Microfinance Focus January 2009

`
www.microfinancefocus.com
January 2009
Developing
Credit Bureau An Exclusive
IFC`s Group Effort
Interview
It is not just Technology : Planet Finance with
Opportunities and Challenges
Mr. Aloysius P.
Fernandez
Access to Credit & Human Right Institution Spotlight

Ujjivan Finance Pvt. Ltd
Livelihoods and Microfinance Learning Curve
Product and Methodologies
Credit Management Thoughts
I– Focus
Mobile Banking in India CAPITAL CONNECT
www.microfinancefocus.com Microfinance Focus [ January 2009 ] 1
Designing Staff Incentive System

` January 2009
Contents
Cover Story
Developing Credit
Bureau
23...Developing Credit Reporting for
Microfinance . By Peer Stein , IFC with IFC A2F Team Members
29...Opinion. By Samit Ghosh (Ujjivan) and P N Vasudevan (Equitas )
30...It is Not about Technology. By Anna Somos Krishnan and Enzo Cicchirillo , Planet Finance
32...Opportunities , Challenges and Way forward. By Dr. N Jeyaseelan
Horizon
13...Credit Management
Some Radical Thoughts on Microfinance
By Dr. Souren Ghosal 08...Should Access to Credit be human

Right . By, Alex Count
17...Environmental Analysis: Mobile Banking
In India
08...Poor As a Partner . Farhat Abbas Shah
By Shumit Vatsal
09...Micro Enterprise Training : Gender
Perspective . By Dr. N Lalitha
Best Practices
35..Designing Staff incentive System

By Martin Holtmann, MicroSave

`
Interview
“Affinity to Prosperity : Development of SHGs”
44...An Exclusive Interview with Mr. Aloysius P Fernandez,

Executive Director , MYRADA
Exclusive Presentation From Microfinance Focus to promote innova-

tive ideas /innovation/initiative
I-Focus of this month

41...EDA Capital Connect
Perspective
49...News
10...Livelihoods and Microfinance
By G Muralidhar , Akshara Livelihoods 48..Learning Curve
Today crisis is that the poor are strug-
07...Editorial
gling with lack of ideas for investing
the funds they can access. It is time,
we all jump in to help them out. Rest 06...About the issue
will be history made by us.
Institution Spotlight Send your write up .

38...Ujjivan Microfinance Services
Download “the writing guidelines
They took 980 days to achieve 100 thou- from www.microfinancefocus.com
sand borrowers . Next 300 days , the num-
or
ber is expected to double . More about
their strategies and approaches... write an email to
www.microfinancefocus.com info@microfinancefocus.com
Microfinance Focus [ January 2009 ] 3
`
Team
BOARD OF ADVISORS Managing Editor (India)
Mrs. Frances Sinha , Managing Director Vikash Kumar
EDA Rural System Pvt. Ltd , Gurgaon
Managing Editor (US)
Mr. Sitaram Rao, Director Jerome Peloquin
Equitas Micro Finance India P. Ltd, Chennai
Associate –Knowledge Management
Dr G. Gandhi Christina Weichselbaumer
Regional Head, DHS, New Delhi
EDITORIAL BOARD
Editorial office
Dr. N Jeyaseelan Microfinance Focus ,
Programme Director, Hand in Hand, Kancheepuram Avalahalli, Anjanpura Post , Bangalore( India)-62
P: +91.80.28436237 |f: +91.80.28436577
Dr. Souren Ghosal Email: info@microfinancefocus.com
Ex-Banker, Author , Kolkata Web: www.microfinancefocus.com
GOVERNING BOARD Disclaimer
Views expressed in the article/s are author’s own views. It does not
Mr. Suresh K Krishna , necessarily represent those of Microfinance Focus . Microfinance
MD, Grameen Koota, Bangalore Focus does not take any responsibility of correctness of those data.
Readers are free to use the info contained in the MICROFINANCE
Mr. Ashish Gupta FOCUS for educating the stakeholders in the micro finance sector
COO, Sonata Microfinance , Jabalpur however you must acknowledge MICROFINANCE FOCUS and origi-
nal source for the same.
Mr. M. V. Raman Submission

VP (Marketing), Elitser IT Solutions , Hyderabad
Do you want to share Write up/ case study /research papers or your
Vikash Kumar experiences . Write to us at info@microfinancefocus.com
Executive Director , Microfinance Focus, Bangalore
Microfinance Focus is a Publication of “Centre For Microfinance Promotion”. “Centre For Microfinance Promotion
is not for profit institution” Primary objective of this initiative is to inform about various developments from the
field of microfinance and engage in an open dialogue with various stakeholders of this sector.
www.microfinancefocus.com © copyright 2008-09Microfinance Focus [ January 2009 ] 4

`
Advertise with Microfinance Focus

We offer cost effective, magazine and website advertising solutions.
Write to us for detail

info@microfinancefocus.com
Or call +91. 9916738702
`
FROM INDIA DESK About the Issue
Information for better services!

I was discussing with one of the Microfinance`s client near Bangalore
(India), she has taken loans from 3 microfinance institutions, and she
told me that currently she doesn`t have any problem to repay the
loans installments. What if, she takes loan from 6 microfinance insti-
tutions! Do lending MFIs gauge their debt capacity? Will client`s en-
terprise have enough scope to grow and earn commensurate income
to keep the repayments on time? There may be many negative recip-
rocate of such situation, in case, if she has problem of repayment, she
likely to default with all the MFIs. In the context of microfinance, ac-
cessing and sharing such information will be very useful to minimize
the likely default risks and maintain the portfolio quality. Apart from
this, it will help to weed out clients with bad credit history in early
stages and will contribute on reducing the interest rate. However, in
the context of “Indian Microfinance sector”, setting up a credit bu-
reau might face lots of challenges to set its parameters. In Indian Mi-
crofinance sector, some of the Global Agencies specially
“International Finance Corporation” and “Planet Finance” are putting
their effort to work-out a credit bureau. We understand that, in In-
vikash@microfinancefocus.com dian microfinance sector, there is some effort however with little qui-
etness, going on in this direction. With an objective to bring more
consensus and recent update on effort, we are glad to bring some
very special papers on this issue. However moving to livelihoods do-
main is much needed to sustain growth of the sector and in this re-
gard a sector wide effort is much needed. As in our perspective paper
Mr. Muralidhar, pointed out “Today the crisis is that the poor are
struggling with lack of ideas for investing the funds they can access. It
is time, we all jump in to help them out. Rest will be history made by
us”.
Microfinance Focus has put a modest effort to promote communica-
tion among various stakeholders and incorporate more global issue
and perspective ,since two years almost, decided to re-launch the is-
sue based on reader`s feedback. We have added many new features
such as “Best Practices”, “Learning curve”, “Institution spotlight”, “I-
Focus” and some more features. Before you scroll through pages, I
just wanted to bring your attention that don’t miss a candid interview
with Mr. Aloysius Fernandez on SHGs issue and you will have oppor-
tunities to learn strategical approaches of one of the prominent MFI
in India.
Our Team has really enjoyed putting together various issues in our re-
launched issue, hope you will enjoy and will find a value addition.
www.microfinancefocus.com Microfinance Focus [ January 2009 ] 6- Vikash
`
FROM THE US DESK Editorial
Credit and Prosperity: Two Sides of the Same Coin
This is an argument for a positive scoring credit system to be employed in
developing economies. In the USA, credit is a way of life and has been for
fifty years. In low resource countries credit, even commercial credit is dif-
ficult to impossible to obtain. Most sales of all kinds are on a cash basis.
Yes, can be problems with aggressive and loose credit policies, but the
ability of merchants to depend upon the future payment of a present debt
has fueled and powered our economy. The judicious use of credit in com-
merce is an essential element in building a strong balance sheet.
In developing economies, most local commercial transactions are on a

cash basis. As more financial resources are being made available to the
bottom of the pyramid, (BoP) As these micro enterprise businesses begin
to grow, it will become necessary to grant short-term credit for wholesale
purchases and also to require credit from suppliers as well. Paying cash
for goods and services limits demand. This shrinks economic growth and
discourages investment and equity expansion.
The present negative credit scoring practiced by most banks in the devel-
oping world sets a negative bias toward granting credit privileges and lim-
its the provision of credit to otherwise promising and creditworthy enter-
prises. The credit reviewer is predisposed to find problems, since the
jeromepeloquin@fastmail.fm grading system requires it. A positive scoring method based upon balance
sheet, inventory, cash flow and other financial measures will raise the bar
and open the door to a growing economy. Local MFI’s can and should
band together and form a quasi-public, or cooperative organization apply-
ing a set of positive scoring standards for credit evaluation. It should be
mandatory, in accordance with the transparency and fairness doctrine, to
pre publish such credit standards.
Credit granting also requires a code of commercial law that provides legal
protection to both the creditor and customer. Models for protecting
credit grantors exist in the developed world. The key to an emergent
commercial and mechant class will be the establishment of dependable
and trusted credit and evaluation system. An effective credit scoring
process will be central to the establishment of an MFI Credit Bureau.
- Jerome

`
Should Access
to Credit be a
Human Right?
- Alex Counts
Poor As a Partner
December 10th is the 60th anniversary of the universal
- Farhat Abbas Shah
declaration of human rights. But what does this really
mean for the world’s poorest people? Millions are unable
There is an established principle among all civilized
to enjoy their social, political and economic rights, partly
societies that stigma and discrimination should be
because they live in extreme poverty. Access to credit
discouraged at every level and at every caste. For
and other financial services could help reduce poverty and example in the mental health sector, it is strictly
enable people to effectively realize many other banned to call a person suffering from psychological
rights. Over the decade, Professor Muhammad Yunus, illness a patient and seriously advised to call him or
founder of the Grameen Bank and a founding board mem- her a client. Also in the health sector there is a con-
ber of Grameen Foundation, has argued that credit should tinuous struggle to secure people who are HIV posi-
be recognized as a fundamental human right. Today, this tive from stigma and discrimination. Even people
is more relevant than ever as we grapple with issues of living with any sort of handicap like deafness or
justice and sustainability in a globalizing economy that is blindness are typically called special persons and
teetering on the edge of collapse in many parts of the never called handicapped.
world.
When the microfinance field describes the definition
Economic rights, which are controversial but essential, of poor individuals and claims to help not assist
were added to the International Bill of Human Rights 32 them, the discrimination begins. It is reality that the
years ago and, so far, 159 countries have signed and rati- ultimate goal of the microfinance industry is sustain-
fied this UN covenant. In our increasingly capitalistic ability and after that profitability. Without that the
industry cannot survive, but it should be transparent
world, access to loans and other financial services is the
and clear that a cup of tea is a cup of tea and a busi-
ticket the poor need to stay afloat and create new possi-
ness is a business.
bilities.
With our global economy still reeling from shockwaves, If the industry wants to own the claim of poverty
this important anniversary is a fresh opportunity to exam-
alleviation along with the target of sustainability and
ine our successes and the opportunities that lay ahead in
profitability, then it has to admit that the poor are
achieving universal access to quality financial services. To
have a truly inclusive global economy, the world’s poorest not only the clients but also the partners. When we
people and initiatives that jumpstart their economic activi- discuss helping the poor, we create stigma and dis-
ties must not be left out. crimination against the poor. We are earning money
from them and even then claiming to help them.
We have made tremendous strides in safeguarding human Actually, the poor are our business partners and we
rights since 1948, but more can and must be done. We should accept their status as such. The parameters
should celebrate Human Rights Day 2008 by applauding and modalities can be reset. We should give respect
the more than 113 million people who have already and honor to our clients and declare them our part-
started down the path of self-determination and inde- ners. By doing that, not only will we achieve lifetime
pendence thanks to microfinance – and by redoubling our
loyalty from the poor, but also we can fill the psy-
efforts to ensure that others can follow in their footsteps
chological gap between the working and business
by making access to financial services including credit a
fundamental human right. This would be a bold step in classes. The poor will become secure and remain out
helping the poorest global citizens realize the many rights of the exploitations of the old-fashioned and unsuc-
that currently exist for them only in theory. cessful economic theories as well.
[ Mr. Counts is the President and CEO of

Grameen Foundation]
`
Micro enterprise training

Gender perspectives
- Dr. N. Lalitha
In the arena of microfinance, the major players seem to

be NGOs who help to shape up the SHGs in the form of
initiating, nurturing, motivating, capacitating and upgrad-
ing them. The quantitative growth of about 30 lakhs SHGs
all over India is amazing. But the mission is not only for
forming the group for the sake of forming but economic
empowerment of the poor women by building capability’ in
them to graduate them from micro credit stage to micro
enterprise stage. How far the training programmes NGOs
have been successful in building capability in them. For
Amartya Sen has argued that what is most important is
not what we have but what we are capable of having –
that is using microfinance effectively to start micro enter-
prises or other sustainable economic activity. In the con-
text of globalization, the SHGs have to develop resilience
to absorb the localized shock waves of global competition.
Formation of quality groups, resource mobilization, risk
management , effective management of groups, proper Download a Special
maintenance of records, committed leadership, formation
of Interview
federation, group cohesiveness and participation of mem-
bers, enterprise management, periodic monitoring are the
invincible of management that would ensure outreach www.microfinancefocus.com
with sustainability; the pre requisite factor for ensuring
the above process is training. Have the SHGs been drilled
both theoretically and more practically in obtaining such
skills at least to a workable extent? Yes , but not suffi-
cient. Women find themselves competing in a heavily gen-
dered labour market which disadvantages them vis-à-vis
men who usually have more education, skill, work experi-
ence and capital to draw on. Women are largely perceived
as unskilled and semi skilled. The credit absorbing capac-
ity of the SHG members can be reinforced only by means
of enhancing their capabilities. The capacity building
strategies with women from marginalized sections
strengthen their understanding of the processes leading to
their subordinate position in the society and enhance their
ability to claim their due share of resources and power
within the families and communities and vis-vis the mar-
ket place and government organizations. The most defin-
ing aspect in training women to reach economic independ-
ence and from there on to run up the social ladder and be
visible on level ground, is to pull up the gender differential
and shatter the myths about gender and society.
(Dr. N. Lalitha is the Reader in Dept of Rural De-

velopment with Gandhi Gram Rural University,
Madurai, India )

` Perspective
Livelihoods
and
Microfinance
————————————————————
G Muralidhar
Akshara Network for Livelihoods Support
W
Most of us, who are and continue in the devel-
opment sector, are essentially livelihoods work-
e, as a country, have come a long ers and their intent is to ensure that everyone
way in meeting the financial needs including the poor have a decent portfolio of
of the poor. We are witnessing a transforma- livelihoods. The livelihoods are a play of six
tion of micro-finance as a growth industry. capitals – natural, physical, social, human, fi-
More and more women are mobilized into SHGs nancial and spiritual, within the four contexts –
all over the country. They are further mobilized ecological, techno-economic, patterns of distri-
into higher order federations. Bank linkages are bution of capitals and patterns of investment
growing rapidly. Some banks have started to and expenditure, resulting in four arrows – in-
offer cash credit lines of Rs.5 lakh per group. come, expenditure, employment and risks. The
Credit Cards to farmers, weavers etc., are not livelihoods interventions are at the level of one
uncommon now. or more arrows, capitals, contexts and/or a
While a lot more poor still need to be reached combination thereof. Thus, the intervention re-
sulting in enhancing livelihoods may happen
out with access to microfinance services, and
with information, knowledge, skill development,
some more services can be loaded onto micro- infrastructure, access to finance, collectiviza-
finance bandwagon, many a poor and their or- tion, access to storage, technology, value-
ganizations are struggling to find ideas to in- addition processes, direct reach out to the mar-
vest the funds in remunerative activities. The ket/consumer, risk diversification, minimum
problem moves from the lack of funds to the assured returns, etc. Therefore, the livelihoods
lack of ideas to invest the funds. The sector interventions range from extremely simple ac-
tions to extremely complex sets of activities.
moves from the microfinance to microfinance
Thus, microfinance activities are a small subset
plus all across. Each one is exploring the ‘plus’. of the large livelihoods domain. Microfinance
The ‘plus’ may include insurance, loans and re- plus ways are expanding this subset to an ex-
payments in kind, food loans, businesses by tent.
the groups and federations themselves, public Microfinance activities have become fairly sys-
services for fee etc.
www.microfinancefocus.com tematic and
Microfinance Focus the processes
[ January 2009 ] 10have become
`
‘standard’ for easy replication and scaling-up. institutions.

The communities have responded well to these
processes and are endorsing them with 99%+ The way forward gets further complicated when
repayment rates. The investors and the bank- we contemplate about the people whose lives
ers are responding with increased investments and livelihoods are threatened and affected by
for microfinance. It is able to attract a good disasters. A variety of disasters and crises are
number of human resources into it. The remu- looming large. This gets further amplified in
nerations, it is able to pay, are comparable with many an ecologically fragile and marginalized
the corporate sector. Bright and young minds zone. This further gets fuzzy for the poor with
are getting attracted to give a try. globalization, liberalization, privatization and
climate changes.
Livelihoods activities are too large in number to
attempt any standardization and/or systemati-
In this dynamic context, we, the ‘blind’, should
zation. For example, a small village of 100-200
ensure that all the ‘blind’ come together and
families may have a number of crops, some
unravel the ‘elephant’ first, and explore the so-
once a year, some twice a year and sometimes
lutions. We need to reach the ‘ant’ when the
thrice a year. It may have some plantation
‘fish’ does not dry-up (as in the seven fish and
crops and some horticulture crops. It may have
the ant story). We need to recollect the sane
some trees and some fruit-bearing trees. It
advice of Seattle, the Red Indian Chief of con-
may have fisheries and produce a variety of
serving and living sustainable livelihoods.
fishes. It may have livestock including sheep
and goats, cattle, buffaloes etc. It may have As the pace of life is dramatically faster than
handlooms and handicrafts. It may have stone what our grandfathers had, the most prominent
cutting, bidi rolling, and other miscellaneous issue is how we could offer ‘metafishing’ skills
activities. There may also be some support ser- to the community, in addition to offering
vices like transport, trade, education etc. The ‘fishing’ skills, in stead of offering fish. This is
people may be casual labour, skilled labour, the need of the hour. The entire country and
self-employed, enterprise owners etc. Some the world have to gear up for this effort. And I
may be full-timers and some part-timers. Some understand that this takes time, may be 10
may not be engaged in direct income genera- years or 20 years. This can begin with appre-
tion activities. ciation of current reality and pooling up knowl-
edge-skills-resources in people’s domain with K
We have very few people who can appreciate -S-R in our domain and outsiders’ domain. This
and support these livelihoods in toto. In fact, in turn generates a variety of informed choices
there are very few who can appreciate and for the community to choose from. The com-
support a single value-chain in its entirety. The munity implements the plan so developed. In
so-called experts master a bit of the value- these iterative and repeated rounds, the com-
chain. Yet, the poor and their collectives cannot munity acquires metafishing skills and, I guess,
afford them. learns to adapt to the changing needs and
Some elements in the way forward for enhanc- changing contexts.
ing the livelihoods of the poor include organiz-
ing women and youth around savings, credit Vast majority of the poor have to become part-
and micro-insurance into SHGs and their higher ners in the high growth of the country. The is-
order federations; undertaking participatory sue is how we take some poor out of the exist-
livelihoods planning appreciating livelihoods ing traditional activities so that the remaining
current reality, gaps and opportunities; facili- poor have better returns. What kind of voca-
tating bank linkages and convergence with tions we can think of offering to them so that
other programs to realize these plans; organiz- they come out and prosper? The situation at
ing people around livelihoods activities; orga- migration is not ‘great’. How do we address the
nizing shops that sell essential items; building plaguing issue of the equity in many parts of
skills of the youth for meeting the services re- the country? How do we ensure that minimum
quired; exploring employment opportunities wages come to workers? How do we address
outside and providing training; and building the issue of education and literacy on which the
human resources for working in the people’s long-term solution to the poverty lies? How do

`
we ensure that the poor have access to public Act, increased research into areas of livelihoods
services like health which form the most of the of the poor like dry land agriculture, minimum
family’s expenditure? We still have lot of gen- support prices for all products of the poor, en-
der disparities to cope with and address. Civil suring minimum wages for all workers, risk
Society efforts are, at best, weak. covers for a wide variety of livelihoods of the
poor etc., are important.
MFIs are spreading across the country. SHG
movement is growing rapidly. The proble of ac- Finally, let us appreciate the reality - when
cess to finance is being addressed. The need in crisis, what matter the most are air, wa-
for the Governments and the Civil Society is to ter and food. The rest is a matter of opin-
move into livelihoods domain. These efforts re-
ion really. Today the crisis is that the poor are
quire large number of human resources at the
struggling with lack of ideas for investing the
community level, grassroots and at higher lev-
els – paraprofessionals, professionals and vol- funds they can access. It is time, we all jump in
unteers, with passion, commitment and best to help them out. Rest will be history made by
brains. The poor need to have a hope for better us.
life and this support can give that hope. Further
policy support in terms of institutional frame- *************
work like Mutually Aided Cooperative Societies’
Download
A Special
Issue
on
Social
Performance
Management

`
Horizon
Credit Management
Some Radical Thoughts on Microfinance
Micro credit to farmers and artisans needs to be routed

through some voluntary agencies preferably of farmers
Dr. Souren Ghosal and/or artisans. This has been the findings of almost all
research studies undertaken in this regard particularly
in Asia. The reason is very obvious. Most of the farmers
and artisans in rural areas do not possess necessary
skills and drive to transform themselves as viable en-
trepreneurs. They lack in technical knowledge and mar-
ket intelligence. It is, therefore, necessary that they
should get support from within by grouping themselves
and also by joining with others who have necessary
expertise and leadership to become better entrepre-
neurs.
To effectively provide
micro finance at the root Institutional Structure
level, studies undertaken Further, it would be advisable for commercial banks not
to be branch-centric for catering micro credit to farm-
in Asia suggest that it ers and artisans. Merely conceiving a specialized
should be routed branch to cater to rural finance may not be an ade-
quate innovation. Banks should be encouraged to inno-
through organization of vate and experiment as no foolproof institutional
framework exists today. In fact, almost all research
users. The lack of studies have found that conventional banking would
technical knowledge and not be able to reach farmers and artisans and for that
reason most of them have remained under the clutches
market intelligence is a of moneylenders who, over the years, have swindled
farmers and artisans by providing facile loans at a
major hindrance. It can heavy cost.
be overcome by joining
It has become difficult to replace money lenders de-
up with institutions, spite so much effort made in this regard due to two
very important factors viz.,
which can provide
necessary expertise and 1) facile credit system without the ordeal of much pa-
per work and
leadership. 2) making available the credit for all purposes. The
question may, therefore, be asked why we should try
to have any other system.
The reason is very obvious. Money lenders have ex-
ploited farmers ..Next Page

`
Up-to their neck for their lack of market intelli- (MFIs) are of recent origin and they do not
gence and also for their weak financial position. have unlimited resource both in leadership and
The need is, therefore, to create such institu- management skill. Moreover, such institutions
tional structure that can provide easy credit have to develop Self Help Groups (SHGs) at
with reasonable cost to help farmers and arti- local base in villages and semi-urban places
sans become viable entrepreneurs. where one is having adequate rapport with
For this, considerable experimentations have people of the area. It is true that it is difficult to
been made in India and from those we would prescribe any cutoff rule for the same as each
easily understand that farmers and artisans in- micro financing institution has varied type of
dividually are ignorant and weak in bargaining leadership and management skill besides hav-
loans at competitive interest rates. ing differing amount of financial resources.
Micro Financing to Groups Comprehensive Policy Framework
One popular innovation is to form groups of However, one may suggest that at the apex
farmers and artisans for obtaining any loan level, banks may develop or support one MFI to
from banks. However, it has also been experi- cater to one or two districts of a state. These
enced that groups of farmers or artisans institutions may be informal bodies of NGOs.
formed only to provide group guarantee for But it would be better if some special legislation
loans taken by them would not help them to is enacted by the government to make it a le-
become viable and in many cases such guaran- gal entity to undertake all the jobs envisaged
tees would not be of much help to the lending for such institutions by banks keeping in view
institutions also as the total group may not be of the potency of such institutions to enable
viable because they had no guidance from small farmers and artisans to attain economic
banks on farming and marketing to become viability in the country. It may be worthwhile to
viable farmers and artisans. Further such note that Pakistan has enacted a comprehen-
groups do not have any control on individual sive policy framework (Ordinance No. 2001) to
farmers for undertaking better farming and regulate its micro financing institutions. It is
marketing besides the fact that such groups high time for our government to come out with
could never become a cohesive group to look some such policy framework to guide and
after each other's interest both in farming as monitor these institutions. There cannot be any
well as in marketing. doubt about the need of these institutions in
our country as these have been found highly
These groups are unable to harness resources potent institution for poverty alleviations. How-
for better farming and to generate enough bar- ever, the strength of these institutions will de-
gaining power in buying inputs and marketing pend greatly on how successfully they develop
their produce. Recent studies have revealed self help group of farmers at local base to con-
that micro financial institutions should veer ceive and manage projects to make farmers
round the strategy of building healthy Self Help and artisans viable entrepreneurs. These pro-
Groups (SHGs) of farmers and artisans and jects could be on farming and/or subsidiary
also create opportunity for female members of agro-industries based on local talent.
the family of farmers and artisans to be a
member of the group or its subsidiaries as they Self Help Groups and Micro Financing In-
have been found more prone to saving and mo- stitutions
tivating force for the families.
It has been observed from the present per-
Micro Financing Institution - NGO formance of commercial banks that to make
group of farmers and artisans (SHG) as viable
It has also been observed that banks in India unit, one has to keep in mind the following
depend heavily on 30/40 successful Micro Fi- guidelines:
nancial Institutions (MFIs) instead of develop-
ing new institutions wherever they find such  Should have compact plot of land of 5 to 10
existing institutions over burdened. It has to be acres having irrigation facilities or having
kept in mind that Micro Financing Institutions potentiality of developing such facilities.

`
Similarly, for artisan groups it would be farmers. It may undertake reviews during
helpful if such groups are formed where the crop season and/or production season
cluster of artisans of same trade live or of farmers and artisans and keep SHG in-
where exist the potentiality of developing formed of its comments for initiating neces-
such cluster of people having skills to pur- sary action in the mid-course for safeguard-
sue one or two identified trade. ing the loan. These reviews shall have to be
undertaken by the extension officers of the
 Should be suitably empowered with skills bank who should be competent enough to
and fund to perform their assigned func- guide farmers and artisans for improving
tions. their farming and/or village-based subsidi-
ary industries.
 Should also have internet facilities at village
level for easy reach to latest technology and  Bank shall assess the risk that farmers and
market intelligence similar to e-Choupal artisans have taken and to what extent that
conceived and promoted by the ITC in In- can be provided for through subsidy of the
dia. government and contribution to be made by
the bank and the SHG. A risk fund may be
 Should have well-defined roles to play and created to meet such exigencies in farming
the same should be elaborated by the apex and business undertaken by farmers and
body, i.e., micro financing institutions at artisans.
district headquarter (MIC) in consultation
with the financing banks.  Bank shall examine the possibility of provid-
ing loans to farmers and artisans on profit
 Should also be empowered to develop sharing basis as charging interest on such
schemes to cover risk partially or fully that loans (high or low) have not yielded very
may arise to farmers and artisans due to healthy effect on farmers and artisans. In
unforeseen reasons. A participatory fund fact, right from the days of moneylenders to
may be floated in collaboration with the the days of institutional credit, policy mak-
apex institution and the financing bank. ers have failed to develop suitable interest
strategy with the result in most of the cases
 Should be able to conceive, promote and lending agents satisfied with interest only
manage infrastructure projects in rural and and foregoing principal amount and/ or ex-
semi-urban areas to help farmers and arti- empting partly or fully the same as the rate
sans to store and market their products as of interest levied was unbearable. This
and when they perceive good marketing strategy, therefore, needs serious thinking
opportunities. by the policy makers. In the Islamic bank-
ing, charging of interest is prohibited and
 Should be able to give support services to sharing of profit is adopted. It is interesting
farmers and artisans like supply of capital that RBI has recently appointed a high
and crop inputs and transport and ware- power committee to study the efficacy of
housing for marketing their produce. the adoption of Islamic banking system for
 Should form a subsidiary group or have in lending in some areas. In fact, some foreign
the parent group itself a female group con- banks have shown interest in this consider-
sisting of family members of farmers and/or ing the feasibility of adoption in some coun-
artisans to promote savings and to provide tries. This may be a boon to poverty
employment to women folks in rural handi- stricken farmers and artisans as interest
crafts and/or subsidiary agro jobs and rural charging has been a bane to them for a
industries. long period. This will also do away with the
controversy of whether one should charge
System for Lending low or normal rate of interest to farmers
and artisans. Further, farmers and artisans
 Banks shall lend fund as assessed for pro- need not look for mercy from the lending
jects prepared by the SHG and also for an- institutions.
ticipated consumption needs of the group of

`
 Bank may join hands with insurance compa- to their economic problems. The above
nies to cover the risk in farming and busi- model of micro financing may address ef-
ness run by the group of farmers and arti- fectively some of their problems and bring
sans. Since risk has to be assessed on out their latent strength for amelioration of
group basis it would not be very difficult to their poverty. The need of the hour is to
assess such risk and creating special risk have a bold vision and to adopt innovative
sharing fund to meet unforeseen risks. methods to reach deprived section of our
population who are mostly habitating in ru-
 Bank may also participate in Derivatives in ral areas.
the commodity markets to cover such risks.
Government of India is considering the fea-
sibility of such participation very seriously. **********************
In fact, a change in the market system in
agriculture is in active consideration of the About the Author:
Government of India. The Government of
Dr. Sourendra Nath Ghosal holds a PhD in Finance and
India is actively considering changing the
holds Master degrees in both commerce and Econom-
marketing route (AGRI-PRODUCE-PATH) to
enable farmers to have direct contact with ics. He has experience taught for 18 years in colleges
the market. The present system built and university of Jodhpur Rajasthan; Worked as princi-
around Mandi warps the price signals the pal cooperative training college for about 2 years at
market sends and thereby farmers just get kalyani w. b. He worked with United Bank of India FOR
only 20-25% of the price of their produce. 22 years and retired AS G.M. credit. He served in many
To change the same, the Government of board including "United Industrial Bank, W.B. Agro In-
India is encouraging the private sector to dustries Corporation and Small Industries Corporation.
buy directly from the farmers and to create He has also authored several books and Papers pub-
an alternative link to Mandi. This can really
lished in several national and International journals &
work if MFIs and SHGs are roped in with
adequate resource and skill.
newspaper. He has also served as a visiting/Part-time
faculty member at IIM Kolkata, Vidya Bhawan and In-
 Bank shall have to develop new methodol- dira Gandhi Open University etc.
ogy to increase their rural reach and for this
they may look to the experimentation made
by ITC and HLL in India. ITC's e-Choupal
and HLL's project Shakti may be worth
studying. Read Every Month
 Banks may study the innovative method
adopted by the ICICI bank to enhance their
rural reach. ICICI bank has built up a sup-
porting network of Village Internet Kiosks in
partnership with Social Initiative Group
(SIG).
Microfinance Focus
 The above approach may bring a paradigm
change in rural lending recently branded as Comprehensive coverage on Microfinance issue
micro financing. Such radical change is in-
evitable particularly when we are marching
Absolutely Free subscription
ahead in economic field. There is nothing
wrong to adopt globalization as it strength-
ens the economy rather than weakening it
as often wrongly assumed by the politicians
and the deprived sections of our society. In
fact, the deprived section of the society will
not remain deprived if we carefully address

`
Horizon
Environmental Analysis :
Mobile Banking In India
M obile banking, a symbiosis of technology and financial ser-

vices, is the hottest area of development in the banking
sector and is expected to replace the debit/credit card system in fu-
ture.
Mr. Shumit Vatsal
ATM and Internet banking have been around in India for a while.
While both modes have had some success, penetration and use levels
have been moderate. While ATMs offer convenience, they pose a per-
ceived security threat in India given instances of mugging around
them. Senior citizens and women appear reluctant to use ATMs if
they have a choice to go to a branch and withdraw money in safety.
The security situation in India shows little sign of improvement and
therefore a large-scale proliferation of ATMs will remain a challenge.
Internet banking, on the other hand, relies on PC and Internet pene-
tration. Estimates suggest that there are approx 40 million Internet
users that are expected to rise to 100 million soon – despite this
growth; penetration and use levels remain low, especially in non-
metro areas.
Unlike online banking, mobile banking has certain advantages on its

side. It would not attract much investment from the bank and would
not need a change in the existing infrastructure of the bank.
“We believe branchless banking can offer basic banking services to customers at a cost
of at least 50% less than what it would cost to serve them through traditional channels.
Branchless banking helps address the two biggest problems of access to finance: the
cost of roll-out (physical presence) and the cost of handling low value transactions.”
- Gautam Ivatury , CGAP- Technology Program,

`
M obile banking has the potential to

bring a whole host of people that
have no/little access to land lines/internet con-
nections onto the electronic platform – an inno-
Mobile operators and mobile-application developers
require a separate set of guidelines for nonbanking
providers who want to offer mobile banking services.
Regulations on Security: The RBI’s guide-

vative way to generate financial inclusion. To lines call for a two-factor authentication for
do so successfully will require customer train- validation of a customer. The industry has re-
ing, technology stabilization and managing acted to this by interpreting that two-factor au-
carefully the ‘know your customer’ issues. thentication can be supported only by GPRS
and not through SMS. Media has also criticized
RBI by saying that the new mobile banking
Political Factors regulations such as the two factor authentica-
tion do not facilitate financial inclusion since
Only Banks can Offer Mobile Transaction Ser- basic mobile phones owned by majority of peo-
vices: Only licensed banks that a have a physical ple in rural India do not support GPRS.
presence in India are allowed to offer mobile-
banking services. The banks are responsible for Secure transactions can happen even via SMS.
ensuring Know Your Customer norms, and SMS’es are of two types – Normal and En-
must have core banking systems in place. crypted SMS. Normal SMS is what we use for
day-to-day communication and is not secure.
Several MFIs today act as a business corre- The SMS is not encrypted when it passes
spondent (BC) (agents who work on behalf of through the pipe it can be accessed. On the
banks) for commercial banks to reach areas other hand, an encrypted SMS is converted into
where opening a bank branch is not viable. non-readable text using a RSA / AES (security)
Usually at the business correspondent’s office, algorithm. The text that can be encrypted are
a bank representative is present who oversees numbers from 1-9, capital letters from A-Z and
the enrolment of clients and ensures that the small letters from a-z. Special characters can-
KYC requirements are complied with. The bank not be encrypted. When the bank client sends a
through a BC can enroll clients, the clients can sms from his phone to the server, a sms along
be served by the bank using mobile banking with an encrypted key is sent to the server. If
thus fulfilling the objective and the spirit of fi- the encryption algorithm is strong enough, it is
nancial inclusion not possible to read the SMS. The server then
The table below shows the Political, Economic, Social and Technology (PEST) factors
that affect the mobile banking industry in India
Political Economic Social Technology
Only banks can offer Cost of handsets A required be behavioral One comprehensive applica-
mobile transaction ser- change tion for all mobile handsets
vices
Business Correspondent Mobile penetration in Illiteracy Security concerns

regulation rural India
Regulations on Security
Daily Transaction Limit
Goal of Financial Inclu-

sion

`
decrypts (opens) the encrypted key using a such that banks cannot open branches in every
RSA encryption algorithm. This technology is corner. Mobile banking as a technology is cer-
perfectly secure and GPRS is not mandatory. tainly an answer to the growing demand for
Not many phone users in India subscribe to banking facility at the village level.
GPRS and even fewer have phones that can
support GPRS. Around 60 percent of the 306 Economic Factors
million handsets or mobile connections in India
are without GPRS and WAP. Due to lack of Cost of Handsets: Handsets are priced cur-
GPRS connectivity, Smart Trust applications, rently at less than $25 (Rs.1000) and call rates
secure SMS based applications will be the are less than 0.05 cents (Rs.2) per min-
prominent at least in the initial years of mobile ute. Industry participants like Bharati Airtel
banking. have already awarded a contract worth $2 bil-
lion over two-years to Telefonaktiebolaget LM
Daily Transaction Limits: The RBI has capped Ericsson, to expand its network in rural areas
daily mobile transaction limits at Rs 5,000 for and provide capacity management. Gartner ex-
transfer of funds and Rs 10,000 for purchase of pects 58 percent of the rural population and 95
goods or services. percent of the urban population to be covered
by mobile networks by 2011. It is expected
This regulation, at least in the early stages of that the predominant model is likely to be a
mobile banking, does not affect customers who community owned handset, a concept that has
will be vary of performing high value transac- already been tried and tested in some areas.
tions. It will surely not affect rural customers Considering the rapid growth mobile phone us-
who rarely receive more than Rs.5000 per age, offering financial services through mobiles
day through remittances. It is also unlikely could help thousands, especially in rural areas,
that the rural customer will pay more than gain access financial services (banking and in-
Rs.10,000 for paying his utility bills or other surance products).
services.
Increased Penetration in Rural In-
Goal of Financial Inclusion: Currently in India, dia: Approximately 400 million Indians do not
134 million households are financially excluded, have a bank account. India has a base of ap-
which is 60 percent of country's population. proximately 300 million mobile handsets. Also,
Moreover, Financial Exclusion in Urban India is the Indian mobile phone market is worth up to
about 44 percent where as exclusion in Rural 10 million handsets a month. With the advent
India is about 76 percent. Among the recent of an exponential growth in mobile phones in
Government initiatives it has been proposed India, mobile banking applications can be used
that a National Rural Financial Inclusion Plan as an efficient channel to deliver financial ser-
should be launched with a clear target to pro- vices to the farthest parts of the country at sig-
vide access to comprehensive financial services nificantly low costs both for the financial insti-
to at least 50 percent of the financially ex- tution as well as the client. Only 2% of rural
cluded households (approximately 55.77 mil- India has access to cell phones today. With
lion) by 2012 through regional and semi-urban most mobile companies focusing aggressively
branches of Commercial Banks and Regional on rural India, this situation is likely to change
Rural Banks. The remaining households are to in the very near future. In remote geographies
be covered by 2015. The Finance Minister in his of India, mobile recharge cards are a fast mov-
budget for 2007-08 announced the setting up ing product and Kirana (packed, to-the-brim
of a fund for financial inclusion of about Rs. 500 stores) storeowners earned a significant portion
Crore to meet cost of technology adoption. of their revenues by selling prepaid mobile re-
Looking at financial inclusion especially in charge cards.
unique nature of states such as Uttarakhand
and Himachal where a ‘money order’ economy Social/Demographic/
prevails and transferring money is problematic; Infrastructure Factors
mobile phone banking would prove an effective
way to expand the reach of financial service A Required Behavioral Change: Banks plan to
delivery. The topography in hilly terrains is capitalise on this gap to increase penetration.

`
There are 300 million mobile users, with 6 mil- Security Concerns: Security of financial trans-
lion being added every month. Despite such actions, being executed from some remote lo-
potential for convenience and business oppor- cation and transmission of financial information
tunity, few people use mobiles even for simple over the air, are the most complicated chal-
b a n k i n g q u e r i e s . lenges that need to be addressed jointly by
mobile application developers, wireless network
But people have their reasons for not yet lap- service providers and the banks' IT depart-
ping up the opportunity. They find many fea- ments. Security applications will gain a lot of
tures complex to handle. That apart, there is ground during the period 2009-12. These appli-
the issue of sensitising customers. There have cations will include anti-theft and device recov-
been cases where help-desks at banks have not ery features via GPS. There will also be a lot of
been able to offer much to willing users. Mo- interest in areas such as remote data locking.
biles have become ubiquitous, and using them
for banking is the logical step. But in order for
banks to explore full potential, increasing Conclusion
awareness is essential. A good strategy for
banks to ride on the mobile way will be to ini- Mobile Banking is the most spoken about fac-
tially offer some services for free. tors in the area of development in the banking
sector as a whole and is expected by industry
Banking Network in the Country: There are experts to replace the credit/debit card system
about 68,000 bank branches in this country in future. During the last quarter of 2008, there
and 23,000 ATMs. But what's astounding is that are 47 million mobile users, with an average of
the number of mobile subscribers in India, 2 million being added every month While the
which is 85 million, is growing by 5 million each government incurs a transaction cost of Rs 12-
month. So while today mobile banking is still 13 for every Rs 100 of loan disbursement, mo-
not as widely used, the possibilities are limit- bile banking helps it reduce the cost to a mere
less Rs 2. The number of mobile users is estimated
to have far surpassed the number of Internet
Illiteracy: Illiteracy could prove an issue when users. Some techniques that can be imple-
using technologies like mobile phones, espe- mented for the same include using the phone-
cially for tribal communities. Moreover, mobile lock function on your mobile device when it is
banking pre-supposes that the mobile holder not in use, choosing passwords which are diffi-
has a bank account, and thus along with pro- cult to crack and keeping them safe and ensur-
viding capacity building organizations will have ing that the phone is configured securely, espe-
to focus on financial inclusiveness. This chal- cially when it comes to configuring the Web
lenge can be overcome by service provider de- browser and email software. Finally, unless the
veloping a user friendly mobile application us- experience on the mobile device is as fric-
ing local languages. tionless and simple as possible, consumers will
wait to check their account status by visiting
Technology Factors the bank.
**********************
One Comprehensive Application for All Mobile
Handsets: A major challenge for mobile appli-
Shumit Vatsal works as a program manager at Evolvus Solu-
cation development is the great variety of dif-
tions. Evolvus Solutions offers an end-to-end system called
ferent target devices with different capabilities,
Micro-Beans that creates a link for micro-finance clients to
features and restrictions. There are a large
step into the formal financial sector. Acting as a transaction
number of different mobile phone devices and
backbone, Micro-Beans supports scale that is essential for
it is a big challenge for application providers to
the growth of a micro finance institution. The solution allows
offer mobile banking solution on any type of
data to be captured remotely and transmitted to a backend
device. Some of these devices support J2ME
where data is stored securely and can be retrieved with
and others support WAP browser or only SMS.
ease."
Ideally, the technology provider should ensure
that the application should function on all hand-
sets ranging from a Nokia 1010 to a I Phone.

` In Focus
Developing
Credit
Bureau
Developing Credit Reporting for Microfinance

By Peer Stein , IFC with IFC A2F Team Members
Opinion
By Samit Ghosh (Ujjivan) and P N Vasudevan (Equitas )
It is Not about Technology
By Anna Somos Krishnan and Enzo Cicchirillo , Planet Finance
Opportunities , Challenges and Way forward

By Dr. N Jeyaseelan
“While credit reporting can help MFIs streamline lending activities and
strengthen risk management practices, it is also important to emphasize
the importance of educating borrowers on the relevance and use of per-
sonal credit histories. Empowering the poor to build and use
“reputational collateral” to access financial services at better rates of fi-
nancing, while maintaining prudent levels of indebtedness, benefits them
and the financial system as a whole.”
-Peer Stein
Head (Financial Infrastructure and Institution Building ) , IFC`s Group

`
Share your write-up

Do you want to share Write up/ case study /research papers or your experiences
Please write to us at info@microfinancefocus.com or vikash@microfinancefocus.com
Specifications
Words limit
Content Segment Description
Reflection Small Paragraphs on various issues in Microfinance 300
I- Focus About a significant initiative /idea/innovation 1000-1500
Perspective 1 Detail opinion on some issues 1000-1500
Horizon 2-3 detail stories of any issue pertain to the sector Each 1500-2000
Best Practices Management of Microfinance and for improving operational efficiency 1000-1200
Please write your topic title, your name (with salutation), organization where you are working and your designation along with
the article/case study/document. You may send your brief profile (not more than 3-4 sentences) with your passport size photo.

`
Credit reporting
contributes
to financial
stability and
DEVELOPING deters systemic over-

indebtedness and
defaults
CREDIT
REPORTING
FOR MICROFINANCE
By Mr. Peer Stein , Head (Financial Infrastructure and Institution Building ) ,
IFC`s Group
With Support from Following IFC’s A2F business line Team Members
◊ Tony Lythgoe,
◊ Oscar Madeddu,
◊ Colin Raymond,
◊ Peter Douglas Sheerin,
◊ Nataliya Mylenko,
◊ Makanda Kioko,
◊ Swapnil Kant Neeraj
and
◊ Shalini Sankaranarayanan.

`
(i) Improve risk management. Having access to a cli-

Approximately two-thirds of ent’s credit history enables lenders to make a thor-
the emerging market popula- ough assessment of a borrower’s repayment capacity.
Specifically, a lender can quickly assess a client’s level
tion does not have access to of indebtedness or propensity to repay a new loan,
quickly eliminating obviously bad borrowers from the
financial services. While physical loan appraisal process. Further, the lender can use
the client’s credit bureau data/ranking to structure
infrastructure such as bank the loan to fit the client’s risk profile, e.g. require a
branches, ATMs, POS terminals are higher level of guarantee, reduce the loan amount, or
require payment of existing debt before a new loan is
important for expanding access to issued. In addition, the lender can use the data to cal-
finance, financial infrastructure ele- culate loan loss provision levels more accurately.
ments, including credit bureaus are (ii) Reduce transaction costs. Use of credit bureau
just as important. data has proven effective in reducing loan approval
costs while enhancing risk management. The net ef-
A credit bureau is an institution that collects in- fect is a reduction in costs associated with loan proc-
formation from creditors and available public essing, defaults and provisioning – and, therefore, a
sources on a borrower’s credit history. Informa- potential increase in net income. In Bolivia, Ecuador,
Peru and other markets with microfinance credit re-
tion, on individuals and small firms from various
porting systems, several lenders underscore the im-
sources is compiled into a comprehensive credit
portance of credit information as one of the key in-
report that is then sold to creditors. Credit bu- struments for efficiency gains and cost reductions in
reaus support the retail lending business by pro- loan appraisal and monitoring.
viding objective information on the credit worthi-
ness of individual customers or small businesses. (iii) Improve efficiency. Use of credit bureau data has
They allow lenders to make faster and more ac- proven effective in eliminating part of the labor-
curate credit decisions, thereby lowering their intensive and lengthy early screening part of the loan
default rates, by 30 to 40% according to various appraisal process. For instance, a manager of INFO-
studies and increasing their credit lending vol- CORP, a credit bureau in Peru, claimed that the use of
umes. 1 credit bureaus reduced the waiting time for loan ap-
plications from a week to 24 hours in some cases. 2
Benefits of credit reporting for microfinance In the case of Genesis (a Guatemalan MFI), use of
credit bureau data enabled the average credit officer
Credit reporting has significant benefits for microfi- to select 55% more new borrowers per month. 3
nance institutions (MFIs) and their borrowers. MFIs
are constantly grappling with the need to expand loan (iv) Increase client base and MFI competitiveness.
portfolios and simultaneously lower transactions Credit information can help MFI lenders tap new mar-
costs. It has long been recognized that technology can kets and new borrowers, and can encourage the ex-
enable MFIs to expand while maintaining a double pansion of lending in rural areas. Added to this are
bottom line. Credit reporting represents yet another, the efficiency gains from faster loan processing times
albeit lesser known, opportunity for MFIs to achieve which imply better client service - all of which help
this end. MFIs maintain a competitive edge.
In particular credit reporting can do the following for (v) Increase access to finance at better rates. Microfi-
microfinance: nance borrowers stand to benefit as well, as the
credit bureau helps them build “reputational” collat-
eral, which precludes the requirement for physical

`
“Credit reporting also contributes to financial

stability and deters systemic over-indebtedness
and defaults: it is particularly important and rele-
vant in the context of the current financial cri-
sis.”
collateral when applying for a loan. Moreover, as nance industry was hit by a financial crisis stemming
lenders streamline operations and lower operating from over-indebtedness. Bolivia’s credit crisis of 1999,
costs, these savings are passed on to micro borrowers demonstrated that an effective credit reporting sys-
in the form of lower interest rates. Thus credit report- tem is a public asset that is critical to the financial
ing can help make loans more affordable and more system’s health and responsible finance. The crisis,
accessible to micro borrowers. which was stimulated by over-indebtedness,
prompted borrower revolts, diminishing consumer
(vi) Provide better incentives to repay. Assuming lending, portfolio quality deterioration with portfolios
borrowers are aware of the credit bureau and what it -at-risk (PARs) as high as 10% and reduced business
implies for borrowing, credit bureau information can opportunities for MFIs.4 Drawing lessons from the
discipline borrowers by letting them know that they crisis, Bolivia and several other Latin American coun-
risk being locked out of credit markets if they delay or tries took strong measures to strengthen microfi-
default on their payments. nance credit reporting systems and general financial
sector supervision.
Promoting financial stability
Empowering borrowers
Credit reporting also contributes to financial stability
and deters systemic over-indebtedness and defaults: While credit reporting can help MFIs streamline lend-
it is particularly important and relevant in the context ing activities and strengthen risk management prac-
of the current financial crisis. The current crisis finds tices, it is also important to emphasize the impor-
its underpinnings in a systemic lack of oversight and tance of educating borrowers on the relevance and
the use of lax risk management practices by providers use of personal credit histories. Empowering the poor
of financial services. Users of credit bureaus include to build and use “reputational collateral” to access
financial institutions and non-bank financial institu- financial services at better rates of financing, while
tions that are likely to be affected by global liquidity maintaining prudent levels of indebtedness, benefits
constraints. them and the financial system as a whole.
By pooling data across financial systems and reducing The status of credit reporting in microfinance
information asymmetries, credit information systems today
support efficient credit allocation and strengthen risk
management capabilities, thus enabling lenders to In most emerging markets credit bureaus are either
make better informed and more responsible lending underdeveloped or nonexistent. The situation is ag-
decisions. To reiterate, bureaus can help reduce de- gravated in the context of microfinance since credit
fault rates by 30% to 40% in environments with com- reporting for microfinance is still a nascent concept
prehensive credit information sharing. that is only now gaining support outside of the Latin
American continent. Recent statistics from the World
Credit reporting for microfinance gained prominence Bank’s Doing Business report indicate that of emerg-
in the late 1990s when the Latin American microfi- ing market bureaus surveyed, 60% report receiving

`
data from MFIs.5The news, while encouraging, can be also inflexible and unable to process customer
misleading as several challenges remain with respect feedback and react quickly to changing con-
to integrating MFI data with that of credit bureaus. sumer needs.
The status of credit reporting in microfinance  Both MFIs and the credit information providers
today servicing them recognize the lack of adequately
trained/ skilled manpower and the need to pro-
In most emerging markets credit bureaus are either vide training.
underdeveloped or nonexistent. The situation is ag-
gravated in the context of microfinance since credit  Physical infrastructure, like access to electricity
reporting for microfinance is still a nascent concept and internet, can affect the ability of MFIs to
that is only now gaining support outside of the Latin connect in a timely and secure manner to credit
American continent. Recent statistics from the World bureaus and avail of credit reporting services.
Bank’s Doing Business report indicate that of emerg-
ing market bureaus surveyed, 60% report receiving CREDIT REPORTING FOR MFIS IN INDIA
data from MFIs. The news, while encouraging, can be
misleading as several challenges remain with respect
to integrating MFI data with that of credit bureaus.
Credit reporting for microfinance has
huge potential for impact in a country like
Some of these challenges are:6 India, where, according to World Bank re-
search, 52% of the population lacks access
 MFIs lack good quality data, which makes it dif-
ficult for credit bureau providers to accurately
to financial services. CIBIL, the existing In-
capture demographic profiles, often of largely dian credit bureau, does not provide
illiterate populations. One of the key impedi- credit reporting for MFIs yet.
ments to the inclusion of MFI data in credit bu-
reaus is the difficulty of being able to identify a
unique user match for clients, mostly women IFC estimates that MFI credit reporting in
borrowers in the case of microfinance, due to India could benefit an additional 114 mil-
the lack of national identification numbers and / lion borrowers that are currently not in
or verifiable addresses. the formal financial system due to their
 Traditional credit reporting does not meet the inability to prove creditworthiness. In ad-
specific needs of MFIs, and credit bureaus need dition to this huge market opportunity,
to provide customized services for MFI clients. availing of a credit reporting system can
 The issue remains how to make credit reporting
enable Indian MFIs to assess the level of
not only applicable, but also affordable to the over-indebtedness of their clients, which
MFI sector, where margins are fairly low. can be significant in urban areas that are
heavily concentrated with MFIs. Credit re-
 MFIs face technological challenges and work
with obsolete systems. Unlike the retail banking porting also presents an opportunity for
sector, there is no standard technology platform existing MFIs to scale up lending in the
that MFIs can leverage for their own data main- more rural and remote parts of the coun-
tenance requirements. Existing custom built try.
models vary widely in design and functionality
and do not facilitate information sharing. Exist-
ing backend systems are not only broken but

`
Country and context-specific challenges exist CIBIL

as well. In India, for instance, the multitude of
languages and dialects can add to the level of
complexity required in a credit bureau’s solu- Credit Information Bureau (India) Lim-
tions, as existing credit bureau solutions have ited (CIBIL) was incorporated in 2000.
limited language capabilities. CIBIL’s aim is to fulfill the need of credit
granting institutions for comprehensive
Nevertheless, known examples of successful
integration of microfinance into credit report-
credit information by collecting, collating
ing systems exist in Ecuador, Peru, Bolivia and and disseminating credit information
Guatemala. Challenges notwithstanding, it is pertaining to both commercial and con-
evident from these countries, that credit re- sumer borrowers, to a closed user group
porting systems are integral to facilitating sus- of Members. Banks, Financial Institu-
tainable and responsible access to finance, and
that these challenges are well worth address- tions, Non Banking Financial Companies,
ing. Housing Finance Companies and Credit
Card Companies use CIBIL’s services.
At present there are no known global interven- Data sharing is based on the Principle of
tions that seek to address these challenges. Reciprocity, which means that only Mem-
IFC’s Global Credit Bureau Program, recogniz-
ing that such a void exists, is actively explor-
bers who have submitted all their credit
ing new initiatives to address the specific data, may access Credit Information Re-
credit reporting needs of microfinance institu- ports from CIBIL. The relationship be-
tions. tween CIBIL and its Members is that of
close interdependence. The establish-
IFC’s Global Credit Bureau Program
ment of CIBIL is an effort made by the
IFC’s Global Credit Bureau Program, is an inter- Government of India and the Reserve
nationally recognized leader in promoting credit Bank of India to improve the functional-
bureau development in emerging markets. ity and stability of the Indian financial
Since inception in 2000, the program has cre- system by containing NPAs while improv-
ated or significantly improved credit bureaus in
10 countries, drafted or contributed to the
ing credit grantors’ portfolio quality. CI-
drafting of new laws and regulations in 19 BIL provides a vital service, which allows
countries, organized over 60 credit bureau its Members to make informed, objective
seminars, conferences, and outreach events in and faster credit decisions.
more than 40 countries, and monitored the
credit reporting environment in over 180 coun-
tries through the World Bank’s Doing Business
Source: CIBIL Official website
Report.
The program has always supported the devel-

opment of inclusive credit reporting systems Africa, Tanzania, Mexico, India, Egypt, Mo-
with a view to expanding access to financial rocco, Mongolia, Mozambique, Cambodia, Af-
services by the poor and underserved, espe- ghanistan, Sri Lanka, China, Pakistan, Kenya,
cially those served by microfinance institutions. Ghana, Madagascar, Rwanda, Azerbaijan, Kyr-
In the past it has supported two global confer- gyz Republic, Russia and Uzbekistan.
ences: Next Generation Access to Finance
(September 2007) and Making Small Business In anticipation of the various credit reporting
Lending Profitable (April 2001) that specifically policy needs arising out of the current crisis,
focused on the importance of credit reporting the Global Credit Bureau Program is reinforcing
for small business and micro lending. The pro- its efforts to develop more inclusive credit in-
gram’s microfinance/small and medium enter- formation systems for regulated and non-
prise footprint to date includes work in: South regulated entities, while continuing to provide

`
advice on legal and regulatory issues and ca- nancial education training specific to the use of
pacity building for financial services regulators. credit bureaus and credit information sharing.
The primary audience for such training will in-
More recently, the program has been exploring clude lenders and portfolio and risk managers
the possibility of formalizing a Microfinance in financial institutions with a broader dissemi-
Credit Reporting Program in collaboration with nation strategy for the benefit of general bor-
interested donors. As the liquidity crisis rowers. These efforts will be vital to ensuring
evolves, this focus will be extremely important the successful integration of both microfinance
to ensure that credit is extended to the right institutions and their clients into formal credit
borrowers and that credit lines remain open, or reporting systems.
are reopened for the most vulnerable borrow-
ers, including both households and small busi- ***************
nesses. This new initiative will focus entirely on
integrating microfinance into credit reporting. It
will start with a pilot set of countries and About the Author/s
gradually expand its scope of intervention over
a period of five years. Mr. Peer Stein heads IFC’s group for Financial
The program is also stepping up financial liter- Infrastructure and Institution Building. As Busi-
acy efforts to promote standards for responsi- ness Line Leader for Access to Finance (A2F), he
ble lending during the crisis. In particular, such oversees and supports IFC’s technical assistance
efforts will involve designing and delivering fi- and advisory services in financial markets world-
wide, including SME banking, housing finance,
microfinance, leasing, and energy efficiency fi-
References: nance. As of June 2008, IFC had a total of 230
A2F advisory services projects in over 90 coun-
1. Barron, J. M. and Michael Staten, (2003), “The Value of tries. Further, he leads IFC’s and the World
Comprehensive Credit Reports: Lessons from U.S. Experi- Bank’s advisory work in financial infrastructure,
ence”, Credit Reporting Systems and the International Econ- which includes the development of credit bu-
omy, M. Miller editor. MIT Press. reaus, collateral registries, payment systems and
remittances services to support greater access to
2. Guillamon, Bernardo, Kevin X. Murphy and Saul Abreu, financial services in developing and emerging
“Risk Mitigation as a cost effective MF strategy: Case study- markets.
IDB-Peru Global Micro enterprise credit program”, Inter Other contributors to this article from IFC’s A2F
American Development Bank, Washington.D.C., March 2000, business line include: Tony Lythgoe, Oscar Mad-
p.9. eddu, Colin Raymond, Peter Douglas Sheerin,
Nataliya Mylenko, Makanda Kioko, Swapnil Kant
3. Luoto, Jill; McIntosh, Craig; and Wydick, Bruce (2007) Neeraj and Shalini Sankaranarayanan.
“Credit Information Systems in Less Developed Countries: A
Test with Microfinance in Guatemala.” Economic Develop- Please send any queries to Shalini Sankarana-
ment and Cultural Change, January 2007, Vol.55, issue 2, rayanan at ssankar1@ifc.org.
pages 313-34
4. Bolivian Banking Superintendence
5. World Bank Doing Business reports. Website:

www.doingbusiness.org For more information on the Global
6. IFC, CGAP and Visa. Next Generation Access to Finance.
Credit Bureau Program and its activi-
Proceedings from the Global Conference on Gaining Scale ties please visit the website at
and Reducing Costs with Technology and Credit Scoring.
World Bank Headquarters, Washington, D.C., September 17-
19, 2007. Available online at: http://www.ifc.org/ifcext/
gfm.nsf/AttachmentsByTitle/FI-CB-NextGenProceedings-
www.ifc.org/financialinfrastructure.

`
Credit Bureau
Opinions
“Sharing credit information among lenders in a constructive manner while ensuring
customer confidentiality & privacy of the customer is extremely important for the fi-
nancial services industry. It is not only good for the institutions which reduce
their credit costs but also for the genuine customers, as it would in the long run re-
duce the cost borrowing. In India there are lot of legal & regulatory hurdles. So it is
important to share information in stages both informally and formally: negative areas,
negative list of fraudulent customers & staff, deliberate defaulters etc. In group lend-
ing the traditional approach of credit scoring would not work but it would be effective
in individual lending. One of the big dangers today is multiple lending by MFIs and over
extension of credit. The credit bureau would provide the necessary information to
avoid this kind of risk.”
- Mr. Samit Ghosh, Managing Director , Ujjivan Financial services Pvt. Ltd. ( A
Bangalore-India Based MFI)
Micro finance has seen a multi fold increase in volumes in the recent years, thanks to a fundamentally
strong business model and the entry of private equity players into this segment. This has not only at-
tracted newer players but also enabled the existing players to scale up many times over in quick
time. While on an all-India basis, the penetration of micro credit is still quite low at around 15-20%, yet,
there are geographies where there are multiple MFIs operating. This ends up with customers getting
over leveraged with multiple loans. An unplanned and mindless borrowing by these customers could put
them at grave risk of running into default. Thus, the MFIs are likely to put at risk the very segment of
people that it seeks to serve.
Other similar markets such as the sub-prime in the US and the Small Ticket Personal Loans in India have
witnessed the effect of mindless competition resulting in not only organizations closing down but also put-
ting a large population of people in tremendous difficulties. It is important that the MFIs should immedi-
ately take steps to ensure lessons are learnt from the mistake of others and we create a more sustainable
sector.
Credit Bureau for the micro finance sector would enable consolidation of the customer data base across
the sector and all fresh loans to customers could be decided based on the existing indebtedness of the
clients and their ability to service the new loan. Parallelly it is also important that MFIs adopt a common
code of conduct with regard to the overall exposure that they would permit per client. If these progres-
sive steps are taken immediately, it is still possible that the dream story of growth of MFIs and the hap-
piness that it brings to the face of its millions of poor people can sustain on a longer term basis
- Mr. P N Vasudevan , Managing Director , Equitas ( A Chennai –India based MFI )

`
Microfinance Credit Bureau
It’s not about the

By Anna Somos Krishnan and Enzo Cicchirillo
technology
Planet Finance
Having a mobile phone connection, is a no brainer for

most of us. In the United States when you wish to pur-
chase a post-paid service you can get it without paying a
single cent for about 60 days after launching the service.
How is it possible? Believe it or not it is thanks to the credit bureau. Any person
who has a social security number in the US can avail a phone connection in ex-
actly 5 minutes.
When the customer goes to any retail outlet with the intention of having a new connection, all the shop keeper
needs to know is whether the client would be able to pay for the mobile provider the equivalent of a monthly bill,
which is around 30-50USD (1200-2000INR). For obtaining this information the shop keeper either calls a credit line
phone number and tells the operator the client’s social security number or types the same into a PDA device or
computer screen. This is called a credit check. In a few moments he will receive an “eligible” or a “not eligible”
decision from the other end of the line.
It goes without saying that in the 30 second transaction the shop keeper didn’t have the chance (nor had the in-
tention) to obtain any confidential information about the client other than the eligibility for a service that costs
2000INR a month. He didn’t know at the moment of granting a new phone where the client purchased his previ-
ous phones, in which bank he had his mortgage loan, nor did he know how many children the client had. A credit
bureau is the entity behind this eligibility information. The rapid assessment is based on years of extensive statisti-
cal research in client’s repayment behavior.
A credit bureau is part and parcel of many developed financial systems with a multifold purpose. The most com-
mon role of such an entity is a risk assessment (whether the client is able to repay) of the financial institution or
fraud protection (whether we are able to identify the client). Surprisingly, for most credit bureaus the credit scor-
ing (a system where based on the borrowing and repayment history of clients they assign a score which indicative
to the credit worthiness) is just a by-product of the extensive analytical work that to better understand consumer
behavior. Companies with long term vision also use the services of a credit bureau to understand their clients and
to target meeting their needs better.
`
In India recently we hear a lot about the need of setting up provide. As per our experience there is always too much
a credit bureau with the participation of most MFIs. Most emphasis on the technology hosting platform as opposed
of us agree that not being able to identify clients, mostly to focusing on the data consistency or sounds systems
because of the absence of a national identification system, around the information process flow, which is an opportu-
in densely populated areas are risky. Furthermore, the risk nity to create a safety net around our business.
of multiple lending and indebtedness could defeat the
whole intention of microfinance; financial inclusion, and Planet Finance usually plays an impartial, intermediary role
may have a detrimental impact on the balance sheet of the between the national credit bureaus (where there is any)
institutions. The solution to these problems partially pro- and the MFIs. We take on the role of presenting the regula-
vided by a credit bureau. There are two types of ap- tory study, needs analysis or designing the operative busi-
proaches to such information sharing systems. The first is ness model of the MFI credit bureau . On the technology
called a positive credit bureau, where the entire client data front we always start with a gap analysis between the data
is available and a scoring system rewards the creditworthy that the MFIs can extract from their own software and the
clients or it penalizes the defaulters. The other type is the data we need to feed in to the credit bureau’s software.
negative credit bureau where you obtain only the de- While Planet Finance developed its own credit assessment
faulters or black-listed clients. software called Easy-X-change, we never impose it on our
MFI partners. It is critical that we only bring the alterna-
It is important however that we all understand that an MFI tives to the MFIs but the decision on the final parameters is
credit bureau is meaningless without a voluntary MFI infor- always theirs. We are happy to show how the system
mation exchange and future integration plans with the works but it is always the MFI team which takes the final
national level credit entity. This is exactly in line with the call. They decides for example on which type (positive or
larger mission of development. At the end of the journey negative) credit bureau service they would want to avail.
we would like to see the low-income population as an inte- Similarly, we do not restrict the participation of any MFI in
gral part of the economy and Indian society. More pre- such efforts nor we promote one or the other national
cisely, if we ensure that all MFI clients have their credit level credit bureau. We provide training for all MFIs on
history stored in a central data warehouse system it is what a credit bureau is, how to organize their data to get
much easier later to provide the same clients - building on the most out of the information exchange.
the above example, - with phone lines, electricity, or
healthcare services. After each phase before entering the pilot project we share
Planet Finance followed in the past various efforts of MFI with the MFIs all the findings and encourage everyone to
credit bureau implementations across the world. We ob- bring all the concerns to the fore. For example when it
served the credit bureau efforts in Benin, in Morocco and comes to deciding on which technology company will host
most recently we work on the implementation of a bureau the credit software, we present all applications and it is up
in Egypt. There are some very important lessons learnt to the MFI team to collectively decide on the best suitable
from these efforts. one. This is the single most important success factor and
we try to maintain our support role in this spirit.
Historically, it is not the technology which has the most In India where the MFI sector poised to become the most
critical role in the success. MFIs tend the focus most on developed and innovative globally, it is pivotal to set an
understanding the small details of the technology as op- example of partnership of a bottom up initiative. We need
posed to the larger framework. Technology contributes
to focus on the key issues such as how to ensure data con-
however the smaller proportion to the seamless effort. The
sistency in our MIS systems and understand our strength
larger factor is the common MFI knowledge and partner-
ship platform, which should be based on a clear under- rather than speculating on how our competitors will mis-
standing of the regulatory framework on client-data ware- use the data we provide. Let us remember, credit assess-
houses or more importantly on why sharing the right and ment is “just” means to larger common good.
consistent information is crucial. If MFIs do not trust an
independent entity with the confidential handling of their
********************************
data the whole initiative is meaningless.
Ms. Anna Somos Krishnan is Executive Director of
It is also rarely understood that a thorough needs assess- Planet Finance India.
ment i.e. which data the MFIs would like to supply the
Mr. Enzo Cicchirillo is Director - Planet Finance IT
credit bureau and which information they would like to see
as part of the credit assessment, is an inevitable part of the Solutions.
process. This support a technology company is unable to

`
Dr. N Jeyaseelan
MICRO FINANCE CREDIT BUREAUS in India

OPPORTUNITIES, CHALLENGES
&
WAY FORWARD
I n India, the micro finance has brought about a

revolution in rural areas in the last decade. The
clients out reach has touched a level of 54.87 millions,
with MFI loan outstanding of Rs.59540 millions (as of
Mar 2008) and SHG bank linkage program outstanding
of Rs.123660 millions (as of Mar 2007) as per the
Status of the Sector report (Nov 2008).
The SHG bank linkage program has recorded an annual

growth rate of 18% and the MFI program has recorded
an annual growth rate of 40%. The savings mobilized
by 4.2 million SHGs account for Rs.35000 millions. The
SHGs linked with bank credit has gone up to 3.48 mil-
lion SHGs in Mar 2008. All these massive growth has
led to greater pressure at the operational levels in
banks, NGOs and MFIs and resulted in multiple financ-
ing by MFIs, banks and multiple borrowing by clients,
which will pose a higher risk to the financing institu-
tions in the near future. Under this context, the Credit
Bureaus assume greater significance, as they have the
potential to address these is sues.
“Multiple borrowing by clients, which will pose a higher risk to the financing institutions
in thewww.microfinancefocus.com
near future” Microfinance Focus [ January 2009 ] 32
`
 A credit bureau is a system where cli-

Need for Credit Bureaus: ents’ credit information is collected from
lenders and maintained. Whenever a
In matured markets, the competition is more
lender or others refer a client, the infor-
and the clients have the option to borrow from
many sources and increase their credit risk to mation on the client is provided by the
the financial institution. The sharing of credit bureau for a nominal fee, which will en-
information among the players will remove the able them to take credit decisions.
information asymmetry and will enable the
lender to take an informed credit decision. In  The first and foremost challenge is the
many places, the clients have become over- lack of unique identity number for clients
indebted due to multiple borrowing, which can
in India. Most of the MFIs are not regu-
be prevented through credit bureaus. The
credit history (positive) created at the credit lated and collection of credit information
bureau will enable the client to access the fu- from them may be very difficult. Many
ture loan easily with little time and cost. MFIs still maintain the credit manage-
ment program database manually, which
International experiences: may come in the way of reporting to
credit bureaus on a real time basis.
A credit bureau is a system where clients’
credit information is collected from lenders and
maintained. Whenever a lender or others refer
a client, the information on the client is pro- infrastructure and CIBIL in place, integrating
vided by the bureau for a nominal fee, which micro finance loans with the system will be
will enable them to take credit decisions. In- easier. This will help the banks and MFIs to
ternational Finance Corporation (IFC), a World share the micro credit information among them
bank group promotes setting up of Credit Bu- and will prevent multiple financing and reduce
reau by partnering with financial institutions the credit risk. As the banks have to comply
through its global program on credit bureaus. with Basel norms, which require them to assign
The credit bureaus have high predictive power more capital for higher risks, credit bureaus will
when both positive & negative information is enable the banks to minimize the risk capital.
collected involving a range of players banks,
MFIs, insurers, retailers, card issuers & mobile Challenges:
operators as practiced in US, UK. They have
low predictive power when they collect only The first and foremost challenge is the lack of
negative information and from only one institu- unique identity number for clients in India.
tion as practiced in Korea. Credit bureaus are Most of the MFIs are not regulated and collec-
successful in Dominican Republic, South Africa, tion of credit information from them may be
Brazil and Ecuador. In Ecuador, after the intro- very difficult. Many MFIs still maintain the
duction of credit bureaus in 2004, the default credit management program database manu-
rate has come down from 10% to 4% and time ally, which may come in the way of reporting to
& cost to process new loans have been reduced credit bureaus on a real time basis. In India,
by more than 50%. Pakistan Micro finance net- the banks have overcome the bank secrecy
work has started its credit bureau for Micro fi- laws of not disclosing the client information to
nance in Lahore and Cambodia is also trying to others by taking a consent letter from clients to
set up the credit bureau with the support of give their data to CIBIL. In some rural areas,
IFC. the connectivity is also a problem, which will be
a barrier in information flow from the branches.
Opportunities in India:
The way forward:
In India, the CIBIL (Credit Bureau Information
of India Limited) is already in operation serving In India, it appears that Sa-Dhan has taken
the commercial loans. As India has a huge IT some initiatives to bring in the concept of credit

`
bureaus for MFIs. But, it will be better if the free banking because of good credit histories
micro finance credit bureau is integrated with built through these credit bureaus.
the existing structure (CIBIL) and all players
viz insurers, retailers, utility payment receivers,
mobile operators, card issurers and MFIs share
full information (positive and negative informa- *****************
tion), it will be useful to all the stakeholders.
The central bank i.e. RBI should support the Dr.N.Jeyaseelan- Program Director of Help-
initiative of MF credit bureaus as a pilot in ing Hand Micro Finance and Services (A Unit
some mature markets like Tamilnadu or Andhra of Hand in Hand Tamilnadu) holds a Bache-
Pradesh and then after learning lessons out of lor degree in Agriculture, MBA in Banking &
it, the initiatives can be scaled up. Finance and Ph.D in Micro finance. Earlier
he has served as Senior Manager in Indian
MFIs need to be supported for computerizing Bank. He has two decades of rural banking
their credit management system, so that their experience and piloted several micro fi-
credit operations are transferred to the CIBIL nance initiatives in the bank. He has been a
on a real time basis as being practiced in South consultant to UNDP, UNOPS, GTZ, IFAD, AFC
Africa. Govt. Of India is actively promoting the & Water Partner International (USA) in In-
E-governance projects, wherein the issue of dia and abroad (Myanmar, Bangladesh &
National Identity card to all citizens of India is a South Africa) on Micro credit and Micro in-
priority. Such initiatives should be speeded up surance. He has headed the National level
in areas where the Credit Bureau pilots are to study on Joint Liability Groups (May 2008)
be grounded. As IFC has drawn up a massive commissioned by GTZ-NABARD. He has sev-
micro finance program for Asia, its technical eral publications to his credit.
assistance support may be sought for setting
up micro finance credit bureau pilots in India.
In the long run, the clients will enjoy hassle
Download
A Special
Issue
on
Micro Insurance

` Best Practices
Designing Staff
Incentive
System
There is little dispute among microfinance practitioners
that well-designed staff incentive schemes can have posi-
tive and powerful effects on the productivity and efficiency
By Martin Holtmann of MFI operations. Conversely poorly developed schemes
can have serious detrimental effects. This note lays out
MicroSave the principles and steps for designing effective staff incen-
tive schemes.
Essentials to Any and All Incentive Systems:

Of prime importance is that the staff incentive scheme
must be, and be seen to be, both transparent and fair:
The transparency requirement means that:
◊ Staff members affected by a bonus scheme should eas-
ily be able to understand the mechanics of the calcula-
tion, i.e. the system should not be overly complex;
◊ The scheme should contain as many objective factors
and as few subjective variables as possible;
◊ The “rules of the game” should be made known to eve-
ryone and should not be changed arbitrarily.
In order to comply with the fairness requirement:
◊ The goals set out by the scheme must be attainable;

◊ Better performers must indeed be rewarded with
higher salaries;
To Know More about “MicroSave” and Everyone must be able to achieve a higher compensation
download Focus Notes , Visit the website . by working better and harder.
www.microsave.net

`
Critical Design Issues for Staff Incentive Transparency

Schemes
“It was extremely important for us to be able to calcu-

If the board and management of an MFI are
late the bonus ourselves. Some of us had become sus-
prepared to implement a performance-based
incentive scheme, the following issues among picious of the finance and MIS people. We feared they
others, will need to be addressed. would make maliciously complicated computations de-
signed to deny us the bonus”.
Timing
In general, it is useful to introduce a financial Fairness
incentive scheme only once staff have received
sufficient training. Practical experience sug- “Many of us operate as if there is no incentive scheme.
gests that staff should become eligible for par- We were sent to this difficult area to solve repayment
ticipation in bonus schemes approximately six and drop-out problems. Apart from suffering because
months after joining the organisation. Before we have been transferred to this remote place, we have
that, they should just receive a fixed (trainee) lost the bonuses we used to make in our previous ar-
salary. eas. So any thought of ever getting an incentive is noth-
ing but day dreaming – we’ve given up!”
Frequency of Incentive Payout
The incentive payout (for instance a bonus),
should not be construed by the staff members Participation
as an entitlement, and
there must be a clear understanding that the “The staff incentive scheme design should be participa-
payout is entirely dependent on the perform- tory. The people at headquarters are out of touch with
ance of the individual
the field realities and therefore cannot design a suc-
(or group) during the reference period for cessful scheme. Although the consultation could have
which the bonus is awarded. If the bonus for-
involved a few more people and was a little long, we
mula is elastic (i.e. if it reacts strongly to
applaud them for adopting a more inclusive approach.
changes in output), staff members will receive
different bonuses from month to month, so Then we share in its success and the responsibility if it
that the risk of an “entitlement mentality” fails.”
should be controllable. Annual or semi-annual
bonus payments do not make much sense: it is
more difficult for staff members to relate their schemes the weight of the bonuses for credit
reward to any particular efforts. officers range anywhere from 20% up to 50%
of total compensation.
Weight of Bonus in Total Remuneration There are essentially five main types of incen-
It is important to avoid the extremes: if the tive schemes:
variable portion of the monthly or quarterly
salary is too high most “normal” people would 1. Individual Incentive Schemes
not want to work under such a system. As a Under an individual incentive mechanism, there
consequence, extreme risk seekers would be is a direct link between individual performance and
attracted to the job – such phenomena are ob- remuneration. However, they can lead to a
viously not desirable for MFIs. On the other rather narrow focus, may reduce staff mem-
hand, if the variable part of the salary is too bers’ intrinsic motivation and in addition, it is
insignificant, the bonus system as such will often difficult to distinguish properly between
simply not have any influence on the behaviour individual and group performance. Individual
of the staff members – which would also not be incentive schemes are often used for credit offi-
a desirable result of the incentive scheme. In cers.
practice, we find that for effective incentive

`
2. Team-Based Incentives (Group Incen- 10 Steps to Designing An Effective Staff Incentive Scheme
tive Schemes)
Step 1: Definition and clarification of the strategic goals of the MFI.
The goal of group-based incentive schemes is This is such a fundamental and important process that it requires
to increase the social cohesiveness of the staff the participation of management (and often also of the board of
and to foster good cooperation and team effort. directors).
Among the most important drawbacks of such
schemes is the free-riding effect: If the payout Step 2: Analysis of culture, clientele, products, and processes. We
of the individual depends on the performance need to know the operations of the MFI as well as the mentality and
of the whole group, there is a huge temptation concerns of the staff. At this point it may also be helpful to conduct
to reduce the individual contribution. Group in- statistical analyses and costing exercises (see for example Mi-
croSave’s Toolkit for costing and pricing of Financial Services).
centive schemes are often used for branch-
based activities – in particular savings mobilisa- Step 3: Definition of the objectives of the incentive scheme – what
tion. are we trying to achieve, and which results do we expect? Also:
what problem are we trying to fix?
3. Employee Stock Ownership Plans
Step 4: Decision on how much we are willing to spend. This is the
(ESOPs) point where we need to conduct a proper Cost-benefit analysis.
ESOPs may be attractive tools for motivating
staff members because of their positive sym- Step 5: Decision as to the staff members and occupational levels to
bolic and motivational effect. Through an ESOP, be affected by the scheme. Hint: Often, the introduction of a
employees become owners, so that it should be scheme at one organizational level or function may create a need to
easier for the staff members to internalise the implement schemes at other levels as well. Try to think comprehen-
sively!
interests of the firm. ESOPs are, however, typi-
cally one-time incentive mechanisms that are Step 6: Choice of incentive mechanism(s): merit pay, incentive
probably not very well suited to boost opera- pay, perquisites, benefits, profit sharing, gain-sharing, ownership, or
tional performance over the longer term. a combination of these mechanisms.
4. Profit Sharing and Gain-sharing
Step 7: Technical design work. This includes formula development
Schemes
and calibration, as well as spreadsheet testing. It is useful (and
should be obligatory) to carry out sensitivity and scenario analyses.
Positive effects of profit sharing schemes It helps to use a participatory process in designing the scheme.
can be an increase in the sense of identifica-
tion with the organisation, and a reduction of Step 8: Pilot test in a controlled environment. Based on test results,
the barriers between employees (“us”) and make the necessary adjustments.
owners (“them”). But profit sharing schemes
also have a number of potential problems. They Step 9: Sell the scheme to the staff. Of course, if staff members
provide a very weak connection between the participated in the design, this task will be made easier.
performance of the individual and his/her re-
Step 10: Monitor the performance of the scheme. Make adjust-
ward. Individuals are not able to exercise any ments based on regular reviews (for example, semi-annually).
control over the generation of the annual profit,
and free rider problems will invariably arise.
over at the middle management level – typi-
Gain-sharing schemes are often used to share
cally a scarce resource in microfinance.
the benefits of productivity gains with middle
Conclusion
and senior management.
Staff incentive schemes must be tailor-made,
5. Delayed Benefits since there is no “one size fits all”. It is impor-
These include pension and other social security tant to remember that an incentive system is
contributions that a firm makes on behalf of its only one part of the organisational
employees. Since pension benefits and contri- “architecture”, and that even the best incen-
butions typically rise with tenure, they can help tive scheme cannot compensate for flawed
to reduce turnover and to attract a more stable products or procedures. Good incentive
workforce. Intelligent benefits plans can also schemes are fair and transparent, and all in-
help to increase motivation and reduce turn- centive mechanisms should be reviewed regu-
larly by management
**********************

` Institution Spotlight
It's efficiency, stupid!
Bangalore(INDIA) -based Microfinance Institution Ujjivan did big expansions

and has further plans to cover the urban poor all across India. Microfinance
Focus had a look behind Ujjivan's success: Its strategy, human resource
principals and of course its secret of success.
W hen Samit Ghosh enters his office, it

seems not like he is a successful banker:
He operates from a small room, nothing special
one branch after the other. But after running
the successful pilot in Bangalore, Ujjivan's
management team was sure about how to
representative stuff, which comes along successful run the Grameen model with the
normally with a successful bank's management urban poor as its clients. While it took 980 days
director. But Samit Ghosh had all those things: for the first 100.000 customers, the second
a successful banking career, fulfilling his 100.000 were there after only 300 days. Today
material desires. After 30 years in the Ujjivan is running about 102 branches,
commercial banking business he decided to do providing financial services to urban and semi-
something, „which matters“ as Mr. Ghosh says. urban poor in 9 states. Next year it plans to
He founded one of the recent most successful offer its services in already 15 states.
Microfinance Institutions.
Becoming a national organisation in scale had
Ujjivan seems to be an institution with strong its price: The Break Even initially planned
principals and a strong organisational culture. within 3 years will be delayed, which doesn't
So when he identifies the first big milestone of worry Mr. Ghosh. He is confident about
founding Ujjivan seems to be no surprise: It achieving it this year, still within the 4th year of
was the licence to get in business. Ujjivan was operation.
not supposed to work with an existing licence – Ujjivan was founded by people involved in
everything should start with a clearly clean commercial banking. And commercial success is
record. And it started with a record, having the important at Ujjivan as well. Apart from this
licence within only two month. efficiency is one of the main priorities. Samit
Ghosh is convinced, most MF institutions are
Expansion with clear knowledge terribly inefficient. So what he did was applying
technology and processes of modern retail
In the first 18 month of operation Ujjivan banking. With the upcoming economic crisis he
decided to run a pilot in Bangalore. Based on is sure many MFIs won't survive or will be
the gained experience and extensive research it overtaken by others.
was the MFIs clear strategy, to expand quick.
Most of the MFIs are growing slowly by opening But Ujjivan trys to be one of the big ones even
`
An Interview with Mr. Samit Ghosh, Managing Director , Ujjivan Financial

Service Pvt. Ltd .
What is Ujjivan`s social mission? what challenges do you face in bal-

ancing the 'double bottom line'. What are the key issues they face in
urban microfinance?
Our mission is to provide financial services to the poor and thereby help allevi-
ate poverty. As I was telling you that we have various types of investors, social
investors and private equity investors etc., and private equity investors are
driven by the financial indicators, we have to make sure that our mission does
not get diluted.
What are your plans for tracking your social mission?
What we have done is, putting in place an impact evaluation plan, and
sees what the impact Ujjivan is having in our customer. Accordingly we Mr. Samit Ghosh , MD
would adjust or change our programme. Ujjivan Financial Services Pvt. Ltd
What are the key issues you face in urban microfinance?
Purely from operational point of view, we have to work with smaller group, whereas in rural area you can work
with bigger groups. Secondly, they don’t have too much time, urban people are very busy. We have to make
sure that we should run operation very efficiently. We have to adapt to what our customers can afford in terms
of time or Place etc.
Other thing is, half of our customers are employed, they borrow not only for business, and because they are al-
ready employed thus they are borrowing for children`s education, healthcare, housing things like that. We have
to diversify our products to meet those needs. Now, of-course, we face lot of competition in Urban Markets,
initially, there were few player in Urban Microfinance , but now many players have jumped in, so there is lot of
competition among microfinance institutions.
for other reasons: Small MF institutions are not clear: the capital market knows about the
able to offer attractive career opportunities for ongoing growth of Microfinance and is willing to
professionals. But to keep good people working invest.
an institution has to offer more than only one
project, one assignment or one internship. At Unlike other MFIs Ujjivan applied modern
Ujjivan's employees is offered a longtime marketing methodology into the whole
career with decent compensation. Without business. „We first do a complete market
being economically attractive Samit Ghosh sees research of any city where we go. So little is
no perspective for professionals. But this is known about them. What we do is to focus on
only one reason why Ujjivan is a clearly profit their needs“, explains Mr Ghosh. Due to the
making institution. Apart from efficiency and research results the products are designed. For
HR issues it is about attracting investors. instance Ujjivan found out, 50 % of urban poor
Ujjivan has a balance between social investors are already working in garment factories ore
and pure market equity investors. And investor domestical work. Those who are employed,
relationships are crucial for Ujjivan: To enhance working 12 hours a day don't have time to start
communication flows there's a monthly report a business. Housing is first, second education
about new developments. The strategy seems and third it's health care, people are in need for
to work out: Ujjivan's investors are putting in money. So Ujjivan designed loans for those
more money! According to Mr. Ghosh it is purposes.

`
Facts and Figures

 Top 8 activities for Ujjivan Customers in Banalore
Flower Vendors, Tailors, Housemaids, Saree Sellers,
Agarbatti workers, Beedi Workers, Chamki (Embroidery)
Workers, Garment Factory Workers
 Training Health Educators: Parinaam has conducted
2.144 sessions at which terhe have been 40.108
attendances
Another focus have been emergency loans.

Local money lenders with their exorbitant
interest rates are providing services for 24
hours, 7 days a week. While getting a loan
from MFIs took time. Ujjivan therefore
implemented its successful emergency loan.
Microfinance not enough
Even by taking all this actions, being efficient

Customer Name: Aditi Adhikari and competitive and providing all these
services, Samit Ghosh is convinced MF is not
City: Kolkata enough to alleviate poverty. Many other needs
like health care, life insureance, education,
Purposes of Loan taken : Family Loan trainings and community development have to
be done. Ujjivan did not integrate these MF-
Aditi makes paper packets for a living and is the plus activities in its profit institution. But it set
up the Parinaam Foundation, to cover critical
main earner in her family of five, Her husband is areas of initiatives outside the scope of
currently unemployed and she has three chil- Microfinance. Parinaam's plans for the next
dren. she joined Ujjivan one year ago when she years fit Ujjivan's ambitious goals. It hopes to
began having difficulty paying for her children's impact eight million lives of the poor within the
next six years.
educational expenses. she also wanted to im-
prove her home. The cost of the educational ex- Management Director Samit Ghosh seems
penses and house repair demanded a one-time highly pleased with his efforts, even when he is
convinced there are lot of targets to reach and
lump sum amount, which she could not afford
things to gain. He is proud of having built
on her meager monthly salary. Aditi took a Fam- something valuable, with meaning in life: „ I
ily Loan and later a Top-Up Loan from Ujjivan to was a banker for 30 years and reached a lot
fund her family’s pressing financial needs. with concerning commercial and material life. But
than I had a dialogue with my dead father, who
her children back in school and a newly repaired
passed away when I was 10. I asked my father
roof, she has renewed confidence that her family if he was proud, and he said „So what“. This
life is improving. “My children have again started made me think, I should do something with
going to school and the rainy season is no more more meaning in life“. And Samit Ghosh did.
a problem for us thanks to Uiiivan," chuckles
***********************
Aditi as she goes back to packet making.
To know more about Ujjivan, Visit the web-

site www.ujjivan.com

` I-Focus
Microfinance Focus presents

I-Focus
For the Promotion of New Ideas,
innovation and initiative
EDA
Capital Connect
Background pedes funders’ ability to liquidate their assets
or diversify their portfolios, which curbs their
In the development sector worldwide, the flow incentives to lend or invest in social enter-
of information between providers and seekers prises. These disincentives, in turn, reduce
of capital is imperfect and asymmetric. This in- both the volume of capital flow and the effi-
adequacy is the root cause of three related ciency of capital allocation in the development
problems, all of which reduce the flow of capital sector.
into social enterprises.
Third, industry players cannot track the price
Many social enterprises are unable to engage and volume trends of financial transactions in
institutional lenders and investors in the devel- the social sector, because no organisation or
opment sector because they are small, physi- entity collects this information. A lack of indus-
cally isolated, or unfamiliar with global financial try-wide benchmarks prevents industry players
markets. Similarly, many socially-driven insti- from knowing whether they will receive a com-
tutional funders want to lend to or invest in petitive price for the capital they seek to raise,
these smaller, less-established organisations, lend, or invest. This market inefficiency reduces
but are unable to easily connect with the ones the long-term viability of capital flow into the
that meet their funding objectives. This lack of development sector.
information flow prevents many deserving or-
ganisations from obtaining the capital that they About CapitalConnect
need.
Promoted by EDA Rural Systems, CapitalCon-
Second, lenders and investors find it challeng- nect is an online marketplace that allows social
ing to offload their debt or equity, because they enterprises, institutional lenders, and investors
are unable to efficiently identify and communi- worldwide to communicate with one another,
cate with a majority of the financial institutions initiate financial transactions, and analyze mar-
who might be interested in purchasing their ket trends.
holdings. This restricted flow of information im-

`
Participants register by submitting their organi- Impact of the ICT led innovation
sation's financial performance information,
which is reviewed to verify its adequacy and Benefits to the community:
accuracy. Once they have undergone this initial
due diligence process, participants create their By increasing the efficiency and volume of capi-
own profiles, control which organizations can tal flow into social enterprises, CapitalConnect
interact with them, search for participants with hopes to increase the scope and overall impact
similar interests, initiate conversations that of these organisations. CapitalConnect will also
could lead to strategic partnerships, or send help to make the distribution of capital more
offers to these organizations to buy or sell capi- equitable, because its online service is particu-
tal. Participants will have access to aggregated larly useful for small, isolated, or inexperienced
information on the financial transactions that social enterprises – organisations who have
occur between CapitalConnect's members, al- historically received a disproportionately small
lowing them to analyze market trends. amount of funding relative to their well-
established counterparts. Together, we believe
How CapitalConnect Works How Participants Benefit
Registration Process Join a Secure Network
◊ Submit your organization’s financial information, busi- ◊ detailed registration process creates a secure market-
ness plan, and institutional objectives. place that promotes transparency and integrity.
◊ CapitalConnect will review all documents to ensure
adequacy and accuracy of the information provided. Meet Your Strategic and Privacy Needs
◊ Sign their service agreement, and begin interacting on
portal. ◊ You have complete flexibility and control over your
profile. Want to get noticed? Allow all members to
Setting up your Profile view your profile and send you offers. Prefer to have
privacy? Specifically select which members you want
◊ Select which members can view your detailed profile, to view your profile or communicate with you.
or send you messages and offers.
Identify New Opportunities
Connecting with Members
◊ Use our advanced search tool to efficiently identify
◊ Request other members to let you see their detailed which organizations you want to communicate with,
profiles, or ask them to view your detailed profile. and then easily send them messages and offers.
◊ Initiate conversations to explore potential business
partnerships, or send detailed offers to meet a wide ◊ Interact with a host of providers and seekers of capital
variety of financial needs: who work outside of your region and sector. Expand
your network, and broaden your organization's scope.
 Raising fresh debt and equity
Leverage an Efficient Marketplace
 Offloading existing debt and equity
 Investing in fresh or secondary debt and equity
◊ Receiving interest from a wide set of social enterprises
Probing options for structured obligations Closing your
and institutional investors gives you more choices, and
Deals
increases the efficiency of capital pricing.
◊ More options also improves your ability to liquidate
Once you have exchanged messages, offers, and counterof-
your assets, and diversify your portfolio.
fers, you finalize your partnership or financial transaction
offline.
Make Better-Informed Decisions
Track Market Trends
www.microfinancefocus.com ◊ Quantitatively
Microfinance Focus gauge your2009
[ January market,
] 42and make better-
◊ Have access to aggregate market data and analysis of
informed financial and strategic decisions – decisions
all transactions that occur among members of Capital-
which are more crucial than ever considering the cur-
Connect.
rent financial climate.
`
Participants currently registered on CapitalConnect
Appleaday.in Manidham Grameen Savings cum Credit Services
Ashajyothi Mahilabyudaya Society MicroVenture Support
ASSCOD MITR
BSS Microfinance Pvt. Ltd. Navachetana Foundation
Caspian Advisors Private Limited Pariraksha
CfBT Education Services Partner Microcredit Foundation
EDA Rural Systems Private Limited Prayas (Organisation For Sustainable Development)
ESAF Swasraya Producers Company Limited Rashtriya Gramin Vikas NIdhi
Hope Integrated Rural Development Society Rural and Urban Innovative Social Entrepreneurship
IFMR Trust Guarantee Company Samrudhi Micro Fin Society
Institute of Integrated Resource Management Sonata Finance Private Limited
Institute of Rural Credit & Entrepreneurship Development The Lok Capital Group
Kotalipara Development Society We The People
that these two benefits of our service will facili- Benefits to the Environment:
tate a more efficient, effective, and equitable
flow of capital into social enterprises, leading to CapitalConnect seeks to provide capital to so-
improvements in education, community health, cial enterprises, including those working in the
and overall quality of life throughout the world. field of renewable energy, energy and environ-
mental design, waste treatment and manage-
Benefits to the company / equity partici- ment, and environmental consulting / impact
pating: assessment. By helping these organisations to
expand their scope and efficacy, CapitalConnect
Online marketplace allows investors, lenders, will benefit the environment on a local, re-
and social enterprises to communicate with one gional, and global scale.
another, initiate financial transactions, and
analyse market trends. These industry players Benefits to Regulators / Government
will have the opportunity to interact with or- (central, state, local):
ganizations outside of their region or specific
area of interest, which will help them to expand Any governmental entity that wishes to provide
their networks and more easily meet their fi- or obtain capital – ranging from municipal bod-
nancial needs. Participants will also have access ies to federal agencies – may register on Capi-
to aggregated information on the financial talConnect. Governmental entities can make
transactions that occur between CapitalCon- offers to raise capital for their projects and ini-
nect's members, helping them to make better- tiatives, and can also invest, lend, or partner
informed financial and strategic decisions. with social enterprises who could aid them in
reaching their mandated social objectives. Be-
Benefits to employees of the Company / yond these direct benefits to government bod-
NGO: ies, we believe that channelling capital into the
social enterprise sector will significantly con-
Employees of social enterprises and institu- tribute to the welfare objectives of the state.
tional investors who work in the areas of mar-
keting, outreach, or public relations will find
that CapitalConnect makes their work much ************************
easier and effective. Insofar as the flow of
capital benefits social enterprises, employees
will be less constrained by their organisations’ For more information contact
unmet funding needs, providing both individu- Daniel Brett (danielbrett@edacapitalconnect.com)
als and organisations with greater opportunities
to reach their social objectives.

`
Interview

`
“Affinity to Prosperity :
Development of SHGs”
An Exclusive Interview with

Padamshree Aloysius P. Fernandez
Mr. Aloysius P. Fernandez is Executive Director of rural
development NGO MYRADA and Chairman of the Board of the
microfinance institution SANGHAMITRA Rural Financial Services.
In 2002 he was conferred with the prestigious Padmashree
award.
Christina Weichselbaumer and Vikash Kumar talked to him at his
office in Bangalore. Here are the excerpts :-
MF Focus: What is the distinctive feature of Mr. Fernandez: The Basic concept of SAG- Myrada
Sanghamitra as a Microfinance Insititution? started when a cooperative break down and people
asked me what to do. They wanted to return the money
Mr. Fernandez: goes in where the bank refuses to give but not to the cooperative because they have been
money. With Myrada we have an organisation which cheated. So we finally said, why don't you return the
initiated and strongly pushes the SHGs bank linkage money to yourself!? So we worked out how to do it.
programm. But sometimes banks refuse to give money. Later when we analysed the group we found out that the
Sanghamitra lends not to individuals but only to SHGs. group members were linked with – what we call –
There are three types of lending: One is to the individual, relationships of affinity. That means mutual trust, mutual
one is to the individual in the group, which is like a joint support, which is today called as social capital. This
liability group, like Grameen Bank. And one is to the happened in 1984/85. And then we had about 300
group, where you don't ask for the purpose of the loan. groups like this, all based on affinity. Then we went to
We just analyse the group and then give a loan to them. NABARD (National Bank for Agriculture and Rural
The group then decides what each one wants to do. Development) in 1986 and said we have an alternate
system here. I was convinced if you want to get the poor
MF Focus: How did Sanghamitra start, was there into credit you need an alternate system. So why not give
any specific trigger? us some money.
Myrada is an NGO engaged in the SAG ( Self Affinity groups )movement and also promote the
SHG-Bank linkage programme. Sanghamitra is a MFI promoted by Myrada, providing credit to
Myrada's Self Affinity Groups first and later to groups promoted by other institutions, as far as
they met Sanghamitra's set of criteria.

`
MF Focus: was it only about the money? Don't get the SHGs to do your job, to distribute food
or work. SHGs are independent institutions with its
Mr. Fernandez: No. It was about policy change. Lots own vision, its own work and its own activities.
of studies were made and we came to the conclusion Second: Every SHGs decides on its own livelihood
that policy changes need to be made. We focussed on strategy. If you study what sorts of loans people have
three aspects: One is that you should allow banks to taken over a period of 8 years you will see: They have
lend money to unregistered groups. Second is, to lend taken loans starting with food, than going to clothes,
and not ask for the purpose and third, to lend without going to health continuing with education, going to
physical collateral, if there was adequate social agriculture, buying land, starting business. So it's a
capital. livelihood strategy. It didn't start with goats first. It
started with what they need.
We found out that the dynamics of this discussion
was an empowering shift, it created empowerment: We think a viable lifelihood consists of two cows or
Who to give and how much to give. twenty sheep. But if you give them 2 cows,
Therefore 1992 as a result of this they can't manage two cows. You need
NABARD started the SHGs Bank Linkage “Don't get the SHGs water, food – they don't have that. Before
Programm. But by 1996 we found out to do your job, to taking a cow they need to do something
the banks are not lending enough, so we else. They maybe get into trade, they may
distribute food or want return high cost loans first. They
started Sanghamitra.
work. SHGs are have livelihood strategies, but don't take
MF Focus: You always talk about i n d e p e n d e n t up one or two livelihoods which are viable
self AFFINITY groups, not SHGs. Why institutions with its units. They take lot of lot of smaller things
which are managable for them.
do you make this clear distinction? own vision, its own
work and its own When you look at this woman,
Mr. Fernandez: There are two issues.
One is, the groups were founded on the activities“. Shanthamma, over a period of 8 years she
took 20 loans for different things:
basis of affinity. The people selected
household, cow, education, agriculture,
themselves. We identified the poor
for a job in railways, for telephone booth, for an SHG
people in the village and said you form your own
uniform... It is not one big viable unit, it is a couple of
groups. Whereas the government, they have a list of
things. It's a strategy. Not everybody wants a cow or
so called „BPL“, below poverty line people and
doing trade...
promoted SAGs. When the government made this
official, we changed the name from self help group to
self affinity groups. It is always about affinity, but this MF Focus: What about the SHG's potential to
must be internal. It is not enough affinity that you spread around the globe?
have no house and a similar amount of money... We
have a lot of poor people who don't work together. Mr. Fernandez: It was said, it won't work in
But we invested in training the group, it was an Myanmar, Myrada went to Myanmar, where we have
educational process and the groups were based on 1000 groups, the same for Indonesia, now we have
affinity then. 5000 groups in Indonesia. There are 500 groups in
Timor East and I don't know how many in Bangla
MF Focus: Are there any special lessons learned Desh. We have quite a large number of groups in Sri
Lanka and we also have 300 groups in Iran now.
while working with the SHGs methodology for
years?
MF Focus: Are there any specific preconditions?
Mr. Fernandez: Of course, hundreds of lessons... Any special economical, cultural, social
There are certain problems with the SHGs. The SHGS determinants?
is not part of a delivery service chain. In other words:

`
“Development is a power game and about changing power

relations. And change of power relations produces conflict.
If you are not doing that it is not about development. Then
you are delivering services.“
Mr. Fernandez: Yes, there has to bee the traditional can compete with them – fine!
culture of trust which exists in all our rural
communities. Not the whole community but groups I have been to a village in the 80s and people told me
of people with trust. There has to be social capital, they trust the moneylender most. More than banks.
without that the SHG-movement can't work. The moneylender is trusted, the bank is not.
MF Focus: Was there any special reason you

MF Focus: Which synergetic or antagonistic decided to work in the development field?
effects do you identify between the SHG-model
and Grameen-model? Mr. Fernandez: Before 1971 I didn't care about
developement. During the Bangladesh War I was
Mr. Fernandez: Microfinance is not synonymous with running a refugee program and discovered the
poverty. This is a mistake that they must go together. poverty and the suffering there. What I have seen
A painter, who needs paint – he is not poor. The there changed my life. I went abroad than and when
vegetable vendor – she's not poor... They need 5000 I came back my mission was to raise 1 million people
or 20000 Rs but they are not poor people. But where above the poverty line. And I have done.
do they get their credit from? They have to go for
Microfinance. And there is a whole set of MF Focus: What do you think is important to
Microfinance Institutions to cater different know, for people interested in working with
requirements. development issues?
MF can be used and must be used for the poor, that's
where it started but the demand for MF is much Mr. Fernandez: The developement sector is not an
much bigger by the non poor. Because when it comes afternoon cup of tea. It is not easy, it is tough. If you
to the poor it is not only money they need, it's are not having crisis, you are not gaining anything. If
empowerment they need, negotiating skills to train – you want to change something you will have
and the Self Help Groups helps to develop these skills problems. Development is a power game and about
– how to talk, how to lobby, how to negotiate. changing power relations. And change of power
relations produces conflict. If you are not doing that it
MF Focus: What are the biggest challenges you is not about development. Then you are delivering
are facing now with MF work? services.
MF Focus : What do you think about
Mr. Fernandez: The biggest problem we are facing is Microfinance Developement Bill –India ?
the lack of understanding for the need of
Microfinance, that is not only for the poor. It is a large Mr. Fernandez: Did you read the bill? Than you
group of people in India, who need money. That's shouldn't ask. The MF bill is really/barely a load of
why the moneylender is thriving, the moneylender rubbish! I don't know why we are talking about that.
lends to both people, he is not an idiot. He lends to It's dead. Badly drafted, no way to pass it.
people who are capable of handing money. But he is
lending at very exorbitant rates of interest. So, if you MF Focus: Thank you very much

` Learning curve
Product and Methodologies *
A Microfinance institutions May offer several prod- Three key elements are
ucts and Have a number of ways to delivering them.
A Product is sometime called Service is “what a MFI 1. Target market:
delivered to its customer. The Delivery methodology 2. Loan to individual or Groups:
“Credit Technology” is how the product or service is 3. Loan Process:
delivered. How the product or service is delivered is One import reason for using a particular methodology
sometime called product technology. is the target market. A successful operation under-
stands what motivates potential customers and de-
Characteristics of Product cides whether that market can be reached in a way
that will lead to customer satisfaction and financial
There are 5 key elements consisting to develop a sustainability. Many micro-credits operations deter-
Product mine the methodology based on their development
objectives rather than an analysis of market prefer-
1. Size of the Loan: Microfinance institutions ence or cost consideration. The Most Successful insti-
2. Interest Rate tutions develop methodologies that combine ele-
3. Repayment Interval ments of each.
4. Term:
5. Purpose of Loan: example, working capital, Institutional objectives are important in determining
consumption loan, asset loan etc. the methodology whether the methodology it is ex-
clusive or inclusive.
Similar to product, methodologies are also character- ****************
ized by certain elements (continue in the next issue )
Development Objectives Exclusive: particular business sector such as mar-

ket vendor or small manufacturing.
+ Market Preferences
+ Cost Considerations Inclusive: have more expansive eligibility re-
------------------------------------- quirements and make their service widely avail-
able.
= Successful MFl
* Adapted from MFTOT 4 course

` News
Grameen Foundation 2008 Awards Celebrate Lead- IDB Announces US$20Mln Package for MFIs Ex-
ing Global Poverty Fighters posed to Global Credit Crisis
Washington, D.C., With the shockwaves of the financial crisis The Multilateral Investment Fund (MIF) of Inter-American
reverberating across the globe, there is growing concern Development Bank (IDB) will provide up to US$20 million in
about its impact on the world’s poor. Grameen Foundation financing to the Emergency Liquidity Facility (ELF). This fi-
is hosting a discussion of this issue among microfinance and nancing aims to help Latin American and Caribbean MFIs
international development leaders at its annual Knowledge weather economic crises and natural disasters. The MIF has
Sharing Roundtable on November 12 in Washington, approved a US$16 million line of credit and a US$4 million
D.C. The roundtable precedes the foundation’s annual Mi- subordinated loan for ELF. ELF’s short-term financing allows
crofinance Awards event where it will honor a microfinance otherwise solvent microlenders to meet sudden spikes in
pioneer and two microfinance institutions that play pivotal credit demand or bridge temporary arrears in repayments
roles in helping poor women access financial services to sup- during crises. To qualify for assistance, MFIs must comply
port their self-help efforts. At the awards luncheon, Nurja- with strict criteria concerning solvency ratios, management,
han Begum, one of Dr. Muhammad Yunus’ earliest associates governance and transparency. The facility also provides its
and a founding staff member of Grameen Bank, will receive clients technical assistance to strengthen their administra-
the Susan M. Davis Lifetime Achievement Award for her tion, risk management and contingency planning capabilities,
efforts to organize women in Bangladesh’s poorest villages preparing them to resume operations quickly after emergen-
and for leading the fight for the rights of disadvantaged cies. So far ELF has pre-qualified 51 microlenders in 13 coun-
women for more than 30 years. Named for Grameen Foun- tries with an aggregate loan portfolio of US$4.3 billion. In its
dation’s third chair of its board of directors, this award was first four years of operations the facility has disbursed a total
inaugurated in 2007. US$10 million through 12 operations triggered by political
Mitra Bisnis Keluarga (MBK) Ventura of Indonesia will receive unrest, hurricanes, floods, an earthquake and a volcanic
the Excellence in Microfinance Award for its leadership in eruption.
ensuring that Indonesia’s poorest citizens receive financial
services. Based on the island of Java, it is the only large insti- Read More :
tution focusing on the poorest 25 percent of Indonesians and http://www.iadb.org/news/detail.cfm?
serves almost 90,000 female clients. language=English&id=5087
Al Tadamun of Egypt will receive the Grameen Foundation
and Grameen-Jameel Pan-Arab Pioneer in Microfinance South Koreans Turn to Loan Sharks amid Global
Award in recognition of its innovative and aggressive pro- Credit Crisis
gram to provide financial services to Cairo’s poorest
Low-income South Korean households with poor credit rat-
women. Its creative, client-focused solutions have given
ings are facing increasing difficulty in borrowing money from
more than 41,000 women and their families greater financial
banks and other financial service companies in the wake of
opportunity and security. This year’s Pioneer Award is being
the global credit crunch. Many are turning to loan sharks who
given jointly with Grameen-Jameel Pan-Arab Microfinance,
charge significantly higher interest rates. In recent months,
Ltd., which directs Grameen Foundation’s work in the Middle
the government has introduced a range of steps designed to
East and North Africa.
encourage domestic lenders to extend credit to small busi-
nesses and not households. This has made it even more diffi-
Read More
cult for low wage earners and the self-employed to secure
http://www.grameenfoundation.org/resource_center/
cash amid rising debt and slow income growth.
newsroom/2008_awards_press_kit
Read More : http://www.koreatimes.co.kr/www/news/
nation/2008/12/123_36859.html

` News
MIX Releases 2008 Global Rankings for MFIs
The Microfinance Information eXchange (MIX) has released CGAP Hosts Pioneer Perspectives on Mobile Bank-
the 2008 Global 100 Composite ranking for MFIs. It analyzed ing
and ranked MFI performance based on data from calendar
year 2007. MBK Ventura of Indonesia was ranked as the top
performing MFI for the year.
Last week, CGAP hosted a roundtable and webinar on the
Using data from MFIs throughout the developing world, the topic of how mobile phone banking can deliver a range of
report illustrates successes and challenges experienced by financial services to poor people and change lives for the
MFIs in providing financial services to the unbanked. MIX has better. The presentations and video of the event are now
also created an Excel version of the Composite Rankings, available online.
which allows MFIs to see how improvements in performance
will impact their overall ranking. Download or Read more : http://technology.cgap.org/
To access the report the report, visit MIX website.

http://themix.org/pub_popup.aspx? New Credit Guarantee Facility for Pakistani
publicationID=272&latest=yes&hidepath=yes MFIs Launched
Grameen Campaign Uses Pixels to Fight The State Bank of Pakistan (SBP) has launched a credit guar-
antee facility to arrange easy flow of liquidity to microfinance
Poverty
banks. The Microfinance Credit Guarantee Facility (MCGF)
will ensure that 40% of funds provided by banks to liquidity-
starved MFIs are repaid in case of any default. The Depart-
Grameen Foundation has launched StopPovertyNow.org, a
new campaign that enables people to join the fight against ment of International Development (DFID) has extended a
poverty and celebrate loved ones with as little as US$10. GBP10 million (US$15 million) grant which will be kept in a
With each donation, users will bring to life the greyed-out pool of reserve and used for issuing guarantees to microfi-
image of a microfinance client – underscoring the impact of nance providers. The facility is part of a GBR50 million
these tiny business loans. The photograph is built on (US$74 million) three-program initiative launched by the SBP
10,000 image squares which users can dedicate to loved
with the assistance of UK’s Government Financial Inclusion
ones or memorable moments by posting personal photos
program and an endowment fund worth US$20 million under
and messages.
As visitors scroll over each image square, they can see mes- Asian Development Bank's (ADB) Improving Access to Finan-
sages and photos posted by other supporters. Users can cial Services program. As an incentive, funds given to microfi-
also select multiple squares, making it a good group project nance banks will be deducted from demand and time liabili-
for teaching children about the value of giving and helping ties of banks for the purpose of statutory liquidity require-
people around the world. "StopPovertyNow.org is a simple, ment (SLR) and cash reserve ratio (CRR) calculation.
inexpensive and very personal way to support poor entre-
Read More :
preneurs in their journey to financial independence," said
Alex Counts, president of Grameen Foundation. "With this
new campaign, we are hoping to expand our growing team http://www.thenews.com.pk/daily_detail.asp?id=152734
of global supporters who are committed to enabling the
poor to create opportunities for themselves."
Read More :
you can to sent News , Events organized or participated by
http://www.grameenfoundation.org/resource_center/
newsroom/news_releases/~story=360 your institutions at this email id :

`
Our Sponsors
Principal Sponsor
Associate Sponsor
You can support this initiative :

Sonata Microfinance
To know about various

sponsorship Packages .
Write t us :
Or Call : +91.9916738702
© www.microfinancefocus.com
Visit our website : www.microfinancefocus.com
Microfinance Focus
Avalahalli, Anjanpura Post , Bangalore—560062 (India)
Phone : +91.80.28436237 | Fax: +91.80.28436577
Email : info@microfinancefocus.com | web: microfinancefocus.com

Microfinance Focus January 2009

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Microfinance Focus January 2009

Enviado por

Direitos autorais:

Formatos disponíveis

`

Access to Credit & Human Right Institution Spotlight

Designing Staff Incentive System

29...Opinion. By Samit Ghosh (Ujjivan) and P N Vasudevan (Equitas )

By Dr. Souren Ghosal 08...Should Access to Credit be human

35..Designing Staff incentive System

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 2

“Affinity to Prosperity : Development of SHGs”

44...An Exclusive Interview with Mr. Aloysius P Fernandez,

Exclusive Presentation From Microfinance Focus to promote innova-

I-Focus of this month

Institution Spotlight Send your write up .

GOVERNING BOARD Disclaimer

Mr. M. V. Raman Submission

www.microfinancefocus.com © copyright 2008-09Microfinance Focus [ January 2009 ] 4

Advertise with Microfinance Focus

Write to us for detail

Information for better services!

In developing economies, most local commercial transactions are on a

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 7

[ Mr. Counts is the President and CEO of

Micro enterprise training

In the arena of microfinance, the major players seem to

(Dr. N. Lalitha is the Reader in Dept of Rural De-

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 9

‘standard’ for easy replication and scaling-up. institutions.

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 11

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 12

Micro credit to farmers and artisans needs to be routed

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 13

Micro Financing to Groups Comprehensive Policy Framework

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 14

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 15

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 16

Mobile Banking In India

M obile banking, a symbiosis of technology and financial ser-

Unlike online banking, mobile banking has certain advantages on its

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 17

M obile banking has the potential to

Regulations on Security: The RBI’s guide-

Political Economic Social Technology

Business Correspondent Mobile penetration in Illiteracy Security concerns

Daily Transaction Limit

Goal of Financial Inclu-

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 18

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 19

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 20

Developing Credit Reporting for Microfinance

Opportunities , Challenges and Way forward

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 21

Share your write-up

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 22

DEVELOPING deters systemic over-

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 23

(i) Improve risk management. Having access to a cli-

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 24

“Credit reporting also contributes to financial

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 25

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 26

Country and context-specific challenges exist CIBIL

The program has always supported the devel-

www.microfinancefocus.com Microfinance Focus [ January 2009 ] 27

4. Bolivian Banking Superintendence

5. World Bank Doing Business reports. Website: