BUUSAA GONOFAA MFI

1. MICROFINANCE WEEK – LUXEMBURG Capital markets – European dialogue –RURAL FINANCE BUUSAA GONOFAA MFI PANEL II, group I (Costs control) : Managing Costs in the Delivery of Rural Finance: the Experience of BG MFI, Ethiopia Teshome Yohannes Dayesso BUUSAA GONOFA, Ethiopia Luxemburg, October 18, 2005 Buusaa Gonofaa

2. Buusaa Gonofaa - Introduction • BG MFI – non-bank financial institution licensed by the central bank in 1999 • Total branches – 11 • Total outstanding loan portfolio = ETB 3.4 million (US$ 395,000) • Active clients = 6,750; average loan per client Birr 503 (US$ 58) • It primary focus is on women and landless youth although not exclusionary, and works in rural and peri-urban areas (60% rural) • 80% of clients are women (40% female HH), undertake small income generating activities like petty trading, sheep fattening, trading food and drinks, crafts, agriculture, etc. • Offers a general purpose loan product with a joint liability group guarantee. But difficulty to reach deeper into remote rural areas with this method and pilot testing a community managed rural saving and credit facility (RSCF) Buusaa Gonofaa

3. Defining Rural Microfinance • Rural finance – microfinance service to the economically active poor living in rural areas • Rural areas – is defined geographically or location; includes all areas outside major rural towns (>10,000 population), regardless of the activities pursued by clients • E.g. petty traders, trading in food and drinks, micro-entrepreneurs, farming, animal husbandry, other agricultural activities Buusaa Gonofaa

4. Does Location Matter in Service? • Would context (e.g., population dispersion, poor roads, etc) affect the cost structure of the MFIs? Costs to clients? • Highly dispersed settlement pattern of the population means group methodology is expensive to clients while individual method costs the MFIs more • Location matters in buying and selling of services. • Serving clients in town center of 10 KM radius and far-flung clients living in 30 or 50 KMs away has significant cost implication for all. • How many KMs would one like to walk or drive in order to deposit or withdraw her savings? And what happens if this occurs 10 or 20 times a year as in most MFI methodologies? Buusaa Gonofaa

5. Does Location Matter in Service? (cont’d) • How to reduce costs of serving rural areas that is characterized by low population density and poor infrastructure? • Increase productivity of staff by including urban clients • Transfer some transaction costs to clients, for e.g., screening, guarantee, monitoring, part of travel costs • How to become efficient in the context where there is limited diversification of income sources among and within rural households, e.g., when clients depend on single or few crops? • Serving clients that depend on single or few crops means few clients are served in a given geographic area • It is more costly for the MFI b/c it cannot take full advantage of economies of scale in providing its services Buusaa Gonofaa

6. Balancing Social Objective with Profitability: Volume • Is the MFI’s dual mission achievable in rural areas because of high population dispersion? Is expansion to rural areas a viable business strategy? • Less competition –high potential of expansion of volume • Strong social cohesion among clients means cost advantage for all –closely knit group, more honest and trustworthy, willingness to join solidarity groups • Capital turnover is slow in rural areas, fast in urban • E.g., average loan term for rural clients is rigidly fixed to crop cycle, i.e., 8 months loan for first cycle and repeat loans; but urban clients prefer ave. 4 month loan initially and increase to 6, 8, 10, 12, etc months as the loan size increases • Due to low velocity, same amount of borrowed capital is more costly for rural borrowers compared to urban; • Less profitable activities than urban b/c costs are higher and margins lower in rural areas Buusaa Gonofaa

7. Simplicity and Standardization • General purpose loan product that clients can use in accordance with their livelihood priorities, e.g., farm, non-farm, off-farm, consumption, etc. • Commerce/retail trade = 48% • Crop production/animal raising = 36% • Manufacturing = 7% • Consumption goods (food, school…) = 14% • Cost of loan appraisal and monitoring of loan use is very limited ; the focus is on repayment capacity • Very simple product that uneducated clients can easily understand without a need for sophisticated calculations or record keeping cost for clients • Flat interest rate, simple calculation of installments, loan size growth can be easily memorized by clients (1st = 500; 2nd = 750; 3rd = 1,000; 4th = 1,250; etc …) Buusaa Gonofaa

8. Decentralized Operations • Widely dispersed clients means that it is costly for clients to come to branch office for repayments and saving deposits • Loan officers will travel longer distances to reduce client’s transaction costs and work more autonomously • Each branch has only one branch officer and a cashier/accountant with a number of loan officers (5 – 8 per branch) • loan officers regularly travel to group meeting places and collect loans and saving deposits in the rural villages • Small satellite offices are opened in remote rural market centers and will be opened on regular schedule, e.g., one day a week or every two weekly on market days Buusaa Gonofaa

9. Decentralized Decision Making Reduces Costs for All • BG has effectively decentralized its core operations of lending and saving activities to branch level • Effective decentralization - decision making is decentralized so that branches make quick decision without bothering clients to wait or return again, e.g., all repeat loans are disbursed latest next morning • A policy of standardized loan size increase and limited repayment options allows swift loan approval by the loan officer without need for higher levels of authority • 1st loan - max 500, all repeat loan increase by 250 per cycle, e.g., 2nd – 750; 3rd – 1,000; 4th – 1,250; etc… • Repayment: uniform installment = weekly, biweekly, monthly; variable installments = int + sav; end of term in 4 or 5 install. • The MIS although manual, is maintained at branch level; its allows loan officers to know their clients’ balance (loan/saving) immediately Buusaa Gonofaa

10. Use of Collateral Substitutes • Rural people (including the rich) often lack the right kind of immovable asset to pledge as loan security and this entails significant burden/costs to both parties • the group may require some additional guarantee depending on the profile of the client and the risk level, e.g., farm plot even though there is no title deed to it, livestock, future crop, person guarantor (spouse, family, relative, friend, etc.) • BG will not incur additional cost for monitoring the contract and enforcing the guarantee arrangement • The group members are neighbors and incur no additional cost to identify & monitor the pledged farm plot or livestock • Honesty and solidarity is strong in rural areas and reduces the costs of contract enforcement and loan loss Buusaa Gonofaa

11. Staff Management • Loan officers often in charge of all the stages of the lending process – outreach promotion to group formation to selection of groups, loan assessment, collection of repayments, monitoring and recovery • Each loan officer handles both rural and urban client caseloads – in the morning rural and in the afternoon rural to fully utilize their time and capacity • Important skills in communication and working with adults, facilitation of group dynamics, understanding the community, speak local language • Rural activities are seasonal – two peak periods, farming and harvesting seasons and this results in uneven work load and inefficient utilization of staff time. Serving both rural and urban loans will reduce the cost of wasted staff time Buusaa Gonofaa

12. Controlling Personnel and Administrative Costs Buusaa Gonofaa

13. Controlling Operating Costs Buusaa Gonofaa

14. Controlling Operating Costs Buusaa Gonofaa