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An MFI (Asasah) failure story to learn lessons By Farhat Abbas Shah
Problem Statement: Corrupt and incapable managements are the main cause of making the microfinance a failure Introduction
The microfinance industry’s growth over the past forty years is best described as impressive. In a relatively short amount of time, non-profit institutions founded by non-bankers have transformed into financial intermediaries, including full-fledged banks. Funding has shifted from donor-dependency to a rich mix of private and public, international and local funders – some of whom created for the sole purpose of funding microfinance! But growth spurts beget growing pains, and one of these growing pains manifests in failed institutions. To be clear, the phrase “failed institution” does not solely mean institutions which collapsed and ceased to exist, but also includes institutions which faced a crisis so serious its net worth turned negative and the institution had to be intervened and transformed in order to survive. Just as it is important to celebrate the triumphs of the industry, we must analyze the shortcomings. We can only learn from the mistakes of others by examining and understanding the conditions which lend to error, and ultimately failure. Microfinance institutions may fail for a variety of reasons, but the investigative paper “Failures in Microfinance: Lessons Learned” by Beatriz Marulanda, and others (1) in Latin America, sought to identify the most common causes of failure. The investigation unearthed uncontrolled growth and loss of institutional focus, flaws in credit methodology, and systematic fraud as the main causes of institutional failure. On the other hand, failures do not always arise from exponential growth or flaws in credit methods. We must recognize that systematic fraud can and has occurred in some institutions and that such fraud will lead to an institution’s dissolution. Systematic fraud does not pertain to the handful of cashiers who may pocket money, or the loan officer who creates a ghost borrower. That type of fraud, while significant and requiring control, will not bring down an institution. Systematic fraud refers to fraud at the executive management and board levels. For example, imagine an NGO in which the CEO and Chairman of the Board are one in the same. This duplication of roles in a single person weakens controls in the NGO for obvious reasons, such as weakening the board’s power to pursue the interests of the institution rather than the CEO’s reputation or family members’ businesses. This type of fraud does not necessarily have to be sinister in nature. Too easily can a person justify and rationalize why their interests align perfectly with the institution’s, and their intentions may be pure, but ultimately the reality of their choices may not be best for the institution and the MFI suffers for it. Of course, more criminal fraud can occur, such as embezzlement.
However, even criminal fraud can be identified, contained and corrected if roles are not duplicated. Thus, it is important to separate management and governance roles in order to mitigate mismanagement of the institution, regardless of the intention of the individual in question.
(By Alex Silva and Anais Concepcion, Microfinance Focus, January 7, 2012)
It is not only any simple observation or study but a story of first hand experience. In beginning the CEO of Asasah engaged me to produce the documentaries, stories , shoot events as I was the owner of a media company and doing this sort of business. However after a very short time she offered me to join Asasah if I have a passion to work for poor community. So I accepted the offer with a soft warning that if you are doing any thing wrong, then kindly don’t get me in your business because I am a media person. We are open and transparent and do not afraid of anybody. I joined Asasah on 1rst Sept 2007 till the 1rst of November 2009. In this period of my service I tried at my level best to serve my first MF institution with all my personal, social and journalistic capabilities but I found all in vain because there was nothing except a greed, lust and ultimate cruelty from the family. Particularly I find the CEO even in human with her daily behavior for the all staff and clients, particularly with female staff. She was very sharp to oblige the influential people in managing and using and exploiting them by bribing them with costly gifts and money. At the same time she was extremely nonprofessional to deal the organizational matters. High turnover of staff and the incidents of suicides can be investigated in this perspective. The Jaffery Family misuses the donors funds, Make their own bank balances, utilizes staff’s frauds in their favor by hiding the actual recollection of stolen money. Mr. Michael McGrath the former Chairman of the Board of Asasah left the organization after observing a few nonprofessional events within Asasah. Although he did not mention these events and the reason, however he was not happy with the management. A few other Factors When I, Rafay Mahmood and a few others resigned from Asasah Microfinance Institute of Pakistan in 2009 with the claim that, the management has only six months to declare emergency and make a sound strategy to stop this fall of second largest MFI of Pakistan, nobody was ready to listen us. We informed Pakistan Poverty Alleviation Fund by a mail about our resignation. They rushed to the organization, started audits and evaluation but as usual they came to the MFI as auditors but went as “consultants”. I was eye witness, when PPAF came to know that Asasah’s CEO Ms. Tabinda Alkenz Jaffery invested funding in her personal business of mobile oil with the cooperation of her brother Mr. Imran Jaffrey , an auditor came from PPAF and stop them to do this mal practice but they made neither any charge nor stop funding to them. It was also in the knowledge of PPAF that the staff of Asasah is at a high alert because of un satisfaction and due to a constant inhuman psychological pressure from the CEO and her family members , who directly and indirectly by both ways were, and even involved in the organization’s in and out. As Ms. Zarreen the GM Operation ( mentioned as manager finance at MIX ), brother Mr. Ammar Adam Jaffry (ex head of HR Asasah), who worked as the head of HR ( without any sound experience and qualification), now working as a hidden supplier , brother Mr. Imran Jaffery
some times played his role as a consultant, some times as a legal advisor and lately worked as the responsible of Islamic Microfinance window and participated in SBP focus group meetings with the position. The management always sharply manipulated organizational documents and practiced to change them off and on by the moment they required to hide the facts and figures, for example all the family made money by paying fictitious advances to the staff through cheques, made a complete process and got back that money for their personnel use. When the auditors asked them to refund that money, they have released that advances to the staff against the increments on the advice of the board of directors, the management replied. Currently the new PPAF CEO Qazi Azmat Isa has stopped their funds and made a few steps to recover the delivered funds but they( PPAF) could not analyze the accounts of Asasah, according to different donors funds. Because the Asasah overlaps clients of PPAF and Kiva and others because of inembezzlement of these funds for their personnel benefits. More than two staff members of Asasah committed suicide one gave in under a heavy psychological pressure. The Asasah management has registered a case on a female staff member on resigning from the job after her marriage. The area ex manager Ms. Shumaila can be approached to know a number of facts and evidences. The story of termination of an honest female Internal Auditor is also a case study that reflects the true face of the CEO Ms. Tabinda’s women empowerment claims. Ms. Maryam Baloch can be interviewed in this regard. Now Asasah have not more than five thousand clients reportedly but showing different numbers on deferent accounts. Kiva is also showing an out dated information about Asasah as a Kiva’s partner, and KIVA still continues funding to Asasah without knowing the threats and risks. Kiva can lose a big money of its donors and trust also. KIVA is still working with Asasah without having the updated information about the current status of the organization. Interestingly the Institutional Strengthening Fund( provided by DIFID ) Committee of SBP has released grants to Asasah for conducting the pilot of branchless banking as an organization having capacity to grow as a Microfinance Bank from an MFI, while Asasah is continuously decreasing its clients. The Committee couldn’t analyze and evaluate the institution, and remained unaware of its track. The facility provided by DIFID is being wasted through an inefficient committee and these funds could not create any noticeable impact. The following Weaknesses were observed even after 6years of Asasah,s history but the management was just focusing on making money. 1. 2. 3. 4. Weak Internal Controls Weak and scattered organization structure Pooling of interest Incompetent Staff
5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.
Lack of clearly defined duties and responsibilities Issue in delegation of duties and responsibilities Late approval of any application No appreciation on hard work Sustainability issues Lack of trained and skilled staff Lack of strong assessment of staff Flaws in transaction of cash in fields 100% dependence on donors Lack of professional staff Low efficiency and caliber of majority of staff Non professional working system Week monitoring and audit system Domination of one family upon the top management Major concentration upon one product i.e. productive loan
(Need assessment and staff rationalization of Asasah 2009 by AASR)
The Major factors of failure
1. Family member’s hold in the organization 2. One Man Show l centralization of powers 3. Involvement of family as Consultants and venders etc. 4. Corruption at every level 5. Tax theft 6. Utilizing funds as advances by the CEO and other family members on the name of staff 7. Taking Family members and ex staff on board 8. Throwing out the efficient and honest staff from the organization 9. To Bribe the influential people of the sector throw financial and other kind of gifts 10. PPAF corrupt staff
Sector’s Efforts PPAF new management particularly The CEO Mr. Azmat Isa made various efforts to stop the Jaffery Family to continue mal practices by • • Conducting their audits and assessment reports and advice then to make their functions appropriate and smooth Surprise visits
Providing assistance about mitigating risks Excluding family members from the management
State Bank of Pakistan • IFC • Suggest them to make the board more efficient SBP stop them to send money to KIVA through illegal ways
Here I feel better to present two reports, A. Asasah Microfinance Program Institutional Assessment Report Fab 2011 B. Micro finanza social rating of Asasah Pakistan 2010
The management and governance show a good commitment to the mission, which broadly reflects the intentions and is well disseminated among the staff. Despite the positive evolution in the last years, the governance still presents a gap compared to the best practices in terms of potential conflict of interest. The product design allowing the access to the target clients, the growth focus on the client base and the client profile data collected demonstrate an adequate alignment of the current strategy to the mission, even though a complete set of social objectives is not yet in place. However, the risk prone attitude of the management, entailing a fast growth in the years 2005-07 without proper systems in place has contributed to the current weak financial performance (self-sufficiency not yet achieved, negative equity). The continuity of the operations may be at risk in the medium term unless the MFI succeeds in attracting the necessary external support. Some possible strategies to enhance the financial self-sufficiency may generate some risk of mission drift. The overall internal control system is not adequate due to the weak supervision, the MIS not fully operational and the lack of a proper audit function, leaving room for limited compliance with procedures and fraud risk. However, audit activities also cover some of the client profile data and a consumer protection code of conduct has been recently adopted.
The social responsibility to the staff is overall adequate, with a good remuneration and considerable training provided; however, the lack of a more professional approach, the limited delegation of responsibility and the low productivity in some areas may affect the staff motivation. The cost charged on clients does not appear to be excessive and the risk of client over-indebtedness is medium, even if higher in Lahore city, and yet to be mitigated by the use of a credit bureau and adequate policies. The transparency of the services provided leaves some room for improvement in the cost structure, explanation to the new members of existing groups and documents provided to the clients. Due to the weak control system and the lack of a proper authorization, the collection of client savings does not currently represent a completely responsible practice. No specific internal policies are currently in place for the community and the environment. The breadth of geographical outreach is intermediate, with a branch network covering the Punjab region. The depth of outreach is overall good and overall in line with the mission, showing considerable levels of client vulnerability and poverty. However, the focus on women is not clearly reflected in the results, partly due to cultural reasons, as a significant share of the female clients does not exert control on the loan use. The variety of services offered is currently limited, and the credit product conditions are rather rigid in terms of loan size, repayment frequency and loan term. The long disbursement time is perceived as a serious disadvantage by the clients. On the other hand, the limited requirements to access loans, including the group (Page 4Micro finanza social rating of Asasah Pakistan 2010 )
The report above mentioned could be an alarm but not a single institution working with Asasah seemed in action to come for rescue the funds of the social and noble donors and also to secure a trained but spoiled human resource of the sector. PMN launched a credit bureau but unfortunately could not succeeded to move Asasah for implementation. Asasah got grant for funding MIS for more than 4 years early but consciously did not make it functional to hide the actual information about the clients and finance. The assessment report by shore bank highlights lot of eye opening facts but it looks that there is not any information exchange mechanism in the sector and feels that every related institution trying to hide the facts to cover its own weaknesses.
The report also highlighted a number of gaps mentioned below A. Bazgha Masood - the Company Secretary has not been trained adequately for managing this function • She has been managing this function for the last few months without adequate training and as such she lack experience. This has resulted in non-compliance of several SECP regulations required to be performed by the Company Secretary
The draft Board Book is under preparation for which approval has been granted in principle by BOD members. • Without a detailed functions of the BOD in place, it is not possible for a member to play his/her due role in the BOD meetings and provide necessary guidance to the management Blood relationships with the CEO exists Blood relationship between Head of Operations exists with the CEO. In addition, there are blood relationships within several staff members working in Asasah at different functional levels. All the above relationships are disclosed verbally and are part of BOD approved policy. The position of Internal Audit is lying vacant for the past several months The BOD has made efforts to hire a qualified and experienced internal auditor but has been unsuccessful The Company has violated some key regulations relating to licensing terms, maintaining record of minutes and attendance records in appropriate format, The revised remuneration drawn by CEO is not as approved by the BOD. The CEO is a drawing her monthly salary which half of that approved by the BOD. The Senior Management strength is thin and inexperienced.
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As the senior management comprises of five members, the chances of promotion from within the management is quite low. The senior management team presents weaknesses as the process of capacity building is incomplete. Transfer of responsibilities is not always clearly assumed and bottle-necks appear in the ordinary flow of activities. Some of the managers also undertake multiple functions. Succession planning of the senior management is not carried out. This situation may create difficulties for Asasah to acquire suitable management staff for key positions, if such a situation arises in future. The Head of HR is not experienced. The Head of HR is undertaking HR functions to the satisfaction of CEO according to her abilities. However, she requires specialized training suitable for this position. HR manual has not been updated. Asasah has an HR manual that was developed in 2006 and has not been updated since then. All updates and changes in policies and procedures are communicated through memos but have not been incorporated in the manual. Changes in the policy and procedures have not been formally approved by the BOD. No formal staff succession planning exists in Asasah. The back-up positions for second tier field and CO managers should be documented and formalized. The financial management in Asasah is extremely weak. • A review of advances to staff and advances to third parties for expenses, contracts and other payments reveal that recording of certain accounting transactions are dubious. Given below are few instances of those transactions where huge amounts (Rs. 300,000 to Rs. around 2 million) have been paid as advances and remained unadjusted as on November 30, 2010: 1. Increment to staff approved by BOD that was paid to the staff member but is still recorded as advance to staff
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2. Amounts paid to several consultants based on proposal submitted to donor for funding. The donor did not approve funding as submitted in the proposal but are shown as recoverable. 3. Activities that were completed in 2009 and for which donor funds were also received in prior years are shown as receivable Expenses incurred on verbal commitment of a donor which was later on declined to be funded, is shown as advance 5. Expenses incurred by CEO and senior staff on numerous foreign training and international visits and exposure visits in 2008-09 are lying un- adjusted. 6. Expenses incurred for a BOD event in 2008 is unadjusted. 7. Advances to several ex-employees including blood relative of CEO is shown as receivable 8. Expenses for on-going operational activities are shown as advances 9. Advances made for purchase of furniture for branches without BOD approval for establishing new branches. 10. Monthly retainer fee paid to legal consultants under a contract are shown as advances Advances policies for various activities have been approved by BOD but these policies are not implemented as approved In many cases advances are made through open cheques and in cases where crossed cheques are issued they are not properly crossed A huge amount was embezzled by few employees in 2008 for which litigation is pending in court. A legal counsel has been hired to pursue the cases as a retainer on hefty fee. The retainer who has been not been able to recover any significant amount of the embezzled fund in last two years. (Asasah – Microfinance Programme Institutional Assessment Report Fab 2011, by Shore Bank International)
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Anjum Asim Shahid Rehman company also presented a report with similar indicators as a consultant but they were compelled to change the findings by the management of Asasah.
As I informed by various sources the current situation of the MFI is worst than ever. Every day a new staff is quitting Asasah after making financial fraud, corruption and theft. And the family is planning to save the money they made during last 9/10 years. The same family is planning to step in Islamic Microfinance by starting a new organization to carry on its “vision and mission of poverty alleviation”. Here only a few questions need to be answered… 1. Why PPAF continued the partnership with Asasah after finding the series if in appropriations again and again and what measures have been adopted to encourage new organizations without taking hidden commissions. 2. What is the role of management of PMN in this situation? 3. Who will be pointed out as the responsible at State Bank of Pakistan to approve Asasah and the similar institutions on merit for the grant of ‘ Institutional Strengthen Funds’ provided by DIFID. 4. What will KIVA do if Asasah does not pay back its funds and who will be the responsible person at KIVA to not developing y strategy to evaluate and audit such organizations and carry on funding till the time?
Recommendations A strong deep financial audit, legal investigation and a thorough interrogation by any law enforcement agency is recommended to collect the evidences and to take any legal action against the financial crime committed by the Jaffery family and other involved culprits. So that donors money can be protected in Pakistan and the any efforts for any noble cause can be
secure in an enabling and transparent environment. Note: All institutions mentioned in the paper were asked for their version to include in the paper as their point of view but nobody replied. They are still invited if they want to take any position, most welcome. ……………………………………………………………………………………………………….
References: “Failures in Microfinance: Lessons Learned” was written by Beatriz Marulanda, Lizbeth Fajury, Mariana Paredes, and Franz Gomez. Their investigation and report was sponsored by Calmeadow, The Center for Financial Inclusion, IDB’s Multilateral Investment Fund, the International Association of Microfinance Investors, and Deutsche Bank.