and not an Asian network as listed more effectively. The recommen- its third year of operation would under "Practitioner Networks" in dations will be available in the be much more focused on Issue Three of this newsletter. The summary of the proceedings on "mainstreaming micro-finance Trust's new contact information is: the CGAP Web site and/or from the best practices in the member Tel/Fax - (880) (2) 806-319/801-138, Secretariat by August 1997. The donor agencies," than in previ- E-mail-G_Trust@citechco.net, next Consultative Forum is sched- ous years. Address-Mirpur Two, Dhaka 1216, uled for June 1998 and will be The output of several of the eight Bangladesh. hosted by UNDP in New York. working groups (announced in Issue Three of this newsletter) would be presented in forthcom- The correct phone and fax num- ing FOCUS notes and in the CGAP bers of the Microfinance Network are: Newsletter (topics include savings Tel: 202.347 2953 mobilization by MFIs, and poverty Fax: 202.393 5115 yardsticks). I_I CGAP FUND FACILITY As of July 1997, the Investment Committee had approved funding totaling around US$16.4 million. Investment Country/ Amount Region (US$) Funding for Retail MFIs Doveriye Russia 50,000 Asociacion Programa Compartamos Mexico 2,000,000 Women's World Banking for 5 affiliates Colombia 2,500,000 ACCION Gateway Fund for 3-4 affiliates Latin America 2,500,000 Rural Finance Facility South Africa 50,000 Centenary Rural Development Bank Uganda 220,000 ACODEP Nicaragua 2,000,000 SHARE India 2,000,000 ACEP Senegal 500,000 Save the Children Middle East 250,000 Banco do Nordeste do Brasil Brazil 50,000 Zambuko Trust Zimbabwe 50,000 Aga Khan Rural Development Programme Pakistan 154,925 Kafo Jiginew Mali 50,000 Centre for Self-Help Development Nepal 12,400 Sub-total 12,387,325 Support to Practitioner Networks/MFI Capacity Building DevCap Global 25,000 Credit and Development Forum Bangladesh 50,000 MicroFinance Network Global 150,000 Foundation for Development Cooperation Asia 50,000 Freedom from Hunger West Africa 50,000 PHILNET Philippines 50,000 Pride Africa Africa 56,000 Cashpor, Inc. Asia 323,000 SEEP Network Global 326,125 Pilot Capacity Building Initiative Africa 747,000 Capacity Building Initiative Sri Lanka 28,000 Viet Nam Bank for the Poor (Phase I and II) Viet Nam 450,000 Sub-total 2,305,125 Policy/Best Practice Initiatives Conference on the regulation of MFIs Latin America 15,000 INAISE Workshop Global 5,000 Workshop and Study Tour on Village Banks Tunisia 15,000 Micro-Finance Roundtable for Financial Community Global 50,000 High-Level Policy Forum West Africa 250,000 Micro-Finance Forum China 47,647 Workshop Peru 20,000 Consultative Group Forum III Global 119,000 Impact Assessment Methodology Global 10,000 Strategy & Policy Dialog China 250,000 Micro-creditSummit Global 11,000 Sub-total 792,647 Product Development Audit Standards (Deloitte Touche) Global 300,000 Industry Standards Database (Economics Institute) Global 345,500 Study on National Funds (Ohio State University) Global 180,200 Business Planning and Financial Modeling Global 65,000 Sub-total $890,700 TOTAL 16,375,797 NEWSLETTER CREDITS Editors Joyita Mukherjee Jennifer Isern Copy Editor Allison Tarmann Production Mimi Mogues This newsletter is printed on recycled paper using vegetable-based inks, by The MATTIE Corporation, 16000 Trade Zone Avenue, Bldg. 101 Upper Marlboro, MD 20772. CONTACT INFORMATION The CGAP Secretariat, The World Bank, 1818 H Street, NW, Washington, DC 20433 Tel: 202. 473 9594, Fax: 202. 522 3744 E-mail: CProject@Worl dbank.org World Wide Web: http://www.worldbank.org/html/cgap/cgap.htm CGAP THE CONSULTATIVE GROUP TO ASSIST THE POOREST [A MICRO-FINANCE PROGRAM]