DEVELOPMENT WORKSHOP H u m a n S e t t l e m e n t s a n d D e v e l o p m e n t C P 3 3 6 0 · L u a n d a · ANGOLA R u a R e i K a t y a v a l a 113 · L u a n d a T e l : (244 2) 44 83 66 / 71 / 77 F a x : 44 94 94 E m a i l : d w a n g @ a n g o n e t . o r g w w w . d w . a n g o n e t ..o r g Business Plan Development Workshop Angola Microfinance Program Prepared by Development Workshop Angola with support from the following DAI consultants: Jan Schoeman, Nathanael Bourns and Terence Gallagher. Luanda – February 2003 Canadian..office.: PO BOX 1834 Guelph · Ontario N1H7A1 · Canada · Tel.: (1519).763.39.78 · Fax.: (1519).821.34.38 · www.devworks.org · Email.: devworks.@;web.ca European..office.: Boite Postale 13 · 82110 Lauzerte · France · Tel.: 33.(0).563.958.234 · Fax.: 33.(0).563.958.242 · www.dwf.org · Email.:..dwf.@.dwf.org
Transcript
DEVELOPMENT WORKSHOP H u m a n S e t t l e m e n t s a n d D e v e l o p m e n t
C P 3 3 6 0 · L u a n d a · ANGOLAR u a R e i K a t y a v a l a 113 · L u a n d a
T e l : (244 2) 44 83 66 / 71 / 77 F a x : 44 94 94E m a i l : d w a n g @ a n g o n e t . o r g
w w w . d w . a n g o n e t ..o r g
Business Plan Development Workshop Angola
Microfinance Program
Prepared by
Development Workshop Angola
with support from the following DAI consultants:
Jan Schoeman, Nathanael Bourns and Terence Gallagher.
Institutional Framework .......................................................................................................... 5 Development Workshop Angola ..........................................................................5 Sustainable Livelihoods Program and the USAID Huambo Project..........................6 DWA Microfinance Structure ...........................................................................7 Alliances ..........................................................................................................7
Local Institutions ...................................................................................................7 Foreign institutions................................................................................................7 Legal Framework .............................................................................................8
Market, Clientele and Services............................................................................................... 8 Target Clientele ...............................................................................................9 Lending Methodology ....................................................................................10 Solidarity Group formation .............................................................................10 Solidarity Group Operational Management....................................................10 Group Fund ...................................................................................................11 Solidarity Group Financial Management........................................................11 Current Products ...........................................................................................11
Solidarity Group Loans to Community-based groups...............................11 Solidarity Group Loans to Market-based groups ......................................12 Graduate Group Loans ............................................................................12
Internal Capacity-building..................................................................................................... 14 Cost of External Technical Assistance...........................................................16
Roll-out Plan......................................................................................................................... 17 Projected Roll-out Plan Year 1 ......................................................................18 Roll-out Plan for 5 year planning period.........................................................19
Income Statement ....................................................................................25 Balance Sheet..........................................................................................26 Cashflow Projections................................................................................28
Performance Indicators..................................................................................29 Adjusted Return on Performing Assets (AROA).......................................29 Operational and Financial Sustainability ..................................................30 Operating cost ratio..................................................................................31 Cost Structure as a Percentage of Performing Assets .............................32
Introduction Development Workshop Angola (DWA), a multi-service international NGO, has implemented development projects in Angola for over 20 years, during which time it has maintained a long-term focus on development, but with a flexible approach that has allowed it to respond to emegencies. Throughout its history in Angola, DWA has been, at times the only NGO working in the country, implementing development projects in a variety of sectors, including water access & sanitation, local and community initiatives, improving internet access, shelter initiatives, peace-building, and microfinance.
In broad terms, the current DWA programs focus on support for upgrading social infrastructure and basic services in peri-urban communities in Luanda and Huambo. DWA takes an integrated approach to poverty alleviation within the context of post-war Angola, working to improve ongoing access to basic services such as water, to build cohesion within communities, and to provide formal rights to housing. Within this context, DWA sees its microfinance program as an important service. DWA is a leader in microfinance in Angola and will build on its success to continue to support the economically active poor in peri-urban areas.
The DWA Microfinance Program has provided solidarity group loans to micro-entrepreneurs operating in the massive informal economy of peri-urban Luanda and in the provincial town of Huambo. In the near-term, the microfinance program will build internal capacity to implement policies, procedures and internal controls in line with microfinance best practices in order to then refine and expand its product offering over the next five years. During this period, the program intends to expand its operations throughout Luanda, Huambo and other areas in Angola to be identified, opening 7 new branches. The DWA Microfinance Program sees itself as unique in Angola, combining a deep commitment to the peri-urban poor with a commitment to becoming fully sustainable and capable of financing its own growth and expansion of outreach.
In November 2002, the DWA Microfinance Program undertook an extensive strategic and business planning exercise involving its coordination committee, management and staff, and including several meetings with selected groups of clients. The participatory planning process resulted in the business plan outlined below. The plan is ambitious, but DWA believes it is possible if it can refine its operations and obtain the right support.
Vision and Mission Statement Microfinance is a key element of DWA’s strategy for poverty reduction. The DWA Microfinance Program provides equal opportunities to men and women for financial empowerment to assist them to emerge from chronic poverty. Microenterprises in Angola have few options for credit, which could be a vital resource to help them to improve their businesses and enhance their livelihoods. Without credit history or traditional collateral, a large percentage of Angolans, especially those operating in the informal sector, have no access to formal financial services and are forced to borrow from family and friends if possible, or from moneylenders. Savings and credit can contribute to the livelihoods of poor households and decrease vulnerability to crises and market fluctuations.
The Microfinance program seeks to ensure that expanding access to financial services becomes an integral part of Angola’s poverty reduction strategy and that policy makers recognise the importance of microenterprises as a source of employment and income for the urban and rural poor and therefore as a vital component for the growth of the national economy. This includes the need for conventional financial institutions to accommodate the needs of the microenterprises as well as building an enabling environment for microfinance.
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The mission of the DWA Microfinance Program is to provide opportunities for people in chronic poverty to improve their lives, create jobs and strengthen communities among the poor through the provision of effective financial services. The program also strives to work with and through indigenous partner organizations that provide microfinance services, training and counsel, and to demonstrate through the success of the program that the poor in Angola can make good clients. Environmental Analysis Conditions for microfinance in Angola are difficult by any standard. The social and economic impact of a history of civil war, high inflation, lax contract enforcement, and a very weak banking sector have made the provision of formal financial services to Angolan microenterprises virtually non-existent. The presence of numerous donor- and government-financed credit programs that tolerate very low repayment rates, which are effectively grant schemes, further inhibit the implementation of sustainable microfinance operations.1 Despite Angola’s difficult operating environment, conditions appear to be improving: the long civil war has ended, the inflation rate is gradually falling, and donors are looking to invest in microfinance. In fact, some donors, in line with microfinance best practices, are beginning to recognize the importance of supporting institutions that have a vision of becoming long-term sustainable providers of financial services to the poor, whereas past funding focused on getting loans out with little emphasis on an institution’s capacity to continue service once funding stopped. Also, there is a clear need among clients for financial services, especially in peri-urban Luanda, where participation in kixikilas (rotating savings and credit associations) is common, further confirming demand for financial services. In terms of the supply of formal and semi-formal services, The UNDP funded study “Promoting the Microenterprise Sector in Angola” by Fion de Vletter published in May 2002 estimated the total number of microenterprises receiving credit from microfinance programs or projects in Angola at 5,000. Given this figure, the DWA microfinance program, with greater than 5,000 clients as of October 2002 is by far the largest program in the market.
While competition may well become a factor as situations for providing microfinance services improve and other providers enter the market, at present it is not a major concern. In fact, DWA welcomes the entrance of other providers with long-term focus on offering sustainable financial services that might help to build a dynamic market responsive to the needs of the massive un-served microenterprise market.
Institutional Framework Development Workshop Angola Development Workshop (DW) is an international NGO founded in 1973 with initial operations in North Africa and the Middle East, and incorporated in 1981 as a corporation without share capital in Canada. It later incorporated in 1985 as a not-for-profit in France, and is registering as an International Private Voluntary Organization with the United States Agency for International Development (USAID). An invitation 1 The poor in Angola require a wide variety of services, and some government and donor programs may be tempted to use microfinance interventions to attempt to solve many needs. It is important to remember that microfinance is not a solution to all of the problems of the poor, many of which will require specialized interventions well outside the scope of financial services.
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by the Angolan Government led to the establishment of DW in Angola where the organization has worked since 1981. Registered with the Ministry of Justice in Angola as a international NGO, DW Angola (DWA) operates in terms of a specific country agreement and was for many years the only NGO operating in Angola. The organisational structure of DW may be summarised as follows: DW Members
DW Board of Directors Canada & France
DWA Executive Director
DWA Coordination Council
DWA Mangement Committee
Country Program Manager
Finance & Admin Manager
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Sustainable Livelihoods Program and the USAID Huambo Project DWA has been active in microfinance since 1993 and has grown rapidly in recent years with funding from the Department for International Development (DFID) of the United Kingdom within the framework of the Luanda Urban Poverty Programme (LUPP), in partnership with One World Action. This program includes the Sustainable Livelihoods Programme (SLP) focused on microenterprise development and microfinance. The aim of the SLP is to deliver financial and non-financial services to all actors in the Angolan microfinance industry, including offering financial services to clients, but also providing technical assistance to other microfinance providers and to the Ad Hoc Forum for Microenterprise Development (FADDME). Initially, the SLP program was to include a significant component of business development services (BDS) but DFID and DWA agreed to shift the focus primarily to microfinance, where DWA is seen to have a comparative advantage over other providers. The SLP lending methodology was developed and tested in the peri-urban areas of Luanda and DWA made its first loan under SLP in April 2000. USAID has provided DWA with grant funding to extend the SLP lending methodology, without other related project activities, to Huambo, a province that was particularly devastated by Angola’s long civil war. The Huambo branch opened in January 2002 and made its first loan in March 2002.
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DWA Microfinance Structure The microfinance program is managed from the DWA head office in Luanda by a program coordinator and a technical advisor. Also in the head office are the financial and administrative coordinators who report to the program management, and the MIS administrator who reports to the financial coordinator. There are three operational branches. The Palanca and Cacuaco branches are located in peri-urban Luanda and have a close reporting relationship with the head office. Each of these branches has a supervisor, a bookkeeper, an administrative assistant, and 8 field assistants. The branch supervisor in Huambo has greater operational responsibility than the other two branch supervisors due to the branch’s distance and difficulty with communications. The Huambo branch supervisor manages a bookkeeper, an administrative assistant and two field assistants. Alliances
Local Institutions As part of the SLP project, the DWA Microfinance Program has initiated and worked to strengthen the Ad Hoc forum for the Development of Micro-Enterprise (FADDME). FADDME was established in May 2000 to address issues related to the microenterprise sector through a stakeholder forum. Participation is open to any organization involved or interested in supporting microenterprises in Angola. Participants include NGO’s operating micro-credit programs, as well as MINARS and Ministry of Family and Promotion of Women, the National Bank of Angola (BNA – the regulatory body) and some commercial banks. FADDME’s main functions are to:
Serve as a forum for exchanging experience, information and ideas among the various organizations in the sector
Mediate with the BNA Lead discussion legislation concerning microfinance Improve understanding of microfinance methodology Build consensus on microfinance- and microenterprise-related policy Facilitate coordination among operators
The DWA microfinance program has played, and will continue to play, a central role in FADDME, which will remain an important forum for the program to influence the sector. Still, DWA has recognized that the management of its microfinance program should focus its efforts first on building a stronger microfinance operation, and DWA will attempt to use separate resources it has received to build FADDME.
Foreign institutions DWA maintains a network of partners overseas, and judges that this gives it greater flexibility than some international NGOs with large overhead structures in developed countries. Overseas partners assist DWA with policy development and advocacy with donors and general information sharing. DWA works in partnership with One World Action (with which it works in partnership on DFID-funded projects), the Netherlands Institution for Southern Africa, Alternative Action (of Canada), and is open to exploring an alliance for the microfinance program with regional or international networks if the right relationship can be found. The microfinance program has accessed training from the Southern Africa Microfinance Capacity-building Facility (SAMCAF), and will continue to attempt to access assistance from SAMCAF and other similar entities.
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Legal Framework Legislation in 1990 specifically permitted NGOs in Angola to conduct activities unrelated to government ministries, although it left the legal status of NGOs in general somewhat ambiguous. Given the increasing number of international NGOs in Angola in recent years, especially those focused on humanitarian relief, the Government of Angola is drafting legislation to provide a common framework under which NGOs may operate. DWA has had the opportunity to give input on this draft legislation, which it is likely to require a greater level of reporting to the government, and will prioritise development assistance over relief assistance. Still, the law will not materially change DWA’s ability to continue to operate effectively. In addition to the laws and regulations that govern DWA as an international NGO, the organization’s microfinance operations expose it to financial services laws and regulations. The Financial Services Law of 1999 (Law no. 1/99 of 23 April 1999) establishes the supervision and control of banks, finance companies, and credit cooperatives, and states that a separate law will “regulate the micro-credit institutions.” The National Bank of Angola (BNA), the regulatory body, has demonstrated openness to discuss drafts of the proposed law to regulate microfinance. DWA, both individually and through FADDME, has been providing the BNA input on the approach to regulating the sector. Most important for the microfinance initiatives is that:
The BNA has backed away from drafts of proposed legislation which could have unnecessarily restricted microfinance operations, claiming it will take a hands-off approach until the sector develops and it becomes apparent which types of activities require supervision
The BNA is drafting legislation on microfinance (earlier drafts dealt only with micro-credit) but no date is set for implementation of the law Microfinance programs that cross some threshold of portfolio volume (initially
considered at $50,000, but yet to be set) would have quarterly reporting requirements, including: financial statements, loan portfolio volume information, portfolio-at-risk, and audited annual financial statements
The BNA would also review funding sources for any evidence of money laundering, or risk to depositors
The BNA will examine the possibility of delegated supervision for microfinance to an industry association, such as FADDME
It appears that savings intermediation will remain illegal for unlicensed institutions.
The DWA microfinance program has given valuable input for the BNA and will continue to maintain lines of communication with regulators open, offering the program’s experience and point of view whenever appropriate. Market, Clientele and Services The DWA Microfinance Program estimates that the population of peri-urban Luanda is approximately 3,000,000, of which, conservatively, 200,000 are estimated to be directly involved in microenterprises. This represents the program’s main potential market, although it will examine opportunities to expand beyond peri-urban Luanda and Huambo. Further market analysis will be undertaken to identify other microfinance products to be in a better position to address this potential market.
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Over the past three years DWA succeeded in providing 345 loans to solidarity and graduate groups with a total value of $2,023,740. The total portfolio of the program as of October 2002 is summarized below:
Portfolio As of 31/10/02
Total No. of Clients (group members)
Number of groups
Average outstanding loan Amount USD
Average Initial loan amount USD
Luanda 5380 173 2213 - group 71 - person
130 per person
Huambo 343 14 814 - group 33 - person
130 per person
Total 5723 187
Target Clientele The DWA Microfinance Program’s solidarity group lending methodology targets entrepreneurs of all cultural, social, gender, political, faith and religious backgrounds who are among the poorest of the economically active. Potential clients are identified based on means-test criteria applied by loan officers who play a major role in ensuring that the program reaches this target clientele. It seeks to assist entrepreneurs who:
Are able to meet their basic needs Cannot obtain credit from formal financial institutions to expand their businesses because
they lack traditional collateral Rely on their microenterprise as a source of income and employment where no other
alternatives are available Produce goods and/or services in makeshift premises or are engaged in small scale trading
or retail activities The program is focused on providing services to the poorest of the economically active, especially women, which represent more than 60% of the informal market operators and tend to have a greater share of responsibility managing the household, namely providing food, health and education to the young ones in the family. The microenterprise is considered the primary means for the survival of the target clientele and the activity that can improve their social well-being. Clients’ microenterprises and homes are located in the peri-urban areas of Angola. The microfinance program’s current clients work in the informal sector, primarily in commerce, but also production, processing, and services. The DWA Microfinance Program’s current solidarity group clients can be divided into community-based groups and market-based groups, which have previously been served using a single methodology. Nevertheless, the program has identified that the two types of groups have distinct risk profiles. Community-based groups are perceived to be more cohesive and maintain higher repayment rates, which most likely stems from pre-existing social capital among their members. This means that the program’s facilitation of group formation among community-based groups tends to reinforce existing bonds. By contrast, in many of the market-based groups clients often come together solely for the purpose of obtaining access to a loan, which means that the program is not able to limit its risk as effectively among market based groups since group cohesion must often be developed from scratch. In the short-term, the program will continue to serve good market-based clients, but will place greater emphasis on serving community-based clients, where the lending methodology has proven most successful. In the medium-term, the program will do further analysis of the specific needs of their market-based clientele in order to better serve such clients while also
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limiting the risk to the program. The program will also examine possibilities for serving the fishery, manufacturing and agri-business sectors. Lending Methodology To reach the target group in peri-urban areas, the microfinance program uses the methodology of loans to joint and several groups (JSGs), which is based on solidarity and mutual trust developed among clients. The group develops a feeling of collective ownership that starts during the 10 week self-selection process, continues with training on setting up JSGs and strengthens during the orientation process. The formation of JSGs is based on trust developed through factors such as living in the same community, being part of the same sector or working in the same informal market. In an inflationary, highly dollarized economy the microfinance program operates in dollars in order to minimize risk and ensure that the program can continue to offer services and expand its outreach. Clients have ready access to dollars through kinguilas (money changers) and are generally aware of the exchange rate on the street. Solidarity Group formation Clients are made aware of the program through informational sessions in areas considered to be the target clients’ communities or markets. Interested clients form groups over the course of a 10 week orientation period. The main attributes of the group formation and orientation for the lending program are summarized below:
Groups are comprised of 20-30 members The group self-selects its members, visiting the places of business of potential members Members elect group leaders including: president, vice-president, treasurer, and administrator Leaders oversee sub-groups of five to seven members each Groups write their own constitution to govern themselves and determine whether they will
contribute to an emergency fund Forced savings are collected, intended as a form of guarantee covering 10% of the loan
amount and are held in the Banco de Fomento. By the tenth week of a new Solidarity Group's orientation, each member is expected to have deposited at least 10% of the loan amount they are anticipating to borrow. This amount forms the Solidarity Group Guarantee Fund (SGGF). Clients pay this in small amounts over the ten-week period as opposed to one lump sum. Asking clients to deposit funds before they are given loans helps to ensure clients have legitimate businesses. This also teaches members the value of savings. Prior to each subsequent cycle, clients must have a SGGF that equals 10% of the principal amount of the renewal request. As the size of the principal increases, the SGGF must also increase. Before disbursement of the loan renewal, the members must have deposited additional savings into the SGGF account to amount to 10% of the renewal principal. The client may not withdraw the SGGF during the loan cycle. Solidarity Group Operational Management The DWA loan officer has an important role in the orientation, follow-up and monitoring of groups. After the orientation period, elected group leaders perform much of the operational management, with the loan officer primarily playing the role of facilitator. Loan officers oversee eight to ten groups each. The groups:
Hold weekly meetings Assume all management functions of the group after they have been trained
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Set their own internal policies and voluntarily establish emergency funds (held by the treasurer)
Pursue social, economic, and spiritual goals organized through weekly meetings
Group Fund The group fund is intended to assist the group in meeting its expenses such as transportation costs for weekly deposits, fixing up the meeting place, social events, and special projects. It also serves as an emergency fund that may be borrowed to cover loan repayment in the case of an emergency. The policies governing the management of the group fund are written into the group’s constitution. The group sets the amount of members’ weekly contributions to the group fund, which is also supplemented by fines for lateness or non-attendance at weekly meetings and internal penalties on late loan payment. All contributions are made directly to the group treasurer, who keeps a record of the fund balance. Group members jointly own the fund. The program provides the group with access to savings accounts in the Banco de Fomento, but never lends or intermediates the funds. Solidarity Group Financial Management Groups themselves perform much of the financial management of the group after the orientation phase, with the assistance and follow-up from the loan officer. The process is as follows:
Leaders constitute a credit committee to assess and approve loans to the Group members, including visits to the places of business of fellow members
Members receive their loans simultaneously Members receive small initial loans and may graduate to higher loan amounts Loan terms are four months, graduating to six months, depending on experience
with the program (see graduate group loans) Loans are disbursed and paid in dollars with a flat interest rate (on the original
amount) and administrative fees are charged upon disbursement Members make weekly loan payments, graduating to bi-weekly depending on
experience with the program (see graduate group loans) Leaders receive, deposit, and monitor members’ loan repayments and savings Members co-guarantee all loans and therefore do not require traditional collateral Repeat loans are extended to groups as a continuous, gradually increasing line of
credit Leaders report weekly financial activities to their loan officer
Current Products
The DW microfinance program offers four products: i) Solidarity Group Loans to Community based groups ii) Solidarity Group Loans to Market based groups iii) Graduate Group loans iv) Individual Savings (referred to here as Voluntary Savings to differentiate it
from the Mandatory Savings, which acts as a guarantee for the loan facility.)
Solidarity Group Loans to Community-based groups Loans to groups formed on the basis of mutual trust developed among on average 25 members from the same community. The basis of group formation is trust among members of the group who individually can be involved in different kind of micro-business. The loan conditions are summarized as follows:
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Loan amount - USD 50-150 initially per group member with a 40% increment between consecutive loans up to a maximum of USD 294
Loan period - 4 months Capital and interest repayment – weekly Interest rate – 10% on initial loan amount (flat) in USD, or 32.5% nominal annual rate. Processing fee – 2% payable before loan is disbursed Bank fee - 1% payable before loan is disbursed Forced savings – 10% of loan amount payable before loan is disbursed Interest rate paid for forced savings – 0% Penalties – a one-time 1% charge when a loan is 3 days late Loans are granted in USD Disbursements are made by staff at the Banco de Fomento Repayments are made in USD by the borrowers directly into the DWA account with the
Banco de Fomento As mentioned earlier, loans to the community groups tend to build upon existing social cohesion. These groups form the heart of DWA Microfinance Program’s current operations, and groups of this type will be the primary focus of new lending operations in the near-term. The program estimates that these groups will constitute 70% of new clients in the future. It should further be mentioned that while the interest rate that the DWA Microfinance Program charges its clients is high, it is in line with industry best practices, which maintain that the rates should be high enough to cover all operating, financial and loan loss provision expenses, as well as a cost of capital for expansion. Years of research in the microfinance industry has shown that the primary constraint that microenterprises face in financing their businesses is access to services, not the price of services. Clients are willing to pay the price of good services. In the long-term the DWA Microfinance Program seeks to cover all of its costs and generate funds sufficient to fund its own expansion and improvement of client services. While the cost of administering many very small loans is high, the program will seek to improve efficiency and pass savings on to the client in the form of lower effective interest rates.
Solidarity Group Loans to Market-based groups The conditions and methodology for loans to the market based groups have been the same as those for the community based groups. Given experience with this type of group, the DWA Microfinance Program has recognized that the market-based groups represent a higher risk than the community based groups. In order to cover part of the program’s higher risk in lending to this type of group, the program will charge a higher interest rate for market-based groups: 12% flat versus 10% for community-based groups. In the future, the program will seek support to study the market and look into adapting its lending methodology more to this important market segment. Until such time, it is necessary to make every attempt to cover the real costs of this product, which has proven more expensive than the others that the DWA Microfinance Program offers because of the elevated risk. The program believes that going forward, market-based groups will be limited to about 30% of the clientele.
Graduate Group Loans The most committed members of community-based and market based groups with proven repayment track records (usually between 8-15 members) are able to from a solidarity group after 4 loan cycles and have the opportunity to progress to a higher loan amount, and a longer repayment period with less frequent payments. Previously, the program charged
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graduate group members 10% on the initial loan balance, as with their original loans. But for a 6-month loan that amounted to a 20% annual nominal interest rate. This is a significant difference and while the program will continue to offer a lower rate to its best clients: 30% annual flat rate (15% on the initial balance) than the one offered fist-time clients, it will not be as low as was previously offered. The effective interest rate for the graduate groups is also lower because of the less frequent loan payments and lower ongoing transaction costs and lower risk in terms the potential cost of covering of a large number of less experienced clients. Terms and conditions are the same as those of a community-based solidarity group loan, except for the following:
Loan amount - USD 300-750 per group member with a 40% increment between consecutive loans
Loan period - 6 months Capital and interest repayment – every 15 days Interest rate – 15% on initial loan amount (flat) in USD, or 30% nominal annual rate. Interest rate, Processing fee, and Bank fee remain the same as the Solidarity Group Loan Forced savings – 10% of the new higher loan amount payable before loan is disbursed
This product will gradually become more important over the next five years in terms of what it contributes to the overall portfolio volume, and will be an important means to keep the program’s best clients. In the future it will be necessary to do market research to determine the type of services that the program’s best clients need in order to meet those needs more effectively, including examining the possibility of offering individual loans. It is important to note that given the significant time and resources invested up-front in developing client groups, maintaining good clients and growing with them is fundamental to the sustainability of the program and will allow it to expand service to new, previously un-served clients. Voluntary Savings The DWA Microfinance Program offers access to voluntary savings accounts at the Banco de Fomento for the group. Groups are encouraged to save more than the amount required for the next loan. The group manages this itself and according to its constitution, clients may deposit and withdraw voluntary savings any time throughout loan cycle. Savings deposits are made to the sub-group leader. When making deposits the individual member must bring along her/his passbook so that the sub-group leader signs. The sub-group leader will in turn make the total payment from her/his group to the group treasurer, who will deposit this money in the bank, where it is maintained as a dollar balance, earning a market interest rate. The recording of these weekly deposits is done in the same way as the loan repayments. The current savings service is offered as an added benefit to clients, and does not constitute a source of funds for the program. There is a clear need for access to safe savings among the DWA Microfinance Program’s market segment, and this could potentially form a significant portion of the program’s funding sources in the future. At present the program cannot legally mobilize and intermediate savings, nor does it have the systems and controls in place to put the public’s money at risk by lending that money out. For this reason, savings mobilization as a funding source is not envisioned as part of the DWA Microfinance Program’s strategy for the foreseeable future, and therefore is not included as a funding source in this business plan. Nevertheless, the program recognizes the importance of savings services and will continue
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to monitor changes in the legislation and examine ways in which it could mobilize deposits both as a service and as a source of funds, thereby benefiting from the low cost funding that savings mobilization could provide. At that point (if not before then) the program would revisit the assumptions included in this business plan since adding a savings product that would appear as a liability on the program’s balance sheet would significantly change the program’s dynamics. Internal Capacity-building The DWA Microfinance Program plans to work over the coming months to improve internal controls and implement policies and procedures to allow for effective management of the aggressive expansion of services envisioned in this business plan.
The program has been effective at meeting project related lending goals and has reached a scale of operations that requires additional internal capacity. Ideally, this capacity would be obtained by hiring locally and by training existing staff, and this is part of the strategy since the current staff form the basis of the program. However, the program’s current needs require external technical assistance if it is to grow and expand its outreach while implementing effective controls and improving processes and services. Therefore, the business plan makes provision for intensive technical assistance in the areas detailed below.
Operational management and training
The current nature and potential growth of the portfolio over the short to medium term requires the dedicated attention of a microfinance operational specialist for a period of 54 months. During this period full operational responsibility will be assumed by this position with the added responsibility of building internal capacity, developing operational systems, procedures and manuals. Specific tasks for the Operational manager will include:
Develop and implement an operations manual that defines all back-office procedures such as, making loans, entering them into the system, standard procedures with Banco de Fomento, interface with other DW programs;
Update and revise the existing credit policies and procedures manual as products and processes are changed, including financial analysis, loan approval;
Train loan officers on how to conduct financial analysis of potential clients and groups, on revisions and additions to the credit manual, and loan disbursement and follow-up
Establish mechanisms for measuring the risk in the loan portfolio on an ongoing basis and provision accordingly for loan losses
Contract annually for a specialized external audit in line with the CGAP audit standards that includes management letter for enhancing internal controls (detailed below)
Train management and the board on financial analysis of the program, including standard financial ratio analysis, measures of efficiency and common measures of outreach for microfinance
Market Research and Product development specialists
Special assignments directed at aspects such as research and development of products, development of systems, procedures and operational manuals. The budget provisions for periodic assistance over a
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period of 30 months stretched over the planning period, beginning after more pressing internal capacity-building needs are met. Short-term specialist will be brought in to establish the process for product development, including the following:
Market assessment and study of the credit and savings needs of the current and potential clientele
Design or adjust products in accordance with client demands and institutional capacity and present to DWA Coordination Council and Management Committee
Pilot test of the product on a select group of clients, to ensure that clients are satisfied with the product and that DWA staff and systems can manage it
Refine and adjust the prototype as required modifications are identified
Design training materials, manuals (including specific roles and responsibilities) and application forms for the new products and train staff to be involved (especially loan officers) on how they will be implemented
Review and supervise product roll-out, including management oversight and select client visits, adjusting the newly established processes as necessary
Management Information Systems (MIS)
The success of a financial service provider is directly related to its capacity to manage and use quality, timely information. Therefore, provision is made for MIS support over 32 months of which the first 12 will be full-time with operational responsibility, given the importance of reliable information. The technical assistance provider will:
Develop an information systems manual that details the ideal flow and use of client, loan portfolio, and financial information throughout the program, from the client’s first contact with the institution to the final repayment or management of delinquency;
Work with staff and the operations manager to make the manual operational;
Fully implement the Loan Performer software, including the integration of financial information (working with the in-house operations specialist described above);
Work with operations manager to train full-time staff on the use of Loan Performer, especially the various reports the software is capable of generating (e.g. daily loan delinquency reports by loan officer and the necessary follow-up) and the composition and meaning of the financial ratios included in the software, analysis of trends and what they can indicate;
Train management on techniques for spotting potential problems with data; and,
Train management on Loan Performer’s audit functions and how to manage levels of access and use electronic audit trails included in the system.
Audit and Internal Control
It will be necessary for the program to contract for an annual external audit tailored to microfinance, which will likely have to come from an international auditor with strong understanding of microfinance. Ideally, that individual would work in conjunction with a local auditor, who could gain
15
an understanding of the nuances of auditing a microfinance program or institution and remain in Angola as a resource to DWA (and the microfinance industry as it evolves). The business plan makes provision for an intensive, collaborative audit by an international expert in the first two years (working with local auditors) and locally contracted audits thereafter, assuming sufficient capacity at that point.
The auditors would:
Ensure that management and the board are presented with independently verified financial statements in order to have a clear understanding of the financial and risk profile of the program.
Conduct a statistical sample of the loan portfolio that includes client visits. This is necessary for an auditor to be able to give a sound opinion of the financial statements of a microfinance institution2
Submit a management letter (common to external audits, but should be explicitly requested in the terms of reference for the audit) that outlines the auditors’ findings with respect to internal controls that help manage internal risk and ensure compliance with laws and regulations. The management letter should provide detailed and suggestions on how internal controls should be enhanced. This may lead to the hiring of an external auditor to work with DWA as a consultant as the necessary controls are put in place.
Cost of External Technical Assistance Unfortunately, in the next few years little of the necessary technical assistance will be sourced from within Angola due to the limited availability of local expertise in microfinance. DWA has estimated that the average cost of international technical assistance will be $13,000 per month for a full-time on-site advisor, including all labor, travel and other direct costs. Over time, DWA will require less intensive technical assistance and may at some point be able to meet some of its technical assistance requirements through local providers, but this is not foreseen for the 5-year planning period. The cost provision for the external technical assistance outlined above is estimated in the chart below, which shows the full-time equivalent for each category, which is multiplied by the estimated monthly cost of technical assistance per person.3
2 Statistics can be used to determine the sample size. For example, for an auditor to be able to say with a 95% degree of certainty that there is no more than a 5% deviation in the loan portfolio, the auditor would have to conduct 60 randomly selected client visits (regardless of portfolio size) and encounter zero errors. The sample size would have to be expanded if errors are encountered. Obviously, other sample sizes could be used depending on the room for error that the board deems acceptable. 3 The costs outlined above are included as monthly costs in the Microfin tool (Admin Tab Line 7.03) used to create the projections in this business plan. For microfinance analysts, technical assistance paid by a third party often forms the basis for adjustments in the form of shadow costs in appraisals and ratings. Still, it is rarely included on the financial statements of even the most developed microfinance institutions and banks, except occasionally in notes that accompany financial statements. The Microfin model does not include such costs in the financial statements.
While these figures are high, significant assistance will allow for substantial growth given the massive un-served market in Angola. It is important to note that the best microfinance institutions in the world have benefited from substantial in-kind subsidies and donations. Such assistance rarely appears on financial statements, but is a key aspect of the development of sustainable microfinance institutions.5 DWA’s ability to build internal capacity to implement the aggressive roll-out plan detailed below will require technical assistance from donors. Adjustments to the roll-out plan will have to be made if DWA is unable to obtain the level of in-kind technical assistance outlined here.
Roll-out Plan As the Microfinance Program begins to build its capacity for expansion, which it believes will be underway by May 2003, it will begin an aggressive roll-out plan. Given the massive un-served market in Angola and interest among donors and investors, the roll-out plan is based not on the program’s current capacity to grow, but on projections as to how the program could grow if it is able to mobilize the necessary funding to invest in internal capacity and later in expansion.
The productivity of loan officers is key to the projections. The plan is based on current methodology that provides for a loan officer to start working with 3 groups (an average of 25 clients each for new groups), and on the successful completion of a first cycle work with three more groups and finally upon the successful completion of the second group’s 1st cycle, to begin working with four more groups to reach a total of 10 active groups. The DWA Microfinance Program has decided that it will open a new branch each year with a full complement of 10 loan officers trained at the existing branches, with the next branch opening planned for June 2003. The program also plans to expand its current branch network of three branches to ten over the next 5 years, adding one per year for the first three years and two per year thereafter. In the first four months of the plan, the program will focus on building the necessary capacity to enable aggressive growth thereafter. While this expansion may appear conservative at first glance, opening another branch in year one of the plan will require adding capacity to identify potential clients, form groups and manage new active group loans, while also adjusting a series of internal processes. This is an ambitious undertaking that will require significant effort on the part of all those involved in the program.
4 This category includes part-time assistance in product development and audit specialists. 5 A sound practice would be to include in-kind donations, including goods and technical assistance, in the notes of audited statements so that analysts and potential investors can review donations and make the adjustments to their financial analysis that they see fit for their purposes.
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Projected Roll-out Plan Year 1 The roll-out plan for 2003, planning year one, is as shown in the chart below: The chart shows the number of groups with active loans for each month. On average, the group size is 25 for market and community groups and 12 for graduate groups.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Palanca
Roll-out Plan for 5 year planning period The roll-out plan below indicates the total number of active group loans (net of dropouts) at the end of the each planning year for each branch over the full five-year period.
B ra n c h n e tw o rkF Y 0 3 F Y 0 4 F Y 0 5 F Y 0 6 F Y 0 7
P a la n c aS o l id a r i ty lo a n s C o m 5 6 6 9 8 2 9 5 1 0 4S o l id a r i ty lo a n s M a rk 2 7 3 4 4 1 4 8 5 5G ra d u a te 1 2 2 8 4 9 6 2 7
C a c u a c o 0 0 0 0 0S o l id a r i ty lo a n s C o m 5 4 6 7 8 0 9 3 1 0 6S o l id a r i ty lo a n s M a rk 2 4 3 1 3 8 4 5 5 2G ra d u a te 1 6 3 1 5 1 6 4 7
H u a m b o 0 0 0 0 0S o l id a r i ty lo a n s C o m 1 4 2 7 4 0 5 3 6S o l id a r i ty lo a n s M a rk 6 1 3 2 0 2 7 3G ra d u a te 1 4 1 2 1 9 2
B ra n c h 4S o l id a r i ty lo a n s C o m 6 0 7 3 8 6 9 9 1 1 2S o l id a r i ty lo a n s M a rk 2 6 3 3 4 0 4 7 5 4G ra d u a te 1 7 3 8 5 1 6
B ra n c h 5S o l id a r i ty lo a n s C o m 6 0 7 3 8 6 9S o l id a r i ty lo a n s M a rk 2 6 3 3 4 0 4 7G ra d u a te 1 7 2 8 4 2
B ra n c h 6S o l id a r i ty lo a n s C o m 6 4 7 7 9 0S o l id a r i ty lo a n s M a rk 2 8 3 5 4 2G ra d u a te 1 0 2 2
B ra n c h 7S o l id a r i ty lo a n s C o m 6 4 7 7S o l id a r i ty lo a n s M a rk 2 8 3 5G ra d u a te 8 1
B ra n c h 8S o l id a r i ty lo a n s C o m 6 4 7 7S o l id a r i ty lo a n s M a rk 2 8 3 5G ra d u a te 8 1
B ra n c h 9S o l id a r i ty lo a n s C o m 6 0S o l id a r i ty lo a n s M a rk 2 6G ra d u a te 8
B ra n c h 1 0S o l id a r i ty lo a n s C o m 6 0S o l id a r i ty lo a n s M a rk 2 6G ra d u a te 8
S o l id a r i ty g ro u p s C o m m u n ity 1 8 4 2 9 6 4 2 5 6 3 1 8 5 1S o l id a r i ty g ro u p s M a rk e t 8 3 1 3 7 2 0 0 2 9 8 4 0 6G ra d u a te g ro u p s 2 9 8 0 1 6 7 2 5 0 3 6 6T o ta l n o o f g ro u p lo a n s 2 9 6 5 1 3 7 9 2 1 1 7 9 1 6 2 3
P ro je c t io n s
6
9
648
7
9
8
8
Envisioned Structure The DWA Microfinance Program has had considerable success managing projects and making loans to its target market in a difficult operating environment. A good part of this success is due to the continuous logistical and financial support and leadership provided by the DWA structure. The program will continue to benefit from this situation in the near term. Still, the program and DWA management have recognized that its microfinance operations are unlike other DWA programs in that it can be most effective at expanding outreach if it is run as a sustainable business. In order for the program to run effectively it will gradually take over support functions provided by the DWA’s overhead structure, with the vision that the DWA board of directors may take the decision at a future date to create a separate microfinance institution under DWA.
19
Branch structure The head office, leaving the branch focused on operational matters, provides functional institutional support. The branch structure may be summarised as follows:
Accounting clerk Driver Cleaner / Guard
S
Branch Supervisor The branch supervisor reports to thoperational matters at the branch levoperational activities of the loan officoperational manager.
Loan officer The loan officer reports to the branch starts with the formation of the solidrepayment of all loan installments. training. The employment and traininstart with a three month probation periloan officer, in this way obtaining on successful completion of this hands-onbasis and undergoes two weeks of inte
A newly trained loan officer is then supervisor and starts with the support amain responsibility during the 16 weeformed groups in their group activitieloan contract. Upon completion of thformation of three additional groups anew groups which becomes their totalout.
Accounting clerk The accounting clerk reports to the brfollowing:
Maintain branch accounting Provide logistic support to th
Branch upervisor
e operationael. Their resers, auditing
supervisor anarity groups Both existin
g of the loanod during whthe job expos training per
nsive training
assigned to nd assistancek repayments and ensuree loan repaynd finally on portfolio of
anch supervis
records e operation
10 Loan officers
l manager and takes full responsibility for all ponsibilities include periodic participation in the of all loan-related processes, and reporting to the
d their area of responsibility during the loan cycle and continues through the timely and successful g and new loan officers will require significant officers are integrated operational processes that ich the loan officer shadows an existing competent ure and training in the operational process. Upon
iod the new loan officer is employed on a full time on all aspects of the loan cycle.
a specific area under the supervision of a branch necessary for the formation of three groups. Their
period is then to visit, audit and assist the newly that repayments are made in accordance with the ments the loan officer then starts working on the the completion of the repayments starts with four 10 groups, assuming that none of the groups drop
or and his main areas of responsibility include the
al staff
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Control over the branch driver/guard and cleaner
Branch staffing plan The staffing plan for the branch network is set out below:
The probation loan officers are temporarily employed for the three-month probation period prior to their two weeks operational training. Upon successful completion of the probation period and operational training, probation loan officers are employed full-time as new loan officers.
Head-office structure The Head-office staffing plan is directed at building internal capacity over the projected period and makes provision for specialised support for areas that require strengthening. At present DWA provides functional support in the following areas.
Program Management Financial Management Human resource Management Internal Audit (new function) Logistical Support
The pace of development of capacity in the program will determine the nature and extent of continued DWA support services. The cost of these services is charged to the microfinance program on the basis of 15% of overall program expenditures. The current staffing of the microfinance program at the head office is as follows:
Microfinance Sector Manager Project Coordinator Finance Officer (accountant) MIS officer Administrator Driver Cleaner/Guard Information Assistant
Given the projected growth in the DWA Microfinance Program’s branch structure, by planning year three the following new positions will be required:
Program Director – As the program grows and begins to take on greater responsibility for its own support services, leadership of the program will be elevated through a new position,
21
which could be filled internally, depending on staff progress, or an external search could be conducted. The individual who fills this position will gradually take over many of the functions that the Operations manager (Technical assistance) will manage initially as the technical assistance is phased out in years 3-5.
Finance Manager – dedicated to the program – this position would fill the need to take on increasing control of the program’s finances.
Human Resources Manager – the human resource needs and the composition of compensation packages, including the possibility of incentive systems, will be the responsibility of a dedicated manager as the number of staff (especially loan officers) grows over the planning period.
Internal Auditor – Support in the first two planning years will be primarily external, including hiring specialized microfinance auditors for an annual audit of the program and a consultant to advise the program on internal controls. An experienced loan officer with in-depth knowledge of operations may be considered for this position after intensive audit training.
Logistics support – Given the aggressive plans for expansion, the microfinance program will need to hire staff dedicated to the growing logistics needs of the program.
The addition of qualified personnel in these positions will represent an important step in the development of DWA’s history in microfinance. Aside from adding to a growing cost structure and making continued growth possible, with these additions, the program will take over many of the support functions presently handled by the DWA overhead structure.
Capital Equipment The existing programme was initiated by DWA who also provided much of the required infrastructure. The business plan provides for the expansion of the branch network for which basic infrastructure needs to be provided for.
Financial Projections The substantial expansion envisioned here is within the capabilities of the program, subject to:
The availability of funding The strengthening of the institutional capacity as recommended through the provision
of intensive technical assistance funded by a third party
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Improvement in portfolio quality indicators The implementation of effective control systems and procedures
Projected Portfolio Performance The loan portfolio is the program’s largest and most important asset and forms the basis of the projections. The actual performance over the past three years showed a major growth in the gross portfolio. With this growth, as can be expected from a new program in a tremendously difficult operating environment, portfolio-at risk over 30 days (that is, the total value of all outstanding balances for loans in arrears divided by the gross portfolio) levels were high. Reducing the current level of portfolio at risk, which is 30%, is a major focus of the business plan, especially in planning year one, when the program will build the capacity of loan officers to manage their assigned portfolios effectively.
Through diligent oversight and monitoring, and by creating the right incentives for repayment and loan officer follow-up, the portfolio quality will improve significantly over the planning period. Investment in improving portfolio quality will pay off significantly in planning years 3-5, allowing for faster net portfolio growth. The portfolio at risk will be cut in half to 15% by the end of planning year 1 and will gradually be reduced each year to 9% by the end of the planning period. While this is still higher than the best international microfinance standards, the projections account for the higher risk of the operating environment, as mentioned in the environmental analysis section, including the limited existing culture of credit that is influenced by the prevalence of microfinance programs that have little concern with loan repayment rates.
This elevated risk translates to a need for the higher reserves for loan losses indicated in the table below. While the provision and reserve figures in later years are significantly higher, it should be pointed out that the reserves in those periods are for a much larger loan portfolio than in earlier years.
Loan Loss Provision and Write-off 2002 2003 2004 2005 2006 2007 Loan Loss Provision 212,751 261,300 60,225 454,965 542,241
Ending Loan Loss Reserve 112,892 136,311 304,335 190,502 251,843 339,867
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Portfolio Volume
Portfolio (nominal)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
1 7 13 19 25 31 37 43 49 55 61Month
Val
ue o
f Por
tfol
io (D
olla
rs)
Community Solidarity Grou Graduate Group Market Solidarity Group
Despite the fact that the majority of clients remain in the community- and market-based groups, the graduate groups (the middle band in the area graph above) begin to constitute a significant portion of the total volume of the loan portfolio. This is due to the higher loan amounts and retention rates. This does not represent a move away from the target market, but rather a process of growth with good clients, which will actually allow for expanded outreach among the poorest of the economically active, who will continue to access smaller loans. Projected Financial Statements The DWA Microfinance Program is an important part of DWA and its finances are part of DWA. However, the financial statements and projections presented here treat the program as if it were a separate entity, or “subsidiary” of DWA in order to review the program’s projected progress.
In the income statement and balance sheet below6, it is important to point out that for 2001 and 2002, operational losses were covered by grants income, leaving zero net profit. The grants income appears as donated equity on the balance sheet, covering operating losses and leaving zero net equity for 2001 and 2002. Although the grant funds used for this purpose came with restrictions, and could therefore be considered liabilities (they could effectively be treated as loans at 0% interest until officially transferred), part of the funding was intended for operations, so the losses are covered with this funding. The remainder of the grant funding is treated as a liability until project completion and official transfer of funds.
24
6 All figures are shown in US Dollars, the operating currency of the DWA Microfinance Program.
Income Statement
Income Statement 2001 2002 2003 2004 2005 2006 2007 Total Financial Income 66,704 168,079 558,648 1,046,562 1,968,542 3,318,467 5,121,537 Total Financial Costs 0 0 4,057 18,526 38,208 60,867 78,381 Gross Financial Margin 66,704 168,079 554,591 1,028,037 1,930,334 3,257,600 5,043,156 Provision for loan losses 0 135,652 212,751 261,300 60,225 454,965 542,241 Net Financial Margin 66,704 32,427 341,840 766,737 1,870,110 2,802,635 4,500,915 Program Operating Exp 276,977 298,437 321,667 563,847 870,935 1,199,114 1,708,015 Administrative Operating Exp 48,878 52,665 243,869 239,280 351,134 363,659 374,655 Amount of taxes paid 0 0 0 0 0 0 0 Net income from operations (after taxes) (259,151) (318,675) (223,696) (36,390) 648,041 1,239,863 2,418,246 Grant Income 259,151 318,675 398,530 657,971 1,045,884 809,474 418,399 Excess of Income over Expenses 0 0 174,834 621,581 1,693,925 2,049,337 2,836,645
The income statement shows the financial results of all of the projected elements of the plan. The DWA Microfinance Program is expected to have positive net income in the first year of the plan as a result of improved operations and grant funding, but the more important landmark is in planning year three, where the program is able to turn a profit before counting grant income. By planning year five, because of efficiency gains and economies of scale in the lending operations, the program is more than covering its income with expenses and could consider lowering interest rates charged to clients, or investing in further expansion.
An important assumption is that the program will soon have to pay for funding (note the financial costs rise from zero) in order to finance expansion. Still, the financial costs will remain relatively low, the assumption being that the program will be able to obtain concessionary loans, guarantees or other low-cost funds. It is also important to mention that the substantial technical assistance costs that are detailed in section 6.1 are not included in this income statement since it is unadjusted. Thos costs are, however, used in the adjusted ratios explained below, including adjusted return on assets and the financial sustainability indicator.
A much higher expense than the total financial costs is the provision for loan losses, the size of which is directly related to the quality and size of the loan portfolio. Although portfolio quality will improve significantly over the planning period, the portfolio will also grow significantly, requiring the program to make provisions (on the income statement) for greater loan loss reserves (on the balance sheet) to cover non-performing loans that must be written off.
The DWA Microfinance Program does not currently invest any of its available cash in savings accounts, term deposits or other secure market instruments but will begin to do so in planning year one. While this will never be a substantial use of available cash, it is good financial management and allows the program to make productive use of liquid assets and augment program income. The expected rates of annual return on such short-term investment are: 2% on cash deposits and 4% on others.
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Balance Sheet
.Balance Sheet 2001 2002 2003 2004 2005 2006 2007 ASSETS * Cash in Bank and Near Cash 399,882 373,831 85,661 166,832 286,903 445,754 646,464 Net Portfolio Outstanding 242,743 333,736 726,199 1,467,910 3,298,912 5,428,460 8,214,995 Net Fixed Assets 53,942 60,203 230,377 193,568 197,892 161,198 115,197 Long-term Invest. & other LT assets 0 0 0 0 0 0 0
TOTAL LIABILITIES 696,567 767,771 867,403 1,031,896 1,293,367 1,495,736 1,600,336 EQUITY * Accum. Donated equity, prev. periods 280,706 539,857 858,532 1,257,062 1,915,033 2,960,917 3,770,391 Donated equity, current period 259,151 318,675 398,530 657,971 1,045,884 809,474 418,399 Shareholder equity (less div pmt) 0 0 0 0 0 0 0 Accumulated net surplus (539,857) (858,532) (1,082,228) (1,118,618) (470,577) 769,286 3,187,531
TOTAL EQUITY 0 0 174,834 796,415 2,490,340 4,539,677 7,376,322
The projections for the balance sheet show a positive evolution of the program’s structure over the course of the planning period. The program currently holds much of its assets in cash. This is a result of the halt in new lending in August 2002, which meant that as clients repaid their loans, the cash position went up but because that cash was not used for new lending, the net portfolio dropped. In 2003, year one of the projections, the significant changes in the program’s cash position and its net portfolio (which is the gross portfolio less reserves for loan loss) represents a strong emphasis on reinitiating lending operations.
Also among the notable changes in the program’s asset composition is the investment in fixed assets in 2003 that will be necessary to support expansion. Those fixed assets are depreciated thereafter along with the current fixed assets and the branch-level fixed assets that are projected for purchase with each branch opening. Additional fixed assets are added when the overhead structure is enhanced in planning year three.
The program will need to diversify its funding base to include commercial and other concessionary loans over the planning period, with a gradually stronger emphasis on commercial loans. It may be possible to obtain a guarantee from a donor or access other funding mechanisms in order to establish a credit history with commercial banks since such loans may be difficult to obtain early on. Obviously, commercial loans also carry higher cost, but the program must take into account the likelihood that donor funding and concessionary loans may not cover the program’s full financing needs in the future. Savings are not yet contemplated as a source of funds, but could be an important source to consider in future planning since such funding also provides an important service to clients and is also relatively low-cost once the appropriate systems and controls are in place.
Despite the diversification of funding sources, the Liability and Equity Composition graph above most important source of funding in the first planning years will come from donated equity. After the program reaches sustainability and is able to reinvest profits, a large portion of the funding of expansion could come from the program’s own equity, shown in the upper far-right area of the graph above.
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Use of Funds (nominal)
0
100,000
200,000
300,000
400,000
500,000
600,000
1 7 13 19 25 31 37 43 49 55Month
Am
ount
(Dol
lars
)
Operations Portfolio Other Assets Cash & Investments
The Uses of Funds graph above shows where the program will need to invest its funding sources in order to attain the projected results. As the graph shows, early in the planning period the program will need to spend a larger portion of its total funding on operations and on purchasing assets (which represent many of the spikes in spending) in order to prepare for growth, while in later periods the portfolio becomes by far the biggest use of funds. The top, thin line of the area graph represents the use of liquid cash in short-term, secure market investments mentioned earlier, which are important to effective financial management of the program’s assets.
Cashflow Projections
Cashflow Projections 2003 2004 2005 2006 2007 Cash flow from Operations (a) 41,285 283,621 780,678 1,778,058 3,053,023 Total Other Sources (b) 3,237,757 6,515,145 11,857,468 19,125,586 28,891,557 Total Other Uses (c) 3,965,742 7,375,567 13,563,960 21,554,267 32,162,269 Plus grant income (e) 398,530 657,971 1,045,884 809,474 418,399 Ending Balance 85,661 166,832 286,903 445,754 646,464
The program’s cashflow projections for the planning period show, in numbers, the sources and uses of funds, and ending cash position, detailed above.
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Performance Indicators Ratio Analysis 2003 2004 2005 2006 2007
Portfolio Quality Loan Loss Reserve Ratio 15.8% 17.2% 5.5% 4.4% 4.0% Loan Write-off Ratio 25.4% 6.8% 6.6% 8.7% 6.4% Profitability Adj. After-tax Return on Performing Assets * -104.6% -34.6% 11.2% 19.6% 28.0% Solvency Equity Multiplier * 5.96 2.30 1.52 1.33 1.22 Efficiency & Productivity Operating Cost Ratio * 76.6% 58.6% 48.9% 34.3% 29.3% Borrowers per Loan Officer * 126 129 190 187 182 Loan Officer as % of total staff" * 61.9% 77.2% 76.8% 79.5% 82.8% Growth Total Loan Portfolio * 862,510 1,772,245 3,489,415 5,680,304 8,554,862 Overall growth in portfolio 93% 105% 97% 63% 51%
In general, the projected performance indicators shown above are reflective of a growing institution that is gradually becoming more efficient and sustainable over time, and gaining substantial capacity to expand its outreach to increasing numbers of microenterprises. Some of the most important institutional performance indicators are detailed below.
Adjusted Return on Performing Assets (AROA) This ratio is calculated by dividing net income (excluding any donations) by average performing assets (any asset that earns a return). This measure of profitability reflects both the profit margin and the efficiency of operations, or how well the institution uses its earning assets. The adjustment that is made imputes a market price on donated or concessionary funding, accounts for the effects of inflation and takes into account in-kind donations of technical assistance or fixed assets.7 As would be expected during a period of serious investment in technical assistance and preparation for expansion, this indicator is sharply negative in the first two years of the plan. However, as the program begins to cover more of its costs through operating income, the AROA indicator improves substantially, reflecting higher return and higher potential to invest in further expansion of services.
7 The program is largely protected from inflation due to the complete dollarization of operations, thus the effect of inflation is much reduced in this adjustment.
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Operational and Financial Sustainability
Operational and Financial Sustainability
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
1 7 13 19 25 31 37 43 49 55Month
Perc
ent
Oper. Sust. Fin. Sust.
Operational and financial sustainability are two of the most common indicators used in microfinance. The operating sustainability indicator shows how close an institution is to generating enough operating income to cover all of its operating expenses (including financial expenses) – that is, operating income divided by operating expenses. Financial sustainability is a similar ratio, except that adjustments (the same ones used for the adjustments to AROA above: inflation, subsidized cost of funds, and in-kind donations) are made to the operating expenses (the denominator). As the graph shows, the program is projected to generate enough operating income to cover its operating expenses—it is projected to reach operational sustainability—by the end of year two, and financial sustainability shortly thereafter. This is a rather fast achievement of such milestones, but the DWA Microfnance Program believes it is possible if the right investments in capacity and program expansion can be made.
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Operating cost ratio
Operating Cost Ratio
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
1 7 13 19 25 31 37 43 49 55Month
Perc
ent o
f Por
tfol
io
The operating cost ratio (total operating costs divided by the average portfolio) provides the best indicator of the overall efficiency of a lending institution – it measures the institutional cost of delivering loan services. Reduction in this ratio over time means that the program is becoming more efficient, with lower operating costs relative to the growing portfolio size (the denominator). The projections show a substantial reduction in the operating cost ratio from almost 120% to around 30% in year five. While this is still high by banking standards, it is quite good for operations targeting the poorest of the economically active with a group-based lending methodology. By reducing this ratio, it becomes possible to cover operating costs while passing savings on to clients in the form of lower interest rates.
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Cost Structure as a Percentage of Performing Assets
Cost Structure (as % of Performing Assets)
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
1 7 13 19 25 31 37 43 49 55Month
Program Exp Admin Exp. Provisioning Financial Costs Adjustments
The Cost Structure (as % of Performing Assets) graph is also useful for analyzing efficiency trends by expressing each expense category as a percentage of the portfolio. If the portfolio is growing faster than expenses, then the institution is actually becoming more efficient economically, reflected in the downward trend in the graph. The outer shape of this graph shows the total expenses (including adjustments) as a percentage of the portfolio. This amount can be compared to the average yield (or effective interest rate) that would need to be charged on the portfolio to generate sufficient income to cover costs. Microfinance programs can rarely cover all costs in the early years of the program, especially if adjustments (the same as those made for the AROA indicator) are included as a cost.
As is evident in the graph the current cost structure of the program is quite high in relation to the size of the portfolio, but as the portfolio grows, the cost structure percentage is significantly reduced and the program can begin to cover costs. The graph is useful to view the cost structure but also emphasizes the importance of growth in the loan portfolio (which makes up the vast majority of the performing assets).
Conclusion The projected results envisioned in this business plan are ambitious. They are based on the success of the DWA Microfinance Program and the position of leadership it holds in the nascent microfinance industry in Angola. Given the right support, in the next five years the DWA Microfinance Program will overcome the many challenges inherent in this market to develop into an institution capable of serving massive numbers of poor clients, expanding its services while demonstrating that the poor can be a good credit risk and that they will pay for ongoing access to effective financial services.
