CREDIT FOR MICRO ENTERPRISE DEVELOPMENT (CMED MODULE)

Transcription

1 CREDIT FOR MICRO ENTERPRISE DEVELOPMENT (CMED MODULE) PREPARED BY: A. S. BHANDARI, Ph.D. AND K. B. TAMANG (CONSULTANTS) PREPARED FOR: MICRO ENTERPRISE DEVELOPMENT PROGRAM (MEDEP), UNDP, P.O. BOX 107 KATHMANDU, NEPAL APRIL 1999

2 LIST OF ACRONYMS ADB ADB/N ASHG BWTP CB CBO CBBG CECI CFCO CIGAP CM CO CMED DPIO CSD CSI DCM DICGC DSC EDF FAO FDC GBB GDP GM DGM GTZ HDI HMG/N Asian Development Bank Agriculture Development Bank/Nepal Association of Self-Help Groups Banking With The Poor Commercial bank Community Based Organization Community Based Business Group Canadian Center for International Studies and Cooperation Common Facility Center Organization Credit for Income Generating Activities for the Poor Center Manager Community Organization Credit for Micro Enterprise Development District Program Implementation Office Center for Self-Help Development Cottage and Small Industry Deputy Center Manager Deposit Insurance and Credit Guarantee Corporation Deprived Sector Credit Enterprise Development Facilitator Food and Agriculture Organization Federation for Development Cooperation Grameen Bikash Bank Gross Domestic Product Group Manager Deputy Group Manager German Technical Cooperation Human Development Index His Majesty's Government of Nepal 2

3 IBP INGO LTF MCPW ME MEG MEDEP NEFSCUN NPC NGO NBL NRB RBB RMDC RSRF RUDA PB PCRW PDDP PL PMS PSC SACCO SCF SFCL SFDP SM SCO SCU SHG SHO Intensive Banking Program International Non-Government Organization Local Trust Fund Micro Credit Program for Women Micro Entrepreneurs Micro Enterprise Group Micro Enterprise Development Program National Federation of Saving and Credit Union Nepal National Planning Commission Non-Government Organization Nepal Bank Limited Nepal Rastra Bank Rastriya Banijya Bank Rural Microfinance Development Center Rural Self-Reliance Fund Rural Development Association Participating Bank Production Credit for Rural Women Participatory District Development Program Program Locations Poverty Monitoring System Priority Sector Credit Program Saving and Credit Cooperative Saving and Credit Facilitator Small Farmers' Cooperative Limited Small Farmers' Development Program Saving Mobilizer Saving and Credit Organization Saving and Credit Unions Self-Help Group Self-Help Organization 3

4 SWC UNESCO UNDP VDC WB Winrock Social Welfare Council United Nations Educational Scientific and Cultural Organization United Nations Development Program Village Development Committee World Bank Winrock International Institute for Agricultural Development 4

5 PREFACE Laxman Pun, Ph.D. National Program Manager 5

6 ACKNOWLEDGMENT Micro Enterprise Development Program (MEDEP), a joint-undertaking of the Ministry of Industry (MOI), His Majesty's Government of Nepal (HMG/N) and the United Nations Development Program (UNDP) has rightly foreseen the importance of shifting Nepalese economic-base from mere agricultural sector to off-farm and non-farm (enterprise / industrial) sectors. Which is essential for alleviating chronic poverty at a faster rate because, the participant-beneficiaries can generate more money by undertaking micro enterprises and cottage industries than that of their traditional engagement in mere agricultural activities. To contribute to the country's prime goal of poverty alleviation during the Ninth Plan period, MEDEP's emphasis on poverty alleviation through micro enterprise development with equal opportunity for women is an worthy step. The key program strategies (Demand driven, sustainable enterprise partnership and local capacity building) adopted by MEDEP have the vision of changing the fate of the poorest of the poor and the women to the highest level of their competence and a competitiveness. Dr. Laxman Pun, National Program Manager, MEDEP is appreciated for his enthusiastic efforts to achieve the defined goals. His kind cooperation and constructive critique has helped the consultants to prepare this report. Likewise, thanks are due to Ms. Bidula Shrestha, Marketing Specialist and Mr. Ken Nikolson, Marketing Advisor, MEDEP has kindly cooperated in making their fruitful comments that has contributed considerably to improve the report Thanks are extended to Mr. Niranjan Baral, National Program Director, MEDEP, for his judicious awarding of this noble job of preparing a micro credit operational manual of MEDEP to RUDA. The consultants would also like to express thanks to the United Nations Development Program (UNDP), Ministry of Industry, MEDEP's partner agencies, concerned micro credit module designers and implementors, and other institutions as well as the individuals who provided important inputs while preparing this manual. A. S. Bhandari, Ph.D. and K. B. Tamang (Consultants) 6

7 TABLE OF CONTENTS LIST OF ACRONYMS...2 PREFACE...5 ACKNOWLEDGMENT...6 TABLE OF CONTENTS...7 EXECUTIVE SUMMARY...8 CHAPTER - I...14 INTRODUCTION...14 CHAPTER - II...19 OBJECTIVES, POLICIES AND STRATEGIES OF CMED...19 CHAPTER - III...31 OPERATIONAL PROCEDURES...31 CHAPTER - IV...38 ROLES AND RESPONSIBILITIES OF THE STAKEHOLDERS...38 CHAPTER - V...44 BUILDING CAPACITY OF MICRO ENTREPRENEURS...44 CHAPTER - VI...50 FINANCIAL MANAGEMENT SYSTEM...50 CHAPTER - VII...61 SUPERVISION, MONITORING AND EVALUATION OF CMED...61 ANNEX ROLE OF MEDEP FOR ESTABLISHING LINKAGE WITH MICRO CREDIT MODULES...65 ANNEX II...83 SMALL FARMERS DEVELOPMENT PROGRAM...83 ANNEX III PRODUCTION CREDIT FOR RURAL WOMEN ANNEX IV MICRO CREDIT PROJECT FOR WOMEN ANNEX V GRAMEEN BIKASH BANK ANNEX VI BANKING WITH THE POOR ANNEX VII THE LOCAL TRUST FUND ANNEX VII VILLAGE DEVELOPMENT PROGRAM (VDP)

8 EXECUTIVE SUMMARY The basic objective of the present study is to prepare an "Operational Manual of Micro Credit for MEDEP". The maual will serve as a guideline to MEDEP in materializing its goal of poverty reduction of low-income families by focussing on sustainable micro-enterprise development and also by building the capacity of service delivery mechanisms related to micro-enterprise development. In particular, the study aimed at achieving the objectives such as: (1) Describe and represent several key models of micro credit system being operated in the country and find out the possibilities of best alternative micro credit model to be adopted by MEDEP; (2) Prepare a operational manual on micro finance and credit management to provide specific guidelines to MEDEP staffs and partner agencies at local, district, and central levels; and (3) Assess the options for ensuring credit mechanism for micro entrepreneurs on institutionalized basis within the legal frameworks. In this regard, many banking and non-banking agencies have been undertaking different kinds of micro credit modules in many parts of the country including those districts covered under MEDEP. According to Nepal Rastra Bank (Gorkha Patra, April 19, 1999), the financial institutions dealing with banking or partial-banking activities comprise of : 13 Commercial Banks; Four Development Banks; Five Grameen Bikash Banks; 45 Finance Companies; 28 Cooperatives; and 25 NGOs (Affiliated to NRB only). In addition to those institutions, there are several other organizations dealing with saving and credit business. They are several Cooperatives affiliated to NCDB, NGOs, INGOs, CBOs, SACCOs, SCUs, and SHGs. Despite all those micro credit modules and financial institutions, an access of credit to the rural people is only 25% of the total credit requirement in rural areas. This shows that the present financial institutions has not been able to satisfy the credit needs of the rural people (men and women) in a effective and efficient manner. Additional efforts are, therefore, needed to ensure credit for promoting micro entrepreneurial environment in rural areas. The micro credit modules are carried through formal, non-formal, and informal systems. The modalities as well as the concepts of micro credit systems are found changing with the changing perspectives of national as well as international scenarios. The major micro credit modules and their implementing agencies are recognized as: (1) Rural Microfinance Development Center (RMDC affiliated to Nepal Rastra Bank-Central Bank of Nepal); (2) Rural Self-Reliance Fund (RSRF implemented by Nepal Rastra Bank); (3) Cooperative Societies (Regulated by NRB); (4) Non-Government Organization (NGOs affiliated to Nepal Rastra Bank); (5) Small Farmers' Development Program (SFDP implemented by Agriculture Development Bank-ADB/N); (6) Small Farmers Cooperatives Limited (SFCL affiliated to ADB/N); (7) Priority Sector Credit Program (PSC implemented by Commercial Banks); (8) Production Credit for Rural Women (PCRW initiated by the Ministry of Local Development (MLD, HMG/N); (9) Micro-Credit Program for Women (MCPW initiated by the Ministry of Local Development (MLD), HMG/N); (10) Deprived Sector Credit Program (DSC initiated by the Ministry of Finance and implemented by the Commercial Banks); (11) Banking with the Poor (BWTP initiated by NGO (RUDA) and 8

9 financially linked with a leading Commercial bank i.e. Rastriya Banijya Bank); (12) Grameen Network Nepal (GNN, a coordinative network initiated by the Ministry of Finance and affiliated to Nepal Rastra Bank); (13) Grameen Bikash Banks (Grameen Bank module of Bangladesh replicated in Nepal through an initiation of the His Majesty's Government, Nepal); (14) Grameen Clones i.e. Nirdhan and CSD (Development bank and an NGO respectively); (15) Cottage and Small Industries Project (CSI led by Nepal Rastra Bank and financed by the large Commercial Banks i.e. RBB and NBL); (16) Cooperatives (Regulated by National Cooperative Development Board (NCDB); (17) Sajha Aviyan (Cooperative Movement affiliated to the Department of Cooperatives, HMG/N); (18) Non- Government Organizations (a number of NGOs affiliated to NRB); (19) Non-Government Organizations (NGOs) and International Non-Government Organizations (INGOs) practicing micro credit transactions informally; (20) Saving and Credit Organizations (SCOs self-sprouting at community level); (21) Saving and Credit cooperatives (SCCs selfsprouting at community level); (22) Community Based Organizations (CBOs self-sprouting at community level); (23) Community Based Business Group (CBBGs organized professional money lenders at community level); (24) Deposit Insurance and Credit Guarantee Corporation (DICGC); (25) UNDP modules i.e. the Local Trust Fund (LTF) model under PDDP program and the proposed Credit for Micro enterprise Development (CMED) module under MEDEP program; (26) Proposed Cottage and Small Industry Development Bank (CSIDB) module of credit transactions for cottage and small industry development; (27) Proposed Employment Promotion Bank (EPB) module of poverty alleviation through credit programs for promoting self-employment and foreign employment; (28) Saving and Credit Cooperatives (SCCs) / Saving and Credit Unions (SCUs) affiliated to National Federation of Saving and Credit Unions Nepal (NEFSCUN); and (29) Self-sprouted Self-Help Groups (SHG). The more talked ongoing formal micro credit programs are: SFDP, PCRW, MCPW, GBB, BWTP and LTF. The first four models were initiated by the government. The BWTP, however, is a linkage program initiated by an NGO (RUDA) and channeled through a leading Commercial Bank (Rastriya Banijya Bank). The LTF is run by involving local government participation e.g. District Development Council (DDC) in collaboration with PDDP program of UNDP and the participating VDCs. Grameen Module (GBB) is now replicated by all the Grameen banks; Nirdhan Uthan bank Ltd.; and an NGO known as the Center for Self-Help Development (CSD). They are providing services to women and the poor following their own procedures of lending and saving mobilization. They are appreciated for their outreach to access the poor and side by side, they are also criticized for their faulty policies and inefficient management practices in alleviating poverty. The Small Farmers Development Program (SFDP), which operates through 322 Sub-Project Offices (SPOs) of the bank is an exemplary innovation of the bank to reach to the poor on a group-basis. As of mid-july 1996, under SFDP program, 16,743 groups, consisting of 189,061 members (146,589 males and 42,472 females) has been assessed with credit and social activities. SFDP has provided a philosophical base and practical guidelines of "Group-lending approach" to other micro-credit programs in and outside the country. The rapid expansion of the program without allowing for consolidation, in some cases has led to have an access of the program to better off farmers getting into groups. Similarly, an insufficient attention to quality of the groups is also reported to be low. 9

10 The SFDP also suffered because of some compromise with the original concept. Group lending was intended to replace the collateral lending. Previous studies showed that most loans are granted against collateral (Some 93 percent of group leaders reported that loans are made against collateral) and enough time was taken for loan sanctioning. In the case of SFDP, the cost of fund is reportedly very high, where in the administrative cost is estimated at seven percent of the loan amount which is so high. Looking from different angles i.e. high cost of transaction, small size of loan per member, low rate of repayment and other problems associated with SFDP may be an obstacle to broaden SFDP's horizon to a new dimension of micro enterprise development which requires comparatively sizable volume of loans as well as timely delivery on a sustainable basis. Similarly, the PCRW was initiated by the Women Development Division under the Ministry of Local Development in The Women Development Division (WDS) provides Nonfinancial services whereas the financial services are channeled through commercial Banks (Nepal Bank Limited, Rastriya Banijya Bank) and the Agricultural Bank of Nepal). The program is heavily supported by several external donor agencies. The PCRW has been reasonably successful program with a repayment rate of per cent as of In the past 14 years, about 35,000 rural women have received loans. The program has also been so success in bring various line agencies in a common plate-forum. Above all PCRW is also widely referred for its outstanding jobs in awakening the rural women of poor households in the program areas. The outreach is very low as compared to the resource investment and time taken in implementing the program. The program does not consist of clear-cut saving mobilization mechanism so far. In addition, It is not practicable to bring majority of the poor households into a self-organized institutions of their own despite huge numbers of staffs involved into the system. Since the Ministry of Local Development (MLD) does not have its own sources of funds to support the program, the sustainability of the system would decline upon stopping external resources. Above all, the threat to the continuity of PCRW has come from its extremely high delivery costs as reported to be 42 per cent. In addition to that considering from the point of view of the added funds cost and bad debt cost, it will be still higher, compared to its income of per cent interest on loans. Observing all the above factors in its present form, it is not a sustainable program. The another program similar to PCRW is MCPW which was initiated by WDS of the Ministry of Local Development under a loan assistance program of Asian Development Bank (ADB) in This is the second largest program in a series of credit programs having a focus on women. MCPW is the first government initiated credit program to recognize the role of NGOs as an alternative mechanism for service delivery with a hope to achieve costeffectiveness. As of mid November, 1998 as many as 70 NGOs are participating in this project. In totality, the MCPW has been able to disburse the loan amount of Rs. 140 million to 9,292 women borrowers. The program is running at its last stage as a project. The program has reportedly maintained a high repayment rate of 95 per cent and above. According to the mid-term review of MCPW there is a question mark on the financial viability of the participating NGO. Although, the repayment rates are reported around 95% but they declined over the years. In the beginning the project the had a repayment rate of nearly hundred percent which, however, fell down over the years. However, this situation is not improving and the fate of participating NGOs is remained as before. There are less 10

11 chances of relying on the financial services of the participating NGOs after the Project terminates next year. Therefore, this would not be wise decision to suggest MCPW module for the purpose of micro enterprise development program. Another series of micro credit comes from five independent Grameen Bikash Banks (GBBs) established in each of the five developmental regions of the country. With respect to the policies of decentralization and regional balance, these GBBs could be seen as a good example. On the top of that they are also specialized institutions in mobilizing resources in rural areas through their own institutional efforts. The total outreach of these five GBBs is about 9,520 groups having a total of 47,780 members. Since most of the other GBBs are new, the GBB Biratnagar consists of nearly 70 per cent of the total achievements in this sector. Grameen could be seen as a target specific approach to reach the poor house-holds. Fortunately, the repayment rates under GBBs are reported hundred per cent. They have a unique style of group formation, group training, group recognition, center management, saving and lending which is not the weakness but the strength of GB system. But incorporating the interest of other institutions/programs like MEDEP would create an uneasy environment to both the programs because of their basic differences of target groups, program lacations, group/center concepts and functions, and decision making system and endtargets. There may be less chances of modifying GB system for MEDEP purposes. Instead of that MEDEP could extend its services to GB members (women beneficiaries) without duplicating the loans through a coordinative approach. Here comes the new approach of BWTP upon the initiation of an NGO recognized as Rural Development Association (RUDA) and launched through a leading commercial bank (Rastriya Banijya Bank) since This is an unique and alternative poverty alleviating program which has an in-build capacity of the module to run on a sustainable basis. The main aim of the project is to develop sustainable community based organization of the rural poor by linking them with an opportunity of self-employment, greater incomes and enhanced microfinancial productivity. The organizations of the rural poor in this module are called as the Association of Self Help, (ASHGs) which chhannelize social services and financial resources on a sound commercial basis. The Program is running successfully in seventeen districts of the country. It has distributed the credit volume of Rs. 800 millions; and has been able to extend its outreach to 10,000 members of which women comprise 95 per cent. The program possesses special feature in such a way that the ASHGs become financial viable within three year of their establishment depending on the program locations and support services. In BWTP, the loan delivery cost is very low as compare to such other programs. Moreover, there is a mechanism of sharing these cost amongst the stakeholders. Which has made the program financial viable at even 15 percent interest rate of the Bank. The lending procedure are very simple and repayment system is comfortable with a rate of above 98 percent. The program has the capacity for developing the level of consciousness amongst the rural poor. NGO is the heart of the Project and it supply none financial services to the project for healthy growth of ASHG and proper use of loan. Unfortunately out of 100 ASHG only 20 ASHGs are supported by NGO and rest are operating without NGO. The NGOs which are supporting to ASHGs are not providing sufficient supports due to the resource constrain with them. In additional, The program demands intensive training on organization development and credit 11

12 management, But the supply of training is almost Nil in the program. It is therefore there are many unanswered questions for sustainability of the program though the program is financially viable. As the developmental programs evolve one after another, so as the micro credit modules are also found evolved. For example, the evolution of a micro credit module called LTF appeared as a subsidiary of PDDP program implemented by UNDP in collaboration with local government authorities. The LTF has several components of socio-economic development activities in which credit a part. However, the focused activities of the LTF are associated to social mobilization rather than the credit specific. Micro savings and credit components incorporated within the broad contest of PDDP are appreciable in accordance with the nature of the program their the level of efforts done in this regard. The groups called as COs are too large in number ranging from 18 to 103 members in each of the COs. Which creates problem of managing and controlling at their own level. Although, they have started generating resources at their own levels but they are nominal. The loan volumes availed to them are also quite small and insufficient to support any kind of income generating activity. With such a provision of small amounts credit capital (CC) availed from LTF sources linked with equally small amounts of lendings from their own savings to the needy member of their organization, a sizable project can not be expected. That kind of saving and credit functions could rather be explained as a motivating factors for social mobilization rather than a considerable factor of production required to run a micro enterprise. With that kind of loan volumes Micro enterprise development is seemingly difficult with these small loans. The groups (COs) are also heterogeneous and big for micro-enterprises. In such a large and heterogeneous groups, it is not suitable to deliver loan effectively to the entrepreneurs in a group guarantee basis. The CC availed from LTF to a CO is based on 1:4 ratio of lending : saving ratio. It means for borrowing four hundred thousands rupee loan the members would have to deposit a minimum of one hundred rupees from their micro savings amongst themselves. Moreover, a field level study of LTF practices also revealed that a maximum of Rs. 25, 000 credit capital (CC) is availed to each of the COs so far which is a negligible amount to start-up a micro enterprise by the members as many as 18 to 103 per CO. From the view points of all these angles, LTF would require a major modification in its existing saving and lending practices in order to satisfy the micro enterprise development goals of MEDEP. Increasing the access of the micro credit to the poor entrepreneurs can enhance their capacity to utilize their hidden potentialities and disguised labor for productive purposes. Since credit is an important factor of production, the micro entrepreneurs would essentially require an easy access of credit on a sustainable basis. Considering the strength and weaknesses of the major micro credit modalities, it is realized that existing major micro credit models like SFDP, PCRW, MCPW, GBB, BWTP, and LTF can be utilized for MEDEP with some sort of expected modifications / simplification in their respective credit policies as well as in the procedures too. However, MEDEP should not fully depend on the afore said micro credit modules only. Therefore, there is a need of a new and a strong micro credit model which would help promote the economic-base of the targeted micro entrepreneurs along the lines of MEDEP principles. For that reason, MEDEP would require an option of its convenient linkage with 12

13 various micro credit modules. In addition to make the best use of existing micro credit modules as mentioned above, a special micro credit program: Credit For Micro Enterprises Development (CMED) to be implemented through an NGO known as RUDA is suggested for MEDEP to link with. 13

14 CHAPTER - I INTRODUCTION Micro Enterprise Development Program (MEDEP) is a five year ( ) project being implemented by the Ministry of Industry (MOI), His Majesty s Government in collaboration with the United Nations Development Program (UNDP) Nepal. The program aims at achieving the goal of poverty alleviation, which is a top most priority of the nation during the period of Ninth Plan ( ). The program runs in several selected districts of the country and provides an off-farm employment opportunities to unemployed and underemployed labor force in rural areas. 1. MEDEP Goals The micro enterprise development program (MEDEP) aims at achieving the following goals: Poverty reduction of low-income families through sustainable micro enterprise development Capacity building of service delivery mechanisms related to micro enterprise development 2 Immediate Objectives of the MEDEP Development of micro entrepreneurs: MEDEP attempts to develop the new and existing micro entrepreneurs of poor families by linking them with local market. Special needs of women are taken into account in this process of raising the incomes of the low-income families. Creation of micro enterprise service mechanism: The program aims at creating micro enterprise development mechanism on a sustainablebasis through a networking of partner organizations with micro entrepreneurs. The participatory management program shall be ensured in building the capacity of the local government, private organizations and the community. 3 Developmental Vision of the Program The program endeavors to develop hidden potentialities of the micro entrepreneurs by facilitating them with entrepreneurship training, access to resources, finance, and market opportunities. With these supportive roles of MEDEP, the rural poor can create self-employment at their locality. By and by, they will be able to graduate into viable micro entrepreneurs, which is essential for shifting the economic-base from onfarm activities to non-farm as well as off-farm activities. 14

15 Thus, the program keeps the vision to promote sustainable financial institutions and induces a strong sense of desire amongst the poor entrepreneurs to lead their lives move towards prosperous and respectful life styles. The CMED program, therefore, has based on its philosophical vision of: alleviating mass poverty, reverting the culture of poverty into the culture of prosperity and developing the capacity of the poor to enable them to participate in the main stream of economic development of the country. Transform rural economy from low returning agricultural activities to more profitable off-farm activities and prepare local- base for the industrialization of the country. In this regard, MEDEP foresees that the developmental partnership between low-income families, buyers of micro enterprise products and services; and the local delivery organizations will create a new, dynamic, private sector micro industrial-base by developing entrepreneurs at the grass-roots level. 4. MEDEP Principles The program is guided by certain principles related to target beneficiaries and the delivery mechanism. They are: For target beneficiaries: (a) (b) (c) Participating families or groups make micro enterprise decisions Use open market policies No consideration of subsidy For delivery mechanism: (a) (b) (c) Only existing delivery institutions are used Outputs achieved should benefit all partners Implementation is done on a cost-sharing basis 5. Basic Approaches of MEDEP The MEDEP endeavors to fulfill its goals of improving the living conditions of the low-income groups in rural areas through improvements and institutionalization of the delivery system related to micro-entrepreneur. The program follows three main strategies of micro enterprise development as follows: Demand driven approach: Program activities are based on developmental potentials, market demands and felt-needs of women as well as men entrepreneurs. Sustainable enterprise partnership: The program targets its 15

16 investments to strengthen networking and building capacity of local level partner organizations for stimulating micro enterprise growth and poverty alleviation. (iii) Building local capacity: The investments of the program intend to build capacity of the DDC and local business organizations to plan and implement micro enterprise development and promote employment at the district level based on market demand. The program envisages that the needs of the participating families would increase as they graduate from the existing level of poverty. New enterprise partnership will be required due to emerging demands created from the rise in income levels. The need for building capacity will also be increased. In this way, MEDEP aims to promote a continuous process of development. 6. Objectives of undertaking this Study Increasing the access of the poor to micro credit can enhance their capacity to utilize their hidden potentialities and disguised labor for productive purposes. Micro credit has been the inherent component of many developmental programs like MEDEP. Since credit is an important factor of production, the micro entrepreneurs would essentially require an easy access of credit on a sustainable basis. No doubt, there are several models of micro credit systems being operated in many parts of the country; however, MEDEP would like to follow the most effective and endurable model to fulfill the following purposes: Micro credits increase the productive capacity of the poor by making use of their skill and labor through self-employment activities (iii) (iv) (v) (vi) It facilitates to adopt new technologies Micro credits, in one hand reserve human right of the poor (Yunus, 1985); and on the other side increase the bargaining power of the poor Micro credit and saving can help the poor to escape from exploitative practice of local moneylenders Increased access of micro credits to women and the poor empowers them socially and economically Access to productive resources i.e. credit, empowers the rural poor and increases their bargaining power. The basic objective of the present study is to help MEDEP by providing consultancy services on micro credit modalities and suggest alternate micro credit model for the specific purpose of MEDEP. The present undertaking supports MEDEP to achieve 16

17 broad goal of reducing the poverty encountered by the low-income families through sustainable micro-enterprise development; and in building the capacity of service delivery mechanisms related to micro-enterprise development. In particular, this study endeavored to achieve the following objectives: Describe and represent several key models of micro credit systems being operated in the country and find out the possibilities of best alternative micro credit model to be adopted by MEDEP (iii) Prepare a operational manual on micro finance and credit management to provide specific guidelines to MEDEP staffs and partner agencies at local, district, and central levels Assess the options for ensuring credit mechanism for micro entrepreneurs on institutionalized basis within the legal frameworks. There are various micro credit models being operated in the country. So far, the important micro credit models in the country are known as small farmers development program (SFDP); production credit for rural women (PCRW); micro credit program for women (MCPW); Grameen Banks (GB clones); banking with the poor (BWTP); and the local trust fund (LTF). These key modalities of micro credit systems provide a mechanism of making small loans to the poor mainly for agricultural activities. Despite some problems with each of the above mentioned modules, there is a possibility for MEDEP to link its enterprise development activities with the existing lines of credit. Besides making making use of the existing micro crdit modules, there is an essential need of a micro credit model that could speciafically focus on micro enterprise development. Thus, MEDEP requires an alternate micro credit model that would mainly focus on micro enterprise development on sustainable-basis. Therefore, a new and a strong model of micro credit targeted to micro enterprise development, named as Credit for Micro Enterprise Development (CMED) is suggested for MEDEP to adopt. 7. Justification of CMED Mass poverty is a burning issue in Nepal. It is not only the greatest impediment for affecting the socioeconomic development but also a cause of rampant degradation of natural resource of the country. Rapid growth of economy may require a shift from agricultural-activities to entrepreneurial activities. Since the main factor for brooding several social economic and entrepreneurial problems making the problem of poverty more complex is poverty, it has to be reduced if not eliminated. Likewise, the situation of the women is more serious than the men do. They are socially and economically suppressed, and entrepreneurially dependent. So, there is an immediate need to improve their situations which MEDEP has already realized by setting a target of 70:30 ratio of female and male entrepreneurs. 17

18 Rural Credit Review (ADB, 1991) has shown that existing institutional credit has not been able to cover more than 25% of the total credit needs in rural areas. While on the other this has been recognizing that the credit is the effective instrument to reduce poverty mostly in rural areas. There are several efforts being undertaken in the developing countries like ours to improve the living standards of the poor people by increasing their access to credit. Likewise, the MEDEP undertaken by MOI, HMG/N and the UNDP is also dedicated to poverty alleviation through micro entrepreneurial development. In Nepal, various study report on poverty alleviation has pointed out that the access of women to credit is far less compared to men. Also the instances show that as compared to the magnitude of the poverty, the efforts made so far in poverty alleviating has become a lip service only. On the top of that government initiated targeted-credit programs are sorrounded by their institutional problems. Viewing all those facts, the country demands a dynamic and specific model of micro credit to deal with micro enterprise development which can serve more numbers of the poor at low cost of transaction and also mobilize scattered resource at optimum level on a sustainable basis. Therefore, there is a need of a new and a dynamic micro credit model that could help promote the economic base of the entrepreneurs from various micro enterprises. For this purpose, a special micro credit program is designed in the name of Credit For Micro Enterprises Development (CMED). This program designed by considering the focus of MEDEP to develop micro enterprises deriven by market forces. The proposed CMED program shall bear a legal status unpon implementing through banks or specialized NGOs. 18

19 CHAPTER - II OBJECTIVES, POLICIES AND STRATEGIES OF CMED PREAMBLE Whereas it is necessary to provide market driven opportunities to micro entrepreneurs of poor families for poverty alleviation and balanced growth of Nepal; and Whereas such opportunities can be effectively provided through a decentralized framework involving participation of micro entrepreneurs, their organization CFCO, participating banks / financing agencies, local governments and non-government organizations and other partners of micro enterprise development program; and Whereas such a result can be better obtained when there is an autonomous institution to provide alternative source of credit facility and technical support to micro entrepreneurs of poor families. 1. Short Title and Cmmencement (1) This Manual shall be called "Credit for Micro Enterprise Development" (2) This Manual shall come into force upon signing a letter of understanding between the participating Bank/NGO and the MEDEP and the date specified by MEDEP in formal notification. 2. Definitions In this Manual unless and until the context otherwise requires: (a) (b) (c) (d) (e) "CMED" means the Credit for Micro Enterprise Development to be launched under the guide lines of this Manual "CFCO" means the Common Facility Center Organizations to be created under the provisions of this manual "Chairperson" means the Chairperson of the CMED "CM/DCM" refer to the Center Manager/Deputy Center Manager under CMED program "GM/DGM" refer to Group Manager/Deputy Group Manager of the enterprise groups to be formed under the program 19

20 (f) (g) "Member" means a member of the CFCO and includes the Chairperson or CM/DCM of the CFCO "Executive Secretary" means the Executive Secretary appointed under the rovisions of this Manual (h) "Manual" means the Micro Credit Operational Manual of MEDEP 1999 (j) "CFCO" means a federation of enterprise groups of micro entrepreneurs with a membership of a dozen of groups (60 members) at program locations "MEDEP" means micro enterprise development program of MOI, HMG/N launched in collaboration with UNDP 3. Implementation of CMED A micro credit program by the name of Credit for Micro Enterprise Development shall be implemented by participating bank/ngo in collaboration with MEDEP The CMED shall have the following sources of funds and initially all expenses to be incurred by the stakeholders of the program and later on the operational costs shall be borne by the interest earned out of credit capital account of the fund or the subsidies provided by any other agency; (a) (b) (c) (d) (e) (f) (g) (h) Funds to be provided by UNDP through MEDEP Funds to be availed by accridated NGO Funds to be provided by the respective DDC and VDCs as matching fund Funds to be proved by other bilateral or multilateral donors by way of grant or soft loan Funds received by way of donations from any national or international organizations Funds availed by banking/financing agencies Funds received from any CMED partners and other sources Funds generated by the CFCO members from saving credit activities. (iii) (iv) All funds of the CMED shall be kept in a bank to be specified by the CFCOs. The procedures for operation of any account of the CMED in a bank will be as specified by the CFCOs. 20

21 (5) The CFCOs shall have a separate Secretariat of its own and the Executive Secretary. 4. Objectives Micro enterprise development program attempts to alleviate poverty by enhancing developmental potentials of micro entrepreneurs. Strong coordination to be established by MEDEP amongst its various partners will ensure effective linkage of physical labour of the poor entrepreneurs with improved skill, technology, resources and market agencies. The poor entrepreneurs will be linked with institutionalized saving and credit system suitable to meet their needs. The MEDEP has designed special credit program i.e. credit for micro enterprise development (CMED). In general the objective CMED is to provide a mechanism of sustainable credit and savings system in rural areas that ensures micro entrepreneurs who have obtained training and skill from MEDEP with adequate loans for establishing a viable business plan. In doing so CMED aims to: Create opportunities for the effective utilization of unemployed / under-employed labor force and local resources to achieve greater national productivity (iii) (iv) (v) (vi) Increase self-reliance of the micro entrepreneurs by organizing them into groups to initiate, formulate and implement enterprise development programs for their own benefit Increase their access to institutionalized credit, new technologies, input delivery systems and market outlets Develop skill, technology and market in support of the micro entrepreneurs Promote micro enterprises based on market driven demand Induce economic development-base of the rural people from on-farm activities to non-farm as well as off-farm activities that suit to micro entrepreneurs and demanded by the market forces (vii) Reverse the age-old vicious circle of low income --> low savings --> low investment --> low-income" into and expanding system of lowincome --credit --investment --production--market> more income --> more credit --> more investment --> graduation from viscious circle of poverty to greater prosperity. 21

22 Low-income vicious Low-income circle of Low-savings poverty Low-investment Low income More income More investment viscous circle of affluence More credit Micro credit Investment More income 5. Basic Policies The basic policies of the CMED are to: (iii) (iv) Organize micro entrepreneurs into homogeneous groups of 5 members possibly around certain enterprise and name each group with a specific "Micro Enterprise Group (MEG)". The group members shall choose a "Group Manager (GM)" and a "Deputy Group Manager (DGM)" among them who shall manage group dynamics. Federate every 12 groups (60 members) into one enterprise center closest to each other and name each of such centers with a specific "Common Facility Center (CFCO)". The Center shall be managed by the "Center Manager (CM)" assisted by Deputy Center Manager (DCM). The members of the Center shall periodically elect CM and DCM among them. Democratic election of CM and DCM will take place and salaries will be paid out as part of CFCO overhead. In order to avoid donor-dependency a sound financial linkage will be established with Agricultural Development Bank, Commercial Banks, Grameen Banks, Private Sector Development Banks, Grameen-Type NGOs and recognized saving and credit organizations 22

23 (v) (vi) (vii) Emphasize on off-farm enterprises that generate more income to the entrepreneurs Develop managerial as well as technical skills of entrepreneurs and local level personnel involved in CMED Promote and disseminate market opportunities for the finished products of the micro entrepreneurs (viii) Enable micro entrepreneurs to develop their capacity to access the services from the delivering agencies by strengthening their receiving mechanism (ix) (x) (xi) (xii) Coordinate various partner agencies for achieving greater productivity Enable micro entrepreneurs to formulate their own group plans and avail credit on group guarantee-basis Habituate micro entrepreneurs for making savings at individual as well as groups basis Effectively monitor and evaluate the program activities both from process and performance standpoint (xiii) Provide credit facilities to these micro entrepreneurs for undertaking income generating activities on a group guarantee basis (xiv) (xv) (xvi) (xvi) Prioritize women entrepreneurs to participate in the program such that at least 70 per cent of the entrepreneurs are women Ensure sound and sustainable lending to the members at market rate of interest Build capacity of the local entrepreneurs to run their undertaking as an business enterprise Focus micro entrepreneurs having household land-holding of less than 0.67 ha (one bigha) and a gross annual family income of RS. 12, for a family of five members (per capita income below RS. 2,511) to join into groups. 6. Strategies The CMED shall adopt several coordinative strategies to successfully implement the program. Main strategies will be as given below: I. Central Level Coordination 23

24 In order to maintain smooth functioning of the CMED, a central level "CMED Coordination Committee" shall be formed. The committee shall be comprised of the following representatives: National Program Director (NPD), MEDEP Chairman Concerned Departmental representatives of participating Banks / Financing Institutions Member (iii) Representative, FNCCI Member (iv) Representative, Cottage Industry Development Board Member (v) Representative, Department of Agriculture Development, HMG/N Member (vi) Representatives, partner agencies Member (vii) Representative, NPC Member (viii) Representative, Ministry of Finance Member (ix) Representative, micro entrepreneurs' Association Member (x) Representative, specialized NGO in microcredit Member (xi) Representatives, linkage banks as Needed Member (xii) National Program Manager (NPM), MEDEP Member (xiii) Representative, leading bank/ngo Member Secretary II. District CMED Implementation Committee The District Program Manager shall maintain close coordination with partner agencies as well as with various developmental agencies of government, and non-government sectors. To facilitate the district level implementation of this program, there will be a "District CMED Implementation Committee" comprised of the following representatives: Local Development Officer Chairman Branch Managers, of participating banks/financing Agencies Member (iii) District Chairman, FNCCI Member (iv) District Cottage Industry Development Officer Member (v) District Agriculture Development Officer Member (vi) District Incharge of partner agencies Member (vii) Reprersentatives, CFCOs Member (viii) Representative District Administration Office Member (ix) Representative of micro entrepreneurs Member (x) Representatives of the District Level NGOs Member (xi) Representative other Line Agencies as Needed Member (xii) District Program Manager, MEDEP Member Secretary III. Area Selection In order to link the program with the line of credit, the program will be launched in selected program areas. The potential areas will be selected upon the recommendation 24

25 of the 'District CMED Implementation Committee'. Similarly, the expansion of the working- area of CMED will also be done following the same practice as of the area selection (This will be worked out under DPIO). IV. Target Group Identification and Motivation The aims, objectives, strategies and the expected outputs of CMED shall be explained explicitly to the potential target entrepreneurs of low-income groups within the specified service areas. Entrepreneurs from backward classes and the others remaining below the extreme poverty line shall be the target groups of CMED. Personal contact, group contact and the mass meetings, which so ever become more effective in the selected program areas, will be adopted. The mass meetings organized for this purpose shall involve the participation of: (a) (b) (c) (d) (e) (f) (g) (h) Micro entrepreneurs Representatives of business groups Local traders VDC authorities Representatives of the various government offices Representatives of district level NGOs Teachers, local intellectuals Female as well as the male members of target groups (However, selection of the target groups is already done as specified in MEDEP implementation manual). V. Baseline Survey Every household within the selected areas will be surveyed for preparing a baseline information of their social and economic status prior to the project. Household incomes must carefully be asked which is important information for identifying the target groups. (However, baseline survey, selection of the program locations is already done as specified in MEDEP implementation manual). VI. Poverty Demarcation Based on the findings of the household survey, it becomes easy to identify the households remaining below extreme poverty in the project areas. Upon computing the gross annual household income of a respective family, divide that volume of income by the number of family members in that particular family. Should, the per capita annual income of each member of the family exceeds RS. 2,511.00, than that family will be considered to be above the poverty line, otherwise, below extreme poverty line. (However, poverty demarcation is already done as specified in MEDEP implementation manual). 25

26 VII. Prepare Profile of the Program Location The District program Manager will prepare a profile of each of the program locations that include all the information of the household surveys. Usually, the following information will be maintained in the village profile: Physical conditions Social aspects (iii) Economic situations (iv) Entrepreneurial skills (v) Potential entrepreneurs (vi) Potential enterprises (vii) Market opportunities (viii) Educational status (ix) Religious/ethnic values (x) Infrastructure development (xi) NGOs (xii) Financing institutions (xiii) Developmental potentials (However, preparing a profile of program locations is already done as specified in MEDEP implementation manual). VIII. Group Formation The groups are essential women organizations required for linking them to CMED lines of credit. Thus, the groups of micro entrepreneurs shall be formed with 5 members in a group. The following are the key considerations in-group formation: (iii) (iv) (v) (vi) Disseminate enough information about the purposes of group formation prior to its formation. Emphasize on women groups to a minimum of 70:30 female: male ratio of the groups/members Let the local entrepreneurs choose the members of their group by themselves The group members should select the potential projects for income generation Members of any one group shall not be allowed to join another group for same purpose. The selection of the group members shall be based on many similarities among themselves i.e. economic status, educational levels, 26

27 language/dialect, affinity, and trustworthiness. Likewise, reciprocal behavior, sense of group activities, patience, self-confidence, willingness to work in a group, willingness to do some thing and having same professional entrepreneurship will be additional qualifications for joining a group. (vii) Separate groups of women and men shall be formed. (However, group formation is already guided as specified in MEDEP implementation manual). IX. Federate Groups into a "Center" The Credit for Micro Enterprise Development program shall make use of the "Common Facility Center Organizations (CFCOs)" for any kind of transactions. For every 12 "micro enterprise groups", there shall be one CFCO, however, the enterprise centers shall be separate for male and female entrepreneurs. In the begining CFCOs shall be formed on adhoc basic upon the initiation of the participating NGO and DPIO. The CFCO management comprised of one CM, one DCM and three Executive Members (EMs) shall be democratically elected from amongst the CFCO members (ideally 60 in no.). CFCO management shall be responsible for the smooth functioning of their organization. They shall formulate rules and regulations and get approved from the general assembly of all the members. X. Need Identification of the Target Groups Need-based programs get more support from the people. Therefore, CMED gives focus to need identification of the target groups through the following ways: Group discussion Meeting with community development committees (iii) Field study / observation (iv) Household survey findings (v) Developmental projects in village (vi) Village profile (vii) Local market demands (viii) Rapid rural appraisal (RRA) (ix) Information from district/village level development agencies and etc. (However, the need identification of the target groups is already done as specified in MEDEP implementation manual). XI. Priority Setting Prioritize investment plans for those most important enterprises which are urgently felt by a majority of the group members in a community (felt-needs) and on the top of 27