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"MicroStart: A Guide for Planning, Starting and Managing a Microfinance Programme" :
Table of Contents
Purchase a hard copy of this guide (at Pact Publications).
Chapter One
B. Preparing the Plan
1. The
Mission and Summary
2. Organization
Review
3. Strategic Environment
4. Market
5. Marketing Plan
6. Financial Services
7. The Organization
Plan
8. Work Plan
9. Governance,
Management and Advisors
10. The Budget
11. Funding
a.
The mission
b. Plan summary
c. Sample mission and summary
The mission statement is the heart of your plan. in a few words, describe the target market, programme objectives, and the guiding principles you will use to achieve them.
What is the problem to be addressed?
In other words, what is the prevailing need? Is it access to credit for the poor? Or is it something larger such as dignity to disenfranchised women or the alleviation of poverty? Make sure you clearly understand the problem and the ways in which a microfinance project may contribute to the solution.
Who has stated the need and how do you propose to reach these people?
Who are your target clients? Where do they live and work? What are the prevailing living conditions? How will you find them and interest them in joining? Define your market and your basic strategies for reaching them.
Review your mission regularly.
Your plan will unfold from your mission statement. As you proceed through each step, review the mission statement. Make your plan consistent with your mission. If planning research uncovers new information, revise your mission statement to match the problems you hope to solve. The mission statement should be clear and concise and define the institutional culture of your organization.
A plan summary is a brief statement concerning your project's broadcast goals and the outlook for its long-term survival.
State your general goals.
What do you hope to achieve in five years? What do you expect to see in terms of programme growth and impact on clients' lives? Articulate basic expansion and growth plans. Define how you will measure success.
Evaluate your project viability.
What plans do you have for self-sufficiency? What measures will you take to reduce long-term dependence on grant funding and increase the use of loans from the financial sector? How will savings be promoted with the financial sector?
Mission
The MicroStart Riceland Project will assist women living in the villages of Riceland Province, most of whom are self-employed. These women earn their living through a variety of agricultural, silk production, and trading activities. They currently get credit from suppliers or other informal sources who charge effective rates of interest of as high as 1,000 per cent per annum.
To meet the credit need, the project will provide credit through a group lending model. We expect to see increased self-respect among women, new business income, and more vital village economies. While credit is our priority, group meetings will also be used to help clients to address common issues and problems.
Plan Summary
The MicroStart Riceland Project plans to serve 380 clients in the first year and grow to 2,280 clients by Year three. Our primary market is poor women, of which there are some 20,000 living in the eighty villages throughout the Riceland Province. Formal credit institutions deem these women poor credit risks because they lack collateral. Consequently, they have no access to business loans to help their self-employed activities grow.
MicroStart Riceland will bring its loan services to villages clustered around the rural city of Jasmina where our organization operates other programmes. A field staff totaling nine by the end of five years will use the MicroStart model to bring a package of 'minimalist' financial services to villagers.
By the end of five years, we plan to have issued a succession of small loans to our target clientele. We expect a 98 per cent repayment rate or greater Through these loans, we hope to see economic growth in participating villages and an increase in the self-respect and dignity of our women clients. We project programme revenues to fully cover all project operational and financial costs by the end of our fifth year of operation.
a.
The review process
b. Sample
organization description
This section will help you analyze your organization. If you do not yet have an organization in place and plan to start one, examine the strengths and weaknesses of your proposed team.
This section will help you identify areas of potential weakness and determine areas of strength. Using what you learn from the review process, build on current strengths and address relevant weaknesses.
Aspects of your organization to review include:
- existing
infrastructure including staff, office facilities, and transportation;
- the strength
of the management, advisors, and technical specialists;
- Policy
of the organization regarding accountability and compensation;
- financial
or fundraising capacity to manage a new project;
- effectiveness
of other projects sponsored by your organization and your reputation
for success or failure as seen by target communities, local
government, the private sector, and others;
- your relationships
with banks, governments, businesses, or other non-profits.
Find your comparative advantage.
When reviewing strengths, find those features that set your organization apart. What are the areas in which your organization excels over similar agencies?
Make sure your missions are compatible.
Does your microfinance mission complement your organization's mission? Are they compatible? Do they strengthen one another?
b. Sample organization description
Description of Organization
MicroStart Riceland inherits a number of strengths and weaknesses from our parent organization, Riceland Environments. Riceland Environments has been operating for 12 years in the Riceland Province. We have grown from a small organization concentrating on water resources to providing a range of sanitation, agricultural, and water engineering services.
Mission Compatibility
Riceland Environments is "dedicated to bringing services to improve the natural, social, and economic environments of the poorest villagers living in Riceland Province". Our mission includes bringing financial services to disadvantaged women living in this area with the hope of strengthening some of the poorest village economies. We believe this project adds a vital and complementary service to other organization activities.
Strengths
The organization offers a number of strengths which we believe can accelerate the project. They include:
- Strong
reputation with municipal governments and local banks;
- Excellent
accounting staff able to take on additional financial management;
- Delivery
systems already in place in all target villages. Good relationships
with local village leadership;
- Positive
name recognition within villages;
- High staff morale evidenced by low turnover.
Weaknesses
We are mindful of the following weaknesses, some of which we will address immediately to prepare for the project launch.
- Current
staff and management have no experience in microfinance;
- Current
managers have no time availability. Organization must hire a
new project manager or reassign an existing staff person;
- Delayed
funding on a key project last year severely tested our cash
flow. We are still compensating for measures taken to prevent
a financial crisis, such as canceling purchases of new bicycles
for our field staff;
- Accounting department lacks loan processing experience
a.
Analysis
b.
Sample strategic environment
You have just taken a close look at the factors within your organization which have a direct impact on success. This section will help you review relevant forces outside of your organization. Forces outside your organization- over which you have little control- can threaten or strengthen your project.
The assessment of a strategic environment is similar to an organization review. Factors beyond your control can be either threats, opportunities or a mix. As you identify potential threats, ask: what are measures we might take to mitigate their impact? As you identify opportunities, ask. how might we take advantage of these opportunities, now or even later? When is the opportunity real or simply a distraction?
Examples of factors to assess include:
Informal sector practices
What are the traditional sources and methods used by the target group to access credit and accumulate savings? Detail the practices of ROSCAS, moneylenders, suppliers. and other sources which provide financial services.
Transportation and communications infrastructure
What is the condition of roadways, transport, and telephones? Do these conditions help or hinder you in delivering services?
Geographic profile
What is the geography of your target communities? Are locations close together? Far apart? How far from headquarters?
Laws, regulations, and policies
Do banking laws, interest rate regulations. or business registration requirements restrict your ability to lend to your clients? Do laws mandate ceilings on interest? Does the government monitor bank activity? Do policies encourage or limit economic development?
Economic indicators
Is inflation a major factor in the economy? Is it high? Does it fluctuate? Is it predictable? What are trends in poverty levels? Are economic conditions improving or declining?
Language and literacy
Is literacy widespread in your region? Does illiteracy impede your loan delivery system? Do your target clients speak a common language? How will you communicate in multiple languages?
Gender issues
What are the gender roles and needs of women and men? Are women allowed to own property or sign for loans? How many women-headed households are there? What are the resources which women control? What are the main constraints facing women in terms of improving their lives?
Cultural norms
Are there social norms which may discourage borrowing? Do local customs encourage group formation? How can you use these customs to your advantage or minimize any difficulty they might cause?
Financial sector involvement
Will banks or financial institutions be involved as strategic partners in the project? Will they provide loan capital or be involved in savings services? Can local banks or government sources provide you with any loan capital to onlend to borrowers?
Other collaborative institutions
Can you form strategic alliances with other organizations? Can local non-profit agencies offer assistance to your project? Can credit unions capture savings? Can government, cultural, social or religious institutions help you promote your services?
b. Sample strategic environment
The Riceland national government and our provincial government have implemented dramatic economic reforms. Our greatest opportunities and challenges come directly from pending initiatives.
Economic and Political Considerations
Threat
Inflation is 60% per annum. We must charge interest rates that ensure we cover financial costs including the cost of infla- tion and its impact on our loan capital.
Threat
New politicians frequently forgive repayment of loans as a political position. Clients accustomed to this may lack the discipline we require. We must make ground rules for repayment clear at the very beginning.
Opportunity
The government may soon require banks to operate in low income areas. We may be able to use this law as a tool to secure loan capital.
Opportunity
The Ministry of Finance has released the lending industry from interest rate ceilings. We can charge a rate sufficient to cover costs and potential controversy surrounding our intended interest rates will be minimized.
Cultural Issues
Threat
Most women are illiterate in Riceland Province. We may incur extra expense to convert written materials into graphic materials.
Threat
Most villages along the Riceland border speak a mix of three languages. We face an extra expense to hire tri-lingual staff.
Competitive Issues
Opportunity
Moneylenders and other sources charge as high as 1,000 per cent interest per year. We have room to charge an interest rate that will cover costs.
Threat
Lending programmes in other provinces use subsidized interest rates. Our target clients may have heard of these lower rates and protest our own.
Potential Partnerships
Opportunity
Three NG0s and government organizations have recently begun to provide services in the area in agriculture, financial services, business training, and marketing. We believe we can establish a technical assistance alliance with at least one of them.
a.
Understanding your market
b.
Market background
c.
Selection criteria
d.
Individual interviews
e.
Research with groups
f.
Market profile
g.
Sample market
This section will help you understand your prospective clients, their need for financial services, and the environment in which their economic activities operate.
Target clients
Aim to describe the basic characteristics and needs of the group of clients you would most like to reach. How do they earn money? What do they need to help their economic activities grow? Will your proposed services be useful to them?
Target communities
Identify geographic regions, villages or neighbourhoods with high concentrations of your target clientele.
In previous sections, you gathered information through brainstorming. To understand your market, however, you will need to collect information from prospective clients. The steps to understanding your market are:
- Review
this entire section to understand the various tasks required;
- identify
your target clients and your target communities. Develop a list
of questions to ask groups of prospective clients in these target
communities;
- Arrange
for and conduct market research in selected target communities;
- Compile
and review findings with staff and develop a client profile.
You may find the following perspective in microfinance markets useful. We have listed some features shared by microfinance clients around the world.
Women
In many programmes, the clientele consists primarily of women who have often proven to be more reliable than men in repaying loans. Women are also more likely to direct increased income toward food, shelter, and health benefits for their families. They usually have little or no access to financial services.
Reaching the poor
Generally, microfinance initiatives aim to serve the economically active among the poor. Recent findings are that microfinance, in general, does not reach the poorest (the bottom 20 per cent) of the poor.
Existing economic activities
Most initiatives do not finance brand new businesses. Generally, they focus on women already engaged in one or several small-scale activities.
Collateral
Most clients have no assets to pledge as collateral against default, nor are they required to.
No access to credit or a safe place to store savings
Most clients lack financial services and often use expensive moneylenders to finance growth. Banks generally consider low income clients poor credit risks.
Household enterprises
Microfinance clients are part of a household economy that consists of a complex set of full- or part-time activities (microenterprises) to generate their income.
A new microfinance project cannot serve every community that demonstrates need. Long-term success is better assured if you spend time care- fully selecting where you work. Choose only communities with good access, demonstrated interest, committed and capable local leadership, and real poten- tial.
Work with local organizations, banks, and government agencies to learn more about the area. As you travel, you will soon be able to identify a community where there is interest, leadership, and solid possibilities. On the other hand, don't be so strict in your selection criteria that you only work with prosperous communities. One of the objectives of microlending is to reach the poor. Seek communities that meet criteria such as these:
Less than two hours away from your office
Pressure from far away delegations may tempt you to visit more distant communities, but it is almost impossible to adequately serve clients more than two hours away.
Year-round access
Microfinance requires contact throughout the year.
Community size
In rural areas, it takes as much time to work with a small village as a large one. Communities with less than 40 households may lack sufficient population for an effective programme.
Cluster communities where you work
The closer the communities are, the easier it will be to service them. Also, if communities are tightly clustered, smaller communities can be considered as viable candidates. Density also facilitates learning between communities and larger group training and lowers cost.
This activity will be, perhaps, your first understanding of the reality of the clients you wish to serve.
As a first step, brainstorm with your staff about fundamental market questions. Who are your prospective clients? Where are you likely to find them?
Next, develop a list of specific questions to ask prospective clients with very small-scale income- generating activities. Make sure to interview a significant sample of potential clients. We recommend 30- 50 interviews covering a wide range of economic activities such as street traders, seamstresses, and artisans. Allocate one hour or more
to each interview and choose a time which is convenient to the prospective client. Also, be sure to treat the potential client with respect.
Be careful when asking about income. This is a sensitive issue and you could easily appear to be a government tax official. Stick to asking clear questions about the type of economic activities in which they are engaged, where they sell their products, to whom, etc..
This process can also serve as an opportunity to determine the relative wealth or poverty of your clients. Make note of some of the following indicators to identify the poor from the less poor:
| Furniture | Houses which were unfurnished |
| Farming equipment | Houses that lacked essential equipment |
| Stable income | Households without a stable source of income |
| Education | If household members did not attend school |
| Electricity | Households not wired with electricity in areas with access to electricity |
| Women | Households headed by women |
| Food shortage | Households that had food supply difficulties |
|
Roofing |
Houses with poorly maintained roofing |
This survey is included in the Tool Kit in attachment II and can be used to collect the information you need:
Sample Interview Questions
What do you do to earn money?
How many years have you done this? Year round or only in certain months?
Do you work at this all the time or do you also work at something else?
How much do you earn after you pay your expenses?
Do you work alone? How many family members help? How many employees?
Do you ever borrow money for this activity? From whom can you borrow money? ... family and friends, a bank, a moneylender, a supplier, a savings group? How much do you borrow and for how long?
What interest do you pay monthly? Weekly? Daily? (Amount usually expressed in value, not in interest.)
If you had money in your pocket how would you use it to make more money?
If you could borrow money, would you?
How much would you borrow?
Could you repay the loan in six months? less than six months? More than six months?
Would you be willing to pay four per cent interest per month on a loan of $100, which means making ten payments of $12.00 each every two weeks?
Imagine a programme that issues small loans to members of borrower groups. Members of the group guarantee each other's loans. If one person is behind on a loan no one in the group can borrow any more money. To resolve this problem, sometimes the group pays the overdue loan out of their own pockets.
Do you think you would join such a group?
Would you be willing to organize 4 or more others to form such a group?
The response received in the individual interviews will allow you to develop and fine tune good key questions which you can then discuss with larger groups.
Use the questions you developed.
Follow a neatly printed list of questions.
Select three to five communities.
Identify communities which you believe have concentrations of prospective clients. These will be your research sites.
Gather 8 to 15 community members.
Bring together community representatives in each site for an informal conversation. Have food and drinks on hand. Plan for a two to three hour session. Those attending should include economically active women of the lowest income levels as well as leaders.
Keep notes.
Ask a staff member to track responses on a flip chart and to record important points or questions as they arise.
Keep interviews relaxed and informal.
Relaxed participants are more likely to give you the information you seek.
Recognize the wisdom of the entrepreneur.
Chances are clients have been working at their economic activities for years. They know how to wisely use resources, such as loans and savings, and can evaluate the risk of a loan to another member of the community.
Utilize the wisdom of the community.
Political leaders, religious leaders, school teachers, the self-employed, and others make up the fabric of a village or urban community. These individuals know the major economic activities of their community; they know the moneylenders and what they charge; they know the poorest of the economically active and can be relied upon to give staff good information and advice.
When you complete initial market research, leave time at the end of each day to discuss findings with staff and register their impressions while they are still fresh. Sample questions to start a discussion include:
- Were you
surprised by any thing that prospective clients said?
- What was
the general condition of the community? Impoverished, well-off?
What were the primary income-generating activities: agriculture,
trading, vending?
- What were
the participants like? Mostly women? Young, old? Literate? The
poorest in the community? What language(s) did they speak?
- Did they
seem to understand their business needs? Did they have plans
for their economic activities? What were some of the activities?
How much did they earn?
- Did individuals
seem to need a loan or have a good idea of how they would use
one?
What were some of the uses?
- Were other
institutions (banks, credit unions, other organizations, money-lenders)
offering similar services? If so, at what price?
- Based on your findings, do you believe there is sufficient demand for your financial services? Note: each community requires at least 20 to 30 clients using your services to make promoting them worth while.
The information gathered in your client survey is the foundation for two important sections of the written plan.
Target client profile
Describe your prospective client in a few sentences. Include gender, income bracket, primary income-generating activities, current access to credit, and other important social or economic characteristics.
Target community profile
Describe communities of primary focus. Discuss rural/ urban settings, population ranges, general make-up of members, transportation, health, and communications infrastructure, a profile of local leadership, and other important social or economic characteristics.
Riceland MicroStart aims to serve clients in a 50 square mile geographic area in the northeastern province of Riceland. The provincial capital is Jasmina, with a population of 150,000.
Target Community Profile
The project intends to serve forty to sixty communities clustered around the rural city of Jasmina. These communities are about a 15-25 minute bicycle ride from one another, and the furthest is about an hour's bus ride from the centre of Jasmina. The roads are dirt but in excellent condition.
Village populations vary, with an average population of about sixty families or 350 people per village. Villages focus on rice production and cultivation of crops with short seasons. About half the villages are also involved in some form of silk production - either growing mulberries, cultivating silkworms, or in spinning and processing silk. Villages along the border have refugees from the two border countries and any one of three languages is spoken. The estimated annual income per capita is less than US$200.
Target Client Profile
Target clients include all self-employed persons living in target communities with a focus on women with income of less than US$200 per year.
Potential Demand
Since a dominant share of our target communities includes individuals with the above profile, we expect considerable demand in each village. Informal research indicates that each village has about fifty such individuals of which thirty may be interested in microfinance services.
a. Elements
b. Sample
marketing plan
Developing a marketing plan and marketing goals requires a thoughtful sequencing of important tasks. Refer to Chapter Two: Starting to get a more complete understanding of the steps required in marketing and promotion. This section helps you develop a plan to reach enough clients to ensure financial viability.
To develop your plan, address basic marketing questions..
- How will
you identify your clients?
- What are
the steps you will use to promote your services in a community?
- What are
the key messages you will use to promote loan services? How
will you communicate them? Word of mouth? Information meetings?
Flyers? Will you use words or graphics?
- To which communities will you market during the first year? What is your timing and rationale? Have you clustered target communities for efficient servicing or are they distant from one another? Why or why not?
As you develop a marketing plan, keep in mind:
The support of community leaders is key
Before visiting a community, talk to local community leaders to enlist their goodwill. If they approve your programme, much of your marketing work is already done. if they stand in the way, no promotional effort can overcome their disapproval.
Go to the community
Do not ask the community to come to you! Low-income entrepreneurs do not have the time to travel to urban centres to learn about a programme they aren't sure will help them. Your staff must visit them, especially for the initial marketing meetings.
Build from local customs
Hold information meetings in places where community members are used to gathering: in a village centre, a church or temple, a school, or under a tree. Find a time of day when people customarily take time out from work.
The number of clients your project can reach is determined by the size of the geographic area you plan to cover, the proximity of target communities, local road conditions, and other factors. Be realistic. Marketing goals should include demand for services, target community populations, proximity of communities and other factors. Make sure your goals are achievable. Determine the following as you develop goals:
- The number
of communities you expect to reach each year
- The average
number of groups you expect to form per community per year.
- The average
number of clients you expect per group. (Anywhere from five
to fifteen is reasonable.)
- The average
number of clients you expect to leave your programme each year.
Remember, clients may withdraw for personal reasons, because
they graduate to other credit sources, or because they do not
like working with a group.
A drop-out rate anywhere from five to ten per cent is reasonable.
Marketing Plan
MicroStart Riceland plans to interest villagers through a series of information meetings held in village centres. Initially, we will hold weekly information meetings and thereafter will hold them once per month. To promote attendance at these meetings we plan to:
- Meet with
community leaders in advance. We already extend services in
these communities through other activities of Riceland Environments
and know community leaders well.
- Post flyers
(illustrating working women receiving loans) at the local village
centre which announce our programme and the first information
meeting.
- Invite
a broad cross-section of community leaders to be the first to
introduce us at the information meeting.
- Initially, promote our services in a cluster of fourteen villages in the northeast section of the province. We have the strongest relationships with leaders in these villages due to the recent success of an irrigation project. We plan to start where we know we will be most successful. We expect word of mouth to give our programme a good name elsewhere.
| MARKET GOALS | YEAR 1 | YEAR 2 | YEAR 3 |
| a) Number of new communities reached |
10
|
20
|
30
|
| b) Total communities reached |
10
|
30
|
60
|
| c) Average number of groups per community |
5
|
5
|
5
|
| d) Average number of clients per group |
8
|
8
|
8
|
| e) Number of clients per community |
40
|
40
|
40
|
| f) New groups: all communities |
50
|
100
|
150
|
| g) New clients: all communities |
400
|
800
|
1,200
|
| h) Total clients: all communities |
400
|
1,180
|
2,321
|
| i) Annual drop-out rate |
5%
|
5%
|
5%
|
| j) Annual drop-outs |
20
|
59
|
116
|
| k) Total active clients |
380
|
1,121
|
2,205
|
See attachment 1.5 of the Tool Kit.
a.
Loan description
b.
Inflation, interest rates and payment periods
c.
Sample credit programme
Developing a loan product requires that you 'forget' what you may know about conventional banking and become acquainted with lessons learned from the world of microfinance. Before proceeding with the planning exercise, review this entire section and the one entitled, Credit Model. You will get a more complete idea of important tasks.
Brainstorm loan design with your staff. Create a loan structure that provides flexibility and quick turnaround. Also aim to eventually cover all project operating costs.
Microfinance institutions have refined the design of very small loans to the self-employed. Below are important lessons to consider in your project design:
Make initial loans small.
New clients typically lack experience managing debt and a large loan may bring on business failure.
Match loan sizes to economic conditions.
Review the market research you conducted. What was the average income level and prior borrowing of prospective clients? Loan payments should take income into account.
Establish uniform loan cycles for each group.
When one member of a group begins to borrow, the group's loan cycle commences. The cycle is complete on the date of the last payment. All members of a group should be on one loan cycle, though different groups may be on different cycles. Disbursements in a cycle can be made on a staggered basis to borrowers over three meeting periods. Other programmes opt to disburse at one time.
Match loan cycles to economic conditions.
If your clients are operating in an urban area, loan cycles may be short (three to six months) to accommodate the working capital needs of street venders and homebased manufacturers. If your clients live in a rural area and are involved in agriculture, loan cycles may be longer (six months to one year). Never allow loan cycles longer than a year - it's too risky!
Meet client needs, not just yours!
Review your client profile frequently and fit your services to the needs of your clients-- not the needs of staff! Do clients need flexibility, information in different languages, loans with shorter terms? Design services to meet those needs.
Develop a 'stepped loan' process.
As their activities grow and clients gain experience in managing capital, they will be ready for larger loan amounts. They will also become adept at assessing risk of other group members. Following is an example of stepped loans.
Price loans and savings services to cover costs.
Do not subsidize loans. Charge full interest and fees. Price to cover costs and work to become efficient. Reach a volume of clients to cover costs so you can operate indefinitely without depend ing on grants.
Keep the loan payments simple.
Clients can better understand and staff can more efficiently administer loans with equal payments (see following example, next page).
Create incentives for clients.
Offer rewards for good performance by allowing larger loans, a common feature in all microfinance programmes. For example, higher loans might be tied to savings or to a good track record. You might lower the interest rate if a group has outstanding performance, and so on.
Let your clients do the work.
Group members will guarantee loans, approve loans, perform routine tracking tasks, collect payments, and make savings deposits. The more clients do, the lower your operating costs.
Minimize aggravation.
Make sure the application process is simple and loans are issued within three days of loan approval. Keep training focused on the credit programme, not on the business of the borrower.
b. Inflation, interest rates and payment periods
This section should be completed after budgeting, since you will need to complete the design of your loan product, determine an interest rate, and establish the frequency with which you will require borrowers to repay loans.
Inflation will be an important factor to consider when making financial decisions. Without question, seek advice on managing for inflation from a banker or other professional familiar with the local economy.
You can have an active loan portfolio and money in the bank, but be gradually going out of business because of the hidden effects of inflation. Consider this simple example:
- In a country
with an average inflation rate of ten per cent per year, a pencil
which costs . 10 on 1 January will cost . 11 by 31 December.
- In this
same country a bank account of $100 earning five per cent interest
per year will grow to $105 by 31 December.
- On 1 January, the $100 could buy 1000 pencils. On 31 December, the $105 balance with interest could buy only 954 pencils.
This example shows that money loses value if it does not earn interest at the same rate as inflation. inflation erodes your money in the bank as well as the value of your loan portfolio. if your total loan portfolio was $100,000 and you charged 15 per cent interest, you would be earning only five per cent in a country with an inflation rate of ten per cent.
When you set interest rates, realize that an annual inflation rate o 12 per cent means money loses one per cent of its value every month. So be sure to include inflation in setting interest rates. If inflation is 15 per cent per year, be sure that your interest rate includes this amount plus whatever you need to cover expenses.
Charge an interest rate which allows operational sustainability in the third year. Interest should cover:
Cost of capital
The cost of capital is the interest you pay to a bank or donor for borrowed funds. Or, if the funds are granted, the cost of capital is the rate of inflation.
Estimated loan losses or defaults
To be safe, assume that two to five per cent of the loan capital you disburse will not be repaid.
Other program costs
As you begin to grow and disburse more loans, the income you generate from your interest should begin to cover operating expenses (see Budget).
Charge a 'flat' interest.
We suggest you calculate interest based on a 'flat rate.' A flat rate calculates interest on the original loan amount. in normal banking, interest rates are calculated on the basis of a declining principal balance and equal payments are carefully differentiated between principle and interest, which are different amounts for each period. For the sake of simplicity and efficiency, we recommend the flat rate system (as described below) as your project is not a bank and, for the borrowers, what is most important is the cash flow, i.e., the value of payments. Please note that in banking terms, a monthly flat rate charged on a five to six month basis generally translates into an annual effective interest rate of two times the amount of the flat fee.
The advantages of the flat rate are that for accounting and control purposes, systems can be extremely simple. While-the flat system, as proposed below, can lead to a very high annual effective rate, this rate should be compared with the rate charged by traditional sources of loans. With borrowers, the critical elements to focus on are the value of the installments and the value of interest in each payment. These clients think almost exclusively in cash flow terms which determine the afford ability
Around the world, it is common that borrowers will consider weekly payments more as rental fees with the full value of principle still due at the end of the loan. Installment loans as calculated below are a major innovation for this market.
Require clients to make frequent, regular loan payments
Payments should be made weekly or bi-weekly (every two weeks).
The following table is an illustration of a loan payment schedule using a flat rate. For simplicity, assume the sample programme has ten bi- weekly payment periods over a five month period. The original loan is $100. The loan balance is the remaining principal which the borrower has not yet repaid. Assume the monthly interest rate is four per cent per month.
| PERIOD |
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
| Original Principal |
$100
|
$100
|
$100
|
$100
|
$100
|
$100
|
$100
|
$100
|
$100
|
$100
|
| Bi-weekly payment |
12
|
12
|
12
|
12
|
12
|
12
|
12
|
12
|
12
|
12
|
| Principal Portion |
10
|
10
|
10
|
10
|
10
|
10
|
10
|
10
|
10
|
10
|
| Interest Portion |
2
|
2
|
2
|
2
|
2
|
2
|
2
|
2
|
2
|
2
|
| Loan Balance |
90
|
80
|
70
|
60
|
50
|
40
|
30
|
20
|
10
|
0
|
| Total Interest Paid |
2
|
4
|
6
|
8
|
10
|
12
|
14
|
16
|
18
|
20
|
We plan to adhere to a simple loan programme in the first years of operations. As we become adept at our outreach methods, we may introduce a savings service in conjunction with local banks.
Micro-Loans. Riceland MicroStart plans to issue micro-loans to clients to use for working capital and the purchase of small fixed assets (such as tools). Below we have listed the basic description of our loan product.
- Loan ceilings
are the following: $50, $75, $100, $150, $200.
- Loan terms
are six months. Market research indicates that clients should
be able to pay back loans within this period.
- Monthly
interest is four per cent flat as inflation is 60 per cent per
annum. Informal sector lending is reported at 10-15 per cent
on a monthly basis (flat).
- Payments will be collected by Group Treasurers on a bi-weekly basis.
a.
Successful staffing
b.
The organization
c.
Sample organization
Hiring the right people to do the right job can mean the difference between success and failure. Recruit individuals from your region who know the target communities well, speak the native languages and who will command the respect of your clients and other community members. Field Agents must be enthusiastic and willing to spend 90 per cent of their time in the field, not behind a desk in the office.
Initial phases can begin with a staff of four to nine members including:
- a Project
Director to manage the project
- a Credit
Manager to manage all field and loan activities
- several
Field Agents to form groups and manage loan portfolios
- an Accountant/Bookkeeper
to process loans
- an Administrative
Assistant to manage the office
Preparing an organization chart is a good way to visually understand the relationships and reporting lines of your staff. It is also a good way to communicate your organizational design to others. When preparing an organization chart, be sure to:
- Include
names and titles of all positions. If you have not hired anyone
for a specific position, simply label the position 'to be named'.
- Include
all reporting lines including those to other members of your
organization.
- Include
any governance or advisory body such as a board of advisors
or directos.
MicroStart Riceland plans to keep new hires to a minimum at the launch of the project. We will use staff within Riceland Environments to the greatest extent possible.
Job Titles, Functions and Reporting Relationships
- Executive
Director, Riceland Environments. Involved on limited, part-time
basis. Reports to Board of Directors and to funders on project's
progress.
- MicroStart
Project Director. Full-time and has overall responsibility for
other MicroStart staff and the success of the project. Reports
to Executive Director.
- Credit
Manager. Plans field activities and oversees Field Agents. Reports
to Project Director.
- Field Agents.
Manage group formation and loan portfolios. Report to Loan Manager
- Administrative
Assistant. Manages office and clerical duties. Reports to Project
Director
- Accountant/Bookkeeper. Processes and tracks loans. Does record-keeping. Reports to Project Director.
The following chart illustrates the organization in its first year of operations:
For a complete description of each staff position, please see Section B of Chapter 2: Starting.
a.
The role of field agents
b.
Key concepts
c.
Growth plan
d.
Sample growth plan
Field Agents are critical to your project. They are the staff responsible for generating groups and loans. Consequently, all programme revenue relates directly to the effectiveness of your Field Agents. Below are some guidelines for Field Agent performance.
Group formation
Field Agent performance varies according to the geography of their assigned areas and to population density. Working full-time, Field Agents should be able to form about twenty to thirty groups per year.
Clients
Field Agents can serve up to 300 clients each, depending on group size. We suggest you keep performance expectations high but plan on Field Agents serving about 200 clients each.
Loans
If each client borrows in each cycle, Field Agents can manage up to 200 loans at a time.
However, for purposes of your own planning, assume that only 85 per cent of your clients borrow during any given loan cycle.
Average Loan Size
Microfinance managers estimate an average loan size to help project their loan portfolio. Example: You disburse a combination of $50, $100, and $150 in a cycle. The average loan size is $100 ($300/3). For estimating purposes, we suggest you keep the average loan size relatively low.
Multipliers/Adjustment Factors
The nature of group formation is such that clients will be staggered over the calendar year period used for planning. In other words, if all clients receive loans on the same day, then planning would be simple. However, to make your plan realistic, we have devised some multiplier/adjustment factors which will lead to credible estimates.
We have introduced some formulas for the sake of simplicity. They are based on the assumption that you will experience steady growth (which is not necessarily a perfect assumption) during the first three years of your project. Multipliers are numbers drawn from experience to help you arrive at a reasonable estimate for:
Numbers of clients borrowing at any given time
We suggest a multiplier of .85 (meaning 85 per cent of clients will be borrowing).
Number of times borrowing
This multiplier depends on how many loan cycles in a year. If your cycles are six months long, then the most a client may borrow is two times in a year. In practice, due to staggered periods, an adjustment is advised so that loan amounts are not overstated. We recommend that instead of 2.0, you use 1.5. Your clients' repayment cycles will run from one calendar year to the next.
Adjustment factor
This factor estimates loans outstanding based on total disbursements. Assuming a programme operating with six month loans, we estimate the adjustment factor to be 50 per cent. The importance of this factor is to accurately estimate capital requirements and interest income.
To prepare a growth plan, review your Market Plan prepared earlier in section 4. Those marketing goals will serve as a basis for your growth plan. Next, complete the assumptions described in the table below. Your time frame should span at least two years.
|
ASSUMPTION
|
EXPLANATION
|
| a) Number of total active clients | Taken from Marketing Plan, Marketing Goals |
| b) Clients per Field Agent | Estimation based on geography. Ranges from 150 to 300. |
| c) Number of Field Agents needed | Divide item (a) by item (b). |
| d) Per cent of clients borrowing |
We suggest using 85% as the percent-
age of clients borrowing during any loan cycle. |
| e) Number of clients borrowing | Multiply (a) by (d). |
| f) Number of times borrowing in the year | Clients borrow once per cycle but there may be several cycles in a year. Use 1.5 times if the cycle is six months. |
| g) Number of loans dispersed | Multiply (e) by (f). If you are issuing group loans, the number is, of course, less. |
| h) Average loan size | Your estimate based on averaging of stepped loans. Experience says estimate conservatively. |
| i) Amount dispersed in year | Multiply (h) by (g). |
| j) Adjustment factor | Adjusts for payment cycles. |
| k)
Principal value to calculate income
(flat rate interest) |
If you are calculating interst based on a flat formula, use this figure. It represents the original principal of the loans outstanding. As noted in section 8b, the simplified method used to charge interest requires an adjustment for proper estimates. Multiple (I) by (j). |
| l) Annual interest rate (flat) | The amount you determined to cover costs in three years. Adjust this figure after completing the expense budget. |
| m) Annual interest income | Under a flat interest method, multiply (k) by (l). |
| n) Required capital | The amount needed to continue to lend to your clients. Add a cushion of 50 percent for a growing project. |
| PROJECTIONS | YEAR 1 | YEAR 2 | YEAR 3 |
| Number of total active clients | 380 | 1,140 | 2,280 |
| Average clients per Field Agent | 250 | 250 | 250 |
| Number of Field Agents needed | 2 | 5 | 9 |
| % of clients borrowing in year | 85% | 85% | 85% |
| Number of clients borrowing in year | 323 | 969 | 1,938 |
| Number of times borrowing | 1.5 | 1.5 | 1.5 |
| Number of loans disbursed | 485 | 1,454 | 2,907 |
| Average loan size | $70 | $90 | $125 |
| Amount disbursed | $33,915 | $130,850 | $363,375 |
| Adjustment factor | 50% | 50% | 50% |
| Principal
value to calculate income (flat rate interest) |
$16,958 | $65,408 | $181,688 |
| Annual interest rate | 48% | 48% | 48% |
| Annual interest income | $8,140 | $31,396 | $87,210 |
| Required Capital | $25,437 | $98,112 | $272,530 |
9. Governance, Management & Advisors
a.
Governance
b.
Bylaws
c.
The board and management
d. Sample
governance, management. & advisors
Any funder or lender grant- ing loan capital or operating capital will be interested in the governance of your organization. What is governance? Generally, the term refers to:
- the constitution
or bylaws that define your objectives and codify your policies;
- the individuals charged with governing your organization.
Governance is the system which controls your organization, both its written rules and the people charged with making sure they are followed.
Bylaws state the general mission and define a system which:
- distributes
powers among those who can influence policy decisions;
- restricts
these powers so that they are not abused;
- motivates
individuals to use these powers toward the greatest good of
the organization.
At times these mandates are at odds. For example, in order for a project to survive, it may need to charge high interest rates. These rates may run counter to the short- term preferences of your clients. Effective bylaws must clarify guidelines for making choices when such choices occur They must find ways of preserving the long-term interest of the organization in the face of short term preferences of clients or even board members. In addressing issues concerning bylaws, ask the following:
- What rules
will you adopt as a mechanism for resolving conflicts and conflicts
of interest?
- How will
the effectiveness of management be monitored?
- How will
the effectiveness of the board be monitored?
Your organization may already have a Board of Directors. Your microfinance project may also want to form its own advisory board whose role is:
Setting general policies
The board sets policies and objectives which guide management in reaching the objectives of the organization.
Financial oversight
The board assumes responsibility for financial welfare by establishing fiscal policies and reviewing financial state ments, and requires annual audits.
Raising funds
The board is responsible for mobilizing financial resources, including loan capital and grant support, to manage your programme.
Management supervision
The board oversees management's implementation of board policy and ensures adherence to the bylaws.
Write one or two paragraphs on each key manager and those qualifications which relate directly to this project.
d. Sample governance, management. & advisors
MicroStart Riceland is a project of Riceland Environments and is managed by an Executive Director, who reports to the Board.
Bylaws and Policies
The project will have its own body of ground rules to be reviewed by the Board. In order to keep our focus on our target clientele- the poor- we will stipulate that our average loan size cannot be greater than $300. Any increase in average loan size will trigger a review by the Board.
Advisory Board
Five individuals will serve on an advisory board:
- A local
banker to help with financial policies and links to other financial
institutions;
- A local
businessperson to help with general management issues;
- A board
member from Riceland Environments as a spokesperson to our parent
organization;
- Two community-based
leaders.
Management
Below is relevant background of key managers.
J. Kim, Executive Director. Mr. Kim has been Executive Director of Riceland Environments for five years. Prior to this position, he served as Vice President of ENVIR, an environmental consulting firm based in the capital city. Mr. Kim holds a masters degree in chemical engineering and an undergraduate degree in business, both from Riceland University
P. Singha, Project Director Ms. Singha has launched three successful projects in social services. Most recently, she started and managed a network of 40 village health clinics focusing on AIDS care in Riceland Villages. Prior to her work in social service, she served as a Field Agent with Riceland National Bank. She has an L undergraduate degree in Health Care from Jasmina University.
a.
The budget process
b.
General categories
c. Other budget items
d. Sample budget
How much will your project cost to start and manage? The budget is a tool for forecasting and monitoring performance. In this section you will learn how to create an expense budget for your first year and an income budget for your first three years.
The budget process requires working closely with financial staff to gather information on costs. Assistance from another microfinance project nearby can also be useful. Wherever possible, get actual prices for items you might include in your budget. To prepare a first year budget:
- Categorize
likely expenses into major categories;
- Research
the general costs associated with those expenses;
- Develop
assumptions regarding expenses for your project.
Be sure to include all sources of revenue in your income projections. General income categories include:
- Income
from grants;
- Income
from interest and fees;
- Other income such as interest on deposits.
We have defined for you three major categories of expenses. You do not need to organize your budget according to these categories, but be sure to consider these items when developing your expense budget.
Overhead Expenses
Include costs associated with running your operation, even during periods when no loans are granted. These expenses occur regularly and include administrative costs such as:
Salaries
including full-time or part-time project employees and a portion of the Executive Director's salary. Include Field Agent salaries here or in a separate Field Expenses section;
Office Expenses
all expenses necessary to keep your office running such as stationary, postage, telephone and fax, and office supplies;
Rent
portion of overall organization rent based on space usage;
Utilities
electricity, water, heating fuel;
Travel Expenses
bus fares, meals, etc. of all staff;
Field Expenses
These expenses are costs associated with Field Agent activity in the field. Some are included below. You may think of others.
Field Agent Salaries
salaries, bonuses or commissions;
Routine Vehicle Expenses
gas, oil, and maintenance.
Purchases
Include major items that are major capital investments:
Equipment
computers, fax machines or typewriters;
Furniture
tables, desks, and chairs;
Vehicles
bicycles, motorcycles and cars.
Variable Expenses
Include costs associated with lending. These expenses vary with the amount you lend or the number of loans you make.
Bad debts
the amount of interest you believe you will not collect because of problem loans;
Cost of capital
the cost of borrowed funds and the effect of inflation on grant funds. Interest on borrowed money is an expense. Principal is not;
Loan losses
loan principal that you cannot collect due to problem loans.
You may have other items which require funds but are not technically classified as expenses. Two examples include:
Loan capital
or the funds available to lend to borrowers. Loan capital is not considered an expense, but you must anticipate how much you will need and must list this cash requirement in the Budget section. Note: If you borrow the loan capital used to lend to clients, the interest on this loan capital is an expense that must be included in the Cost of Capital;
Loan loss reserve
or the money a bank may require that you set aside in order to help protect a credit line. You must include this in your budget if you plan on borrowing funds. Banks typically require between 10-50 per cent of the amount you intend to borrow as a loan loss reserve. The loss reserve is not expensed but the actual losses are expensed in the form of write- offs.
A note