I. Context A.

Socio-economic Overview Any discussion of the history, politics or economy of South Africa begins with Apartheid. For much of the 20th century, industrialist policies enforced economic migration and deprived rural villages of local investment, the ability to accumulate assets and access to credit. Large producers and business hubs prospered on the backs of cheap labour and an insulated banking sector, while remittances typically covered only food and housing needs in rural villages. In this environment, the Small Enterprise Foundation (SEF) was founded in 1992 to combat the severe lack of economic opportunities among the rural poor in the Limpopo Province, in the northeast corner of the country. Ten years after the first democratic elections South Africa remains one of the most economically polarised countries in the world. Although South Africa is classified as an upper-middle income country (source), the Limpopo Province has a Human Development Index equal to that of neighbouring, drought-stricken Zimbabwe, which ranks 121st in the world. The dividends of steady economic growth since exchange rate shocks in _____ have not resulted in significant commercial investment in rural villages. In many cases, men are forced to follow the Apartheidera patterns of economic migration to find work in mines or on farms. With the unemployment rate at over 60% in rural villages self-employment presents the best hope for the poor and the very poor to generate a sustainable income. Yet, without access to credit or savings most small businesses cannot build up assets to withstand the shocks of accidents, disease, natural disaster or other urgent financial requirements. The chicken-and-the-egg dilemma of extending credit to poor populations without credit history or collateral is as old as micro finance itself. However, following the fall of Apartheid, the new government attempted to provide incentives for lenders to cover the risk of reaching the previously unbankable. In the raft of legislation passed to spread equality and opportunity following the fall of Apartheid the government exempted micro credit providers from complying with interest rate ceilings and other regulatory requirements. Unintentionally, the measures enfranchised the usurious practices of informal moneylenders in rural villages and led to a mushrooming of the now formal ‘moneylender industry’. Among poor and very poor populations, who have little access to information and are often illiterate, the effect was disastrous on their chances of emerging from poverty. Currently, (Parliament) is circulating draft proposals of the National Credit Bill, which would regulate the practices of all micro credit providers and, crucially, set an interest rate ceiling that would apply to the moneylender industry. The damage has been done, though, obliging the poor and the very poor to regard promises of collateral-free credit with wariness and suspicion. The difficulty of establishing loan products in this compromised micro credit environment is compounded by South Africa’s high labour costs, crime, and poor transportation infrastructure and unaffordable IT services. Bernadette Moffet, a micro credit specialist working for the Women’s Development Bank in South Africa, calls South Africa “the most expensive place to operate a micro finance institution (MFI) in the world.” As in many countries of sub-Saharan Africa HIV/AIDS threatens economic development in South Africa, especially in poverty-plagued rural villages. According to the UNAIDS Global Report in 2002, “Adult HIV prevalence rates have risen higher than thought possible in this region, with over one third of adults currently infected in

a number of countries.” Reliable statistics are difficult to collect in the Limpopo Province because of the persistent societal stigma attached to the disease and the prevalence of tuberculosis – resulting in misdiagnosis or falsified records. In March 2005, SEF’s HIV/AIDS and gender empowerment partner, the Rural AIDS & Development Action Research Programme, estimated that over 16 percent of the population in SEF’s target areas are infected with the disease (Paul Pronyk source). Among its 25,000 clients SEF loses ____ clients to what official death certificates almost universally label as “natural causes.” (For more information on SEF’s efforts to combat HIV/AIDS see SEEP Network case study: “Efforts to Address the Impact of AIDS on Clients, Households and Enterprises”) This unique set of economic and environmental challenges – remnants of the Apartheid-era economic structure, an emboldened moneylender industry, high business costs and the HIV/AIDS epidemic – affect The unique economic and environmental challenges in South Africa require that a sustainable MFI must set clear goals and streamline its structure in order to reach the poor and very poor. - Add definitions of poverty/poverty line in South Africa -

B. Purpose of Intervention Understanding the choices SEF made in developing Tshomisano Credit Program (TCP) and mapping its future requires a full grasp of its mission and its own definition of success. From the day that founder and Managing Director John de Wit formed SEF’s first group the goal was to eradicate poverty. This is a single-minded pursuit that drives SEF to target the poorest and most vulnerable in the villages of the Limpopo Province, subordinating its performance on common microcredit benchmarks. In distinguishing SEF from its brethren, Ted Baumann wrote in his institutional analysis that, “Other MFIs are committed to reaching the very poor, but most accept a balance between poverty outreach and sustainability that leaves out the very poorest.” (Preface) Against the better recommendations of many experts, SEF did not ‘accept a balance’ that altered its original goal in any way. The allegiance underpinning this mission rigidity is to eradicating poverty by attacking vulnerability at a deeper level than strict income security. In working with the very poor the need to develop social capital is clear and stands as a prerequisite to financial independence. In the words of SEF MD de Wit, “The very poor often have low self-confidence and social skills, do not participate in community structures, and have weak social networks – particularly in times of trouble.” (16) While recognizing the need to build social capital among the very poor SEF also realizes that the process is not technical, nothing like building a house or even teaching a class. Direct, linear transfers of material or information do little to create lasting improvements in household stability, human investment (e.g. health and education) and community involvement. Adding another new-age nail in the commercial coffin of microfinance, SEF understood its focus to be, fundamentally, on purpose, process and people – not strategy, structures and systems. In short, the very poor – all of whom are black in South Africa – have been told what to do for their whole lives.

Call it dependency or vulnerability; TCP clients must overcome its psychological burden before achieving financial independence. This focus is not readily expressed by citing SEF’s double bottom line of poverty outreach and financial sustainability, but it’s wrapped up in the themes of this paper and the development of TCP. Facilitation, participatory targeting, a belief in the psychological roots of extreme poverty, subsidization and integration are the themes that reflect SEF’s allegiance to building social capital. Admittedly, creating lasting improvements in the lives of the very poor presupposes that a lasting program exists. Thus, SEF’s methodology is shaped by the demands of efficiency, scale and portfolio quality. In 1992 they gave shape to SEF’s original Microcredit Program (MCP), using the Grameen Bank’s group lending model, fortnightly meetings, small loan sizes, mandatory savings, short repayment schedules, strict repayment terms and focusing minimally on loan products – not training or education initiatives. When SEF disbursed its first MCP loans in 1992 it expected high transaction costs and small loan sizes to pre-select only the poorest in each village. Certainly, SEF’s experience during the first two years of operation confirmed the existence of widespread rural demand for microcredit. Borrowers almost exclusively operated businesses involved in small-scale trading or hawking, personal services (e.g. hairdressing) and producing specialty goods. These borrowers were thirsty for a lending program that minimized the heavy interest payments demanded by moneylenders, which cut into their already-slim profit margins. As a result of its dual economy, South Africa’s efficient and expanding formal retail and manufacturing sectors prevent microenterprises from competing in valueadded markets and quickly accumulating capital. Most small-scale traders and producers survive by transporting goods to remote areas, through convenience purchases and as manufacturers of occasional needs like school uniforms. By the end of 1994 MCP had 2,000 total clients, but, worryingly, most of these came to SEF because they operated a business or had some business experience. In essence, SEF’s lower interest rates and non-profit status primarily attracted clients that had been forced to take out loans from moneylenders. For them, high transaction costs and small loan sizes were a price they were willing to pay. It is very possible that they continued to use loans from moneylenders to cover the remainder of their credit needs. By this time, SEF had established policies promoting client-led governance (oversight?????) through groups and centres, and begun to form its management structure by organizing Fieldworkers into branches and designating a Head Office for administrative operations. (See Appendix ______ for current structure.) Nevertheless, SEF’s single-minded pursuit of eradicating poverty, beginning with the poorest, led it down a two-year path of re-evaluation and experimenting with poverty-targeting methods. SEF had assumed that high transaction costs and small loan sizes would serve as a self-executing targeting mechanism. A Christopher Dunford would later conclude though, “Loan size is often much more of a reflection of the institution offering the loan than of the characteristics of the borrower.” (6 … from Anton’s bibliography) Studies conducted by SEF during 1995-1996 showed that only 30%-40% of MCP clients could be characterized as very poor by an income measure, meaning they were living below half of the poverty line. Without explicitly targeting, SEF was not reaching the most vulnerable, previously unbankable very poor, but it needed to understand why. Former SEF Development Advisor (??????) Anton Simanowitz described the hazards of relying solely on market research in trying to refocus MCP. “At SEF we heard from clients,

‘we need larger loans, we need shorter terms. We need these different products.’ What we were hearing was not the voices of the very poor, we were hearing the voices of the less-poor people in the program.” (28) Simanowitz could have added that the reason why the voices of the very poor weren’t heard was because they had been largely intimidated and excluded from joining MCP. By attempting to include the very poor in a program with their better-off peers SEF was inadvertently reinforcing their lack of confidence. Better-off clients were reluctant to guarantee the loans of inexperienced group members and staff had a reflexive tendency to exclude them. The latter phenomenon arose from staff incentives that rewarded Fieldworkers with larger portfolios and less repayment problems – all harder to achieve when working with the very poor. The very poor’s own sense of inferiority and the reluctance of their better-off clients to welcome them into groups and centres is explained by SEF MD de Wit. “What we’ve heard from literature from all over the world is what we found in our own case, and through hard experience. The poorer people see who goes to your program, and they just say, ‘This program is not for us; it is for those better off people.’ And then very often the wealthier people, maybe just the less poor, intimidate the poor, simply by saying, ‘This meeting is for serious people. Here we have to be serious about business. Somebody who is only selling a few vegetables is not serious about business.’ Poor people already have pretty low self-esteem, but you add a few comments like that, and they leave. So the presence of the nonpoor unfortunately did scare away the poor. And that’s why we have to go for an exclusive poverty focus.” (53) C. Description of target group/clients/members In designing TCP from 1995-1996 SEF returned to its single-minded pursuit of eradicating poverty by targeting the very poor. Following the lead of Grameen Bank (source?????), SEF realized that it needed to explicitly target the very poor. Given their lack of confidence and the reluctance predisposition of their better-off peers SEF decided that it needed to develop a separate program for the poorest, which became TCP. Comparing their needs to its experience with MCP clients, SEF identified the factors of poverty that reinforced vulnerability with its emphasis on building social capital through group lending and facilitation. In 2003, Catherine van de Ruit and Julian May conducted an analysis of SEF’s participatory poverty-targeting method and found that it presented a comprehensive and consistent view of poverty, including: • • Alienation from the community and government: The poor were seen to be isolated from the institutions of kinship and community as well as from the structures of government. Food insecurity: Participants saw the inability to provide insufficient or good quality food for the family as an outcome of poverty. In particular, households where children went hungry or were malnourished were seen as living in poverty.

• •

Crowded and poorly maintained homes: The poor were perceived to live in overcrowded conditions and in homes in need of maintenance. Having too many children was seen as a cause of poverty – not only by parents, but by grandparents and other family members who had to assume responsibility for the care of children. By contrast, wealth was regarded as having good houses that were well maintained and durable. Usage of basic forms of energy: The poor lacked access to safe and efficient sources of energy. In rural communities the poor, particularly women, walked long distances to gather firewood. In addition, women reported that wood collection increases their vulnerability to physical attack and sexual assault. Wealth was seen to be using more convenient forms of energy, especially electricity, and owning appliances both to reduce effort and for entertainment. Lack of adequately paid, secure jobs: The poor perceived lack of employment opportunities, low wages and lack of job security as major contributing factors to their poverty. Fragmentation of the family: Many poor households were characterized by fathers or children living apart from their parents. Households were sometimes split over a number of sites as a survival strategy (May et al. 1997).

For SEF MD de Wit, the differences between the very poor and most MCP clients were tangible. “If you look at the housing, then the clients in the microenterprise program generally live in brick structures, and very often these are plastered. The clients from the poverty program live in mud buildings. When it comes to schooling, you’ll find that about thirty percent of the children of the poverty program… don’t go to school at all. It very, very seldom happens that children don’t go to schools in the poverty program is generally because the parents can’t afford a school uniform for the children… When it comes to food, you’ll find that the clients in the poverty-focused program don’t eat meat very often… They don’t buy vegetables; they generally collect vegetables. They eat moke and fish and such things very seldom. The clients in the other program… eat meat quite often, and they do buy moke, they do buy fresh vegetables… And then children are the best indication of poverty by far. There’s a substantial difference between the children in the one program versus the other. You’ll find that in the poverty program the children are dirty and are wearing dirty clothing, and they’re not changing their clothing very often. And the main reason is because their parents can’t afford soap. And obviously they can’t afford more clothing as well….” II. Description of Methodology In meeting the triple bottom line of working with the very poor SEF confronts three main challenges in designing and initiating TCP. (Cite?)


Summary of Design Concepts (Describe generally in the present tense – not chronologically)

First, SEF must package an attractive loan product to potential clients while incorporating additional business training, support, discipline and confidencebuilding. As mentioned earlier, the requirements of the triple bottom line often conflict and, in this case, SEF’s client services are constrained by its commitment to financial sustainability. The high-cost micro finance environment of South Africa dictates that SEF employees cannot invest significant amounts of time in monitoring and advising each individual client. Yet among the very poor, who are starting new businesses and often adopting accounting practices for first time, the potential for business failure or misuse of funds is especially severe. How does SEF ensure that TCP clients have the support, discipline and confidence to succeed? The group methodology developed in MCP harbours an inherent and irrepressible advantage over models that provide intensive supervision and assistance to individual clients. The advantage is the strength of the client network developed by group cooperation and centre governance. Business lessons, crisis assistance, accounting checks and centre-enforced discipline are all examples of the benefits of the connections cemented by SEF’s group methodology. By recognizing and promoting this educational support system SEF plays a facilitation role in its interactions with clients. (The benefits of this approach strengthen each leg of its triple bottom line.) Every time clients join SEF, apply for a loan, withdraw savings or make a payment, their peers first vet their actions. Playing the role of facilitator allows employees to reach more clients and improves SEF’s financial performance. More importantly for the future of clients and their families – and the fate of rural villages – SEF’s commitment to facilitation pushes clients to assume leadership roles, enforce responsible business practices and rely on each other for support. In a country scarred by Apartheid’s debasing effects on the psyches of the very poor this may prove to be SEF’s lasting legacy. (Transition) What structures and policies does SEF use to ensure effective group cooperation and centre governance? As a Grameen Bank replication, the most fundamental element in the TCP structure is the group, consisting of five members. Ben Nkuna, SEF’s Operations Manager and an architect of TCP, emphasizes that, “(quote about importance of group formation).” Prospective clients are responsible for establishing groups made up of individuals that know and trust each other, but are not family members. Additionally, group members are expected to be close in terms of business experience, age level and live near each other. These terms ensure that group members easily relate to each other and avoid potential problems with bullying within the group. Placing the responsibility for recruitment on clients helps to certify that they are committed to assuming ownership over their group and to SEF’s strict procedures. Once clients have gathered five potential group members they begin preliminary training with the DF assigned to the area. The substance of the training does not cover specific TCP procedures, business practices or accounting principles. Recognizing the absolute importance of group solidarity, the DF begins training by asking group members to share their goals and fears and discussing SEF’s mission and experience assisting the very poor. Over four separate meetings the DF learns about each client’s business plans, explains the general purpose of loans and checks to make sure that each individual has discussed their participation in TCP with their

families. Crucially, the DF’s role is to foster dialogue between potential group members and their families. Any reluctance to do so is taken as a sign that the group must be broken up and reformed with individuals who are more comfortable with each other. After three sessions of preliminary training the Branch Manager (covering six to ten areas) administers a first test of the group members, which covers their knowledge of each other and their business plans. Then, the DF embarks on four days of formal training to educate group members about TCP policies, procedures and their responsibilities as clients. Topics include: Loan terms, loan sizes, disbursements, repayments, the group savings account, vetting of business plans and loan applications, dispute mediation, options for financial crises and the purpose of the centre. Each topic carries assignments that group members must complete as homework, and training cannot continue unless each step is completed to the DF’s satisfaction. During formal group training, the DF is encouraged to test group members in order to gauge their level of commitment to TCP. This is preparation for the final step in training. For final group recognition the Branch Manager meets with the group again and conducts a test of their knowledge of TCP and their responsibilities. Although the meeting may take place under a tree or in a client’s garage the atmosphere is that of a final exam. Understanding that an uncooperative group will pose real problems down the road, the Branch Manager is not obliged to pass the group unless he or she can vouch for its quality. In fact, as of May 2005 the pass rate across TCP stands at ____%. The importance of group cooperation is presented by the guarantees, accounting checks and centre-enforced discipline used to minimize SEF’s risk in providing credit to the very poor. SEF does not require collateral to join either MCP or TCP, requiring that group members guarantee the repayment of each other’s loans. When working with clients that often have no sources of regular income this requirement presents a fracture point in poor quality groups. A tight-knit group, however, will intervene before non-payment becomes an issue by recognizing the signs of a struggling member. Because groups must independently carry out repayment and savings transactions with two signatories at local bank branches members have a clear window into each other’s finances. SEF mandates that each member must save at least R10 ($____) at every bimonthly centre meeting. Overseeing and reinforcing each group’s cooperation, repayment and savings is the centre, located in one of a DF’s four to six villages and typically consisting of five to ten groups. Run by a Centre Chairperson, Treasurer and Secretary, the bimonthly centre meetings represent clients’ most formal involvement in TCP operations. They are a venue for sharing business advice, checking groups’ repayment and savings, vetting new loan applications, imposing small fines on late or absent members and dealing with problems that individual groups cannot solve. Each centre writes its own constitution, code of conduct and functions independently of the DF, who only intervenes when consulted and to ensure that SEF procedures and policies are correctly followed. Notably, centre meetings may not begin unless fully 80% of its members are present, and must be rescheduled if this threshold is not reached. In group training, during centre meetings and, especially, within individual groups, the DF plays the role of facilitator to the greatest extent possible. This organisational goal utilizes client networks within groups and centres to advise,

monitor and support individual clients, satisfying each leg of SEF’s triple bottom line. B. Process/Steps in Implementation The second challenge in meeting the triple bottom line of working with the very poor is to identify and reach them. As cited above, the purpose in designing TCP was to create a parallel program to serve the needs of very poor clients who were intimidated and reluctant to join the original MCP. Yet, according to MD de Wit, the challenge involved more groundwork than simply hanging up an ‘Open for Business’ sign. “A well-intentioned NGO could design the perfect loan product for a given community, offering ideal repayment terms, but the very poor would never walk in the door because they don’t believe that they can succeed on their own.” (source) In effect, this is what de Wit did in 1992 when he designed MCP in hopes of enticing the very poor with confidence-building building measures like small loan sizes, no collateral requirements and group lending. (Add SEF Pg. 31) Fundamentally, the problem of reaching the very poor sprung from their lack of access to or experience with financial markets – formal or informal. Whereas MCP clients came to SEF’s doorstep to avoid the usurious repayment terms of moneylenders, the very poor had little or no experience with even indigenous forms of financial services, such as stokvels. (define in footnote) TCP had to create demand; a controversial conclusion in the poverty outreach versus sustainability debate. In MD de Wit’s words, SEF had to reach out to the very poor and “crack the fragile eggshell” of defeatism and low expectations. (source) With a renewed sense of purpose SEF still had to answer the question: What defines the very poor? The World Bank/Microcredit Summit Campaign (source ???/de Ruit Pg. 21) has endorsed an international definition of the “poorest” as people that live on less than $1 a day, adjusted for the purchasing power of local currency. The rationale being that success in poverty outreach can only be measured and monitored reliably if common definitions of the very poor are agreed to worldwide. The importance of this goal for the sake of accountability and effectiveness should not be taken for granted. As an early member for the Microcredit Summit Campaign, SEF embraced this pursuit of a statistical, absolute definition of a poverty line. Listed earlier were characteristics that separated MCP clients from the non-participating very poor during SEF’s early years. These indicators provided measurable and relatively consistent benchmarks for objectively defining the very poor. (Use MSC papers on website and from John’s files) Externally-driven measures of poverty center on the idea that individuals’ consumption decisions provide the clearest window into their well-being and income patterns. As with the ‘$1 a day’ line, individuals that fall below a consumption level defined by the cost of an ‘essential’ basket of goods are considered to be very poor. (Note: often a household unit must be divided into individuals) For a short-term, general census of poverty across countries and continents, a consumption-based measurement best identifies the poorest. However, in designing TCP, SEF needed a longer-term picture of individuals’ willingness to engage in economic activity to identify those that struggled with more intractable psychological barriers to independence, not temporary shocks to their consumption decisions and income patterns. Still tied to a quantitative focus, SEF looked for other observable indicators that would give insight into poverty’s infectious grasp on the very poor. It is

important to remember that as a relatively new MFI embarking on a new commitment to poverty outreach SEF was constrained by its limited staff, data-gathering capabilities, villagers’ worries of fraudulent schemes and the high-cost environment of South Africa. Therefore, when SEF launched TCP in ______ it turned to a simple housing material survey to identify potential clients. The advantages for an experimental, cost-sensitive poverty outreach program were clear; and the differences in the availability of new housing materials since the fall of Apartheid presented an indicator sensitive to income patterns. When households generated income above strict subsistence levels, they often replaced their mud-walled or aluminium slat homes with stronger structures made of cement or brick. TCP field staff only had to walk through a village and survey the prevalence of different types of housing materials to identify struggling households. (Expand if possible on the length of SEF’s use and more on effectiveness of housing test) This visual test of poverty gave SEF a better-targeted pool of potential TCP clients than the self-selecting MCP pool. At the time MD de Wit presented the findings of an internal study of the housing material survey method to the ________(year) meeting of the Microcredit Summit Campaign, concluding that it was seventy percent accurate in identifying the very poor. He added: “But one thing we know for sure is that the clients we are getting from this test are very, very different from the clients we were getting before we introduced this test (i.e. in MCP).” (source) In this initial pilot phase, TCP field staff began reporting inherent shortcomings in the housing material survey method. As an absolute measure of poverty the surveys suffered from an opaque but recurring lack of information, just as pure-consumption-driven measures of poverty do. Specifically, the housing material survey missed households in need of SEF’s (attention?) because their better-quality housing materials either hid their total dependence on family members or belied financial crises that had taken place since the house was built – such as the death of a primary earner. Operations Manager Ben Nkuna, one of the architects of TCP, reflected that, “________________.” (source) Conceptually, the outcome of the housing material survey did not fit SEF’s vision of its role in development. By identifying the very poor without their input and then knocking on their doors to announce their eligibility for loans without collateral requirements, SEF was bypassing its commitment to involve clients as stakeholders in the program from the moment SEF entered each village. SEF was ignoring its philosophy of facilitation for the sake of expediency and absolute, but flawed definitions, and establishing itself as the driver of change and opportunity. SEF was not pushing the community to define what poverty meant in its most personal, local context, and to take ownership of its poorest members. ________ years/months after SEF hung its ‘Open for Business’ shingle on TCP, it

C. Method of Measuring Results If the first two challenges for developing TCP can be defined as operationalising a philosophy for fighting poverty and reaching the very poor, then the third and final

challenge is monitoring, assessing and improving the impact of the program. Although this is the most elusive task, an internally-driven approach to measuring impact on poverty outreach and the success of individual clients complements the sustainability of the program. How SEF has designed a system to measure the results of TCP has as much to do with how SEF has answered the first two challenges. Focusing on a facilitation philosophy – as opposed to a more educational one – and a participatory approach to defining poverty pushes SEF to incorporate TCP clients in judging and improving the program’s effectiveness. Impact monitoring, assessment and improvement begins at the individual level and is conducted by groups and centres without SEF’s direct guidance. Echoing a theme of this case study, the group lending methodology provides built-in checks that both reflect the fortunes of clients and offers the first opportunity for intervention. Foremost is the group guarantee of members’ loans, which gives individuals the incentive to monitor other members’ businesses and repayment records. Reinforcing this responsibility to track and, in times of need, to intervene with struggling members is SEF’s requirement that all group members must have finished repaying their loans before the group can embark on a new loan cycle. The group savings accounts, in which multiple members must verify deposits and withdrawals, ensures that groups have a window into the financial stability of their members. Experienced clients know that their fellow group members’ savings rates are a useful proxy for their shared risk. (quote) As highlighted earlier, centres provide the first line of oversight and enforcement of SEF’s policies and procedures, performing a built-in impact monitoring, assessment and improvement function. Every two weeks these group-led structures check repayment records and savings accounts, record attendance and serve as a forum for resolving intra-group disputes that have the potential to push group members to abandon their shared responsibilities and risk. Additionally, centres debate and vote on recommended loan sizes for members of groups that are applying for a new loan cycle. These methodological characteristics of TCP don’t provide indicators that can be graphed and tracked, as financial statistics do; however, they are arguably more important to improving the program’s poverty outreach. Further, they adhere to SEF’s commitment to a facilitation role by utilizing the very poor to detect problems in groups and centres. (Internally-driven) Of course, a client-led approach to ensuring poverty outreach is susceptible to widespread fraud, disillusionment, or, at the very least, a misunderstanding of responsibilities – especially when working with the unconfident very poor. Therefore, SEF has crafted the role of Development Facilitator (DF) to inform, assist and, when necessary, censure centres and groups in their educational and oversight roles. At centre meetings the DF ensures adherence to SEF’s policies and procedures and duplicates the centre’s accounting functions, creating a second record of repayments, savings and attendance, which is sent to the Head Office. Working with individuals and groups, the DF performs more traditional impact monitoring and assessment functions. After PWR has identified the very poor, interested individuals have formed groups and joined TCP, SEF tracks their “poverty score” using impact evaluation forms. The process is participatory with the DF interviewing clients after they complete each of the first _____ loan cycles. The indicators used to compile clients’ poverty score, listed in Table ____ (Kate Pg. 79), are relative rankings, reinforcing SEF’s commitment to allowing individuals to define poverty in their own local, personal context.

Also central to the shared risk of group members and SEF’s financial health is how the centre determines loan sizes for each client. (academic quote) Recognizing this, SEF requires the DF to ensure that the centre’s recommended loan size follow a strictly-defined loan size policy, which is tied to the DF’s calculation of each client’s business value. Rigid standards for business value growth, repayment, savings and attendance records further define clients’ eligibility for larger loan sizes, buttressing the centre’s recommendations. For groups, centres and DFs the focus of impact monitoring, assessment and improvement functions is to ensure poverty outreach and the success of each individual client. In measuring sustainability – the other half of the double bottom line – SEF relies on standardized loan applications to collect financial information and incentive-based staff contracts geared toward sustainability. With standardized loan applications, SEF is able to utilize the accounting functions of groups, centres and DFs to calculate business value and loan size growth; repayment, savings and dropout rates; as well as secondary financial indicators like employment. Therefore, SEF can cost-effectively build a complete picture of TCP’s growth and sustainability. Weekly reports from DFs to the Head Office fill accounting holes and raise warning flags when clients miss their payments or centres have poor attendance. As of June 2005, SEF’s management information system (MIS) for processing loan applications, and thus monitoring and assessing sustainability, is highly labourintensive. Once again, the roadblocks to improving reporting and disbursement lay in the high-cost micro finance environment of South Africa. Low population density and high labour costs mean that DFs ____ to ____ ratio is a low ____, which has prevented SEF from making the costly initial investment in information technology (IT) and training for field staff.. While SEF’s Head Office utilizes IT systems to compute and track growth and staff performance, field constraints mean that all loan applications and other information must be transcribed before impact can be monitored or assessed. Despite these logistical and technological challenges, SEF has seemingly conquered the elusive hurdle of ensuring that field staff buy-in to the importance of poverty outreach, in conjunction with sustainability. As Operations Manager, Ben Nkuna phrases this crucial balance, “We need field staff that can combine a banker’s head with a social worker’s heart.” (source) Interestingly, SEF has found that DFs transferred from MCP, the non-targeting micro credit program, usually do not succeed in TCP because working with the very poor requires more oversight and follow-up to understand clients’ needs. All this is not to say that personality types alone determine the fate of impact monitoring, assessment and improvement in TCP. SEF uses performance-based indicators to create monthly reports of group recruitment, arrears, centres with poor attendance and dropout rates (defined by clients that do not reply for loans three months after finishing their last cycle). Most importantly, contracts for field staff is laden with incentives tied to these monthly reports and establish minimum targets for each indicator. Unique for most MFI’s, SEF enforces these minimum targets with a disciplinary process for offending staff, incorporating additional training, peer review and, ultimately, the real threat of dismissal. Although this policy is a source of frustration for field staff unaccustomed to performance-based pay and regular evaluations, SEF has relieved much of this discontent by incorporating successful field staff in training to reinforce the importance of impact monitoring, assessment and improvement. The result is an impact monitoring and assessment system that incentivizes internally-driven improvements in sustainability, and thus poverty outreach.

III. Results The results of TCP have changed both the lives of very poor women and their families in the Limpopo Province and SEF’s long-term goals. The impact of TCP on poverty outreach is demonstrated by experiential evidence from TCP clients and distinguished by three types of impact. Likewise, the success of TCP in achieving sustainability redefined SEF’s plans for fighting poverty. Most importantly for the purposes of this case study, the results of the first ten years of TCP affirmed SEF’s assumption about the difference between economically-active individuals and the very poor. In November 2004 SEF achieved financial sustainability with its dual microcredit and pro-poor lending programs. (Insert Q?) This is remarkable for two reasons: First, many leading researchers and writers on microfinance have largely dismissed the viability of sustainable programs that target the poorest. (Academic quote) Not only does SEF’s subsidization strategy challenge this accepted wisdom, but TCP’s success in the treacherous microfinance environment of South Africa casts a favorable light on prospects for replication in other countries. Second, SEF’s separate programs camouflage the telling fact that, operationally, MCP and TCP are identical. Subtract the PWR process and the use of poverty scores from TCP and SEF’s facilitation role, loan products and policies are no different for relatively-business savvy MCP clients and vulnerable TCP clients. This finding cannot be underemphasized: the only difference between MCP and TCP clients are the psychological barriers that burden the very poor. Further, these barriers can be overcome by pushing the very poor to assume ownership of their futures and the success of their peers. And, contrary to the approach of Asian MFIs like BRAC (spell out), the very poor do not need alternative repayment schedules or interest rates in order to expand their businesses, fulfill their loan contracts and improve their families’ well-being, simultaneously. Some may question if clients can discern the benefits of loan products and policies that match their better-off peers. (Stories and quotes fromTCP Women) Of course, it is important to qualify and quantify the impact that these empowerment-rich stories demonstrate. TCP’s success in poverty reduction can be distinguished by three types of impact: Income, Social and Economic. These three dimensions of a pro-poor lending program summarize its performance on the first leg of the double bottom line – poverty outreach. As Ted Bauman defined it in his SEF Monograph, “This positive impact is a combination of building strong businesses to ensure reliable and adequate income to meet household needs, and the development of assets to protect this income and reduce vulnerability.” (Pg. 21) On the first level of impact – clients’ income, savings and assets – SEF relies primarily on information gathered by centres and submitted by DFs in loan applications. (Need: Current stats on growth of TCP clients’ business value, loan size, savings and assets – employment/equipment) Supplementing these financial indicators, which are updated after each loan cycle, SEF commissioned a two-year TCP Impact Survey of clients in eight villages, from 1998-2000. Undertaken at a crucial point in TCP’s development and expansion, the study covered four consistent indicators of poverty and demonstrated that TCP clients had made reliable improvements in income and savings. As Table _____ shows, regular increases in average business value after each loan cycle allowed TCP

clients to protect their families against financial shocks by saving greater amounts after all but one loan cycle. The second, social form of impact encompasses the development of ‘human assets’ that reduce clients’ vulnerability and improve well-being. According to Martin Greeley’s discussion of TCP, “These would include health, education and empowerment benefits, crucial to the MDG [the United Nation’s Millenium Development Goals], as well as other direct welfare impacts on clients.” (Pg. 16) In addition to income and savings, the TCP Impact Survey also covered clients’ opinions of food security and housing improvements. Their feedback confirmed that regular increases in average business value translates into greater satisfaction with food and housing quality, while also providing enough income to improve savings rates. In order to regularly monitor these patterns SEF institutionalized the TCP Impact Survey in the form of the poverty scores collected by DFs after the first ____ loan cycles. (Need: Data on poverty scores…) The third impact that TCP has shown on poverty outreach is felt in each community that SEF builds groups and centres in. Quantifying the exact economic impact on a village is beyond the scope of this case study; however, SEF’s focus on facilitation creates social networks that undoubtedly improve the economic environment in each community. These networks bring _______ values and new economic activity that both educate and empower TCP clients, creating a social safety net and ‘independent’ income. At the community level, SEF has made inroads into defining the level of impact that TCP can achieve without pushing new TCP clients into a over-saturated markets. Because TCP successfully targets the very poor, SEF has needed to define how many households in a given community can succeed in typical TCP markets, such as hawking fruits and vegetables and dress-making. Research conducted by SEF indicates that about fifty percent of the population in TCP target villages can be defined as very poor, but, because of the cut-off lines for PWR, no more than forty percent of these households can participate in TCP at any one time. Therefore, as MD de Wit concludes, “This can be read as SEF’s answer to the eternal question: ‘Is micro-enterprise credit meant for all the poor?’ At least twenty percent of the very poor can benefit from micro-enterprise credit., but perhaps not many more that this, at least not if a program is also to attain self-sufficiency.” (source) In turn, SEF’s answer to this critical mass dilemma is to assist TCP clients in expanding their businesses into more traditional microcredit markets. SEF has found that about fifty percent of TCP clients diversify into larger businesses that capture customers from outside their immediate communities. To meet their needs, SEF has redefined its long-term plans and its strict separation of MCP and TCP clients to provide a pathway for the very poor to join and learn from their more experienced peers. SEF reached sustainability with a pro-poor lending program that is now operationally identical to its traditional microcredit program. However, the lessons that SEF learned in identifying the very poor, incentivizing poverty outreach and expanding TCP were born of ten years of monitoring, assessing and improving impact. Comparing SEF to other MFIs adhering to a double bottom line, Martin Greeley observed that, “Experience shows that MFIs which are able to perform on the poverty route and be credible with their performance on the market route have gone through a process of learning.” (11) In TCP, the learning process to sustainability

covered six distinct stages in which SEF strove to calibrate its growth with the needs of the very poor. ____ 1996 – December 1998: Stage One marked the launch of TCP as a pilot program. In early 1996, SEF deployed eleven Fieldworkers (later christened ‘Development Facilitators’) to ____ villages, using the housing material survey method of identifying the very poor. A year later, SEF developed and implemented its own poverty-targeting tool, PWR. Correspondingly, SEF refocused TCP staff on their poverty outreach responsibilities, retraining them to place their highest priority on building cohesive and responsible groups and centres. Although this emphasis on strengthening networks slowed recruitment, SEF quickly decided to expand TCP in 1997. With plans to also add staff to MCP and the Head Office, SEF hired and trained 22 new employees. However, in early 1998, SEF realized that the numbers of TCP clients had stagnated, despite Fieldworkers success in recruiting new groups. A drop-out rate hovering around 35% and total clients of less than 1,000 led SEF to delay its expansion plans for TCP and shift all newlytrained Fieldworkers to MCP. Nevertheless, the average loan size disbursed to TCP clients grew from R409 to R556 during this period, contributing to an 82% increase in loan interest income for SEF as a whole from 1997-1998. In an attempt to understand if this growth was reducing the vulnerability of the very poor, SEF launched the TCP Impact Survey at this time. As SEF dealt with TCP’s high drop-out rate and prepared to renew expansion plans, its prescriptions were noteworthy because they only concerned how TCP policies and procedures had been applied – not their basic suitability to the very poor. This faith in SEF’s group lending methodology derived from the years spent perfecting MCP and early anecdotal evidence that the very poor were held hostage by psychological barriers to financial independence. Without these guides – and the financial benefits of subsidization – TCP would have been vulnerable to costly methodological experimentation in trying to balance poverty outreach and sustainability. January 1999 – March 2000: Stage Two improbably transformed TCP from a pilot program to the centrepiece for SEF’s future plans. By 1999, SEF realized the dividends of the hard work that TCP staff had put into developing PWR, understanding how to motivate the very poor and building their individual portfolios. In its third year, TCP’s steady growth and resiliency reinforced the assumptions that SEF had made about the nature of extreme poverty and the capabilities of the very poor. Largely because it takes Development Facilitators three years to recruit and retain enough groups to reach a full portfolio, TCP staff’s performance indicators registered a marked improvement in 1999, beginning with total clients reaching more than 1,500. Reflecting a consistent trend, the average loan size in TCP had also jumped to more than R800 by 1999. Owing to the success of TCP clients in their third, fourth and fifth loan cycles, these larger loan sizes helped to encourage

SEF that the returns of 1999 could be replicated while maintaining its high repayment rates. Subsequent projections led SEF to declare that it would reach financial self-sufficiency in 2003. Meanwhile, SEF expected TCP to cover its own expenses before 2003, relying on returns from the even larger loan sizes in MCP to pay for an increasing portion of administrative and development costs. In a bold declaration of its confidence in the very poor, and the market they represent, SEF announced its intention to phase out MCP and become a pure pro-poor lender when it reached financial sustainability. Results of the TCP Impact Survey, completed in 2000, reinforced the anecdotal evidence that TCP performance indicators served as a reliable, regular proxy for poverty impact. To reach the sale necessary for financial sustainability SEF undertook its delayed expansion of TCP during 1999-2000. SEF set the stage for rapid growth by extending TCP from eleven to 28 Fieldworkers in _____ branches. Nonetheless, in the midst of this expansion push SEF declined a R9 million grant from the South African Department of Social Development, which would have been tied to the government’s own outreach targets. The decision reflected SEF’s commitment to retaining full control over its methodology and performance targets, and echoed the recommendations of microfinance researchers that document the damaging effects of misaligned subsidies. (Source H & M, Pg ?… add quote?) April 2000 – March 2001: Stage Three professionalized TCP and set it on an equal footing with MCP, providing for its rapid growth and the resulting destabilizing effects. Prior to 2000, TCP had operated independently of SEF’s main program, MCP. As a pilot, TCP had functioned with senior management exercising hands-on control in training staff, vetting groups, establishing centres and resolving individual group disputes. With its decision to recast itself as a purely pro-poor lender when it reached sustainability SEF sought to maintain efficiency by streamlining TCP operations into the systems set up for MCP. Operations policies and procedures, administrative systems and staff incentives were standardized across both programs. In devolving direct control over dayto-day operations, SEF management enabled TCP’s expansion and unavoidably erected operational barriers to soothing the symptoms of unchecked growth. SEF’s push for financial sustainability by 2003, combined with the grafting of MCP systems onto TCP operations, pressured staff to focus on profitability beyond poverty outreach. TCP retained its proven ability to target the very poor by virtue of PWR; however, incentives aimed at portfolio growth encouraged staff to value group quantity above quality and neglect signs of financial distress or discord within groups. Immediately, group recruitment rose dramatically with the deployment of 17 new Fieldworkers in TCP, climbing by 105% on the year to March 2001. A further increase in the average loan size in TCP to R884 – despite the influx of new, inexperienced clients – cast a foreboding shadow on the future of TCP staff’s performance indicators.

Another telling sign of profitability pressure and mission drift arising from sustainability projections and the standardization of TCP was a week-long staff strike in September 2000. Wage demands unsheathed TCP staff’s concerns over performance-based pay and indicated that they had not fully bought into SEF’s long-term plans. According to Ted Baumann’s institutional analysis, “SEF management believe that the strike was a positive experience, however: staff became more serious about taking responsibility for SEF’s performance.” (7) Although TCP’s self-sufficiency ratio brightened in 2000 – thanks to new clients and larger loans – SEF realized that the greater returns from rapid growth heralded greater risk for its most vulnerable clients and its double bottom line. Indeed, monthly arrears skyrocketed from a running average of about 12 groups to 187 groups in March 2001. Traditionally, SEF’s write-offs always amounted to less than 1% of portfolio outstanding over the course of any given year, but, in 2000, it worryingly began to rise. Even clients that paid back their loans on time and in full felt the pressure of SEF’s focus on profitability, manifested in TCP staff’s inattention to group quality and push for larger loans. Hence, the dropout rate in TCP began to rise from 19% in July 2000, ultimately reaching 31% in July 2001. Clearly, SEF’s longstanding goals of poverty outreach and sustainability had come into conflict, begging the question: Would SEF be forced to pare back its goals on one to reach the other? April 2001 – June 2002: Stage Four answered this question as SEF, characteristically, chose to re-immerse itself in its double bottom line by pushing back its sustainability projections in order to focus on repairing its portfolio quality. SEF recognized that the solutions to repayment problems and dropouts would be realized and implemented most effectively by groups and centres. Motivating these structures to tackle repayment problems and bolster their education responsibilities required the leadership of TCP staff. SEF realigned staff priorities by introducing new incentives aimed at performance indicators like arrears and dropouts, adding an innovation budget for staff projects in each branch and providing additional training for staff that neglected clients’ business difficulties. Again, SEF’s approach is noteworthy for its striking lack of methodological experimentation and its belief in the very poor’s ability to succeed with structures designed for their better-off peers. To ensure that clients were not pressured into large increases in loan size, SEF accompanied these staff-based changes with a more conservative loan size policy for centres and Fieldworkers to use. These quality-focused adjustments reversed the average loan size trend in TCP, leading to a fall in principal outstanding from R9.1 million to R8.0 million for SEF as a whole. This drop reflected a move towards equilibrium and sustainability, as evidenced by SEF’s steady growth to nearly 3,000 total clients by June 2002. Underscoring how long it took to reengineer TCP in favor of portfolio quality, write-offs continued to rise to 2.4% of principal outstanding during Stage Four – a high SEF has come nowhere near since. Meanwhile, in 2002, SEF sought to improve the secondary impact of TCP

on the well-being of clients and their families by launching the Rural AIDS and Development Action Research Program (RADAR), a pilot combining HIV/AIDS education and support with SEF’s microcredit operations. Partnering with the Health Systems Development Unit of the University of Witswatersrand, SEF justified the added transaction costs imposed on clients by RADAR after taking into account the detrimental effects that HIV/AIDS imposes on clients’ ability to save and build assets – especially the very poor. July 2002 – June 2004: Stage Five quickly validated SEF’s qualityfocused adjustments, allowing SEF to lock-in its efficiency gains and redesign its commitment to and expansion of TCP. Despite the destabilizing effects of rapid growth during 1999-2001 – and the subsequent cool-down period of 2001-2002 – TCP recovered to post dramatic and, most importantly, sustainable improvements in the second half of 2002. By December 2002, SEF as a whole registered more than 16,500 total clients and principal outstanding of R11 million – both increases of 25% on a six-month period. Crucially, the average loan size in TCP remained at a manageable R754, while write-offs dropped back below 1% and monthly arrears and dropouts continued to decline. As TCP grew and its self-sufficiency ratio inched upwards, SEF moved to standardize its management structures and simplify its expansion procedures. With the creation of zones encompassing up to five branches SEF added a management layer to absorb all day-to-day oversight of TCP. Additionally, managers of each zone assumed active responsibility for the performance of individual branches, budgeting and staff performance contracts, as well as the deployment of new Fieldworkers and the opening of new branches. Outsourcing TCP operations to zones decreased the amount of time and effort field staff spent on communicating and travelling to the Head Office. Conversely, senior management in the Head Office were freed to focus on impact projects and long-term goals relating to the effectiveness and expansion of TCP. Accordingly, SEF dusted off its plans to transform itself into a purely pro-poor lender when it reached sustainability. Earlier projections of sustainability by 2003 were postponed by the destabilizing effects of rapid growth in TCP, leading to a re-evaluation of SEF’s intention to phase out MCP. Financially, the optimism generated by large increases in average loan size in TCP prematurely convinced SEF that the very poor alone could finance its sustainability without a huge jump in scale. As this optimism waned with creeping repayment problems SEF had to revalue the financial contributions of MCP clients to its double bottom line. Operationally, inherent drawbacks in the exclusive, targeted methodology of TCP presented a persistent drag on SEF’s plans to focus solely on poverty outreach. Foremost, the historic strict separation between MCP and TCP precluded SEF from accessing the very poor in villages with MCP operations. This barrier prevented SEF from scaling up TCP without undertaking risky, expensive expansions with new staff in new villages. Given the demands of the high-cost microcredit environment in South Africa phasing out MCP would further entrench

administrative burdens by limiting potential clients to less than half of the households in TCP-targeted villages. Therefore, in _____, SEF changed course and reintegrated its five existing MCP branches into its plans to stake its future on the success of TCP. SEF’s answer to the inefficiency problems of growing as a purely pro-poor lender was to relax the division between MCP and TCP operations and experiment with mixed branches, villages and centres. The policy change provided for greater efficiency as SEF expands TCP and rationalizes its administrative burden by opening existing MCP villages to TCP expansion, and vice versa. For successful TCP clients the prospect of graduating to MCP adds a ladder to bridge the divide from focusing on poverty alleviation to wealth creation. Operationally, SEF is currently piloting several approaches to mixing MCP and TCP, testing how quickly the demonstrated success of the very poor can break down better-off clients’ traditional aversion to sharing risk, oversight and educational responsibilities. July 2004 – Present (June 2005): Stage Six brought realization of SEF’s projections of sustainability and ushered in the most recent phase of TCP expansion, with its new commitment to mixing MCP and TCP operations. The result was SEF’s financial self-sufficiency ratio exceeded 100% for the first time in September 2004. Most importantly, SEF’s qualityfocused adjustments continued to promote both steady growth and superior performance indicators. With this stability and its ability to recruit and train new staff to improve existing portfolios SEF projected that its current structure would guarantee sustainability for the foreseeable future. As in Stage Two, the success of TCP presented SEF with the choice of maintaining its impressive financial and performance indicators or replenishing its commitment to poverty outreach through expansion, while shouldering the added risk. With the final approval of its Board of Directors SEF chose the latter, endorsing the expansion-minded changes that it had made in its management structure and to open up MCP and TCP villages. Following up on these efficiency gains, SEF also incorporated additional private sector practices into its expansion by packaging a new focus on recruitment with its poverty-targeting PWR Team. As opposed to the previous, gradualist method of relying on individual DFs to build and service their own portfolios, SEF created ‘Starter Teams’ – made up of 2 PWR staff, 2 Salespersons (new position) and the DF – to deploy to each new area. By combining targeting, recruitment and group training activities, SEF hopes that this new expansion format will capture the exposure generated by PWR and translate it into faster client growth and quicker branch profitability. Since reaching sustainability in September 2004, SEF has reached 26,000 clients, opened three new TCP branches and begun deploying Starter Teams to new areas in these branches. By July 2008, SEF expects this format to provide a total of _____ new TCP branches. Crucially, with Starter Team and DF targets SEF expects each area and DF to reach individual profitability in the 24th (?????) month of operation,

an improvement of 12 (??????) months over the previous, gradualist method of expansion. Ensuring that its expansion maintains a client to loan officer ratio of 275 to 1 (??????), SEF projects that its financial selfsufficiency ratio will stand at 107 (?????) percent in July 2008, when it will have ________ clients. (****Need more financial data and expansion events****) In summary, the six stages of TCP’s development reflect the operational and policy decisions made to adhere to SEF’s original mission of eradicating poverty among the very poor and achieving financial sustainability. In confronting mission creep towards bloated loan sizes SEF reinforced its lending policy and realigned staff priorities with an incentive scheme based on portfolio quality. To improve efficiency SEF embarked on a phase of integration between TCP and MCP that continues with pilots to explore how to mix branches, villages and centres. These actions improved impact and efficiency as SEF demonstrated the primacy of its original assumption that psychological barriers impeded the very poor from achieving financial independence. Yet, the real costs of fine-tuning TCP and adhering to a double bottom line have been felt in villages that SEF has not reached and on the incomes of successful TCP clients. First and foremost, SEF has devoted itself to designing a program that ensures and improves impact. However, the downside is that a program oriented towards attaining financial sustainability faster – by expanding to more villages and boosting interest income – would reach more of the very poor and allow successful clients to take out bigger loans. Since making quality-focused adjustments to combat the destabilizing effects of rapid growth from _____ to _____, SEF has sought to push this ‘impact frontier’ outwards and upwards. (H&M quote? Next paragraph?) SEF’s current expansion of TCP using the newly-assembled Starter Teams and its decision to provide a ladder for successful TCP clients to graduate to MCP are key operational assaults on this impact frontier. Nevertheless, the costs of pursuing both poverty outreach and financial sustainability in South Africa have buttressed this frontier since TCP’s inception in _____. IV. Resources Required/Cost to the Institution (****Need yearly costs data****) The unique high-cost microcredit environment in South Africa forced SEF to choose the terms of TCP’s development long before it disbursed its first loan. Conceptually, the choice was between theory and reality – and SEF dove headlong into the pursuit of a theoretical, methodological golden standard for microcredit in South Africa. In this sense, the choice wasn’t between explicitly pressing growth in poverty outreach or financial sustainability because SEF did not push to expand and integrate until 2002 (?????). Driven by its institutional belief that the very poor do not need ‘special’ repayment flexibility or incentives to start and build their own businesses, SEF mortgaged its short-term pursuit of a double bottom line in order to create, in TCP, a program based on impact (right word????). An evaluation and comparison of SEF to 124 international MFIs, conducted in 2001 by the MicroBanking Standards Project, underscores its emphasis on perfecting

the methodology and operation of TCP, as well as the ever-present high-cost microcredit environment in South Africa. As SEF refocused on clients’ needs in April 2001, the report found that, “SEF is above average in reaching the poorest of the poor, about average in terms of access to market-based funding, but below average in its average loan size, both absolutely and as a percentage of GDP, operational selfsufficiency and productivity.” (SEF Pg ??) The analysis highlighted the effectiveness of PWR, but captured SEF’s struggle to design a sustainable pro-poor lending program within South Africa’s dual economy. Tellingly, at the time the report was published SEF had revised its loan size policy and implemented new staff incentives designed to rationalize and, ultimately, slow the growth in average loan size policy in TCP. These quality-focused adjustments dampened SEF’s operational self-sufficiency rate, demonstrating its commitment to designing a methodological golden standard before unleashing a dash for scale. Omnipresent in the development of TCP, the high-cost microcredit environment in South Africa distorted the productivity findings of the MicroBanking Standards Project. The low population density of South Africa’s rural regions, including much of the Limpopo Province, depresses SEF’s client per loan officer rate. More specifically, productivity ratios using South Africa’s relatively high average GDP hide absolute poverty levels similar to other African countries and cast doubt on the efficiency of poverty outreach organizations. Both SEF’s average staff salary as a percentage of GDP and average loan size as a percentage of GDP suffer from this inherent bias. (Add quote from SEF Pg. 30?????) The costs of SEF’s choice to adhere to a path that subordinated short-term growth and productivity to methodological rigor and portfolio quality were born by MCP. Fundamentally, these costs arose in two phases; first, with the subsidization of TCP operations by MCP, and, second, as SEF integrated TCP operations into the systems it had set up for MCP. Throughout the development of TCP, the design, the lessons and income from MCP allowed SEF to pursue its methodological golden standard with another layer of financial and experiential insulation from donors. Although SEF was surely reliant on low-interest loans from donors to build and expand TCP, it was able to use income from MCP and commercial loans to fund its loan portfolio and separate its development and commercial costs. The effect was to reduce its dependence on and obligations to external subsidies and donors’ prerogatives. SEF demonstrated this independence when it declined a R9 million grant from the South African Department of Social Development in 2000 (??????). Subsidization gave SEF more freedom to experiment with its povertytargeting method and to maintain its commitment to group lending in an environment that would otherwise dictate an individual or streamlined group approach. In his analysis of SEF and two other MFIs pursuing poverty outreach, Martin Greeley referenced the corollary of targeting. “The case studies confirm that any form of targeting involves additional cost. The trade-off issue is real. For an MFI that is working towards sustainability and also wants to target the very poor, it is inevitable that the cost recovery interest rate will be higher, in an accounting sense at least. To the very poor, the cost of money is higher.” (15) In SEF’s case, subsidization allowed SEF to shield the very poor from the additional costs of targeting by utilizing income earned from MCP clients. The

inherent shortcomings in externally-driven measures of poverty – coupled with SEF’s emphasis on involving clients as stakeholders – pushed SEF to experiment and trade these costs for greater (???????) outreach. Clearly, the original housing method survey used in TCP was far cheaper than the _______-step, community-led PWR process. In fact, a strictly-financial argument could be made that the original method, in which Fieldworkers conducted their own targeting at 70% effectiveness, outweighed the high cost of the former PWR Team, R500,000 per year. (Remember: the PWR Team has been folded into Starter Teams as of June 2005.) As moneylenders and SEF’s most serious competitor, Marang Financial Services, have found, South Africa’s high-cost micro credit environment almost demands an individual, staff-lean approach to lending. Thanks to its ability to subsidize the targeting and development costs of TCP, SEF rejected this commercial orthodoxy in favour of poverty outreach and portfolio quality. Cost-wise, the choice surely delayed its attainment of self-sufficiency until September 2004 and continues to weigh on productivity ratios more tangibly than the effect of South Africa’s inherent GDP bias. SEF’s group methodology limits its loan officer per client ratio of _____ to 1, except or the highest performing staff. The result is that SEF must hire, train and employ more staff than a lender using an individual approach. Again, in South Africa, this is an especially risky and expensive proposition. Under Apartheid, South Africa’s inferior black education system served to produce compliant labourers and low-level administrators. A majority of black adults were educated under this system and post-Apartheid educational reforms have been slow to produce results, meaning that SEF must invest considerable time and resources in training for Development Facilitators and managers. Once deployed, SEF has had to cope with many fully trained staff leaving for better-paying, lessdemanding job opportunities. This has locked SEF into a balance sheet with salary expenses as a percentage of total assets that are four times the international MFI average. Compounded with the low average loan sizes of a pro-poor lending program, the effect is that the average first loan in TCP is about one-third to one-fourth of a DF’s monthly salary. Internationally, most MFIs disburse average first loans that are roughly 120% of an average loan officer’s monthly salary. Thus, to meet the international average DFs must service three to four times as many clients or increase average loan size by fourfold – both impossible tasks given SEF’s environment and double bottom line. Subsidization lowered these costs to the point that by 1999-2000 (??????) SEF believed that it could phase out MCP and reach sustainability by 2003. Of course, these projections sprung from rapid growth that SEF chose to scale back; and, reevaluating TCP in 2003, SEF recognized the benefits of its integration of TCP operations into MCP systems and the need to provide a ladder for successful clients to graduate to MCP. This phase of integrating further lowered the costs of developing TCP and continues to improve SEF’s efficiency. Beginning in 2000, SEF standardized operations policies and procedures, administrative systems and staff incentives; from 2002-2004 SEF updated and simplified its management structures and expansion procedures. Despite the benefits of subsidization and integration, three built-in weaknesses in pro-poor lending anchor the impact frontier that has limited SEF to 26,000 clients as of June 2005. These three basic ‘costs’ are: higher risk, lower loan sizes and a paradox that accompanies growth in client incomes. Fundamentally, a lender to the very poor incurs greater risk in tapping a market largely ignored by even traditional

moneylenders. However, the vulnerability of inexperienced clients limits the lender’s ability to shield itself from this increased risk by raising interest rates. Financial sustainability ultimately demands freedom from subsidies – ideally, even internal ones – so an initial built-in weakness persists. Both in absolute terms and as a percentage of salary costs the average loan size in TCP remains low. Apart from structural limitations SEF has engineered its fall with a conservative loan size policy and staff incentives rewarding portfolio quality. These quality-focused adjustments avoid over-burdening new TCP clients, ensuring that they cultivate business skills before assuming heavier liabilities. Of course, these measures all unavoidably restrain SEF’s loan interest income, while, to a lesser extent, hindering TCP staff’s ability to compensate by servicing more clients. This is a second built-in weakness. Just as average loan sizes begin small they grow more slowly than in more traditional microfinance programs. Development Facilitators in TCP take an additional 12 months to reach a full portfolio compared to their counterparts in MCP. As noted earlier, they typically cannot service as many clients because of the added oversight and support required in working with the very poor. More to the point, successful TCP clients can reduce the transaction costs of borrowing by taking their business to commercial lenders. If SEF had pursued its intentions of phasing out MCP it would have run head-on into this growth paradox. This is a third built-in weakness of a pro-poor lending program. (Add H&M quote about externalities????) SEF has countered these three basic ‘costs’ of operating TCP through integration with MCP. In its final act, this integration will eventually combine TCP and MCP in branches, villages and, perhaps, centres. V. Challenges and Pitfalls/Lessons Learned ( SPECIFIC Challenges and Solutions) - Challenges: - Lack of business expertise - Repayment (due to clients’ start-up risks) - Increased impact of short-term shocks/crises - Banker vs. social worker staffing - Solutions: - Group and centre network development (as it varies from MCP client culture) - Short loan cycles, small loan sizes - Internal group loans from savings accounts - DF recruitment and training

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