TANZANIA. Synopsis. Highlights POSITIVE NEGATIVE

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1 a PRIDE Tanzania Non Governmental Organisation Contacts MicroRate: Todd Farrington Tel: Fax: PRIDE Tanzania: James Obama jobama@pride-tz.org Tel: Fax: PERFORMANCE RATING Date of visit June 25 Date of previous rating n.a. Previous rating n.a. α β γ α++ α+ α α β+ β β γ+ γ γ β PRIDE Tanzania Main Performance Indicators Dec '3 Dec '4 Gross Portfolio ( s) $9,61 $11,23 Number of active borrowers 6,587 61,918 ROE 32.9% 24.2% Portfolio Yield 56.8% 54.2% Portfolio at Risk.1%.3% Operating Expense Ratio 43.7% 43.4% Average Loan Size $15 $178 Borrowers per staff Synopsis TANZANIA Report as of PRIDE Tanzania commenced operations as a non-profit organization in With a gross portfolio of $11 million equivalent, 28 branch offices and 62, borrowers as of, the company is now the largest micro lender in the country. Using a modified Grameen approach, PRIDE makes loans in amounts equivalent to $18 on average, whilst maintaining excellent portfolio quality. However, recent liquidity constraints have hindered growth. The company first broke even in 21 and has been increasingly efficient (and profitable) since then. PRIDE is currently in the process of transforming into a supervised microfinance company. Highlights The rating accorded takes into account information obtained after MicroRate s on site visit in June 25. This pertained to two credit lines totalling roughly $1.4 million, which according to management, will be used mainly to boost liquidity. POSITIVE High profitability. Excellent portfolio quality. Experienced management and organization. Strong market position, national coverage. NEGATIVE Scarce liquidity, limited access to funds. Lack of sufficient reserves for client savings. Low client retention rate. Limited product offering. Washington Headquarters 217 Wilson Blvd., Suite 45 Arlington, VA 2221 USA Phone: +1 (73) Fax: +1 (73) MicroRate Latin America Plz. 27 de Noviembre 43, 3B Lima 27 Perú Phone: +51 (1) Fax: +51 (1) MicroRate Africa 29 Autumn Road, Rivonia, 2128, Johannesburg, Republic of South Africa Phone: +27 (11) Fax: +27 (11)

2 Hggkhk PRIDE Tanzania PRIDE Tanzania TANZANIA Sources of Funding Rating Rationale Poor Excellent % 2% 4% 6% 8% 29% Operating expense 43.4% 5% 66% Commercial Borrowing Deposits Equity Borrowers per Employee 243 % 3% 6% 9% 12% 15% Portfolio at Risk.3% 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% Average in MicroRate's Comparative Sample * ROE Adjusted for discrepancies in accounting policies and subsidies. ROE * 24.2% The operating expense ratio and ROE compared to all African MFIs rated by MicroRate with average loans < US$5. PRIDE continues to generate healthy profits Despite strong asset quality and minimal loss provisioning costs, profitability has been driven by the low cost of funds (due to the heavy weighting of low interest paid on savings in the funding mix). This being said, given the need to diversify the capital structure towards more commercially priced funding, profitability would be expected to sharply decrease in future.. Good portfolio quality Given that the loan portfolio is comprised almost entirely of group loans, one would expect portfolio at risk to be low (especially since PRIDE can access clients savings once a client defaults). Although still excellent, quality deteriorated slightly in 24. Competent management and staff Management and Staff know their jobs well and are committed to achieving PRIDE s goals and objectives. Efficiency still relatively low Despite the low average loan size, operating expenses remain comparatively high at 43.3% given inherent efficiencies to the Grameen system. This is confirmed by cost per borrower trending markedly upward over the past three periods, from $54 to $ 71 as of. Risky practice of using clients savings Approximately 73% of the portfolio has been funded by clients savings. The risks of this are high (especially as PRIDE is not yet regulated) and already liquidity is extremely low. As at, cash and banks declined to an alarming 2.2% of gross loans and only 3.2% of total deposits (from 16% in 21). However, following the receipt of two credit lines in July 25 (of roughly $1.4 million), cash coverage of deposits improved to a more comfortable 17%. Lack of funding - This is the biggest obstacle to growth and a likely factor which could slow transformation into a regulated financial intermediary. Funding will be critical to maintaining the MFI s strong market position, especially as competition is expected to increase further. Governance structure is not optimal - Although the quality of governance is good, the structure of the Board is concentrated with members who are linked to government. In MicroRate s opinion this creates an appearance that PRIDE is not independent. Not only could this result in a conflict of interest, but could jeopardise PRIDE s ability to attract investors in line with its transformation requirements. info@microrate.com jobama@pride-tz.org

3 Country Overview Macroeconomic Information Dec 1 Dec 2 Dec 3 Dec 4 Annual Inflation 5.1% 4.5% 4.6% 4.1% Exchange Rate per US$ 14.1% 6.5% 8.9% -1.9% Annual Currency Devaluation ,63.6 1,43. Deposit Rate (Year Average) 4.1% 3.% 4.9% 4.2% Source: International Finance Statistics Tanzania has been spared the internal strife that has blighted many African states, although it remains one of the poorest countries in the world. GDP per capita is US $599, on the low end of the African range. The economy depends heavily on agriculture, which accounts for about half of GDP, provides 85% of exports, and employs 8% of the work force. Industry has traditionally featured the processing of agricultural products and light consumer goods. Continued donor assistance and solid macroeconomic policies supported real GDP growth of more than 5.2% in 24. This growth has come at the price of painful fiscal reforms, although the country remains one of the few functioning socialist economies in Africa. Banking reforms, among other factors, have helped drive the recent increase in growth and investment. New financial sector legislation has modified the existing Banking and Financial Institutions Act of These modifications indicate a shift to risk-based supervision, promote independent internal controls, and provide a window for commercial banks to move down market with microfinance operations carried out through subsidiaries. This has potential to increase competition in the microfinance sector. The microfinance industry in Tanzania (in terms of number of active institutions) is mainly comprised of Savings and Credit institutions (SACCOs) and NGOs. FINCA Tanzania is one of these NGOs with national scope, although many MFIs tend to be regionalized. FINCA is a significant competitor for PRIDE, although competition from smaller institutions like SEDA is expected to increase. The fact that NMB is also a second tier lender to many MFIs could create conflicts, further restricting PRIDE s access to lending capital. Nevertheless, PRIDE continues to have the largest loan portfolio in the national market as of 25. But the microfinance landscape in Tanzania is set to change. In 25 the Central Bank issued the Banking and Financial Institutions (Microfinance Companies and Microcredit Activities) Regulations. These were formally published on 25th March 25, opening the door for the licensing of MFIs. A new class of institutions, MFIs hoping to become true financial intermediaries through legal deposit mobilization, must now be licensed as Microfinance Companies (MFC). Both PRIDE and FINCA Tanzania are well positioned for this transformation. PRIDE is currently welladvanced in the process, and anxiously moving forward due to acute liquidity pressures. As the head of the microfinance division in the Central Bank also sits on the Board of PRIDE, it may be that PRIDE has a certain advantage in this process over the other aspiring MFCs. One of the Bill s requirements is that a potential MFC must convert into a company limited by shares, with a maximum shareholding by the founding microfinance NGO of 66%. PRIDE welcomes like-minded shareholders (both domestic and international) and foresees a declining participation while retaining control. The Central Bank is charged with supervising MFCs. Its capacity and effectiveness as a supervisor of microfinance companies is untested. There is currently no national credit bureau (nor one on the horizon), and borrower information on a systemic level is limited to non-existent. Although growth will eventually make this an issue, competition is not sufficiently acute to cause concern. As above, the microfinance industry will increasingly have to compete with commercial banks, which have begun to move downscale. Most notable entrants are National Microfinance Bank ( NMB ) and Akiba Bank. info@microrate.com jobama@pride-tz.org

4 Microfinance Operations Main Indicators 31 Dec-1 31 Dec-2 31 Dec-3 31 Dec-4 Gross Loan Portfolio ( s) $5,516 $7,621 $9,61 $11,23 Number of Active Borrowers 5,546 56,141 6,587 61,918 Asset Quality Portfolio at Risk / Gross Loan Portfolio.%.%.1%.3% Loan Loss Provision Expense / Average Gross Portfolio.2%.4% 1.1%.5% Loan Loss Reserves / Portfolio at Risk 4211% 77,5% 3,2% 778% Write-offs / Average Gross Portfolio Efficiency and Productivity Operating Expenses / Average Gross Loan Portfolio 49.% 44.4% 43.7% 43.4% Cost per Borrower $58.4 $54.2 $62.4 $71.2 Average Outstanding Loan Size $19 $136 $15 $178 Number of Borrowers / Credit Officer Number of Borrowers / Staff PRIDE Tanzania is good at making and recovering small, unsecured loans. The company uses a variant of the Grameen lending model, learned with technical assistance from PRIDE Africa and its management services company beginning in They have developed a keen sense of their market, know their business, and have processes and systems that function well. They are currently expanding their product offering to include small group and consumer loans. With a high quality portfolio (see Portfolio Quality, below) of more than $11 million equivalent in local currency, PRIDE is the leading MFI in Tanzania. Loan growth has hovered at a moderate 2% for the last two years, constrained by available funding rather than demand, which is considerable given limited supply of competitively priced micro loans. $ ' 12,. 1,. 8,. Portfolio Growth Rate % 5 25 This portfolio is managed through a nationwide network of twenty-eight branches, divided into five geographic zones. Regional supervisors help to knit this far-flung network together, and to insure consistent application of credit policy. The markets are urban and peri-urban, with an average loan balance of US$ 178 equivalent that has been trending up in recent years as the portfolio matured. $ ' 12,. 1,. 8,. 6,. 4,. 2,. - Portfolio and Ave. Out. Loan Size Dec ' Dec '1 Dec '2 Dec '3 Dec '4 Gross Loan Portfolio Average Outstanding Loan Size per Active Borrower $ ,. 4,. 2,. - Dec ' Dec '1 Dec '2 Dec '3 Dec '4 Gross Loan Portfolio Annual Change in Gross Loans -25 One of the greatest operational weaknesses PRIDE is currently addressing is interconnectivity (information flows) amongst its branch network (see Information Systems, below). As is often the case with Grameen replicators, the initial emphasis was on outreach putting money into the hands of as many people as possible. This approach lead to poor portfolio quality, high operating expenses and rapid decapitalization (see Financial Profile, below). info@microrate.com jobama@pride-tz.org

5 Since 1999, the focus of the Board and management has been on asset quality and commercial viability (profitability). After a period of consolidation during which technical assistance from PRIDE Management Services succeeded in improving policies and practice, the company has had consistent quality across branches. Branch expansion continues despite liquidity constraints, with two new branches opened between February and June 25. The new branches were opened at a time when a bank loan facility had been negotiated and lined up but whose disbursement was unexpectedly delayed for almost three months for reasons beyond the control of PRIDE. Although loan quality is consistent among branches, size varies, ranging from around 15 to as big as 7,857 clients. The company offers three products: Traditional Grameen group loans, a variant of traditional solidarity group loans in larger amounts to existing clients, and straight consumer (salary) loans. The principal product is the group loan. Typical of Grameen replicators, loan appraisal is done by clients, in that amounts are proposed and approved by the group itself, the group offers a joint and several guarantee and is self-selecting. This aligns interests such that only those members that are known by the others to have the willingness (character) and ability (capacity) to pay are allowed entrance and approved by their peers for certain amounts. The scaled lending approach helps allow the group (and the company) to get to know payment behaviours whilst limiting risk. Groups consist of 5 members, and are divided into sub-groups of five. Good group formation is a key element of PRIDE s success. Within each group, individual loan amounts are strictly scaled according to the number of previous loans the client has had with PRIDE. Amortization is weekly. Starting from US$5 equivalent at interest of 3% flat p.a. for 25 weeks, amounts and terms increase and interest decreases, so that by the eighth loan a client can borrow $5, for 1 weeks at 24% flat p.a. All loans are in local currency. The competitive advantage of this credit technology in the Tanzanian market is its low initial amount, market interest, and adaptivity to individual needs: an individual group member may pay down the loan more quickly and immediately receive a subsequent loan in the next larger amount without waiting for others to complete their payments (as is the case with PRIDE s main competitor, FINCA Tanzania). All clients must establish a 25% savings base during the first loan cycle as a guarantee. A minimum level of 25% savings is maintained by additional savings as subsequent loan sizes increase. Known as the Loan Insurance Fund, it appears as a liability on PRIDE s books. Additional voluntary savings are often contributed by the client. As competition increases, the delay in disbursement caused by group formation, as well as the savings requirement, may prove to be disadvantages. The most obvious aspect of operational risk is cash management: all loans are both disbursed and collected in cash in the branch offices. Separation of functions and a three-part check system (cash on hand, paper documents signed by all parties, and individual client movements recorded by the information system) allow adequate payment control at the branch level. Each branch has a teller and strongbox. When cash on hand exceeds insured amounts the excess is transferred to commercial branch accounts. Weekly amortization allows PRIDE a dependable cash flow, but increases transaction cost for clients. This could become a competitive disadvantage. Small group loans are available to existing clients that have reached the upper borrowing limit. They start at $2, equivalent with set 6, 12, 18 and 24 month terms as the amount increases. The savings requirement is similar to the Grameen loans, but amortization is monthly. Amounts only increase if subsequent assessment of the business allows. These loans are approved by a committee (two loan officers and branch manager) that meets directly with the group of 3-5 experienced clients. Before giving preliminary approval, group members visit each others businesses. Payment capacity of each client is verified by a loan officer. This product should help reduce desertion rates by retaining mature clients. There is a huge demand for individual consumer (salary) loans. Strategy calls for lending through institutional alliances with police and armed forces, but is on hold due to liquidity constraints. info@microrate.com jobama@pride-tz.org

6 Portfolio Quality Asset quality is an outstanding strength in PRIDE Tanzania, and is due to two factors: zero tolerance for delinquency and the access to client savings (the Loan Insurance Fund). Zero tolerance is inculcated from earliest contact with a client, and clearly part of organizational culture. Accordingly, PaR over 3 days is low at.3% (24:.1%), which is well above the average (3.4%) for other African MFIs rated by MicroRate. Internal arrears (arrears by those clients whose payments had to be covered by others in the group) are tracked on an individual level and available historically. These data are very useful in screening out individual problem clients from subsequent loans, and contribute to portfolio quality. Some clients currently have multiple loans, but so far show no signs (arrears, anecdotal) of over indebtedness. As a matter of last resort (four consecutive missed weekly payments) the group can pay itself back from the savings (Loan Guarantee Fund) of that individual. This is not common, given the strong group and community bonds; most frequently members who have covered the weekly obligation of another go immediately en masse to collect. The write-off policy is clear and has been consistently applied in recent years. Provisioning continues to be excessive, primarily due to adherence to regulatory minimums that remain inappropriate to microfinance. Organization and Management PRIDE Tanzania is staffed by well-trained, experienced and dedicated professionals. Many have been with the company since its inception. The organization also benefits from strong management oversight and control: All upper management must visit at least one branch per quarter to stay in touch. Procedures and policies are documented in concise and clearly presented manuals (Training, Loan Policy, Internal Control, MIS and Personnel). They bear close resemblance to what the MicroRate team saw in practice at all levels of the company. The current General Manager started with PRIDE in He is an MBA with some commercial banking experience and one year with MEDA (an international microfinance organization) in wholesale funding of MFIs in Tanzania. He demonstrates an awareness of the principal liquidity, credit and operational risks faced by the company as well as their mitigants. That said, the company has no specifically defined riskmonitoring function. The dynamic ex-general Manager, Board member and ex-consultant for PRIDE Management Services plays a key role as the Transformation Manager. He is a major driving force in the success of the company in the short run. Although new to her post in April 25, the current Operations Manager has 9 years experience in PRIDE as credit officer, branch manager and regional supervisor. She displays a keen grasp of relevant issues of planning, staff motivation and discipline, branch expansion, and portfolio growth and market strategy. She works closely with recently created regional managers who all have many years experience with the company. Responsibility and lines of reporting are clear, and there is good communication among levels despite limitations to branch integration that results in up to a month lag for consolidated information. The Finance manager is a CPA with 1 years experience with regional trading companies. He has been with PRIDE since its beginning. He works with limited asset and liability management tools (maturities) and treasury management techniques (liquidity). The company places strong emphasis on hiring and training the right people through a well-defined human resource area. Given the emphasis on growth and formalization, the full time in house training manager is a key member of the organization. Attractive salaries both drive high operating expenses and low staff turnover. The Internal Auditor is an MBA and accountant with 1 years experience. His team is comprised of four others, two of whom are accountants. He is effective, but not fully independent, reporting directly to the General Manager and with little Board contact. The area is one of the strongest seen by MicroRate in Africa, with an annual audit plan of quarterly branch visits. info@microrate.com jobama@pride-tz.org

7 Personnel and Productivity Client retention rates are low, and most branches are not at full capacity. Given their own estimates of capacity in terms of number of groups per branch per loan officer, they are operating at 72%. This indicates that further reduction in the operating expense ratio should be possible. $ ' 12,. 1,. 8,. 6,. 4,. 2,. - Portfolio and Loan Officer Productivity Dec ' Dec '1 Dec '2 Dec '3 Dec '4 Gross Loan Portfolio Number of Clients / Loan Officer The good news for the future is that this will allow productivity gains. Loan officers do not visit clients, but rather clients come to them, except a cursory visit for small group clients. There is no individual analysis. These points provide context for the productivity and efficiency numbers. Operating Efficiency $ ' Operating Expense Ratio % Nonetheless, despite low average loan size, operating expenses remain comparatively high at 43.3% given inherent efficiencies to the Grameen system. This is confirmed by the cost per borrower trending markedly upward over the past three periods, from $54 to $ 71 as of. A rough average for African microfinance is $56. Management Information System PRIDE installed fully integrated banking software in 23, a major improvement that increases operating efficiencies and reduces operational risks. The MIS manager and his staff are experienced and competent, and have made significant improvements. Source codes and technical support are nearby in Nairobi. The hardware infrastructure (branch networking aside) is modern, and in good repair with adequate support to branches. Each branch has its own server with dedicated servers at headquarters for data consolidation purposes in headquarters. Information flows from the branch offices to the head office are not good, but a combination of the Internet, phone, fax and physically transported data disks help compensate for lack of a fully networked information system. Operational risks in this area are related to branch connectivity and timely reporting. Security is good. Headquarters and most branches have alternate power supplies. All have good back up practices, including daily automated backup, weekly consolidation of branch portfolio information and consolidated backup. Fully consolidated financial and portfolio information is only available monthly. The system is above average and improving with respect to complete, timely and useful information for management Governance and Strategic Positioning Dec ' Dec '1 Dec '2 Dec '3 Dec '4 Average Outstanding Loan Size per Active Borrower Operating Expenses / Average Gross Portfolio Increased automation (improved MIS / reduced paperwork) has improved operating efficiency and loan officer productivity. PRIDE Tanzania has a capable and diverse board, and enjoys a strong market position with a clear, forwardlooking strategy. Practical obstacles to realizing that strategy (such as the inability to hedge foreign exchange risk) remain. The eight Board members, seven of whom are founders, meet quarterly. One member is also founder of Pride Africa (a successful international microfinance organization with technical assistance and microfinance operations in Kenya and Uganda). info@microrate.com jobama@pride-tz.org

8 The chairman of the Board is ex-director of the East African Development Bank. He is a former Cabinet Minister, currently a Member of Parliament and has a private economic consultancy unit in Dar-es-Salaam. The Board functions well and is stable. Most importantly, its key members exhibit awareness of the principal risks facing company. There are no formal auxiliary Board committees (Risk, Audit and Finance). These are contemplated, and will become more urgently necessary with the planned transformation to a supervised Microfinance Company (MFC). PRIDE s main strategic issue is currently how to finance growth while increasing obligatory reserves necessary for transformation (adequate for deposits as per regulatory requirements). Current dependency on client savings (the Loan Insurance Fund) to finance loan growth in the context of insufficient reserves is a major financial risk. Strategically, the issue is one of a competitive disadvantage presented by a comparatively high savings requirement (obligatory, essentially zero interest) in an increasingly competitive market. PRIDE s main competitors are FINCA Tanzania, SEDA and the Presidential Trust Fund. Within the context of the group-lending approach, PRIDE offers clients a more flexibly individual relationship than FINCA, as well as offering initial loans at significantly lower amounts ($5 equivalent). National Microfinance Bank (NMB) could be a double concern since it is both a competitor as well as a source of funds for PRIDE. The strategic and business planning process is participative and based on reasonable assumptions. The weakest link is the assumption of an increase in access to lending capital. Gaining access to commercial capital has been an elusive goal since 1993, although some recent progress has been made. A three-year plan to 24 came in below growth projections, primarily due to capital constraints, but on target with respect to institutional strengthening. A new three year plan emphasizes transformation to a supervised company, increased regulatory reserves, moderate diversification on commercial liabilities, and a strong emphasis on capturing public savings. Financial Profile Financial Ratios 31 Dec-1 31 Dec-2 31 Dec-3 31 Dec-4 Capital Adequacy Debt / Equity Asset Quality Portfolio at Risk / Gross Loan Portfolio.%.%.1%.3% Write-offs / Average Gross Loan Portfolio Loan Loss Reserves / Portfolio at Risk 4211% 77,5% 3,2% 778% Loan Loss Provision Expense / Average Gross Portfolio.2%.4% 1.1%.5% Management Operating Expenses / Average Gross Loan Portfolio 49.% 44.4% 43.7% 43.4% Number of Borrowers / Credit Officer Number of Borrowers / Staff Earnings Net income / Average Equity (ROE) 3.% 16.3% 32.9% 24.2% Net income / Average Assets (ROA).9% 4.3% 8.5% 6.6% Portfolio Yield 52.5% 51.7% 56.8% 54.2% Interest and Fee expenses / Average Gross Loan Portfolio 3.7% 2.9% 3.2% 3.3% Interest and Fee expenses / Average Funding Liabilities 4.5% 3.2% 7.3% 8.2% Liquidity Cash & Liquid Assets / Total Deposits 16%.9% 4.4% 3.2% info@microrate.com jobama@pride-tz.org

9 Although profitable in unadjusted terms, PRIDE is in a tenuous financial position. The primary issues are liquidity and solvency. Inability to hedge foreign currency risk exacerbates the former (by limiting access to international hard currency funding). Despite a highly liquid short-term loan portfolio, in the context of inability to further constrain portfolio growth, liquidity is a key risk. As of, cash and banks had declined to an alarming 2.2% of gross loans and only 3.2% of total deposits (from 16% in 21), where it was hovering as of June 25. However, it is noted though that soon after the MicroRate visit, PRIDE received a facility of $1.5 million equivalent, providing much needed temporary relief. $ Liquidity Dec ' Dec '1 Dec '2 Dec '3 Dec '4 Total Deposits Cash and Liquid Assets / Total Deposits Partly as a consequence, the strategic need to meet demand has led to dependence on funding portfolio growth by means of client savings (the Loan Guarantee Funds), thereby making the risk of insolvency more acute. Although the company lacks the ability 1 to define its position precisely, PRIDE may be close to technical insolvency in the sense that it appears to lack sufficient liquidity to meet depositor obligations should all those who could withdraw their savings actually do so. Although on-lending of client savings by un-supervised financial companies is not officially permitted in Tanzania, PRIDE s finesses this by referring to deposits as a Loan Insurance Fund. As of this report, 73% of the portfolio was funded by client savings. Since only those with completed loans, or those who choose not to renew their credit relationship, may withdraw their savings. % The desertion rate (which is high) is a key operational consideration driving financial risk (see Microfinance Operations, above). So far, not all who could withdraw savings actually do so. As of the date of the visit, sixteen of twenty eight branches projected a negative liquidity position between projected growth and withdrawal of deposits. The consolidated position was marginally positive, but the withdrawal assumptions were optimistic (although historically on trend). An unadjusted ROE of 24% as of is down from the record high of 33% of the previous year. As portfolio yield dropped due to changes in portfolio composition the net operating margin contracted to 1.2%. % (15.) Financial Performance Dec ' Dec '1 Dec '2 Dec '3 Dec '4 Net Operating Margin Portfolio Yield Operating Expenses / Average Gross Loans Despite a favourable trend in the operating expense ratio, the company s cost of funds increased almost a full point further squeezing margins. That said, a cost of funds of 8.2% is artificially low due to the heavy weighting of extremely low interest paid on client savings in the funding mix. Despite strong asset quality and minimal loss provisioning costs, this low cost of funds drives profitability. Given the need to both diversify and increase commercially priced funding as well as the market interest rate for public savings, this profitability would be expected to sharply decrease in the near future. Between 1994 and 21 PRIDE received a total of $7.8 million in donations mainly from Scandinavian donors. Initial focus on outreach conceived as simply putting money into the hands of as many people as possible resulted in rapid decapitalization. They have received no donor funding since Due to varying conditions for withdrawal according to loan amount, savings level, loan status and group status. info@microrate.com jobama@pride-tz.org

10 Leverage of almost 3 times equity is primarily due to client deposits. The company currently funds operations with a mix of 66% deposits (loan insurance fund), 29% equity and 5% commercial borrowing. The latter consists of three relatively short term (up to 18 months) obligations. None have an external guarantee (credit enhancement); all are in local currency, at nominal rates between 12%-15%. Sources include STROMME Microfinance East Africa Ltd, the African Development Bank funded Small Enterprise Loan Facility (second tier / 2% of total), and the National Microfinance Bank (now in the process of privatization). All have increased their commitments for 25, with the National Microfinance Bank now lending on the strength of endorsed loan notes. Despite an expected Norwegian grant, PRIDE continues to face a $1.5 million - $2 million funding gap given 3% projected loan growth for 25. Future Prospects Management sees transformation into a regulated microfinance company (MFC) as partial solution to current funding constraints. Authorization is expected in January 26. This will create a new company, into which the assets of the NGO will be transferred. The NGO will retain control of the mission of the MFC, and plans three phases of decreasing share ownership (from 66% to 33%) through incorporation of new shareholders. AFRICAP, an investment fund specializing in microfinance, is currently considering $1.5 million equiv. equity investment after PRIDE transforms to a regulated company. Questions remain regarding future government claims on assets through NGO shares. Regulatory requirements include improvements in infrastructure (safes, security, facilities) reporting, adequate liquid reserves for managing public savings, and improved customer service and corporate image. PRIDE will have 12 months to comply after receiving its license. In addition to the risk of lack of compliance, the costs of transformation are also high. The whole process is anticipated to cost $9,. Of this, $4, will come from company funds. info@microrate.com jobama@pride-tz.org

11 (All amounts in US$' except as noted) Income Statement for the year ended: 31-Dec- 31-Dec-1 31-Dec-2 31-Dec-3 31-Dec-4 Interest and Fee Income 2, , , , ,438.7 Interest and Fee Expense (23.5) (216.9) (19.3) (265.2) (332.6) Net Interest Income 2, ,898. 3, , ,16.2 Provision for Loan Loss (34.3) (9.) (23.4) (87.9) (53.8) Net Interest Income After Provisions 2,78. 2,889. 3,153. 4, ,52.3 Operating Expense (2,898.) (2,95.6) (2,89.7) (3,642.5) (4,362.4) Net Operating Income (19.) (16.6) Other Income Other Expenses (11.9) Extraordinary Items Net Income Before Taxes (192.4) Taxes Net Income (192.4) Balance Sheet as at: Cash and Banks Temporary Investments Net Loans 5, ,45.6 7, ,87.3 1,797.6 Gross Loans 5, ,516. 7,621. 9, ,23.8 Performing Loans 5, , ,62.8 9,55.1 1,994.7 Portfolio at Risk Loan Loss Reserve Other Current Assets Current Assets 6,47.4 6, , , ,422.6 Long Term Investments Property and Equipment Other Long Term Assets Long Term Assets Total Assets 6, , , , ,73.6 Demand Deposits 4, ,82.2 5, ,652. 7,387.1 Short Term Time Deposits Short Term Funding Liabilities Other Short Term Liabilities Current Liabilities 4, ,815. 5, , ,121.2 Long Term Time Deposits Long Term Funding Liabilities Other Long Term Liabilities Long Term Liabilities Capital 2, , , Retained Earnings (2,981.9) (2,996.3) (2,494.7) ,87.7 Other Capital Accounts 2, ,14. 1,522. 2, ,26.3 Equity 2, , ,47.1 2, ,294. Total Liabilities & Equity 6, , , , ,73.6 Key ratios: Asset Quality Portfolio at Risk / Gross Loan Portfolio (%) n.a Loan Loss Provision exp. / Average Gross Portfolio (%) Loan Loss Reserves / Portfolio at Risk (%) n.a. 4, ,54.2 3, Write-offs / Average gross portfolio (%) Efficiency and Productivity Operating Expenses / Average Gross Loan Portfolio (%) Cost per borrower Average outstanding loan size Number of Borrowers per Staff (no.) Number of Borrowers / Credit Officer (no.) Operating Expenses / Net Interest and Other Income (%) Profitability Net Income / Average Equity (%) (ROE) (9.5) Net Income / Average Assets (%) (ROA) (2.9) Portfolio Yield (%) Net Interest Income / Average Gross Loan Portfolio (%) Non Interest Income / Total Operating Income (%) Financial Management Interest and Fee Expenses / Average Gross Portfolio (%) Interest and Fee Expenses / Average Funding Liabilities (%) Debt / Equity (:1) Total Capital / Risk Weighted Assets (%) Tier One Capital / Risk Weighted Assets (%) Tier Two Capital / Risk Weighted Assets (%) Cash and Liquid Assets / Total Deposits (%) Cash and Liquid Assets / Liabilities to the Public (%) Nominal Growth indicators Assets (%) Loan Portfolio (%) (2.9) Shareholders Equity (%) (15.8) Deposits (%) Net income (%) n.a (6.2)

12 Annex A Page 1 1. Excellence in Microfinance Rating Definitions Grade α++ α+ α α β+ β β γ+ γ γ Definitions Those MFIs consistently exhibiting a clear, rational and balanced relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Optimal efficiency and effectiveness. Very low risk. Excellent future prospects. Those MFIs striving to balance a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Good efficiency and effectiveness. Low risk. Good future prospects. Those MFIs working to define a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Satisfactory efficiency and effectiveness. Acceptable risk. Satisfactory future prospects Those MFIs without a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Poor efficiency and effectiveness. Very risky. Poor future prospects. 1 Optimal 2 Good 3 Satisfactory 4 Poor Scoring key: ++ Optimal 1 α Good 2 β Satisfactory 3 γ Poor 4