MICROFINANCE PAPER WRAP-UP: “Setting Standards and Sticking to Them: When Microfinance Network NGOs Decide to Exit,” edited by Elissa McCarter and Andree Simon

Published by the Small Enterprise Education and Promotion (SEEP) Network, “Setting Standards and Sticking to Them: When Microfinance Network NGOs Decide to Exit,” is a collection of four case studies, each written by a different author, that focus on the central theme of exit strategies for microfinance network NGOs. Broadly speaking, microfinance network NGOs are large-scale apex organizations that start-up and/or support microfinance operations in different countries with financial investments and grants, capacity building, and monitoring. The first three case studies discuss the processes underwent by the Cooperative Housing Foundation (CHF), Adventist Development and Relief Agency (ADRA), and the Foundation for International Community Assistance (FINCA) to divest from their respective microfinance operations in a particular country. The fourth outlines the general process in which Women’s World Banking (WWB) disaffiliates from a microfinance subsidiary. Full text of the article is 31 pages, and is available here. What follows is a brief summary of each case study.

(1) “Portfolio Sale in Honduras: A Case for Tradable Microfinance Assets,” by Elissa McCarter, Director of Development Finance, CHF International

This case study (p5) outlines the sale of the borrower’s portfolios of Cooperative Housing Foundation’s (CHF)’s Honduras microfinance program to Prisma Microfinance in 2005. CHF is an international philanthropic organization that in fiscal year 2007 had a total annual operating budget of USD 280 million (p6). CHF’s microfinance operations in Honduras began in 1998 in response to Hurricane Mitch with a funding agreement from USAID that ended in 2002. At that point, CHF Honduras’ outstanding loan portfolio was worth USD 1 million (p6).

From the beginning, CHF Honduras was not designed to be a financially sustainable MFI. It lacked the financial and human resources needed, and the program ran into financial problems due to persistent arrears and high operating costs. Contributing factors (p6-7) included increased competition in a relatively saturated microfinance market, unpredictable funding after the USAID grant ended, a weak repayment rate, and lack of sufficient senior microfinance technical skilled staff. CHF decided that sale of the loan portfolios was the best option.

Prisma, a US-based MFI with subsidiaries operating in Nicaragua and Honduras, was identified as the best buyer (p8) due to its similar philosophy, geographical overlap and ability to pay upfront. Difficulties in the sale included a dedicated CHF staff and a geographically dispersed loan portfolio. Prisma ensured a discount on the sale to write off the loans of the hard to borrowers, and absorbed four out of eight recommended employees from CHF. Prisma was able to offer the clients a wider variety of financial products, and a lower interest rate, due to its larger scale and more efficient operations.

(2) “The Risk-Return Tradeoff,” by Mark Webster, Program Management Bureau Chief, ADRA International

The philanthropic Adventist Development and Relief Agency (ADRA) began a partnership (p13) with the Lao Women’s Union (LWU), a small MFI, in 1998. ADRA provided loan capital, capacity building, and monitoring services, which allowed LWU to serve 1500 clients with microfinance in Lao PDR. The program ran into trouble due to (p14) government caps on interest rates, poorly designed loan products, and extreme inflation in the Lao economy after the Asian Financial Crisis. Due to a poorly performing loan portfolio, ADRA chose to exit from the partnership. It donated all existing loan fund equity to LWU.

LWU operations (p14) carried on as before, but with the understanding that if another investor was not found services and jobs would eventually be terminated. It had always been the understanding that ADRA’s departure from the relationship would be the eventual end. However, as a result of the experience, ADRA determined to both ensure that the environment is conducive to microfinance, and to develop a proper exit strategy (p15) and performance monitoring systems before entering into a microfinance project.

(3) “Learning to Appreciate Sunk Costs,” by Andree Simon, Deputy Director, FINCA International Inc.

The Foundation for International Community Assistance (FINCA) is a global microfinance network that operates on the principle of ensuring the greatest social return within the context of sustainability. FINCA has developed a set of requirements (p20) that a start-up must achieve to prevent it from hurting other MFIs in the FINCA network:

– The financial business plan needs to indicate positive net present value.
– The program needs to break even within three years.
– The program needs to identify sufficient resources to sustain it.
– The market has to be in a low- or middle-income country.
– FINCA needs to be in the top five MFIs in the market.
– The program cannot jeopardize FINCA’s existing global strategy.

FINCA RSA was formed in South Africa in 2000. Although FINCA had invested significant effort and resources into the MFI, in 2004, the MFI had just over 600 clients, a loan portfolio of under USD 70 thousand, and a projected Net Operating Margin (NOM) of negative USD 427 thousand (p20). FINCA felt compelled to exit because the MFI had exhausted its start-up capital and was diverting capital away from other projects that could achieve a greater social return per dollar. It was the first program FINCA had exited due to poor performance.

FINCA established certain criteria to exit an MFI including the identification of similar, poverty-focused provider to absorb clients. It identified MFI Marang Financial Services as the best candidate because it had achieved operational self-sustainability and operated in a similar geographic area. Rather than transfer clients’ loan portfolios, FINCA introduced them to Marang loan officers as they repaid their loans. Marang offered positions to successful FINCA credit officers, and FINCA provided staff with severance packages.

(4) “Disaffiliating Network Members,” by Wanjiku Kibui, Director Relationship Management, Women’s World Bank

Women’s World Banking (WWB) is a global network of organizations serving women with financial services. WWB has set clear requirements for member organizations to meet. Over time, these requirements have become more stringent. In 2003, WWB performance standards looked at whether members had at least 20 thousand clients, at least 75 percent of which were women; less than 5 percent portfolio at risk within 30 days; less than 0.2 percent operating cost ratio; and an adjusted return on assets of 3 percent (p29). Failure to meet these standards could result in disaffiliation from WWB. Other reasons that WWB may severe the relationship include corrupt or unethical behavior of the organization; departure from WWB’s principles and mission; interruption of services or failure to expand; alliance of member with a political party; change in legal structure or merger without prior agreement; or failure to contribute to WWB knowledge, service and policy change agenda.

A number of WWB members have been disaffiliated over the years. In the 1990s, WWB terminated relations (p28) with organizations in Cameroon and Senegal after the leadership was found to be corrupt. Other organizations were disaffiliated (p28) both when WWB implemented more rigid performance standards, and when it decided to focus on microfinance. WWB reported a number of difficulties (p29) it experienced in severing relations with former member organizations. After disaffiliation, a number of institutions ceased to exist, leaving clients un-served. Also, some disaffiliated members continued to use WWBs name promotionally. However, WWB found that by working with member states to promote shared performance standards (p29) it increased the strength of the network and led to increased accountability. It developed training programs that introduced members to a more advanced set of financial indicators allowing for the majority to better manage and expand operations.

Recurring Themes

Certain themes (p2) are present in each of the four case studies. Each demonstrated the importance of establishing an exit strategy right from the beginning, and that consistent performance criteria should be established and communicated across all network programs. Communication with stakeholders at all levels was essential to the exiting process. Finally, in each case, there was a desire to ensure clients continued to receive services: “There is a very human side to MFI exits.”

By Ryan Hogarth, Research Assistant

Additional Resources:

Adventist Development and Relief Agency (ADRA): Home

Cooperative Housing Foundation (CHF): Home

Foundation for International Community Assistance (FINCA): Home

Marang Financial Services: Home

Lao Women’s Union (LWO): Home

Prisma Microfinance: Home

Small Enterprise Education and Promotion (SEEP) Network: “Setting Standards and Sticking to Them: When Microfinance Network NGOs Decide to Exit”, edited by Elissa McCarter and Andree Simon: October 2008

Women’s World Banking (WWB): Home

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