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					Innovative Approaches to Rural Finance
   Services Provision with Emphasis on
    Smallholder Producers in Lesotho




A Presentation by the Central Bank of Lesotho at the
AFRACA Southern African Regional Workshop held in
      Johannesburg RSA 24 – 26 March 2004




                         1
Part I
Introduction
The objective of this paper as shown by its title, is to present the
experience of Lesotho on innovative approaches undertaken by
microfinance operators in extending their services to the rural sector –
particularly smallholder producers. The contribution of the Central
Bank of Lesotho (CBL) and the Government of Lesotho (GoL) is also
reviewed. Microfinance operators within the context of Lesotho
encompass       saving     and    credit   cooperatives,      moneylenders       and
societies.


The outline of the paper is as follows. Part 1 is the introduction, which
spells out the objective of the paper. Part II presents the background
within which microfinance institutions operate in Lesotho. Part III
provides     the   legal    and     supervisory        framework    upon     which
microfinance institutions are expected to function. Part IV presents an
analysis of various products that the MFIs provide to suit the demands
of   their   clientele.    The   contribution     of    the   CBL   and    GoL    in
strengthening the institutional capacity of microfinance institutions
and fostering of financial intermediation in general is also reviewed.
Part V provides a summary and conclusion.


Part II
Background
In 2003 Lesotho’s GNP is estimated to have grown by 2.7% while its
population increased by 2.2%. The secondary and tertiary sectors were
the main sources of growth jointly contributing about 83% of total
output. Within the secondary sector, manufacturing and building and
construction continued to be the main drivers each contributing 18%
and 17% of total output. The agricultural sub-sector upon which
about 70% of the population subsist, contributed 17% down from 24%


                                           2
in the early 1980’s. The net factor income, ascribed mainly to
remittances from Basotho mineworkers in South Africa contributed
only 11% compared with 40% as recent as in 1996.
The contraction of the agricultural sector and the decline in remittance
income have brought new survival challenges in Lesotho, particularly
in the rural areas. Rural communities are now keener than ever to set
up small-scale enterprises (SSEs) to make ends meet. According to a
rather old study conducted by Gemini in 1990, there were about 103
000 SSEs then of which 80% were in the rural areas. About half of
these SSEs are found in manufacturing (processing of items), 30% in
trade and commerce and the balance in services activities. The SSE
sector is dominated by five types of enterprises namely, brewing,
leasing buildings, knitting, street vending and food catering. The surge
in SSEs, particularly in the rural areas, has increased demand for
financial services and hence exacerbated an age-old problem of lack of
banking and credit facilities in this sector.


In response to this hiatus, many financial service providers have
emerged ranging between formal and informal. The formal entities are
those operating with formal licenses while the informal are those
operating without licenses.


Financial Institutions –


The formal financial institutions serve mainly the Government and the
formal private sector. They comprise 3 commercial banks, 4 insurance
companies, 7 insurance brokers, one unit trust, 18 registered
moneylenders and 1599 cooperative societies.




                                     3
   (i)      The Banking System


The banking system has recently been restructured after government
disinvestiture in two state-owned banks. The only agricultural
development bank was liquidated while the other, a commercial bank,
was restructured and privatised. The restructuring has resulted in all
banks falling under private ownership.
Since its restructuring, the banking sector is generally well capitalised,
liquid and profitable. However, it is also characterised by a number of
structural problems that have limited the scope of financial deepening
in the country. The volume of bank credit relative to total output is
small compared to other countries in the sub-region and well below
the average of 71% for low and middle-income countries in Sub-
Saharan Africa. Financial intermediation has actually deteriorated
since the privatisation and liquidation of state-owned banks. The
privately-owned banks have rationalised their operations and branch
network with the objective of enhancing their profitability. This has
resulted in banks that now mobilise fewer deposits because of stricter
requirements and higher thresholds for opening new accounts. Most
branches in remote rural areas have been closed down, as they were
considered unprofitable. This has adversely affected the rural
communities, as they now have to travel long distances to get financial
services.


(ii) Non-bank Financial Sector


The non-bank financial entities that provide financial services to rural
communities and SSEs in Lesotho are moneylenders, burial societies,
and stokfels. Credit unions and cooperatives also play an active part in
provision of financial services. The main attraction to these types of


                                    4
financial service providers has been the speed and efficiency with
which they transact their business, their flexibility in dealing with
clients, the provision of credit at the convenience of the clients at their
residence, work place, simple loan documentation, non-insistence on
collateral, and low transaction costs. Apart from the large number of
small moneylenders, traders and individuals who lend on their own
terms, the services rendered by these traditional savings and credit
groups are significant, considering that most of them operate in
remote and inaccessible areas with the absence of branch networks of
formal banks.


Cooperative Societies and Credit Unions


Various studies reflect unimpressive results on the performance of
cooperatives and credit unions in Lesotho. Their status are classified
in three types including collapsed, on the verge of collapse and
continuing operations though with a lot of weaknesses . According to
the World Bank report, 1998:1 credit unions have in the past twenty
years received enormous amounts of donor funding            ‘but still find
themselves in a sorry state’ as reported above. The report also
mentions that cooperatives are commended for their good history of
mobilising funds from their members yet they have proved to be
failures in handling credit . The report further generalises without
exception that all cooperatives have a record of very poor performance.
It is only lately after the revamping of the Cooperatives Act 2000 when
a few cooperatives especially newly born like Boliba started recording
improvements and sustainability in their operations. Another report by
department of Cooperatives with an element of bias (more committee
members interviewed) reports the number of cooperatives as 1600.
However, it was agreed to use 1129 as the official figure comprising
13% active cooperatives, 19% semi-active, 57 dormant and 11% pre-


                                     5
registered. This indicates clearly that more than half the cooperatives
are dormant while a very small percentage 11% are in the registration
process implying a very slow growth.
The grid below represents the Cooperative status countrywide and
their justifications:




   Cooperative Status      Number of Societies     Justification
   Active                  148                     Social and economic
                                                   business viability
   Semi-Active             211                     Irregular            and
                                                   seasonal        business
                                                   activity
   Dormant                 644                     Ceased operations
   Pre-registered          126                     Preparation          for
                                                   registration
   Total                   1129
    Department of Cooperatives May, 2003.


   Active cooperatives engage in handicrafts while semi-active are in
   farming and the dormant being consumer cooperatives. Decrease in
   membership continues to decline hence it is highly likely that even
   those    categorised   under   semi-active    will   eventually    cease
   operations.
   Reasons for non/poor performance by cooperatives :


   NGO Credit Centre


   This constituted an amalgamation of three institutions namely
   Women in Business, Lesotho Chamber of Commerce and Lesotho



                                   6
council of Non-Governmental Organisation who were funded by the
donor community to act as credit windows in credit dispensation
especially to their members clients. The three NGOs were merged in
response to concerns, among others, of economies of scale where
the three would share in the overhead expenses. The scheme took
off in 1997 but never yielded any promising results until donors
advocated for its closure due to high non-performing loans. The
loan portfolio stood at 79.7,79.2 and 81,7 for WIB, 79.2 and LCCI.
Loanable Funds came from ADF and Irish consulate           for loan
disbursements .




LCCI
EXPECTED          129,480.00         136,012.00      549,497.86
RECOVERED         105,768.94         107,786.00      335,942.92
BALANCE           23,711.06          28226.00        88,287,987
UNIDO, 2002



Studies show that the poor performance of institutions as reflected
were due to the following reasons:


-Conducting of audits is not frequent due to capacity.
-Agricultural Officers do not carry out adequate and timely
research to learn about product development and diversification
neither do they train the rural communities in different skills as
required.
-Violations on ursupation of assets by individuals
-Problems of loose management, cashflow and low morale of
cooperative members




                                7
   Unfortunately, there is no reliable data available on these financial
   entities though cooperatives useful as they are have recorded a
   history of poor performance.


The observations made in this paper will be based on few microfinance
institutions that were interviewed. These are: Boliba Multipurpose
Cooperative, MAMOTH Financial Services, and Letsema Investment
Holdings. The choice of these finacial services providers is premised on
their large size relative to others, their broad outreach, availability of
reliable information, and ease of access.
Before analysing their performance and the initiatives they are taking
to improve their operations, it was felt necessary to first present the
legal and supervisory framework within which they operate. The legal
and supervisory framework provides the enabling environment and
parameters that financial services providers have to contend with in
their quest for survival, growth and development.


Part III
The      Legal   and   Supervisory       Framework   for   Microfinance
Institutions in Lesotho

   (i)     The Legal Framework


There are several laws affecting microfinance institutions in Lesotho.
These are the Financial Institutions Act (FIA), Moneylenders Act,
Cooperative Societies Act, Societies Act and the Companies Act. Most
of these laws except the FIA and Cooperative Societies Act are old and
need to be reviewed in line with the latest developments in the market.
Besides, the multiplicity of laws has also caused a problem of
regulatory arbitrage whereby financial institutions conveniently prefer
to be licensed through laws that pose the least regulatory burden. This


                                     8
situation is currently under review with the main objective being to
rationalise and harmonise the legislation governing the financial sector
in Lesotho.


Although MFIs that accept deposits can be licensed under the FIA, no
MFI has ever applied because of the onerous requirements of the Act,
particularly the high minimum capital requirement. The only MFI that
accepts deposits in Lesotho, Boliba Multipurpose Cooperative chose to
be licensed under the Cooperative Societies Act as that Act allows
soliciting of deposits from non-members. The Societies Act allows
societies to extend credit and collect deposits but from members only.
There are also a few cases where some MFIs have procured their
licenses under the Companies Act as in the case of MAMOTH
Financial Services while Letsema has been licensed by the Ministry of
Industry, Trade, Cooperatives and Marketing .


The Moneylenders Act only applies to MFIs that deal in credit
business. They are not allowed to accept deposits at all. Although this
law provides a good framework for licensing, setting the usury interest
rate and providing protection to borrowers, it has a number of
limitations that need to be urgently addressed. Chief among these are:
 The usury interest rate that is too low to allow operators meet their
   costs. It was set a long time ago and has never been reviewed. As a
   result,    moneylenders   are    charging   anything   they   consider
   appropriate.
 Moneylenders not being allowed to advertise their businesses. This
   prohibition constrains growth.
 The law gives more protection to debtors than creditors and as a
   result enhances credit risk.




                                     9
The Supervisory Framework

Supervision of MFIs in Lesotho is mainly the responsibility of the
Central Bank of Lesotho with respect to moneylenders and the
Commissioner of Cooperatives with respect to cooperatives.
Although the Moneylenders Act gives CBL various powers to supervise
moneylenders, currently CBL uses a few of these powers because
many of them are inoperable. The main activity done by CBL is the
issuing of licenses. The major reason why CBL cannot effectively
supervise moneylenders is that the Act is obsolete. Many of its
provisions have been overtaken by events and hence not applicable to
the present environment. The other reason is that CBL also lacks the
capacity to supervise moneylenders. Since its inception, the main
focus of CBL is as far as supervision is concerned has been on banks.
It is only recently with the proliferation of moneylenders and other
activities that CBL is working hard to acquire the requisite supervisory
capacity.
With regard to cooperatives, the Cooperative Societies Act gives the
Commissioner power to license and oversee the conduct and
operations of cooperatives. However, there is currently clear-cut
supervisory framework for cooperatives. A brief history on the
performance of cooperatives is detailed below as demonstration of the
level of frustration imposed on smallholders by the poor performance
of the institutions that would otherwise be expected to bail them out of
poverty.




                                   10
Part IV

Innovative Approaches by Microfinance Institutions in
Lesotho

(i)   Initiatives by MFIs


The information in this section has been drawn from interviews
undertaken with three selected MFIs, namely, Boliba Multipurpose
Cooperative, Letsema Investment Holdings (PTY) Ltd and MAMOTH
Financial Services. Discussions on each of the MFIs included
initiatives advanced in devising products that are relevant to their
clientele; ways in which risk is managed; the types of management
information systems used; and performance management.


1. Boliba Multipurpose Cooperative


In normal situations when a venture comes into operation it would
have been properly researched and its feasibility justified. In the case
of Boliba that was not necessarily the case. The birth of Boliba was
the result of pressure from the market demanding a financial vehicle
which would serve the lower end of the market in mobilising savings
and providing credit. In short, ordinary people wanted a financial
institution that unlike banks, would be driven by their own demands.




                                   11
Products
Boliba offers three types of products namely, savings, credit and
hardware sold to members. These products are further classified
below.
 The clientele of Boliba is 65% women and 35% men.
        (a)Savings:
Through its savings and credit wing, Boliba decided on M50.00 as an
opening balance for savings as against M500.00 demanded by
commercial banks. This threshold was tailor-made for the targeted
clientele of small producers.
        -
Boliba’s savings accounts are in three classes:
(i)         Ordinary saving ranging from M50.00 to over M10,000 with
            interest rate of 4% - 6%.
(ii)        Fixed deposits – Depending on client’s choice and preference
            this category ranges between 3 months to 24 months with
            interest of 5% - 7.5%.
(iii)       Subscription account – This is a relatively long-term product
            ranging between 24 to 48 months. It pays interest between 7%
            and 9%.


       (b) Credit:
To give loans to clients, a client should have been a member for a
period above three months. Their credit policy demands that:
 A client must be employed or a business person
 There must a third party to guarantee the loan
 There must be ability to generate income
 Client must display ability to pay
 Client must have a good reputation in repaying debts
 It is preferable if client knows one of Boliba’s staff and can appoint
        him/her for reference.


                                        12
 To borrow from Boliba one needs to have an account with it.


There are two types of loans, viz. Business and Domestic.
Business loans: These are short to medium term loans that also
include bridging finance. Short-term loans are more common among
small businesses while retail businesses mostly prefer medium term
facilities.
Domestic loans: Domestic loans are mostly earmarked for individuals.
A borrower has to have the ability to repay the loan. To ensure that
this is the case, a borrower must be an employed person and the loa
must not exceed 1/3 or 30% of the take home pay.


-Risk Management
Boliba manages credit risk by screening borrowers and by using credit
insurance. Also, a statement of the client’s financial status is
submitted on a monthly basis. There is a problem of cession of the
client’s rights to the lender due to non-cooperation of employers whose
employees seek loans from Boliba. According to this practice,
employers deduct monthly instalments their employees owe the
lenders and transfer such amounts to the account of the lender.
Alternatively, they inform lenders when pay-days fall due.


-Controlling Delinquent Loans
Whenever there is any threat of a client reneging on the loan, the main
weapon is the lawsuit. There is also a collection department whose
responsibility is:
 to    follow-up and remind clients about their monthly loan
   instalments
 to visit clients at home or work places when their payments fall into
   arrears.



                                  13
- Asset and Liability Management
Assets are mostly maintained on short-term basis in line with the
short-term nature of liabilities. To ensure a good return while at the
same time minimising risk, Boliba now invests a sizeable part of its
assets in government securities, especially Treasury Bills.


-Operational Controls
To ensure all is well in managing its day to day operations, Boliba has
put in place the necessary security measures. It has employed security
guards for cash transfers. Also employees are normally thoroughly
screened before they are employed to ensure that they can be trusted
to work with cash. Ordinary internal controls and checks and
balances like signature verification and credit authorisation are being
implemented.


- Governance
Organisational    and   operational        structures   are   in   place   with
management answerable to the board.


- Management Information System (MIS)
Boliba has an in-house software that is designed according to
specification and requirements of the institution. This package has so
far served Boliba well. Every time management has access to the
Central Data Bank which informs it about what is happening in all
sections of the organisation.


-Performance Management
Staff are send on regular basis for training. There exists also an
incentive-based   appraisal     system       intended    to   enhance      staff
performance. There is also a practice to hold regular meetings with
staff at all levels to share information affecting the organisation. An


                                      14
information office has been established responsible for among other
things, public relations and marketing. There is also a suggestion box
for clients to submit queries or complaints about the organisation.


Letsema Investment Holding (PTY) Ltd.


Letsema is an MFI that has a lot of interest in assisting Basotho,
particularly those that are employed in South Africa.


   Products
   (b)Credit
Letsema offers credit to its clients in the following categories:
 Contractor loans
 Civil Servants loans
 General loans – these are loans individuals excepting those
   mentioned above.
 Self-help group loans – As a result of the free education
   programme, there are groups that have been formed to provide
   school feeding. Letsema provides funding to such groups


The conditions for securing a loan are as follows:
 Be employed
 Be able to provide latest pay slip
 Copy of certified passport
 Fill a stop order payment form for future repayment of the loan.
The maximum loans offered are equal to the net salary and monthly
repayment instalments should not go beyond 30% of one’s salary.
Letsema does not classify loans by purpose or sector except most
loans are for school fees, funerals and furniture.


(b)Burial Scheme


                                     15
This is the scheme whereby Letsema receives from its clients pre-
payments for funeral expenses. The main requirement is that the
client must produce a passport or other legal document for identity
and submit an application form that would also show the number of
dependants. The product is differentiated in ascending order as:
 Ordinary
 Luxury
 Executive
 Supreme, and
 Elite.


The higher the sub-product the higher the subscription and monthly
payments.


- Risk Management
There is collection department that deals with matters concerning
arrears and other client problems. This department ensures that it
stays in touch with clients all the time and the moment a problem
arises it handles it together with the client. In some cases, the credit
they provide has to supported by collateral.
- Management Information
Letsema uses an accounting software called Pastel which is able to
provide it with all necessary information like loans profiles, loan
balances, interest rate calculation and data analysis of clients.
- Performance Management
Letsema     enhances   performance        of   its   staff   through   continual
interaction and consultation. This is achieved through regular
meetings every Tuesday of the week. Staff is also sent on regular
training on such important areas as customer service, micro finance
and management. Letsema is very cost conscious and its budget is


                                     16
monitored on a continuos basis. Telephone call are closely monitored
and all its five vehicles are equipped with log books to monitor
unauthorised trips.


MAMOTH Financial Services

Like other MFIs, MAMOTH emerged in response to the gaps left by
formal financial institutions. At the start, it borrowed M10 million from
a partner in South Africa as initial capital. By January 2004, the
principal had been fully paid. Mamoth provides credit and insurance
only products.


Products
 MAMOTH provides credit only as by law it cannot accept deposits.
 It also provides insurance against loan default of their clients with
       commercial banks, retrenchment and death.
 They are insurance brokers for any type of general insurance.
 (a)Insurance
They provide medical aid schemes namely, Student Medical Aid
Portfolio and Employee Medical Aid for working people differentiated
as:
(i)      Standard Option catering for day to day medical expenses and
         hospitalisation.
(ii)     Hospital Option catering for hospital treatment. Both options
         have similar benefits of, out of hospital, in hospital, extended
         medicine, funeral cover, HIV/Aids benefit, and savings account
         (optional).
(b)Credit –
Lending is done to working clients and only those working with
institutions that cooperate to provide stop orders for their employees.




                                     17
-Risk Management
All loans are insured against death and retrenchment. Collections are
made       through   Employee   HR    salaries   Offices.   MAMOTH   has
experienced defaults from teaches, pensioners, and deceased clients.
However, it putting in place measures to put the problem under
control.
It has established a recording system that lists both active clients and
defaulters. Checks and balances have also been established to ensure
correct information is received from clients who present insurance
claims.
-Management Information Systems
All information pertaining to clients is computerised and backed up on
disk and hard copies.
Loan application forms are computerised and this makes work easier
and faster for employees.
-Loan Portfolio
Defaulting clients are followed up. Ommission are relodged and
relevant offices contacted. A record of improvement after this was
recoreded.
-Performance Management
TO ensure a conducive working environment , offices are clientfriendly
and easy to reach. Staff performance is closely monitored and
supervised. Working conditions are conducive to both staff and clients.


   (i)      The Initiatives of CBL and GoL
   In its quest to foster financial intermediation in the country,
   particularly to the unbankable segments of the economy, the CBL
   in collaboration with GoL has taken some innovative initiatives that
   fall outside its core mandate. These are:



                                     18
 The establishment of a Commercial Court
The court commenced its operations in 2001. It is expected to
facilitate speedy processing of cases that are classified as
commercial. The facility is also expected to encourage lenders to
extend more loans to the private sectors due to the fact that they
now have a more convenient recourse to the law in case of
borrowers reneging on their contracts.
   Establishment of a Credit Bureau
Due   lack   of   information   about    borrowers,   many   financial
institutions including MFIs, are very risk-averse. To alleviate this
problem, the CBL in collaboration with GoL are in the process of
establishing a credit bureau. A policy paper on the credit bureau
was passed by the Cabinet in 2003 and the facility is expected to
start operations in 2004.




 RSCG Scheme
The Rural Savings and Credit Groups scheme (RSCG) is meant to
facilitate access to credit by smallholder producers through
commercial banks. The success of the scheme will be achieved by
encouraging banks to provide more credit to RSCGs through the
mobilisation of RSCG savings and support from the credit
guarantee fund that is to be administered by CBL. The existence of
the fund is expected to make rural groups more attractive to
commercial banks.
 Export Finance Guarantee Scheme
This scheme is designed to assist a wider range of exporters,
especially the indigenous exporters with pre-shipment and post-
shipment facilities through commercial banks. The scheme has
been launched and applications are already being received by


                                19
  commercial banks. The scheme is not new as it was first
  established in 1988. Due to operational problems it encountered, it
  was temporarily suspended. It was resuscitated in 2001 and this
  time more emphasis was put on indigenous smallholder exporters
  who are expected to be assisted by 60% of the facility’s resources.


   Re-establishment of the Lesotho Post Bank
  Preparations are afoot to re-establish the Lesotho Post Bank in
  order to fill the gap that has been caused by commercial banks by
  closing some of their branches in remote rural areas.




Part Five
Conclusion and Recommendations

This section will draw general conclusions based on innovative
approaches undertaken by small scale financial services providers as
well the supervisory authorities. The recommendations will be drawn
from observed limitations either legal or operational hampering the
growth and development of MFIs in Lesotho.


  There is very low access to financial services in Lesotho. Even
  though other than commercial banks’ products access to insurance
  products and other non-bank financial services is evidenced, it is
  still quite limited to make any impact. Following analysis of the
  MFIs some of the impediments are due to:




                                  20
   debit or stop order functionality on savings accounts and
    non- cooperation by institutions to make deductions from
    employee salaries.
   Difficulty in accessing the mountainous terrains of Lesotho
   Absence of consistent and effective regulation of various
    components       of   the    financial     sector   hence   calling   for
    harmonisation of all pieces with contradictions.
   Absence of policy guiding some sectors as the insurance,
    microfinance and savings and credit Association which are
    still   at   inception     stage.   This    therefore   renders    them
    unregulated.
   Difficulties with the legal and contractual environment that
    include the rights of women.


In general there is no adequate data available from the
interviews and studies conducted. Even where there has been
sufficient data, no analysis was conducted and no framework
exists.


Other weaknesses purported to be impediments to developing
the financial sector include:
       Supply led as opposed to demand led initiatives. Many of
        the previous schemes focused on providing finance to the
        rural    poor     on     concessional      terms    ignoring      the
        incorporation of savings component into projects. The
        advantage of this is to provide a less expensive source of
        funding while instilling discipline and a culture of
        banking to enhance outreach and sustainability of such
        projects




                                  21
               Outreach levels at the grassroots are still very low as due
                to capacity and adequate financing MFIs mostly serve the
                employed   urban    with   the   exception   of     very   few
                penetrating into the rural sector.
               Weak implementation led to collapse of many schemes.
                Several of them failed because there was lack of
                monitoring and recovery mechanisms in place to ensure
                that the objectives of the schemes were met.
               Most of the schemes’ management were not fit and proper
                such that they did not adhere to banking principles.

The microfinance industry in Lesotho is inchoate. The laws governing
it are obsolete. They are many and inconsistent. As a result, the
supervision of the industry has also been compromised by a weak
legal framework and poor capacity of the supervisory authorities. All
the above factors have directly contributed to the stagnation of the
industry.
To render the industry more dynamic, it is recommended that:
 The legal framework be revised with immediate effect. CBL has
    already initiated this process.
   The legal framework be rationalised and harmonised.
 The governance, managerial and operational capacity of MFIs be
    enhanced through a more robust prudential supervision.
The actions proposed above will provide an enabling environment
quintessential to encourage MFIs to be more enterprising and to adopt
innovative practices that will promote efficiency,                growth and
development of the industry.




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