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  • MicroFinance Network

    MOVING MICROFINANCE FORWARD

    Ownership, Competition, and Controlof Microfinance Institutions

    Edited byCraig F. Churchill

    1998

  • MicroFinance Network

    i

    FOREWORD

    The MicroFinance Network is a global association of leading microfinance practitioners. Oneof the primary purposes of the Network is to provide advanced microfinance institutions with aforum to learn from each others experiences. Each year Network members assemble for threedays of presentations and discussions about important issues regarding the operation of theirinstitutions.

    The three themes of this years conferenceOwnership, Competition, and Controlwereidentified by the Network members as important issues. Network members and a handful ofspecial guests provided quality presentations on these topics, which were followed by extensivediscussions. This document presents a summary of the proceedings of the conference to sharethe content with a wider audience. Anyone who is interested in the sustainable provision ofmicrofinancial services will find this document invaluable.

    The 5th Annual Conference of the MicroFinance Network, Moving Microfinance Forward,was one of the Networks most successful conferences. It was held in Alexandria, Egypt andhosted by the Alexandria Business Association (ABA), a founding member of the Network.The Network greatly appreciates the hard work and dedication of Nabil El Shami, theExecutive Director of ABAs Small and Micro Enterprise (SME) Project, and his very capableteam including Ahmad Mokhtar, the Deputy Director, Amani AlAmir, and Taline Artine. TheNetwork would also like to thank Mohamed Ragab, the Chairman of the Alexandria BusinessAssociation for hosting this event.

    During the opening of the conference, we were very fortunate to have two Egyptian Ministersin attendance to initiate our deliberations, as well as other dignitaries. The Network is verygrateful to Dr. Yousef Boutros Ghali, Minister of Economy, and Mrs. Mervat El-Tallawi,Minister of Social Affairs, for their words of wisdom and support. The Network would alsolike to thank Mr. Abdel Salam Mahgoub, Governor of Alexandria, and Mr. John Wesley,USAID Cairo Mission Director, for their attendance and kind words. In addition, the Networkappreciates the eloquent opening address of Juan Pea, the Executive Vice President ofFONCAP, a public sector initiative in Argentina designed to support the development ofmicrofinance institutions.

    On behalf of the Network, I want to welcome four new members to the MicroFinanceNetwork: Association for Social Advancement (Bangladesh), Fundusz Mikro (Poland),CHISPA (Nicaragua) and Centenary Rural Development Bank (Uganda). We look forwardto their participation and contribution to the Network, and to furthering our mutual objective ofincreasing the access of financial services for low-income communities.

    Finally, I want to take this opportunity to thank the supporters of the MicroFinance Network.Calmeadow continues to do an excellent job serving as the institutional sponsor of theMicroFinance Network. David Wright and the Department for International Development(formerly ODA) has contributed greatly to the Networks research agenda. The ConsultativeGroup to Assist the Poorest (CGAP) provides generous assistance that enables the Networkto increase the scope of its activities. Citibank and a private foundation have been helpful bysupporting the Networks special activities, including staff exchanges and our forthcoming

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    research project on corporate governance. I also want to thank Hank Jackelen and the UnitedNations Development Programme for providing resources toward the Networks annualconference. Finally, the Network would like to thank Marguerite Robinson for her ongoinginvolvement with the Network.

    Maria OteroChair, MicroFinance NetworkWashington, DC, USAJanuary 1998

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    TABLE OF CONTENTS

    FOREWORD.................................................................................................................................... i

    TABLE OF CONTENTS ............................................................................................................... iii

    TABLE OF TABLES ......................................................................................................................iv

    LIST OF ABBREVIATIONS...........................................................................................................v

    THEME I: OWNERSHIP...............................................................................................................1

    PRIVATE EQUITY CAPITAL IN THE MICROFINANCE INDUSTRY, Martin Connell...................................1

    TYPES OF OWNERS FOR MICROFINANCE INSTITUTIONS, Maria Otero.................................................3

    PANEL ON OWNERSHIP INNOVATIONS: K-REP, ACP, CITI S&L .........................................................9Ownership of the K-Rep Bank, Janet Mabwa..............................................................................9The Creation of MiBanco, Manuel Montoya .............................................................................13Experience of Citi Savings and Loans Company Ltd., Peter Ocran ...........................................15

    THEME II: COMPETITION .......................................................................................................19

    COMPETITION IN MICROFINANCE: MARKETS, PRODUCTS, AND STAFF, Michael Chu ........................19

    MARKETS......................................................................................................................................23Marketing Strategies in a Competitive Microfinance Environment, Hermann Krutzfeldt...........23Achieving Microfinance Market Penetration, Shafiqual Haque Choudhury...............................26

    PRODUCTS.....................................................................................................................................28New Product Development, Rosalind Copisarow.......................................................................28Small-scale KUPEDES: Product Development at the BRI Units, Jarot Eko Winarno ................31

    STAFF ...........................................................................................................................................33Preliminary Thoughts On How To Retain Good Staff In MFIs, Marguerite S. Robinson ...........33Staff Incentive Schemes, Nabil El Shami ..................................................................................37Private Sector Incentives for Senior Management, Michael Chu ...............................................41

    THEME III: CONTROL ...............................................................................................................44

    OVERVIEW ON MICROFINANCE FRAUD, Liza Valenzuela .................................................................44

    PANEL ON FRAUD AND INTERNAL CONTROL: BRI, K-REP, PRODEM..............................................47Internal Control Procedures at BRIs Unit Division, Suharsono ................................................47The Experience of Fraud at K-Rep, Janet Mabwa .....................................................................52Everything You Wanted to Know about Fraud, Edurardo Bazoberry.....................................54

    AUDITING: THE MISSING DIMENSION IN MICROFINANCE, Hank Jackelen ........................................56

    APPENDICES

    LIST OF CONFERENCE PARTICIPANTS ............................................................................................A-1

    MICROFINANCE NETWORK MEMBER LIST.....................................................................................A-2

    MICROFINANCE NETWORK MEMBER STATISTICS ..........................................................................A-5

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    TABLE OF TABLES

    Table 1: What is at Stake for Microfinance Owners? ..........................................................................5

    Table 2: Ownership/Capital Structure of the K-Rep Bank.................................................................10

    Table 3: Ownership of MiBanco.......................................................................................................14

    Table 4: Evolution of the Bolivian Financial System (1992-1997) ....................................................24

    Table 5: Diversification of the Bolivian Financial System (1992-1997) ............................................24

    Table 6: Changes in the Bolivian Financial System (1992-1997)......................................................25

    Table 7: Market Share: BancoSol and the Competition.....................................................................25

    Table 8: Fundusz Mikro Pilot Program Analysis ..............................................................................29

    Table 9: Freedom of Choice: Guarantors and Interest Rates at Fundusz Mikro .................................30

    Table 10: ABA Incentive Scheme/Portion A.....................................................................................38

    Table 11: ABA Incentive Scheme/Portion B.....................................................................................38

    Table 12: ABAs Incentive Scheme for Back Office Staff .................................................................39

    Table 13: A Sample of MFI Fraud Cases from Around the World ....................................................45

    Table 14: Fraud Survey: United States Banks (1993)........................................................................48

    Table 15: Management and Control Function for Financial Institutions ...........................................51

    Table 16: Treasury Risks, Controls, and Auditing Procedures ..........................................................56

  • MicroFinance Network

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    LIST OF ABBREVIATIONS

    ABA Alexandria Business Association

    ACP Accion Comunitaria del Peru

    AfDB African Development Bank

    ASA Association for Social Advancement

    BDB Bank Dagang Bali

    BIMAS Integrated Mass Guidance

    BRAC Bangladesh Rural Advancement Committee

    BRI Bank Rakyat Indonesia

    CABEI Central American Bank for Economic Integration

    CAF Corporacion Andina de Fomento

    CDC Commonwealth Development Corporation

    CGAP Consultative Group to Assist the Poorest

    DFID Department for International Development

    EDPYME Entidades de Desarrollo para la Pequena y Microempresa

    EO Extension Officer

    ESOP Employee Stock Ownership Plan

    EQI Environmental Quality International

    FFP Fondos Financieros Privados (Private Financial Funds)

    FMO Nederlandse Financierings-Mautschappij Voor Ontwikkelingslanded

    IDB Inter-American Development Bank

    IFC International Finance Corporation

    IFI Instituto de Fomento Industrial

    IIC Inter-American Investment Corporation

    IT Information Technology

    K-Rep Kenya Rural Enterprise Program

    KUPEDES General Rural Credit

    MFI Microfinance Institution

    MIF Multilateral Investment Fund

    MIS Management Information Systems

    NBFI Non-Bank Financial Institution

    NGO Non-Governmental Organization

    ODA Overseas Development Administration

    PRODEM Fundacion para la Promocion y Desarrollo de la Microempresa

    ROSCA Rotating Savings and Credit Associations

    SIDI Societ dInvestissement et de Developpement International

    SME Small and Micro Enterprise

    USAID United States Agency for International Development

  • MicroFinance Network

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    THEME I: OWNERSHIP

    PRIVATE EQUITY CAPITAL IN THE MICROFINANCE INDUSTRYMartin Connell, President, Calmeadow, Canada

    The leaders of the microfinance industry are committed to delivering sustainable andcommercially viable microfinance services. This is a tremendous challenge, particularly fornon-governmental organizations (NGOs) that establish regulated financial institutions. Forinstitutions that succeed in making this transformation, it will irrevocably change the nature oftheir business and how it is run. One key component of transformation is the raising of privateequity capital.

    As NGOs around the world contemplate transforming into commercial ventures, the level ofinterest in how and where to source private equity capital has risen dramatically. However, theharsh reality is that, with few exceptions, private sector portfolio equity capital is basicallyunavailable. By portfolio investment, one refers to capital from private individuals,corporations, investment funds, and financial institutions, which assume minority positions inmicrofinance institutions purely for profit.

    Alternatively, various forms of social capital are available to the microfinance sector. Thesecapital sources sometimes get confused with private capital because in many respects theymimic it in their expectations and terms. This social capital comes primarily from privatefoundations, certain NGOs, some public institutions, and a handful of wealthy, progressively-minded and sometimes politically-motivated individuals and corporations.

    It is encouraging to witness the successful equity financing and subsequent commercializationof a few institutions, such as BancoSol and Caja Los Andes in Bolivia, ACP in Peru, and K-Rep in Kenya. However, because there are some misconceptions about the availability ofcapital sources, a number of NGOs spend a great deal of time pursuing funds that do not yetexist. Quite simply, because the microfinance industry has not demonstrated its comparativeadvantage as a profitable equity investment opportunity, pure private capital is holding backand waiting for results. Since this is the situation, it is better for microfinance institutions(MFIs) to focus their efforts where the opportunities do lie.

    Sources of Private Capital

    The following is a list of investment capital resources that are keen on the microfinance sectorand have accessible funds, albeit with a current bias towards Latin America:

    Private social capital Private social capital includes a limited number of private foundations,like Ford and Rockefeller; North American NGOs such as ACCIONs Gateway Fund andCalmeadow; and a handful of private individuals and corporations, including The CalvertGroup, Shorebank, and Triodos.

    Public social capital These are public funds working in a private sector manner for socialgood. Examples include the International Finance Corporation (IFC), Corporacion Andina de

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    Fomento (CAF), the Multilateral Investment Fund (MIF) and the Inter-American InvestmentCorporation (IIC) of the Inter-American Development Bank (IDB), FMO from theNetherlands, Central American Bank for Economic Integration (CABEI), BAWI of the SwissGovernment, and the Commonwealth Development Corporation.

    Private investment funds These funds, which specialize in microfinance, are backed bysome of the same private and public institutions listed above. To date, ProFund of Costa Ricais the only private sector investment fund that exists specifically for microfinance. However,Calmeadow is conducting a study to determine the feasibility of creating a similar fund forAf...

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