Overview of the Report - Summary

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The following report has 4 sections. Section I covers the recommendations for: (i) the Taiz project; (ii) the remainder of phase I of MicroStart and its envisaged Phase II; and (iii) the microfinance industry as a whole in Yemen.

MFIs provide financial services in a business-oriented manner. As such their organizational development is similar to that of any small businesses. Some small businesses will always remain small (which can be a strategic and conscious choice) while other aim to grow and expand. The same is the case for MFIs: some will remain small, while others make the strategic choice to grow and serve more poor people.

Organizational and management theory shows that any growing small business, whether a MFI or a regular small business, will grow and evolve in phases. While the business develops, it will experience "growing pains". The end of one phase of its development and the beginning of the next phase are usually characterized by "crises". These crisis are natural to the organization's development. Section II describes a typical development path of an MFI: from a loan programme to a full-fledged professional financial intermediary. This section uses the expected "crises" points or growing pains in the MFI's development path to point out possible areas in the current MicroStart programme in which there is room for improvement. It will recommend actions to be taken for the remainder of Phase I and the planned for Phase II.

Legal transformation of the MFIs - i.e., not only the Taiz project but also of the three projects currently operating as NGOs - becomes a necessity under the following conditions: (i) the MFI operates in a market with sufficient demand; (ii) the MFI has made the strategic choice to become financially and institutionally sustainable; and (iii) the MFI has made the strategic choice to grow and expand.

Section III will show that if a MFI remains a NGO it is quite unlikely that it will achieve the objectives described above. The section will review the drawbacks of NGOs focusing on flaws intrinsic to any NGO and to flaws in the new NGO Law: "The Law on "Public Associations, Corporations and Organizations". The section will continue with a review of the Company forms available to MFIs under the Company Law and will show that the Closed Joint Stock option appears to be the most appropriate. The section will conclude with issues that UNDP-MicroStart may encounter in introducing the concept of Joint Stock Company as legal modality for a microfinance programme and how these issues may be overcome.

Section IV will analyze the Joint Stock Company option for the Taiz project in detail. It will report on the successful visit to Taiz and meetings with local business and community leaders interested to become shareholders in a microfinance company. The section will emphasize the need to develop as soon as possible a strategic 4-year business plan for the Taiz project as a MFI and not a loan programme. The section will include a possible capitalization and funding plan for the MFI. It will conclude with recommended next steps to move the institutionalization of the Taiz project forward and maintain momentum in shaping the future of the microfinance industry in Yemen.