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Spinning Off for Sustainable MicrofinanceSave the Children Federation into JWDS, Al Majmoua, and FATEN

Case Study

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Spinning Off for Sustainable Microfinance

Save the Children Federation intoJWDS, Al Majmoua, and FATEN

Case Study

Rahut Dhumale and Ameta Sapcanin with Judith Brandsma

A study by the Middle East and North Africa Region,

World Bank, in cooperation with the

Regional Bureau for Arab States,

United Nations Development Programme

The authors are with the Private and Financial SectorDevelopment Department of the World Bank'sMiddle East and North Africa Region. They are grateful to the United Nations DevelopmentProgramme's Regional Bureau for Arab States and the World Bank 's Rural and Microfinanxe/SmallEnterprises thematic group (of the Finance, Private Sector, and Infrastructure Network) frfund-ing this study. They are also indebted to Niveen Abboushi (Jordanian Women's Development Society,or the JWi)S), Mohammad A. Khaled (Palestine for Credit and Development, or FATEN), RedaMamari (Al-Majmoua), and their staffsfor their assistance duringfield visits to each of their insti-tutions. They are equally grateful to Michael Austin, Mark Eldon-Edington, Rajan Gill, ThomasR Krift, and Michael McGrath (Save the Children Federation, Inc. )for their cooperation through-out the project. This report was edited by Paul Holtz, designed by Laurel Morais, and laid out byWendy Guyette, all with Communications Development.

The findings and recommendations expressed in this report are entirely those of the authors andshould not be attributed in any manner to the United Nations Development Programme or the WorldBank.

Contents

Executive summary 1

The move toward microfmance 3Why study spin-offs in microfinance? 5Save the Children's spin-offs 6

Save the Children's spin-off history: from programs to independent institutions 8Save the Children in the Middle East 8From Save the Children to theJordanian Women's

Development Society (JWDS) ... 10... to Al Majmoua... 12... to Palestine for Credit and Development (FATEN) 14Where are the institutions today? 15

Building blocks for spinning off 18Choosing a legal form 18Deciding on institutional governance 20Determining the status of staff in the spin-off process 23Transferring management information and accounting systems 24

Benefits and risks of spinning off 26Institutional and marketing benefits 26Operational, financial, and risk management benefits 27Product and services benefits 28Conclusion 29

The spin-off and the parent institution: strengthening ties or phasing out? 31The spin-off process and personalities 32Building relationships for the future 33Building networks: pros and cons 35

The role of donors in spinning off 37Donor policies and strategic interests in microfinance 37Reporting requirements: standard monitoring or interference? 39Achieving targets and facing pressure to grow 39How can donors help? 41The role of microfinance institutions in donor relations 41

Fraud and its effects on spin-offs 43

Lessons and recommendations 47Recommendations for organizations contemplating a spin-off 48Developing a corporate culture in a new institution 49Life after spin-off: defining responsibilities for the parent organization 50

Annex Recent economic strides and challenges in Jordan, Lebanon,and the West Bank and Gaza 52

Bibliography 54

Boxes1 What is microfinance? 32 Guiding principles of best practice microfinance 43 What are Group Guaranteed Lending and Savings programs? 94 Key dates for theJWDS I 15 Key dates for Al Majmoua 126 Key dates for FATEN 147 Roles and responsibilities of boards of directors in the

corporate context 228 A focus on women and their effect on institution building 309 What does it take to build a successful microfinance network? 3510 Decisionmaking in the Save the Children-JWlDS partnership 3811 Essential elements of donor policy for microfinance 4112 Examples of microfinance fraud cases involving loan officers 4413 Fraud in the West Bank and Gaza 45

TablesI Basic data for Group Guaranteed Lending and Savings programs

in the Middle East, December 1996 92 Basic data for the JWDS, Al Majmoua, and FATEN, February 1999 123 Comparative institutional indicators for the JWDS,

Al Majmoua, and FATEN 19

Annex table1 Economic and social indicators in Jordan, Lebanon, and the

West Bank and Gaza, 1997 52

Executive summary

Wo rldwide, microfinance is moving marketing considerations, and the legal, Spinning off is afrom government- and donor- financial, and programmatic futures of the strategic choice

'I'! funded subsidized credit to sus- institutions, especially as they relate to their one that makestanable financial intermediation. In the prospects for growth and sustainability. sense only if it isMiddle East and North Aftica, however, many Added to this were numerous intangible done in themicrofinance programs are lodged in larger factors and positive externalities brought context of anotherparent organizations that provide social or about by spinning off, such as the building strategic choice:charitable services. Although some of these of local capacity or the regional microfi- sategic chieinstitutional forms may be appropriate in the nance industry. Today all three institutions achieving fullearly stages of a microfinance program, they are optimistic about their futures as inde- sustainabilitywill likely block a program's development as pendent entities and seem determined toa financial intermediary. To decrease its face any challenges they encounter.dependence on donors, achieve growth, and The experiences of Save the Childrenbecome fully sustainable, a microfinance pro- and JWDS, Al Majmoua, and FATEN offergram should gain access to commercial important lessons for organizations that aresources of funds. considering spinning off their microfi-

Not all microfinance programs can or nance operations. Regulatory and legalshould be spun off from their parent insti- issues and institutional governance struc-tution, however. Spinning off is a strategic tures must be carefully considered whenchoice-one that makes sense only if it is building a new institution, because they candone in the context of another strategic profoundly affect an institution's ability tochoice: achieving full sustainability. This is achieve full sustainability.the context in which the discussion of and Another important aspect of spinning offrationale for spinning off microfinance pro- is to instill a sense of ownership in newgrams must be examined. boards of directors, as well as a sense of

The only known spin-offs in the Middle responsibility for institutional quality andEast and North Africa's microfinance indus- operations. Ownership and responsibility aretry are Save the Children's microcredit pro- also relevant when it comes to transferringgrams in Jordan, Lebanon, and the West staff from a setting with a program focus toBank and Gaza. Spinning off the Jordanian one based on the functions and objectivesWomen's Development Society (JWDS), Al of an independent institution. The threeMajmoua, and Palestine for Credit and spin-offs have often found themselves hav-Development (FATEN) was complicated ing to change a corporate culture ratherand difficult. But these experiences brought than build a new one.to light many of the issues inherent to such Also important is the timing and tech-program restructuring-issues similar to nicalities of transferring managementthose typically found in a corporate context. information and accounting systems.These include external market factors, During the transitions to institutional

I

2 SPINN[NG OFF FOR SUSTANABL.E MICROFINANCE,

independence, all three programs only where donors have real advantages and thatgradually assumed responsibility for oper- require resources.ational and portfolio management. Thus it There is no evidence linking the spinningis important to consider a program's pre- off of Save the Children's microfinance pro-paredness for spinning off at every level- grams to the fraud that subsequentlyas well as to plan for contingencies. plagued the JWDS and FATEN. Still, fraud

One of the biggest challenges in the has had significant effects on the spin-offtransformation process is to develop a work- process. Both fledgling institutions' expe-ing relationship between the parent insti- riences with fraud were devastating andtution and the spin-offs that benefits both threatened to destrov them. But both insti-

institutin is ano parties and solidifies the bridge between tutions learned valuable lessons early in theirinstitution is not them. The role of the parent must be prop- institutional development that may have

erly defined, with a clear division of respon- made them stronger and so contributed tomanaging a sibility and accountability from the start of their long-term stability.

program the spin-off process. Finally, Save the Children, the JWDS, Al

External factors directly or indirectly Majmoua, and FATEN agree that perhapsinfluence the transition to institutional inde- many of these issues could have beenpendence. In this context the role of the addressed-or avoided altogether-if fromdonors needs to be examined, because the the outset lending operations had focused onapproach that donors take to microfi- developing a sole-purpose, independentnance and the requirements they set for microfinance institution rather than contin-microfinance institutions can help deter- uing in a program-based setting. Recognizingmine the development of this industry and that managing an institution is not the samethe future of many microfinance institutions. as managing a prograni could have enhancedDonors can play an invaluable role in devel- the spin-offs' institutional capacity to manageoping the microfinance industry. But the key more products and services, mobilizeis to identify areas-such as building capac- resources, and enhance management infor-ity and establishing a policy dialogue- mation systems.

The move toward microfinance

M icrofinance is a powerful devel- (NGOs)-often with microfinance activities Despite widespreadopment tool-one that can reach lodged within the organizations' larger demand, somethe poor, raise their living stan- social operations-and quasi-governmental 90 percent of

dards, create jobs, and contribute to long- organizations-including state-owned banks microentrepreneursterm economic growth (box 1). Yet operating under government pressure and in developinginstitutional microfinance worldwide con- serving merely as windows for credit delivery. countries lack accesstinues to suffer from what has been called an Few private banks in the region are engaged to institutional"absurd gap" between demand and supply. in microfinance.Despite the widespread demand for financial Instruments have been designed to pro- financeservices, some 90 percent of microentre- vide accountability and performance incen-preneurs in developing countries lack access tives to the microfinance programs operatingto institutional finance (Robinson 1995). in this way. But the financial services provided

Microfinance has shown that it can alle- by nonprofit NGOs are supply driven, as theviate poverty in many parts of the world. programs are typically designed and fundedAlthough the potential effects may be sim- by outside actors, limiting the freedom ofilar in the Middle East and North Africa, the local decisionmakers, program managers,region's microfinance industry is still in its and staff with direct, hands-on experience ininfancy. As a result the region has been the the local microfinance market. Givenleast exposed to microfinance best practices. historical and cultural values and charitableThe region contains more than 60 millionpoor people-defined as those living on lessthan $2 a day-but only 112,000 (less than Box I .What is microfinance?2 percent) have access to financial services. Microfinance institutions provide the entre-Nearly $1.4 billion in microloans is needed preneurial poor with financial services-suchto bridge the funding gap (Brandsma and as credit, deposit, and savings-that are tai-Chaouali 1998). lored to their needs. Good microfinance pro-Chaouali 1998). ~~~~~grams rely on:

Microfinance providers worldwide include * Small, usually short-term loans and securea wide range of organizations and institutions savings products.with public owners, private owners (corpo- Streamlined, simple appraisal of borrow-rate and mutual institutions), and no owners and investments.

* Alternative approaches to collateral.ers at all (nonprofits) . While private capital, * Quick disbursement of repeat loans afterwhether in the forrn of sole proprietor or timely repayment.partnership or corporation, dominates most * Interest rates or fees that are high enoughcountries' economies, this is not the case for to cover costs-including costs of capital.microfinance. In the Middle East and North * Convenient location and timing ofAfrica, for example, there are more than 60 services.active microfinance programs. Of these, 40 Sourre: Goldberg and Fruman 1997; UNDP 1997.

are run by nongovernmental organizations

3

4 SPINNING OFF FOR SUSTAINABLE MICROFINANC(.

and social work traditions in the Middle East ital mobilization-requires greater attention

and North Africa, the 40 microfinance pro- to the ownership and governance of insti-

grams run by NGOs and quasi-governmental tutions providing financial services to

organizations will likely face serious organi- microenterprises.

zational obstacles on the path to sustainability. According to a World Bank study, less

Most of them will probablynotmake itif they than a third of the more than 60 microfi-

maintain their current ownership and gov- nance programs in the Middle East and

ernance frameworks. North Africa are implemented using best

The demand for institutional microfi- practice principles (box 2). As the region's

The demand for nance can be met only by sustainable finan- industry develops, however, positive devel-

institutional cial institutions. Early microfinance opments are becoming increasingly evident.programs focused on extending credit ser- Only two programs in the region are con-

microfinance can be vices, but today achieving financial sustain- sidered fully sustainable-covering their

met only by ability, mobilizing savings, and integrating costs and maintaining or deepening out-

sustainable financial with the domestic financial markets have reach-and eight others are on the road to

institutions becomejust as important. This new focus on sustainability (Brandsma and Chaouali

economic results and sustainable busi- 1998). Fifty-five programs have not achieved

nesses-together with primary indicators minimum outreach and do not cover 100

such as profitability, operational efficiency, percent of their operational costs. Poor loan

service quality, institutional stability, and cap- portfolios, inadequate management infor-

Box 2. Guiding principles of best practice microfinance

Experiences in countries as varied as Bangladesh, need rapid and continued access to finan-Bolivia, Egypt, Senegal, Mali, and the West Bank cial services. Besides, microlenders cannotand Gaza show that the poor are bankable and afford to subsidize their borrowers. Subsidiesthat savings and credit services can be delivered send a signal to borrowers that governmentto the poor on a sustainable basis. Long-term or donor funds are a form of charity, whichfinancial sustainability depends on charging inter- discourages borrowers from repaying.est rates that cover operational costs (including Moreover, microfinance institutions havethe cost of loan defaults) and capital costs (includ- learned that they cannot depend on gov-ing interest on borrowed capital and inflation on emments and donors as reliable, long-termowned capital). Successful microfinance opera- sources of subsidizing funding.tions worldwide charge interest rates that are * Promoting outreach and demand-driven servicehigher than market rates. Guiding principles of delivery. Successful microfinance institutionsbest practice microfinance include: increase access to financial services for grow-* Covering costs. To become sustainable, micro- ing numbers of low-income clients, offering

finance institutions-regardless of their them quick and simple savings and loan ser-institutional setup-must cover their costs of vices. Loans are often short term, and newlending. If such costs are not covered, the loans are based on timely repayments. Loans

institution's capital will be depleted and are based on borrowers' cash flows and char-microenterprises' continued access to finan- acters rather than their assets and docu-cial services-and even the existence of the ments, and alternative forms of collateralmicrofinance institution-will be injeopardy. (such as peer pressure) are used to motivate

* Achieving a certain scale. Successful microfi- repayment.nance institutions have reached a certain * Maintaining a clearfocus. It takes time andscale, as measured by the number of active commitment to build a sustainable micro-clients. This number depends on the coun- finance program. Thus mixing the deliverytry setting, lending methodology used, of microfinance services with, for example,and loan sizes and terms offered. the provision of social services is inadvisable

* Avoiding subsidies. Microentrepreneurs do because it sends conflicting signals tonot require subsidies or grants-but they do clients and program staff.

Source: Brandsma and Chaouali 1998; UNDP 1997.

THF MOVE TOWARD MICROFINANCE 5

mation, excessive donor reporting require- undermine the sustainability of the micro-ments, and inefficient systems and proce- finance provider. Thus programs that aredures hamper the operational sustainability engaged in both types of services shouldof these organizations. In this context manage their provision separately, withmany of the region's programs may never different managerial and administrativebecome sustainable-unless they make sus- procedures, recruitment, staffing, andtainability a strategic choice. Examples of sometimes even names.emerging but not yet fully sustainable insti-tutions include the Save the ChildrenFederation's spin-off programs: the The joint provisionJordanian Women's Development Society Worldwide, microfinance is experiencing a of social services(JWDS), Al Majmoua in Lebanon, and paradigm shift away from government- and of microl navcesPalestine for Credit and Development donor-funded subsidized credit to sustain- and microfinance by(FATEN) in the West Bank and Gaza.' able financial intermediation (Robinson the same program

Best practice experience shows that the 1996). Institutions cannot become fully sus- usually does notjoint provision of social services and micro- tainable if they onlend donor funds at sub- workfinance by the same program usually does not sidized interest rates and combine socialwork. Often the objectives, culture, and man- and financial services. Instead they remainagerial and operational systems of the larger dependent on continuing donor or gov-program clash with those of the microfmance ernment injections of low-cost funds. Toprogram. For instance, the socially oriented become sustainable, these institutions mustparent organization may have a charitable raise interest rates on loans, mobilize vol-outlook, give grants to the needy, employ untary savings, and separate social andsocial workers and rely on volunteers, and use financial activities. This is the context ina cash-based budgeting system. A successful which the discussion and rationale for spin-microfinance program, however, needs a ning off microfinance programs has beenbusiness orientation, business-oriented loan placed.officers who are rewarded based on perfor- Yet there is hardly any documentedmance, and financially oriented administra- hands-on experience on how to spin off ative and budget systems. It also needs a microfinance operation from a larger socialgovernance structure to provide strategic program. There is no best practice and nodirection, ideas, and solutions to managers worst practice. Moreover, the issues areto ensure the longevity of the program. daunting and include:

These clashing objectives and operations * The timing of the spin-off.may result in "institutional schizophrenia" * Legal issues involving decisions on thethat permeates the entire organization. On organizational form of the new entity.the one hand, the organization provides * Funding issues, including makinggrants to the poor; on the other, it provides arrangements for subgrants,2 searchingloans for which repayment is strictly for new donors and grants, and raisingenforced. The clients of the social program funds in local capital markets.are beneficiaries and the clients of the * Ownership and govemance issues, includ-microfinance program are customers who ing selecting the board of directors andbuy a service that they value. A good social determining the appropriate roles for dif-worker is not necessarily a good loan offi- ferent levels of governance.cer, and a good loan officer is not neces- * Staffing issues and changing or buildingsarily a good social worker. The confusion a corporate culture.of staff, donors, and clients is often * Managerial and operational issues.reflected in poor repayment rates and high * Psychological issues of the "divorce" fromdelinquencies-elements that directly the parent institution.

6 SPINNING OFF FOR SUSTAINABLE MICROFINAN(:C

In addition, spinning off gets even more complexity of the issues involved in suchcomplicated when it is understood that the institutional transformation and offeringprocess is done while normal lending oper- knowledge about key guidelines for otherations continue because clients want contin- microfinance programs contemplatng suchued access to finance. The period when the undertakings. Stll, the main objective of thisprogram operates on concurrent systems- case study is not to present a one-size-fits-allthe old one and the new one-can be espe- model on how to spin off a microfinancecially harrowing. Finally, one of the most program, or to provide an in-depth evalua-complicated pieces of this puzzle is the con- tion of each of the institutions created by the

Spinning off is often tinuance of a symbiotic relationship between spin off process. Rather, the study seeks toessential for a the parent instituton and the new instituton. explain the most important aspects of theessentiacrofnan Still, spinning off is often essential for a spin-off discussion, the process to arrive atmicrofinance microfinance program to become sustainable. the spin-off decision and itsjustification, and

program tO Microfinance programs that are newer add- the spin-off process itself, using these three

become sustainable on activities face serious obstacles ranging examples as part of the learning experience.

from institutional ambivalence, image The study highlights a series of crucialproblems, internal obstruction, bureaucracy, issues-including legal issues, governancetransition problems, and capital constraints, issues, organizational and operational issues,In many cases the parent organization is personnel issues, and important psycholog-legally prohibited from engaging in financial ical issues. The costs of the spin-off process,obligations-such as mobilizing deposits or the needs for proper process management,borrowing for onlending-when the micro- and the possible need for technical assistancefinance organization must be able to do so in in this process are also described. The studyorder to grow and serve more of its poor also discusses the evolving relationship

clients. In many cases spinning the microfi- between the parent organization and thenance operation off of the parent organiza- newly independent institutions, and criticallytion may be the only way for the microfinance examines some factors external to the spin-operation to become sustainable. Thus the off process (such as the involvement ofoperation must be an independent legal entity donors and the impact of administrativewith its own objectives and with managerial crises on a microfinance institution's insti-and operational systems appropriate for tutional stability and development).microfinance. Microfinance is not a panacea for poverty.

But it can have enormous effects in the lives

Save the Children's spin-offs of the most disadvantaged. The clients ofmicrofinance institutions are the measure of

The only known spin-offs in the Middle the successes or failures of each program.East and North Africa's microfinance These clients' stories are brought through-industry are those of Save the Children's out the text as exarnples-but also as a

microcredit programs in Jordan, Lebanon, reminder that, in essence, microfinance isand the West Bank and Gaza. Group about and for the entrepreneurial poor.Guaranteed Lending and Savings programspreviously housed under Save the

Children's larger umbrella were spun off Notesinto three legally independent entities: the 1. Except where otherwise noted, all mentions

of Save the Children refer to Save the ChildrenJWDS, Al Majmoua, and FATEN. Federation/U.S.

Although at different stages, these three 2. Iftheproceedsofagrant-allorpart-are tospi-of prcesesare nearing completion be made available to execuiting agencies other thanspin-off processes are nearing completion the primary grant recipient, the donor may require

and appear to have been successful. They the recipient to enter into a subsidiary agreementhave provided many lessons, illustrating the with the executing agency. Subgrant agreements

THE MOVE TOWARD MICROFINANCE 7

are typically subsidiary agreements between the pri- does not have a direct contractual relationship withmary grant recipient and the executing agency, the primary donor, the agreements spell out thewhich set out the terms and conditions of the trans- obligations of the executing agency for the exe-fer of funds. In addition, if the executing agency cution and operation of the project.

Save the Children's spin-off history:from programs to independent institutions

For Save the ave the Children is a voluntary, non- gram, are the Group Guaranteed LendingChildren, economic sectarian, nonprofit entity established and Savings programs, which provide credit

and social kJin 1932 to assist the children of U.S. to groups of poor female microentrepre-

advancement rest on coal miners suffering the effects of the Great neurs (box 3). In acldition to credit andself-sufficiency and Depression. During World War II Save the other economic support, the lending pro-

sustainable solutions Children began expanding its frontiers grams sometimes include health and edu-to pressing beyond the United States and started help- cation initiatives for T:he women and their

ing children around the world. Today Save families.dev blelopme the Children is a multisectoral international For Save the Children, economic andproblems development organization providing services social advancement rest on self-sufficiency

for children and self-help for communities, and sustainable solutions to pressing devel-participating in projects in 39 developing opment problems. Following this approach,countries. The funds for its operations come in the early 1 990s Save the Childrenfrom private donors (who contribute embarked on economic opportunities pro-through child sponsorship programs) and jects in the Middle East and North Africa.public donors (including the U.S. Agency The original program and the subsequentfor International Development, the U.K. spin-offs have given families (with a focus onDepartment for International Development, women) access to credit, savings opportu-and the Dutch government). nities, and support that have enabled them

Like all U.S. nonprofits, Save the to develop small businesses-businesses thatChildren finances some of its core man- could help them break free of poverty.agement and administrative costs througha "cut" of funds received from donors. Thisindirect cost recovery rate is applied to all Save the Children in theSave the Children programs. Save the Middle EastChildren does not see this cut as profit but Save the Children has a brief history ofas real cost-because it covers the cost of microlending in the MIiddle East. Until thedelivering programs worldwide, and because early 1990s its operations focused on healthSave the Children believes that this cut rep- services, children's education, public infra-resents part of the real value of the organi- structure, and environmental programszation's community development knowledge (including safe water and sanitation services).

and worldwide experience. In the early 1990s, however, microloans

In developing countries Save the became more prominent-as Save the

Children provides services in three main Children began to redefine its role in the

areas: education, primary health care, and region, with a stronger focus on income-

economic opportunities, especially for generating activities. Save the Children's

women. Save the Children's main initiative, Middle East operations are coordinated

part of the economic opportunities pro- through its regional headquarters in Beirut

8

SAVF. THE CHILDREN'S SPIN-OFF HISTORaY FROM PROGRAMS TO INDEPENDENT INSTITUTIONS 9

Box 3.What are Group Guaranteed Lending and Savings programs?

Designed to help meet the high demand for * Allow borrowers to implement individual pro-sustained access to credit among disadvantaged jects, but to receive loans require that borrowerswomen, Group Guaranteed Lending and form credit and savings groups, usually with atSavings program usually: least 10 members who guarantee repayment of* Open a long-term line of credit by providing one another's loans. Such groups elimninate the

small initial loans that grow larger with every need for formal collateral and so provide thesenew loan cycle, which typically run from 4.5 female entrepreneurs with access to financeto 6.0 months. Each borrower is expected to that would otherwise be denied to them in thetake out a series of loans over a number of formal financial sector.years. * Require group members to conduct all

* Charge borrowers market-related interest repayment and savings transactions atrates-and in some cases, fees that cover nearby branches of commercial banks.financial and operating costs-and protect * Allow loans to support a variety of businessthe value of loan capital against inflation and activities, including food production, stores,defaults. clothes, hair care, and animal rearing.

(Lebanon), with field offices in Egypt, Bank and Gaza, it knew that selecting or cre-Lebanon, Jordan, and the West Bank and ating a local microfinance institution andGaza. The field offices can be considered as enhancing its capacity to manage the pro-branch offices of the U.S.-based headquar- gram was the starting point for providing dis-ters, under the supervision of the vice pres- advantaged female microentrepreneurs withident for international operations. In sustainable access to microfinance services.addition, the Washington, D.C.-based This approach was in line with cost-effectiveEconomic Opportunities technical unit program strategies that cover costs throughprovides support to the region. interest payments and other fees, as well as

strategic planning and the creation of aproper institutional framework for expand-ing the programs that Save the Children pur-

Despite capital constraints, Save the sued from the start of Group GuaranteedChildren has a good track record of lending Lending and Savings operations.to poor female borrowers at commercial Thus, with the goal of achieving long-interest rates (table 1). Until the spin-off term program sustainability by building upprocess created theJWDS, Al Majmoua, and local institutional capacity and ultimatelyFATEN, the Group Guaranteed Lending handing over the programs to local insti-and Savings programs were one of the main tutions in Jordan, Lebanon, and the Westcomponents of Save the Children operations Bank and Gaza, Save the Children consid-in the region. ered a number of local financial and non-

When Save the Children introduced financial organizations as potential partners.Group Guaranteed Lending and Savings pro- Earlier it had teamed up with a local part-grams in Jordan, Lebanon, and the West ner in other program areas as well. For

Table 1. Basic data for Group Guaranteed Lending and Savings programs in the MiddleEast, December 1996

Indicator Jordan Lebanon West Bank and Gaza

Date of the first loan June 1994 July 1995 January 1995Number of active borrowers 2,690 1,465 1,266Outstanding loan portfolio $220,197 $240,205 $374,007

Source:JWDS,AI Majmoua, and FATEN data.

10 SPINNING OFF FOR SUSTAINABLE MICROFINANC.E

example, in the West Bank and Gaza, Save program hosted by the World Bank,the Children was implementing an institu- appraised these programs-in considerationtional development program (funded by of a future grant to help spin them off tothe U.S. Agency for International Develop- new institutions and to manage the transi-ment) with several local NGOs to enhance tion. At the time theJordan operation wastheir capacity to implement sustainable being restructured, so the appraisal covereddevelopment programs. only the programs in Lebanon and the West

But the nontraditional methods of the Bank and Gaza. But the process of definingGroup Guaranteed Lending and Savings the appropriate role for Save the Children's

The spin-off programs-small loans, market based inter- headquarters in Westport, Connecticutprocess was long est rates, lending based on groups, a focus (United States) and mobilizing technicalprdo pless in w aslog on women, and complex management assistance took much longer than antici-

and complex in all needs-made it impossible to find a right pated, and work was delayed by a year. Thethree countries match with organizations in the region. In original partnership agreement included a

addition, the partnership model required time frame that had to be renegotiatedco-management by Save the Children and because of this delay-a delay that partlythe local partners. As first proven in occurred because Save the Children's bud-Lebanon, this duplicated model created get scheme included an indirect cost recov-confusion about accountability and respon- ery rate for overhead that CGAP foundsibility, and it increased operational costs. At unacceptable.one point this model almost led to the res- Once the delay was resolved, the grantignation of all local staff in Lebanon's micro- agreement was signed inJune 1997. CGAP'sfinance program. Recognizing these $250,000 investment financed microfinancedifficulties, Save the Children concluded advisers that were to go through all the tech-that local partnerships were not appropriate nical and managerial aspects of an institu-for managing Group Guaranteed Lending tional spin-off by tapping expertise on suchand Savings programs. Hence for a few years topics as governance, legal issues, informa-the programs were implemented without tion systems, branch and product develop-local partners and under the Save the ment, staff training, and business planning.Children umbrella. CGAP has considered the investment suc-

cessful because all three of the field micro-finance programs are now independentinstitutions (CGAP 1998). Still, the process

Two events initiated the spin-off discussions was long and complex in all three countries.and process. First, in December 1995 Save theChildren's Economic Opportunities Officehosted a 10-day business planning conference Froave thenChiDrenoptein Cairo for staff from Save the Children Jordanian Women's Developmentoffices working in or interested in beginningprograms such as Group Guaranteed In Jordan Save the Children began imple-Lending and Savings. The local partnership menting the Group Guaranteed Lending andframework Save the Children had originally Savings program as a pilot project in Junechosen was discussed, and as a result the idea 1994 in the Amman refugee camps ofto spin off came to the forefront. Several Mahatta and Natheef (box 4). Before this, ininternational microfinance experts-the April 1994, Save the Children held an exten-facilitators of this workshop-suggested this sive workshop in Amman to present the basiccourse of action as well. principles of the Group Guaranteed Lending

Then in mid-1996 the Consultative andSavingsprogramtothestaffintheregion.Group to Assist the Poorest, a multidonor This workshop marked a tuming point for

SAVE THE CHILDREN'S SPIN-OFF HISTORY. FROM PROGRAMS TO INDEPENDENT INSTITUTIONS 11

Box 4. Key dates for the JWDS

June 1994 Save the Children introduces a Group Guaranteed Lending and Savingsprogram inJordan

December 1995 Save the Children organizes a business planning workshop in Cairo. The ideato spin off, rather than partner with local organizations, is developed

1995-96 Unsuccessful attempts are made to partner with thejordanian Women's UnionDecember 1996 The JWDS is registered as an independent Jordanian NGO with an

independent board of directorsApril 1997 The JWDS assumes responsibility for implementing the cost side of the

program, including the transfer of staff contractsAugust 1998 The JWDS assumes full responsibility for the program, including The JWDS was the

management of the loan portfolio and transfer of the management pioneer in theinformation system spin-off process

January 1999 The JWDS completes the move to its own premises

Save the Children regionwide. Before the But it soon became clear that a partner-workshop all field offices were involved in ship would not work because the unionsmall enterprise development programs, but lacked administrative discipline due to thethey all gradually switched to Group social and charitable nature of its operations.Guaranteed Lending and Savings programs. In addition, senior and middle managers

The Jordan project incorporated a dual lacked commitment and capacity to carry outpurpose: to test the feasibility of the Group complex tasks under the Group GuaranteedGuaranteed Lending and Savings method- Lending and Savings program. No account-ology in Jordan and to provide poor ability could have been established in suchwomen with access to credit and savings circumstances. Save the Children and themechanisms. Based on early success and union held opposing views on such funda-using funds raised through the United mental issues as the need to recover costs andNations Children's Fund and other donors, the interest rates that clients were expectedSave the Children expanded its Group to pay. The failed partnership later provedGuaranteed Lending and Savings activities to be a blessing in disguise, as Save theto two new areas in March 1995-the Prince Children had more reasons to abandon theHassan (Nasser) refugee camp in Amman idea of partnering with the union.and the Mafraq governorate in ruralJordan. In 1996 Save the Children field managersThe project was successful, and the method- decided to spin off Group Guaranteedology appeared well suited to Jordan's cul- Lending and Savings operations and createture and economy. a new NGO. Two goals were defined: to cre-

As the programn began to grow beyond ate a sustainable local institution capable ofthe pilot stage, Save the Children began providing poor female microentrepreneursmodifying the program's goals and started with access to financial services, and toreevaluating the institutional framework empower women as income earners and deci-under which the credit program was to con- sionmakers in their families and communi-tinue in the long term in order to achieve ties. After completing lengthy preliminaryfull sustainability. Save the Children tried to work, theJWDS-the pioneer in the spin-offpartner with theJordanian Women's Union, process-was registered as an independenta similar local multisectoral organization. Jordanian NGO in December 1996.The union had targeted women in the pro- Effective 1 April 1997, theJWDS assumedvision of its services and had a large net- responsibility for implementing the spin-offwork-features that were in line with Save program through a subgrant from Save thethe Children's strategy and focus. Children. Since then the JWDS has

12 SPINNING OFF FOR SUSTAINABLE MICROFINANCE

increased its capacity to implement this large across the country. Lebanon saw its firstand complex program, while Save the Group Guaranteed Lending and SavingsChildren has provided funding, technical program in April 1994 as a response to theassistance, and institutional development postwar lack of liquidity and need for finan-support. On 1 August 1998, and consistent cial services to support the development ofwith overall program strategies, the JWDS the disadvantaged-particularly femaleassumed responsibility for directly manag- microentrepreneurs--in war-affected com-ing the loan portfolio and management munities (box 5). The introduction of theinformation system. By February 1999 the program was facilitated by funds from a pre-JWDS had nearly 5,000 active female bor- vious credit prograrn under the Smallrowers (table 2). By the end of March 1999 Enterprise Development initiative.operational sustainability was 66 percent and During the program's first phasefinancial sustainability, 55 percent. (June-December 19934) implementation

was undertaken primarily by Save theChildren. Efforts during this time focusedon developing a loan methodology and

Save the Children has been working in building implementation systems. LinksLebanon since 1953, implementing human- were established with Fransabank for mak-itarian emergency and development projects ing all cash transactions, processing loan dis-

Table 2. Basic data for the JWDS, Al Majmoua, and FATEN, February 1999

Indicator JWDS Al Majmoua FATEN

Number of disbursed loans 29,358 22,135 24,730

Amount of disbursed loans $4,505,582 $7,872,135 $6,958,510Number of active borrowers 4,465 3,138 4,068

Outstanding loan portfolio $529,127 $755,236 $704,143

Source:JWDS,AI Maimoua, and FATEN data.

Box 5. Key dates for Al Majmoua

April 1994 Save the Children launches the Group Guaranteed Lending and Savingsprogram

June-December 1994 Efforts focus on developing a loan methodology and building animplementation system

1995 Changes are made to the loan methodology and local partners areidentified to eventually hand the program over to

August 1995 Secour Populaire Libanais identified as a local pa:-tnerDecember 1995 Save the Children organizes a business planning workshop in Cairo. The

idea to spin off, rather than partner with local organizations, is developedJune 1996 Partnership with Secour Populaire Libanais terminatedSeptember 1996 In preparation for the spin-off, Save the Children's offices are split up

to physically separate the Group Guaranteed Lending and Savingsprogram from other Save the Children activities

September 1996- Preparations are made for the spin-offOctober 1997

January 1997 Application to create an independent NGO is subinitted to the Ministryof Interior

September 1997 Approval is granted and Al Majmoua is registered as an independent NGOJanuary 1998 Al Majmoua assumes full responsibility for the portfolio, expenses, and

program management of the Group Guaranteed Lending and Savingsprogram

SAVE THE CHILDREN'S SPIN-OFF HISTORY: FROM PROCRAMS TO INDEPENDENT INSTITUTIONS 13

bursements, accepting loan repayments, and not been fruitful and that Secour Populaireopening savings accounts for groups. Libanais would not be the best partner given

As program parameters were set and the two organizations'very different featuresexpansion was under way, Save the Children and capacity. A second external evaluation byfollowed its original plan to identify potential CGAP consultants in May 1996 furtherlocal partners to experiment with joint pro- endorsed the spin-off proposal.gram implementation. But during this second Essential for proceeding with the spin-off,phase (January-December 1995) it became however, were the motivation and commit-clear that most existing institutions did not ment of the staff of the Lebanon field office-share Save the Children's understanding and particularly the staff of the Group Guaranteed A strong feeling ofvision of the program. In August 1995 Secour Lending and Savings program-to develop- ownership amongPopulaire Libanais was selected as a potential ing a leading Lebanese microfinance insti- Al Maimoua's staffpartner. In addition, the U.S. Agency for tution that would implement the programInternational Development made funding nationwide. The key principles that guided was crucial foravailable for the Lebanon program. At that the staff were best practice principles of finan- its successfulpoint the program, working with Secour cial sustainability, service-oriented activities, transitionPopulaire Libanais, began to expand imple- and accountability to clients. In the words ofmentation in three areas: Akar, south Al Majmoua's executive director, "there wasLebanon, and Baalback-Hermel. The objec- a strong feeling of ownership of the programtive was for Secour Populaire Libanais to among the staff. This was crucial for our suc-become the main implementer of the Group cessful transition."Guaranteed Lending and Savings program, The final decision to terminate the 10-while Save the Children would provide fund- month partnership between Save theing and technical assistance. Children and Secour Populaire Libanais

But this partnership remained tenuous at came inJune 1996. This third phase of thebest. The co-management model that this process provided invaluable lessons aboutpartnership assumed was problematic from the ingredients needed for building localthe start, undermining accountability and capacity and establishing an adequate orga-responsibility and increasing operational nizational structure when creating an inde-costs. In addition, differences in capacity, pro- pendent microfinance institution.gram vision, and organizational culture The fourth phase of the spin-off processbetween Save the Children's Group (September 1996-October 1997) saw exten-Guaranteed Lending and Savings team and sive preparation for the creation of the newSecour Populaire Libanais further strained institution. To assess the administrativethis partnership-and, most important, the needs of a new institution devoted solely tosustainability of the program in Lebanon. microcredit, Save the Children's field

After the business planning workshop in offices were physically separated inCairo in December 1995, the idea to spin off September 1996. Over the next year the newprogram operations was discussed with the organization's institutional structure wasU.S. Agency for International Development. developed and refined, staffing and humanAt first USAID/Beirut rejected the idea, insist- resources were improved, and new systemsing on the partnership with Secour Populaire were created. The bylaws and statutes of AlLibanais. Following extensive negotiations, a Majmoua were defined to regulate its func-USAID consultant was dispatched to review tioning and to allocate powers and respon-the grant and to assess the structure and sibilities to the bodies created (generalcapacity of Secour Populaire Libanais as a assembly, board of directors, officers, andpartner in the Group Guaranteed Lending the finance, staff, operations, and strategicand Savings program. The consultant's planning committees). As with the programsreport concluded that the partnership had in Jordan and the West Bank and Gaza,

14 SPlNNINCO OFF FOR SUSTAINAIYE MICROFINANCU.

lending operations continued while all these initiated a pilot Group Guaranteed Lendingspin-off activities were under way. program to address the shortcomings of the

InJanuary 1997 Al Majmoua applied to the Small Enterprise Development program,Ministry of Interior to register as an inde- which did not adequately respond to the eco-pendent NGO dedicated to providing micro- nomic situation in the West Bank and Gazafinance services. This approval was granted in or achieve the desired outreach or financialSeptember 1997. During its fifth phase of sustainability. In August 1993 an internaldevelopment (November 1997-June 1998) Al assessment of the program suggested thatMajmoua took steps to increase its institu- smaller initial loan sizes would allow Save the

By moving to tional capacity through board training, Children to reach poorer Palestinians, thussmaller loans, promotion campaign, human resources more effectively serving those who tradi-

FATEN was better recruitment, training and development, tionally have no access to credit.FAbeTEN tasretteoor product testing and development of business Drawing on this finding, on experienceable to target poor plans for expansion and branch developmenL gained from internationial workshops and vis-

people On 1 January 1998 Al Majmoua assumed full its to group-based lendling and savings pro-

responsibility for the Group Guaranteed grams in other countries, and on Save theLending and Savings program's portfolio, Children's earlier experiences in Lebanon,operational costs, and management. By Jordan, and Egypt, the Palestinian credit staffFebruary 1999 Al Majmoua had 3,138 active reformulated the group-based lending andfemale borrowers (see table 2). At that time savings program in January 1995 (box 6).operational sustainability was 66 percent and The new program seemned to respond betterfinancial sustainability, 59 percent. to country circumstances, and Save the

Children felt that it enabled the agency to... to Palestine for Credit and better achieve its primary goals by targeting

Development (FATEN) female microentrepreneurs. Since January1995 agreements have been reached with sev-

Save the Children had run a credit program eral commercial banks in the West Bank andin the West Bank and Gaza since 1986, start- Gaza to service program needs.ing with the Small Enterprise Development Having failed to identify a suitable localprogram. In February 1993 Save the Children partner to co-manage the Group Guaranteed

Box 6. Key dates for FATEN

January 1995 Save the Children introduces a Group Guaranteed Lending and Savingsprogram in the West Bank and Gaza

December 1995 Save the Children organizes a business planning workshop in Cairo. The ideato spin off, rather than partner with local organizations, is developed

1996 Failed attempts are made to identify a suitable local partnerMay 1996 CGAP appraisalEarly 1997 Process initiated to select the board of directors of a new institution to be

createdNovember 1997 Fifteen people meet to found the new institutionJanuary 1998 bylaws are approved and FATEN is chosen as the official nameApril 1998 Founders meeting held in Larnaca, Cyprus; the first board of directors is

electedMay 1998 Board of directors and staff meet in Antalya, Turke, to discuss FATEN's

mission, goals, and guiding principlesJuly 1998 FATEN officially registered as a nonprofit joint stock company with an

independent board of directorsMarch 1999 FATEN assumes full responsibility for the operation ar,d management of its

loan portfolio, operational costs, and management information system

SAVF. THE CHILDR}.N'S SPIN-OFF HISTORY: FROM PROGRAMS TO INDEPENDENT INSTITUTIONS 15

Lending and Savings program-and having oping their target groups, and the strategieslearned from its experiences inJordan and for the evolution of their institutions. IssuesLebanon-Save the Children worked with have been raised about target markets,donors to create a new local institution financial products, operational structures,geared toward long-term implementation and institutional forms. Before proceeding toand sustainability. Existing program staff the next stage, all three institutions plan towere to make up the core of the staff of the work through these issues and develop real-new organization. Early 1997 saw increased istic strategic business plans that take intoefforts by Save the Children and program account their needs and those of their clients.staff to lobby some 100 prominent All threePalestinians for this initiative. The JWDS is working toward its institutions are

After this vetting process, about 15 peo- i l trying to refocusple in Gaza and 25 people in the West Bank the basic model forwere invited to a series of meetings where The vision of theJWDS is to harness the pro- m icr mode inthe methodology of the program, its vision, ductive capacity of every potential microen- microfinance inand its working principles were explained trepreneur in every sector of the economy, their countriesand discussed. The draft plan for spin-off was with a focus on people who lack access to for-presented and legal issues related to the mal financial markets. The Groupestablishment of the organization, the role Guaranteed Lending and Savings programand characteristics of board members, and has been successfully implemented in seventhe vision of the new organization were con- governorates in northern, central, andsidered. Because of the limited freedom of southern Jordan: Amman, Balqa, Irbid,movement between Gaza and the West Bank Mafraq, Rusaifeh, Karak, and Madaba. A pro-for Palestinians, these meetings had to be gram in one area, Zarqa, was closed in earlyheld in Cyprus and in Turkey. These limi- 1999 because of substantial fraud cases thattations continue and have made FATEN's are still pending in court. A thorough inves-institutional management more complex. tigation of the Zarqa area continues to assess

After considerable preliminary work, in the possibility of reopening it for new clients.July 1998 FATEN was registered as an inde- In line with its strategic plans, the JWDSpendent nonprofitjoint stock company ded- aims to achieve several objectives over the nexticated to providing microfinance services. few years. It plans to achieve and maintain aOn 1 March 1999 FATEN became fully strong portfolio with good client services. Itresponsible for managing the entire pro- plans to develop and test new individual loangram. At that time FATEN had more than products catered to client needs. In trying to4,000 active female borrowers (see table 2).

During this first month of complete insti- Hoda has been borrowing from the JWDS for twotutional independence FATEN's opera- and a half years and is now on her eighth loan, for

tional sustainability was 62 percent and its 350Jordanian dinars ($494). A friend told Hodafinancial sustainability, 52 percent. about the program; currently she is in a seven-

member group. Hoda produces facial creams athome. She has her own secret formula and uses nat-

Where are the institutions today? ural ingredients. The creams are of high quality andhave been selling well. Hoda makes 0.5 dinars of

Although the JWDS, Al Majmoua, and pure profit per smalljar of cream and usually sells

FATEN are at different stages of develop- 50-70 jars a month. Recently she has been plan-

ment, all three are trying to refocus the basic ning to patent herformula and has approached themodel for microfinance in their countries. To Ministry of Commerce. Although a patent will be

that end, they have each succeeded in reach- expensive, it will be essential ifHoda is to considermass production. Butfor this she will need a small

ing out to poor women and are now focusing workshop and more ingredients.

on their operations, their vision for devel-

16 SPINN[NG OFF FOR SUSTAINABLE MICROFINANCE

widen its client base, theJWDS plans to repli- Turfah owns a store that sells sweets andjuices incate best practice branch models. Finally, it Ain-ElHelweh Camp, located in Saida (Sidon) in

plans to strengthen staff capacity to operate southern Lebanon. One of the first clients of Al

an efficient institution so that it can use its Majmoua, Turfah has been borrowingforfour andcapacity to become eligible for donor funds. a halfyears and is on her twelfth loan, for $900. HerTo become more efficient, theJWDS must- store is profitable and has grown significantly sinceamong other things-develop financial prod- she became an Al Majmows client. Turfah recentlyamongve t lglsucue sss h used the prceeds of a loan to purchase a juice standucts, review its legal structure, assess the for better marketingopportunities. Part of her btsi-viability of strategic alliances with formal bank- ness is seasonal. For example, during the Feast, fol-

Al Majmoua's ing institutions, and broaden its capital base lowing the holy month of Ramadan, her businessmission and (possibly to include commercial funds). prospered because of high demandfor specalty szweets.

mission and Turfah hopes to soon purchase a new machine soindependence have that she can increase output when demand is high.

allowed it to Al Majmoua has a strong reputation Her monthly revenue averages nearly $1,100. Eachmonth she uses $800-$900 to purchase supples anddevelop a strong The next three years will be expansive ones pays $65 in rent. Thus her retained monthly earn-

identity that has for Al Majmoua. With its solid and promising ings come to $100-$200 o month.

affected staff, target past as a pilot project with Save the Childrenclients, and the and then as an independent institution, Al clients by 2000, 10,900 by 2001, and nearlygeneral public Majmoua is ready to grow to a national scale 18,000 by 2002. If successful, this ambitious

and achieve financial sustainability. It plans growth plan will make Al Majmoua the lead-to rely on its well-trained staff, strong insti- ing player in Lebanese microfinance.tutional image, and exceptional track record Current funding wi]l ensure that opera-to expand the delivery of group-guaranteed tions remain on track over the next twoloan and credit services, develop new finan- years, after which Al Majmoua will need tocial products, and establish an extensive secure new grants or begin to access privatebranch network. Its defined mission and inde- funding, with the eventual possible aim ofpendent status have allowed Al Majmoua to seeking a strategic partner such as a bank-develop a strong identity that has affected ing institution. Any concrete discussion ofstaff, target clients, and the general public. such a strategic alliance would be premature

Al Majmoua's greatest strengths include its at this point, however. Given Lebanon's busyclient base and the experience it has gained banking sector, Al Majmoua should expectsince 1996. Current clients represent an to face further competition as commercialexceptional database of microentrepre- banks begin to engage in microfinance.neurial information in Lebanon. The large Again, Al Majmoua can rely on thenumber of loans issued in recent years, cou- lessons it has learned about reaching poorpled with the high rate of repayment, have clients in Lebanon. This is a clear advantagegiven Al Majmoua a strong reputation for reli- for Al Majmoua over its more formal bank-ability. Thus client satisfaction will be key to ing counterparts, but one that must not beensuring Al Majmoua's growth-particularly relied on too heavily. Al Majmoua plans togiven the increasing competition from other remain focused on senring women and willNGOs and banks. continue to deliver microloans tailored to

New products need to be developed to conditions in Lebanon.meet client needs. The first new product-larger loans to repeat clients-has already

been developed and will be followed by other uAqe strengthsinnovative products. Al Majmoua is expectedto achieve operational sustainability in 2000 Having only recently overcome some fraudand financial sustainability in 2001. Al that coincidedwith the spin-off preparations-Majmoua projects that it will have 5,800 while its microfinance program was still

SAVE THE CHILDREN'S SPIN-OFF HISTORY: FROM PROGRAMS TO INDEPENDENT INSTITUTIONS 17

under the Save the Children umbrella-FATEN is drafting a three-year business plan Alia, who lives in Hebron, borrowedfromFATEN

for the first time when her primary business wasthat will more clearly outline its development trading clothing. She is now on her ffth loan, for

goals and strategic directions. Senior managers 500 Jordanian dinars ($705). She buys cheaper

are working dosely with board members in this clothes in Amman, Jordan, and resells them, earn-exercise to develop ajoint plan that reflects the ing a small profit. Her revenue averages 2, 000 newv

full ownership of the institution. Israeli sheqels ($590) a month, while retained earn-.ATEN's missio is to strengthen theeco ings come to 500-600 sheqels ($150-$180) a

ATN's misionisosregthntee month. Alia s monthly expenses total about 300 she-nomic base of Palestinian microentrepre- qels ($90), which covers the cost of employees who

neurs and to provide high-quality and purchase the supplies, rentfor the shop, and so on. Of the threesustainable financial services to them- Sofar herprofits have been used to expand her busi- Sin-ff FATENparticularly to female borrowers in the West ness and to reinvest in her household. In addition, pn-O FTBank and Gaza. By charging a market-based she has been able to diversify her business and is now faces the most

selling spices and nuts. Besides business reasons, complexitiesinterest rate, the program is expected to Alia mentioned that if she did not invest her prof-achieve financial self-sufficiency by the its, her husband might use them to manry a second

end of 2000. FATEN provides financial ser- wife.

vices to women in Khan Yunis, Gaza City,Rafah, and Jabaliya in Gaza and in Jenin, increased the loan amount and term, andHebron, Nablus, and Tulkarem in the West cancelled mandatory savings. Additional cri-Bank. By the end of 2000 the program is teria, such as the size and capacity of a bor-expected to cover most major urban areas rower's business, are considered a stepin the West Bank and Gaza. The program is toward individual lending.funded by the U.S. Agency for Inter- Of the three spun-offs, FATEN faces thenational Development, the U.K Department most complexities. In effect, FATEN mustfor International Development, and Irish run three programs and offices (in Gaza,Aid. Hebron, and North) and all that comes with

One of FATEN's greatest strengths-one them. Yet in many ways FATEN has thethat was supported while it was under Save potential to become the most successfulthe Children's umbrella-is its ability to institution given its dedication, marketadapt and to learn from clients. For exam- potential, and drive for independence. Inple, for clients starting the fourth loan cycle, the end the complexities it deals with mayFATEN has cut the group size to five, facilitate its sustainability and growth.

Building blocks for spinning off

A strong sense of he three spin-offs (the JWDS, Al employee incentive plans, staff training, andinstitutional Majmoua, and FATEN) widely administrative systems and internal controls.

independence A accept that from the outset their Such changes ultimately point to theand program existence has largely been due to the finan- desire of each of the programs and their

self-sustainability cial and institutional support of Save the staffs to become independent and self-sus-drove each of the Children. But Save the Children-having tainable businesses following separate oper-

failed to identify suitable long-term partners ational and management models. As partsto implement the Group Guaranteed of larger organizations, the programs wouldLending and Savings programs in Jordan, not necessarily have been able to achieve thisLebanon, and the West Bank and Gaza-has technical and strategic independence.viewed the creation of independent micro- Several steps are involved in the spin-offfinance institutions as essential to ensuring toward institutional independence: choos-sustainable access to credit for female ing a legal form, deciding on institutionalmicroentrepreneurs. A strong sense of governance, determining the status of staffinstitutional independence and program in the process, and transferring manage-self-sustainability drove each of the spin-offs. ment information and accounting systems.

Each institution acknowledges theimmense contribution of Save the Childrento its programs as well as to the development g gof the microfinance industry in the Middle Regulatory and legal issues are key to con-East and North Africa. At the same time, the sider when building a new institutionsupport that nurtured these programs in because they can have a profound impact ontheir early stages was not sufficient for their institutions' ability to achieve their statedrapidly growing operational, management, objectives. As noted, in the Middle Eastand market needs. This shortcoming may microfinance programs are often lodged inhave been largely due to the fact that as larger parent organizations that providethese programs developed, their needs were social or charitable services. These organi-not simply increasing but changing. zations are often registered as NGOs or as

Some of these needs followed from a voluntary or charitable associations. Thoughdesire to focus solely on microfinance, pos- these legal forms may be appropriate in thesibly improving on the group guaranteed early stages of a microfinance program, theylending and savings methodology-for will likely block a prograam's development asexample, by changing its target audience a financial intermediary. To decrease itsand group sizes. As one manager noted, the dependence on donors, achieve growth, andold group approach was "100 percent become fully sustainable, a microfinancerigidity and 0 percent analysis. Becoming an program has to gain access to commercialinstitution gave us room to analyze and sources of funds-that is, by borrowing fromthink." Reforms were considered for banks for onlending cr taking deposits.

18

BUILDING BLOCKS FOR SPINNING OFF 19

The legal structure of the parent organi- profit company, an option available underzation can impede a microfinance program's the British commerce law still used in Gaza.move toward sustainability. NGOs and char- Moreover, the founders believed that thisitable associations do not have identifiable approach would make it easier to become aowners who can be held personally or insti- for-profit or a bank.tutionally liable (even to a limited extent) for Besides the perception that there was noachieving the organization's statutory objec- alternative cost-effective structure, it is possi-tives. As a result these types of organizations ble that the ease of operation-as NGOs inoften have no proper governance structure Jordan and Lebanon, and as a corporation inand lack accountability and transparency. the West Bank and Gaza-contributed to each An NGOThus commercial providers of funds institution's choice of legal form. That is, each microfinance(whether of loans or equity) are unwilling to arrangement involved the least potential polit- provider eventuallyinvest in such entities. ical and bureaucratic resistance or subsequent has to change its

Thus an NGO microfinance provider even- interference. But while these forms may have hal formtually has to change its legal form to ensure been the right choice in the short term, they legal forman appropriate ownership structure and appear to contradict the organizations'related accountability. In other parts of the stated reason for spinning off: to build sus-world the new legal forms have included non- tainable and independent institutions.profit company, for-profit company, financial Although the JWDS and Al Majmouaintermediary, and even deposit-taking bank appear to find the NGO form to be an(licensed by banking authorities). Some acceptable institutional structure, somecountries, for example, have created a special troubling issues are starting to emerge. Onelegal form for microfinance intermediaries. hinges on each institution's capacity to

Legal and regulatory factors played an legally enforce repayment of its loans. Forimportant role in the choices made by Save example, because there is little experiencethe Children's spin-offs. The JWDS and Al in the region with nonprofits engaging solelyMajmoua registered as NGOs because both in the delivery of financial products, therebelieved that they had no other feasible or is a want of relatedjurisprudence in courts.cost-effective legal option (table 3). But Thus it is difficult to predict how ajudge willFATEN-after extensive discussions based on react to a nonprofit organization suing apresentations made by lawyers, auditors, and client who the judge perceives to be poorrepresentatives of the Palestinian Monetary when the organization is claiming to beAuthority-decided not to register as an doing social good. Another issue that mayNGO. FATEN's founders investigated several crop up is ownership of each institution'slegal options, including registering as an assets. For example, Al Majmoua's assets areNGO, but bureaucratic complications with projected to rise to nearly $8 million overthe Ministry of Interior barred them from the next few years. Defining who owns thesedoing so. Because the fledgling institution's assets will become important.resources were too limited to register as a On the other hand, while the legal struc-financial company, it chose to become a non- ture of FATEN-as a nonprofit-ensures

Table 3. Comparative institutional indicators for the JWDS,AI Majmoua, and FATEN

Indicator JWDS Al Majmoua FATEN

Month and year of registration December 1996 September 1997 July 1998Legal structure NGO NGO CorporationNumber of board members 7 6 9Save the Children represented on the board? Yes No No

Source:JWDS,AI Majmoua, and FATEN data.

20 SPINNING OFF FOR SUSTAINABILE; MICROFINANCE

accountability and transparency, the insti- This distinction has been clearly under-tution's lack of a profit objective may stood in the spinning off of the JWDS, Alundermine future capitalization and growth. Majmoua, and FATEN. Founders and boardSimilarly, the JWDS and Al Majmoua will members sought to separate daily manage-have to change their legal form if they want ment of each institution from a separateto reduce donor dependence, enhance sus- body with a strong sense of ownership-atainable growth, and access commercial body that will help oversee and guide thefunds to finance that growth. Hence the sus- vision and strategy of the institution. Thetainability objective and related integrated spin-offs into the JWDS, Al Majmoua, and

In the corporate business orientation may be more buzzwords FATEN also resulted in a unique situation:context the than actual practices reflected and inte- Save the Children program staff and man-crimaryreasont the grated in the institutional structure and own- agement in all three countries were actively

primary reason for ership of the three microfinance institutions. involved in identifying individuals to serve

institutional The managers and boards of theJWDS, on the boards of the institutions being cre-governance is to Al Majmoua, and FATEN recognize- ated. Those who negotiated and explained

separate ownership though to varying degrees-the potential the program and tried to convince currentand control limitations of their current organizational board members to take on thejob are now

forms. But they also point out that their cur- serving and reporting to their boards. As onerent structures may simply be stepping of the institution's managers put it, "the staffstones as the institutions evolve. As they brought in their supervisors."

grow, some of these managers hope to make This peculiar feature of all three spin-offs

the institutions true financial intermediaries, is reflected in the actual selection of thereaching the point where they turn a board members. This process was driven byprofit, capitalize their assets, and, in the dis- a desire to identify individuals who weretant future, even transform into a bank. committed to microfinance and who shared

the vision and principles developed by the

staff and management of these programs.Deciding on institutional Attention was also paid to including mem-governance bers with diverse backgrounds-from social

In deciding on institutional governance, two work to banking, academia to industr,y-andmain questions must be answered. How will not necessarily a lot of board experience.the board of directors be selected? And what The institutions have found that suchrole and responsibilities will the board have? diversity brings tremendous benefits because

each board member contributes different

How to select the board of directors? expertise to the work of the board.

In the corporate context, institutional gov- Sameera has taken two loarsfromFATEN She and

ernance deals with mechanisms through her husband are supporting a large family, with

which an institution's stakeholders exercise seven daughters andfour sons, and she is expect-

control over management to protect their ing. They all live in Hebron. Sameera used the pn

interests. Stakeholders can include credi- ceeds from her first loan of 150 Jordanian dinars($212) to buy herfirst sheep. The second loan of 200tors, donors, and other claimants who sup- Jordanian dinars ($282) s.as used to buy another

ply capital as well as employees, clients, and sheep and more food for her animals. In addition

other suppliers. The managers, the entre- to breeding sheepfor theiryoung, she is raisingthem

preneur, and other insiders control the for milk, cheese, and butter--products that are con-

institution's key decisions. Thus the pri- verted into an average of 150 Jordanian dinars

mary reason for institutional governance, ($212) of pure profit each month. Repayments formary the corporate context, is to separ-ateown- her loans come from the sale of cheese and milk.i the corporate context, iS to separate own- Young sheep are assets that are being accumulated.

ership and control._________ _________


FATEN had the most open, thorough, and members. The JWDS's founding board hadtransparent process for selecting board seven members, of which two were repre-members. In 1997, the year prior to the spin- sentatives of Save the Children. That theseoff of FATEN, staff of the Group Guaranteed two members accounted for nearly 30 per-Lending and Savings program, supported by cent of the board had other implications forupper management, met with about 100 the JWDS as an independent institution.Palestinians-including bankers, business- This was aptly demonstrated when the pro-men, members of the Palestinian Authority, gram experienced a serious case of fraudand other interested individuals in the West and the board assumed full control of theBank and Gaza-to explain the program. institution-including its daily manage- Any institution'sThe intention was to create a broad base of ment-after the executive manager resigned stakeholders mayinterest and support for the program and to in the midst of crisis. include clients,select candidates for the board from among Al Majmoua's board contains no repre- donors, su lers,individuals who expressed interest and were sentatives from Save the Children. Instead adon rs,enthusiastic about the program's vision. the board is made up of six individuals and others

Technically, there are no representatives selected to be the founding members of Alfrom Save the Children on the board, Majmoua. Board members have diversebecause the board members believed that backgrounds, ranging from an academicthat organization's presence could cause con- working in development to bankers andflicts of interest and undermine the institu- even an industrial engineer. The board rep-tion's independence. But although it does not resents the general assembly, and plans aredirectly participate in regular decisionmak- in place to introduce new members to theing, Save the Children holds a 26 percent general assembly. Al Majmoua's board hasequity stake through a Save the Children staff become an important strength for the insti-person. Thus it effectively has a voice or veto tution, especially given its intentionally non-in case of any changes to FATEN's bylaws. religious and nonpolitical affiliation.

TheJWDS and Al Majmoua, on the other

hand, took a more individualized approach. What role and responsibilities should theBoth programs asked prominent individu- board have?als whom they knew and whom they couldtrust. Especially inJordan, Save the Children As noted, any institution's stakeholders mayplayed an active role in recruiting board include clients, donors, suppliers, and oth-

ers. The board of directors should beAmna liesintealuaaaotsdAma accountable to all these groups, because to

An ies ,the Pal qa Area otsidean, some extent these groups have some formin one of the Palestinman camps. Amna does sewmng o wesi nteisiuin(o ) hand tailoring and owns a workshop and store in of ownership in the instituton (box 7). Thethe neighborhood. When we visited her, several concept of ownership prevents this legiti-clients were in the store picking up old orders and mate special group of stakeholders frommaking new ones. Amna recently learned about the being lost in the general array of stake-JWDS and has received two loans. She used both to holders. Moral rather than legal ownershipincrease her working capital, buying an additional could be the basis on which a board ulti-stitching machine, some sewing tools, and tailor-ing scissors. Amna employs a youngfriend of hers, mately determines its accountability. In casesAlia, and the two of them can hardly meet the where the government requires nonprofitsdemand for their work. They would need to go a to have legal ownership, the board mustmonth without takng new orders to finish the back- determine whether the moral ownership islog of orders. On average, Amna makes about 300 a larger concept far beyond the bounds ofJordanzan dinars ($423) inprofit each month She the formal membership.hopes to take another loan, get another sewing the importantaspectspomachine, and employ one more person. Similarly, one of the important aspects of

the spin-off process was to instill a sense of

22 SPINNLNG OFF FOR SUSTAINABI.E MIGROFINANCE

Box 7. Roles and responsibilities of boards of directors in the corporate context

The essence of any institution lies in what it dom. The board needs control because it isbelieves, what it stands for, and what and how accountable for all organizational activity,it values. The telling assessment of an institu- however obscure or far removed. But the boardtion's beliefs are its works, not its words. These needs to be free from operational mattersvalues and perspectives might form the basis for because it is merely a part-time body. Somethe more mechanical and visible aspects of an boards might relinquish control to be free frominstitution. Prudential governance might begin details or to grant the executive director free-by recognizing this central determining feature dom from board intrusion; such boards mightof any institution. Setting goals, deploying staff, be guilty of "rubber stamping." Other boards

The role of the writing procedures, formulating plans, devel- forgo freedom to control many details; such

board is being oping strategy, and other board activities boards might be guilty of meddling. Thus the

intensely discussed depend on core values and perspectives that are challenge for boards is to be reasonably certainbest blended in the concept of policy. that nothing goes wrong and to grant as much

and is evolving as Thus policymaking might be proactive, con- latitude as possible to people with the skill and

the three cerning the broadest issues, rather than reac- talent for the work to be done. Boards need to

institutions develop tive to all issues. Board policies might become oversee staff operations without obscuring rolecrucial to all executive action. Brevity and clar- differences and without taking staff membersity are essential qualities of any policy, so that off the hook for their decisions.updating becomes far easier and makes policies Also essential is for boards to maintain anmore of a reference than a tome. Most reso- arm's-length distance from prescribing stafflutions in board meetings might be motions to means. It is as damaging to have a board thatamend policy structures so that policy devel- constrains an institution too much as one thatopment is not an occasional chore for the does not at all. For institutions to gain the mostboard but its main occupation. Though the from their relationship with the board, thereboard may charge its officers or committees must be a balanced relationship between thewith parts of these tasks, the ultimate respon- two. The board should not impose technicalsibility lies with the entire board. policies without considering the recommen-

As important as it is for the board to control dations of operational staff who know morethe complexity and details of staff operations, about clients, but it should hold sufficient lever-it also needs to have a certain degree of free- age to assert its authority.

Source: Mueller 1981; Chait and Taylor 1989.

ownership in the board of directors, as well 'was mainly due to problems with fraud and

as a sense of responsibility for institutional management, after which theJWDS's board

quality and operations. In this regard the had to step in to rescue the program. From

role of the board is being intensely discussed the outset Al Majmoua chose an approach

and is evolving as the three institutions that board members refer to as an "advisorydevelop. While the boards have not been role." The board is responsible for over-expected to take over management respon- seeing and strategically directing the insti-sibility, they have committed their reputa- tution and supervises the work of thetions and, in the case of FATEN, accepted executive director. The board reports to thelegal liabilities for these institutions. But this general assembly, but under the law on non-does not necessarily reflect equally on the profits in Lebanon, the general assembly'sdefinition or level of involvement of the only power over the board is to dissolve itboards of each institution. and call for elections.

Although the board of FATEN is the only Once the board's role has been clarified,one that is in theory legally liable, it also its responsibilities are often partitioned into

appears to be most "hands off." By contrast, committees. The existence of committees

the board of the JWDS, which as an NGO shotuld in no way disturb the wholeness andwas not at all legally liable, maintained active authority of the board or the "single voice"involvement until recently. This active role of governance. Board committees should


exist to help complete the board'sjob, not This was especially the case in Althe staff'sjob. This division of labor on the Majmoua. Its employees had always felt thatboards of the JWDS, Al Majmoua, and their future in a program-based setting wasFATEN has occurred in some cases on a tem- finite and that, to build a career, they wouldporary basis and in other cases on a per- need to be in their own institution.manent bases, as each of the program's Nonetheless, as former employees of theboards resorted to subcommittees to deal program under Save the Children, they werewith aspects of their work. guaranteed the same benefits as before by

Still, the decision to establish committees all the new institutions.does not always reflect an ideal structure, nor In the JWDS almost all employees were The institutionsis there any "right" number of committees transferred at the time of the transition, often foundthat a board must have tojustify its existence. while many more were hired after the tran- themselvesIn exceptional cases, such as FATEN, this divi- sition. Many questions and concerns were themsldsion of responsibilities within the board raised about the quality and quantity of changing the oldhelped overcome practical problems, such remuneration for these new employees rel- corporate cultureas the "movement" problems between the ative to those who had moved over from rather than buildingWest Bank and Gaza. In it efforts to over- Save the Children. In some cases the new a new onecome these issues, the board of FATEN even institutions tried to go out of their way totried to organize itself so that each com- maintain continuity in benefits by retainingmittee has members from just one region. similar working standards. For example,

A certain mix of people and expertise althoughJordanian organizations generallymay concentrate the board's work better in work six days a week, theJWDS retained thesubgroups. For example, FATEN's com- five-day working week it had under Save themittee in Gaza reviewed the personnel man- Children. In other cases the new institutionsual, while the committee in the West Bank provided more benefits. For example,(with members from the banking sector) FATEN issued employment contracts forreviewed the financial manual. But these loan officers that had not officially existedsubdivisions were not permanent features of under Save the Children.the FATEN board, as it strives to conduct its Senior managers tried to retain one ofbusiness as a unit-despite the distance their greatest assets-their institutions'between members. employees-while changing their strategic

outlook. As a result the institutions often

Determining the status of staff in found themselves changing the old corpo-rate culture rather than building a new one.the spin-off process All the institutions recognized that this

An important component of the spin-off approach was much more difficult. Theyprocess involves the transfer of program staff were no longer part of a larger framework,to new institutions. All staff working in Save as under Save the Children, but rather werethe Children's microfinance programs prior now in their own institutions. As oneto the spin-offs were allowed to choose senior manager said, staff "needed to be inwhether to join the new institutions. Many an institutional rather than a program-basedof these employees had originally been framework. That required a change in think-attracted to Save the Children because of the ing." Some senior managers felt that theprestige and other benefits that come with Group Guaranteed Lending and Savingsworking for a reputable international orga- methodology did not lend itself to buildingnization. But some employees admitted that such an institutional structure and may havethey had joined Save the Children's micro- impeded this change in approach. The con-finance programs knowing that they would sequences of this change are vast and cru-eventually spin off into their own institution. cial to the sustainability of all these


institutions, because staff at all levels culties when the JWDS has to report to theneeded to assume more responsibility for govemment. Similarly, until August 1998their actions and not (as before) rely on Save expenses were treated using cash-basedthe Children's infrastructure. accounting. Today, howexer, the institution

One important staffing issue noted by has switched almost 90 percent to accrual-some of these institutions is the difficulty of based accounting. Still, when using grantsrecruiting experienced and well-trained local from the U.S. Agency for Internationalstaff to work on microfinance. In effect the Development, the JWDS has to report on ainstitutions-although local organizations- cash basis in order to receive reimbursements.

All three programs essentially have to maintain the salary and ben- Multiple cost (profit) centers are anothergradually efit structures of intemational NGOs to ensure innovation introduced by the JWDS. This

only grasumed their competitiveness in thejob market and setup makes it easy to verify the efficiency ofassumed attract the best staff. This challenge affects the each center that theJWDS operates. Under

responsibility for capacity of the three microfinance institutions Save the Children there was just one costoperational and to build strong middle management struc- center. In considering more decentralized

portfolio tures, which in some cases were found to be operations for the future, theJWDS is think-management weak or nonexistent. ing of turning branch offices into separate

cost centers as well, responsible for profits,revenues, and costs. This reform may rep-Transferring management resent a new incentive scheme and intro-

information and accounting systems duce competitiveness among branch

During the transition to institutional inde- managers. For this proposal to be imple-pendence, all three programs only gradually mented, however, branch managers wouldassumed responsibility for operational and need relevant training.portfolio management. For example, in FATEN has implemented a similar struc-April 1997 theJWDS took over operational ture, initially with regions and, as of Marchcost accounts. Until the end ofJuly 1998 the 1999, with branches considered as cost cen-JWDS technically recorded all costs incurred ters. At the end of each month, realonly to its accounts. Yet although the income statements are produced for eachJWDS was responsible for implementing the branch, region, and the entire organization.program, all the revenue was booked in Save These statements are used to calculate costthe Children's account. In August 1998 the recovery levels. In FATEN the establishedJWDS took over portfolio management, a benchmarks form the basis for an incentivemove that coincided with the transfer of the scheme for branch managers. Everytime theoriginal Group Guaranteed Lending and institution reaches a benchmark with anSavings finance manager to the JWDS. In average portfolio at risk below 2 percent,hindsight this seems to be a long transfer, managers move to another level on thebut the management of Save the Children salary scale. In addition, FATEN has beenbelieved that it was too risky to transfer both using an entirely accrual-based accountingoperational and portfolio management system since March 1999.functions right away. FATEN has also had to deal with trans-

After the transfer some of the features of ferring the management information systemthe accounting system used by Save the and with recruiting issues. At first FATENChildren, as an international NGO, were and Save the Children had worked togethertransferred to the JWDS. But these features to train a finance manager-who then unex-were not appropriate for the JWDS's micro- pectedly left. At a personnel level, replacingfinance business orientation. For example, that manager has entailed not only identi-Save the Children's fiscal year differs from fying and hiring a qualified candidate, butJordan's-a difference that can create diffi- also waiting until the new manager is famil-


iar with FATEN's systems. At a technical point is the absence of a suitable manage-level, FATEN has recognized the need to ment information system. With funding sup-change even its most basic information port from Save the Children, Al Majmoua isrequirements. FATEN rightfully decided to developing a management informationoffer employees official contracts, but this system tailored to the possible expansion ofsmall task requires much information. the institution and designed to provideMoreover, without an official list of employ- more thorough management information.ees, the payroll cannot be sorted and run All of these changes and innovationssmoothly. Thus the finance manager posi- bring out the many complexities of thetion requires skills ranging from managing financial management of a separate insti-accounting information to identifying inef- tution. But there are many benefits as well:ficiencies in the system. FATEN finally found information is more transparent and enablesa new finance manager-one who hap- management to make prompt and timelypened to be a former senior accountant with decisions because the management infor-Save the Children and was familiar with mation system is more streamlined, andFATEN's work-and he assumed his duties costs and profit sources are more transpar-in May 1999. ent. Thinking in a business-like setting has

Al Majmoua managed to hire a finance encouraged further innovation in this fieldmanager from the time all cost and profit as well, as demonstrated by the JWDS andaccounts were transferred. This process has others as they strive to find the best possiblegone smoothly, but Al Majmoua's weakest system to address their growing needs.

Benefits and risks of spinning off

Spin-offs provide 1he spin-off of Save the Children's parent institution and the spun-off firm

managerial and microfinance programs into the would each have specialized managementmarketing benefits JVWDS, Al Majmoua, and FATEN reporting to a separate board of directors,to both the parent brought to light many of the benefits inher- there would be a better framework for man-

entity and the ent in such program restructuring and sim- agement decisions on the use of capital andspun-off entity ilar to those typically found in a corporate human resources and the operation of the

context. These include external market fac- separate businesses.tors, marketing considerations, and the On the marketing front, such spin-offsfuture legal, financial, and programmatic may allay fears by clients, donors, and oth-developments of the programs, especially as ers that these institutions were committedthey relate to the programs' prospects for to and would not end participation in theirgrowth and sustainability. Added to this were industry. Spin-offs motivated by marketingnumerous intangible factors and positive considerations would be designed to sepa-externalities brought about by the spin-off rate potentially incompatible product linesprocess, such as the building of local to avoid institutional schizophrenia-ascapacity or the regional microfinance when, for example, the same organizationindustry. But there were caveats to these ben- deals with social services and microcreditefits as well-although all three institutions programs, requiring the same employees toare optimistic about their futures as inde- serve as social workers as well as loan officers.pendent entities and seem determined to These roles do not always complement eachface any challenges they may encounter. other.

All three microfinarice institutions,

Institutional and whether under Save the Children or as newlymarketing benefits spun-off institutions, have at some point had

to deal with such institutional image andA review of evidence in the corporate con- marketing issues. FATEN cites an interestingtext supports the claim that spin-offs provide example of a loan officer (promoter) whomanagerial and marketing benefits to both defrauded the organization. The Groupthe parent entity and the spun-off entity. Guaranteed Lending and Savings programUsually, each of these bodies might have staff handling the issue managed to persuadeoperated in different lines of business and the loan officer and her family to mortgagedifferent environments, each with its unique their house in the name of the program. Butmanagerial and operational problems. By Save the Children's field office managersseparating these businesses through a spin- were opposed to using the house as collateraloff, management might often suspect that or selling it to collect the stolen fundseach entitywould fare better because of bet- because of concerns about the effect suchter managerial decisionmaking and more moves could have on Save the Children's rep-efficient managerial incentives. Because the utation in the field. FATEN cites this incident

26

BENEFITS AND RISKS OF SPINNINC OFF 27

as a clear divide between Save the Children's another example of organizational regula-missions and goals on the one hand, and the tions impeding innovation, FATEN's man-microfinance program within the same agement cites the issue of buying rather thanorganization on the other. Microfinance insti- renting office space, or of extending loanstutions must develop and maintain their rep- to its staff to buy vehicles rather than borrowutations as running lending programs them from Save the Children.whose sustained operations-and conse- Similarly, the JWDS's recent plans forquent benefits to other clients-depend on gradual decentralization provide anothercollecting repayments. example where spinning off has allowed

The JWIDS has had to deal with getting more options to be considered in opera- Spinning offsimilar points across to its clients. As the three tional management. As it decentralizes, the provides a clearerspun-off microfinance institutions take firm JWDS would consider offices or branches to basis for investorspositions in their societies, however, such be semiautonomous units. Standard guide- and donors inimage problems are starting to disappear. lines would be developed for loan process- identifying andMoreover, the reputations of all three as lending and approval, authority to make enting theing institutions whose existence and future approvals would be delegated to branch evaluating theprovision of loans depends on repayment offices, and a timely centralized information business of eachseem to have taken firm root among their system would be maintained to keep track institutionemployees, clients, and partners. of individual branches.

Another potential benefit of separating

Operational, financial, and risk from the parent organization is that it pro-management benefits vides a clearer basis for investors and

donors in identifying and evaluating theOperational and financial transparency is business of each institution-an advantageanother major benefit of spinning off. That when additional financing is needed. Bythe operational and financial progress of the increasing market visibility for the spun-offseparate businesses tends to be more visible entity's growing business, new donors andmight inspire executives to build on growth eventually private investors might be per-and foster improvement. There would be a suaded to donate to or invest in the entity.clearer basis for evaluations and so a more Similarly, the parent institution might ben-accurate appraisal of employee perfor- efit after the spin-off if management is ablemance, clients (actual and potential), and to concentrate more of its resources ondonors as well as providers of commercial removing inefficiencies and focusing onfunds. other operations.

These benefits have been evident in the Similar logic about the potential benefitsspin-offs of the JWDS, Al Majmoua, and of spinning off was noted in the discussionsFATEN. When the programs were part of with the three microfinance institutions. ForSave the Children, their financial statements example, beside some small grants fromwere tied to its accounting and financial sys- other donors, much of the funding for thetem and did not precisely allocate costs or JWDS and Al Majmoua comes from the U.S.profits to each line of business. In that con- Agency for International Development-atext it was almost impossible to accurately result of the institutions' direct relationshipsdelineate program assets and liabilities. with Save the Children, a U.S. NGO. Even

FATEN, for example, has introduced sep- in the West Bank and Gaza, where an addi-arate incentives for branch managers-a tional donor was the U.K. Department formove that it does not believe it could have International Development, FATEN wouldmade earlier because the organizational and not have obtained those funds if there werefinancial structure of Save the Children no partnership between Save thecould not have handled two salary scales. As Children/U.S. and Save the Children/U.K

28 SPINNING OFF FOR SUSTAINABLK MICROFINANCE

Some of the microfinance institutions felt systems, and knowledge and experience inthat under Save the Children it was difficult negotiating and administering fundingto leverage funds from the wide range of that in the past helped secure large grants.donors interested in microfinance and in If Save the Children decides to move out offunding local organizations. A direct bene- microfinance operations in the Middle East,fit of spinning off, according to these insti- rather than recommit at a higher level, alltutions, was that as independent entities they three institutions recognize that they maycould lobby a diverse community of donors. have to learn to function without its assets.Such efforts may help the institutions not

All three only expand their portfolios but alsoincrease their institutional autonomy with

institutions the potential reduction of dependence on Having moved from managing programs torecognize that they a single donor. managing institutions, all three spun-offmay have to learn In many spin-offs the parent organization institutions have tried to rnodify their orig-

to function without and the spun-off entity have engaged in very inal Group Guarantee(d Lending and

Save the Children's different lines of business, with each having Savings programs. The rigidity embodied bytangible and separate and distinct operating, financial, the original programs posed methodologi-

intangible assets and investment characteristics. As a result cal challenges to the spin-offs. In essence,

the two institutions often have different spinning off has increased the focus on the

operating or business risks. In such cases the products and the clients that the new insti-spin-off may insulate each institution from tutions wish to pursue in their continuedrisks associated with the other. After the spin- autonomous development and with theoff the inherent risks would likely be more objective of securing full sustainability.stable and predictable, at least partly Moreover, under the old programs therebecause of the sharper focus of each insti- were concerns about amortization sched-tution. Each institution would be able to ules, the high dropout rates for new clients,finance expansion on terms that are more the slow growth of the programs and of aver-in line with its historical and projected age loan balances, and the inability to reachgrowth rates. While in many cases these may graduated clients. Such considerationsbe positive developments, they may also cre- have become crucial as the institutions rec-ate problems.

For example, FATEN stated in its bylaws For the past eight years Magdc has owned a shop

that it will borrow money and use its assets on a busy street centrally located in the Ain El-as collateral. This approach would be diffi- Helwah camp in Saida, Lebancn. Together with her

cult to take within an NGO or Save the husband, she is supporting a 14-menberfamily. She

Children framework. But it may make it sells clothesfor children and n omen, and recentlyharder for FATEN t obtain financing introduced a line of toiletries, deodorants, and per-

harder for FATEN to obtain financing fumes. Magda purchases her inventory in Beirut

because each company will not be able to because it is cheaper there. Every two weeks she

rely on the financial collateralizable assets spends about $1, 000 on new inventory. She usu-of the other, possibly lowering the credit- ally makes $50-$60 a week in bure profit. Magdaworthiness of the riskier entity. was one ofthefirst clients of the credit program in

All three spun-off microfinance institu- Lebanon, and started with a $150 loan. She hasnever had problems in repaying loans, but she finds

tions face this disadvantage. They each that the group meetings interfere with her business.

believe that they will be able to negotiate Because she works alone, she oqten has to close her

new grants or other types of funding. But store to attend the group meetings. This would reflect

they realize that Save the Children provides on the turnover in her business, as her clients count

important tangible and intangible assets: the on steady opening hours. Butd ir the time being sheintends to continue borrowing with Al Majmoua,

strong reputation of an international orga- as there are no other possibilities open to hernization with a long history, well-developed

BENEFrIS AND RISKS OF SPINNING OFF 29

ognize the growing competition in the mar- tion, start-up businesses have decreased in theket, particularly for other target groups. programs' loan portfolios, as programs

Under the Group Guaranteed Lending found through baseline surveys and marketand Savings programs, groups had to have research that they were one of the reasons forat least 10 members. All three spin-offs are high dropout rates. This is an example ofconcemed that this minimum might impose learning by doing-essential for the institu-unnecessarily high transaction costs on tional integrity of microfinance institutionsborrowers. These costs appear in real terms worldwide.when meetings must accommodate 10 dif- Concerns have been raised about limita-ferent schedules and in strategic terms when tions inherent to the current client target Learning by doingit is difficult to generate solidarity among group. In some cases women establish start- is essential for thesuch large groups. More research and insti- up activities that do not survive the loan institutionaltutional experience may clarify whether cycle. While empowering these activities is an integrity ofsmaller groups may be better suited in all important objective of the microloans, this Inrofcases, as well as in different cycles of lending. type of lending limits portfolio growth and microfinance

Similarly, biweekly payments do not quality. In some cases women have started up institutionsalways respond to the cash flows of economic activities that disappear by the end worldwidemicrobusinesses. One consideration has of the cycle without an effective capitalizationbeen to design amortization schedules that of some part of their "profit." In other casesbetter suit the needs of clients, including women are found to be "fronting" for men'send-of-the-month repayments. Another productive activities, so women becomeconsideration has been to lower the mini- liable for loans that they do not control.mum loan size, given that loan sizes are not These situations not only increase the port-increasing over time and dropout rates are folio at risk of microfinance institutions buthigh. Initially there was concern about arbi- are also far less stable for the financial growthtrariness in the application of the Group potential of these institutions (box 8).Guaranteed Lending and Savings method- The three spin-offs absolutely must knowology with respect to loan amount and their clients well in order to be able togroup size. In each country a specific for- achieve the institutions' strategic goals. Almula was used to determine the initial loan Majmoua's research and development team,amount. But research has indicated that in for example, has focused on trying to buildsome cases women may not require the up its market-in terms of both quality andentire loan amount-and as a result much quantity. TheJWDS, having surveyed clientsof the loan may be consumed in other, non- who dropped out, has reduced the numberproductive activities, eventually affecting of start-up loans in its portfolio.repayment. If women redirect their loansinto household consumption rather than Conclusionbusiness activities, repayment becomes aproblem. Spinning off has had a major impact on the

It is worth noting that Save the Children evolution of the original Group Guaranteedshowed flexibility on these issues and intro- Lending and Savings programs and theirduced changes to address rigidities that were products, services, and clients. Each of thepartly built into the Group Guaranteed spun-offinstitutions has started offwell andLending and Savings methodology. In the reached down to poor households inter-West Bank and Gaza, for example, loan sizes ested in microentrepreneurial economicwere cut to 150Jordanian dinars from an ini- activity. Furthermore, each institution hastial 200 dinars. This adjustment was made in produced solid programs and plans that willrecognition of the deteriorating economic sit- allow them to move steadily toward sus-uation in the West Bank and Gaza. In addi- tainability through continued growth.


Box 8.A focus on women and their effect on institution building

Women have generally been excluded from for- and through the spinning off, Save themal financial services for a variety of reasons. Children, theJWDS, Al Majmoua, and FATENAs Ledgerwood (1998, p. 226) points out: have provided loans to more than 20,000

Perhaps foremost is a cultural female borrowers. Such results prove that, atbias against women. At the house- least on the surface, women can be involved inhold level, most financial decisions economic life-despite cultural prejudices inare made by male heads of house- the region.hold, although this cultural norm As the three spin-offs become moreis shifting gradually. In addition, autonomous and get to know their clients bet-

Diversifying women represent some of the ter, more analysis may be needed to assess the

financial services poorest people in developing extent of real economic empowerment and towill require a countries. Their microenterprises analyze whether:

and petty trade do not have suffi- * Some women serve only as a front for men'sfundamental cient scale to interest formal finan- productive activities.

transformation in cial intermediaries. Finally, literacy * Loans are redirected into household con-

the institutions' requirements have barred some sumption rather than business activity.illiterate women from obtaining * Women effectively capitalize loans.

operational formal financial services. Although empowering women may be a posi-

practices In the Middle East, Save the Children's tive externality and an important outcome forGroup Guaranteed Lending and Savings pro- these institutions, in the future this type of lend-grams were designed to support the economic ing may bring significant limitations in termsempowerment of women by targeting them as of portfolio growth. It is not clear whether thethe sole clients for financial services. This objec- foundations of the three spin-offs-with theirtive defined the basic platform from which all current organizational and staffing frame-three microfinance institutions were later works-would sustain further broadening ofspun off. Since the start of the group programs products or clients.

Source: Ledgerwood 1998; World Bank data.

Staff in each institution recognize limi- ing methodology. From a training stand-

tations in focusing solely on poor women point, credit officers would need stronger

and are seeking to increase opportunities analytical skills to assess clients' businessesby diversifying products-especially through and to develop basic profitability and

loans to individuals and to men. This cash-flow analysis. Further improvementsprocess will require a fundamental trans- would have to be made to management

formation in the institutions' operational information systems, with updated infor-

practices. Specifically, changing the target mation and increased accountability and

group might require a more analytical lend- transparency.

The spin-off and the parent institution:strengthening ties or phasing out?

iven the complexities of the envi- example, Save the Children proposed a By spinning offG ronment in which Save the complementary services agreement to be its microfinanceChildren has operated, it must be run in conjunction with FATEN's credit pro- programs, Save the

commended for its remarkable courage, gram. The plan was that Save the Children Children has helpedinnovative spirit, and-most important- would provide health and education activ- create a pool ofdedication to developing microfinance pro- ities as additional content for the borrowers' experienced localgrams. It proved that women in the Middle group meetings, while FATEN would imple- experts inEast can be targeted to receive microfinance ment business development services. microfinanceservices. In addition, Save the Children had This proposal seems to have originatedthe vision to plan for the sustainability of its from within Save the Children Alliance. Butmicrofinance programs through strategic a U.K. Department for Internationalchanges and program restructuring. By spin- Development grant to FATEN is channeledning off its microfinance programs, Save the through a subgranL agreement with Save theChildren has helped create a pool of expe- Children U.K., and that organizationrienced local experts in microfinance who expressed concerns about the negative effectwill be able to support the development of that the proposed credit program wouldthe microfinance industry and build insti- have on women. It was feared that familiestutions across the region. would become less stable or that female bor-

At the same time, Save the Children is not rowers would end up devoting less time tosolely a microfinance institution. Its broader their children because they would have tomission and diverse activities worldwide attend borrower meetings or engage in eco-make it a truly multisectoral organization. nomic activities that take time away fromBut while Save the Children understands the child care. In the end FATEN decided notsocial dimensions of microfinance, in the to pursue the business part of this proposalauthors' view the organization's overall mis- because it was rightfully concerned aboutsion and vision may contradict the business losing its focus at a time when the institutionorientation of the spun-off microfinance is still building its image as a credible micro-institutions. Similarly, Save the Children's finance intermediary. Social activities will stillbasic philosophy could keep these institu- be provided and, as originally planned,tions from achieving their primary objective: directly implemented by Save the Children.long-term institutional autonomy and finan- Similar concerns have arisen in othercial sustainability. countries as well. For example, Save the

These different perspectives have posed Children's field office manager in Jordanchallenges to the development of the spun- wondered whether loans to female bor-off microfinance institutions. For example, rowers indirectly lead to less school time forin some cases there are conflicting views on adolescent girls because the girls help theirmicrofinance at different levels of Save the mothers with their businesses. This managerChildren. In the West Bank and Gaza, for suggested that philosophically a question

31

32 SPINNING OFF FOR SUSTAINABLE MIGROFINANCE

may be posed as to whether the microcredit and its dedicated staff were also crucial in

program is fulfilling its objectives. this rescue effort.These issues are relevant and call for bet- The West Bank and Gaza saw a complex

ter client impact studies and assessments. and ambiguous struggle for the control overBut they are probably more appropriately and independence of FATEN. This struggleaddressed outside the institutional mandate seems to have resulted from miscommuni-of the three spin-offs as they struggle to build cations, mishandling of personnel issues,sustainable businesses. Asked whether they and major differences of opinion betweensee their institution as a social service the key personalities involved in the spin-off

New managers provider or a business, most staff from the process-problems that were compoundedhaeh ngr JWDS, Al Majmoua, and FATEN said busi- by the fraud crisis. In hindsight it appearshave shown greater ness-though one with a social dimension. that this situation could have been avoided

go" of the spun-off Nonetheless, the primary responsibility for or remedied if clear accountability andthe microfinance institutions lied in improv- responsibility benchmarks had existed from

microfinance ing economic outcomes to ensure the the start and had been rigorously enforced.institutions long-term survival and viability of their insti- Such an approach may have led to a better

tutions and their clients. As programs understanding among all those involved inexplore different market niches, it is not yet the spin-off and may have expedited theclear how a continued relationship with Save process. Finally, the spin-off of FATEN hadthe Children would affect a microfinance an additional dimension not felt as pointedlyinstitution's ultimate vision and mission. by the other two spin-offs-the desire of theSave the Children does not believe that its institution's staff to first and foremost cre-vision and mission have to match those of ate a Palestinian institution, and then to cre-the microfinance institutions i t works with. ate a microfinance institution.Rather, it feels that in areas where there is Though the extent of Save the Children'soverlap-as with lending to female bor- involvement and attempts to phase itself outrowers-there is room to work together. has been guided by an institutional "road

map," at least as important have been the

The spin-off process and personalities of the visionaries driving thispersonalities process. The further away these people were

from the creation of the Group GuaranteedThe spin-off process has been marked by Lending and Savings program, the morediverse approaches and degrees of Save the autonomy and independence were grantedChildren's involvement with microfinance to the spun-off institution. And with the rota-institutions. In Lebanon a "hands off' tion of senior management within Save theapproach by Save the Children's regional Children's field offices, new managers havemanager, coupled with the dedication and shown greater willingness to "let go" of thestrong feeling of ownership of the program spun-off microfinance institutions.by local staff, has been the key to a smooth In all three cases the relationshipsspin-off and a continued healthy working between Save the Children and the spin-offs,relationship between Al Majmoua and Save as well as their institutional development,the Children's regional office. InJordan the have been affected-positively or nega-mix of personalities was different, and until tively-by the professional chemistry among1998 the JWDS was controlled by Save the the key personalities involved on both sidesChildren's field office manager and staff of the spin-off. Yet the importance of per-Without such intensive support the JWDS sonalities seems to have been overplayed.would not have been able to overcome its Perhaps better institutional communicationfraud and management crisis. The deter- between field offices would have eased- themination of theJWDS's board of directors process. Too often certain personalities in

THE SPIN-OFF AND THE PARENT INSTITUTION: STRENGTHENING TIFS OR PHASING OUT? 33

the field were excessively relied on at every seems to have been institutional ambiva-level, from Save the Children regional and lence about microfinance in general. Fromfield office managers to boards of directors the outset of the spin-off process Save theto staff within institutions. As a result the Children viewed microfinance as a route todeparture at this stage of senior staff within reaching female entrepreneurs and build-the JWIDS, Al Majmoua, or FATEN could ing local institutional capacity. As the pro-seriously jeopardize the future of these grams underwent institutional transition andyoung institutions. the new institutions began to explore

Spinning off ultimately should be about broader markets and evolve operationally,institutional development. Thus the focus at Save the Children's goals and the new insti- The relationshipevery level must be on building institutional tutions' goals may no longer mesh. This may between Save therelationships for the future rather than on lead to potential clashes as the visions of Children and therelying on personal relationships that may each diverge and outgrow the founding plat- spin-offs requiresor may not continue throughout the form designed by Save the Children. f 9process. It is not clear whether this idea has Finally, Save the Children is constrained further clarificationbeen fully grasped within the spun-off micro- in real terns in microfinance investments. and betterfinance institutions, particularly within For example, it cannot take a full equity stake definitionsome boards of directors. in its investments. As an alternative, Save the

Children is exploring the option of regis-tering a legally separate entity, a subsidiary

Building relationships for the future that would not face such legal constraintsOne of the biggest challenges in the trans- and may be able to become a full share-formation process is to develop a working holder in investments. As explained by therelationship between Save the Children and organization's management, such a move "iseach spin-off that benefits both parties and tied to the desire of Save the Children tosolidifies the bridge between them. In the have a say in the evolution of their invest-absence of a proper definition of this rela- ments, rather than to exert control."tionship, and because of the expectations In all three countries the relationshipthat Save the Children had for this process, between Save the Children and the spin-offsit has not fully capitalized on the experience requires further clarification and better def-and knowledge that the spin-offs have inition beyond the legal obligations involvedgained in autonomously managing their in the subgrant agreements. Most important,Group Guaranteed Lending and Savings specific roles should be defined as toprograms and new institutions. whether Save the Children remains a parent

This shortcoming may have resulted from institution, a donor, an equal partner, aseveral factors. As recognized by all those stakeholder, or even a competitor. Theseinvolved, spinning off was not very method- issues are currently the subject of intenseical or strategically thought out beyond a discussion among all involved parties.short- or medium-term prospective. In The JWDS, Al Majmoua, and FATEN seeaddition, despite several regional workshops, mutual benefits from a continued relation-it did not seem as if much communication ship with Save the Children. But for such aor collaboration had occurred between Save relationship to be mutually fruitful beyondthe Children's field offices in the three coun- the funding issues involved, each spin-off willtries. The spin-off process in one country have to address:rarely benefited from experiences gained or * The nature of the relationship.lessons learned in the process previously * The consequences such a relationshipconducted in another country. may have on the spin-offs ability to

Moreover, within the larger Save the broaden its target group and better serveChildren umbrella, at a certain level there its local market.


* The types of technical assistance the spin- sonnel to new institutions. But no properoff would require from Save the Children. feedback channel was established from the

* The type of networking arrangement. start for Save the Children to benefit from* The role the spin-off envisions for Save what are in some cases steep learning

the Children. curves. In the long run and in a perfectTo address these issues, the spin-offs need world, this might be regarded as the ulti-

to better understand and define their mate success, because local capacities areneeds. At this stage theJWDS, Al Majmoua, being developed to red ace dependence onand FATEN may overestimate their ability to international assistance. The reality of the

For a continued deal with certain issues-such as lobbying development business, however, creates arelationship with for donor funds, negotiating grants, and per- financial incentive for Save the Children to

Save the Children forming administrative tasks-not because maintain ties to the spin-offs.Save the mutulldn they lack capacity (though that hasyet to be To build the capacity that Middleto be mutually tested) but because they still have a lot of Eastern microfinance institutions expect,

beneficial, the work to do in building their basic adminis- considerable dedication and focus will be

spin-offs need to trative and organizational models and get- needed if the experiences of other net-better understand ting systems up and running. Even more works-such as ACCION International or

and define their important, much more effort needs to be FINCA-are to be taken as examples, andneeds urgently invested by spin-offs to better if Save the Children wants to create a net-

understand their client base. In addition, work that can offer real gains to its mem-that their reputations are still in their infancy bers (box 9). Save the Children is acutelyshould not be neglected in connection with aware of this issue and is recruiting a micro-lobbying among donors. finance expert to provide technical assis-

Save the Children, for its part, needs to tance to institutions across the region. Thisclarify the form in which liability stemming expert's duties will include backstopping inout of subgrant and grant agreements can cases of fraud, supporting spin-offs' direc-be distributed among the parties, and tors in undertaking new projects (such asdefine the responsibilities toward donors for developing a management information sys-the performance of the spin-offs. Save the tem and new products), monitoring theChildren also needs to better understand accuracy of indicators, and introducing athe needs of these institutions-as well as standard set of indicators.assess its capacity on whether and to what Another idea is for this expert to play aextent it can provide the needed assistance. coordinating role or even serve as the begin-A crucial issue for Save the Children is deter- ning of a Save the Children technical unitmining what it can offer the spin-offs in the region. Whether -his move would bebeyond funding arrangements. sufficient to reengage Save the Children in

There is a perception among some that a way that is respected and needed by theSave the Children has limited capacity to spin-offs remains to be seen. As noted bydirectly provide technical or management many of the spin-off staff interviewed in theassistance in microfinance to the Middle region, "things would have been differentEast spin-offs. An illustrative comment if Save the Children had this capacity." Bycame from one of Save the Children's field not resolving its institutional ambivalence,managers: "we have the capacity to monitor by rapidly decreasing its comparativeand control [the spin-offs], but we cannot advantage, and by not clarifying its rolehelp them." In spinning off its Group sooner, Save the Children has strained itsGuaranteed Lending and Savings opera- relationships with the new institutions-tions in the region, Save the Children trans- leading to a sentiment that its involvementferred all of it institutional microfinance may not be needed. As one of our inter-knowledge and microfinance expert per- viewees stated, "all three [spin-offs] are way

THE SPIN-OFF AND THE PARENT INSTITUTION: STRENGTHENING TIES OR PH{ASING OUT? 35

Box 9.What does it take to build a successful microfinance network?

The Secretariat of the Consultative Group to will likely emerge only in the long term. Still,Assist the Poorest (CGAP), within the frame- CGAP's experience offers important lessons.work of support to retail microfinance institu- Efforts to build capacity through networkstions, has provided funds through networks as should include:well as through direct retail funding, technical * A human element: strong, professional net-assistance, and business planning support. The work leadership and technical competence.rationale for funding retail microfinance insti- * An ability to leverage appropriate outsidetutions through network or wholesale organi- resources and expertise.zations was based on the benefits derived from * An excellent relationship with networkeconomies of scale, the network knowledge of members. Save the Children'saffiliates, and more agile response. * A focused, member-driven agenda. management

But CGAP also found that the benefits of * Value-added, demand-driven services, as evi- believes that it hasbuilding capacity through networks are difficult denced through cost recovery.to verify. Many of the desired results-such as Any capacity-building proposal must be owned learned valuablestrengthening of the network and better out- by network members rather than by the head- lessons and wantsreach and sustainability of network members- quarters or network head. to continueSource: CGAP 1998. doing so

past Save the Children in microfinance for continued quality, this desire reflects Saveexpertise in the region." the Children's interest in earning more

credit for these institutions' success, as wellas in increasing its understanding of thespin-off process for similar ventures around

This discord has brought to the fore an the world. Save the Children's managementinteresting dilemma that raises a deeper believes that it has learned valiable lessonsinstitutional issue. Should an international and wants to continue doing so.NGO such as Save the Children be a micro- In an attempt to maintain these mutualfinance provider in the field? Or should it relationships, and in an effort to reengage,focus on building its international or Save the Children has for more than a yearregional capacity to provide technical assis- been negotiating with the JWDS, Altance to the microfinance institutions that Majmoua, and FATEN about their futureit creates? Or should it create a conceptual ties. Save the Children has envisioned cre-agreement explaining why both local and ating a regional network or defining a con-international institutions should engage in ceptual agreement of cooperation with themicrofinance together? spin-offs. It has planned to offer its own tech-

Save the Children has asserted that it nical assistance to these institutions or towants to be a player in microfinance, and it help find other experts when it cannot. Itplaces enormous value on its financial and has proposed building on both the techni-institutional investments in the spin-offs. cal and strategic quality of management.Some of the success of the JWDS, Al Save the Children plans to prepare annualMajmoua, and FATEN reflects efforts that reviews for each spin-off that will look atSave the Children has made in introducing financial and other systems. On the strate-these programs to the region. Thus in many gic side, Save the Children hopes to ensureways Save the Children's desire to have an quality management while increasing theongoing relationship with these institutions number of clients each institution serves.represents its deeply held conviction that no Save the Children would also lend its inter-matter what happens with these spin-offs, it national reputation and engage in promo-will always be held responsible by donors for tion of the spin-offs. In this framework thethe outcomes. In addition, besides concerns institutions would loosely oblige themselves

36 SPINNING OIFF FOR SUSTAINABLE MICROFINANC(

to remain under Save the Children's issues that can be summarized in two ques-umbrella, would provide technical assistance tions often exchanged in these discussions:to programs in other regions according to What do you need? And what can you offer?Save the Children's requests and needs, and Misunderstandings and miscommunica-would recognize the affiliation with Save the tions seem to continue.Children in all its activities. Taking a broader view, however, it is clear

Some of Save the Children's proposed that more fruitful relationships can andnetworking arrangements do not seem to go should be developed. Save the Children hasbeyond what microfinance institutions a lot to offer the spin-offs. The key would becould do on their own. Still, it is legitimate to focus on what Save the Children knowsto ask whether the spin-offs would do these and does best. Assistance and training inthings-such as collaborating and exchang- administering grants, negotiating funding,ing experience, holding annual meetings, supporting management, training andand searching for technical assistance- developing boards of directors, andgiven the daunting institution-building exchanging regional experience, for exam-tasks still facing all three. Regardless, the ple, could be fields where Save the Childrenissue of establishing a network of affiliates would have comparative advantage tohas been fiercely contested by the institu- remain a long-term strategic partner fortions precisely because of the unresolved these institutions.

The role of donors in spinning off

In recent years microfinance has bene- agreements with Save the Children, which The approach thatfited tremendously from its newly places it in the unique position of being a pro- donors take toprominent position on the development gram creator and a microfinance donor. This microfinance can

agenda. Nearly all donors-whether local, funding relationship involves many com- greatly affect thebilateral, or multilateral government agen- plexities for the institutional development of development ofcies or local or international NGOs- microfinance institutions, such as the allo- this industrysupport microfinance activities by providing cation of responsibilities for performance andgrants, lines of credit, lending guarantees, compliance with various donor directives.or technical assistance. Donors are the main Each donor obliges the institutions to usefunders of microfinance services and in most funds in accordance with the negotiatedcases effectively provide the funds for grant agreement. For example, USAIDonlending. funds are to be used in a manner consistent

Thus the approach that donors take to with the agency's microenterprise policymicrofinance and the requirements that they directive. One such agreement, typical ofset for microfinance institutions can greatly this directive, requires that (among otheraffect the development of this industry and things) spin-offs:the future of many microfinance institutions. * Demonstrate a willingness and ability toDonors can also significantly affect spun-off set interest rates and fees on loans highmicrofinance institutions in the effects that enough to cover the full long-run costs ofthey have on the transition to complete insti- lending on an opportunity cost basis.tutional independence. * Commit themselves to maintaining firm

control over delinquency and losses.* Commit themselves to attaining full finan-

Donor policies and strategic cial sustainability and expanding the

availability of financial services to micro-Most microfinance institutions work with entrepreneurs and other poor people.more than orie donor, often developing sep- * Promise that women's access to credit willarate products to meet each donor's require- be encouraged and promoted under thements-requirements that tend to reflect grant and specify that women will be thedifferent strategies and different donor sole borrowers.interests. For example, the three Middle * Adopt standard reporting requirements.Eastern spin-offs have received indirect The requirement specifying that womengrants from the U.S. Agency for International be the sole borrowers, following on that ofDevelopment (USAID), U.K Department for the original Group Guaranteed Lending andInternational Development, Irish Aid, Savings programs, has continued throughoutCanadian International Development the subgrant agreements signed betweenAgency, and others. These funds are chan- Save the Children and the three spin-offs.neled to the institutions through subgrant The agreement transferring the outstanding

37

38 SPINNING OFF FOR SUSTAINABII.E MICROFINANCE

portfolio from Save the Children to FATEN, Such changes would require properfor example, requires that FATEN continue analysis, market research, and product test-"to extend and develop programs in the ing to ensure that theJWDS is ready and ablesame spirit and orientation as the [Group to provide such services to a broader market.Guaranteed Lending and Savings] pro- In addition, the name of the institution couldgram in order to provide support and assis- have to change as well, to reflect this markettance to needy women and children." broadening and to attract more male bor-

Since becoming independent all three rowers. Because these changes would meaninstitutions have conducted market research a major deviation from theJWDS's original

Donors and to review the opportunities for developing stated mission, they would require theinstitutions must new products-such as individual loans and approval of the board of directors as well as

institutionsemust loans to much smaller groups than man- Save the Children-which, ultimately, is themake strategic dated under the Group Guaranteed Lending institution that would hiave to comply with

choices from the and Savings programs-and broadening the donor policies negoiiated in the subgrantstart of spinning off their target client base. If these institutions agreement (box 10).

were to broaden their lending landscape to These examples show the inherent insta-include men, the move would have to be bility and institutional insecurity of donor-approved by Save the Children and ulti- sponsored programs and institutions inmately by the original donor, USAID,because it would be perceived as a majorchange to the original methodology. In prin- Box 10. Decisionmaking in the Saveciple, all three institutions are free to the Children-JWDS partnershipobtain donor funds from other sources and Like any autonomous organization, thenegotiate any kind of agreement they JADS ultimately chooses what it will and willdesire, with no limitations on their target not do. But within the partnership between

Save the Children and -he JWDS-throughwhich Save the Children provides funding for

could create confusion, depending on the Jordan's Group Guaranteed Lending andstated mission or image of each organization. Savings program-Save he Children has set

Consider, for example, the JWDS, whose parameters for JWDS operations. Save theprimary goal is to "provide poor women Children is committed to supporting pro-entrepreneurs with access to financial ser- grams committed to best practice microfi-

nance. In addition, as the prime recipient forvices on a sustainable basis." Given the mar- donor funding, Save the Children has a fidu-ket opportunities to expand its target ciary responsibility to ensure that donor reg-clientele, it may have to rethink its original ulations are upheld by subgrantees.design and eventually start lending to To meet both of these objectives, Save themen. This move would, however, imply a Children imposed limitations on JWDS

changes to its methodology. To some extentmajor change in the JWDS's methodology these limitations are perfunctory-they areand staffing structure. For example, group- quite limited, and Save the Children typicallybased lending may be less appropriate for approves any reasonable change immediately.men, so theJWDS would have to embark on As theJWDS's experience has increased, Saveindividual lending. Such a move requires the Children has cut back these limitations tocredit agents trained with more analytical affect only the most important areas of

methodology. In practice the JWDS hasskills than are now available, because agents almost complete flexibility in modifying loanmust be able to examine the profitability of operations or testing changes to loanindividual businesses and perform (at methodologies. As intendled, theJWDS gen-least) simple cash-flow analysis. Moreover, erally perceives Save the Children's contri-because all of theJWDS's credit agents are butions as facilitative rather than obstructive.

women, it would have to consider hiring Soure: Save the Children.male credit agents as well.

THE ROLE OF DONORS IN SPINNINC OFF 39

microfinance. They also highlight the strate- cate a program and undermine its institu-gic choices that donors and institutions must tional independence.make from the start and bring to the fore a The situation in Jordan was even morekey issue: practitioners and donors should be complex because the contractor involved, onaware of what the other is doing. Practitioners behalf of USAID, is one of the main fundersshould know which donors support an for several of the JWDS's competitors.approach consistent with their own, so that Giving the contractor a presence on theaccess to funding does not mean changing JWDS's board of directors could create a seri-the philosophy of their organization. ous conflict of interest because this donor

would be able to "look into the kitchen" of Intrusive donor

Reporting requirements: standard several competing institutions. This kind of involvementinvolvement is extremely unproductive and undermine

monitoring or interference? is not in the interest of the long-run devel- may sn-offIs

Reporting requirements are another impor- opment of the microfinance industry. institutionaltant aspect of the relationship betweendonors and microfinance institutions. ,e, independenceBecause most funding for the three spin-offs Aieving targ dcomes through subgrant agreements withSave the Children, a direct grantee of Microfinance is often wrongfully perceivedUSAID, reporting is channeled through Save as a panacea for poverty alleviation-notthe Children. The reporting requirements for least because microfinance has become sothe three institutions vary but typically prominent on the development agenda.involve monthly financial reporting, quarterly Indeed, widespread donor interest in micro-progress reports, and a final report expected finance could lead to an oversupply of fundson the completion date of the subgrant. for onlending and, consequently, over-

Recent negotiations of a grant agreement whelming pressure to disburse funds. Thiswith theJWDS offer a more peculiar picture may translate into pressure on programs towhen it comes to donors requiring micro- expand and develop extensive branch net-finance institutions to go beyond standard works (even when notjustified by marketreporting-and give an interesting example conditions) despite limited institutionalof donors crossing the line between moni- capacity to take on these funds and embarktoring and interference. The USAID con- on expansion. Such pressure may have irrev-tractor on this grant required daily or weekly ocable consequences for young institutions.reporting, a requirement that by itself would Donor pressure is evident on both endshave imposed unnecessary administrative of the growth and expansion spectrum inburdens on the young microfinance insti- Jordan, Lebanon, and the West Bank andtution. In addition, however, this contractor Gaza. For example, donor microfinanceinsisted on nominating its representative as activities inJordan emphasize achieving tar-a member of the JWDS's board of directors gets and quantitative performance goals.(though without voting rights). Such pressures come at a time when the

This anecdote raises an important point JWDS would benefit from having breathingabout donor approaches to reporting room to strengthen its systems and stream-requirements. Under a standard, hands-off line controls-particularly given the fraudapproach in which responsibilities are that plagued the program in 1998 and thatdefined in legal documents, there is no need resulted in management resignations andfor donors to take a stake in the board of institutional restructuring.directors of an independent institution. At the other end of the spectrum, donorMoreover, intrusive and excessively con- pressure is essentially absent in Lebanon. Thistrolling involvement may eventually suffo- lack of pressure has given Al Majmoua the

40 SPINNING OFF FOR SUSTAINABILE MICROFINANCFE

liberty to lend at a slower pace. In fact, Al expanding microfinance institutions areMajmoua is experiencing stagnation in its loan likely to experience premature growth,portfolio, but it has developed a stronger focus which occurs before an institution's systemson building corporate structures. Rather than are in place and when procedures are not suf-engaging in actual outreach to the market, it ficiently tested. In either- case the institutionhas been active in training staff, redesigning will ultimately suffer from increases in delin-the program, analyzing the market, devel- quency and desertion-as demonstrated inoping a public relations campaign, and exper- Jordan and the West Bank and Gaza. Systemimenting with new loan products. Whether weaknesses came back with a vengeance to

Fast growth and this strategy will prove successful remains to undermine both institutions' achievements.durability are often be seen, but Al Majmoua has developed an Fast growth and durability are often

duaiity pareiofen image of a serious corporate business with a incompatible (Hawkins 1987). Thus institu-iincompatible recognizable logo and a clear vision. At the dons should not perceive the pursuit ofgrowLh

same time, however, Al Majmoua cannot as a tradeoff between quality and quantity. Theafford to become too inward looking and test only tradeoff may be in short-term outlooks-every possible approach. Now is the time to where the higher profits lhat come with moredeliver services. clients may be the main concern, rather than

FATEN's case is more complex because the cost of installing proper systems. In thethe pressure to grow essentially came from long run, however, if profit is an institution'swithin. Targets were set by staff workingAwith sole objective-rather than investing in sys-management in the field. For example, the tems, standardizing procedures, and strength-microcredit program's September 1997 ening policies-such "growth" mayjeopardizeproposal for additional USAID funding pro- the institution by contaminating the loan port-jected that by the end of fiscal 1999 the pro- folio with high delinquencies, poor cus-gram would provide nearly 50,000 new loans tomer service, or fraud.to female microentrepreneurs, have 20,000 Rapid initial growth, despite the early per-active borrowers, and be fully sustainable. ception of success and boost in morale, willDonors were more concerned about the fast ultimately undermine the institution. Butgrowth that the program embarked on with- healthy growth, based on a balance betweenout recognizing the weaknesses in its systems. quality and quantity, is sustained over time

Between November 1997 and April 1998 and is durable. The natural rate of growthFATEN's outstanding loan portfolio nearly will depend on an organization's prepared-doubled. Because the institution could not ness and ability to learn. Microfinancebear the burden of such growth, opportu- institutions need to gain a sense their naturalnities for fraud arose-almost leading to the growth and be prepared to slow things downmeltdown of the program in 1998. Still, (Churchill 1997). It is management's respon-there is a balance to strike between growth sibility to sense the natural, inherent growthand systems. FATEN and theJWDS saw too rate of the program ancd to adhere to it. Amuch growth and too few systems; Al founder's job is not to lead staff to newMajmoua appears to have seen too many sys- heights. Rather, it is to moderate thetems and too little growth. changes that will be required of everyone as

Growth is one of the most complicated the business grows (Hawkins 1987).issues in microfinance. Managing growth- Microfinance practitioners too often suc-both by donors and by program or institution cumb to donor pressure and believe thatmanagers-requires finding the right mix donor targets must be achieved at any cost-between depth and breadth to balance out- even at the expense of porffolio quality.reach with viability (Churchill 1997). Rapid Donors do not emphasize enough that thegrowth is not inherently bad. But it can be, issues at stake should never require a long-as with the JWDS and FATEN. Rapidly term tradeoff. Rather, the need for comple-

THE ROLE OF DONORS IN SPINNING OFF 41

mentarity needs to be made clear through- microfinance institutions in regions whereout the process. If lending goals are achieved they have worked. In this way donors canat the expense of capacity building, the end provide an excellent source of learning forresult may be a highly contaminated portfo- microfinance providers. Sharing these expe-lio, a long period of convalescence after fraud riences among practitioners and otheror delinquencies, and slow (if not absent) donors would be extremely valuable forgrowth of the remaining healthy loans. developing the microfinance industry in theAdditional consequences include institutional Middle East and North Africa.instability and the ruined reputation of a In many countries donors and practitionersmicrofinance institution. Donors should have already set up infornal networks to share The key toinsist on targets, but targets should be rea- their experiences, influence policies, and set successful donorsonable and require high portfolio quality. industry standards. But much more needs to intervention is to

be done to promote donor coordination; dupli- identify areascating or counteracting one another's activities wdenti nors

How can donors help? will not help create a consistent strategy forDonors can play an invaluable role in devel- microfinance based on market segmentation real advantages andoping the microfinance industry (box 11). and comparative advantage. Inadequate coor- that are in need ofThe key to successful donor intervention is dination can quickly undermine the efforts of resourcesto identify areas-such as building capacity good microfinance providers-as evidenced byand establishing a policy dialogue-where the many cases where donors and govemmentsdonors may have real advantages and that are have distorted microfinance markets by sub-often in need of resources. Donors can also sidizing interest rates, making it difficult forplay an instrumental role in influencing pol- other microfinance providers to competeicy reforms and supporting efforts that lead (Ledgerwood 1998).to a stable macroeconomy and financial sec-tor, promote a proper legal environment in The role of microfinancewhich microfinance institutions can develop, institutions in donor relationsand encourage entrepreneurialism.

Donors can help disseminate knowledge Relations between microfinance institutionsabout and present different approaches to and donors should be equal partnerships. In

Box I1. Essential elements of donor policy for microfinance

Donors need to pay close attention to several * Reporting standards. Donors should insistissues as they formulate support for microfinance. that supported organizations report on* A commitment to efficiency. If operational effi- their performance using generally accepted

ciency can be achieved in most parts of the standards in a way that makes subsidiesworld and in a range of geographic and eco- transparent. Donors should also be pre-nomic settings, donors should expect that pared to offer technical assistance to orga-any microfinance program they support will nizations that lack the capacity to do so.reach operational efficiency in a reasonable * Frontier issues. Donors have an importantperiod. Donors should select organiza- facilitating role in helping top-performingtions for support that have a credible com- institutions make the transition to full inde-mitment to reaching operational efficiency. pendence. Among the interventions that

* Interest rate policy. Donors should insist that may be called for are policy dialogue withthe organizations they support price their governments on supervisory standards forservices at levels that support financial via- microfinance, technical support to trans-bility. In particular, programs must adjust forming institutions and to those who wishadequately to the potentially erosive effects to develop savings services, and support forof inflation. identifying and securing equity investors.

Source: Christen and others 1994.


reality, however, this is often not the case. tually manage a financially sustainableEspecially during a microfinance institu- microfinance institution that does nottion's start-up phase, it is often completely depend on donors.dependent on one donor for funds for Many microfinance institutions in theonlending and technical assistance. This Middle East maintain a donor-dependentnurturing relationship may be beneficial at mentality. They appear to accept every con-first. But over time the microfinance dition (even ridiculous ones) from donorsinstitution must decrease its donor depen- simply to gain access to funds. Microfinancedency to avoid being "hijacked" by the institutions tend to forget that donors needdonor to serve a certain (political) agenda them as much as they need donors, and theback home. negotiating position of a microfinance

While the ultimate constituency of the institution is usually better than it believes.donor is usually the government it repre- Microfinance institutions should learn to asents, the ultimate constituency of the micro- take clear methodological and institutionalfinance institution is its clients. Initially a stand. They should also formulate clear andmicrofinance institution could decrease its transparent objectives, a vision, and a strat-dependence on one donor by trying to egy. Such institutions wAill find that donorssecure funds from other donors while may initially be taken by surprise but thatmaintaining its stated objectives, target they may be more than happy to accept thegroups, and methodologies. Over time the microfinance institution's terms and con-institution could mix its sources of funds ditions because they help ensure that thewith commercial funds so that it can even- donor's funds will be used well.

Fraud and its effects on spin-offs

A Imost every microfinance program * High employee turnover among man- As microfinancehas experienced fraud. Yet there is agers, administrators, or loan officers. institutions grow,

IL almost no literature on fraud in * Insufficiently standardized products and the size andmicrofinance and few frank discussions of it provision of multiple loan products. incidence of fraudin public settings. In fact, microfinance insti- * Cash handling by loan officers. tend to grow astutions are often reluctant to talk about their * Rapid growth, which can make it difficult wellexperiences with fraud-though their peers to cultivate the integrity required amongcould learn a lot from such an exchange. staff (Valenzuela 1995).Wherever there is money, there is an oppor- Some of these features were evident in thetunity for fraud. Moreover, that an organi- JWDS and FATEN. In both cases it appears-zation has not experienced fraud does not though this conclusion would have to bemean that it is immune to it. As microfinance bome out by much more thorough research,institutions grow, their portfolio sizes if not a separate study-the fraud was carriedincrease, and their operations become out by loan officers (box 12). The problemsmore complex, the size and incidence of were compounded by insufficient supervi-fraud tend to grow as well (Valenzuela 1995). sion, weak checks and balances, and the

There is no evidence linking the spin-off absence of proper follow-up. Had better sys-of Save the Children's microfinance pro- tems been in place from the outset, the riskgrams to the fraud that subsequently of fraud would have been minimized.plagued JWDS and FATEN. But fraud has TheJWDS and FATEN have learned thathad significant effects on the spin off fraud is usually not immediately evidentprocess. Fraud remains a somber issue from through the portfolio at risk or arrears.which theJWDS and FATEN are still recov- Rather, it was detected through internal sys-ering. Its effects were devastating and tems that began to crack under rapidthreatened to destroy the fledgling institu- growth. These experiences highlight anothertions. But in the process both institutions important lesson: the key is to know the exactlearned valuable lessons early in their insti- amount of repayments expected on eachtutional development that may have made repayment day, to verify whether these repay-them stronger and so contributed to their ments were received, and to react promptlylong-run stability. In this sense, then, a brief to one- to five-day delinquencies, particularlyoverview is warranted of the fraud episodes constant ones. When repayments are due onthat shook both programs to the core. one day and disbursements are due on the

Several features make microfinance insti- following day, such cash flow can veil delin-tutions vulnerable to fraud: quencies with some loan officers. Thus it is* Weak information systems and changes in crucial to monitor these indicators and to

information systems. closely supervise loan officers.* Weak or nonexistent internal controls. The fraud in bothJordan and the West* An absence of internal or external auditors. Bank and Gaza was systemic and occurred

43

44 SPINNING OFF FOR SUSTAINABLE MICROFINAN(:E

Box 12. Examples of microfinance fraud cases involving loan officers

Most fraud cases in microfinance institutions involve loan officers. These cases may involve ficti-tious loans, "ghost" borrowers, kickbacks from clients for receiving a loan, or cash theft, eitherfrom petty cash or loan repayments. The examples in the table below are drawn from actual fraudcases from around the world.

Example Detection trnggers Amount lost

A loan officer in a rural program makes The central office notices an increase $100,000fictitious loans. Repayments come from in delinquency and investigates.

Most fraud cases new loans, though those loans soon be-come delinquent. An accountant is often

in microfinance colluding with the loan officer.

institutions involve A loan officer sets up 18 fictitious loans A high-volume branch is selected for an $2,500

loan officers for personal use. The loans become ambassador's visit, or a client selected

delinquent. for a visit does not exist.

A loan officer in a remote rural area The loan officer is under suspicion $3,000disburses and collects loans in cash. The because of sloppy paperwork,officer keeps some of the repayments and Delinquency increases and the centralclaims that he lost loan payment receipts. office investigates.Most clients do not demand receipts.

A loan officer, in collusion with a A tip from another staff member. $900,000supervisor and regional internal auditor,sets up ghost groups in a "successful"high-growth branch. Loans are repaidfrom new loans.

A loan officer collects repayments from The internal audit department reviews $500clients, keeps half for himself, and reports daily and discovers insufficientrecords that only half of repayments payments from the clients of the loanwere made. officer.

Source: Valenzuela 1995.

in fast-growing institutions marred by lax tance of managers to deal with the problem

internal administrative controls and staff and to take a firm stand with loan officers

supervision. Even minimal supervision caught in the act made the situation

was missing-otherwise the problems worse. In fact, if theJWI)S's board of direc-

could have been detected much sooner. In tors had not taken over the program andaddition, other shortcomings of the Group operationally managed it for three months

Guaranteed Savings and Lending programs (following the resignation of the executivewere transferred to the new institutions director), this spin-off probably would notwithout realizing their potential effects. have survived. Efforts are still under way to

In the West Bank and Gaza, for example, clean the contaminated portfolio and col-the original Save the Children program lect the remaining funds, in order to pre-lacked contractual employment arrange- vent future outbreaks.ments for loan officers. Furthermore, In addition, complaints have emergedFATEN did not establish a proper chain of that the experience inJordan, where fraudresponsibilities from the beginning, so in was detected first, was riot communicated

the end it was almost impossible to deter- transparently among the three spin-offs or

mine the level of accountability for cases of within Save the Children's field offices. As

fraud (box 13). Finally, injordan the reluc- one of the interviewees in the West Bank and

FRAUD AND ITS EFFECIS ON SPIN-OFFS 45

Box 13. Fraud in the West Bank and GazaAt the end of April 1998, while preparations identify with or feel loyalty toward any institu-were being made to spin off Save the Children's tion (whether FATEN, which wasjust being cre-microfinance program into FATEN, the pro- ated, or Save the Children). About 20 creditgram in the West Bank and Gaza had 9,600 promoters-nearly a quarter of the creditclients with $1.8 million in outstanding loans. staff-were involved in the fraud.Just six months earlier the program had 5,700 Due to the extraordinary efforts of its capa-clients, so it was clearly on a steep expansion ble managerial staff, however, FATEN has over-curve. In March 1998 alone 2,200 loans were come these problemns and collected many of theissued for $600,000. defrauded funds. By March 1999, $204,000 had

But at the same time, signs of fraud were been recovered, of which $114,000 was resched- FATEN is stillbecoming evident. Monthly reports indicated uled as loan payments with new interest rates, recovering from itslarge delinquencies among some credit pro- late payment fines, and legal fees. The guilty fraud crisis, but ismoters (loan officers). Central management credit promoters signed confessions stating thatheard of a fraud case in the south, but it they owe FATEN the new totals and gave stronger becausethought that the case was being handled by FATEN post-dated checks as guarantees. of itbranch management. Another case appeared FATEN is determined to collect all the moneyin Nablus, but it did not seem serious at first. due, and continues to make progress in col-Then, in May 1998 the supervisor for the south- lections and rescheduling.ern area was instructed to conduct an audit. Because of this experience, FATEN hasThis audit rang alarm bells because half of the moved to a very centralized structure, one thatloans-worth $18,000-had been taken by one involves some rather cumbersome procedures.loan officer and one client. Central manage- SinceJune 1998 many changes have been intro-ment then suspended the issuing of new loans duced. Recruitment policy was amended, dif-until proper checks were conducted in all areas. ferent incentives were introduced, new credit

These additional checks revealed fraud of promoters were hired, and the issue of contractsenormous magnitude. Such fraud could only was solved. To avoid the formation of ghostpersist because of growth. New loans, disbursed groups, FATEN moved from disbursing in theeach month, were used to repay the fake loans. field to disbursing in branch offices. ImmediateHence the loan portfolio did not show arrears actions follow for any late payment. The manualbecause there were no arrears. Only when paper trail is followed and updated daily. Formoney supply stopped was there no cash to example, since July 1998, when lending beganrepay the fake loans. In the end FATEN deter- again, more than 97 percent of payments havemined that it had been defrauded of $708,000. either been paid on the same day or one day

Most of the fraud started in early 1998, when before. The other 3 percent are paid within nolending was skyrocketing. The fraud spread more than four days.quickly, indicating considerable failings in the These changes have slowed growth-system. Internal controls and supervision were FATEN spent most of 1998 collecting loansextremely poor. Area supervisors were not and restructuring and testing systems-anddoing their jobs, and branch managers failed some of its best clients are dropping outto sufficiently check the area supervisors. When because they find it difficult to attend branchthe fraud was discovered, the program had disbursement meetings. FATEN's challengeabout 70 credit promoters. An important short- now is to internalize these changes and inte-coming-and one unique to the Palestinian grate them at all levels of management. It hasprogram-was the absence of signed employ- yet to find a more definitive operational modelment contracts between Save the Children and that will allow it to operate in a highly effec-credit promoters. As a result credit promoters tive and decentralized fashion. Although it hasdid not feel any legal liability toward Save the good prospects, FATEN is still recovering fromChildren and, even more important, did not the fraud crisis.

Gaza said: "The Jordanian staff were for- key challenge for microfinance institutionsbidden to talk to us about it at the workshop. is to maintain effective control without exces-We could have learned more about it." sive costs or burdensome procedures as the

The causes of and vulnerabilities to program grows. In addition, it should be rec-fraud must be carefully kept in check. The ognized that fraud can never be entirely

46 SI'INNING OFF FOR SUSTAINABILE MIGROFINANCE

eliminated. It can, however, be reduced and that may occur as an institution develops newkept firmly in check by addressing the system products, diversifies its market, and becomesweaknesses that create opportunities for more sophisticated.fraudulent activities. Staff morale and a team As the three spin-offs experiment withculture and ethics have to be continuously their products, clients, and administrativenourished, particularly as an institution and organizational models, fraud should notexpands. The spin-offs' experience show that be taken lightly. The JWDS and FATEN areit is important to respond swiftly and deci- trying to perfect and fully implementsively when fraud becomes apparent. administrative structural changes that haveOtherwise, other staff may be encouraged to already been introduced and that will notengage in fraud as well. Finally, senior man- allow for any laxity in internal controls andagers should be aware of new types of fraud could detect these problems sooner.

Lessons and recommendations

T he spinning off of the JWDS, Al Children spin-off experience, the chance of A clearer designMajmoua, and FATEN has been success with spinning off and of eventually from the startcomplicated and difficult. Still, it has achieving institutional autonomy appears to might have

taught Save the Children-and to some be higher when the original creator (or benefited Save theextent, the entire microfinance industry- sometimes manager) is gone or not Children and thesome important lessons. These lessons can involved. Such a setup leaves more space for spin-offsbe used to draw recommendations for orga- the spin-off to seize on its independence andnizations that are considering spinning off learn on its own, even if by making mistakes.their microfinance operations, as well as for Save the Children has pointed out thatSave the Children and the three Middle the issue of organizing each institution'sEastern spin-offs. board of directors should have been given

After Save the Children began programs more attention. Initially it was assumed thatproviding loans to microenterprises, the idea merely transferring management woulddeveloped for the programs to act as catalysts ensure a continued vision. But boards playand organizational forerunners for institutions key roles in spin-offs and merit much morespecialized in providing finance. In hindsight, attention. Board member developmenta clearer design from the start on the long- and training could have been higher on theterm institutional structures of these programs agenda of both Save the Children and itsmight have benefited Save the Children and spin-offs. Continuous attention needs to bethe spin-offs during the transition. paid to ensure that boards of directors

Another important consideration for remain involved and responsible for thethese spin-offs turned on the preparedness future of these institutions. Save theof each program to become self-operating Children is committed to providing addi-in every regard. As part of Save the tional board trainingin 1999-2000.Children, most of the programs relied on it Properly defining from the start the rela-to perform many tasks-from disbursing tionships between Save the Children and thestaff salaries and benefits to running man- new institutions would have preemptedagement information systems. While one some strains as the spin-offs ensued. But thiscan never prepare for everything, proper effort is necessarily tied to the parent insti-contingency planning through strategic tution's long-term strategy for the spin-off,planning workshops and "how to" work- to the parent's expectation that the newshops could have preempted some issues microfinance institutions will soon take onthat have marred the relationships between lives of their own, and to the parent's con-Save the Children and the spin-offs. tinued feeling of responsibility for the suc-

The same can be said about some "psy- cess or failure of the new institutions.chological" issues they may not be easily pre- Save the Children and the spin-offsdicted but for which people can be agree that perhaps many of these issuesprepared. Judging from the Save the would have inherently been addressed-or

47

48 SNINNING OFF FOR SUSTAINABILE MICROFINAN(C:

altogether avoided-if from the outset the Some may be better off excelling in theirlending operations were lodged in a sole-pur- original core operations. Internationalpose, independent microfinance institution NGOs engaging in microfinance half-rather than in a program-based setting. heartedly do not contribute to the healthyRecognizing that managing an institution is and competitive development of the micro-not the same as managing a program could finance industry.have placed a greater focus on enhancing the International NGOs (such as Save thespin-offs' institutional (as opposed to pro- Children) that have made the strategicgram) capacity to manage more products choice and commitment to develop micro-

International and services, mobilize resources, and finance in their countries of operations

NGOs should enhance management information systems. should consider starting out microfinanceconsider starting operations as independent institutions

rather than as parts of a larger organization.out microfinance feommendations This approach allows the new institutions to

operations as for organizations build and enhance their institutional capa-independent contemplating a spin-off bilities from the beginning. Instead of rely-

institutions rather Most microfinance programs in the Middle ing exclusively on the larger organization tothan as parts of a East and North Africa are part of larger pro- manage the daily chores of its business, such

larger organization grams. Not all of these programs can or sole-purpose new microfinance institutionsshould be spun off. Spinning off is a strategic may increase their capabilities throughchoice and makes sense only if it is done in "learning by doing" and allow their systemsthe context of another strategic choice: achiev- to grow with the number of borrowers.ing full sustainability. Many programs do not Further collaboration on other importantwant to make the strategic and difficult choice issues-such as providing technical assis-

for full sustainability because it requires a busi- tance, exchanging expertise (in both direc-ness orientation that is often incompatible tions), and training staff, managers, andwith the visions and choices of their founders. boards of directors-can foster an evenSuch programs may be better off doing "busi- healthier working relationship with the par-ness as usual" under a parent organization. ent institution as well as highlight the inde-Over time, however, their funds will dry up pendence of newly fomied institutions. Thisand the programs may disappear because they type of arrangement might benefit a newdid notaim for sustainability. Still, during their institution by forcing it to deal with theexistence they may have provided a useful, everyday problems of building independentalbeit temporary, service. and self-reliant entities from the start.

Save the Children's experience pro- Moreover, it could allow the parent institu-vides useful lessons for other multisectoral tion to be more involved in developing theinternational or local NGOs wishing to vision rather than the technical aspects ofengage in microfinance. Doing so is also a these programs.strategic choice, and international NGOs The establishment of new institutions-wishing to make this choice should realize including setting up and selecting thethat it requires substantial up-front and board-is often marred by bureaucracy andongoing investment in their ability to help difficulties, as witnessed in the spin-offs intolocal organizations develop sustainable the JWDS, Al Majmoua. and FATEN. At themicrofinance programs. This is a long-term same time, the lending had to continue,commitment requiring long-term invest- which placed additional strain on the orga-ment in capacity and systems that not only nization because they were simultaneouslyincrease but also change over time. Not engaged in institution building andevery NGO should engage in microfinance microlending operations. Starting out as ansimply because donor funds are available. independent institution may relieve some of

LESSONS AND RECOMMENDATIONS 49

this strain because the first phase can be NGO legal form is not recommended.devoted to developing appropriate institu- NGOs lack legal accountability and trans-tional arrangements and capacity and to parency and so cannot access the com-building strong systems. The second phase mercial funds required if the institution iscould then more easily handle program to away move from donor-subsidized oper-growth and expansion. ations and dependence.

If possible, new microfinance institutionsshould register under a legal form with iden-

Developingtiautorporatenculture ina tifiable owners that are personally or insti-tutionally liable and take an equity stake: Board members

Starting out as an independent institution, for-profit company, nonprofit company, should be selectedmay also preempt such difficulties as trying financing company, microfinance inter- based on theirto change the corporate culture transferred mediary (if available as a legal form), non- wide range offrom a program-based setting. As noted, one deposit-taking bank, and so on. In this way expertise ofof the biggest challenges in spinning off is the full sustainability goal will be embedded expertise andgetting the staff of the new institutions to in the institutional form and governance experienceshift from a program-based to an institu- structure from the start and will preempttional attitude. This crucial metamorphosis potential complications, such as the need foraffects the technical aspects of day-to-day re-registration, image changes, and so on.operations and alters the strategic approachof each institution.

This shift offers a number of benefits. It Board of reorsallows and even compels staff to assume a The choice of legal form also affects themore analytical role, whether in terms of selection of board members. Playing a rolereassessing lending methodologies and tar- on the board of an NGO is different fromget groups or in determining whether to being a liable board member of a companymove to individual lending or use the insti- (even if limited). "NGO board members dotution's funds for onlending. Spinning off not usually fulfill the board's fiduciary rolehas increased local capacity by investing in by assuming responsibility for the institu-local practitioners who will be the microfi- tion's financial resources, especially thosenance experts of tomorrow; clearly, the provided by donors" (Ledgerwood 1998, p.entire region's microfinance industry ben- 112). NGO board members are oftenefits from such local initiatives. On a more bound only by the feeling of moral respon-personal level, staff who had been under sibility and the sense of having a personalSave the Children programs have begun to reputation at stake. NGOs generally do notfeel a greater sense of belonging in their have shareholders. Instead, managementcareers, and professional opportunities will usually selects board members, as inJordanonly increase as the spin-offs develop. Each and Lebanon. This approach may lead to aof these lessons not only benefits individual conflict of interest if management selectsinstitutions but also improves future part- board members who conform to its interests.nerships with other organizations. Thus board members should be selected

based on their wide range of expertise and

Choice of legal form experience-including financial, legal,managerial, and private sector. Of utmost

If the choice is made to pursue full sus- importance is the board's ability to criticallytainability and this choice is the underly- analyze management's plans and provideing reason for spinning off microfinance effective guidance. Board members' inde-operations and for creating a new micro- pendence and selection based on expertisefinance institution, in the long run an rather than personal interests or political

50 SPINNINC OFF FOR SUSTAINABLE MICROFINANCE

agendas (or those of senior management) Life after spin-off: definingare crucial to board performance. In addi- responsibilities for the parenttion, board members should be given organizationextensive training on the microfinance busi-ness and on the role they are expected to In a corporate context, parent firms oftenplay as institutions evolve. emphasize their most important businesses.

After a spin-off the parent firm is expectedto be able to provide maximum support toits remaining businesses without being

The need to When assessing the director's role, attention concerned about the spun-off entity. Butthink from should be paid to his or her personal attach- because of the donor environment in

ment to and interests in the institution. At which Save the Children operates, it hasrather instional one extreme the commitment and personal often said that it believes it would be heldrather than a dedication of the director can only help fos- responsible for these institutions' ongoing

program-based ter the institution's development-especially operations. This is the main reason Save the

perspective cannot during the early stages. But this personal Children wants to continue to have a work-

be overemphasized attachment can be risky if it is allowed to ing relationship with these institutions anddominate or influence the vision of the have a say in their development.entire institution. Perhaps the perforrmance issue is overem-

Kets de Vries (1985) documents such phasized and Save the Children needs to bet-cases for corporate entrepreneurs and sug- ter define its expectations, responsibilities,gests that an entrepreneur's attention to and liabilities-both among the spin-offsdetail-which is a virtue in the start-up and with donors. As the new microfinancephase-can be crippling if he or she con- institutions take on lives of their own and calltinues to exert such control when the orga- for equal partnership treatment, Save thenization grows. An entrepreneur who Children needs to draw distinct linescannot let go of the reins even when faced between its real and perceived responsibil-with the company's demise must have a need ities for operations that it may, in effect, nothat is greater than the desire to see the com- longer control.pany succeed. The same is true of the par- More important, there is an inherent con-ent organization that finds it difficult to let tradiction in Save the Children's larger orga-go of the institution it helped create. nizational structure that affects relationships

Executive directors undoubtedly need at various levels within the organization itselfto concentrate on strategies and goals and with the spin-offs. By design, technicalwhen they head programs. But this need expertise is to be concentrated in theis even more intense when they become Economics Opportunities Unit based inleaders of their own institutions. Their Washington, D.C., and responsible for theattention to the operational and technical organization's worldwide effort in this field.aspects of their business cannot be under- But the spin-offs, through subgrant arrange-stated, but their role in more strategic deci- ments with donors, technically report to thesions of the institution and in team field office line hierarchy. Still, while thedevelopment becomes even more impor- Economics Opportunities Unit plays only antant. Also documented is the need to have advisory role, it is ultimately held accountablestrong senior management team (rather for developments on the ground. Moreover,than one or two key individuals) and to the Economics Opportunities Office and thebuild the ranks of middle management. field offices often hold divergentviews on theThe need to think from an institutional development of the spin-offs and on therather than a program-based perspective nature of Save the Children's involvement.cannot be overemphasized. This divide highlights the need for the par-

LESSONS AND RECOMMENDATIONS 51

ent institution to speak in one voice and to work it has applied many lessons from spin-better align reporting requirements, advisory ning off the JWDS, Al Majmoua, andfunctions, and ultimate accountability. FATEN. In Georgia, for example, it imme-

This divide raises several questions as well. diately introduced Group GuaranteedShould the Economic Opportunities Unit be Lending and Savings as a separate institu-the focal point for the spin-offs? Or should tion rather than as a program. In Januarythat role be played by field offices, which 1997 it registered Constanta, a local micro-maintain a multisectoral focus and are no finance institution, as a nonprofit NGO tolonger staffed to provide technical assistance provide female entrepreneurs with sus-in microfinance? Should there be a local tainable large-scale access to financial ser- The relationshiptechnical or coordinating position in the vices. Due to changes in the laws governing between the parentregion to respond more closely to the needs NGOs, inJanuary 1999 Constanta re-regis- orwanathe andof the spin-offs? Some of these alternatives tered as Foundation Constanta. The insti- organization andare being reviewed in recognition that this tution's charter outlines its mandate and the the spin-off shouldstructural conflict must be resolved, as it will responsibilities of its five-member board of benefit both if it ishave a profound effect on the spin-off directors. All assets, liabilities, and staff from to solidify theprocess and on the development of all par- the NGO were transferred to the new legal bridge betweenties involved in this venture. entity. them

Finally, these concerns go back to the Constanta distributed its first loans inneed to define the framework that is to October 1997, after Save the Children hiredguide the relationship between the parent a consultant to train Constanta's first fiveinstitution and the new independent insti- loan officers. During the trainingtutions. Such a working relationship should Constanta's loan officers manual was pre-benefit both parties if it is to solidify the pared, and it has since been updated. Underbridge between them. It can be based on Georgian law, because it is considered a non-overlapping interests and mutual incentives formal financial institution Constanta is pro-and benefits, but it should be determined by viding lending services but no savingsall parties in recognition of their expecta- services. Constanta has already achieved 90tions and needs. A two-way channel for percent operational sustainability, hasexchanging experiences between the micro- formed 319 borrower groups with 2,879finance institutions and the parent, and active female clients, and has maintained aamong the spin-offs, could contribute to delinquency rate below 1 percent of the out-such a relationship and to the institutional standing portfolio. Save the Children isdevelopment of the new institutions. drafting a proposal to provide a full-time

Save the Children recognizes many of expert based in Tblisi, Georgia, to providethese issues. In subsequent microfinance timely technical assistance to Constanta.

Annex Recent economic strides andchallenges in Jordan, Lebanon, and theWest Bank and Gaza

J ordan ranks as a middle-income devel- have translated into external debt of moreoping country, with a per capita income than 96 percent of GDP, making debt theof about $1,500 at the end of 1997 main structural challenge facingJordan.

(annex table 1). After a five-year boom with World Bank research indicates thataverage annual growth of about 5.5 percent, between 1992 and 1997 measured povertyJordan is experiencing recessionary con- declined inJordan, from 14.9 percent of thetractions, with economic growth having population to 11.7 percent. In 1997 thereslowed to 1.0 percent in 1996 and 1.3 percent were an estimated 538,000 poor people inin 1997. Real GDP growth in 1998 is esti- a total population of 4.4 million. Moreover,mated to have been 2.2 percent but is poverty was less deep in 1997 than in 1992,expected to rise to at least 3-4 percent by with the poverty gap index at 2.5 percent,2001, with inflation in the 2-3 percent range. down from 3.8 percent. But given recentThe Jordanian dinar is officially pegged to economic contractions, poverty and unem-the U.S. dollar, producing an average ployment appear to be on the rise.exchange rate of 0.708 dinar to the dollar. Since the war ended, Lebanon has initi-

The public sector dominates the ated an ambitious program of reconstruc-Jordanian economy. Government services tion and economic stabilization. In 1993-96remain the largest contributor to GDP, the acceleration in government capitalaccounting for 18.6 percent in 1997. Large spending and stabilization efforts werepublic consumption and capital spending associated with high economic growth, with

Annex table 1. Economic and social indicators in Jordan, Lebanon, and the West Bank andGaza, 1997

Indicator Jordan Lebanon West Bank and Gaza

Population (millions) 4.4 4.1 2.6Annual population growth (percent) 3.7 1.8 3.7Labor force (millions) 1.2 1.4 0.6Labor force, female (percentage of total) 23 22 12GDP at market prices (billions of current U.S. dollars) 7.0 14.9 3.4GDP per capita (U.S. dollars) 1,516 3,692 1,361Annual GDP growth (percent) 1.3 4.0 0.9Unemployment (percent) I5.0 8.5 20.3Inflation (percent) 3.1 8.5 7.6Average exchange rate (local currency per U.S. dollar) 0.71 1,539 3.47 (new

Israeli sheqels);0.71 (Jordanian

dinars)

a.Excludes EastJerusalem.if EastJerusalem is included the total population is 2.9 million.Source: World Bank data and staff estimates; Palestinian Central Bureau of Statistics: Central Bank of Jordan; Banque du Liban andLebanon's Central Administration of Statistics; IMF. Internotional Financial Statistics 1 998.

52

ANNEX 53

growth averaging 7.4 percent a year (El- stances. Although GDP growth was strong inErian and Fennel 1997). The government 1994-reflecting the high expectations cre-has restored political stability, taken steps to ated by the 1993 peace agreement betweenrebuild Lebanon's economy and physical Israel and the Palestinian Liberationinfrastructure, and supported private sector Organization-the Palestinian economydevelopment. The exchange rate has stabi- saw a steady decline in economic activity inlized, and inflation has dropped from 120 1995 and 1996, and stagnant growth in 1997.percent in 1992 to 8.5 percent in 1997. In Per capita income declined continuously,1996, however, real GDP growth fell to 4 per- falling by an average of 6 percent a yearcent, adversely affected by the Israeli bomb- between 1994 and 1998, so that in 1998 perings and a slowdown in construction activity. capita income was 22 percent below its levelIn 1997 GDP growth remained at 4 percent, in 1994. The link between growth andbut in 1998 was forecast to be about 5 per- employment is crucial in the Palestiniancent. GDP per capita in 1995 was $2,700- economy and reflects employment levelsa remarkable increase from less than $1,000 that are highly sensitive to the ability of work-in 1990 (Porter 1999). Today GDP per capita ers to enter Israel. By 1995-96 unemploy-is more than $3,500. ment, underemployment, and consequent

Fifteen years of war caused significant poverty became major problems. In 1995,damage to Lebanon's middle class, creating for example, given a poverty level of $650a new class of poor who joined the tradi- per capita per year, about one-fifth oftionally deprived. Target clients for micro- Palestinians were poor. In Gaza, wherefinance institutions such as Al Majmoua employment is especially sensitive to Israeliinclude the 28 percent of Lebanon's pop- border closures, the incidence of povertyulation living under the poverty line of $760 exceeded 36 percent at the end of 1995,(measured in 1996). Poverty is worsened by coinciding with local unemployment ratesgender discrimination and social depriva- above 30 percent.tion. Among economically active groups, Recent economic developments havewomen have lower wages and fewer employ- been positive, however. In 1998job creationment opportunities. But female microen- accelerated and unemployment fell to 13trepreneurs support their families atvarious percent, down from 20 percent in 1997.levels: 35 percent contributed a significant Furthermore, labor force participationamount to the main income, and 24 percent increased throughout 1998, peaking at 42are household heads (Porter 1999). percent in the fourth quarter. Strong

The West Bank and Gaza's economy suffers employment growth suggests that eco-from a number of structural imbalances, nomic output grew an estimated 3-4 percentmany due to adverse political circum- (in real terms) in 1998.

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