Strategy for
Microfinance Introduction Strømme Foundation (SF) is a Norwegian development organisation with the vision of a world free from poverty and the mission to eradicate poverty through interventions in Education, Microfinance, Strengthening Civil Society and Social Protection. As articulated in SF’s Development Policy, “Enhanced access to sustainable income sources” is one of SF’s four Thematic Goals. SF believes that, together, the four Thematic Goals described in our Development Policy enhance the opportunities of the poor and vulnerable to significantly increase their chances of a better life, and thus they contribute toward our vision of a world free from poverty. The Microfinance interventions in SF are organised/run under a separate company; Strømme MicroFinance AS (SMF AS), a registered company limited by shares fully owned by SF. Accordingly, SMF AS shares SF’s vision and mission, as well as SF’s core values; Human dignity, Justice and Solidarity. SMF AS’ operations are led by the Microfinance Manager, who reports to the International Director of Strømme Foundation.
Approach The Microfinance Strategy is based on the Strømme Foundation Development Policy, which provides broader guidelines for SF’s engagement in development work. Accordingly, the Microfinance Strategy subscribes to the Rights-Based Approach with its emphasis on advocacy, capacity building and service delivery (or assets transfer) where deemed necessary. The strategy also subscribes to SF’s Cross-Cutting Issues (Gender, Environmental Sustainability, and Inclusion). In line with our Development Policy SMF AS acknowledges that poverty denies billions of poor people access to formal financial services. In the absence of access to formal financial services, the poor are left with no alternative but to rely on informal financial services which increase their risk of being trapped in an inescapable vicious circle of deep poverty and deprivation of rights. For example, loans can be acquired from moneylenders, saving can take place by putting money in the mattress, and remittances are done by physically carrying money from the urban areas back to the villages. SF therefore believes in the decisive role of an inclusive financial system in supporting our target group to fight poverty. We acknowledge that conventional microfinance as carried out through Microfinance Institutions (MFIs) play a crucial role in reaching the majority of poor people – especially in the rural areas – that are not connected to formal financial service providers. We also acknowledge the limitations of conventional microfinance in reaching the poorest of the poor due to the challenges of achieving and maintaining financial sustainability. Thus, the Microfinance Strategy distinguishes itself in its deliberate focus on the poor. Accordingly, SMF AS’ microfinance services will be provided through two main interventions, namely Institutional Microfinance and 1 Community Managed Microfinance (CMMF) .
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Community Managed Microfinance is an overarching term and covers the various community based microfinance interventions in Strømme Foundation, such as “Saving for Change” in West Africa, “Community Based Organisations” in Sri Lanka, “People’s Organisations” in Bangladesh, and “Community Managed Microfinance” in East Africa.
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Financial Inclusion SMF AS aims at reaching as far down “the economic pyramid” as is possible with microfinance. To address these challenges, SMF AS, in cooperation with the SF Regional Offices, will train and educate the implementing Community Managed Microfinance partners and assist them in preparing the rights-holders for access to financial services, first within a group-based microfinance method and further through conventional microfinance. For institutional microfinance, SMF AS emphasises the development of pro-poor financial services, understood as financial services and products that are tailored to the needs and socio-economic 2 realities of the poor (see figure 1).
Figure 1: Relationship between Institutional Microfinance and Community Managed Microfinance
Capacity Building SMF AS’ experience shows that access to financial services alone is not enough to lift people out of poverty. We see that the provision of capacity building services in addition to financial services is crucial in combating poverty. In order to strengthen the capacity of partners and rights-holders, a variety of capacity building initiatives need to be in place, as does training on financial literacy, book keeping and report writing. In line with our Rights Based Approach this includes training in advocacy and leadership skills; training in community based income generation; market-led business development services; value chain development and technology-led microfinance etc. SMF AS also acknowledges that not everyone is eligible for credit at all times, and thus savings, insurance, and other relevant basic financial services are of equal importance. Clearly defined target groups and the development of appropriate products to meet the socio-economic needs and realities of the respective target groups is the prime focus for SMF AS in its effort at balancing the poverty focus with financial sustainability. This balancing act is the governing principle of all SMF AS initiatives in microfinance.
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In line with SF’s development policy SMF AS adapts the globally recognised poverty line of USD 1.25 – 2.00 per day as a basis for defining our target group.
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Advocacy SMF AS defines advocacy as a deliberate process that influences the policies, practices and laws of duty bearers in ways that will have a positive impact on poor, vulnerable and marginalised people's lives. (cf. SF’s Advocacy Guidelines) In the context of microfinance this means that, in addition to strengthening the capacity of the rights-holders at the community level, we will also work with the governments as duty bearers, and civil society through networks, in order to advocate for pro-poor regulation of the microfinance sector in our respective countries of intervention, but also through strengthening the capacity of the end rights-holders.
Governance Structure SMF AS SF’s microfinance activities are handled by SMF AS, a separate company limited by shares and wholly owned by SF. The Secretary General of SF is the CEO of SMF AS and the SF Board of Directors is the Board of Directors of SMF AS. The day-to-day operations are handled by the Microfinance Manager who reports to the International Director of SF. A specialist Finance and Credit Committee serves as an advisory committee to the SMF AS Board and a member of the Finance and Credit Committee is also selected as an SMF representative on the Subsidary Company boards.
Regional Office vs. Subsidiary Companies (Apexes) The Subsidiary Companies (Apexes) aim at maintaining a financially sustainable client mix that caters for the segment below and immediately above the local poverty line. Where we don’t have apexes, such as in West Africa and South America, SMF AS has sought and established strategic partnership alliances through which it manages its mainstream microfinance interventions under a close follow up of the Regional office. The SF Regional Offices play a crucial role in creating an enabling environment for the poor to benefit from microfinance. The Regional Office handles all SF programmes that are not Institutional Microfinance, as it has its core competence in the implementation of education-related programmes. Therefore, the Regional Office has the responsibility for following up the implementation of Community Managed Microfinance partners. Our structure aims at balancing financial sustainability with a clear poverty oriented focus. We acknowledge that the poor access financial services in a number of informal ways. We aim at providing them with products and services that are tailored to their needs and reality and thus to support their struggle out of poverty. Both 3 the Regional Office and the Subsidary Companies strive to facilitate pro-poor linkages between informal and formal financial markets. The main role of the Subsidiary Companies, however, is to build capacity, train, and lend to the people in the higher end of the target group, through partner Microfinance Institutions. The Regional Office’s role, on the other hand, is to build the capacity of the CMMF, through implementing CMMF partners, and to ensure that the transition to conventional microfinance and/or linkage to other institutions is beneficial to the poor.
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SMF AS has three subsidiary companies; one in East Africa (Kampala, Uganda) and two in Asia (Colombo, Sri Lanka and Dhaka, Bangladesh). The subsidiaries are governed by a separate Board of Directors, where the SF Regional Director is the chairperson, and where SF, through SMF AS, has the majority of the votes through a representative on the Board of Directors. The subsidiary companies’ main role is to function as wholesale lenders and providers of capacity building services to partnering Microfinance Institutions.
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Methods of Intervention The following extract from SF’s Development Policy outlines SMF AS’ focus within microfinance for the Strategic Plan period from 2014-2018.
Thematic Goal
ENHANCE ACCESS TO SUSTAINABLE INCOME SOURCES
Intervention
Outcome
Livelihood Development
Increased socio-economic self-reliance for participants.
Micro-Enterprise Development
Increased access to market and self-reliance among participating individuals and enterprises.
Fair prices and access to productive assets and markets, through advocacy.
1) Community Managed Microfinance Community Managed Microfinance is an overarching term with local adaptations but the common ground is that the group is at the centre of the intervention. The group setting has proven to be an excellent arena for training and empowering right-holders on various topics, ranging from business development services and literacy training to awareness building and advocacy for their basic rights. The group serves as a place where rights-holders can come together and discuss issues that are relevant to their everyday lives. The rules and regulations are set by the members of the group themselves and the financial services are provided without external funds. Groups are voluntarily formed by the members themselves from the community or by a project implementer or facilitator of the external partner organisation. SF does not provide loan capital to the Community Managed Microfinance groups directly but supports partner organisations with funds for capacity building and training.
2) Institutional Microfinance SMF AS aims at connecting the poor to formal financial systems. While Community Managed Microfinance aims to cater to a poorer segment of a population, the focus in Institutional Microfinance is to provide a broad range of pro-poor financial services needed in the lives of the poor. It is the SMF AS’ conviction that promotion and provision of both Community Managed Microfinance and Institutional Microfinance enables us to effectively assist the poor in climbing the ladder out of poverty. Institutional Microfinance is primarily carried out through SMF AS’ Subsidiary Companies in East Africa, Sri Lanka and Bangladesh. Funds are provided from SMF AS or through external funding and are in turn lent out to Microfinance Institutions (MFIs) in East Africa (SMFEA) and in Asia (SMAGL). Where there is no Subsidiary Company, like in West Africa and South America, the Institutional Microfinance activities are handled by the Regional Office, under the supervision of SMF AS. Partner MFIs are selected on the basis of not only their capacity and complementarity of their values to SF’s values, but also a rigorously due diligence process to confirm adherence to certain financial criteria and procedures. In addition to loan capital, the Subsidiary Companies provide capacity building services for the development of the institutions we serve and contribute to the goal of building sustainable financial markets in the regions in which we operate. In all microfinance operations SMF AS is committed to contributing to well-functioning financial markets in our intervention countries, and strives to provide competitive credit facilities without compromising the local financial markets. We shall always try to maintain the purchasing power of our capital. That said, when
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targeting the poorer segments, particularly through CMMF, SMF AS may provide subsidised loans and grants as part of the capacity building of the partners and the people we serve. Finally, SMF AS aims at being at the forefront of using financial mechanisms to fight poverty, and we will therefore continue to follow cost-effective technology and innovative approaches closely, and seek to apply them where applicable.
Measurement of Results Enhancing the access to sustainable income sources for the poor is an ultimate development objective of SMF AS. Accordingly, SMF AS places great emphasis on measuring the results of its interventions. For this purpose, SMF AS has adopted a Results Based Management approach in measuring the results of its microfinance activities, under which emphasis is placed on measuring not only the immediate output of our interventions but also the longer term outcome and, ultimately, the impact on the lives of the poor. SMF AS is committed to internationally recognised best practices in the Microfinance sector and for that 4 purpose this Strategy aligns itself with CGAP’s Good Practice Guidelines for Funders of Microfinance . SMF AS 5 takes part in the Social Performance Task Force and is also committed to the reporting and measurement of social results according to agreed-upon standards. This includes the Client Protection Principles by the SMART 6 7 Campaign and the Principles for Investors in Inclusive Finance initiated by the United Nations. For the Community Managed Microfinance intervention the result measurements in use are adapted to the local context. However, the minimum required indicators used to measure the results are as follows: o o o o o o o o o o
Number of Partners Number of Groups Number of Members in Groups Percentage Women Total Savings of Groups % Growth in Savings of Groups % of Groups Trained in Social Component Number of Animators Number of Replicators % of Self-Replicated Groups
Institutional Microfinance SMF AS tracks both the Minimum Financial Performance Indicators for Retail Financial Institutions as described 8 by CGAP as well as indicators specific to the Subsidary Companies’ operations. The Holding Company and each Subsidiary Company will have separate and additional indicators, adapted to their local markets and needs. However, the Subsidiary Companies still report to the Holding Company on a defined set of financial and social indicators through quarterly progress reports. The minimum required indicators are outlined below:
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http://www.cgap.org/sites/default/files/CGAP-Consensus-Guidelines-Good-Practice-Guidelines-for-Fundersof-Microfinance-Oct-2006.pdf 5 http://www.sptf.info/ 6 http://smartcampaign.org/ 7 http://www.unpri.org/ 8 http://www.cgap.org/sites/default/files/CGAP-Consensus-Guidelines-Good-Practice-Guidelines-for-Fundersof-Microfinance-Oct-2006.pdf
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FINANCIAL INDICATORS Portfolio Quality Portfolio at Risk > 30 days Target: 0% Needs Attention: >2.5% Critical: >5% Write-Off Ratio Target: Needs Attention: Critical:
% % %
Loan loss reserve/Gross loan portfolio Target: >10% Needs Attention: <5% Critical: <2% Arrears Rate Target: Needs Attention: Critical:
0% >1% >3%
Productivity and Efficiency Portfolio Yield Target: >3% Needs Attention: <3% Financing Cost Ratio To be monitored over time Operating Expense Ratio Target: % Needs Attention: % Critical: % Operational Self-Sufficiency (excl. Loan Loss Provisions and Currency Loss) Target: >100% Needs Attention: <100% Critical: <80% Operational Self-Sufficiency (incl. Loan Loss Provisions and Currency Loss) Target: >100% Needs Attention: <100% Critical: <80%
Financial Sustainability Return on Assets Target: >2% Needs Attention: <2%
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SOCIAL INDICATORS Depth of Outreach Average outstanding loan balance per client To be monitored over time (serves as a proxy for poverty level) Average outstanding loan / GNI per capita To be monitored over time (serves as a proxy for poverty level) Outreach Number of active clients of partners To be monitored over time
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