Find your comparative advantage.
When reviewing strengths, find those features that set your organization apart. What are the areas in which your organization excels over similar agencies?

Make sure your missions are compatible.
Does your microfinance mission complement your organization's mission? Are they compatible? Do they strengthen one another?

b. sample organization description

DESCRIPTION OF ORGANIZATION. MicroStart Riceland inherits a number of strengths and weaknesses from our parent organization, Riceland Environments. Riceland Environments has been operating for 12 years in the Riceland Province. We have grown from a small organization concentrating on water resources to providing a range of sanitation, agricultural, and water engineering services.

MISSION COMPATIBILITY. Riceland Environments is "dedicated to bringing services to improve the natural, social, and economic environments of the poorest villagers living in Riceland Province". Our mission includes bringing financial services to disadvantaged women living in this area with the hope of strengthening some of the poorest village economies. We believe this project adds a vital and complementary service to other organization activities.

STRENGTHS. The organization offers a number of strengths which we believe can accelerate the project. They include:

• Strong reputation with municipal governments and local banks;

• Excellent accounting staff able to take on additional financial management;

• Delivery systems already in place in all target villages. Good relationships with local village leadership;

• Positive name recognition within villages;

• High staff morale evidenced by low turnover.

WEAKNESSES. We are mindful of the following weaknesses, some of which we will address immediately to prepare for the project launch.

• Current staff and management have no experience in microfinance;

• Current managers have no time availability. Organization must hire a new project manager or reassign an existing staff person;

• Delayed funding on a key project last year severely tested our cash flow. We are still compensating for measures taken to prevent a financial crisis, such as canceling purchases of new bicycles for our field staff;

• Accounting department lacks loan processing experience.

b. market background

You may find the following perspective in microfinance markets useful. We have listed some features shared by microfinance clients around the world.

women
In many programmes, the clientele consists primarily of women who have often proven to be more reliable than men in repaying loans. Women are also more likely to direct increased income toward food, shelter, and health benefits for their families. They usually have little or no access to financial services.

reaching the poor
Generally, microfinance initiatives aim to serve the economically active among the poor. Recent findings are that microfinance, in general, does not reach the poorest (the bottom 20 per cent) of the poor.

existing economic activities
Most initiatives do not finance brand new businesses. Generally, they focus on women already engaged in one or several small-scale activities.

collateral
Most clients have no assets to pledge as collateral against default, nor are they required to.

no access to credit or a safe place to store savings
Most clients lack financial services and often use expensive moneylenders to finance growth. Banks generally consider low income clients poor credit risks.

household enterprises
Microfinance clients are part of a household economy that consists of a complex set of full- or part-time activities (microenterprises) to generate their income.

c. selection criteria

A new microfinance project cannot serve every community that demonstrates need. Long-term success is better assured if you spend time care- fully selecting where you work. Choose only communities with good access, demonstrated interest, committed and capable local leadership, and real poten- tial.

Work with local organizations, banks, and government agencies to learn more about the area. As you travel, you will soon be able to identify a community where there is interest, leadership, and solid possibilities. On the other hand, don't be so strict in your selection criteria that you only work with prosperous communities. One of the objectives of microlending is to reach the poor. Seek communities that meet criteria such as these:

Less than two hours away from your office
Pressure from far away delegations may tempt you to visit more distant communities, but it is almost impossible to adequately serve clients more than two hours away.

Year-round access
Microfinance requires contact throughout the year.

Community size
In rural areas, it takes as much time to work with a small village as a large one. Communities with less than 40 households may lack sufficient population for an effective programme.

Cluster communities where you work
The closer the communities are, the easier it will be to service them. Also, if communities are tightly clustered, smaller communities can be considered as viable candidates. Density also facilitates learning between communities and larger group training and lowers cost.

d. individual interviews

This activity will be, perhaps, your first understanding of the reality of the clients you wish to serve.

As a first step, brainstorm with your staff about fundamental market questions. Who are your prospective clients? Where are you likely to find them?

Next, develop a list of specific questions to ask prospective clients with very small-scale income- generating activities. Make sure to interview a significant sample of potential clients. We recommend 30- 50 interviews covering a wide range of economic activities such as street traders, seamstresses, and artisans. Allocate one hour or more

to each interview and choose a time which is convenient to the prospective client. Also, be sure to treat the potential client with respect.

Be careful when asking about income. This is a sensitive issue and you could easily appear to be a government tax official. Stick to asking clear questions about the type of economic activities in which they are engaged, where they sell their products, to whom, etc..

This process can also serve as an opportunity to determine the relative wealth or poverty of your clients. Make note of some of the following indicators to identify the poor from the less poor:

As you develop a marketing plan, keep in mind:

The support of community leaders is key
Before visiting a community, talk to local community leaders to enlist their goodwill. If they approve your programme, much of your marketing work is already done. if they stand in the way, no promotional effort can overcome their disapproval.

Go to the community
Do not ask the community to come to you! Low-income entrepreneurs do not have the time to travel to urban centres to learn about a programme they aren't sure will help them. Your staff must visit them, especially for the initial marketing meetings.

Build from local customs
Hold information meetings in places where community members are used to gathering: in a village centre, a church or temple, a school, or under a tree. Find a time of day when people customarily take time out from work.

The number of clients your project can reach is determined by the size of the geographic area you plan to cover, the proximity of target communities, local road conditions, and other factors. Be realistic. Marketing goals should include demand for services, target community populations, proximity of communities and other factors. Make sure your goals are achievable. Determine the following as you develop goals:

• The number of communities you expect to reach each year

• The average number of groups you expect to form per community per year.

• The average number of clients you expect per group. (Anywhere from five to fifteen is reasonable.)

• The average number of clients you expect to leave your programme each year. Remember, clients may withdraw for personal reasons, because they graduate to other credit sources, or because they do not like working with a group.

  A drop-out rate anywhere from five to ten per cent is reasonable.

b. sample marketing plan

MARKETING PLAN. MicroStart Riceland plans to interest villagers through a series of information meetings held in village centres. Initially, we will hold weekly information meetings and thereafter will hold them once per month. To promote attendance at these meetings we plan to:

• Meet with community leaders in advance. We already extend services in these communities through other activities of Riceland Environments and know community leaders well.

• Post flyers (illustrating working women receiving loans) at the local village centre which announce our programme and the first information meeting.

• Invite a broad cross-section of community leaders to be the first to introduce us at the information meeting.

• Initially, promote our services in a cluster of fourteen villages in the northeast section of the province. We have the strongest relationships with leaders in these villages due to the recent success of an irrigation project. We plan to start where we know we will be most successful. We expect word of mouth to give our programme a good name elsewhere.

See attachment 1.5 of the Tool Kit.

Price loans and savings services to cover costs.
Do not subsidize loans. Charge full interest and fees. Price to cover costs and work to become efficient. Reach a volume of clients to cover costs so you can operate indefinitely without depend ing on grants.

Keep the loan payments simple.
Clients can better understand and staff can more efficiently administer loans with equal payments (see following example, next page).

Create incentives for clients.
Offer rewards for good performance by allowing larger loans, a common feature in all microfinance programmes. For example, higher loans might be tied to savings or to a good track record. You might lower the interest rate if a group has outstanding performance, and so on.

Let your clients do the work.
Group members will guarantee loans, approve loans, perform routine tracking tasks, collect payments, and make savings deposits. The more clients do, the lower your operating costs.

Minimize aggravation.
Make sure the application process is simple and loans are issued within three days of loan approval. Keep training focused on the credit programme, not on the business of the borrower.

b. inflation, interest rates and payment periods

This section should be completed after budgeting, since you will need to complete the design of your loan product, determine an interest rate, and establish the frequency with which you will require borrowers to repay loans.

Inflation will be an important factor to consider when making financial decisions. Without question, seek advice on managing for inflation from a banker or other professional familiar with the local economy.

You can have an active loan portfolio and money in the bank, but be gradually going out of business because of the hidden effects of inflation. Consider this simple example:

• In a country with an average inflation rate of ten per cent per year, a pencil which costs . 10 on 1 January will cost . 11 by 31 December.

• In this same country a bank account of $100 earning five per cent interest per year will grow to $105 by 31 December.

• On 1 January, the $100 could buy 1000 pencils. On 31 December, the $105 balance with interest could buy only 954 pencils.

This example shows that money loses value if it does not earn interest at the same rate as inflation. inflation erodes your money in the bank as well as the value of your loan portfolio. if your total loan portfolio was $100,000 and you charged 15 per cent interest, you would be earning only five per cent in a country with an inflation rate of ten per cent.

When you set interest rates, realize that an annual inflation rate o 12 per cent means money loses one per cent of its value every month. So be sure to include inflation in setting interest rates. If inflation is 15 per cent per year, be sure that your interest rate includes this amount plus whatever you need to cover expenses.

Charge an interest rate which allows operational sustainability in the third year. Interest should cover:

cost of capital
The cost of capital is the interest you pay to a bank or donor for borrowed funds. Or, if the funds are granted, the cost of capital is the rate of inflation.

estimated loan losses or defaults
To be safe, assume that two to five per cent of the loan capital you disburse will not be repaid.

other program costs
As you begin to grow and disburse more loans, the income you generate from your interest should begin to cover operating expenses (see Budget).

Charge a 'flat' interest.
We suggest you calculate interest based on a 'flat rate.' A flat rate calculates interest on the original loan amount. in normal banking, interest rates are calculated on the basis of a declining principal balance and equal payments are carefully differentiated between principle and interest, which are different amounts for each period. For the sake of simplicity and efficiency, we recommend the flat rate system (as described below) as your project is not a bank and, for the borrowers, what is most important is the cash flow, i.e., the value of payments. Please note that in banking terms, a monthly flat rate charged on a five to six month basis generally translates into an annual effective interest rate of two times the amount of the flat fee.

The advantages of the flat rate are that for accounting and control purposes, systems can be extremely simple. While-the flat system, as proposed below, can lead to a very high annual effective rate, this rate should be compared with the rate charged by traditional sources of loans. With borrowers, the critical elements to focus on are the value of the installments and the value of interest in each payment. These clients think almost exclusively in cash flow terms which determine the afford ability

Around the world, it is common that borrowers will consider weekly payments more as rental fees with the full value of principle still due at the end of the loan. Installment loans as calculated below are a major innovation for this market.

Require clients to make frequent, regular loan payments
Payments should be made weekly or bi-weekly (every two weeks).

The following table is an illustration of a loan payment schedule using a flat rate. For simplicity, assume the sample programme has ten bi- weekly payment periods over a five month period. The original loan is $100. The loan balance is the remaining principal which the borrower has not yet repaid. Assume the monthly interest rate is four per cent per month.

b. the organization

Preparing an organization chart is a good way to visually understand the relationships and reporting lines of your staff. It is also a good way to communicate your organizational design to others. When preparing an organization chart, be sure to:

• Include names and titles of all positions. If you have not hired anyone for a specific position, simply label the position 'to be named'.

• Include all reporting lines including those to other members of your organization.

• Include any governance or advisory body such as a board of advisors or directos.

c. sample organization

MicroStart Riceland plans to keep new hires to a minimum at the launch of the project. We will use staff within Riceland Environments to the greatest extent possible.

Job Titles, Functions and Reporting Relationships

• Executive Director, Riceland Environments. Involved on limited, part-time basis. Reports to Board of Directors and to funders on project's progress.

• MicroStart Project Director. Full-time and has overall responsibility for other MicroStart staff and the success of the project. Reports to Executive Director.

• Credit Manager. Plans field activities and oversees Field Agents. Reports to Project Director.

• Field Agents. Manage group formation and loan portfolios. Report to Loan Manager

• Administrative Assistant. Manages office and clerical duties. Reports to Project Director

• Accountant/Bookkeeper. Processes and tracks loans. Does record-keeping. Reports to Project Director.

The following chart illustrates the organization in its first year of operations:

For a complete description of each staff position, please see Section B of Chapter 2: Starting.

a. governance

Any funder or lender grant- ing loan capital or operating capital will be interested in the governance of your organization. What is governance? Generally, the term refers to:

• the constitution or bylaws that define your objectives and codify your policies;

• the individuals charged with governing your organization.

Governance is the system which controls your organization, both its written rules and the people charged with making sure they are followed.

b. bylaws

Bylaws state the general mission and define a system which:

• distributes powers among those who can influence policy decisions;

• restricts these powers so that they are not abused;

• motivates individuals to use these powers toward the greatest good of the organization.

At times these mandates are at odds. For example, in order for a project to survive, it may need to charge high interest rates. These rates may run counter to the short- term preferences of your clients. Effective bylaws must clarify guidelines for making choices when such choices occur They must find ways of preserving the long-term interest of the organization in the face of short term preferences of clients or even board members. In addressing issues concerning bylaws, ask the following:

• What rules will you adopt as a mechanism for resolving conflicts and conflicts of interest?

• How will the effectiveness of management be monitored?

• How will the effectiveness of the board be monitored?

Your organization may already have a Board of Directors. Your microfinance project may also want to form its own advisory board whose role is:

setting general policies
The board sets policies and objectives which guide management in reaching the objectives of the organization.

financial oversight
The board assumes responsibility for financial welfare by establishing fiscal policies and reviewing financial state ments, and requires annual audits.

raising funds
The board is responsible for mobilizing financial resources, including loan capital and grant support, to manage your programme.

management supervision
The board oversees management's implementation of board policy and ensures adherence to the bylaws.

Write one or two paragraphs on each key manager and those qualifications which relate directly to this project.

d. sample governance, management. & advisors

MicroStart Riceland is a project of Riceland Environments and is managed by an Executive Director, who reports to the Board.

BYLAWS AND POLICIES. The project will have its own body of ground rules to be reviewed by the Board. In order to keep our focus on our target clientele- the poor- we will stipulate that our average loan size cannot be greater than $300. Any increase in average loan size will trigger a review by the Board.

ADVISORY BOARD. Five individuals will serve on an advisory board:

• A local banker to help with financial policies and links to other financial institutions;

• A local businessperson to help with general management issues;

• A board member from Riceland Environments as a spokesperson to our parent organization;

• Two community-based leaders.

J. Kim, Executive Director. Mr. Kim has been Executive Director of Riceland Environments for five years. Prior to this position, he served as Vice President of ENVIR, an environmental consulting firm based in the capital city. Mr. Kim holds a masters degree in chemical engineering and an undergraduate degree in business, both from Riceland University

P. Singha, Project Director Ms. Singha has launched three successful projects in social services. Most recently, she started and managed a network of 40 village health clinics focusing on AIDS care in Riceland Villages. Prior to her work in social service, she served as a Field Agent with Riceland National Bank. She has an L undergraduate degree in Health Care from Jasmina University.

Be sure to include all sources of revenue in your income projections. General income categories include:

• Income from grants;

• Income from interest and fees;

• Other income such as interest on deposits.

We have defined for you three major categories of expenses. You do not need to organize your budget according to these categories, but be sure to consider these items when developing your expense budget.

Overhead Expenses

Include costs associated with running your operation, even during periods when no loans are granted. These expenses occur regularly and include administrative costs such as:

Salaries

including full-time or part-time project employees and a portion of the Executive Director's salary. Include Field Agent salaries here or in a separate Field Expenses section;

Office Expenses

all expenses necessary to keep your office running such as stationary, postage, telephone and fax, and office supplies;

Rent

portion of overall organization rent based on space usage;

Utilities

electricity, water, heating fuel;

Travel Expenses

bus fares, meals, etc. of all staff;

Field Expenses

These expenses are costs associated with Field Agent activity in the field. Some are included below. You may think of others.

Field Agent Salaries
salaries, bonuses or commissions;

Routine Vehicle Expenses
gas, oil, and maintenance.

Purchases

Include major items that are major capital investments:

Equipment
computers, fax machines or typewriters;

Furniture
tables, desks, and chairs;

Vehicles
bicycles, motorcycles and cars.

Variable Expenses

Include costs associated with lending. These expenses vary with the amount you lend or the number of loans you make.

Bad debts
the amount of interest you believe you will not collect because of problem loans;

Cost of capital
the cost of borrowed funds and the effect of inflation on grant funds. Interest on borrowed money is an expense. Principal is not;

Loan losses
loan principal that you cannot collect due to problem loans.

c. other budget items

You may have other items which require funds but are not technically classified as expenses. Two examples include:

Loan capital
or the funds available to lend to borrowers. Loan capital is not considered an expense, but you must anticipate how much you will need and must list this cash requirement in the Budget section. Note: If you borrow the loan capital used to lend to clients, the interest on this loan capital is an expense that must be included in the Cost of Capital;

Loan loss reserve
or the money a bank may require that you set aside in order to help protect a credit line. You must include this in your budget if you plan on borrowing funds. Banks typically require between 10-50 per cent of the amount you intend to borrow as a loan loss reserve. The loss reserve is not expensed but the actual losses are expensed in the form of write- offs.

A note on principal and interest

Be sure you understand the differences between principal and interest on capital borrowed by your organization and capital borrowed by clients.

Principal borrowed to on-lend to clients
is not income or expense. It is, indeed, cash which you must repay and therefore it must be included in your budget under "Other Budget Items".

Interest you pay your lender
on capital you borrow is an expense noted as Cost of Capital.

Principal repaid to you by borrowers
is not income and should not be noted on the Budget.

Interest you receive from borrowers
is income and should be noted under Income from Interest and Fees.

d. sample budget

a. types of funds

In this section, you will develop an understanding of the kinds of capital you require. We have classified funding uses into three categories, which define your funding needs by purpose, and have matched them to potential sources as described below: