Strømme Foundation Microfinance AS Annual Report 2006

ST R Ø M M E

M I C R O F I NAN C E

D E PARTM E N T

ANNUAL REPORT 2006

FOREWORD

2006 has been an exceptional year for the Microfinance industry in general and for Strømme Foundation Microfinance in particular.

the No ar of be Ye

Prize eace lP

2006 - The year of the Nobel Peace Prize

2006 • Th e

Contents

Page The Microcredit Summit Campaign Report for 2006 reveals that : Foreword Strømme Microfinance Department (SMF) in brief SMF Governance Structure Strømme Microfinance East Africa Ltd (SMF EA), Kampala, Uganda Strømme Microfinance Asia Guarantee Limited (SMAG) Colombo, Sri Lanka Microenterprise Development Foundation (MDF) Dhaka, Bangladesh SMF, strategic guidelines SMF, main activities 5.1 Financial Services 5.2 Non-financial services 5.3 Networking SMF, highlights and achievements through 2006 The SMF Personnel The Financial Intermediation 8.1 The loan portfolio 8.2 Equity Holdings 8.3 The result from operations 8.4 The currencies 8.5 SMF Dep Funding Non Financial Services, report from the regions Challenges ahead

3 4 5 6 7 8 9 9 10 10 11 13 14 15 15 16 17 17 17 18 19

Appendix I Financial Report

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Appendix II Acronymns

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As of December 31, 2005, 3,133 microcredit institutions have reported reaching 113,261,390 clients, 81,949,036 of whom were among the poorest when they took their first loan. Of these poorest clients, 84.2 percent, or 68,993,027, are women.

Eight hundred forty-seven of these institutions submitted an Institutional Action Plan in 2006. Together these 847 institutions account for 88 percent of the poorest clients reported. Assuming five persons per family, the 81.9 million poorest clients reached by the end of 2005 affected some 410 million family members.

This means that the Goals for 2005 have been reached.

On December 10th 2006 the Nobel Peace Prize for 2006 was awarded to Professor Mohammad Yunus and Grameen Bank” for their efforts to create economic and social development from below”. This is probably the highest recognition of Microfinance by the international Community ever, and caused a great and increasing interest in Microfinance from all stakeholders.

Finally, in April 2006 Nordic Consulting Group published its latest “INVENTORY of Microfinance Activities Supported by Norway, which speaks highly about SF: Quotes: “The clearly biggest and most active organisation is Strømme Foundation……..The planned increase in the total (..level of support to microfinance..) can almost exclusively be attributed to Strømme’s plans for expansion.

The introduction of an APEX level of funding in Strømme is one reason why loans are now the norm in SF. It is an instrument that in many cases provides better performance incentives than pure grants to an MFI. This is also more in line with best practice and the recent CGAP guidelines.”

Kristiansand, 2nd May 2007

Alfred Solgaard MF Director

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Johannes Sannesmoen Acting MF Director

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Lars-Ivar Gjørv Acting General Secretary

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2] Strømme Microfinance Department (SMF) in Brief:

3] Governance Structure within Strømme Microfinance

Strømme Microfinance Department (SMF) is part of Strømme Foundation, Norway. It serves as the top body of microfinance within the total structure of entities. Therefore this annual report reflects the global picture of SF microfinance activities.

Countries of activity

The Strømme Microfinance Department, as part of SF Norway, serves as a coordinator of all microfinance activities within SF worldwide. Its role is further to be a liaison office between the SF micro-finance bodies, the funding partners (like Norad etc) and other stakeholders in North.

Below you will find the overall facts and figures as of EOY 2006. (The financial report can be found in Annex I.)

Region West Africa: Mali, Burkina Faso, Mauritania

Region East Africa: Uganda, Tanzania, Rwanda, Kenya, Sudan

Total assets:

2006 99 893 691

2005 82 126 906

% 21,6

Region South America: Peru

Total equity:

91 676 308

79 304 758

15,6

Gross Loan Portfolio:

85 119 958

74 329 741

14,5

Region Asia: Bangladesh, India, Myanmar, East Timor, Cambodia, Sri Lanka

SF BOARD OF DIRECTORS

SECRETARY GENERAL

MICROFINANCE DEPARTMENT MF Director

OTHER DEPARTMENTS

Total operating income:

2 737 367

1 830 101

49,6

Total operating exp.:

1 927 415

2 066 148

-6,7

The organisation chart below illustrates the microfinance organisation of Strømme Foundation at present. Note that the expression “Strømme Microfinance Department” comprises the MF part of Strømme Foundation.

Outreach / gross number of clients reached:1.817.579 Activities • Financial services: Wholesale Lending, Guarantees and Equity investments • Non financial services: Capacity building, Technical Assistance and Business Development Services.

SMF EAST AFRICA LTD BY SHARES (UGANDA)

PARTNER MFI

PARTNER MFI

SMF ASIA LTD BY GUARANTEE (SRI LANKA)

PARTNER MFI

PARTNER MFI

MICROENTERPRISE DEVELOPMENT FOUNDATION (BANGLADESH)

PARTNER MFI

PARTNER MFI

MF-ACTIVITIES WEST AFRICA

PARTNER MFI

PARTNER MFI

MF-ACTIVITIES SOUTH AMERICA

PARTNER MFI

PARTNER MFI

MF-ACTIVITIES ASIA (OUTSIDE BANGLADESH & SRI LANKA

PARTNER MFI

PARTNER MFI

• Networking: National umbrella organisations, Networking in North and local MFI networks.

Entity with separate Board Regional MF-activities

SF has organised its work in the microfinance sector through a small top body at the head quarter in Norway. The CEO of the SMF Department is called “Director of Microfinance”. He represents the Secretary General in issues concerning MF. As the total MF activities differ in size and complexity in the four southern regions of SF, the microfinance work has been contextualized:

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In the regions of South America and West Africa, as well as in a few other cases, the MF portfolio is managed in collaboration between the regional director and the MF Department in Norway, the latter serving as credit committee for new loans, while the regional office is responsible for identifying, supporting and monitoring MF partners.

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Strømme Microfinance East Africa Ltd (SMF EA), Kampala, Uganda

In Asia SF has chosen to set up two different companies:

Strømme Microfinance Asia Guarantee Limited (SMAG) Colombo, Sri Lanka

SMF EA is a company limited by shares, incorporated in 2004, holding the activities of MF for the whole East African region.

Strømme Foundation holds the majority of shares in the company. The regional director serves as chairperson of the Board.

SMF EA is a complete Apex organisation with a local Board of directors, a full set of manuals covering Board policies, Accounting, Human Resources management and Operational & Financial issues. The company has a revolving five years’ Business Plan.

SMF EA Ltd BALANCE SHEET: Total current assets: Total non-current assets: TOTAL ASSETS

NOK 30 105 192 2 142 533 32 247 724

Total current liabilities: Total non-current liabilities: Total equity: TOTAL LIABILITIES AND EQUITY

77 313 23 427 729 8 742 683 32 247 724

INCOME AND EXPENSES STATEMENT Total operating income Total financing expenses Provision for loan losses+write-offs Total operating expenses Net income from operations

2 892 649 -858 611 -1 965 958 -1 530 789 -1 462 709

Currency gains and losses Total grants received

553 395 4 853 638

Net income after grants for the period

3 944 325

Total number of partners: 34 Total number of outstanding loans: 73 Total number of clients of partners: 446 029 Gross portfolio yield: 10,33 Gross Assets yield: 9,42 Operation Income/Operational expenses: 0,66

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SMAG is incorporated under the Companies’ Act no 17 at the Registrar of Companies on January 6th 2006 with SF Norway as the Founding Member. SF’s legal consultant in Sri Lanka recommended a company limited by guarantee as the most convenient set up for an MF Apex.

The company has taken over all MF activities from the Regional office, it has appointed a professional board with local resource persons and has had two board meetings. The SF regional Director is chairing the board and SF Norway appoints two members. At the time of registration, the SF loan portfolio in Sri Lanka was converted into a subordinated loan from SF to SMAG.

INCOME AND EXPENSES STATEMENT Total operating income Total financing expenses Provision for loan losses+write-offs Total operating expenses Net income from operations Currency gains and losses Total grants received Net income after grants for the period Apex in Asia and Disaster program combined.

792 333 -543 258 -1 174 177 -404 958 -1 330 060 8 455 0 -1 321 605

Total number of partners: 31 Total number of outstanding loans: 123 Total number of clients of partners: 89 690 Gross portfolio yield: 5,63 Gross Assets yield: 5,40 Operation Income/Operational expenses: 0,54

Local legislation hinders SMAG from granting loans to other countries in the region. Loans to partners in Myanmar, Cambodia, India, East Timor etc. from 2006 therefore started to report directly to SMF Department, Norway.

SMAG Ltd BALANCE SHEET: Total current assets: Total non-current assets: TOTAL ASSETS

NOK 17 377 700 29 586 17 407 286

Total current liabilities: Total non-current liabilities: Total equity: TOTAL LIABILITIES AND EQUITY

260 385 18 065 239 -918 338 17 407 286

SMF EA Ltd is part of the (Apex) wholesale lenders organisations’ network. They have very actively assisted and funded the Practitioner Network in their following up of the Microfinance regulations. SMF EA Ltd are also actively supporting the Association of Microfinance Institutions in Uganda through participation in meetings, seminars and workshops.

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Microenterprise Development Foundation (MDF) Dhaka, Bangladesh MDF is a joint venture that was planned to be launched during late 2006 or early 2007. The set up will be on a 50 / 50 basis between CARE International and SF. Bangladesh used to be SFs Asian head quarter, thus the portfolio in the region is significant in both amount and outreach.

The development of partnerships and portfolio has been sound and vital and today Bangladesh is the country where the SF portfolio reaches out to most poor people. This also has to do with the concentration on hard core poor, the tribal groups and the slum dwellers, many of whom being flood victims. Among these clients, the average loan size is small; thus the funds for MF reach out to a large number of clients.

The launch of the new company will probably be postponed for some time. It turns out that the new MF legislation in Bangladesh together with the political situation does not favour any new company creations in the field of MF. We have therefore been recommended to postpone the establishment.

In the meantime the Apex in Bangladesh (in fact a department within the Regional Office) will continue as before, along the same healthy track.

In the last minute, as this reports goes to the press, we are informed that CARE has changed their opinion. They are going to continue their old microfinance programme without us. This means that we have to start from scratch again.

Bangladesh BALANCE SHEET: Total current assets: Total non-current assets: TOTAL ASSETS

NOK 31 940 878 0 31 940 878

Total current liabilities: Total non-current liabilities: Total equity: TOTAL LIABILITIES AND EQUITY

260 758 31 702 610 -22 490 31 940 878

INCOME AND EXPENSES STATEMENT Total operating income Total financing expenses Provision for loan losses+write-offs Total operating expenses Net income from operations Total grants received Net income after grants for the period Total number of partners: Total number of outstanding loans: Total number of clients of partners: Gross portfolio yield: Gross Assets yield: Operation Income/Operational expenses:

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1 736 757 -721 900 -971 225 -415 233 -371 601 62 355 -309 246 10 109 1 069 298 7,31 6,16 0,82

4] Strømme Foundation MF strategic guidelines.

5] Strømme Foundation MF Main activities.

The SF Board of Directors discussed and approved the adjusted MF strategy in the beginning of 2007.

Aiming for long term partnerships, the SF relationship to partners may vary from grants to loans to guarantees to equity holdings to networking with other partners. The contents of these partnerships may again vary from time to time.

Strømme Foundation has decided to promote the following basic guidelines and principles for its MF involvement: PRINCIPLES

SMF’s work can be divided in to three major categories: 5.1 Financial services: Financial support and involvement in partner organisations / microfinance institutions (MFIs).

• Promote building of inclusive financial systems, based on Best Practice Microfinance, re CGAPs 11 principles of microfinance.

• To emphasize demand-led and pro-poor financial systems, re Norad’s position paper on MF. • To work as Apex institutions through partner microfinance Institutions (MFIs).

• To support established and promising partner MFIs through loans and grants for technical assistance.

• To aim for the total field structure of entities within Strømme Microfinance to reach operational sustainability by EOY 2008.

SPECIFIC POLICIES AND PRACTICES • Create and support a structure of strong regional wholesale lenders / Apex companies in which Strømme Foundation plays the role of majority stakeholder.

• Promote a ”holistic approach” implying close, long term responsible relationship with the partners.

• Encourage and support strong partnerships and networks, both vertical and horizontal.

• Keep a clear poverty orientation, focusing on underserved, rural and other vulnerable groups.

• Aim to stimulate innovations, find special niches and promote new methods and tools – i.e. provide ”cutting edge” microfinance.

5.2 Non financial services / Technical Assistance (TA): Facilitate and promote training-sessions, equipment, work-shops and courses aimed at partner MFIs in issues such as good governance, management information systems (MIS) and best practice MF. 5.3 Networking 5.3.1 Support to strengthen local and national MF networks, umbrella-organisations and information strategies towards the authorities.

5.3.2 Building strategic partnerships with like-minded entities for the purpose of co-funding, MF cooperation, mutual strengthening both on regional and headquarter levels.

5.3.3 Networks for capacity building, such as common efforts for training and education within the field of MF.

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5.1 Financial Services: SF supports microfinance mainly by working through partner organisations.

SF’s means of intervention are: • Loans to microfinance institutions (MFIs) • Guarantees • Equity holdings As such, SF conducts wholesale lending as one of its main interventions. (Promotion of clients savings, however, is of essential importance for the funding and security of the MFIs.) The lending activities have increased significantly over the last years. SF aims at offering competitive facilities for our partner MFIs, yet without compromising the local financial markets. SF thus should not subsidize the interest rate, as we believe one of our missions is to promote inclusive, financial markets. Having said, that SF must aim at promoting business between the local banks and the national MFIs to take place.

Achieving this is a milestone as SF sees it.

In certain cases, there is need for extra support to MFIs, for capacity building. A loan on market based terms may, in such situations, be accompanied by a time- and amount limited grant from SF. This arrangement avoids a situation of subsidized interest rate.

Guarantees have become more common over the years. It is of great importance for the MFIs to have access to local capital. This is all the more possible since commercial banks in most of the SF countries of intervention are over liquid. On the other side the commercial banks normally have very little experience in financing the MFI sector; it is thus necessary to inform the banks and negotiate in order to obtain favourable conditions for the MFIs. A guarantee is needed when there is too much asymmetry between the lender (Bank) and the borrower. This is frequently the case when MFIs want to access the commercial financial markets. The conventional financing institutions have very limited knowledge of the MF sector. Hence a guarantee from an accepted institution can help the MFI access commercial

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capital. In this process it is essential that the guarantee should decrease over time (or the loan amount increase) so that the guarantee amount may be leveraged. Thus a certain amount in guarantee will leverage a higher amount in loans. An Apex institution could play a key role in this context. That is what SF wants to do.

As a way of supporting the MF sector and build external relationships, SF has chosen to make direct investments. These equity instruments, when invested in stakeholder companies in the North, open doors of collaboration with international players in the field, give access to information and new networks and let SF become an international, recognised MF player.

When investing in partner MFIs in the South, the rationale could be a need for closer monitoring by having a seat on the Board, a symbolic support to an interesting, growing partner or a financial investment in a strong MFI. SF also aims at exploring various quasi equity instruments, such as subordinated loans when involved in this sector.

Acknowledging the inadequate capital structure of most NGOs / MF players, the latter is a most interesting challenge calling for innovations.

5.2 Non financial services / Technical Assistance (TA): By non financial services SF understands f.i. institutional capacity building, market development support, applied research, provision of equipment for the MFI etc.

SF has chosen a focus on a good balance of well established, well run MFIs and promising, emerging MFIs with a potential for development.

Where applicable, SF offers grants to cover deficits and onetime investments in the MFIs. By building up a strong structure of Strømme MF entities in the regions, concentrating on conducting MF services to MFIs with good governance, strong management, transparency and accountability, SF finds the grants increasingly directed at the emerging MFIs in the early part of their life cycle.

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Since all parties should strive to reach operational sustainability, the grant element should be limited accordingly and reducing.

Even if we have a focus on emerging MFIs we also support programs aiming a mobilisation of local savings and empowerment of poor people, particularly in rural areas. In some cases such village groups may develop into more organised forms of Microfinance.

of microfinance programmes targeted at low income / disadvantaged individuals, groups/ communities in the society • Contribute to the promotion of professionalism, transparency and accountability among member MFIs and other main players in the microfinance industry.

5.3.2 Building strategic partnerships In line with the increasing professionalism and commercialisation of the MF industry, SF sees an ever growing need to partner up with other, strong entities involved in our playfield.

5.3 Networking 5.3.1 Support to strengthen local and national MF networks.

SF acknowledges the importance of strong, national networks within MF, be it on MFI level, Apex level, between different donor agencies or collaboration with governmental bodies. SF also believes in supporting the MF group in the Norwegian Development Network.

In the SF countries of intervention, one sees both excellent and less developed models of this. In some countries they are non existent.

The example of Uganda shows how the structure of networks can be built and what an important role such networks play in securing a sound, vital development of the MF field. SF believes, through financial and managerial support, one should support these structures in the chosen countries of intervention. The main objectives of the said networks are: • Improve the capacity of member MFIs to increase their outreach with a commitment to quality services and performance • Provide counselling services, research, information and other finance support and services to member MFIs • Contribute to building of alternative microfinance institutions that are committed to sustainable human development • Establish and maintain effective networking relationships among appropriate regional, national and international organisations that pursue the promotion and development

Funding: On the one hand, SF seeks strong funding partners in the traditional donor communities, such as ICCO, Norad, SIDA etc.

On the other hand, as a parallel and a result of the growing awareness and public interest for MF, SF takes every possible opportunity of attracting more business minded players, like Terrafina = ICCO, Oicocredit, Rabo Bank Foundation, SIDI, Oikos etc.

As such, SF has been discussing and exchanged ideas with leading financial institutions. These contacts range from aiming to create a fund for social responsible investors to discussing borrowing through already established, international funds set up to reach out to well performing MFIs in the poor countries.

SF believes that, as the MF industry matures and reaches a level of greater professionalism, this part of the work will be increasingly important as it is expected to give valuable contribution, both in terms of experience and funding in the years to come.

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Synergies through partnership with like-minded partners: Without necessarily having extended funding as a goal, SF sees the importance of partnership with strong operators in our regions.

Strengthening the ties to fellow players in the MF field, gives access to their networks both locally and in their country of origin with the ensuing opportunities.

Nationally: Norway: Bistandstorget (Norwegian Development Network) Uganda: Uganda Association of Microfinance Institutions Kenya: Association of Microfinance Institutions Tanzania: Tanzania Association of Microfinance Institutions Mali: Association des Praticiens et institutions de la Microfinance Sri Lanka: Donor MF Coordination Network, Microfinance Practitioners’ Network in Srilanka Bangladesh: INAFI Bangladesh

5.3.3 Networks for capacity building SF strongly promotes capacity building within the MF industry.

The institutional context differs largely from country to country.

In countries where there are institutions providing capacity building services, SF supports them and promotes interaction between the ordinary MFIs and these. Otherwise, SF promotes, often by using grants, setting up such institutions in countries where these do not exist.

SF does not conduct the capacity building and business development services themselves, but we try to bring together the demand and supply for these services. These activities also strengthen the relationship between partner MFIs. Below is a list of some of the networks where we are members: Internationally: Microcredit Summit and CGAP, Opportunity International European level: The European Microfinance Platform in Luxembourg ICCO, Oicocredit, Terrafina, SIDI, Oikos, Equity Foundation

6] SMF highlights of achievements in 2006 In the report for 2005 SF focussed on the following main challenges for 2006: 6.1. Having not yet reached the final, adjusted agreement with Norad on revolving MF funds through the SF various bodies of interventions, SF considers this a major challenge also for the year 2006. The effects of not having such agreement in place, hinders part of the work within networks and in exploring new models and sources of funding. From an SF point of view, this will be prioritized highly also for this year.

Achievements: Despite multiple attempts we failed to obtain an agreement.

There was some progress however, since Norad has given clear signals that they approve of our way of implementing microfinance. They also have signalled that there is no going back on the previous realisations. We may continue as we have started, but a final statement should be made in the New Framework Agreement to be implemented from 2008 .

6.2. The formalisation of the Apex organisation in Colombo was done through 1st quarter 2006. Now the challenge is to get the Board of Directors and the Management of the company to work well together, forming good governance structures and documents, pointing out a prosperous direction for the activities in the company.

We have managed to assemble a BoD with very resourceful persons. In addition we have found as the new CEO a highly experienced MF expert called Upul Bogoda, who has many years of experience, in particular from Bangladesh. He has immediately started to improve the management procedures and there is every reason to believe that within the first semester of 2007 all these tools will be ready and functional.

6.3. The establishment of a new Apex, together with CARE in Bangladesh will certainly be a big challenge to the SF organisation throughout 2006.

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This project has had its ups and downs during the year. First DFID in London refused to approve the transfer of the balance of the CARE project Capital (appr. 5 mill USD), although recommended by DFID Bangladesh. We then decided we would follow the recommendations made by the international experts, but do it alone. Soon after that, however, DFIF in London changed their opinion to the effect that they were willing to go for the original solution. Therefore, by the end of 2006 we are back to Zero again and shall work from there. There will, however, be a certain halt because new legislation and the political situation in the country are not in favour of new company establishments.

6.4 The search for good models for MF work in the SF West Africa together with like minded partners is challenging also seen together with the upcoming change in leadership in that region as of July 1st 2006.

MF interventions in West Africa started again with the new Regional Director Zakaryia Abdou. In the mean time the Department had been working to establish close contacts with SIDI-France and Terrafina with the intention to entertain a close cooperation with their representatives in Mali. We are now about to sign an Agreement of Cooperation with Oikocredit in Mali (the local outlet of Terrafina) pertaining to mutual assistance in the field of partner and loan assessments and monitoring. With SIDI we are trying to find out how we can, in the future, support the Banque Malienne de Solidarité as well as rural involvement with one of our common partners, JEMENI. 6.5. A new challenge this year will be to develop new ways of obtaining external funding, including from more commercial sources, for SMF work.

In this respect the Nobel Peace Prize given to Mohammad Yunus and Grameen Bank this year had an amazing effect on Microfinance in the public eye. Many new doors seemed to open up and we are now working on funding opportunities, from two large Financial Institutions in Norway. We have also participa-

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ted in the creation of two investment funds based in Sweden.

In addition to this there seems to be renewed activity in the MF section in Norad. We are therefore optimistic concerning the future funding opportunities, both for grants and for loans.

6.6. Making our contributions more performance based is a great challenge, at all levels. This means we must strive to improve measuring impact on poverty of our interventions.

In this field we still have a long ways to go. We have achieved very little this year, if anything at all. Some of our partners do measure it, and we all see it with our eyes that MF works. It is mainly anecdotal evidence though, and we know that this must change.

6.7. Obtaining new and well adapted financing instruments for MF is also a great challenge, the main problem being that most MFIs are not shareholding companies.

This is a field where we are in permanent discussions with our partners. The idea is to develop subordinated loans into something better adapted to the NGO world. We still are working on it. No one seems to have found the magic bullet.

6.8. Further, as the company structure of MF entities now is about to be established within SF, one must focus to establish a smoothly working administrative relationship between the regional Apexes and SMF Dept.

This is a real challenge to all of us, in particular since Alfred Solgaard has resigned from his post as Microfinance Director at the end of 2006, and we have had to look for a replacement (Johannes Sannesmoen will replace him until a new candidate has been found). SF has had a major reshuffle since the Secretary General resigned earlier in 2006. The Board has therefore started procedures to find a new and smoother administrative system. This will be a major challenge for 2007.

6.9. To promote local MF networks in the countries of intervention.

See par. 5.3.3

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7] The SMF personnel

8] The Financial Intermediation

The executive staff involved in Microfinance in 2006 are composed of the four Regional Directors as well as a number of Microfinance specialists:

All the financial intermediation taking place in the regions is now under the three Apex institutions, the only exceptions being loans to Jamii Bora (Kenya) which are given directly from Norway (SMF Department) and the regions where there is no Apex (West Africa and South America).

Nimal Martinus (RD Asia) Priscilla Mirembe Serukka (RD East Africa) John Brett (RD West Africa) whose contract ended July 1st 2006 Zakariya Abdou (RD West Africa) Susana Tapia (RD South America) Zahirul Islam, Microfinance specialist in Bangladesh Grantham Fernando, MF specialist in Asia with residence in Burma (Returned to Norway end of 2006) Dinesh Kanagaratnam, MF specialist in Asia, resident in Colombo (Resigned in 2006) Upul Batagoda, CEO of SMAG, Srilanka Priyantha Saman Bankara, Operations Coordinator, SMAG Mohamed Naseer, field coordinator, responsible for training in Srilanka Savarimuththu Gnanapragasam, Administration and Finance Officer, SMAG in Srilanka Paul Mayanja, Microfinance director, Kampala, Uganda Daniel Sentumbwe, microfinance specialist, Uganda Robert Baliddawa Muloki, mfi accountant, Uganda (Contract ended in 2006) Denis Okaba, Finance Officer, SMF EA Ltd Elizabeth Naiga, MF Sepcialist, SMF EA Ltd Alfred Solgaard, Head of Microfinance Department (Resigned end of 2006) Johannes Sannesmoen (former Head of Microfinance) - working as a consultant for Strømme Microfinance Heidi Prestbakmo Holtskog, Accountant in the SMF Dept from April 2006 (1/5 position)

The financial intermediation reported here will therefore be the financial relationships between SMF Department and the Apex institutions and the individual partners in the other regions. All portfolio information in the Apex areas will be reported in their annual reports.

8.1. The Loan portfolio. (In 1000 NOK)

SMF EA LTD SMF Asia LTD SMF BDESH LTD Jamii Bora URC BAM, Microstart Jemeni, Jigiaso Ba Adenord, Piyeli, Sinsinso Asidme, Mide ASIA (outside of Bdesh and Srilanka)

COUNTRY Uganda, Kenya, Tanzania Sri Lanka incl. Tsunami grant Bangladesh Kenya Burkina Faso Mali Peru Cambodia, India, Myanmar

Total number of clients in our partner MFIs Total number of clients reached by SMF funds

LOANS # 4 2 1 3 2 8 2 7

OUTST. BALANCE 22 595 18 065 31 703 6 658 634 2 326 248 2 033

1 817 580 174 550

SMF is basing its work on networking with local service providers and resource persons in order to strengthen local capacity both among partners and among the service providers.

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8.2 Equity holdings

8.3. The result of the year’s operations is the following *:

SMF Department has for various reasons decided to purchase ownership parts in various companies abroad. Below, please find an overview of the investments: a) OIKOS 110 000 NOK is a Danish Co-operative bank with a clear purposeof collecting deposits to be relent to MFIs in developing countries.SF has purchased 100.000DKK worth of shares (and taken several loans from them). b) OIKOCREDIT 83 954 NOK Oikocredit is a Church based finance trust incorporated in the Netherlands. They are one of the most reputed Wholesale lending MFIs in the world. SF has purchased 10.00€ worth of shares. c) UNOPHONE 39 000 NOK Unophone is a (Grameenphone-like) company combining the services of MF and Mobile telephones. They operate in Uganda. SF has bought shares worth of 64.000 NOK in order to help them get started.

For various reasons the value has now been reduced to half. d) SIDI 356 142 NOK Societe d’Investissements dans le Developpement International, is a French Apex institution very much like ourselves. Only they are older, more experienced and financially very solid. Both SIDI and SF wanted to enter into partnership with a view to establishing cooperation wherever judged advantageous. SF has bought

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45.600€ worth of shares in SIDI (and they have given a 300.000USD loan to SMFEA Ltd with an option to convert it into equity at a later stage). e) STRØMME MICROFINANCE EAST AFRICA LTD SMF EA Ltd is the first of the SF Apexes to be incorporated. SF is capitalizing this Apex with 500.000.000UGS in shares.

1 731 500 NOK

f) JAMII BORA SCANDINAVIA AB 360 720 NOK Jamii Bora Schandinavia is an investment fund incorporated in Sweden.

It is owned by SF, Svenska Kyrkans lands fond, og Jamii Bora trust. The company has As its sole objecte to channel foreign funds to the Jamii Bora Group. Total equity is 1.200.000 SEK. SF has paid 1/3 of the total capital (400.000 SEK) g) JAMII BORA KENYA LTD 2 300 865 NOK Jamii Bora Kenya Ltd is the Microfinance part of the JB Group that has been organised as a shareholding company to comply with new legislation.

Some old loans (given on the condition they should be transformed into Equity) have now been transformed into shares.

SF has 8% of the total share Capital.

TOTAL WORTH OF OWNERSHIP PARTS

8.4 The currencies

All figures in 1000 NOK Total operational income Interest expense

2006 2 737 221

2005 1 830 133

The main currencies in which we are trading depreciated in the following manner (to the NOK) in 2006 according to www.oanda.com.

GROSS FINANCIAL MARGIN

2 516

1 697

Currency

Provision for Loan losses and Write-offs

1 365

1 073

NET FINANCIAL MARGIN

1 151

624

Operating expenses

1 931

2 066

(LOSS)/GAIN FROM OPERATIONS

(780)

(1 442)

US Dollar (USD) Uganda Shillings (UGS) Kenya Shillings (KES) CFA Franc BCEAO (XOF) Bdesh Taka (BDT) Srilanka Rupees (LKR)

% 7,98 3,95 3,71 2,53 8,69 12,53

8.5. Principles of evaluation of assets and liabilities Non-operational income and expenses: Currency gains/(losses) Non-operational income Non-operational expenses NET RESULT FOR 2006/5

(6 797) 303 (25) (7 299)

(3 257) 388 (4 311)

With total grants from SF of 18 779 848 NOK the final result is an surplus of 11 480 599 NOK. * See complete financial report in Appendix 1

Current assets and short-term liabilities contain items due for payment within one year after purchase. Other items are classified as fixed/financial assets or long-term liabilities.

Current assets are valued at the lowest of procurement cost and actual value. Other accounts receivable are included in the balance sheet at face value after deduction of provision for expected loss. Items in foreign currency are valued at year end exchange rates. Short-term liabilities are recorded at the nominal amount at the time of accrual.

Fixed/financial assets are valued at procurement cost, but are depreciated to actual value if the fall in value is not expected to be temporary. Long-term debt is entered at the nominal amount at the time of establishment.

4 982 180 NOK

Strømme Microfinance AS has also invested in 20 shares (20 400NOK) in Kolibri Kapital since SMF AS is holder of a special account for financial investments (Verdipapirkonto).

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9] Non-financial Services

10] Challenges ahead

SMF-Dep. is promoting a number of different activities related to Microfinance, and which are necessary for our partners to provide or facilitate a supply of services that really corresponds to the needs of their clients. These are the following

SF foresees the following main challenges in the coming year:

Talent Finance/Business Development Services (BDS)/Entrepreneurship Impact Assessment Product development Technical Assistance. Business Plans Technical Assistance. Management Information Systems Action Research Trainings in MFI management

There has been a major reshuffle of SF Leadership from 2006 to 2007 with the replacement both of the General Secretary and the Microfinance Director. Fortunately we have found valid replacements but some time will be needed for the new MF leaders to be familiar with the job and the organisation. Creating a flexible and efficient transition will be a major challenge for 2007.

Below a summary of non-financial interventions in the regions:

Region

Activity

West Africa South America

Trainings Staff training Clients’ training Equipmenet etc.

Staff trainings Staff training 9 Trainings of staff 20 Trainings for partners 2 partners rec. equipment 9 partners rec. subsidies Training staff head qter Training of partners Subsidies for equipment etc.

Bangladesh Myanmar Sri Lanka

East Africa

Totals

Find a long term solution for the virtual Apex in Bangladesh.

Establish, sign and development cooperation Agreement with peers in West Africa.

Follow up and contribute to the development of the Norwegian Microfinance Initiative that was initiated by the Minister of Development Cooperation, Erik Solheim as a follow up of the Nobel Peace Prize 2006.

Search for simple affordable mechanisms that can help us make impact assessments among MFI clients.

Search for funding mechanisms that are adapted to the needs and limitations of MFIs that are not organised as Shareholding companies (Sub-ordinated loans etc.).

Promote Ratings as a tool to improve the performance of our partner MFIs.

Participants

Costs in NOK

46 500 18 5 100

69 410

6 42

Trainings Other

Grand total

2 060 252 49 321 46 824 143 593 31 216 106 759 107 695 212 268 276 261 2 747 131 107 93 648 2 535 921 725 770 3 261 691

In preparation for a new Framework Agreement that will come into effect fro 2009 it is important for us to find both an organisational set-up and funding sources that will help us develop our MF interventions further. We hope to meet with Norad’s understanding when we will work for the introduction of our Apex organisations as new entities in the Framework budget applications.

We are continuously searching for affordable and functional software for portfolio tracking in particular but also for savings and accounting.

Joha Actin

Kristiansand, 2nd May 2007

Lars-Ivar Gjørv Acting Secretary General

Johannes Sannesmoen Acting MF Director

Alfred Solgaard Past MF Director

In all we have spent 3.261.691 NOK on various kinds of capacity building and strengthening of our partners in our MF network in 2006.

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Appendix 1] FINANCIAL REPORT

Profit and loss statement

SMF – Financial Report as per December 31st 2006 2006

2005

Assets Bank deposits: Banco Latino in Peru BIM-Mali Nordea Stanbic Bank, Nairobi Deposit SF, Kr.sand Bago YMCA, Myanmar Subtotal for bank deposits

1 030 887 1 868 809 6 343 162 510 597 1 143 886 108 386 11 005 727

5 561 617

Gros Regional Fund Loans Less Loan Loss Provision Net Regional Fund Loans

84 263 909 -1 287 303 82 976 606

74 329 741 -284 001 74 045 740

1 029 177 4 982 180

28 706 2 490 843

99 993 690

82 126 906

End of year transactions (accruals) Ownership parts Total Assets

522 728 258 280 3 179 417 751 183 850 009

Total operating income Expenses: Interest on loans Total financing expenses Gross financial margin: Provision for loan losses and write-offs * Net financial margin Operating expenses: Personnel expenditures Travel expenditures Other adm. Expenses Bank charges Government taxes

Liabilities Current liabilities Non-current liabilities

Income Interest from banks Interest from RF loans Interest from APEX and FWA loans Dividend from Equity holdings Recovered write-offs

103 376 8 214 008

0 2 822 148

Equity as per 31.12.2005 Currency exchange as per 1.1.2006 Result in 2005: Equity as per 31.12.2006

79 304 758 890 949 11 480 599 91 676 306

62 222 142 17 082 616 79 304 758

Total Liabilities and Equity

99 993 690

82 126 906

Total operating expenses Profit and loss from operations

2006

2005

145 059 881 082 1 711 225

78 499 537 071 1 212 862 1 669

2 737 366

1 830 101

221 567 221 567

132 627 132 627

2 515 799 1 365 231 1 150 568

1 697 474 1 072 968 624 506

987 535 398 937 508 974

1 224 450 401 180 383 153

3 624 31 968

2 734 54 630

1 931 038

2 066 147

-780 470

-1 441 641

-6 796 747 302 968 -25 000

-3 256 891

Income and expenses from non-financial services Currency loss Currency gain Other non-operating expenses Other non-operating income Extra Credit Components in Srilanka in 2004 (omitted in 2004) Grants toward loan capital Grants towards running expenses

17 053 423 1 726 425

387 773 158 559 19 138 450 2 096 367

TOTAL PROFIT (LOSS) FOR 2006/2005

11 480 599

17 082 617

* This amount is composed of LLPr 1.000.000 and write-offs 365.231

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APPENDIX 2] ACRONYMS: AMFI :

Association of Microfinance Institutions (Kenya)

MF:

Microfinance

MIS :

Management Information Systems

MFI :

Microfinance Institutions

NGO:

Non Governmental Organisation

Oikos:

Danish Savings Bank

Oikocredit:

Dutch, Church related MF Apex Institution

RD:

Regional Director (in SF)

SBP:

Stromme Business Partner

SEEP:

Small Enterprise Education Program

SF:

Strømme Foundation

SIDA :

Swedish International Development Agency

SIDI :

Societe d’Investissements. dans le Dev. Int’l (France)

AMFIU:

Association of Microfinance Institutions in Uganda

AR:

Action Research

BDS:

Business Development Services

BOD:

Board of Directors

CEO:

Chief Executive Officer

CBO:

Community Based Organisations

CGAP:

Consultative Group to Assist the Poor

EOY:

End of Year

HH:

Household

FWA:

Framework Agreement

IA:

Impact Assessment

ICCO:

Inter Church. (Netherlands)

SMF:

Strømme Microfinance Department

ID:

Institutional Development

TA:

Technical Assistance

Microfinance Department Strømme Foundation, June 2007 Lay-out and graphic design: Strømme Foundation All photos: Strømme Foundation The Strømme Foundation is member of The Norwegian Control Comittee for Fundraising

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the No ar of be Ye

Prize eace lP

2006 • Th e

Skippergaten 3 • Box 414 • N-4664 Kristiansand Norway Tel +47 38 12 75 00 • Fax +47 38 02 57 10 • Org. no 952 002 139 E-mail: post@stromme.org • www.stromme.org