“Women’s Empowerment” Project - Pilot Course
9th- 20th January 2006
School of Management
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Marco Elia, University of Turin - Italy
Turin, 19th January 2006
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Summary lfa
1. Focus and clarify what is financial sustainability
2. Is FSS important to reduce poverty?
2. An example of a commercial bank in microfinance:
Banco Procredit El Salvador
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1.
Financial sustainability
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Financial sustainability lfa
• Financial sustainability is the ability of an MFI to cover all of its
costs
An institution is financially viable when it generates sufficient
income from its financial services and investment activities
to cover its operating expenses
Financial viability requires that all the effects of subsidies, in cash and
in kind donations have been removed from financial statements.
Only then does an MFI has the resources to provide ongoing
financial services without donor support.
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Financial sustainability lfa
• According to the United Nations sustainability is necessary to reach
a larger number of people on an ongoing basis
• If MFIs remain dependent on limited donor funding they will be
able to reach only a limited number of people
• Financial sustainability is not an end in itself but it is the only way
to reach significant scale well beyond what donor agencies can
fund
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Financial sustainability lfa
To analyze the level of sustainability of an MFI two main indicators
have been developed:
Operational Self Sufficiency (OSS)
operating income
total operating expenses
Financial Self Sufficiency (FSS)
adjusted operating income
adjusted operating expenses
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Financial sustainability lfa
Financial Self Sufficiency (FSS)
adjusted operating income
adjusted operating expenses
It measures the degree to which operating income covers adjusted
operating expenses.
The adjustments attempt to show how the financial picture of the MFI would
look on an unsubsidised basis
FSS shows how an MFI would look if funds had been raised on a commercial
basis and if services or equipment had been purchased at a market rate
and were not received as a donation
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Financial sustainability
Example
The MFI ABC in 2004 showed operating expenses of 254.200
and an operating income of 255.400. It received subsidised
loans (soft loans) from an international development agency
(200.000 at 2%, while the market rate is 22%) and
donations for 6.000.
operating income
OSS= = 255.400/254.200 = 100,4%
total operating expenses
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Financial sustainability lfa
ADJUSTMENTS
1. Subsidized loans 200.000
Commercial rate of interest 22% (44.000)
Actual interest expense 4.000 (2% of 200.000)
ADJUSTMENT 40.000 (44.000 – 4.000)
2. Donations 6.000
ADJUSTMENT 6.000
adjusted operating income
FSS= = 255.400 / (254.200 + 40.000 + 6000)
adjusted operating expenses
= 255.400/ 300.200 = 85%
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Financial sustainability lfa
• The MFI ABC does nor show losses because it receives loans
at below-market rate and donations
• It is operationally self sufficient but after the adjustments
needed to account all the resources on a market-price basis it
shows a loss
The MFI ABC does not have the resources to deliver its
services without donor support
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2.
Is FSS important to reduce poverty?
The Institutionists and the Welfarists
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Institutionists ans Welfarists lfa
Unity of commitments and concerns
It masks different approaches
Different types of institutions, borrowers, delivery
systems put (sometimes incorrectly) under the term
“MICROFINANCE”
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Institutionists ans Welfarists lfa
MICROFINANCE
SPECIALIZED FIELD THAT COMBINES
BANKING WITH SOCIAL GOALS
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Institutionists ans Welfarists lfa
Institutionist approach (WB, CGAP, USAID)
Focus on Financial self-sufficiency (FSS) and
institutional scale
Welfarist approach
Direct poverty alleviation among the very poor
Jonathan Morduch(1998) “The Microfiance Schism”
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Institutionists ans Welfarists lfa
THE INSTITUTIONISTS
Emphasis: FSS and breadth over depth of outreach
Center of attention: The institution
Main success index: achieve FSS
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Institutionists ans Welfarists lfa
THE WELFARISTS
Emphasis: Depth of outreach
Center of attention: Clients
Accept and require subsidies
Grameen Bank of Bangladesh
THE INSTITUTIONIST HAVE CLEARLY WON THE DEBATE TO DATE
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Institutionists ans Welfarists lfa
PRACTICAL IMPLICATIONS
Different clients served
Different methodologies
Different institutional structures and financing
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Institutionists ans Welfarists lfa
The Institutionist argument
Recognition of scarsity (potential demand cannot be met only
by donors)
Poverty reduction requires masssive scale
BEST PRACTICES: essential step for FSS, CAPITAL MARKET
ACCESS and MAXIMUM OUTREACH TO POOR CLIENTS
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Institutionists ans Welfarists lfa
The Welfarists
Depth over breadth of outreach
FSS desirable, not necessary
Concerns that “profit-making MFIs” will lose their
“social mission”
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3.
Banco ProCredit: a Commercial Bank in the business
of microfinance
“Conocemos el trabajo de nuestra gente. Somos su banco”
“We know the work of our people. We are their bank”
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Banco ProCredit lfa
Country overview
• Earthquakes
• Civil war (1980 – 1992)
• El Salvador signed the Central America Free Trade
Agreements (CAFTA)
• GDP per capita US$2,100 (4,900 at purchasing power
parity exchange rates)
• Dollarization (2001) – increased inequalities
• Huge remittances (17% GDP)
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Banco ProCredit lfa
Banco ProCredit
• It is a for profit commercail bank that directly provides
microfinance services
• Founded in 2004
• Offers a full range of financial services (Loans,
Savings, Insurance and money transfer)
• 23 Branches
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Banco ProCredit lfa
Map El Salvador and Banco Procredit branches
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Banco ProCredit lfa
History
• 1988: AMPES (Asociacion de Medianos y Pequenos
Empresarios Salvadorenos) it was an NGO
•1995: The NGO was transformed into Financiera Calpia
Financiera Calpia was the first example of NGO transformed into a regulated financial
institution in Central America and the fourth in all Latin America after BancoSol in Bolivia,
BancoSol in Colombia and Caja de los Andes again in Bolivia.
•2004: Financiera Calpia transformed into Banco ProCredit
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Banco ProCredit lfa
The ProCredit Network
Founded in 1998 with aim to create and shape commercially
sustainable institutions designed explicitly to serve socially
relevant target groups excluded from the formal financial
sector.
Now the network comprises 19 financial institutions in Eastern
Europe, Latin America and Africa - FOCUS ON MICROLOANS
ProCredit Holding controlling shareholder in all these
institutions
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Banco ProCredit lfa
The ProCredit Network
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Banco ProCredit lfa
Ownership structure – Banco ProCredit
Shareholder % Country
Procredit Holding AG 25.125 Germany
FUNDASAL 21.013 El Salvador
Internationale Finance Corporation (IFC) 15.181 U.S.A.
Nederlandse Financierings Maatschappi
voor Ontwikkelingslanden (FMO) 15.181 Netherlands
Entwicklungsgesellschaft (DEG) 15.181 Germany
Internationale Project Consult (IPC) 7.912 Germany
Other 0.407 El Salvador
Source: FitchRatings
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Banco ProCredit lfa
Ownership structure – ProCredit Holding
Shareholder Sector Headquarters Share Paid-up Capital (EUR)
IPC Consulting Germany 21.8% 16,095,040
IPC invest Consulting staff Germany 4.2% 3,111,160
DOEN Foundation Netherlands 24.4% 17,990,960
DEG Banking Germany 4.3% 3,172,000
ProCredito Foundation Bolivia 3.5% 2,600,000
IFC Banking USA 9.2% 6,812,000
FMO Banking Netherlands 8.5% 6,240,000
BIO Banking Belgium 8.2% 6,055,400
KfW Banking Germany 10.6% 7,804,160
Fundasal Foundation El Salvador 3% 2,222,480
Responsability Investment Switzerland 1.1% 780,000
Andromeda Investment UK 1.1% 780,000
Total 100% 73,663,200
Source: ProCredit Holding Annual Report 2004
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Banco ProCredit lfa
Products
1. Loans
2. Savings In December 2004 deposits totalled 61,530, 68%
of the gross loan portfolio. Minimun balance: US$3
3. Insurance on assets given as collateral
4. Money transfer in partneship with Western Union – also to
non-clients as part of a promotional strategy
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Banco ProCredit lfa
Loans
• Not for start-ups (min. 1 year experience)
• Collaterals: traditional and alternative collaterals
• Repayment capacity is analyzed
• Stepped approach (Automatic loans for best customers)
• Fast process
• Direct visit loan officer
• Weekly, biweekly,monthly instalments
Most of these features come from moneylenders’ practices
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Banco ProCredit lfa
Banco Procredit main loan categories
Amount (US$) Interest rate
Micro enterprise 25 – 10,000 18% - 30%
Small enterprise 10,001 – 100,000 12% - 18%
Medium enterprise 100,001 – 250,000 10% - 12%
Automatic loans 25 – 10,000 15% - 27%
Housing loans Maximum 40,000 14% - 18%
Housing improvement loans Maximum 5,000 18% - 24%
Source: Banco ProCredit
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Banco ProCredit lfa
Loans data
Loan size categories Number Gross loan portfolio
(amount in US$ ‘000)
US$1,000, US$ 10,000, US$ 50,000 106 11,199
Source: Banco ProCredit
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Banco ProCredit lfa
Gender issue
43 % total amount loans owned by women
56% number clients are women
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Thank you
E-mail: progettomeda.saa@unito.it
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