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Spinning Off for Sustainable Microfinance

Save the Children Federation intoJWDS, Al Majmoua, and FATEN

Case Study

Rahul Dhumale and Amela 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 Sector Development 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 Microfinance/SmallEnterprises thematic group (of the Finance, Private Sector, and Infrastructure Network) for fund-ing this study. They are also indebted to Niveen Abboushi (Jordanian Women’s Development Society,or the JWDS), Mohammad A. Khaled (Palestine for Credit and Development, or FATEN), RedaMamari (Al-Majmoua), and their staffs for their assistance during field 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 microfinance 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 the Jordanian 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 the JWDS 115 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–JWDS 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

Tables1 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

Spinning off is astrategic choice—one that makessense only if it isdone in thecontext of anotherstrategic choice:achieving fullsustainability

1

Executive summary

Worldwide, microfinance is movingfrom government- and donor-funded subsidized credit to sus-

tainable financial intermediation. In theMiddle East and North Africa, however, manymicrofinance programs are lodged in largerparent organizations that provide social orcharitable services. Although some of theseinstitutional forms may be appropriate in theearly stages of a microfinance program, theywill likely block a program’s development asa financial intermediary. To decrease itsdependence on donors, achieve growth, andbecome fully sustainable, a microfinance pro-gram should gain access to commercialsources of funds.

Not all microfinance programs can orshould be spun off from their parent insti-tution, however. Spinning off is a strategicchoice—one that makes sense only if it isdone in the context of another strategicchoice: achieving full sustainability. This isthe context in which the discussion of andrationale for spinning off microfinance pro-grams must be examined.

The only known spin-offs in the MiddleEast and North Africa’s microfinance indus-try are Save the Children’s microcredit pro-grams in Jordan, Lebanon, and the WestBank and Gaza. Spinning off the JordanianWomen’s Development Society (JWDS), AlMajmoua, and Palestine for Credit andDevelopment (FATEN) was complicatedand difficult. But these experiences broughtto light many of the issues inherent to suchprogram restructuring—issues similar tothose typically found in a corporate context.These include external market factors,

marketing considerations, and the legal,financial, and programmatic futures of theinstitutions, especially as they relate to theirprospects for growth and sustainability.

Added to this were numerous intangiblefactors and positive externalities broughtabout by spinning off, such as the buildingof local capacity or the regional microfi-nance industry. Today all three institutionsare optimistic about their futures as inde-pendent entities and seem determined toface any challenges they encounter.

The experiences of Save the Childrenand JWDS, Al Majmoua, and FATEN offerimportant lessons for organizations that areconsidering spinning off their microfi-nance operations. Regulatory and legalissues and institutional governance struc-tures must be carefully considered whenbuilding a new institution, because they canprofoundly affect an institution’s ability toachieve full sustainability.

Another important aspect of spinning offis to instill a sense of ownership in newboards of directors, as well as a sense ofresponsibility for institutional quality andoperations. Ownership and responsibility arealso relevant when it comes to transferringstaff from a setting with a program focus toone based on the functions and objectivesof an independent institution. The threespin-offs have often found themselves hav-ing to change a corporate culture ratherthan build a new one.

Also important is the timing and tech-nicalities of transferring managementinformation and accounting systems.During the transitions to institutional

independence, all three programs onlygradually assumed responsibility for oper-ational and portfolio management. Thus itis important to consider a program’s pre-paredness for spinning off at every level—as well as to plan for contingencies.

One of the biggest challenges in thetransformation process is to develop a work-ing relationship between the parent insti-tution and the spin-offs that benefits bothparties and solidifies the bridge betweenthem. The role of the parent must be prop-erly defined, with a clear division of respon-sibility and accountability from the start ofthe spin-off process.

External factors directly or indirectlyinfluence the transition to institutional inde-pendence. In this context the role of thedonors needs to be examined, because theapproach that donors take to microfi-nance and the requirements they set formicrofinance institutions can help deter-mine the development of this industry andthe future of many microfinance institutions.Donors can play an invaluable role in devel-oping the microfinance industry. But the keyis to identify areas—such as building capac-ity and establishing a policy dialogue—

where donors have real advantages and thatrequire resources.

There is no evidence linking the spinningoff of Save the Children’s microfinance pro-grams to the fraud that subsequentlyplagued the JWDS and FATEN. Still, fraudhas had significant effects on the spin-offprocess. Both fledgling institutions’ expe-riences with fraud were devastating andthreatened to destroy them. But both insti-tutions learned valuable lessons early in theirinstitutional development that may havemade them stronger and so contributed totheir long-term stability.

Finally, Save the Children, the JWDS, AlMajmoua, and FATEN agree that perhapsmany of these issues could have beenaddressed—or avoided altogether—if fromthe outset lending operations had focused ondeveloping a sole-purpose, independentmicrofinance institution rather than contin-uing in a program-based setting. Recognizingthat managing an institution is not the sameas managing a program could have enhancedthe spin-offs’ institutional capacity to managemore products and services, mobilizeresources, and enhance management infor-mation systems.

Managing aninstitution is not

the same asmanaging a

program

2 SPINNING OFF FOR SUSTAINABLE MICROFINANCE

Despite widespreaddemand, some 90 percent ofmicroentrepreneursin developingcountries lack accessto institutionalfinance

3

The move toward microfinance

Microfinance is a powerful devel-opment tool—one that can reachthe poor, raise their living stan-

dards, create jobs, and contribute to long-term economic growth (box 1). Yetinstitutional microfinance worldwide con-tinues to suffer from what has been called an“absurd gap” between demand and supply.Despite the widespread demand for financialservices, some 90 percent of microentre-preneurs in developing countries lack accessto institutional finance (Robinson 1995).

Microfinance has shown that it can alle-viate poverty in many parts of the world.Although the potential effects may be sim-ilar in the Middle East and North Africa, theregion’s microfinance industry is still in itsinfancy. As a result the region has been theleast exposed to microfinance best practices.The region contains more than 60 millionpoor people—defined as those living on lessthan $2 a day—but only 112,000 (less than2 percent) have access to financial services.Nearly $1.4 billion in microloans is neededto bridge the funding gap (Brandsma andChaouali 1998).

Microfinance providers worldwide includea wide range of organizations and institutionswith public owners, private owners (corpo-rate and mutual institutions), and no own-ers at all (nonprofits). While private capital,whether in the form of sole proprietor orpartnership or corporation, dominates mostcountries’ economies, this is not the case formicrofinance. In the Middle East and NorthAfrica, for example, there are more than 60active microfinance programs. Of these, 40are run by nongovernmental organizations

(NGOs)—often with microfinance activitieslodged within the organizations’ largersocial operations—and quasi-governmentalorganizations—including state-owned banksoperating under government pressure andserving merely as windows for credit delivery.Few private banks in the region are engagedin microfinance.

Instruments have been designed to pro-vide accountability and performance incen-tives to the microfinance programs operatingin this way. But the financial services providedby nonprofit NGOs are supply driven, as theprograms are typically designed and fundedby outside actors, limiting the freedom oflocal decisionmakers, program managers,and staff with direct, hands-on experience inthe local microfinance market. Givenhistorical and cultural values and charitable

Box 1.What is microfinance?

Microfinance institutions provide the entre-preneurial poor with financial services—suchas credit, deposit, and savings—that are tai-lored to their needs. Good microfinance pro-grams rely on:• Small, usually short-term loans and secure

savings products.• Streamlined, simple appraisal of borrow-

ers and investments.• Alternative approaches to collateral.• Quick disbursement of repeat loans after

timely repayment.• Interest rates or fees that are high enough

to cover costs—including costs of capital.• Convenient location and timing of

services.

Source: Goldberg and Fruman 1997; UNDP 1997.

and social work traditions in the Middle Eastand North Africa, the 40 microfinance pro-grams run by NGOs and quasi-governmentalorganizations will likely face serious organi-zational obstacles on the path to sustainability.Most of them will probably not make it if theymaintain their current ownership and gov-ernance frameworks.

The demand for institutional microfi-nance can be met only by sustainable finan-cial institutions. Early microfinanceprograms focused on extending credit ser-vices, but today achieving financial sustain-ability, mobilizing savings, and integratingwith the domestic financial markets havebecome just as important. This new focus oneconomic results and sustainable busi-nesses—together with primary indicatorssuch as profitability, operational efficiency,service quality, institutional stability, and cap-

ital mobilization—requires greater attentionto the ownership and governance of insti-tutions providing financial services tomicroenterprises.

According to a World Bank study, lessthan a third of the more than 60 microfi-nance programs in the Middle East andNorth Africa are implemented using bestpractice principles (box 2). As the region’sindustry develops, however, positive devel-opments are becoming increasingly evident.Only two programs in the region are con-sidered fully sustainable—covering theircosts and maintaining or deepening out-reach—and eight others are on the road tosustainability (Brandsma and Chaouali1998). Fifty-five programs have not achievedminimum outreach and do not cover 100percent of their operational costs. Poor loanportfolios, inadequate management infor-

The demand forinstitutional

microfinance can bemet only by

sustainable financialinstitutions


Experiences in countries as varied as Bangladesh,Bolivia, Egypt, Senegal, Mali, and the West Bankand Gaza show that the poor are bankable andthat savings and credit services can be deliveredto the poor on a sustainable basis. Long-termfinancial sustainability depends on charging inter-est rates that cover operational costs (includingthe cost of loan defaults) and capital costs (includ-ing interest on borrowed capital and inflation onowned capital). Successful microfinance opera-tions worldwide charge interest rates that arehigher than market rates. Guiding principles ofbest practice microfinance include:• Covering costs. To become sustainable, micro-

finance institutions—regardless of theirinstitutional setup—must cover their costs oflending. If such costs are not covered, theinstitution’s capital will be depleted andmicroenterprises’ continued access to finan-cial services—and even the existence of themicrofinance institution—will be in jeopardy.

• Achieving a certain scale. Successful microfi-nance institutions have reached a certainscale, as measured by the number of activeclients. This number depends on the coun-try setting, lending methodology used,and loan sizes and terms offered.

• Avoiding subsidies. Microentrepreneurs donot require subsidies or grants—but they do

need rapid and continued access to finan-cial services. Besides, microlenders cannotafford to subsidize their borrowers. Subsidiessend a signal to borrowers that governmentor donor funds are a form of charity, whichdiscourages borrowers from repaying.Moreover, microfinance institutions havelearned that they cannot depend on gov-ernments and donors as reliable, long-termsources of subsidizing funding.

• Promoting outreach and demand-driven servicedelivery. Successful microfinance institutionsincrease access to financial services for grow-ing numbers of low-income clients, offeringthem quick and simple savings and loan ser-vices. Loans are often short term, and newloans are based on timely repayments. Loansare based on borrowers’ cash flows and char-acters rather than their assets and docu-ments, and alternative forms of collateral(such as peer pressure) are used to motivaterepayment.

• Maintaining a clear focus. It takes time andcommitment to build a sustainable micro-finance program. Thus mixing the deliveryof microfinance services with, for example,the provision of social services is inadvisablebecause it sends conflicting signals toclients and program staff.

Box 2. Guiding principles of best practice microfinance

Source: Brandsma and Chaouali 1998; UNDP 1997.

mation, excessive donor reporting require-ments, and inefficient systems and proce-dures hamper the operational sustainabilityof these organizations. In this contextmany of the region’s programs may neverbecome sustainable—unless they make sus-tainability a strategic choice. Examples ofemerging but not yet fully sustainable insti-tutions include the Save the ChildrenFederation’s spin-off programs: theJordanian Women’s Development Society(JWDS), Al Majmoua in Lebanon, andPalestine for Credit and Development(FATEN) in the West Bank and Gaza.1

Best practice experience shows that thejoint provision of social services and micro-finance by the same program usually does notwork. Often the objectives, culture, and man-agerial and operational systems of the largerprogram clash with those of the microfinanceprogram. For instance, the socially orientedparent organization may have a charitableoutlook, give grants to the needy, employsocial workers and rely on volunteers, and usea cash-based budgeting system. A successfulmicrofinance program, however, needs abusiness orientation, business-oriented loanofficers who are rewarded based on perfor-mance, and financially oriented administra-tive and budget systems. It also needs agovernance structure to provide strategicdirection, ideas, and solutions to managersto ensure the longevity of the program.

These clashing objectives and operationsmay result in “institutional schizophrenia”that permeates the entire organization. Onthe one hand, the organization providesgrants to the poor; on the other, it providesloans for which repayment is strictlyenforced. The clients of the social programare beneficiaries and the clients of themicrofinance program are customers whobuy a service that they value. A good socialworker is not necessarily a good loan offi-cer, and a good loan officer is not neces-sarily a good social worker. The confusionof staff, donors, and clients is oftenreflected in poor repayment rates and highdelinquencies—elements that directly

undermine the sustainability of the micro-finance provider. Thus programs that areengaged in both types of services shouldmanage their provision separately, withdifferent managerial and administrativeprocedures, recruitment, staffing, andsometimes even names.

Why study spin-offs in microfinance?

Worldwide, microfinance is experiencing aparadigm shift away from government- anddonor-funded subsidized credit to sustain-able financial intermediation (Robinson1996). Institutions cannot become fully sus-tainable if they onlend donor funds at sub-sidized interest rates and combine socialand financial services. Instead they remaindependent on continuing donor or gov-ernment injections of low-cost funds. Tobecome sustainable, these institutions mustraise interest rates on loans, mobilize vol-untary savings, and separate social andfinancial activities. This is the context inwhich the discussion and rationale for spin-ning off microfinance programs has beenplaced.

Yet there is hardly any documentedhands-on experience on how to spin off amicrofinance operation from a larger socialprogram. There is no best practice and noworst practice. Moreover, the issues aredaunting and include:• The timing of the spin-off.• Legal issues involving decisions on the

organizational form of the new entity.• Funding issues, including making

arrangements for subgrants,2 searchingfor new donors and grants, and raisingfunds in local capital markets.

• Ownership and governance issues, includ-ing selecting the board of directors anddetermining the appropriate roles for dif-ferent levels of governance.

• Staffing issues and changing or buildinga corporate culture.

• Managerial and operational issues.• Psychological issues of the “divorce” from

the parent institution.

The joint provisionof social servicesand microfinance bythe same programusually does notwork

THE MOVE TOWARD MICROFINANCE 5

In addition, spinning off gets even morecomplicated when it is understood that theprocess is done while normal lending oper-ations continue because clients want contin-ued access to finance. The period when theprogram operates on concurrent systems—the old one and the new one—can be espe-cially harrowing. Finally, one of the mostcomplicated pieces of this puzzle is the con-tinuance of a symbiotic relationship betweenthe parent institution and the new institution.

Still, spinning off is often essential for amicrofinance program to become sustainable.Microfinance programs that are newer add-on activities face serious obstacles rangingfrom institutional ambivalence, imageproblems, internal obstruction, bureaucracy,transition problems, and capital constraints.In many cases the parent organization islegally prohibited from engaging in financialobligations—such as mobilizing deposits orborrowing for onlending—when the micro-finance organization must be able to do so inorder to grow and serve more of its poorclients. In many cases spinning the microfi-nance operation off of the parent organiza-tion may be the only way for the microfinanceoperation to become sustainable. Thus theoperation must be an independent legal entitywith its own objectives and with managerialand operational systems appropriate formicrofinance.

Save the Children’s spin-offs

The only known spin-offs in the MiddleEast and North Africa’s microfinanceindustry are those of Save the Children’smicrocredit programs in Jordan, Lebanon,and the West Bank and Gaza. GroupGuaranteed Lending and Savings programspreviously housed under Save theChildren’s larger umbrella were spun offinto three legally independent entities: theJWDS, Al Majmoua, and FATEN.

Although at different stages, these threespin-off processes are nearing completionand appear to have been successful. Theyhave provided many lessons, illustrating the

complexity of the issues involved in suchinstitutional transformation and offeringknowledge about key guidelines for othermicrofinance programs contemplating suchundertakings. Still, the main objective of thiscase study is not to present a one-size-fits-allmodel on how to spin off a microfinanceprogram, or to provide an in-depth evalua-tion of each of the institutions created by thespin off process. Rather, the study seeks toexplain the most important aspects of thespin-off discussion, the process to arrive atthe spin-off decision and its justification, andthe spin-off process itself, using these threeexamples as part of the learning experience.

The study highlights a series of crucialissues—including legal issues, governanceissues, organizational and operational issues,personnel issues, and important psycholog-ical issues. The costs of the spin-off process,the needs for proper process management,and the possible need for technical assistancein this process are also described. The studyalso discusses the evolving relationshipbetween the parent organization and thenewly independent institutions, and criticallyexamines some factors external to the spin-off process (such as the involvement ofdonors and the impact of administrativecrises on a microfinance institution’s insti-tutional stability and development).

Microfinance is not a panacea for poverty.But it can have enormous effects in the livesof the most disadvantaged. The clients ofmicrofinance institutions are the measure ofthe successes or failures of each program.These clients’ stories are brought through-out the text as examples—but also as areminder that, in essence, microfinance isabout and for the entrepreneurial poor.

Notes1. Except where otherwise noted, all mentions

of Save the Children refer to Save the ChildrenFederation/U.S.

2. If the proceeds of a grant—all or part—are tobe made available to executing agencies other thanthe primary grant recipient, the donor may requirethe recipient to enter into a subsidiary agreementwith the executing agency. Subgrant agreements

Spinning off is oftenessential for amicrofinance

program tobecome sustainable


are typically subsidiary agreements between the pri-mary grant recipient and the executing agency,which set out the terms and conditions of the trans-fer of funds. In addition, if the executing agency

does not have a direct contractual relationship withthe primary donor, the agreements spell out theobligations of the executing agency for the exe-cution and operation of the project.

THE MOVE TOWARD MICROFINANCE 7

For Save theChildren, economic

and socialadvancement rest on

self-sufficiency andsustainable solutions

to pressingdevelopment

problems

8

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

Save the Children is a voluntary, non-sectarian, nonprofit entity establishedin 1932 to assist the children of U.S.

coal miners suffering the effects of the GreatDepression. During World War II Save theChildren began expanding its frontiersbeyond the United States and started help-ing children around the world. Today Savethe Children is a multisectoral internationaldevelopment organization providing servicesfor children and self-help for communities,participating in projects in 39 developingcountries. The funds for its operations comefrom private donors (who contributethrough child sponsorship programs) andpublic donors (including the U.S. Agencyfor International Development, the U.K.Department for International Development,and the Dutch government).

Like all U.S. nonprofits, Save theChildren finances some of its core man-agement and administrative costs througha “cut” of funds received from donors. Thisindirect cost recovery rate is applied to allSave the Children programs. Save theChildren does not see this cut as profit butas real cost—because it covers the cost ofdelivering programs worldwide, and becauseSave the Children believes that this cut rep-resents part of the real value of the organi-zation’s community development knowledgeand worldwide experience.

In developing countries Save theChildren provides services in three mainareas: education, primary health care, andeconomic opportunities, especially forwomen. Save the Children’s main initiative,part of the economic opportunities pro-

gram, are the Group Guaranteed Lendingand Savings programs, which provide creditto groups of poor female microentrepre-neurs (box 3). In addition to credit andother economic support, the lending pro-grams sometimes include health and edu-cation initiatives for the women and theirfamilies.

For Save the Children, economic andsocial advancement rest on self-sufficiencyand sustainable solutions to pressing devel-opment problems. Following this approach,in the early 1990s Save the Childrenembarked on economic opportunities pro-jects in the Middle East and North Africa.The original program and the subsequentspin-offs have given families (with a focus onwomen) access to credit, savings opportu-nities, and support that have enabled themto develop small businesses—businesses thatcould help them break free of poverty.

Save the Children in the Middle East

Save the Children has a brief history ofmicrolending in the Middle East. Until theearly 1990s its operations focused on healthservices, children’s education, public infra-structure, and environmental programs(including safe water and sanitation services).In the early 1990s, however, microloansbecame more prominent—as Save theChildren began to redefine its role in theregion, with a stronger focus on income-generating activities. Save the Children’sMiddle East operations are coordinatedthrough its regional headquarters in Beirut

(Lebanon), with field offices in Egypt,Lebanon, Jordan, and the West Bank andGaza. The field offices can be considered asbranch offices of the U.S.-based headquar-ters, under the supervision of the vice pres-ident for international operations. Inaddition, the Washington, D.C.–basedEconomic Opportunities technical unitprovides support to the region.

The approach to microfinance

Despite capital constraints, Save theChildren has a good track record of lendingto poor female borrowers at commercialinterest rates (table 1). Until the spin-offprocess created the JWDS, Al Majmoua, andFATEN, the Group Guaranteed Lendingand Savings programs were one of the maincomponents of Save the Children operationsin the region.

When Save the Children introducedGroup Guaranteed Lending and Savings pro-grams in Jordan, Lebanon, and the West

Bank and Gaza, it knew that selecting or cre-ating a local microfinance institution andenhancing its capacity to manage the pro-gram was the starting point for providing dis-advantaged female microentrepreneurs withsustainable access to microfinance services.This approach was in line with cost-effectiveprogram strategies that cover costs throughinterest payments and other fees, as well asstrategic planning and the creation of aproper institutional framework for expand-ing the programs that Save the Children pur-sued from the start of Group GuaranteedLending and Savings operations.

Thus, with the goal of achieving long-term program sustainability by building uplocal institutional capacity and ultimatelyhanding over the programs to local insti-tutions in Jordan, Lebanon, and the WestBank and Gaza, Save the Children consid-ered a number of local financial and non-financial organizations as potential partners.Earlier it had teamed up with a local part-ner in other program areas as well. For

SAVE THE CHILDREN’S SPIN-OFF HISTORY: FROM PROGRAMS TO INDEPENDENT INSTITUTIONS 9

Designed to help meet the high demand forsustained access to credit among disadvantagedwomen, Group Guaranteed Lending andSavings program usually:• Open a long-term line of credit by providing

small initial loans that grow larger with everynew loan cycle, which typically run from 4.5to 6.0 months. Each borrower is expected totake out a series of loans over a number ofyears.

• Charge borrowers market-related interestrates—and in some cases, fees that coverfinancial and operating costs—and protectthe value of loan capital against inflation anddefaults.

• Allow borrowers to implement individual pro-jects, but to receive loans require that borrowersform credit and savings groups, usually with atleast 10 members who guarantee repayment ofone another’s loans. Such groups eliminate theneed for formal collateral and so provide thesefemale entrepreneurs with access to financethat would otherwise be denied to them in theformal financial sector.

• Require group members to conduct allrepayment and savings transactions atnearby branches of commercial banks.

• Allow loans to support a variety of businessactivities, including food production, stores,clothes, hair care, and animal rearing.

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

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,Al Majmoua, and FATEN data.

example, in the West Bank and Gaza, Savethe Children was implementing an institu-tional development program (funded bythe U.S. Agency for International Develop-ment) with several local NGOs to enhancetheir capacity to implement sustainabledevelopment programs.

But the nontraditional methods of theGroup Guaranteed Lending and Savingsprograms—small loans, market based inter-est rates, lending based on groups, a focuson women, and complex managementneeds—made it impossible to find a rightmatch with organizations in the region. Inaddition, the partnership model requiredco-management by Save the Children andthe local partners. As first proven inLebanon, this duplicated model createdconfusion about accountability and respon-sibility, and it increased operational costs. Atone point this model almost led to the res-ignation of all local staff in Lebanon’s micro-finance program. Recognizing thesedifficulties, Save the Children concludedthat local partnerships were not appropriatefor managing Group Guaranteed Lendingand Savings programs. Hence for a few yearsthe programs were implemented withoutlocal partners and under the Save theChildren umbrella.

The decision to spin off

Two events initiated the spin-off discussionsand process. First, in December 1995 Save theChildren’s Economic Opportunities Officehosted a 10-day business planning conferencein Cairo for staff from Save the Childrenoffices working in or interested in beginningprograms such as Group GuaranteedLending and Savings. The local partnershipframework Save the Children had originallychosen was discussed, and as a result the ideato spin off came to the forefront. Severalinternational microfinance experts—thefacilitators of this workshop—suggested thiscourse of action as well.

Then in mid-1996 the ConsultativeGroup to Assist the Poorest, a multidonor

program hosted by the World Bank,appraised these programs—in considerationof a future grant to help spin them off tonew institutions and to manage the transi-tion. At the time the Jordan operation wasbeing restructured, so the appraisal coveredonly the programs in Lebanon and the WestBank and Gaza. But the process of definingthe appropriate role for Save the Children’sheadquarters in Westport, Connecticut(United States) and mobilizing technicalassistance took much longer than antici-pated, and work was delayed by a year. Theoriginal partnership agreement included atime frame that had to be renegotiatedbecause of this delay—a delay that partlyoccurred because Save the Children’s bud-get scheme included an indirect cost recov-ery rate for overhead that CGAP foundunacceptable.

Once the delay was resolved, the grantagreement was signed in June 1997. CGAP’s$250,000 investment financed microfinanceadvisers that were to go through all the tech-nical and managerial aspects of an institu-tional spin-off by tapping expertise on suchtopics as governance, legal issues, informa-tion systems, branch and product develop-ment, staff training, and business planning.CGAP has considered the investment suc-cessful because all three of the field micro-finance programs are now independentinstitutions (CGAP 1998). Still, the processwas long and complex in all three countries.

From Save the Children to theJordanian Women’s DevelopmentSociety (JWDS)…

In Jordan Save the Children began imple-menting the Group Guaranteed Lending andSavings program as a pilot project in June1994 in the Amman refugee camps ofMahatta and Natheef (box 4). Before this, inApril 1994, Save the Children held an exten-sive workshop in Amman to present the basicprinciples of the Group Guaranteed Lendingand Savings program to the staff in the region.This workshop marked a turning point for

The spin-offprocess was long

and complex in allthree countries


Save the Children regionwide. Before theworkshop all field offices were involved insmall enterprise development programs, butthey all gradually switched to GroupGuaranteed Lending and Savings programs.

The Jordan project incorporated a dualpurpose: to test the feasibility of the GroupGuaranteed Lending and Savings method-ology in Jordan and to provide poorwomen with access to credit and savingsmechanisms. Based on early success andusing funds raised through the UnitedNations Children’s Fund and other donors,Save the Children expanded its GroupGuaranteed Lending and Savings activitiesto two new areas in March 1995—the PrinceHassan (Nasser) refugee camp in Ammanand the Mafraq governorate in rural Jordan.The project was successful, and the method-ology appeared well suited to Jordan’s cul-ture and economy.

As the program began to grow beyondthe pilot stage, Save the Children beganmodifying the program’s goals and startedreevaluating the institutional frameworkunder which the credit program was to con-tinue in the long term in order to achievefull sustainability. Save the Children tried topartner with the Jordanian Women’s Union,a similar local multisectoral organization.The union had targeted women in the pro-vision of its services and had a large net-work—features that were in line with Savethe Children’s strategy and focus.

But it soon became clear that a partner-ship would not work because the unionlacked administrative discipline due to thesocial and charitable nature of its operations.In addition, senior and middle managerslacked commitment and capacity to carry outcomplex tasks under the Group GuaranteedLending and Savings program. No account-ability could have been established in suchcircumstances. Save the Children and theunion held opposing views on such funda-mental issues as the need to recover costs andthe interest rates that clients were expectedto pay. The failed partnership later provedto be a blessing in disguise, as Save theChildren had more reasons to abandon theidea of partnering with the union.

In 1996 Save the Children field managersdecided to spin off Group GuaranteedLending and Savings operations and createa new NGO. Two goals were defined: to cre-ate a sustainable local institution capable ofproviding poor female microentrepreneurswith access to financial services, and toempower women as income earners and deci-sionmakers in their families and communi-ties. After completing lengthy preliminarywork, the JWDS—the pioneer in the spin-offprocess—was registered as an independentJordanian NGO in December 1996.

Effective 1 April 1997, the JWDS assumedresponsibility for implementing the spin-offprogram through a subgrant from Save theChildren. Since then the JWDS has

The JWDS was thepioneer in the spin-off process


Box 4. Key dates for the JWDS

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

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 the Jordanian 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

management of the loan portfolio and transfer of the management information system

January 1999 The JWDS completes the move to its own premises

increased its capacity to implement this largeand complex program, while Save theChildren has provided funding, technicalassistance, and institutional developmentsupport. On 1 August 1998, and consistentwith overall program strategies, the JWDSassumed responsibility for directly manag-ing the loan portfolio and managementinformation system. By February 1999 theJWDS had nearly 5,000 active female bor-rowers (table 2). By the end of March 1999operational sustainability was 66 percent andfinancial sustainability, 55 percent.

…to Al Majmoua…

Save the Children has been working inLebanon since 1953, implementing human-itarian emergency and development projects

across the country. Lebanon saw its firstGroup Guaranteed Lending and Savingsprogram in April 1994 as a response to thepostwar lack of liquidity and need for finan-cial services to support the development ofthe disadvantaged—particularly femalemicroentrepreneurs—in war-affected com-munities (box 5). The introduction of theprogram was facilitated by funds from a pre-vious credit program under the SmallEnterprise Development initiative.

During the program’s first phase(June–December 1994) implementationwas undertaken primarily by Save theChildren. Efforts during this time focusedon developing a loan methodology andbuilding implementation systems. Linkswere established with Fransabank for mak-ing all cash transactions, processing loan dis-


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 partnerDecember 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 submitted 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 Savings program

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 24,730Amount of disbursed loans $4,505,582 $7,872,135 $6,958,510Number of active borrowers 4,465 3,138 4,068Outstanding loan portfolio $529,127 $755,236 $704,143


bursements, accepting loan repayments, andopening savings accounts for groups.

As program parameters were set andexpansion was under way, Save the Childrenfollowed its original plan to identify potentiallocal partners to experiment with joint pro-gram implementation. But during this secondphase (January–December 1995) it becameclear that most existing institutions did notshare Save the Children’s understanding andvision of the program. In August 1995 SecourPopulaire Libanais was selected as a potentialpartner. In addition, the U.S. Agency forInternational Development made fundingavailable for the Lebanon program. At thatpoint the program, working with SecourPopulaire Libanais, began to expand imple-mentation in three areas: Akar, southLebanon, and Baalback-Hermel. The objec-tive was for Secour Populaire Libanais tobecome the main implementer of the GroupGuaranteed Lending and Savings program,while Save the Children would provide fund-ing and technical assistance.

But this partnership remained tenuous atbest. The co-management model that thispartnership assumed was problematic fromthe start, undermining accountability andresponsibility and increasing operationalcosts. In addition, differences in capacity, pro-gram vision, and organizational culturebetween Save the Children’s GroupGuaranteed Lending and Savings team andSecour Populaire Libanais further strainedthis partnership—and, most important, thesustainability of the program in Lebanon.

After the business planning workshop inCairo in December 1995, the idea to spin offprogram operations was discussed with theU.S. Agency for International Development.At first USAID/Beirut rejected the idea, insist-ing on the partnership with Secour PopulaireLibanais. Following extensive negotiations, aUSAID consultant was dispatched to reviewthe grant and to assess the structure andcapacity of Secour Populaire Libanais as apartner in the Group Guaranteed Lendingand Savings program. The consultant’sreport concluded that the partnership had

not been fruitful and that Secour PopulaireLibanais would not be the best partner giventhe two organizations’ very different featuresand capacity. A second external evaluation byCGAP consultants in May 1996 furtherendorsed the spin-off proposal.

Essential for proceeding with the spin-off,however, were the motivation and commit-ment of the staff of the Lebanon field office—particularly the staff of the Group GuaranteedLending and Savings program—to develop-ing a leading Lebanese microfinance insti-tution that would implement the programnationwide. The key principles that guidedthe staff were best practice principles of finan-cial sustainability, service-oriented activities,and accountability to clients. In the words ofAl Majmoua’s executive director, “there wasa strong feeling of ownership of the programamong the staff. This was crucial for our suc-cessful transition.”

The final decision to terminate the 10-month partnership between Save theChildren and Secour Populaire Libanaiscame in June 1996. This third phase of theprocess provided invaluable lessons aboutthe ingredients needed for building localcapacity and establishing an adequate orga-nizational structure when creating an inde-pendent microfinance institution.

The fourth phase of the spin-off process(September 1996–October 1997) saw exten-sive preparation for the creation of the newinstitution. To assess the administrativeneeds of a new institution devoted solely tomicrocredit, Save the Children’s fieldoffices were physically separated inSeptember 1996. Over the next year the neworganization’s institutional structure wasdeveloped and refined, staffing and humanresources were improved, and new systemswere created. The bylaws and statutes of AlMajmoua were defined to regulate its func-tioning and to allocate powers and respon-sibilities to the bodies created (generalassembly, board of directors, officers, andthe finance, staff, operations, and strategicplanning committees). As with the programsin Jordan and the West Bank and Gaza,

A strong feeling ofownership amongAl Majmoua’s staffwas crucial for its successfultransition


lending operations continued while all thesespin-off activities were under way.

In January 1997 Al Majmoua applied to theMinistry of Interior to register as an inde-pendent NGO dedicated to providing micro-finance services. This approval was granted inSeptember 1997. During its fifth phase ofdevelopment (November 1997–June 1998) AlMajmoua took steps to increase its institu-tional capacity through board training,promotion campaign, human resourcesrecruitment, training and development,product testing and development of businessplans for expansion and branch development.On 1 January 1998 Al Majmoua assumed fullresponsibility for the Group GuaranteedLending and Savings program’s portfolio,operational costs, and management. ByFebruary 1999 Al Majmoua had 3,138 activefemale borrowers (see table 2). At that timeoperational sustainability was 66 percent andfinancial sustainability, 59 percent.

…to Palestine for Credit andDevelopment (FATEN)

Save the Children had run a credit programin the West Bank and Gaza since 1986, start-ing with the Small Enterprise Developmentprogram. In February 1993 Save the Children

initiated a pilot Group Guaranteed Lendingprogram to address the shortcomings of theSmall Enterprise Development program,which did not adequately respond to the eco-nomic situation in the West Bank and Gazaor achieve the desired outreach or financialsustainability. In August 1993 an internalassessment of the program suggested thatsmaller initial loan sizes would allow Save theChildren to reach poorer Palestinians, thusmore effectively serving those who tradi-tionally have no access to credit.

Drawing on this finding, on experiencegained from international workshops and vis-its to group-based lending and savings pro-grams in other countries, and on Save theChildren’s earlier experiences in Lebanon,Jordan, and Egypt, the Palestinian credit staffreformulated the group-based lending andsavings program in January 1995 (box 6).The new program seemed to respond betterto country circumstances, and Save theChildren felt that it enabled the agency tobetter achieve its primary goals by targetingfemale microentrepreneurs. Since January1995 agreements have been reached with sev-eral commercial banks in the West Bank andGaza to service program needs.

Having failed to identify a suitable localpartner to co-manage the Group Guaranteed

By moving tosmaller loans,

FATEN was betterable to target poor

people


Box 6. Key dates for FATEN

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

December 1995 Save the Children organizes a business planning workshop in Cairo. The idea to 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, Turkey, 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 and management of its

loan portfolio, operational costs, and management information system

Lending and Savings program—and havinglearned from its experiences in Jordan andLebanon—Save the Children worked withdonors to create a new local institutiongeared toward long-term implementationand sustainability. Existing program staffwere to make up the core of the staff of thenew organization. Early 1997 saw increasedefforts by Save the Children and programstaff to lobby some 100 prominentPalestinians for this initiative.

After this vetting process, about 15 peo-ple in Gaza and 25 people in the West Bankwere invited to a series of meetings wherethe methodology of the program, its vision,and its working principles were explainedand discussed. The draft plan for spin-off waspresented and legal issues related to theestablishment of the organization, the roleand characteristics of board members, andthe vision of the new organization were con-sidered. Because of the limited freedom ofmovement between Gaza and the West Bankfor Palestinians, these meetings had to beheld in Cyprus and in Turkey. These limi-tations continue and have made FATEN’sinstitutional management more complex.

After considerable preliminary work, inJuly 1998 FATEN was registered as an inde-pendent nonprofit joint stock company ded-icated to providing microfinance services.On 1 March 1999 FATEN became fullyresponsible for managing the entire pro-gram. At that time FATEN had more than4,000 active female borrowers (see table 2).During this first month of complete insti-tutional independence FATEN’s opera-tional sustainability was 62 percent and itsfinancial sustainability, 52 percent.

Where are the institutions today?

Although the JWDS, Al Majmoua, andFATEN are at different stages of develop-ment, all three are trying to refocus the basicmodel for microfinance in their countries. Tothat end, they have each succeeded in reach-ing out to poor women and are now focusingon their operations, their vision for devel-

oping their target groups, and the strategiesfor the evolution of their institutions. Issueshave been raised about target markets,financial products, operational structures,and institutional forms. Before proceeding tothe next stage, all three institutions plan towork through these issues and develop real-istic strategic business plans that take intoaccount their needs and those of their clients.

The JWDS is working toward its strategic goals

The vision of the JWDS is to harness the pro-ductive capacity of every potential microen-trepreneur in every sector of the economy,with a focus on people who lack access to for-mal financial markets. The GroupGuaranteed Lending and Savings programhas been successfully implemented in sevengovernorates in northern, central, andsouthern Jordan: Amman, Balqa, Irbid,Mafraq, Rusaifeh, Karak, and Madaba. A pro-gram in one area, Zarqa, was closed in early1999 because of substantial fraud cases thatare still pending in court. A thorough inves-tigation of the Zarqa area continues to assessthe possibility of reopening it for new clients.

In line with its strategic plans, the JWDSaims to achieve several objectives over the nextfew years. It plans to achieve and maintain astrong portfolio with good client services. Itplans to develop and test new individual loanproducts catered to client needs. In trying to

All threeinstitutions aretrying to refocusthe basic model formicrofinance intheir countries


Hoda has been borrowing from the JWDS for twoand a half years and is now on her eighth loan, for350 Jordanian dinars ($494). A friend told Hodaabout the program; currently she is in a seven-member group. Hoda produces facial creams athome. She has her own secret formula and uses nat-ural ingredients. The creams are of high quality andhave been selling well. Hoda makes 0.5 dinars ofpure profit per small jar of cream and usually sells50–70 jars a month. Recently she has been plan-ning to patent her formula and has approached theMinistry of Commerce. Although a patent will beexpensive, it will be essential if Hoda is to considermass production. But for this she will need a smallworkshop and more ingredients.

widen its client base, the JWDS plans to repli-cate best practice branch models. Finally, itplans to strengthen staff capacity to operatean efficient institution so that it can use itscapacity to become eligible for donor funds.To become more efficient, the JWDS must—among other things—develop financial prod-ucts, review its legal structure, assess theviability of strategic alliances with formal bank-ing institutions, and broaden its capital base(possibly to include commercial funds).

Al Majmoua has a strong reputation

The next three years will be expansive onesfor Al Majmoua. With its solid and promisingpast as a pilot project with Save the Childrenand then as an independent institution, AlMajmoua is ready to grow to a national scaleand achieve financial sustainability. It plansto rely on its well-trained staff, strong insti-tutional image, and exceptional track recordto expand the delivery of group-guaranteedloan and credit services, develop new finan-cial products, and establish an extensivebranch network. Its defined mission and inde-pendent status have allowed Al Majmoua todevelop a strong identity that has affectedstaff, target clients, and the general public.

Al Majmoua’s greatest strengths include itsclient base and the experience it has gainedsince 1996. Current clients represent anexceptional database of microentrepre-neurial information in Lebanon. The largenumber of loans issued in recent years, cou-pled with the high rate of repayment, havegiven Al Majmoua a strong reputation for reli-ability. Thus client satisfaction will be key toensuring Al Majmoua’s growth—particularlygiven the increasing competition from otherNGOs and banks.

New products need to be developed tomeet client needs. The first new product—larger loans to repeat clients—has alreadybeen developed and will be followed by otherinnovative products. Al Majmoua is expectedto achieve operational sustainability in 2000and financial sustainability in 2001. AlMajmoua projects that it will have 5,800

clients by 2000, 10,900 by 2001, and nearly18,000 by 2002. If successful, this ambitiousgrowth plan will make Al Majmoua the lead-ing player in Lebanese microfinance.

Current funding will ensure that opera-tions remain on track over the next twoyears, after which Al Majmoua will need tosecure new grants or begin to access privatefunding, with the eventual possible aim ofseeking a strategic partner such as a bank-ing institution. Any concrete discussion ofsuch a strategic alliance would be prematureat this point, however. Given Lebanon’s busybanking sector, Al Majmoua should expectto face further competition as commercialbanks begin to engage in microfinance.

Again, Al Majmoua can rely on thelessons it has learned about reaching poorclients in Lebanon. This is a clear advantagefor Al Majmoua over its more formal bank-ing counterparts, but one that must not berelied on too heavily. Al Majmoua plans toremain focused on serving women and willcontinue to deliver microloans tailored toconditions in Lebanon.

FATEN faces challenges but has unique strengths

Having only recently overcome some fraudthat coincided with the spin-off preparations—while its microfinance program was still

Al Majmoua’smission and

independence haveallowed it to

develop a strongidentity that has

affected staff, targetclients, and thegeneral public


Turfah owns a store that sells sweets and juices inAin-El Helweh Camp, located in Saida (Sidon) insouthern Lebanon. One of the first clients of AlMajmoua, Turfah has been borrowing for four anda half years and is on her twelfth loan, for $900. Herstore is profitable and has grown significantly sinceshe became an Al Majmoua client. Turfah recentlyused the proceeds of a loan to purchase a juice standfor better marketing opportunities. Part of her busi-ness is seasonal. For example, during the Feast, fol-lowing the holy month of Ramadan, her businessprospered because of high demand for specialty sweets.Turfah hopes to soon purchase a new machine sothat she can increase output when demand is high.Her monthly revenue averages nearly $1,100. Eachmonth she uses $800–$900 to purchase supplies andpays $65 in rent. Thus her retained monthly earn-ings come to $100–$200 a month.

under the Save the Children umbrella—FATEN is drafting a three-year business planthat will more clearly outline its developmentgoals and strategic directions. Senior managersare working closely with board members in thisexercise to develop a joint plan that reflects thefull ownership of the institution.

FATEN’s mission is to strengthen the eco-nomic base of Palestinian microentrepre-neurs and to provide high-quality andsustainable financial services to them—particularly to female borrowers in the WestBank and Gaza. By charging a market-basedinterest rate, the program is expected toachieve financial self-sufficiency by theend of 2000. FATEN provides financial ser-vices to women in Khan Yunis, Gaza City,Rafah, and Jabaliya in Gaza and in Jenin,Hebron, Nablus, and Tulkarem in the WestBank. By the end of 2000 the program isexpected to cover most major urban areasin the West Bank and Gaza. The program isfunded by the U.S. Agency for Inter-national Development, the U.K. Departmentfor International Development, and IrishAid.

One of FATEN’s greatest strengths—onethat was supported while it was under Savethe Children’s umbrella—is its ability toadapt and to learn from clients. For exam-ple, for clients starting the fourth loan cycle,FATEN has cut the group size to five,

increased the loan amount and term, andcancelled mandatory savings. Additional cri-teria, such as the size and capacity of a bor-rower’s business, are considered a steptoward individual lending.

Of the three spun-offs, FATEN faces themost complexities. In effect, FATEN mustrun three programs and offices (in Gaza,Hebron, and North) and all that comes withthem. Yet in many ways FATEN has thepotential to become the most successfulinstitution given its dedication, marketpotential, and drive for independence. Inthe end the complexities it deals with mayfacilitate its sustainability and growth.

Of the three spin-offs, FATENfaces the mostcomplexities


Alia, who lives in Hebron, borrowed from FATENfor the first time when her primary business wastrading clothing. She is now on her fifth loan, for500 Jordanian dinars ($705). She buys cheaperclothes in Amman, Jordan, and resells them, earn-ing a small profit. Her revenue averages 2,000 newIsraeli sheqels ($590) a month, while retained earn-ings come to 500–600 sheqels ($150–$180) amonth. Alia’s monthly expenses total about 300 she-qels ($90), which covers the cost of employees whopurchase the supplies, rent for the shop, and so on.So far her profits have been used to expand her busi-ness and to reinvest in her household. In addition,she has been able to diversify her business and is nowselling spices and nuts. Besides business reasons,Alia mentioned that if she did not invest her prof-its, her husband might use them to marry a secondwife.

A strong sense ofinstitutional

independence and program

self-sustainabilitydrove each of the

spin-offs

18

Building blocks for spinning off

The three spin-offs (the JWDS, AlMajmoua, and FATEN) widelyaccept that from the outset their

existence has largely been due to the finan-cial and institutional support of Save theChildren. But Save the Children—havingfailed to identify suitable long-term partnersto implement the Group GuaranteedLending and Savings programs in Jordan,Lebanon, and the West Bank and Gaza—hasviewed the creation of independent micro-finance institutions as essential to ensuringsustainable access to credit for femalemicroentrepreneurs. A strong sense ofinstitutional independence and programself-sustainability drove each of the spin-offs.

Each institution acknowledges theimmense contribution of Save the Childrento its programs as well as to the developmentof the microfinance industry in the MiddleEast and North Africa. At the same time, thesupport that nurtured these programs intheir early stages was not sufficient for theirrapidly growing operational, management,and market needs. This shortcoming mayhave been largely due to the fact that asthese programs developed, their needs werenot simply increasing but changing.

Some of these needs followed from adesire to focus solely on microfinance, pos-sibly improving on the group guaranteedlending and savings methodology—forexample, by changing its target audienceand group sizes. As one manager noted, theold group approach was “100 percentrigidity and 0 percent analysis. Becoming aninstitution gave us room to analyze andthink.” Reforms were considered for

employee incentive plans, staff training, andadministrative systems and internal controls.

Such changes ultimately point to thedesire of each of the programs and theirstaffs to become independent and self-sus-tainable businesses following separate oper-ational and management models. As partsof larger organizations, the programs wouldnot necessarily have been able to achieve thistechnical and strategic independence.Several steps are involved in the spin-offtoward institutional independence: choos-ing a legal form, deciding on institutionalgovernance, determining the status of staffin the process, and transferring manage-ment information and accounting systems.

Choosing a legal form

Regulatory and legal issues are key to con-sider when building a new institutionbecause they can have a profound impact oninstitutions’ ability to achieve their statedobjectives. As noted, in the Middle Eastmicrofinance programs are often lodged inlarger parent organizations that providesocial or charitable services. These organi-zations are often registered as NGOs or asvoluntary or charitable associations. Thoughthese legal forms may be appropriate in theearly stages of a microfinance program, theywill likely block a program’s development asa financial intermediary. To decrease itsdependence on donors, achieve growth, andbecome fully sustainable, a microfinanceprogram has to gain access to commercialsources of funds—that is, by borrowing frombanks for onlending or taking deposits.

The legal structure of the parent organi-zation can impede a microfinance program’smove toward sustainability. NGOs and char-itable associations do not have identifiableowners who can be held personally or insti-tutionally liable (even to a limited extent) forachieving the organization’s statutory objec-tives. As a result these types of organizationsoften have no proper governance structureand lack accountability and transparency.Thus commercial providers of funds(whether of loans or equity) are unwilling toinvest in such entities.

Thus an NGO microfinance provider even-tually has to change its legal form to ensurean appropriate ownership structure andrelated accountability. In other parts of theworld the new legal forms have included non-profit company, for-profit company, financialintermediary, and even deposit-taking bank(licensed by banking authorities). Somecountries, for example, have created a speciallegal form for microfinance intermediaries.

Legal and regulatory factors played animportant role in the choices made by Savethe Children’s spin-offs. The JWDS and AlMajmoua registered as NGOs because bothbelieved that they had no other feasible orcost-effective legal option (table 3). ButFATEN—after extensive discussions based onpresentations made by lawyers, auditors, andrepresentatives of the Palestinian MonetaryAuthority—decided not to register as anNGO. FATEN’s founders investigated severallegal options, including registering as anNGO, but bureaucratic complications withthe Ministry of Interior barred them fromdoing so. Because the fledgling institution’sresources were too limited to register as afinancial company, it chose to become a non-

profit company, an option available underthe British commerce law still used in Gaza.Moreover, the founders believed that thisapproach would make it easier to become afor-profit or a bank.

Besides the perception that there was noalternative cost-effective structure, it is possi-ble that the ease of operation—as NGOs inJordan and Lebanon, and as a corporation inthe West Bank and Gaza—contributed to eachinstitution’s choice of legal form. That is, eacharrangement involved the least potential polit-ical and bureaucratic resistance or subsequentinterference. But while these forms may havebeen the right choice in the short term, theyappear to contradict the organizations’stated reason for spinning off: to build sus-tainable and independent institutions.

Although the JWDS and Al Majmouaappear to find the NGO form to be anacceptable institutional structure, sometroubling issues are starting to emerge. Onehinges on each institution’s capacity tolegally enforce repayment of its loans. Forexample, because there is little experiencein the region with nonprofits engaging solelyin the delivery of financial products, thereis a want of related jurisprudence in courts.Thus it is difficult to predict how a judge willreact to a nonprofit organization suing aclient who the judge perceives to be poorwhen the organization is claiming to bedoing social good. Another issue that maycrop up is ownership of each institution’sassets. For example, Al Majmoua’s assets areprojected to rise to nearly $8 million overthe next few years. Defining who owns theseassets will become important.

On the other hand, while the legal struc-ture of FATEN—as a nonprofit—ensures

An NGOmicrofinanceprovider eventuallyhas to change itslegal form

BUILDING BLOCKS FOR SPINNING OFF 19

Table 3. Comparative institutional indicators for the JWDS,Al 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


accountability and transparency, the insti-tution’s lack of a profit objective mayundermine future capitalization and growth.Similarly, the JWDS and Al Majmoua willhave to change their legal form if they wantto reduce donor dependence, enhance sus-tainable growth, and access commercialfunds to finance that growth. Hence the sus-tainability objective and related integratedbusiness orientation may be more buzzwordsthan actual practices reflected and inte-grated in the institutional structure and own-ership of the three microfinance institutions.

The managers and boards of the JWDS,Al Majmoua, and FATEN recognize—though to varying degrees—the potentiallimitations of their current organizationalforms. But they also point out that their cur-rent structures may simply be steppingstones as the institutions evolve. As theygrow, some of these managers hope to makethe institutions true financial intermediaries,reaching the point where they turn aprofit, capitalize their assets, and, in the dis-tant future, even transform into a bank.

Deciding on institutional governance

In deciding on institutional governance, twomain questions must be answered. How willthe board of directors be selected? And whatrole and responsibilities will the board have?

How to select the board of directors?

In the corporate context, institutional gov-ernance deals with mechanisms throughwhich an institution’s stakeholders exercisecontrol over management to protect theirinterests. Stakeholders can include credi-tors, donors, and other claimants who sup-ply capital as well as employees, clients, andother suppliers. The managers, the entre-preneur, and other insiders control theinstitution’s key decisions. Thus the pri-mary reason for institutional governance,in the corporate context, is to separate own-ership and control.

This distinction has been clearly under-stood in the spinning off of the JWDS, AlMajmoua, and FATEN. Founders and boardmembers sought to separate daily manage-ment of each institution from a separatebody with a strong sense of ownership—abody that will help oversee and guide thevision and strategy of the institution. Thespin-offs into the JWDS, Al Majmoua, andFATEN also resulted in a unique situation:Save the Children program staff and man-agement in all three countries were activelyinvolved in identifying individuals to serveon the boards of the institutions being cre-ated. Those who negotiated and explainedthe program and tried to convince currentboard members to take on the job are nowserving and reporting to their boards. As oneof the institution’s managers put it, “the staffbrought in their supervisors.”

This peculiar feature of all three spin-offsis reflected in the actual selection of theboard members. This process was driven bya desire to identify individuals who werecommitted to microfinance and who sharedthe vision and principles developed by thestaff and management of these programs.Attention was also paid to including mem-bers with diverse backgrounds—from socialwork to banking, academia to industry—andnot necessarily a lot of board experience.The institutions have found that suchdiversity brings tremendous benefits becauseeach board member contributes differentexpertise to the work of the board.

In the corporatecontext the

primary reason forinstitutional

governance is toseparate ownership

and control


Sameera has taken two loans from FATEN. She andher husband are supporting a large family, withseven daughters and four sons, and she is expect-ing. They all live in Hebron. Sameera used the pro-ceeds from her first loan of 150 Jordanian dinars($212) to buy her first sheep. The second loan of 200Jordanian dinars ($282) was used to buy anothersheep and more food for her animals. In additionto breeding sheep for their young, she is raising themfor milk, cheese, and butter—products that are con-verted into an average of 150 Jordanian dinars($212) of pure profit each month. Repayments forher loans come from the sale of cheese and milk.Young sheep are assets that are being accumulated.

FATEN had the most open, thorough, andtransparent process for selecting boardmembers. In 1997, the year prior to the spin-off of FATEN, staff of the Group GuaranteedLending and Savings program, supported byupper management, met with about 100Palestinians—including bankers, business-men, members of the Palestinian Authority,and other interested individuals in the WestBank and Gaza—to explain the program.The intention was to create a broad base ofinterest and support for the program and toselect candidates for the board from amongindividuals who expressed interest and wereenthusiastic about the program’s vision.

Technically, there are no representativesfrom Save the Children on the board,because the board members believed thatthat organization’s presence could cause con-flicts of interest and undermine the institu-tion’s independence. But although it does notdirectly participate in regular decisionmak-ing, Save the Children holds a 26 percentequity stake through a Save the Children staffperson. Thus it effectively has a voice or vetoin case of any changes to FATEN’s bylaws.

The JWDS and Al Majmoua, on the otherhand, took a more individualized approach.Both programs asked prominent individu-als whom they knew and whom they couldtrust. Especially in Jordan, Save the Childrenplayed an active role in recruiting board

members. The JWDS’s founding board hadseven members, of which two were repre-sentatives of Save the Children. That thesetwo members accounted for nearly 30 per-cent of the board had other implications forthe JWDS as an independent institution.This was aptly demonstrated when the pro-gram experienced a serious case of fraudand the board assumed full control of theinstitution—including its daily manage-ment—after the executive manager resignedin the midst of crisis.

Al Majmoua’s board contains no repre-sentatives from Save the Children. Insteadthe board is made up of six individualsselected to be the founding members of AlMajmoua. Board members have diversebackgrounds, ranging from an academicworking in development to bankers andeven an industrial engineer. The board rep-resents the general assembly, and plans arein place to introduce new members to thegeneral assembly. Al Majmoua’s board hasbecome an important strength for the insti-tution, especially given its intentionally non-religious and nonpolitical affiliation.

What role and responsibilities should theboard have?

As noted, any institution’s stakeholders mayinclude clients, donors, suppliers, and oth-ers. The board of directors should beaccountable to all these groups, because tosome extent these groups have some formof ownership in the institution (box 7). Theconcept of ownership prevents this legiti-mate special group of stakeholders frombeing lost in the general array of stake-holders. Moral rather than legal ownershipcould be the basis on which a board ulti-mately determines its accountability. In caseswhere the government requires nonprofitsto have legal ownership, the board mustdetermine whether the moral ownership isa larger concept far beyond the bounds ofthe formal membership.

Similarly, one of the important aspects ofthe spin-off process was to instill a sense of

Any institution’sstakeholders mayinclude clients,donors, suppliers,and others


Amna lives in the Balqua area, outside Amman,in one of the Palestinian camps. Amna does sewingand tailoring and owns a workshop and store inthe neighborhood. When we visited her, severalclients were in the store picking up old orders andmaking new ones. Amna recently learned about theJWDS and has received two loans. She used both toincrease her working capital, buying an additionalstitching machine, some sewing tools, and tailor-ing scissors. Amna employs a young friend of hers,Alia, and the two of them can hardly meet thedemand for their work. They would need to go amonth without taking new orders to finish the back-log of orders. On average, Amna makes about 300Jordanian dinars ($423) in profit each month. Shehopes to take another loan, get another sewingmachine, and employ one more person.

ownership in the board of directors, as wellas a sense of responsibility for institutionalquality and operations. In this regard therole of the board is being intensely discussedand is evolving as the three institutionsdevelop. While the boards have not beenexpected to take over management respon-sibility, they have committed their reputa-tions and, in the case of FATEN, acceptedlegal liabilities for these institutions. But thisdoes not necessarily reflect equally on thedefinition or level of involvement of theboards of each institution.

Although the board of FATEN is the onlyone that is in theory legally liable, it alsoappears to be most “hands off.” By contrast,the board of the JWDS, which as an NGOwas not at all legally liable, maintained activeinvolvement until recently. This active role

was mainly due to problems with fraud andmanagement, after which the JWDS’s boardhad to step in to rescue the program. Fromthe outset Al Majmoua chose an approachthat board members refer to as an “advisoryrole.” The board is responsible for over-seeing and strategically directing the insti-tution and supervises the work of theexecutive director. The board reports to thegeneral assembly, but under the law on non-profits in Lebanon, the general assembly’sonly power over the board is to dissolve itand call for elections.

Once the board’s role has been clarified,its responsibilities are often partitioned intocommittees. The existence of committeesshould in no way disturb the wholeness andauthority of the board or the “single voice”of governance. Board committees should

The role of theboard is being

intensely discussedand is evolving as

the threeinstitutions develop


The essence of any institution lies in what itbelieves, what it stands for, and what and howit values. The telling assessment of an institu-tion’s beliefs are its works, not its words. Thesevalues and perspectives might form the basis forthe more mechanical and visible aspects of aninstitution. Prudential governance might beginby recognizing this central determining featureof any institution. Setting goals, deploying staff,writing procedures, formulating plans, devel-oping strategy, and other board activitiesdepend on core values and perspectives that arebest blended in the concept of policy.

Thus policymaking might be proactive, con-cerning the broadest issues, rather than reac-tive to all issues. Board policies might becomecrucial to all executive action. Brevity and clar-ity are essential qualities of any policy, so thatupdating becomes far easier and makes policiesmore of a reference than a tome. Most reso-lutions in board meetings might be motions toamend policy structures so that policy devel-opment is not an occasional chore for theboard but its main occupation. Though theboard may charge its officers or committeeswith parts of these tasks, the ultimate respon-sibility lies with the entire board.

As important as it is for the board to controlthe complexity and details of staff operations,it also needs to have a certain degree of free-

dom. The board needs control because it isaccountable for all organizational activity,however obscure or far removed. But the boardneeds to be free from operational mattersbecause it is merely a part-time body. Someboards might relinquish control to be free fromdetails or to grant the executive director free-dom from board intrusion; such boards mightbe guilty of “rubber stamping.” Other boardsforgo freedom to control many details; suchboards might be guilty of meddling. Thus thechallenge for boards is to be reasonably certainthat nothing goes wrong and to grant as muchlatitude as possible to people with the skill andtalent for the work to be done. Boards need tooversee staff operations without obscuring roledifferences and without taking staff membersoff the hook for their decisions.

Also essential is for boards to maintain anarm’s-length distance from prescribing staffmeans. It is as damaging to have a board thatconstrains an institution too much as one thatdoes not at all. For institutions to gain the mostfrom their relationship with the board, theremust be a balanced relationship between thetwo. The board should not impose technicalpolicies without considering the recommen-dations of operational staff who know moreabout clients, but it should hold sufficient lever-age to assert its authority.

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

Source: Mueller 1981; Chait and Taylor 1989.

exist to help complete the board’s job, notthe staff’s job. This division of labor on theboards of the JWDS, Al Majmoua, andFATEN has occurred in some cases on a tem-porary basis and in other cases on a per-manent bases, as each of the program’sboards resorted to subcommittees to dealwith aspects of their work.

Still, the decision to establish committeesdoes not always reflect an ideal structure, noris there any “right” number of committeesthat a board must have to justify its existence.In exceptional cases, such as FATEN, this divi-sion of responsibilities within the boardhelped overcome practical problems, suchas the “movement” problems between theWest Bank and Gaza. In it efforts to over-come these issues, the board of FATEN eventried to organize itself so that each com-mittee has members from just one region.

A certain mix of people and expertisemay concentrate the board’s work better insubgroups. For example, FATEN’s com-mittee in Gaza reviewed the personnel man-ual, while the committee in the West Bank(with members from the banking sector)reviewed the financial manual. But thesesubdivisions were not permanent features ofthe FATEN board, as it strives to conduct itsbusiness as a unit—despite the distancebetween members.

Determining the status of staff inthe spin-off process

An important component of the spin-offprocess involves the transfer of program staffto new institutions. All staff working in Savethe Children’s microfinance programs priorto the spin-offs were allowed to choosewhether to join the new institutions. Manyof these employees had originally beenattracted to Save the Children because of theprestige and other benefits that come withworking for a reputable international orga-nization. But some employees admitted thatthey had joined Save the Children’s micro-finance programs knowing that they wouldeventually spin off into their own institution.

This was especially the case in AlMajmoua. Its employees had always felt thattheir future in a program-based setting wasfinite and that, to build a career, they wouldneed to be in their own institution.Nonetheless, as former employees of theprogram under Save the Children, they wereguaranteed the same benefits as before byall the new institutions.

In the JWDS almost all employees weretransferred at the time of the transition,while many more were hired after the tran-sition. Many questions and concerns wereraised about the quality and quantity ofremuneration for these new employees rel-ative to those who had moved over fromSave the Children. In some cases the newinstitutions tried to go out of their way tomaintain continuity in benefits by retainingsimilar working standards. For example,although Jordanian organizations generallywork six days a week, the JWDS retained thefive-day working week it had under Save theChildren. In other cases the new institutionsprovided more benefits. For example,FATEN issued employment contracts forloan officers that had not officially existedunder Save the Children.

Senior managers tried to retain one oftheir greatest assets—their institutions’employees—while changing their strategicoutlook. As a result the institutions oftenfound themselves changing the old corpo-rate culture rather than building a new one.All the institutions recognized that thisapproach was much more difficult. Theywere no longer part of a larger framework,as under Save the Children, but rather werenow in their own institutions. As onesenior manager said, staff “needed to be inan institutional rather than a program-basedframework. That required a change in think-ing.” Some senior managers felt that theGroup Guaranteed Lending and Savingsmethodology did not lend itself to buildingsuch an institutional structure and may haveimpeded this change in approach. The con-sequences of this change are vast and cru-cial to the sustainability of all these

The institutionsoften foundthemselveschanging the oldcorporate culturerather than buildinga new one


institutions, because staff at all levelsneeded to assume more responsibility fortheir actions and not (as before) rely on Savethe Children’s infrastructure.

One important staffing issue noted bysome of these institutions is the difficulty ofrecruiting experienced and well-trained localstaff to work on microfinance. In effect theinstitutions—although local organizations—essentially have to maintain the salary and ben-efit structures of international NGOs to ensuretheir competitiveness in the job market andattract the best staff. This challenge affects thecapacity of the three microfinance institutionsto build strong middle management struc-tures, which in some cases were found to beweak or nonexistent.

Transferring managementinformation and accounting systems

During the transition to institutional inde-pendence, all three programs only graduallyassumed responsibility for operational andportfolio management. For example, inApril 1997 the JWDS took over operationalcost accounts. Until the end of July 1998 theJWDS technically recorded all costs incurredonly to its accounts. Yet although theJWDS was responsible for implementing theprogram, all the revenue was booked in Savethe Children’s account. In August 1998 theJWDS took over portfolio management, amove that coincided with the transfer of theoriginal Group Guaranteed Lending andSavings finance manager to the JWDS. Inhindsight this seems to be a long transfer,but the management of Save the Childrenbelieved that it was too risky to transfer bothoperational and portfolio managementfunctions right away.

After the transfer some of the features ofthe accounting system used by Save theChildren, as an international NGO, weretransferred to the JWDS. But these featureswere not appropriate for the JWDS’s micro-finance business orientation. For example,Save the Children’s fiscal year differs fromJordan’s—a difference that can create diffi-

culties when the JWDS has to report to thegovernment. Similarly, until August 1998expenses were treated using cash-basedaccounting. Today, however, the institutionhas switched almost 90 percent to accrual-based accounting. Still, when using grantsfrom the U.S. Agency for InternationalDevelopment, the JWDS has to report on acash basis in order to receive reimbursements.

Multiple cost (profit) centers are anotherinnovation introduced by the JWDS. Thissetup makes it easy to verify the efficiency ofeach center that the JWDS operates. UnderSave the Children there was just one costcenter. In considering more decentralizedoperations for the future, the JWDS is think-ing of turning branch offices into separatecost centers as well, responsible for profits,revenues, and costs. This reform may rep-resent a new incentive scheme and intro-duce competitiveness among branchmanagers. For this proposal to be imple-mented, however, branch managers wouldneed relevant training.

FATEN has implemented a similar struc-ture, initially with regions and, as of March1999, with branches considered as cost cen-ters. At the end of each month, realincome statements are produced for eachbranch, region, and the entire organization.These statements are used to calculate costrecovery levels. In FATEN the establishedbenchmarks form the basis for an incentivescheme for branch managers. Everytime theinstitution reaches a benchmark with anaverage portfolio at risk below 2 percent,managers move to another level on thesalary scale. In addition, FATEN has beenusing an entirely accrual-based accountingsystem since March 1999.

FATEN has also had to deal with trans-ferring the management information systemand with recruiting issues. At first FATENand Save the Children had worked togetherto train a finance manager—who then unex-pectedly left. At a personnel level, replacingthat manager has entailed not only identi-fying and hiring a qualified candidate, butalso waiting until the new manager is famil-

All three programsonly gradually

assumedresponsibility foroperational and

portfoliomanagement


iar with FATEN’s systems. At a technicallevel, FATEN has recognized the need tochange even its most basic informationrequirements. FATEN rightfully decided tooffer employees official contracts, but thissmall task requires much information.Moreover, without an official list of employ-ees, the payroll cannot be sorted and runsmoothly. Thus the finance manager posi-tion requires skills ranging from managingaccounting information to identifying inef-ficiencies in the system. FATEN finally founda new finance manager—one who hap-pened to be a former senior accountant withSave the Children and was familiar withFATEN’s work—and he assumed his dutiesin May 1999.

Al Majmoua managed to hire a financemanager from the time all cost and profitaccounts were transferred. This process hasgone smoothly, but Al Majmoua’s weakest

point is the absence of a suitable manage-ment information system. With funding sup-port from Save the Children, Al Majmoua isdeveloping a management informationsystem tailored to the possible expansion ofthe institution and designed to providemore thorough management information.

All of these changes and innovationsbring out the many complexities of thefinancial management of a separate insti-tution. But there are many benefits as well:information is more transparent and enablesmanagement to make prompt and timelydecisions because the management infor-mation system is more streamlined, andcosts and profit sources are more transpar-ent. Thinking in a business-like setting hasencouraged further innovation in this fieldas well, as demonstrated by the JWDS andothers as they strive to find the best possiblesystem to address their growing needs.


Spin-offs providemanagerial and

marketing benefitsto both the parent

entity and thespun-off entity

26

Benefits and risks of spinning off

The spin-off of Save the Children’smicrofinance programs into theJWDS, Al Majmoua, and FATEN

brought to light many of the benefits inher-ent in such program restructuring and sim-ilar to those typically found in a corporatecontext. These include external market fac-tors, marketing considerations, and thefuture legal, financial, and programmaticdevelopments of the programs, especially asthey relate to the programs’ prospects forgrowth and sustainability. Added to this werenumerous intangible factors and positiveexternalities brought about by the spin-offprocess, such as the building of localcapacity or the regional microfinanceindustry. But there were caveats to these ben-efits as well—although all three institutionsare optimistic about their futures as inde-pendent entities and seem determined toface any challenges they may encounter.

Institutional and marketing benefits

A review of evidence in the corporate con-text supports the claim that spin-offs providemanagerial and marketing benefits to boththe parent entity and the spun-off entity.Usually, each of these bodies might haveoperated in different lines of business anddifferent environments, each with its uniquemanagerial and operational problems. Byseparating these businesses through a spin-off, management might often suspect thateach entity would fare better because of bet-ter managerial decisionmaking and moreefficient managerial incentives. Because the

parent institution and the spun-off firmwould each have specialized managementreporting to a separate board of directors,there would be a better framework for man-agement decisions on the use of capital andhuman resources and the operation of theseparate businesses.

On the marketing front, such spin-offsmay allay fears by clients, donors, and oth-ers that these institutions were committedto and would not end participation in theirindustry. Spin-offs motivated by marketingconsiderations would be designed to sepa-rate potentially incompatible product linesto avoid institutional schizophrenia—aswhen, for example, the same organizationdeals with social services and microcreditprograms, requiring the same employees toserve as social workers as well as loan officers.These roles do not always complement eachother.

All three microfinance institutions,whether under Save the Children or as newlyspun-off institutions, have at some point hadto deal with such institutional image andmarketing issues. FATEN cites an interestingexample of a loan officer (promoter) whodefrauded the organization. The GroupGuaranteed Lending and Savings programstaff handling the issue managed to persuadethe loan officer and her family to mortgagetheir house in the name of the program. ButSave the Children’s field office managerswere opposed to using the house as collateralor selling it to collect the stolen fundsbecause of concerns about the effect suchmoves could have on Save the Children’s rep-utation in the field. FATEN cites this incident

as a clear divide between Save the Children’smissions and goals on the one hand, and themicrofinance program within the sameorganization on the other. Microfinance insti-tutions must develop and maintain their rep-utations as running lending programswhose sustained operations—and conse-quent benefits to other clients—depend oncollecting repayments.

The JWDS has had to deal with gettingsimilar points across to its clients. As the threespun-off microfinance institutions take firmpositions in their societies, however, suchimage problems are starting to disappear.Moreover, the reputations of all three as lend-ing institutions whose existence and futureprovision of loans depends on repaymentseem to have taken firm root among theiremployees, clients, and partners.

Operational, financial, and riskmanagement benefits

Operational and financial transparency isanother major benefit of spinning off. Thatthe operational and financial progress of theseparate businesses tends to be more visiblemight inspire executives to build on growthand foster improvement. There would be aclearer basis for evaluations and so a moreaccurate appraisal of employee perfor-mance, clients (actual and potential), anddonors as well as providers of commercialfunds.

These benefits have been evident in thespin-offs of the JWDS, Al Majmoua, andFATEN. When the programs were part ofSave the Children, their financial statementswere tied to its accounting and financial sys-tem and did not precisely allocate costs orprofits to each line of business. In that con-text it was almost impossible to accuratelydelineate program assets and liabilities.

FATEN, for example, has introduced sep-arate incentives for branch managers—amove that it does not believe it could havemade earlier because the organizational andfinancial structure of Save the Childrencould not have handled two salary scales. As

another example of organizational regula-tions impeding innovation, FATEN’s man-agement cites the issue of buying rather thanrenting office space, or of extending loansto its staff to buy vehicles rather than borrowthem from Save the Children.

Similarly, the JWDS’s recent plans forgradual decentralization provide anotherexample where spinning off has allowedmore options to be considered in opera-tional management. As it decentralizes, theJWDS would consider offices or branches tobe semiautonomous units. Standard guide-lines would be developed for loan process-ing and approval, authority to makeapprovals would be delegated to branchoffices, and a timely centralized informationsystem would be maintained to keep trackof individual branches.

Another potential benefit of separatingfrom the parent organization is that it pro-vides a clearer basis for investors anddonors in identifying and evaluating thebusiness of each institution—an advantagewhen additional financing is needed. Byincreasing market visibility for the spun-offentity’s growing business, new donors andeventually private investors might be per-suaded to donate to or invest in the entity.Similarly, the parent institution might ben-efit after the spin-off if management is ableto concentrate more of its resources onremoving inefficiencies and focusing onother operations.

Similar logic about the potential benefitsof spinning off was noted in the discussionswith the three microfinance institutions. Forexample, beside some small grants fromother donors, much of the funding for theJWDS and Al Majmoua comes from the U.S.Agency for International Development—aresult of the institutions’ direct relationshipswith Save the Children, a U.S. NGO. Evenin the West Bank and Gaza, where an addi-tional donor was the U.K. Department forInternational Development, FATEN wouldnot have obtained those funds if there wereno partnership between Save theChildren/U.S. and Save the Children/U.K.

Spinning offprovides a clearerbasis for investorsand donors inidentifying andevaluating thebusiness of eachinstitution

BENEFITS AND RISKS OF SPINNING OFF 27

Some of the microfinance institutions feltthat under Save the Children it was difficultto leverage funds from the wide range ofdonors interested in microfinance and infunding local organizations. A direct bene-fit of spinning off, according to these insti-tutions, was that as independent entities theycould lobby a diverse community of donors.Such efforts may help the institutions notonly expand their portfolios but alsoincrease their institutional autonomy withthe potential reduction of dependence ona single donor.

In many spin-offs the parent organizationand the spun-off entity have engaged in verydifferent lines of business, with each havingseparate and distinct operating, financial,and investment characteristics. As a resultthe two institutions often have differentoperating or business risks. In such cases thespin-off may insulate each institution fromrisks associated with the other. After the spin-off the inherent risks would likely be morestable and predictable, at least partlybecause of the sharper focus of each insti-tution. Each institution would be able tofinance expansion on terms that are morein line with its historical and projectedgrowth rates. While in many cases these maybe positive developments, they may also cre-ate problems.

For example, FATEN stated in its bylawsthat it will borrow money and use its assetsas collateral. This approach would be diffi-cult to take within an NGO or Save theChildren framework. But it may make itharder for FATEN to obtain financingbecause each company will not be able torely on the financial collateralizable assetsof the other, possibly lowering the credit-worthiness of the riskier entity.

All three spun-off microfinance institu-tions face this disadvantage. They eachbelieve that they will be able to negotiatenew grants or other types of funding. Butthey realize that Save the Children providesimportant tangible and intangible assets: thestrong reputation of an international orga-nization with a long history, well-developed

systems, and knowledge and experience innegotiating and administering fundingthat in the past helped secure large grants.If Save the Children decides to move out ofmicrofinance operations in the Middle East,rather than recommit at a higher level, allthree institutions recognize that they mayhave to learn to function without its assets.

Product and services benefits

Having moved from managing programs tomanaging institutions, all three spun-offinstitutions have tried to modify their orig-inal Group Guaranteed Lending andSavings programs. The rigidity embodied bythe original programs posed methodologi-cal challenges to the spin-offs. In essence,spinning off has increased the focus on theproducts and the clients that the new insti-tutions wish to pursue in their continuedautonomous development and with theobjective of securing full sustainability.

Moreover, under the old programs therewere concerns about amortization sched-ules, the high dropout rates for new clients,the slow growth of the programs and of aver-age loan balances, and the inability to reachgraduated clients. Such considerationshave become crucial as the institutions rec-

All threeinstitutions

recognize that theymay have to learn

to function withoutSave the Children’s

tangible andintangible assets


For the past eight years Magda has owned a shopon a busy street centrally located in the Ain El-Helwah camp in Saida, Lebanon. Together with herhusband, she is supporting a 14-member family. Shesells clothes for children and women, and recentlyintroduced a line of toiletries, deodorants, and per-fumes. Magda purchases her inventory in Beirutbecause it is cheaper there. Every two weeks shespends about $1,000 on new inventory. She usu-ally makes $50–$60 a week in pure profit. Magdawas one of the first clients of the credit program inLebanon, and started with a $150 loan. She hasnever had problems in repaying loans, but she findsthat the group meetings interfere with her business.Because she works alone, she often has to close herstore to attend the group meetings. This would reflecton the turnover in her business, as her clients counton steady opening hours. But for the time being sheintends to continue borrowing with Al Majmoua,as there are no other possibilities open to her.

ognize the growing competition in the mar-ket, particularly for other target groups.

Under the Group Guaranteed Lendingand Savings programs, groups had to haveat least 10 members. All three spin-offs areconcerned that this minimum might imposeunnecessarily high transaction costs onborrowers. These costs appear in real termswhen meetings must accommodate 10 dif-ferent schedules and in strategic terms whenit is difficult to generate solidarity amongsuch large groups. More research and insti-tutional experience may clarify whethersmaller groups may be better suited in allcases, as well as in different cycles of lending.

Similarly, biweekly payments do notalways respond to the cash flows ofmicrobusinesses. One consideration hasbeen to design amortization schedules thatbetter suit the needs of clients, includingend-of-the-month repayments. Anotherconsideration has been to lower the mini-mum loan size, given that loan sizes are notincreasing over time and dropout rates arehigh. Initially there was concern about arbi-trariness in the application of the GroupGuaranteed Lending and Savings method-ology with respect to loan amount andgroup size. In each country a specific for-mula was used to determine the initial loanamount. But research has indicated that insome cases women may not require theentire loan amount—and as a result muchof the loan may be consumed in other, non-productive activities, eventually affectingrepayment. If women redirect their loansinto household consumption rather thanbusiness activities, repayment becomes aproblem.

It is worth noting that Save the Childrenshowed flexibility on these issues and intro-duced changes to address rigidities that werepartly built into the Group GuaranteedLending and Savings methodology. In theWest Bank and Gaza, for example, loan sizeswere cut to 150 Jordanian dinars from an ini-tial 200 dinars. This adjustment was made inrecognition of the deteriorating economic sit-uation in the West Bank and Gaza. In addi-

tion, start-up businesses have decreased in theprograms’ loan portfolios, as programsfound through baseline surveys and marketresearch that they were one of the reasons forhigh dropout rates. This is an example oflearning by doing—essential for the institu-tional integrity of microfinance institutionsworldwide.

Concerns have been raised about limita-tions inherent to the current client targetgroup. In some cases women establish start-up activities that do not survive the loancycle. While empowering these activities is animportant objective of the microloans, thistype of lending limits portfolio growth andquality. In some cases women have started upeconomic activities that disappear by the endof the cycle without an effective capitalizationof some part of their “profit.” In other caseswomen are found to be “fronting” for men’sproductive activities, so women becomeliable for loans that they do not control.These situations not only increase the port-folio at risk of microfinance institutions butare also far less stable for the financial growthpotential of these institutions (box 8).

The three spin-offs absolutely must knowtheir clients well in order to be able toachieve the institutions’ strategic goals. AlMajmoua’s research and development team,for example, has focused on trying to buildup its market—in terms of both quality andquantity. The JWDS, having surveyed clientswho dropped out, has reduced the numberof start-up loans in its portfolio.

Conclusion

Spinning off has had a major impact on theevolution of the original Group GuaranteedLending and Savings programs and theirproducts, services, and clients. Each of thespun-off institutions has started off well andreached down to poor households inter-ested in microentrepreneurial economicactivity. Furthermore, each institution hasproduced solid programs and plans that willallow them to move steadily toward sus-tainability through continued growth.

Learning by doingis essential for theinstitutionalintegrity ofmicrofinanceinstitutionsworldwide

BENEFITS AND RISKS OF SPINNING OFF 29

Staff in each institution recognize limi-tations in focusing solely on poor womenand are seeking to increase opportunitiesby diversifying products—especially throughloans to individuals and to men. Thisprocess will require a fundamental trans-formation in the institutions’ operationalpractices. Specifically, changing the targetgroup might require a more analytical lend-

ing methodology. From a training stand-point, credit officers would need strongeranalytical skills to assess clients’ businessesand to develop basic profitability andcash-flow analysis. Further improvementswould have to be made to managementinformation systems, with updated infor-mation and increased accountability andtransparency.

Diversifyingfinancial services

will require afundamental

transformation inthe institutions’

operationalpractices


Women have generally been excluded from for-mal financial services for a variety of reasons.As Ledgerwood (1998, p. 226) points out:

Perhaps foremost is a culturalbias against women. At the house-hold level, most financial decisionsare made by male heads of house-hold, although this cultural normis shifting gradually. In addition,women represent some of thepoorest people in developingcountries. Their microenterprisesand petty trade do not have suffi-cient scale to interest formal finan-cial intermediaries. Finally, literacyrequirements have barred someilliterate women from obtainingformal financial services.

In the Middle East, Save the Children’sGroup Guaranteed Lending and Savings pro-grams were designed to support the economicempowerment of women by targeting them asthe sole clients for financial services. This objec-tive defined the basic platform from which allthree microfinance institutions were laterspun off. Since the start of the group programs

and through the spinning off, Save theChildren, the JWDS, Al Majmoua, and FATENhave provided loans to more than 20,000female borrowers. Such results prove that, atleast on the surface, women can be involved ineconomic life—despite cultural prejudices inthe region.

As the three spin-offs become moreautonomous and get to know their clients bet-ter, more analysis may be needed to assess theextent of real economic empowerment and toanalyze whether:• Some women serve only as a front for men’s

productive activities.• Loans are redirected into household con-

sumption rather than business activity.• Women effectively capitalize loans. Although empowering women may be a posi-tive externality and an important outcome forthese institutions, in the future this type of lend-ing may bring significant limitations in termsof portfolio growth. It is not clear whether thefoundations of the three spin-offs—with theircurrent organizational and staffing frame-works—would sustain further broadening ofproducts or clients.

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

Source: Ledgerwood 1998; World Bank data.

By spinning off its microfinanceprograms, Save theChildren has helpedcreate a pool ofexperienced localexperts inmicrofinance

31

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

Given the complexities of the envi-ronment in which Save theChildren has operated, it must be

commended for its remarkable courage,innovative spirit, and—most important—dedication to developing microfinance pro-grams. It proved that women in the MiddleEast can be targeted to receive microfinanceservices. In addition, Save the Children hadthe vision to plan for the sustainability of itsmicrofinance programs through strategicchanges and program restructuring. By spin-ning off its microfinance programs, Save theChildren has helped create a pool of expe-rienced local experts in microfinance whowill be able to support the development ofthe microfinance industry and build insti-tutions across the region.

At the same time, Save the Children is notsolely a microfinance institution. Its broadermission and diverse activities worldwidemake it a truly multisectoral organization.But while Save the Children understands thesocial dimensions of microfinance, in theauthors’ view the organization’s overall mis-sion and vision may contradict the businessorientation of the spun-off microfinanceinstitutions. Similarly, Save the Children’sbasic philosophy could keep these institu-tions from achieving their primary objective:long-term institutional autonomy and finan-cial sustainability.

These different perspectives have posedchallenges to the development of the spun-off microfinance institutions. For example,in some cases there are conflicting views onmicrofinance at different levels of Save theChildren. In the West Bank and Gaza, for

example, Save the Children proposed acomplementary services agreement to berun in conjunction with FATEN’s credit pro-gram. The plan was that Save the Childrenwould provide health and education activ-ities as additional content for the borrowers’group meetings, while FATEN would imple-ment business development services.

This proposal seems to have originatedfrom within Save the Children Alliance. Buta U.K. Department for InternationalDevelopment grant to FATEN is channeledthrough a subgrant agreement with Save theChildren U.K., and that organizationexpressed concerns about the negative effectthat the proposed credit program wouldhave on women. It was feared that familieswould become less stable or that female bor-rowers would end up devoting less time totheir children because they would have toattend borrower meetings or engage in eco-nomic activities that take time away fromchild care. In the end FATEN decided notto pursue the business part of this proposalbecause it was rightfully concerned aboutlosing its focus at a time when the institutionis still building its image as a credible micro-finance intermediary. Social activities will stillbe provided and, as originally planned,directly implemented by Save the Children.

Similar concerns have arisen in othercountries as well. For example, Save theChildren’s field office manager in Jordanwondered whether loans to female bor-rowers indirectly lead to less school time foradolescent girls because the girls help theirmothers with their businesses. This managersuggested that philosophically a question

may be posed as to whether the microcreditprogram is fulfilling its objectives.

These issues are relevant and call for bet-ter client impact studies and assessments.But they are probably more appropriatelyaddressed outside the institutional mandateof the three spin-offs as they struggle to buildsustainable businesses. Asked whether theysee their institution as a social serviceprovider or a business, most staff from theJWDS, Al Majmoua, and FATEN said busi-ness—though one with a social dimension.Nonetheless, the primary responsibility forthe microfinance institutions lied in improv-ing economic outcomes to ensure thelong-term survival and viability of their insti-tutions and their clients. As programsexplore different market niches, it is not yetclear how a continued relationship with Savethe Children would affect a microfinanceinstitution’s ultimate vision and mission.Save the Children does not believe that itsvision and mission have to match those ofthe microfinance institutions it works with.Rather, it feels that in areas where there isoverlap—as with lending to female bor-rowers—there is room to work together.

The spin-off process andpersonalities

The spin-off process has been marked bydiverse approaches and degrees of Save theChildren’s involvement with microfinanceinstitutions. In Lebanon a “hands off”approach by Save the Children’s regionalmanager, coupled with the dedication andstrong feeling of ownership of the programby local staff, has been the key to a smoothspin-off and a continued healthy workingrelationship between Al Majmoua and Savethe Children’s regional office. In Jordan themix of personalities was different, and until1998 the JWDS was controlled by Save theChildren’s field office manager and staff.Without such intensive support the JWDSwould not have been able to overcome itsfraud and management crisis. The deter-mination of the JWDS’s board of directors

and its dedicated staff were also crucial inthis rescue effort.

The West Bank and Gaza saw a complexand ambiguous struggle for the control overand independence of FATEN. This struggleseems to have resulted from miscommuni-cations, mishandling of personnel issues,and major differences of opinion betweenthe key personalities involved in the spin-offprocess—problems that were compoundedby the fraud crisis. In hindsight it appearsthat this situation could have been avoidedor remedied if clear accountability andresponsibility benchmarks had existed fromthe start and had been rigorously enforced.Such an approach may have led to a betterunderstanding among all those involved inthe spin-off and may have expedited theprocess. Finally, the spin-off of FATEN hadan additional dimension not felt as pointedlyby the other two spin-offs—the desire of theinstitution’s staff to first and foremost cre-ate a Palestinian institution, and then to cre-ate a microfinance institution.

Though the extent of Save the Children’sinvolvement and attempts to phase itself outhas been guided by an institutional “roadmap,” at least as important have been thepersonalities of the visionaries driving thisprocess. The further away these people werefrom the creation of the Group GuaranteedLending and Savings program, the moreautonomy and independence were grantedto the spun-off institution. And with the rota-tion of senior management within Save theChildren’s field offices, new managers haveshown greater willingness to “let go” of thespun-off microfinance institutions.

In all three cases the relationshipsbetween Save the Children and the spin-offs,as well as their institutional development,have been affected—positively or nega-tively—by the professional chemistry amongthe key personalities involved on both sidesof the spin-off. Yet the importance of per-sonalities seems to have been overplayed.Perhaps better institutional communicationbetween field offices would have eased theprocess. Too often certain personalities in

New managershave shown greater

willingness to “letgo” of the spun-off

microfinanceinstitutions


the field were excessively relied on at everylevel, from Save the Children regional andfield office managers to boards of directorsto staff within institutions. As a result thedeparture at this stage of senior staff withinthe JWDS, Al Majmoua, or FATEN couldseriously jeopardize the future of theseyoung institutions.

Spinning off ultimately should be aboutinstitutional development. Thus the focus atevery level must be on building institutionalrelationships for the future rather than onrelying on personal relationships that mayor may not continue throughout theprocess. It is not clear whether this idea hasbeen fully grasped within the spun-off micro-finance institutions, particularly withinsome boards of directors.

Building relationships for the future

One of the biggest challenges in the trans-formation process is to develop a workingrelationship between Save the Children andeach spin-off that benefits both parties andsolidifies the bridge between them. In theabsence of a proper definition of this rela-tionship, and because of the expectationsthat Save the Children had for this process,it has not fully capitalized on the experienceand knowledge that the spin-offs havegained in autonomously managing theirGroup Guaranteed Lending and Savingsprograms and new institutions.

This shortcoming may have resulted fromseveral factors. As recognized by all thoseinvolved, spinning off was not very method-ical or strategically thought out beyond ashort- or medium-term prospective. Inaddition, despite several regional workshops,it did not seem as if much communicationor collaboration had occurred between Savethe Children’s field offices in the three coun-tries. The spin-off process in one countryrarely benefited from experiences gained orlessons learned in the process previouslyconducted in another country.

Moreover, within the larger Save theChildren umbrella, at a certain level there

seems to have been institutional ambiva-lence about microfinance in general. Fromthe outset of the spin-off process Save theChildren viewed microfinance as a route toreaching female entrepreneurs and build-ing local institutional capacity. As the pro-grams underwent institutional transition andthe new institutions began to explorebroader markets and evolve operationally,Save the Children’s goals and the new insti-tutions’ goals may no longer mesh. This maylead to potential clashes as the visions ofeach diverge and outgrow the founding plat-form designed by Save the Children.

Finally, Save the Children is constrainedin real terms in microfinance investments.For example, it cannot take a full equity stakein its investments. As an alternative, Save theChildren is exploring the option of regis-tering a legally separate entity, a subsidiarythat would not face such legal constraintsand may be able to become a full share-holder in investments. As explained by theorganization’s management, such a move “istied to the desire of Save the Children tohave a say in the evolution of their invest-ments, rather than to exert control.”

In all three countries the relationshipbetween Save the Children and the spin-offsrequires further clarification and better def-inition beyond the legal obligations involvedin the subgrant agreements. Most important,specific roles should be defined as towhether Save the Children remains a parentinstitution, a donor, an equal partner, astakeholder, or even a competitor. Theseissues are currently the subject of intensediscussion among all involved parties.

The JWDS, Al Majmoua, and FATEN seemutual benefits from a continued relation-ship with Save the Children. But for such arelationship to be mutually fruitful beyondthe funding issues involved, each spin-off willhave to address:• The nature of the relationship.• The consequences such a relationship

may have on the spin-off’s ability tobroaden its target group and better serveits local market.

The relationshipbetween Save theChildren and thespin-offs requiresfurther clarificationand betterdefinition

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

• The types of technical assistance the spin-off would require from Save the Children.

• The type of networking arrangement.• The role the spin-off envisions for Save

the Children.To address these issues, the spin-offs need

to better understand and define theirneeds. At this stage the JWDS, Al Majmoua,and FATEN may overestimate their ability todeal with certain issues—such as lobbyingfor donor funds, negotiating grants, and per-forming administrative tasks—not becausethey lack capacity (though that has yet to betested) but because they still have a lot ofwork to do in building their basic adminis-trative and organizational models and get-ting systems up and running. Even moreimportant, much more effort needs to beurgently invested by spin-offs to betterunderstand their client base. In addition,that their reputations are still in their infancyshould not be neglected in connection withlobbying among donors.

Save the Children, for its part, needs toclarify the form in which liability stemmingout of subgrant and grant agreements canbe distributed among the parties, anddefine the responsibilities toward donors forthe performance of the spin-offs. Save theChildren also needs to better understandthe needs of these institutions—as well asassess its capacity on whether and to whatextent it can provide the needed assistance.A crucial issue for Save the Children is deter-mining what it can offer the spin-offsbeyond funding arrangements.

There is a perception among some thatSave the Children has limited capacity todirectly provide technical or managementassistance in microfinance to the MiddleEast spin-offs. An illustrative commentcame from one of Save the Children’s fieldmanagers: “we have the capacity to monitorand control [the spin-offs], but we cannothelp them.” In spinning off its GroupGuaranteed Lending and Savings opera-tions in the region, Save the Children trans-ferred all of it institutional microfinanceknowledge and microfinance expert per-

sonnel to new institutions. But no properfeedback channel was established from thestart for Save the Children to benefit fromwhat are in some cases steep learningcurves. In the long run and in a perfectworld, this might be regarded as the ulti-mate success, because local capacities arebeing developed to reduce dependence oninternational assistance. The reality of thedevelopment business, however, creates afinancial incentive for Save the Children tomaintain ties to the spin-offs.

To build the capacity that MiddleEastern microfinance institutions expect,considerable dedication and focus will beneeded if the experiences of other net-works—such as ACCION International orFINCA—are to be taken as examples, andif Save the Children wants to create a net-work that can offer real gains to its mem-bers (box 9). Save the Children is acutelyaware of this issue and is recruiting a micro-finance expert to provide technical assis-tance to institutions across the region. Thisexpert’s duties will include backstopping incases of fraud, supporting spin-offs’ direc-tors in undertaking new projects (such asdeveloping a management information sys-tem and new products), monitoring theaccuracy of indicators, and introducing astandard set of indicators.

Another idea is for this expert to play acoordinating role or even serve as the begin-ning of a Save the Children technical unitin the region. Whether this move would besufficient to reengage Save the Children ina way that is respected and needed by thespin-offs remains to be seen. As noted bymany of the spin-off staff interviewed in theregion, “things would have been differentif Save the Children had this capacity.” Bynot resolving its institutional ambivalence,by rapidly decreasing its comparativeadvantage, and by not clarifying its rolesooner, Save the Children has strained itsrelationships with the new institutions—leading to a sentiment that its involvementmay not be needed. As one of our inter-viewees stated, “all three [spin-offs] are way

For a continuedrelationship with

Save the Childrento be mutuallybeneficial, the

spin-offs need tobetter understand

and define theirneeds


past Save the Children in microfinanceexpertise in the region.”

Building networks: pros and cons

This discord has brought to the fore aninteresting dilemma that raises a deeperinstitutional issue. Should an internationalNGO such as Save the Children be a micro-finance provider in the field? Or should itfocus on building its international orregional capacity to provide technical assis-tance to the microfinance institutions thatit creates? Or should it create a conceptualagreement explaining why both local andinternational institutions should engage inmicrofinance together?

Save the Children has asserted that itwants to be a player in microfinance, and itplaces enormous value on its financial andinstitutional investments in the spin-offs.Some of the success of the JWDS, AlMajmoua, and FATEN reflects efforts thatSave the Children has made in introducingthese programs to the region. Thus in manyways Save the Children’s desire to have anongoing relationship with these institutionsrepresents its deeply held conviction that nomatter what happens with these spin-offs, itwill always be held responsible by donors forthe outcomes. In addition, besides concerns

for continued quality, this desire reflects Savethe Children’s interest in earning morecredit for these institutions’ success, as wellas in increasing its understanding of thespin-off process for similar ventures aroundthe world. Save the Children’s managementbelieves that it has learned valuable lessonsand wants to continue doing so.

In an attempt to maintain these mutualrelationships, and in an effort to reengage,Save the Children has for more than a yearbeen negotiating with the JWDS, AlMajmoua, and FATEN about their futureties. Save the Children has envisioned cre-ating a regional network or defining a con-ceptual agreement of cooperation with thespin-offs. It has planned to offer its own tech-nical assistance to these institutions or tohelp find other experts when it cannot. Ithas proposed building on both the techni-cal and strategic quality of management.Save the Children plans to prepare annualreviews for each spin-off that will look atfinancial and other systems. On the strate-gic side, Save the Children hopes to ensurequality management while increasing thenumber of clients each institution serves.Save the Children would also lend its inter-national reputation and engage in promo-tion of the spin-offs. In this framework theinstitutions would loosely oblige themselves

Save the Children’smanagementbelieves that it haslearned valuablelessons and wantsto continue doing so

THE SPIN-OFF AND THE PARENT INSTITUTION: STRENGTHENING TIES OR PHASING OUT? 35

The Secretariat of the Consultative Group toAssist the Poorest (CGAP), within the frame-work of support to retail microfinance institu-tions, has provided funds through networks aswell as through direct retail funding, technicalassistance, and business planning support. Therationale for funding retail microfinance insti-tutions through network or wholesale organi-zations was based on the benefits derived fromeconomies of scale, the network knowledge ofaffiliates, and more agile response.

But CGAP also found that the benefits ofbuilding capacity through networks are difficultto verify. Many of the desired results—such asstrengthening of the network and better out-reach and sustainability of network members—

will likely emerge only in the long term. Still,CGAP’s experience offers important lessons.Efforts to build capacity through networksshould include:• A human element: strong, professional net-

work leadership and technical competence.• An ability to leverage appropriate outside

resources and expertise.• An excellent relationship with network

members.• A focused, member-driven agenda.• Value-added, demand-driven services, as evi-

denced through cost recovery.Any capacity-building proposal must be ownedby network members rather than by the head-quarters or network head.

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

Source: CGAP 1998.

to remain under Save the Children’sumbrella, would provide technical assistanceto programs in other regions according toSave the Children’s requests and needs, andwould recognize the affiliation with Save theChildren in all its activities.

Some of Save the Children’s proposednetworking arrangements do not seem to gobeyond what microfinance institutionscould do on their own. Still, it is legitimateto ask whether the spin-offs would do thesethings—such as collaborating and exchang-ing experience, holding annual meetings,and searching for technical assistance—given the daunting institution-buildingtasks still facing all three. Regardless, theissue of establishing a network of affiliateshas been fiercely contested by the institu-tions precisely because of the unresolved

issues that can be summarized in two ques-tions often exchanged in these discussions:What do you need? And what can you offer?Misunderstandings and miscommunica-tions seem to continue.

Taking a broader view, however, it is clearthat more fruitful relationships can andshould be developed. Save the Children hasa lot to offer the spin-offs. The key would beto focus on what Save the Children knowsand does best. Assistance and training inadministering grants, negotiating funding,supporting management, training anddeveloping boards of directors, andexchanging regional experience, for exam-ple, could be fields where Save the Childrenwould have comparative advantage toremain a long-term strategic partner forthese institutions.


The approach thatdonors take tomicrofinance cangreatly affect thedevelopment ofthis industry

37

The role of donors in spinning off

In recent years microfinance has bene-fited tremendously from its newlyprominent position on the development

agenda. Nearly all donors—whether local,bilateral, or multilateral government agen-cies or local or international NGOs—support microfinance activities by providinggrants, lines of credit, lending guarantees,or technical assistance. Donors are the mainfunders of microfinance services and in mostcases effectively provide the funds foronlending.

Thus the approach that donors take tomicrofinance and the requirements that theyset for microfinance institutions can greatlyaffect the development of this industry andthe future of many microfinance institutions.Donors can also significantly affect spun-offmicrofinance institutions in the effects thatthey have on the transition to complete insti-tutional independence.

Donor policies and strategicinterests in microfinance

Most microfinance institutions work withmore than one donor, often developing sep-arate products to meet each donor’s require-ments—requirements that tend to reflectdifferent strategies and different donorinterests. For example, the three MiddleEastern spin-offs have received indirectgrants from the U.S. Agency for InternationalDevelopment (USAID), U.K. Department forInternational Development, Irish Aid,Canadian International DevelopmentAgency, and others. These funds are chan-neled to the institutions through subgrant

agreements with Save the Children, whichplaces it in the unique position of being a pro-gram creator and a microfinance donor. Thisfunding relationship involves many com-plexities for the institutional development ofmicrofinance institutions, such as the allo-cation of responsibilities for performance andcompliance with various donor directives.

Each donor obliges the institutions to usefunds in accordance with the negotiatedgrant agreement. For example, USAIDfunds are to be used in a manner consistentwith the agency’s microenterprise policydirective. One such agreement, typical ofthis directive, requires that (among otherthings) spin-offs:• Demonstrate a willingness and ability to

set interest rates and fees on loans highenough to cover the full long-run costs oflending on an opportunity cost basis.

• Commit themselves to maintaining firmcontrol over delinquency and losses.

• Commit themselves to attaining full finan-cial sustainability and expanding theavailability of financial services to micro-entrepreneurs and other poor people.

• Promise that women’s access to credit willbe encouraged and promoted under thegrant and specify that women will be thesole borrowers.

• Adopt standard reporting requirements. The requirement specifying that women

be the sole borrowers, following on that ofthe original Group Guaranteed Lending andSavings programs, has continued throughoutthe subgrant agreements signed betweenSave the Children and the three spin-offs.The agreement transferring the outstanding

portfolio from Save the Children to FATEN,for example, requires that FATEN continue“to extend and develop programs in thesame spirit and orientation as the [GroupGuaranteed Lending and Savings] pro-gram in order to provide support and assis-tance to needy women and children.”

Since becoming independent all threeinstitutions have conducted market researchto review the opportunities for developingnew products—such as individual loans andloans to much smaller groups than man-dated under the Group Guaranteed Lendingand Savings programs—and broadeningtheir target client base. If these institutionswere to broaden their lending landscape toinclude men, the move would have to beapproved by Save the Children and ulti-mately by the original donor, USAID,because it would be perceived as a majorchange to the original methodology. In prin-ciple, all three institutions are free toobtain donor funds from other sources andnegotiate any kind of agreement theydesire, with no limitations on their targetmarkets or methodologies. But doing socould create confusion, depending on thestated mission or image of each organization.

Consider, for example, the JWDS, whoseprimary goal is to “provide poor womenentrepreneurs with access to financial ser-vices on a sustainable basis.” Given the mar-ket opportunities to expand its targetclientele, it may have to rethink its originaldesign and eventually start lending tomen. This move would, however, imply amajor change in the JWDS’s methodologyand staffing structure. For example, group-based lending may be less appropriate formen, so the JWDS would have to embark onindividual lending. Such a move requirescredit agents trained with more analyticalskills than are now available, because agentsmust be able to examine the profitability ofindividual businesses and perform (atleast) simple cash-flow analysis. Moreover,because all of the JWDS’s credit agents arewomen, it would have to consider hiringmale credit agents as well.

Such changes would require properanalysis, market research, and product test-ing to ensure that the JWDS is ready and ableto provide such services to a broader market.In addition, the name of the institution couldhave to change as well, to reflect this marketbroadening and to attract more male bor-rowers. Because these changes would meana major deviation from the JWDS’s originalstated mission, they would require theapproval of the board of directors as well asSave the Children—which, ultimately, is theinstitution that would have to comply withthe donor policies negotiated in the subgrantagreement (box 10).

These examples show the inherent insta-bility and institutional insecurity of donor-sponsored programs and institutions in

Donors andinstitutions must

make strategicchoices from the

start of spinning off


Box 10. Decisionmaking in the Savethe Children–JWDS partnership

Like any autonomous organization, theJWDS ultimately chooses what it will and willnot do. But within the partnership betweenSave the Children and the JWDS—throughwhich Save the Children provides funding forJordan’s Group Guaranteed Lending andSavings program—Save the Children has setparameters for JWDS operations. Save theChildren is committed to supporting pro-grams committed to best practice microfi-nance. In addition, as the prime recipient fordonor funding, Save the Children has a fidu-ciary responsibility to ensure that donor reg-ulations are upheld by subgrantees.

To meet both of these objectives, Save theChildren imposed limitations on JWDSchanges to its methodology. To some extentthese limitations are perfunctory—they arequite limited, and Save the Children typicallyapproves any reasonable change immediately.As the JWDS’s experience has increased, Savethe Children has cut back these limitations toaffect only the most important areas ofmethodology. In practice the JWDS hasalmost complete flexibility in modifying loanoperations or testing changes to loanmethodologies. As intended, the JWDS gen-erally perceives Save the Children’s contri-butions as facilitative rather than obstructive.

Source: Save the Children.

microfinance. They also highlight the strate-gic choices that donors and institutions mustmake from the start and bring to the fore akey issue: practitioners and donors should beaware of what the other is doing. Practitionersshould know which donors support anapproach consistent with their own, so thataccess to funding does not mean changingthe philosophy of their organization.

Reporting requirements: standardmonitoring or interference?

Reporting requirements are another impor-tant aspect of the relationship betweendonors and microfinance institutions.Because most funding for the three spin-offscomes through subgrant agreements withSave the Children, a direct grantee ofUSAID, reporting is channeled through Savethe Children. The reporting requirements forthe three institutions vary but typicallyinvolve monthly financial reporting, quarterlyprogress reports, and a final report expectedon the completion date of the subgrant.

Recent negotiations of a grant agreementwith the JWDS offer a more peculiar picturewhen it comes to donors requiring micro-finance institutions to go beyond standardreporting—and give an interesting exampleof donors crossing the line between moni-toring and interference. The USAID con-tractor on this grant required daily or weeklyreporting, a requirement that by itself wouldhave imposed unnecessary administrativeburdens on the young microfinance insti-tution. In addition, however, this contractorinsisted on nominating its representative asa member of the JWDS’s board of directors(though without voting rights).

This anecdote raises an important pointabout donor approaches to reportingrequirements. Under a standard, hands-offapproach in which responsibilities aredefined in legal documents, there is no needfor donors to take a stake in the board ofdirectors of an independent institution.Moreover, intrusive and excessively con-trolling involvement may eventually suffo-

cate a program and undermine its institu-tional independence.

The situation in Jordan was even morecomplex because the contractor involved, onbehalf of USAID, is one of the main fundersfor several of the JWDS’s competitors.Giving the contractor a presence on theJWDS’s board of directors could create a seri-ous conflict of interest because this donorwould be able to “look into the kitchen” ofseveral competing institutions. This kind ofinvolvement is extremely unproductive andis not in the interest of the long-run devel-opment of the microfinance industry.

Achieving targets and facingpressure to grow

Microfinance is often wrongfully perceivedas a panacea for poverty alleviation—notleast because microfinance has become soprominent on the development agenda.Indeed, widespread donor interest in micro-finance could lead to an oversupply of fundsfor onlending and, consequently, over-whelming pressure to disburse funds. Thismay translate into pressure on programs toexpand and develop extensive branch net-works (even when not justified by marketconditions) despite limited institutionalcapacity to take on these funds and embarkon expansion. Such pressure may have irrev-ocable consequences for young institutions.

Donor pressure is evident on both endsof the growth and expansion spectrum inJordan, Lebanon, and the West Bank andGaza. For example, donor microfinanceactivities in Jordan emphasize achieving tar-gets and quantitative performance goals.Such pressures come at a time when theJWDS would benefit from having breathingroom to strengthen its systems and stream-line controls—particularly given the fraudthat plagued the program in 1998 and thatresulted in management resignations andinstitutional restructuring.

At the other end of the spectrum, donorpressure is essentially absent in Lebanon. Thislack of pressure has given Al Majmoua the

Intrusive donorinvolvement may undermine a spin-off ’sinstitutionalindependence

THE ROLE OF DONORS IN SPINNING OFF 39

liberty to lend at a slower pace. In fact, AlMajmoua is experiencing stagnation in its loanportfolio, but it has developed a stronger focuson building corporate structures. Rather thanengaging in actual outreach to the market, ithas been active in training staff, redesigningthe program, analyzing the market, devel-oping a public relations campaign, and exper-imenting with new loan products. Whetherthis strategy will prove successful remains tobe seen, but Al Majmoua has developed animage of a serious corporate business with arecognizable logo and a clear vision. At thesame time, however, Al Majmoua cannotafford to become too inward looking and testevery possible approach. Now is the time todeliver services.

FATEN’s case is more complex becausethe pressure to grow essentially came fromwithin. Targets were set by staff working withmanagement in the field. For example, themicrocredit program’s September 1997proposal for additional USAID funding pro-jected that by the end of fiscal 1999 the pro-gram would provide nearly 50,000 new loansto female microentrepreneurs, have 20,000active borrowers, and be fully sustainable.Donors were more concerned about the fastgrowth that the program embarked on with-out recognizing the weaknesses in its systems.

Between November 1997 and April 1998FATEN’s outstanding loan portfolio nearlydoubled. Because the institution could notbear the burden of such growth, opportu-nities for fraud arose—almost leading to themeltdown of the program in 1998. Still,there is a balance to strike between growthand systems. FATEN and the JWDS saw toomuch growth and too few systems; AlMajmoua appears to have seen too many sys-tems and too little growth.

Growth is one of the most complicatedissues in microfinance. Managing growth—both by donors and by program or institutionmanagers—requires finding the right mixbetween depth and breadth to balance out-reach with viability (Churchill 1997). Rapidgrowth is not inherently bad. But it can be,as with the JWDS and FATEN. Rapidly

expanding microfinance institutions arelikely to experience premature growth,which occurs before an institution’s systemsare in place and when procedures are not suf-ficiently tested. In either case the institutionwill ultimately suffer from increases in delin-quency and desertion—as demonstrated inJordan and the West Bank and Gaza. Systemweaknesses came back with a vengeance toundermine both institutions’ achievements.

Fast growth and durability are oftenincompatible (Hawkins 1987). Thus institu-tions should not perceive the pursuit of growthas a tradeoff between quality and quantity. Theonly tradeoff may be in short-term outlooks—where the higher profits that come with moreclients may be the main concern, rather thanthe cost of installing proper systems. In thelong run, however, if profit is an institution’ssole objective—rather than investing in sys-tems, standardizing procedures, and strength-ening policies—such “growth” may jeopardizethe institution by contaminating the loan port-folio with high delinquencies, poor cus-tomer service, or fraud.

Rapid initial growth, despite the early per-ception of success and boost in morale, willultimately undermine the institution. Buthealthy growth, based on a balance betweenquality and quantity, is sustained over timeand is durable. The natural rate of growthwill depend on an organization’s prepared-ness and ability to learn. Microfinanceinstitutions need to gain a sense their naturalgrowth and be prepared to slow things down(Churchill 1997). It is management’s respon-sibility to sense the natural, inherent growthrate of the program and to adhere to it. Afounder’s job is not to lead staff to newheights. Rather, it is to moderate thechanges that will be required of everyone asthe business grows (Hawkins 1987).

Microfinance practitioners too often suc-cumb to donor pressure and believe thatdonor targets must be achieved at any cost—even at the expense of portfolio quality.Donors do not emphasize enough that theissues at stake should never require a long-term tradeoff. Rather, the need for comple-

Fast growth anddurability are often

incompatible


mentarity needs to be made clear through-out the process. If lending goals are achievedat the expense of capacity building, the endresult may be a highly contaminated portfo-lio, a long period of convalescence after fraudor delinquencies, and slow (if not absent)growth of the remaining healthy loans.Additional consequences include institutionalinstability and the ruined reputation of amicrofinance institution. Donors shouldinsist on targets, but targets should be rea-sonable and require high portfolio quality.

How can donors help?

Donors can play an invaluable role in devel-oping the microfinance industry (box 11).The key to successful donor intervention isto identify areas—such as building capacityand establishing a policy dialogue—wheredonors may have real advantages and that areoften in need of resources. Donors can alsoplay an instrumental role in influencing pol-icy reforms and supporting efforts that leadto a stable macroeconomy and financial sec-tor, promote a proper legal environment inwhich microfinance institutions can develop,and encourage entrepreneurialism.

Donors can help disseminate knowledgeabout and present different approaches to

microfinance institutions in regions wherethey have worked. In this way donors canprovide an excellent source of learning formicrofinance providers. Sharing these expe-riences among practitioners and otherdonors would be extremely valuable fordeveloping the microfinance industry in theMiddle East and North Africa.

In many countries donors and practitionershave already set up informal networks to sharetheir experiences, influence policies, and setindustry standards. But much more needs tobe done to promote donor coordination; dupli-cating or counteracting one another’s activitieswill not help create a consistent strategy formicrofinance based on market segmentationand comparative advantage. Inadequate coor-dination can quickly undermine the efforts ofgood microfinance providers—as evidenced bythe many cases where donors and governmentshave distorted microfinance markets by sub-sidizing interest rates, making it difficult forother microfinance providers to compete(Ledgerwood 1998).

The role of microfinanceinstitutions in donor relations

Relations between microfinance institutionsand donors should be equal partnerships. In

The key tosuccessful donorintervention is toidentify areaswhere donors havereal advantages andthat are in need ofresources

THE ROLE OF DONORS IN SPINNING OFF 41

Donors need to pay close attention to severalissues as they formulate support for microfinance. • A commitment to efficiency. If operational effi-

ciency can be achieved in most parts of theworld and in a range of geographic and eco-nomic settings, donors should expect thatany microfinance program they support willreach operational efficiency in a reasonableperiod. Donors should select organiza-tions for support that have a credible com-mitment to reaching operational efficiency.

• Interest rate policy. Donors should insist thatthe organizations they support price theirservices at levels that support financial via-bility. In particular, programs must adjustadequately to the potentially erosive effectsof inflation.

• Reporting standards. Donors should insistthat supported organizations report ontheir performance using generally acceptedstandards in a way that makes subsidiestransparent. Donors should also be pre-pared to offer technical assistance to orga-nizations that lack the capacity to do so.

• Frontier issues. Donors have an importantfacilitating role in helping top-performinginstitutions make the transition to full inde-pendence. Among the interventions thatmay be called for are policy dialogue withgovernments on supervisory standards formicrofinance, technical support to trans-forming institutions and to those who wishto develop savings services, and support foridentifying and securing equity investors.

Box 11. Essential elements of donor policy for microfinance

Source: Christen and others 1994.

reality, however, this is often not the case.Especially during a microfinance institu-tion’s start-up phase, it is often completelydependent on one donor for funds foronlending and technical assistance. Thisnurturing relationship may be beneficial atfirst. But over time the microfinanceinstitution must decrease its donor depen-dency to avoid being “hijacked” by thedonor to serve a certain (political) agendaback home.

While the ultimate constituency of thedonor is usually the government it repre-sents, the ultimate constituency of the micro-finance institution is its clients. Initially amicrofinance institution could decrease itsdependence on one donor by trying tosecure funds from other donors whilemaintaining its stated objectives, targetgroups, and methodologies. Over time theinstitution could mix its sources of fundswith commercial funds so that it can even-

tually manage a financially sustainablemicrofinance institution that does notdepend on donors.

Many microfinance institutions in theMiddle East maintain a donor-dependentmentality. They appear to accept every con-dition (even ridiculous ones) from donorssimply to gain access to funds. Microfinanceinstitutions tend to forget that donors needthem as much as they need donors, and thenegotiating position of a microfinanceinstitution is usually better than it believes.Microfinance institutions should learn to atake clear methodological and institutionalstand. They should also formulate clear andtransparent objectives, a vision, and a strat-egy. Such institutions will find that donorsmay initially be taken by surprise but thatthey may be more than happy to accept themicrofinance institution’s terms and con-ditions because they help ensure that thedonor’s funds will be used well.


As microfinanceinstitutions grow,the size andincidence of fraudtend to grow aswell

43

Fraud and its effects on spin-offs

Almost every microfinance programhas experienced fraud. Yet there isalmost no literature on fraud in

microfinance and few frank discussions of itin public settings. In fact, microfinance insti-tutions are often reluctant to talk about theirexperiences with fraud—though their peerscould learn a lot from such an exchange.Wherever there is money, there is an oppor-tunity for fraud. Moreover, that an organi-zation has not experienced fraud does notmean that it is immune to it. As microfinanceinstitutions grow, their portfolio sizesincrease, and their operations becomemore complex, the size and incidence offraud tend to grow as well (Valenzuela 1995).

There is no evidence linking the spin-offof Save the Children’s microfinance pro-grams to the fraud that subsequentlyplagued JWDS and FATEN. But fraud hashad significant effects on the spin offprocess. Fraud remains a somber issue fromwhich the JWDS and FATEN are still recov-ering. Its effects were devastating andthreatened to destroy the fledgling institu-tions. But in the process both institutionslearned valuable lessons early in their insti-tutional development that may have madethem stronger and so contributed to theirlong-run stability. In this sense, then, a briefoverview is warranted of the fraud episodesthat shook both programs to the core.

Several features make microfinance insti-tutions vulnerable to fraud:• Weak information systems and changes in

information systems.• Weak or nonexistent internal controls.• An absence of internal or external auditors.

• High employee turnover among man-agers, administrators, or loan officers.

• Insufficiently standardized products andprovision of multiple loan products.

• Cash handling by loan officers.• Rapid growth, which can make it difficult

to cultivate the integrity required amongstaff (Valenzuela 1995).Some of these features were evident in the

JWDS and FATEN. In both cases it appears—though this conclusion would have to beborne out by much more thorough research,if not a separate study—the fraud was carriedout by loan officers (box 12). The problemswere compounded by insufficient supervi-sion, weak checks and balances, and theabsence of proper follow-up. Had better sys-tems been in place from the outset, the riskof fraud would have been minimized.

The JWDS and FATEN have learned thatfraud is usually not immediately evidentthrough the portfolio at risk or arrears.Rather, it was detected through internal sys-tems that began to crack under rapidgrowth. These experiences highlight anotherimportant lesson: the key is to know the exactamount of repayments expected on eachrepayment day, to verify whether these repay-ments were received, and to react promptlyto one- to five-day delinquencies, particularlyconstant ones. When repayments are due onone day and disbursements are due on thefollowing day, such cash flow can veil delin-quencies with some loan officers. Thus it iscrucial to monitor these indicators and toclosely supervise loan officers.

The fraud in both Jordan and the WestBank and Gaza was systemic and occurred

in fast-growing institutions marred by laxinternal administrative controls and staffsupervision. Even minimal supervisionwas missing—otherwise the problemscould have been detected much sooner. Inaddition, other shortcomings of the GroupGuaranteed Savings and Lending programswere transferred to the new institutionswithout realizing their potential effects.

In the West Bank and Gaza, for example,the original Save the Children programlacked contractual employment arrange-ments for loan officers. Furthermore,FATEN did not establish a proper chain ofresponsibilities from the beginning, so inthe end it was almost impossible to deter-mine the level of accountability for cases offraud (box 13). Finally, in Jordan the reluc-

tance of managers to deal with the problemand to take a firm stand with loan officerscaught in the act made the situationworse. In fact, if the JWDS’s board of direc-tors had not taken over the program andoperationally managed it for three months(following the resignation of the executivedirector), this spin-off probably would nothave survived. Efforts are still under way toclean the contaminated portfolio and col-lect the remaining funds, in order to pre-vent future outbreaks.

In addition, complaints have emergedthat the experience in Jordan, where fraudwas detected first, was not communicatedtransparently among the three spin-offs orwithin Save the Children’s field offices. Asone of the interviewees in the West Bank and

Most fraud cases in microfinance

institutions involveloan officers


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 triggers 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.new loans, though those loans soon become delinquent. An accountant is oftencolluding with the loan officer.

A loan officer sets up 18 fictitious loans A high-volume branch is selected for an $2,500for personal use. The loans become ambassador’s visit, or a client selecteddelinquent. 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.

Gaza said: “The Jordanian staff were for-bidden to talk to us about it at the workshop.We could have learned more about it.”

The causes of and vulnerabilities tofraud must be carefully kept in check. The

key challenge for microfinance institutionsis to maintain effective control without exces-sive costs or burdensome procedures as theprogram grows. In addition, it should be rec-ognized that fraud can never be entirely

FATEN is stillrecovering from itsfraud crisis, but isstronger becauseof it

FRAUD AND ITS EFFECTS ON SPIN-OFFS 45

At the end of April 1998, while preparationswere being made to spin off Save the Children’smicrofinance program into FATEN, the pro-gram in the West Bank and Gaza had 9,600clients with $1.8 million in outstanding loans.Just six months earlier the program had 5,700clients, so it was clearly on a steep expansioncurve. In March 1998 alone 2,200 loans wereissued for $600,000.

But at the same time, signs of fraud werebecoming evident. Monthly reports indicatedlarge delinquencies among some credit pro-moters (loan officers). Central managementheard of a fraud case in the south, but itthought that the case was being handled bybranch management. Another case appearedin Nablus, but it did not seem serious at first.Then, in May 1998 the supervisor for the south-ern area was instructed to conduct an audit.This audit rang alarm bells because half of theloans—worth $18,000—had been taken by oneloan officer and one client. Central manage-ment then suspended the issuing of new loansuntil proper checks were conducted in all areas.

These additional checks revealed fraud ofenormous magnitude. Such fraud could onlypersist because of growth. New loans, disbursedeach month, were used to repay the fake loans.Hence the loan portfolio did not show arrearsbecause there were no arrears. Only whenmoney supply stopped was there no cash torepay the fake loans. In the end FATEN deter-mined that it had been defrauded of $708,000.

Most of the fraud started in early 1998, whenlending was skyrocketing. The fraud spreadquickly, indicating considerable failings in thesystem. Internal controls and supervision wereextremely poor. Area supervisors were notdoing their jobs, and branch managers failedto sufficiently check the area supervisors. Whenthe fraud was discovered, the program hadabout 70 credit promoters. An important short-coming—and one unique to the Palestinianprogram—was the absence of signed employ-ment contracts between Save the Children andcredit promoters. As a result credit promotersdid not feel any legal liability toward Save theChildren and, even more important, did not

identify with or feel loyalty toward any institu-tion (whether FATEN, which was just being cre-ated, or Save the Children). About 20 creditpromoters—nearly a quarter of the creditstaff—were involved in the fraud.

Due to the extraordinary efforts of its capa-ble managerial staff, however, FATEN has over-come these problems and collected many of thedefrauded funds. By March 1999, $204,000 hadbeen recovered, of which $114,000 was resched-uled as loan payments with new interest rates,late payment fines, and legal fees. The guiltycredit promoters signed confessions stating thatthey owe FATEN the new totals and gaveFATEN post-dated checks as guarantees.FATEN is determined to collect all the moneydue, and continues to make progress in col-lections and rescheduling.

Because of this experience, FATEN hasmoved to a very centralized structure, one thatinvolves some rather cumbersome procedures.Since June 1998 many changes have been intro-duced. Recruitment policy was amended, dif-ferent incentives were introduced, new creditpromoters were hired, and the issue of contractswas solved. To avoid the formation of ghostgroups, FATEN moved from disbursing in thefield to disbursing in branch offices. Immediateactions follow for any late payment. The manualpaper trail is followed and updated daily. Forexample, since July 1998, when lending beganagain, more than 97 percent of payments haveeither been paid on the same day or one daybefore. The other 3 percent are paid within nomore than four days.

These changes have slowed growth—FATEN spent most of 1998 collecting loansand restructuring and testing systems—andsome of its best clients are dropping outbecause they find it difficult to attend branchdisbursement meetings. FATEN’s challengenow is to internalize these changes and inte-grate them at all levels of management. It hasyet to find a more definitive operational modelthat will allow it to operate in a highly effec-tive and decentralized fashion. Although it hasgood prospects, FATEN is still recovering fromthe fraud crisis.

Box 13. Fraud in the West Bank and Gaza

eliminated. It can, however, be reduced andkept firmly in check by addressing the systemweaknesses that create opportunities forfraudulent activities. Staff morale and a teamculture and ethics have to be continuouslynourished, particularly as an institutionexpands. The spin-offs’ experience show thatit is important to respond swiftly and deci-sively when fraud becomes apparent.Otherwise, other staff may be encouraged toengage in fraud as well. Finally, senior man-agers should be aware of new types of fraud

that may occur as an institution develops newproducts, diversifies its market, and becomesmore sophisticated.

As the three spin-offs experiment withtheir products, clients, and administrativeand organizational models, fraud should notbe taken lightly. The JWDS and FATEN aretrying to perfect and fully implementadministrative structural changes that havealready been introduced and that will notallow for any laxity in internal controls andcould detect these problems sooner.


A clearer designfrom the startmight havebenefited Save theChildren and thespin-offs

47

Lessons and recommendations

The spinning off of the JWDS, AlMajmoua, and FATEN has beencomplicated and difficult. Still, it has

taught Save the Children—and to someextent, the entire microfinance industry—some important lessons. These lessons canbe used to draw recommendations for orga-nizations that are considering spinning offtheir microfinance operations, as well as forSave the Children and the three MiddleEastern spin-offs.

After Save the Children began programsproviding loans to microenterprises, the ideadeveloped for the programs to act as catalystsand organizational forerunners for institutionsspecialized in providing finance. In hindsight,a clearer design from the start on the long-term institutional structures of these programsmight have benefited Save the Children andthe spin-offs during the transition.

Another important consideration forthese spin-offs turned on the preparednessof each program to become self-operatingin every regard. As part of Save theChildren, most of the programs relied on itto perform many tasks—from disbursingstaff salaries and benefits to running man-agement information systems. While onecan never prepare for everything, propercontingency planning through strategicplanning workshops and “how to” work-shops could have preempted some issuesthat have marred the relationships betweenSave the Children and the spin-offs.

The same can be said about some “psy-chological” issues they may not be easily pre-dicted but for which people can beprepared. Judging from the Save the

Children spin-off experience, the chance ofsuccess with spinning off and of eventuallyachieving institutional autonomy appears tobe higher when the original creator (orsometimes manager) is gone or notinvolved. Such a setup leaves more space forthe spin-off to seize on its independence andlearn on its own, even if by making mistakes.

Save the Children has pointed out thatthe issue of organizing each institution’sboard of directors should have been givenmore attention. Initially it was assumed thatmerely transferring management wouldensure a continued vision. But boards playkey roles in spin-offs and merit much moreattention. Board member developmentand training could have been higher on theagenda of both Save the Children and itsspin-offs. Continuous attention needs to bepaid to ensure that boards of directorsremain involved and responsible for thefuture of these institutions. Save theChildren is committed to providing addi-tional board training in 1999–2000.

Properly defining from the start the rela-tionships between Save the Children and thenew institutions would have preemptedsome strains as the spin-offs ensued. But thiseffort is necessarily tied to the parent insti-tution’s long-term strategy for the spin-off,to the parent’s expectation that the newmicrofinance institutions will soon take onlives of their own, and to the parent’s con-tinued feeling of responsibility for the suc-cess or failure of the new institutions.

Save the Children and the spin-offsagree that perhaps many of these issueswould have inherently been addressed—or

altogether avoided—if from the outset thelending operations were lodged in a sole-pur-pose, independent microfinance institutionrather than in a program-based setting.Recognizing that managing an institution isnot the same as managing a program couldhave placed a greater focus on enhancing thespin-offs’ institutional (as opposed to pro-gram) capacity to manage more productsand services, mobilize resources, andenhance management information systems.

Recommendations for organizations contemplating a spin-off

Most microfinance programs in the MiddleEast and North Africa are part of larger pro-grams. Not all of these programs can orshould be spun off. Spinning off is a strategicchoice and makes sense only if it is done inthe context of another strategic choice: achiev-ing full sustainability. Many programs do notwant to make the strategic and difficult choicefor full sustainability because it requires a busi-ness orientation that is often incompatiblewith the visions and choices of their founders.Such programs may be better off doing “busi-ness as usual” under a parent organization.Over time, however, their funds will dry upand the programs may disappear because theydid not aim for sustainability. Still, during theirexistence they may have provided a useful,albeit temporary, service.

Save the Children’s experience pro-vides useful lessons for other multisectoralinternational or local NGOs wishing toengage in microfinance. Doing so is also astrategic choice, and international NGOswishing to make this choice should realizethat it requires substantial up-front andongoing investment in their ability to helplocal organizations develop sustainablemicrofinance programs. This is a long-termcommitment requiring long-term invest-ment in capacity and systems that not onlyincrease but also change over time. Notevery NGO should engage in microfinancesimply because donor funds are available.

Some may be better off excelling in theiroriginal core operations. InternationalNGOs engaging in microfinance half-heartedly do not contribute to the healthyand competitive development of the micro-finance industry.

International NGOs (such as Save theChildren) that have made the strategicchoice and commitment to develop micro-finance in their countries of operationsshould consider starting out microfinanceoperations as independent institutionsrather than as parts of a larger organization.This approach allows the new institutions tobuild and enhance their institutional capa-bilities from the beginning. Instead of rely-ing exclusively on the larger organization tomanage the daily chores of its business, suchsole-purpose new microfinance institutionsmay increase their capabilities through“learning by doing” and allow their systemsto grow with the number of borrowers.

Further collaboration on other importantissues—such as providing technical assis-tance, exchanging expertise (in both direc-tions), and training staff, managers, andboards of directors—can foster an evenhealthier working relationship with the par-ent institution as well as highlight the inde-pendence of newly formed institutions. Thistype of arrangement might benefit a newinstitution by forcing it to deal with theeveryday problems of building independentand self-reliant entities from the start.Moreover, it could allow the parent institu-tion to be more involved in developing thevision rather than the technical aspects ofthese programs.

The establishment of new institutions—including setting up and selecting theboard—is often marred by bureaucracy anddifficulties, as witnessed in the spin-offs intothe JWDS, Al Majmoua, and FATEN. At thesame time, the lending had to continue,which placed additional strain on the orga-nization because they were simultaneouslyengaged in institution building andmicrolending operations. Starting out as anindependent institution may relieve some of

InternationalNGOs should

consider startingout microfinance

operations asindependent

institutions ratherthan as parts of a

larger organization


this strain because the first phase can bedevoted to developing appropriate institu-tional arrangements and capacity and tobuilding strong systems. The second phasecould then more easily handle programgrowth and expansion.

Developing a corporate culture in anew institution

Starting out as an independent institutionmay also preempt such difficulties as tryingto change the corporate culture transferredfrom a program-based setting. As noted, oneof the biggest challenges in spinning off isgetting the staff of the new institutions toshift from a program-based to an institu-tional attitude. This crucial metamorphosisaffects the technical aspects of day-to-dayoperations and alters the strategic approachof each institution.

This shift offers a number of benefits. Itallows and even compels staff to assume amore analytical role, whether in terms ofreassessing lending methodologies and tar-get groups or in determining whether tomove to individual lending or use the insti-tution’s funds for onlending. Spinning offhas increased local capacity by investing inlocal practitioners who will be the microfi-nance experts of tomorrow; clearly, theentire region’s microfinance industry ben-efits from such local initiatives. On a morepersonal level, staff who had been underSave the Children programs have begun tofeel a greater sense of belonging in theircareers, and professional opportunities willonly increase as the spin-offs develop. Eachof these lessons not only benefits individualinstitutions but also improves future part-nerships with other organizations.

Choice of legal form

If the choice is made to pursue full sus-tainability and this choice is the underly-ing reason for spinning off microfinanceoperations and for creating a new micro-finance institution, in the long run an

NGO legal form is not recommended.NGOs lack legal accountability and trans-parency and so cannot access the com-mercial funds required if the institution isto away move from donor-subsidized oper-ations and dependence.

If possible, new microfinance institutionsshould register under a legal form with iden-tifiable owners that are personally or insti-tutionally liable and take an equity stake:for-profit company, nonprofit company,financing company, microfinance inter-mediary (if available as a legal form), non-deposit-taking bank, and so on. In this waythe full sustainability goal will be embeddedin the institutional form and governancestructure from the start and will preemptpotential complications, such as the need forre-registration, image changes, and so on.

Board of directors

The choice of legal form also affects theselection of board members. Playing a roleon the board of an NGO is different frombeing a liable board member of a company(even if limited). “NGO board members donot usually fulfill the board’s fiduciary roleby assuming responsibility for the institu-tion’s financial resources, especially thoseprovided by donors” (Ledgerwood 1998, p.112). NGO board members are oftenbound only by the feeling of moral respon-sibility and the sense of having a personalreputation at stake. NGOs generally do nothave shareholders. Instead, managementusually selects board members, as in Jordanand Lebanon. This approach may lead to aconflict of interest if management selectsboard members who conform to its interests.

Thus board members should be selectedbased on their wide range of expertise andexperience—including financial, legal,managerial, and private sector. Of utmostimportance is the board’s ability to criticallyanalyze management’s plans and provideeffective guidance. Board members’ inde-pendence and selection based on expertiserather than personal interests or political

Board membersshould be selectedbased on theirwide range ofexpertise andexperience

LESSONS AND RECOMMENDATIONS 49

agendas (or those of senior management)are crucial to board performance. In addi-tion, board members should be givenextensive training on the microfinance busi-ness and on the role they are expected toplay as institutions evolve.

Executive director and management team

When assessing the director’s role, attentionshould be paid to his or her personal attach-ment to and interests in the institution. Atone extreme the commitment and personaldedication of the director can only help fos-ter the institution’s development—especiallyduring the early stages. But this personalattachment can be risky if it is allowed todominate or influence the vision of theentire institution.

Kets de Vries (1985) documents suchcases for corporate entrepreneurs and sug-gests that an entrepreneur’s attention todetail—which is a virtue in the start-upphase—can be crippling if he or she con-tinues to exert such control when the orga-nization grows. An entrepreneur whocannot let go of the reins even when facedwith the company’s demise must have a needthat is greater than the desire to see the com-pany succeed. The same is true of the par-ent organization that finds it difficult to letgo of the institution it helped create.

Executive directors undoubtedly needto concentrate on strategies and goalswhen they head programs. But this needis even more intense when they becomeleaders of their own institutions. Theirattention to the operational and technicalaspects of their business cannot be under-stated, but their role in more strategic deci-sions of the institution and in teamdevelopment becomes even more impor-tant. Also documented is the need to havestrong senior management team (ratherthan one or two key individuals) and tobuild the ranks of middle management.The need to think from an institutionalrather than a program-based perspectivecannot be overemphasized.

Life after spin-off: definingresponsibilities for the parentorganization

In a corporate context, parent firms oftenemphasize their most important businesses.After a spin-off the parent firm is expectedto be able to provide maximum support toits remaining businesses without beingconcerned about the spun-off entity. Butbecause of the donor environment inwhich Save the Children operates, it hasoften said that it believes it would be heldresponsible for these institutions’ ongoingoperations. This is the main reason Save theChildren wants to continue to have a work-ing relationship with these institutions andhave a say in their development.

Perhaps the performance issue is overem-phasized and Save the Children needs to bet-ter define its expectations, responsibilities,and liabilities—both among the spin-offsand with donors. As the new microfinanceinstitutions take on lives of their own and callfor equal partnership treatment, Save theChildren needs to draw distinct linesbetween its real and perceived responsibil-ities for operations that it may, in effect, nolonger control.

More important, there is an inherent con-tradiction in Save the Children’s larger orga-nizational structure that affects relationshipsat various levels within the organization itselfand with the spin-offs. By design, technicalexpertise is to be concentrated in theEconomics Opportunities Unit based inWashington, D.C., and responsible for theorganization’s worldwide effort in this field.But the spin-offs, through subgrant arrange-ments with donors, technically report to thefield office line hierarchy. Still, while theEconomics Opportunities Unit plays only anadvisory role, it is ultimately held accountablefor developments on the ground. Moreover,the Economics Opportunities Office and thefield offices often hold divergent views on thedevelopment of the spin-offs and on thenature of Save the Children’s involvement.This divide highlights the need for the par-

The need to think from

an institutionalrather than a

program-basedperspective cannotbe overemphasized


ent institution to speak in one voice and tobetter align reporting requirements, advisoryfunctions, and ultimate accountability.

This divide raises several questions as well.Should the Economic Opportunities Unit bethe focal point for the spin-offs? Or shouldthat role be played by field offices, whichmaintain a multisectoral focus and are nolonger staffed to provide technical assistancein microfinance? Should there be a localtechnical or coordinating position in theregion to respond more closely to the needsof the spin-offs? Some of these alternativesare being reviewed in recognition that thisstructural conflict must be resolved, as it willhave a profound effect on the spin-offprocess and on the development of all par-ties involved in this venture.

Finally, these concerns go back to theneed to define the framework that is toguide the relationship between the parentinstitution and the new independent insti-tutions. Such a working relationship shouldbenefit both parties if it is to solidify thebridge between them. It can be based onoverlapping interests and mutual incentivesand benefits, but it should be determined byall parties in recognition of their expecta-tions and needs. A two-way channel forexchanging experiences between the micro-finance institutions and the parent, andamong the spin-offs, could contribute tosuch a relationship and to the institutionaldevelopment of the new institutions.

Save the Children recognizes many ofthese issues. In subsequent microfinance

work it has applied many lessons from spin-ning off the JWDS, Al Majmoua, andFATEN. In Georgia, for example, it imme-diately introduced Group GuaranteedLending and Savings as a separate institu-tion rather than as a program. In January1997 it registered Constanta, a local micro-finance institution, as a nonprofit NGO toprovide female entrepreneurs with sus-tainable large-scale access to financial ser-vices. Due to changes in the laws governingNGOs, in January 1999 Constanta re-regis-tered as Foundation Constanta. The insti-tution’s charter outlines its mandate and theresponsibilities of its five-member board ofdirectors. All assets, liabilities, and staff fromthe NGO were transferred to the new legalentity.

Constanta distributed its first loans inOctober 1997, after Save the Children hireda consultant to train Constanta’s first fiveloan officers. During the trainingConstanta’s loan officers manual was pre-pared, and it has since been updated. UnderGeorgian law, because it is considered a non-formal financial institution Constanta is pro-viding lending services but no savingsservices. Constanta has already achieved 90percent operational sustainability, hasformed 319 borrower groups with 2,879active female clients, and has maintained adelinquency rate below 1 percent of the out-standing portfolio. Save the Children isdrafting a proposal to provide a full-timeexpert based in Tblisi, Georgia, to providetimely technical assistance to Constanta.

The relationshipbetween the parentorganization andthe spin-off shouldbenefit both if it isto solidify thebridge betweenthem

LESSONS AND RECOMMENDATIONS 51

52

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

Jordan ranks as a middle-income devel-oping country, with a per capita incomeof about $1,500 at the end of 1997

(annex table 1). After a five-year boom withaverage annual growth of about 5.5 percent,Jordan is experiencing recessionary con-tractions, with economic growth havingslowed to 1.0 percent in 1996 and 1.3 percentin 1997. Real GDP growth in 1998 is esti-mated to have been 2.2 percent but isexpected to rise to at least 3–4 percent by2001, with inflation in the 2–3 percent range.The Jordanian dinar is officially pegged tothe U.S. dollar, producing an averageexchange rate of 0.708 dinar to the dollar.

The public sector dominates theJordanian economy. Government servicesremain the largest contributor to GDP,accounting for 18.6 percent in 1997. Largepublic consumption and capital spending

have translated into external debt of morethan 96 percent of GDP, making debt themain structural challenge facing Jordan.

World Bank research indicates thatbetween 1992 and 1997 measured povertydeclined in Jordan, from 14.9 percent of thepopulation to 11.7 percent. In 1997 therewere an estimated 538,000 poor people ina total population of 4.4 million. Moreover,poverty was less deep in 1997 than in 1992,with the poverty gap index at 2.5 percent,down from 3.8 percent. But given recenteconomic contractions, poverty and unem-ployment appear to be on the rise.

Since the war ended, Lebanon has initi-ated an ambitious program of reconstruc-tion and economic stabilization. In 1993–96the acceleration in government capitalspending and stabilization efforts wereassociated 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 2.6 a

Annual 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) 15.0 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 East Jerusalem. If East Jerusalem 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, International Financial Statistics 1998.

growth averaging 7.4 percent a year (El-Erian and Fennel 1997). The governmenthas restored political stability, taken steps torebuild Lebanon’s economy and physicalinfrastructure, and supported private sectordevelopment. The exchange rate has stabi-lized, and inflation has dropped from 120percent in 1992 to 8.5 percent in 1997. In1996, however, real GDP growth fell to 4 per-cent, adversely affected by the Israeli bomb-ings and a slowdown in construction activity.In 1997 GDP growth remained at 4 percent,but in 1998 was forecast to be about 5 per-cent. GDP per capita in 1995 was $2,700—a remarkable increase from less than $1,000in 1990 (Porter 1999). Today GDP per capitais more than $3,500.

Fifteen years of war caused significantdamage to Lebanon’s middle class, creatinga new class of poor who joined the tradi-tionally deprived. Target clients for micro-finance institutions such as Al Majmouainclude the 28 percent of Lebanon’s pop-ulation living under the poverty line of $760(measured in 1996). Poverty is worsened bygender discrimination and social depriva-tion. Among economically active groups,women have lower wages and fewer employ-ment opportunities. But female microen-trepreneurs support their families at variouslevels: 35 percent contributed a significantamount to the main income, and 24 percentare household heads (Porter 1999).

The West Bank and Gaza’s economy suffersfrom a number of structural imbalances,many due to adverse political circum-

stances. Although GDP growth was strong in1994—reflecting the high expectations cre-ated by the 1993 peace agreement betweenIsrael and the Palestinian LiberationOrganization—the Palestinian economysaw a steady decline in economic activity in1995 and 1996, and stagnant growth in 1997.Per capita income declined continuously,falling by an average of 6 percent a yearbetween 1994 and 1998, so that in 1998 percapita income was 22 percent below its levelin 1994. The link between growth andemployment is crucial in the Palestinianeconomy and reflects employment levelsthat are highly sensitive to the ability of work-ers to enter Israel. By 1995–96 unemploy-ment, underemployment, and consequentpoverty became major problems. In 1995,for example, given a poverty level of $650per capita per year, about one-fifth ofPalestinians were poor. In Gaza, whereemployment is especially sensitive to Israeliborder closures, the incidence of povertyexceeded 36 percent at the end of 1995,coinciding with local unemployment ratesabove 30 percent.

Recent economic developments havebeen positive, however. In 1998 job creationaccelerated and unemployment fell to 13percent, down from 20 percent in 1997.Furthermore, labor force participationincreased throughout 1998, peaking at 42percent in the fourth quarter. Strongemployment growth suggests that eco-nomic output grew an estimated 3–4 percent(in real terms) in 1998.

ANNEX 53

54

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