There are a growing number of examples of microenterprise in development organizations that have decided to move toward financial intermediation. The decision to engage in financial intermediation brings with it the need for a fundamental transformation in the approach to microenterprise development. NGOs that have made this decision believe that such a transformation is the only way to address the demand for financial services over the long term and in a viable in manner.
Financial intermediation is the route taken by NGOs that have decided to specialize in financial services, scale up their microenterprise lending activities, and reach tens of thousands of borrowers. Expansion of lending activities becomes the vision that drives these NGOs forward, influences their operations, and ultimately differentiates their work from that of other NGOs. These organizations become specialized lending institutions whose primary objectives are to improve the quality and efficiency of their lending operations and expand them significantly. Once an NGOs decides to follow this “expansion-led’ app roach, its potential area of coverage becomes the whole country.
7.1 Characteristics for NGOs Engaging in Financial Intermediation
i) Governance and Boards
The governance function and the composition of boards under the expansion-led approach are crucial considerations because the board will decide whether the NGOs should move toward financial intermediation. Key factors are at play in this decision, in particular the increased level of effort the board members must accept to make it happen and the much higher level of risk that they assume, both for themselves and for the institution.
Perhaps the first way in which NGOs link into the financial systems in their countries is by choosing private-sector individuals, business-people and bankers as board members. Private-sector board members create access to institutions and sources of finance that are otherwise unreachable. They also outline a vision for the NGO that can take it toward financial viability and intermediation. They provide the technical financial expertise necessary to prepare for expansion and institutional transformation. They become a priceless and essential resource for the expansion process.
ii) Clients Reached
The scaling up of operations is the characteristic that most clearly differentiates the NGOs that are moving toward financial intermediation. Scaling up refers to gradual but consistent expansion of operations to reach thousands of small-scale entrepreneurs. Scaling up leads programs to develop a market perspective and to focus on financial services that respond to the preferences of their clients. NGOs must maintain clarity about their ultimate oh1ective: provision of services to the poor.
Two indicators assist in determining whether they are lending to the smallest and neediest borrowers. The average size of a loan indicates who is borrowing. Small loans tend to reach smaller businesses. Gender is a second indicator. Those NGOs reaching a significant percentage of women are providing services to the poor, since women predominate at the bottom of the pyramid of microenterprise production.
NGOs coverage must shift from local to regional and eventually, where feasible, to national Most NGOs open branches or regional offices in different cities, developing decentralized systems of operation that resemble bank branches.
iii) Sources of Capital
The shift from being a donor-funded organization to being one that blends grants and soft loans with funds borrowed from banks constitutes the most dramatic change for NGOs. The objective of these organizations is to eliminate subsidies gradually for their lending operations NGOs moving in this direction currently borrow part of their funds from banks and still rely on grants and soft money. Expansion into new areas, for example, continues to require subsidized money. Access to borrowed money and the capacity to use it fundamentally change the relationship between NGOs and donors and between NGOs and financial-sector institutions in their countries, the challenge for these NGOs is to find effective ways to link up with commercial at sources of funds and to work with donors and commercial and institutions to overcome the internal and external barriers that constrain Nods from gaining access to adequate sources of capital.
iv) Methodology and Operations Management
The techniques for providing financial services to the poor pro1iferated in the 1980s, various NGOs demonstrated that one can lower transaction costs and in maintain high repayment rates while reaching large numbers of people. To move toward financial intermediation, NGOs must perfect their lending methodology and concentrate only on financial services. As NGOs move toward financial intermediation, their objective is to improve efficiency and increase the size of their lending operations rather than experiment with new methodologies.
v) Self-Sufficiency and Financial Standing
NGOs on the expansion-led track are concerned not only with operational self-sufficiency (covering their costs with income earned) but also with taking on the financial costs of borrowed money The high unit cot of making very small loans is reflected in the interest rates they charge, which in some successful programs is 10 to 12 percent above the market rate. The ability to operate at or near level three of self-sufficiency is one of the most important determining factors an NGOs capacity to borrow from commercial sources.
vi) Financial Management
For expansion-led organizations, investment in effective financial management is essential for continued growth and any move into financial intermediation. Information systems are at the heart of good financial management (Christen 1990), An NGO must allocate substantial resources so that its system provides timely and accurate information, conducts needed analysis of performance, and generates projections for future planning.
vii) Personnel and Staff Development
Staff training is essential to maintain clear objectives, motivate performance, and increase skills. The closer an NGO gets to financial intermediation, the greater the need to train its staff. Also, the NGO will have to combine staff from social science disciplines with finance professionals. Training must provide both the technical and the social framework to work with the poor in financial intermediation.
The most useful approach to staff training integrates training into ongoing operations to ensure that staff members receive training in a structured and systematic way. In addition to training staff in topics related to their specific responsibilities, the NGOs should upgrade financia1 skills for all staff and in prove their financial management skills. Financial intermediation requires all staff members to move up the learning curve in these areas. Program expansion brings with it rapid growth in staff size.